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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
------ ------.
Commission file number:
33-27312
LAKELAND BANCORP, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2953275
- ------------------------------ --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
250 OAK RIDGE ROAD, OAK RIDGE, NEW JERSEY 07438
- ------------------------------------------ ---------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201)697-2000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- -----------------------------
COMMON STOCK, $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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The aggregate market value of the voting stock of the registrant held by non-
affiliates (for this purpose, persons and entities other than executive
officers, directors, and 5% or more shareholders) of the registrant, as of
February 1, 1997, is estimated to have been approximately $69,858,100.
The number of shares outstanding of the registrant's Common Stock, as of
February 1, 1997, was 3,375,590.
DOCUMENTS INCORPORATED BY REFERENCE:
Lakeland Bancorp, Inc., Proxy Statement for 1997 Annual Meeting of Shareholders
(Part III).
- 2 -
LAKELAND BANCORP, INC.
Form 10-K Index
PART I
PAGE
Item 1. Business............................................. 4
Item 2. Properties...........................................12
Item 3. Legal Proceedings....................................12
Item 4. Submission of Matters to a Vote of Security Holders..12
Item 4A. Executive Officers of the Registrant.................12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..........................14
Item 6. Selected Financial Data..............................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................16
Item 8. Financial Statements and Supplementary Data..........30
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure...............43
PART III
Item 10. Directors of the Registrant..........................43
Item 11. Executive Compensation...............................43
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................43
Item 13. Certain Relationships and Related Transactions.......43
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K..........................................43
Signatures.....................................................45
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PART I
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ITEM 1 - BUSINESS
GENERAL
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Lakeland Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank
holding company, registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company was organized
in March of 1989 and commenced operations on May 19, 1989, upon consummation of
the acquisition of all of the outstanding stock of Lakeland State Bank ("LSB" or
the "Bank"). The Company's primary business consists of managing and
supervising LSB. The principal source of income is dividends paid by LSB. At
December 31, 1996, the Company had total assets, deposits, and stockholder's
equity of approximately $377.5 million, $340.1 million, and $36.8 million,
respectively.
LSB was organized as Lakeland State Bank on May 19, 1969. LSB is a state
banking association, the deposits of which are insured by the Federal Deposit
Insurance Corporation ("FDIC"). LSB is not a member of the Federal Reserve
System. LSB is a full-service commercial bank offering a complete range of
consumer, commercial, and trust services. Its 12 branch offices are located in
the following three New Jersey counties: Morris, Passaic, and Sussex.
COMMERCIAL BANK SERVICES
The Bank offers a broad range of lending, depository, and related financial
services to individuals and small to medium sized businesses in its northern New
Jersey market area. In the lending area, these services include short and
medium term loans, lines of credit, letters of credit, inventory and accounts
receivable financing, real estate construction loans and mortgage loans.
Depository products include: demand deposits, savings accounts, and time
accounts. In addition, LSB offers collection, wire transfer, and night
depository services.
CONSUMER BANKING
The Bank also offers a broad range of consumer banking services, including
checking accounts, savings accounts, NOW accounts, money market accounts,
certificates of deposit, secured and unsecured loans, consumer installment
loans, mortgage loans, safe deposit services, and traveler's cheques. LSB also
provides discount brokerage services to its customers through a third party.
TRUST SERVICES
A variety of fiduciary services are available through a third party. These
include investment management, advisory services, and custodial functions for
individuals. The trust function also administers, in a fiduciary capacity,
pensions, personal trusts, and estates.
- 4 -
SUPERVISION AND REGULATION
----------------------------
Lakeland Bancorp, Inc.
- ----------------------
The Company is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"), and is required to
file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act. The Company is subject to examination by the Federal Reserve
Board.
The Holding Company Act limits the activities which may be engaged in by the
Company and its subsidiaries to those of banking, the ownership and acquisition
of assets and securities of banking organizations, and the management of banking
organizations, and to certain non-banking activities which the Federal Reserve
Board finds, by order or regulation, to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Federal
Reserve Board is empowered to differentiate between activities by a bank holding
company or a subsidiary thereof and activities commenced by acquisition of a
going concern. With respect to the acquisition of banking organizations, the
Company is required to obtain the prior approval of the Federal Reserve Board
before it may, by merger, purchase or otherwise, directly or indirectly acquire
all or substantially all of the assets of any bank or bank holding company, if,
after such acquisition, it will own or control more than 5% of the voting shares
of such bank or bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Interstate
Banking and Branching Act") permits bank holding companies to acquire banks in
states other than their home state, regardless of applicable state law. The
Interstate Banking and Branching Act also authorizes banks to merge across state
lines, thereby creating interstate branches, beginning June 1, 1997. Under such
legislation, each state has the opportunity either to "opt out" of this
provision, thereby prohibiting interstate branching in such states, or to "opt
in" at an earlier time, thereby allowing interstate branching within that state
prior to June 1, 1997. Furthermore, a state may "opt in" with respect to de
novo branching, thereby permitting a bank to open new branches in a state in
which the bank does not already have a branch. Without de novo branching, an
out-of-state bank can enter the state only by acquiring an existing bank.
During 1996, New Jersey enacted legislation to opt-in with respect to earlier
interstate banking and branching and the entry into New Jersey of foreign
country banks. New Jersey did not authorize de novo branching into the state.
With respect to non-banking activities, the Federal Reserve Board has by
regulation determined that several non-banking activities are closely related to
banking within the meaning of the Holding Company Act and thus may be performed
by bank holding companies. Although the Company's management periodically
reviews other avenues of business opportunities that are included in that
regulation, the Company has no present plans to engage in any of these
activities other than providing discount brokerage services through a third
party.
- 5 -
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on any extension of credit to the bank
holding company or any of its subsidiaries, on investments in the stock or other
securities of such holding company or its subsidiaries, and on the acceptance of
such stocks or securities as collateral for loans. Moreover, subsidiaries of
bank holding companies are prohibited from engaging in certain tie-in
arrangements (with the holding company or any of its subsidiaries) in connection
with any extension of credit or lease or sale of property or furnishing of
services.
The policy of the Federal Reserve Board provides that a bank holding company is
expected to act as a source of financial strength to its subsidiary bank and to
commit resources to support such subsidiary bank in circumstances in which it
might not do so absent such policy.
Lakeland State Bank
- -------------------
LSB is a state chartered banking association subject to supervision and
examination by the State of New Jersey and the FDIC. The regulations of the
State of New Jersey and FDIC govern most aspects of LSB's business, including
reserves against deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, and location of branch offices. LSB is subject to
certain restrictions imposed by law on, among other things, (i) the maximum
amount of obligations of any one person or entity which may be outstanding at
any one time, (ii) investments in stock or other securities of the Company or
any subsidiary of the Company, and (iii) the taking of such stock or securities
as collateral for loans to any borrower.
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a state bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a state non-member bank, to assess the bank's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such association. Under the FDIC's CRA
evaluation system, the FDIC focuses on three tests: (i) a lending test, to
evaluate the institution's record of making loans in its service areas; (ii) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing and programs benefiting low or moderate
income individuals and businesses; and (iii) a service test, to evaluate the
institution's delivery of services through its branches, ATMs and other offices.
- 6 -
Securities and Exchange Commission
- ----------------------------------
The common stock of the Company is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result of such registration, the Company and its officers, directors, and
major stockholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules promulgated
pursuant to the 1934 Act.
Effect of Government Monetary Policies
- --------------------------------------
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will likely
continue to have, an important impact on the operating results of commercial
banks through the Board's power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of, among other things, the discount rate
of borrowings of banks and the reserve requirements against bank deposits. It
is not possible to predict the nature and impact of future changes in monetary
fiscal policies.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") restructured the regulation, supervision, and deposit insurance of
savings and loan associations and federal savings banks whose deposits were
formerly insured by the Federal Savings and Loan Insurance Corporation
("FSLIC"). FSLIC was replaced by the Savings Association Insurance Fund
("SAIF") administered by the FDIC. A separate fund, the Bank Insurance Fund
("BIF"), which was essentially a continuation of the FDIC's then existing fund,
was established for banks. For further information regarding assessments, see
"FDICIA".
FIRREA and the Crime Control Act of 1990 expanded the enforcement powers
available to federal banking regulators including providing greater flexibility
to impose enforcement actions, expanding the persons dealing with a bank who are
subject to enforcement actions, and increasing the potential civil and criminal
penalties.
Under FIRREA, failure to meet capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
Furthermore, under FIRREA, a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of a commonly controlled FDIC-
insured depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository
- 7 -
institution in danger of default. FIRREA also imposes certain independent
appraisal requirements upon a bank's real estate lending activities and further
imposes certain loan-to-value restrictions on a bank's real estate lending
activities.
Capital Adequacy Guidelines
- ---------------------------
The Federal Reserve Board has adopted Risk-Based Capital Guidelines. Their
guidelines establish minimum levels of capital and require capital adequacy to
be measured in part upon the degree of risk associated with certain assets.
Under these guidelines all banks and bank holding companies must have a core or
tier 1 capital-to-risk-weighted-assets ratio of at least 4% and a total capital-
to-risk-weighted-assets ratio of at least 8%. At December 31, 1996, the
Company's Tier 1 capital to risk-weighted assets ratio and total capital to
risk-weighted assets ratio were 17.01% and 18.26%, respectively.
In addition, the Federal Reserve Board and the FDIC have approved leverage ratio
guidelines (Tier I capital to average quarterly assets, less goodwill) for bank
holding companies such as the Company and banks such as LSB. These guidelines
provide for a minimum leverage ratio of 3% for bank holding companies that meet
certain specified criteria, including that they have the highest regulatory
rating. All other holding companies will be required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. LSB
is subject to similar minimum leverage criteria. The Company's leverage ratio
was 9.53% at December 31, 1996.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), federal banking agencies have established certain additional minimum
levels of capital which accord with guidelines established under that Act. See
"FDICIA".
- 8 -
Dividend Restrictions
- ---------------------
The Company is a legal entity separate and distinct from the Bank. Virtually all
of the revenue of the Company available for payment of dividends on its capital
stock will result from amounts paid to the Company by the Bank. All such
dividends are subject to various limitations imposed by federal and state laws
and by regulations and policies adopted by federal and state regulatory
agencies. The Bank is required to obtain the approval of the FDIC for the
payment of dividends if the total of all dividends declared by the Board of
Directors of the Bank in any year will exceed the total of the Bank's net
profits (as defined and interpreted by regulation) for that year and the
retained net profits (as defined) for the preceding two years, less any required
transfer to surplus. Furthermore, under State law, the Bank may not pay
dividends unless, following the dividend payment, the capital stock of the bank
would be unimpaired and either (a) the Bank will have a surplus of not less than
50% of its capital stock, or, if not, (b) the payment of the dividend will not
reduce the surplus of the Bank.
If, in the opinion of the FDIC, a bank under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), the
FDIC may require, after notice and hearing, that such bank cease and desist from
such practice or, as a result of an unrelated practice, require the bank to
limit dividends in the future. The Federal Reserve Board has similar authority
with respect to bank holding companies. In addition, the Federal Reserve Board
and the FDIC have issued policy statements which provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings. Regulatory pressures to reclassify and charge-off loans and
to establish additional loan loss reserves can have the effect of reducing
current operating earnings and thus impacting an institution's ability to pay
dividends. Further, as described herein, the regulatory authorities have
established guidelines with respect to the maintenance of appropriate levels of
capital by a bank or bank holding company under their jurisdiction. Compliance
with the standards set forth in such policy statements and guidelines could
limit the amount of dividends which the Company and the Bank may pay. Under
FDICIA, banking institutions which are deemed to be "undercapitalized" will, in
most instances, be prohibited from paying dividends. See "FDICIA". See also
the "Dividend Limitation" Note of the Notes to Consolidated Financial Statements
for further information regarding dividends.
FDICIA
Enacted in December 1991, FDICIA substantially revised the bank regulatory
provisions of the Federal Deposit Insurance Act and several other federal
banking statutes. Among other things, FDICIA requires federal banking agencies
to broaden the scope of regulatory corrective action taken with respect to banks
that do not meet minimum capital requirements and to take such actions promptly
in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies
were required to establish minimum levels
- 9 -
of capital (including both a leverage limit and a risk-based capital
requirement) and specify for each capital measure the levels at which depository
institutions will be considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized".
Under regulations adopted under these provisions, for an institution to be well
capitalized it must have a total risk-based capital ratio of at least 10%, a
Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at
least 5% and not be subject to any specific capital order or directive. For an
institution to be adequately capitalized it must have a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a
Tier I leverage ratio of at least 4% (or in some cases 3%). Under the
regulations, an institution will be deemed to be undercapitalized if the bank
has a total risk-based capital ratio that is less than 8%, a Tier I risk-based
capital ratio that is less than 4%, or a Tier I leverage ratio of less than 4%
(or in some cases 3%). An institution will be deemed to be significantly
undercapitalized if the bank has a total risk-based capital ratio that is less
than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3% and will be deemed to be critically undercapitalized
if it has a ratio of tangible equity to total assets that is equal to or less
than 2%. An institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating or is deemed to be in an unsafe or unsound
condition or to be engaging in unsafe or unsound practices.
In addition, FDICIA requires banking regulators to promulgate standards in a
number of other important areas to assure bank safety and soundness, including
internal controls, information systems and internal audit systems, credit
underwriting, asset growth, compensation, loan documentation and interest rate
exposure.
Proposed Legislation
- --------------------
From time to time proposals are made in the United States Congress, the New
Jersey Legislature, and before various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict the impact, if any, of potential
legislative trends on the business of the Company and its subsidiaries.
In accordance with federal law providing for deregulation of interest on all
deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. It is not
clear whether deregulation and other pending changes in certain aspects of the
banking industry will result in further increases in the cost of funds in
relation to prevailing lending rates.
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Competition
- -----------
LSB operates in a highly competitive market environment within northern New
Jersey. Three major multi-bank holding companies in addition to several large
independent regional banks and several large multi-state thrift holding
companies operate within LSB's market area. These larger institutions have
substantially larger lending capacities and typically offer services which LSB
does not offer.
In recent years, the financial services industry has expanded rapidly as bariers
to competition within the industry have become less significant. Within the
banking field, banks must compete not only with other banks and traditional
fiancial institutions, but also with other business corporations that have begun
to deliver financial services.
Concentration
- -------------
The Company and LSB are not dependent for deposits or exposed by loan
concentrations to a single customer or a small group of customers the loss of
any one or more of which would have a material adverse effect upon the financial
condition of the Company or LSB.
Employees
- ---------
At December 31, 1996, there were 198 persons employed by the Company and LSB.
- 11 -
ITEM 2 - PROPERTIES
The Company's principal offices are located at 250 Oak Ridge Road, Oak Ridge,
New Jersey.
LSB operates 12 banking locations located in Passaic, Morris, and Sussex
Counties, New Jersey. LSB's Wantage office is leased under a long term lease
expiring August 1, 1999. LSB's Rockaway office is under a long-term lease
expiring May 15, 2009. LSB's Newton office is under a lease expiring October 1,
2000. LSB's Wharton Office is under a lease, expiring August 22, 2005.
All other offices of LSB and the Company's principal office are owned by LSB and
are unencumbered.
ITEM 3 - LEGAL PROCEEDINGS
There are no significant pending legal proceedings involving the Company or LSB
other than those arising out of routine operations. Management does not
anticipate that the ultimate liability, if any, arising out of such litigation
will have a material effect on the financial condition or results of operations
of the Company and LSB on a consolidated basis.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of 1996.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age of each executive officer of the
Company and LSB. Each officer is appointed by the Company's Board of Directors.
Unless otherwise indicated, the persons named below have held the position
indicated for more than the past five years.
Officer of Position with the Company,
Name and Age LSB since LSB, and Business Experience
- ---------------------------------------------------------------
Robert B. Nicholson 1969 Chairman of The Board
Age 68 of the Company
and LSB; Chairman
of the Board,
Eastern Propane
Corp. (a fuel
distribution
company)
John W. Fredericks 1969 President of the Company and
Age 61 LSB; President,
Fredericks Fuel
and Heating
Service (a fuel
distribution
company)
- 12 -
Arthur L. Zande 1971 Executive Vice President and
Age 62 CEO of the
Company and LSB
William J. Eckhardt 1975 Vice President and Treasurer
Age 46 of the Company
since 1994; Vice
President and
Treasurer, LSB
- 13 -
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $2.50 par value, is traded in the over the counter
market, although the Company does not regard that market to be an established
public trading market with respect to the Company's Common Stock. As of
December 31, 1996, there were 1961 shareholders of record of Common Stock.
The market maker for the Common Stock is:
Ryan, Beck & Company
80 Main Street
West Orange, N.J. 07052
The following table indicates the quarterly high and low bid prices of the
Common Stock as provided by Ryan, Beck and Company and the cash dividends
declared per share of Common Stock (adjusted for subsequent stock dividends).
Bid Dividends
Prices Declared
Year ended December 31, 1995 High Low
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First Quarter $15 $14 $.118
Second Quarter 15 5/8 15 .118
Third Quarter 17 1/8 15 5/8 .118
Fourth Quarter 18 5/8 17 1/8 .127
Year ended December 31, 1996
First Quarter $21 1/8 $18 5/8 $.127
Second Quarter 22 21 1/8 .127
Third Quarter 23 22 .127
Fourth Quarter 24 23 .13
The prices listed above reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
Dividends on the Company's Common Stock are within the discretion of the Board
of Directors of the Company and are dependent upon various factors, including
the future earnings and financial condition of the Company and the Bank and bank
regulatory policies. Federal and State laws and regulations contain restrictions
on the ability of the Company and the Bank to pay dividends.
State of New Jersey Banking laws specify that no dividend shall be paid by the
Bank on its capital stock unless, following the payment of each such dividend,
the capital stock of the Bank will be unimpaired and the Bank will have a
surplus of not less than 50% of its capital stock, or, if not, the payment of
such dividend will not reduce the surplus of the Bank. Capital guideline and
other regulatory requirements may further limit the Bank's and the Company's
ability to pay dividends.
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ITEM 6
Selected Consolidated Financial And Other Data
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
At December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
Selected balance sheet data:
Investment securities (1) $116,959 $125,972 $129,303 $135,621 $124,178
Short-term investments (2) 2,750 17,325 1,300 12,200 22,100
Loans, net 222,950 187,812 172,197 145,957 119,000
Total assets 377,545 360,661 333,588 320,593 293,600
Deposits 340,084 327,942 307,121 297,301 272,903
Mortgage payable -- -- -- -- 2,988
Stockholders' equity 36,819 32,040 26,161 23,069 17,341
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands Except for Per Share and Ratio Information)
Selected operating data:
Interest income $ 25,475 $ 23,848 $ 22,184 $ 20,431 $ 18,395
Interest expense 9,696 9,114 7,607 7,822 8,562
-------- -------- -------- -------- --------
Net interest income 15,779 14,734 14,577 12,609 9,833
Provision for loan losses 534 129 226 695 789
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses 15,245 14,605 14,351 11,914 9,044
Other income 2,234 1,982 1,912 1,832 1,704
Other expenses 9,783 9,505 9,257 8,589 7,390
-------- -------- -------- -------- --------
Income before income taxes 7,696 7,082 7,006 5,157 3,358
Income taxes 2,635 2,286 2,175 1,509 848
-------- -------- -------- -------- --------
Net income $ 5,061 $ 4,796 $ 4,831 $ 3,648 $ 2,510
======== ======== ======== ======== ========
Weighted average common shares outstanding (3) 3,346 3,290 3,257 2,983 2,967
Net income per common share (3) $ 1.51 $ 1.46 $ 1.48 $ 1.22 $ 0.85
Other selected data:
Return on average assets 1.40% 1.42% 1.46% 1.22% 1.02%
Return on average stockholders' equity 14.86 16.62 19.29 19.45 15.45
Average stockholders' equity to average assets 9.41 8.55 7.59 6.25 6.58
Cash dividend per share (3) $ 0.51 $ 0.48 $ 0.37 $ 0.30 $ 0.26
Dividend payout ratio 33.66% 32.79% 25.22% 24.85% 30.32%
(1) Includes securities available for sale and held to maturity.
(2) Comprised of federal funds sold.
(3) Per share figures are based on the weighted average number of shares
outstanding during the periods after giving retroactive effect to a 2%
dividend distributed on December 10, 1996, a 100% stock dividend
distributed on October 25, 1995, a 5% stock dividend distributed on June
30, 1995, a 10% stock dividend distributed on June 10, 1994, and a 6% stock
dividend distributed on June 30, 1993.
- 15 -
ITEM 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL REVIEW
Lakeland Bancorp, Inc., (the "Company") reported net income of $5.1 million for
the year ended December 31, 1996, an increase of $265,000 or 5.53% compared to
$4.8 million for the year ended December 31, 1995. Net income per share
increased $.05 or 3.42% to $1.51 per share for the year ended December 31, 1996,
as compared to $1.46 per share for the year ended December 31, 1995. Increases
in net interest income, derived primarily from an average volume increase in the
loan portfolio, and an increase in other income were partially offset by
increases in the provision for loan losses, other expenses, and income tax
expense. Net income in both 1995 and 1994 was $4.8 million. As of December 31,
1996, the Company had total assets of $377.5 million, an increase of $16.8
million or 4.66% compared to $360.7 million at December 31, 1995.
The Company's return on average assets and average stockholders' equity was
1.40% and 14.86%, respectively, for 1996, compared to 1.42% and 16.62%,
respectively, in 1995 and 1.46% and 19.29%, respectively, in 1994. The decline
in the return on average stockholders' equity since 1994 reflects increases in
stockholders' equity resulting primarily from profitable operations over this
period along with an increased capital generated pursuant to the Company's
dividend reinvestment and optional cash purchase program.
The Company's gross loan portfolio increased $35.2 million or 18.45% from $190.8
million at December 31, 1995, to $226.0 million at December 31, 1996. This
increase was reflected in commercial loan increases of $10.3 million, mortgage
loan increases of $12.5 million, and consumer installment loan increases of
$12.4 million.
The investment portfolio, including both held to maturity and available for sale
securities, decreased $9.0 million or 7.14% from $126.0 million at December 31,
1995, to $117.0 million at Dec-ember 31, 1996. The decrease in the investment
portfolio was used to fund the increase in the loan portfolio. The investment
portfolio contains net unrealized gains of $2.3 million at December 31, 1996, a
decrease of $300,000 from the net unrealized gain of $2.6 million in the
portfolio at December 31, 1995.
Cash and cash equivalents decreased $10.7 million, or 31.66% to $23.1 million at
December 31, 1996, from $33.8 million at December 31, 1995, principally due to a
$14.6 million decrease in federal funds sold. This decrease was used to
partially fund the increase in the loan portfolio.
Premises and equipment increased $1.6 million or 19.94% to $9.8 million in 1996.
This increase was due to the acquisition of five properties, which will be used
to expand the existing branch network.
INTEREST INCOME
Interest income (on a tax equivalent basis) increased $1.6 million or 6.43% to
$25.7 million in 1996. In 1995, interest income increased $1.6 million or 7.00%
to $24.2 million from $22.6 million in 1994.
The increase in 1996 was attributable to an increase in average interest earning
assets of $21.2 million or 6.73%. Interest income on loans increased $1.9
million, or 11.77%, to $17.8 million in 1996 from $15.9 million in 1995, due to
an increase in average loan balances offset partially by a decrease in average
yield. During 1996, average loans increased $24.4 million, comprised of
increases in the average volume of commercial loans of $10.9 million, mortgage
loans (including construction loans) of $6.9 million, and consumer installment
loans (including home equity and improvement loans) of $6.6 million. These
increased average balances were partially offset by a 13 basis point decrease in
the average yield on such loans.
Interest income on taxable investment securities decreased $129,000 or 1.97% to
$6.4 million in 1996 from $6.5 million in 1995 primarily due to a $2.7 million,
or 2.54%, decrease in the average balance of such securities. The average yield
on taxable investment securities remained little changed in 1996 at 6.17% as
compared to 6.14% in 1995.
Interest income on tax-exempt securities (on a tax equivalent basis) decreased
$122,000 or 10.39% to $1.1 million in 1996 from $1.2 million in 1995, due
primarily to a 60 basis point decline in yield.
Interest income on federal funds sold decreased $68,000 or 12.23% to $488,000 in
1996 from $556,000 in 1995, due primarily to a 57 basis point decrease in yield,
which resulted from lower short term market interest rates.
The interest income increase in 1995 was attributable to increases in both the
volume of average interest earning assets of $8.4 million or 2.73% and an
increase of 31 basis points in the average interest rates earned on those
assets. Interest income on loans increased $2.2 million, or 15.74%, to $15.9
million in 1995 from $13.8 million in 1994, due to increases in both average
loan balances and average yields. During 1995, average loans increased $19.3
million, comprised of increases in the average volume of commercial loans of
$9.6 million, mortgage loans (including construction loans) of $7.2 million, and
consumer installment loans
- 16 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
(including home equity and improvement loans) of $2.5 million. Along with these
increased average balances was an increase of 28 basis points in the average
yield on such loans.
Interest income on taxable investment securities decreased $584,000 or 8.20% to
$6.5 million in 1995 from $7.1 million in 1994 primarily due to a $9.9 million
or 8.5% decrease in the average balance of such securities. The average yield on
taxable investment securities remained little changed in 1995 at 6.14% as
compared to 6.12% in 1994.
Interest income on tax-exempt securities (on a tax equivalent basis) decreased
$229,000 or 16.32% to $1.2 million in 1995 from $1.4 million in 1994, due to
decreases in both average balance and yield.
Interest income on federal funds sold increased $230,000 or 70.55% to $556,000
in 1995 from $326,000 in 1994, due primarily to a 202 basis point increase in
yield, which resulted from higher short term market interest rates.
INTEREST EXPENSE
Interest paid on deposits during 1996 increased $595,000 or 6.54% to $9.7
million from $9.1 million in 1995, as a result of increased average balances.
While the average volume of interest-bearing deposits increased $14.0 million or
5.61% during 1996, the average rate paid on those deposits increased by only 3
basis points. During 1996, the average volume of time deposits increased $13.3
million, while the average rate paid on time deposits decreased by 13 basis
points. Interest expense on interest bearing demand deposits and savings
deposits remained virtually the same, as average volumes and average rates
changed slightly.
Interest paid on deposits during 1995 increased $1.5 million or 19.69% to $9.1
million from $7.6 million in 1994. While the average volume of interest-bearing
deposits decreased $4.3 million or 1.70% during 1995, the average rate paid on
those deposits increased 65 basis points, due primarily to an increasing
interest rate environment which prevailed during the first half of 1995 and a
migration of deposits from savings accounts to higher cost time deposits. During
1995, the average volume of time deposits increased $33.3 million, while the
average rate paid on time deposits increased by 138 basis points. The increase
in the average volume of interest-bearing time deposits was more than offset by
a $29.9 million decrease in the average volume of savings deposits and a $7.7
million decrease in the average volume of interest-bearing demand deposits.
Interest expense on interest-bearing demand deposits and savings deposits
declined primarily due to the aforementioned volume declines as rates paid were
little changed. The average rate paid on savings deposits increased 3 basis
points, while the average rate paid on interest-bearing demand deposits
decreased 5 basis points.
NET INTEREST INCOME
Net interest income, typically the largest component of the Company's income, is
the difference between interest and fees earned on loans and other interest
earning assets, and interest paid on deposits and other funding sources.
- 17 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table refects the components of the Company's net interest income,
setting forth for the years presented herein, (1) average assets, liabilities
and stockholders' equity, (2) interest income earned on interest-earning assets
and interest expense paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) the Company's net interest spread (i.e., the average yield on
interest-earning assests less the average cost of interest- bearing liabilities)
and (5) the Company's net yield on interest-earning assets. Rates are computed
on a taxable equivalent basis.
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- ------------------------------
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)
Interest-earnings assets:
Loans (A) $205,425 $ 17,790 8.66% $181,013 $ 15,917 8.79% $161,684 $13,752 8.51%
Taxable investment
securities (B) 103,778 6,406 6.17 106,483 6,535 6.14 116,397 7,119 6.12
Tax-exempt investment
securities (C) 17,770 1,052 5.92 17,996 1,174 6.52 20,048 1,403 7.00
Federal Funds sold 9,191 488 5.31 9,462 556 5.88 8,446 326 3.86
-------- -------- ---- -------- -------- ---- ---------- ---------- -------
Total
interest-earning
assets 336,164 25,736 7.66 314,954 24,182 7.68 306,575 22,600 7.37
-------- -------- ----------
Non-interest-earning
assets:
Allowance for loan
losses (2,945) (3,062) (3,069)
Other assets 28,698 25,580 26,488
-------- -------- ----------
Total assets $361,917 $337,472 $ 329,994
======== ======== ==========
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 56,750 1,166 2.05 $ 53,128 1,071 2.02 $ 60,794 1,257 2.07
Savings and club
deposits 105,817 3,204 3.03 108,734 3,290 3.03 138,681 4,154 3.00
Time deposits 101,494 5,326 5.25 88,169 4,740 5.38 54,884 2,193 4.00
Other borrowings -- -- -- 221 13 5.88 66 3 4.55
---------- ---------- -------- -------- -------- ---- ---------- ---------- -------
Total
interest-bearing
liabilities 264,061 9,696 3.67 250,252 9,114 3.64 254,425 7,607 2.99
-------- -------- ----------
Non-interest-bearing
liabilities:
Demand deposits 61,884 56,840 49,609
Other liabilities 1,904 1,516 922
Stockholders' equity 34,068 28,864 25,038
-------- -------- ----------
Total liabilities and
stockholders' equity $361,917 $337,472 $329,994
======== ======== ==========
Net interest income/net
interest spread (taxable
equivalent basis) $ 16,040 3.99% $ 15,068 4.04% $ 14,993 4.38%
======== ======== ======== ======== ========== ==========
Net yield on
interest-earning
assets (taxable equivalent
basis) (D) 4.77% 4.78% 4.89%
======== ======== ==========
CODE
(A) Includes non-accrual loans, the effect of which is to reduce the yield
earned on loans.
(B) Includes certificates of deposit and interest-bearing cash accounts.
(C) The taxable equivalent adjustments, which total $262,000, $335,000 and
$416,000 in 1996, 1995, and 1994, respectively, are based on a marginal tax
rate of 34% and the provisions of Section 291 of the Internal Revenue Code.
(D) Net interest income (taxable equivalent basis) divided by average interest-
earning assets.
- 18 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates on a taxable equivalent basis. The table reflects the extent
to which changes in the Company's interest income and interest expense are
attributable to changes in volume (changes in volume multiplied by prior year
rate) and changes in rate (changes in rate multiplied by prior year volume).
Changes attributable to the combined impact of volume and rate have been
allocated proportionately to changes due to volume and changes due to rate.
1996 Versus 1995 1995 Versus 1994
----------------------------------------- -----------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Change In Increase Due to Change In Increase
------------------------- --------------------
Volume Rate (Decrease) Volume Rate (Decrease)
----------------------------------------- -----------------------------------
Interest income:
Loans $2,112 $(239) $1,873 $1,698 $ 467 $2,165
Taxable investment securities (162) 33 (129) (607) 23 (584)
Tax-exempt investment securities (15) (107) (122) (137) (92) (229)
Federal funds sold (16) (52) (68) 46 184 230
------ ----- ------ ------ ----- ------
Total interest income 1,919 (365) 1,554 1,000 582 1,582
------ ----- ------ ------ ----- ------
Interest expense:
Interest-bearing demand deposits 78 17 95 (157) (29) (186)
Savings deposits (86) -- (86) (905) 41 (864)
Time deposits 703 (117) 586 1,625 922 2,547
Borrowed money (13) -- (13) 9 1 10
------ ----- ------ ------ ----- ------
Total interest expense 682 (100) 582 572 935 1,507
------ ----- ------ ------ ----- ------
Net interest income $1,237 $(265) $ 972 $ 428 $(353) $ 75
====== ===== ====== ====== ===== ======
For the year ended 1996, net interest income on a tax equivalent basis increased
$972,000 to $16.0 million from $15.1 million in 1995. This increase was
attributable to an increase in the volume of average interest earning assets. A
$7.4 million increase in the excess of average interest-earning assets over
average interest-bearing liabilities was offset in part by a 5 basis point
decrease in the net interest spread and a decrease of 1 basis point in the net
yield on interest-earning assets. For the year ended 1995, net interest income
on a tax equivalent basis increased $75,000 to $15.1 million from $15.0 million
in 1994. This increase, too, was attributable to an increase in average
interest-earning assets. In 1995, a $12.6 million increase in the excess of
average interest earning assets over average interest-bearing liabilities was
offset in substantial part by a 34 basis point decrease in the net interest
spread and an 11 basis point decrease in the net yield on interest-earning
assets.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established to absorb the impact of losses
inherent in the loan portfolio. Additions to the allowance are made by means of
charges against current earnings and recoveries on loans previously charged to
the allowance. The level of the allowance is determined by the loan review
committee and Board of Directors after considering such elements as economic
conditions, risk exposure, adequacy of collateral, and such other factors as are
deemed to be relevant. The loan review committee assigns a specific reserve
allocation to each commercial loan in excess of $100,000 together with a general
percentage based on experience with respect to commercial loans less than
$100,000 and with respect to all real estate mortgage and consumer installment
loans.
During 1996 the Company provided $534,000 to the allowance and had net charge-
offs of $444,000 for a $90,000 increase to the allowance, leaving a balance of
$3.0 million. At December 31, 1995, the allowance stood at $2.9 million, a
$90,000 decrease from December 31, 1994, as the Company provided $129,000 to the
allowance and had net charge-offs of $219,000. Based on its ongoing loan review
process, its collateral positions, and its loss and recovery experience, the
Company believes that its allowance for loan losses at December 31, 1996, was
adequate. The immediately preceding sentence constitutes a forward-looking
statement under the Private Securities Litigation Reform Act of 1995. While it
constitutes management's reasoned judgement, actual results could differ from
management's determination, as a result of a variety of factors, such as
economic distress within the Company's
- 19 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
primary marketing area and unanticipated financial problems for the Company's
significant borrowers.
At December 31, 1996, the allowance for loan losses as a percentage of total
loans was 1.33%, as compared to 1.53% and 1.71% at December 31, 1995, and 1994,
respectively. At December 31, 1996, the Company's allowance balance of
$3,000,000 exceeded the aggregate balance of non-accrual and 90 day delinquent
and accruing loans of $2,764,000.
OTHER INCOME
Other (i.e., non-interest) income increased $252,000 or 12.68% to $2.2 million
in 1996 from $2.0 million in 1995 and represented 8.06% of total income for
1996. This increase was primarily attributable to an increase in ATM fee income.
Other income increased $70,000 or 3.68% to $2.0 million in 1995 from $1.9
million in 1994 and represented 7.68% of total income for 1995. This increase
was primarily attributable to a $53,000 or 3.47% increase on service charges on
deposits. The increase in service charges on deposits reflected the higher
deposit base.
OTHER EXPENSES
Other (i.e., non-interest) expenses in 1996 increased $279,000 or 2.93% over
1995. Salaries and benefits, the largest component of other expenses, increased
by $160,000 or 3.02%. While salaries increased by $232,000 or 5.58% due to
normal salary increases, benefit expense decreased by $72,000 or 6.32%, as the
Company realized a cost reduction due to a change in health insurance plans.
Occupancy expense increased $153,000 or 14.94%. This was primarily the result of
an increase of $84,000 or 32.30% in building maintenance, which was the result
of higher costs associated with the harsh 1996 winter, as compared to the mild
winter in 1995. The decrease of $80,000 or 8.99% in furniture and fixtures
expense is primarily the result of furniture and fixtures in the administration
building becoming fully depreciated in March 1996. Other expense categories
increased, in the aggregate, $46,000 or 1.99%. Significant sources of changes in
these expenses included FDIC Insurance expense, which totalled the statutory
minimum of $2,000 in 1996 as compared to $352,000 in 1995, and other real estate
owned expense, which totalled $61,000 in 1996 as compared to no expense in 1995
and was predominantly due to the payment of prior year real estate taxes for a
property which was maintained in other real estate owned. Exclusive of FDIC
insurance and other real estate owned expenses, other expenses increased
$335,000 or 17.3% due primarily to increased advertising, automatic teller
machine, postage, stationery and supplies expenses, reflecting increased
marketing efforts and the increased size and branch network of the Company's
banking business.
Other expenses in 1995 increased $247,000 or 2.67% over 1994. Salaries and
benefits increased $317,000 or 6.36% due primarily to normal salary and benefit
increases. Occupancy and furniture and equipment expenses increased $27,000 or
1.44%, primarily as the result of higher maintenance and depreciation costs on
the Company's offices. Federal Deposit Insurance premium expense decreased
$312,000 or 47.02%, due to a reduction in the assessment rate effective June 1,
1995. Expenses other than the foregoing increased $215,000 or 12.52% to $1.9
million in 1995 from $1.7 million in 1994. This was primarily attributable to
increased stationery, supplies, and postage costs, resulting from expanding
operations, and a $94,000 increase in miscellaneous losses due to two check
frauds and thefts, which occurred at two branch locations.
INCOME TAXES
The components of income taxes are summarized as follows:
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Current $2,656,972 $2,469,763 $2,372,072
Deferred ( 22,662) (183,090) (196,789)
---------- ---------- ----------
$2,634,310 $2,286,673 $2,175,283
========== ========== ==========
The Company's effective income tax rate was 34.2%, 32.3%, and 31.0%, in the
years ended December 31, 1996, 1995, and 1994, respectively. The increasing
effective rate is the result of the reduced contribution of income from tax-
exempt investments.
LOANS
The following table sets forth the classification of the Company's loans by
major category as of December 31 for each of the last five years:
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
Commercial $ 75,528 $ 65,190 $ 56,730 $ 44,808 $ 39,152
Real estate
mortgage 95,538 83,688 78,551 68,995 60,855
Real estate
construction 2,186 1,535 1,687 2,652 2,897
Home equity
and consumer
installment 52,768 40,401 38,277 32,546 18,722
-------- -------- -------- -------- --------
Total Loans 226,020 190,814 175,245 149,001 121,626
Less: Unearned
income 70 92 48 44 176
Allowance for
loan losses 3,000 2,910 3,000 3,000 2,450
-------- -------- -------- -------- --------
Net loans $222,950 $187,812 $172,197 $145,957 $119,000
======== ======== ======== ======== ========
- 20 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
The Company has not made loans to borrowers outside the United States.
Commercial loans increased $10.3 million from December 31, 1995 to December 31,
1996, but declined to 33.4% of total loans as compared to 34.1% at December 31,
1995. These loans are primarily to borrowers within the Company's market area.
Real Estate loans increased $12.5 million from December 31, 1995, but declined
to 43.3% of the total loan portfolio at December 31, 1996, from 44.7% at
December 31, 1995. Of that $12.5 million increase, $8.4 million was attributable
to commercial mortgages and the balance was attributable to residential
mortgages.
Home equity and consumer installment loans increased $12.4 million, representing
23.3% of total loans at December 31, 1996, as compared to 21.2% at December 31,
1995.
Rate sensitive loans of $34.1 million represented 15.1% of total loans at
December 31, 1996, as compared to $28.1 million or 14.7% of total loans at
December 31, 1995. These rate sensitive loans consist primarily of commercial
loans of $29.8 million and home equity loans of $4.3 million that will reprice
with changes in the prime lending rate.
The following table sets forth certain categories of loans as of December 31,
1996 in terms of contractual maturity:
Within 1 to 5 After 5
1 Year Years Years Total
------- -------- ------- -------
(In Thousands)
Commercial $38,282 $34,486 $2,760 $75,528
Real estate
construction 2,186 -- -- 2,186
------- -------- ------- -------
Total $40,468 $34,486 $2,760 $77,714
======= ======== ======= =======
The following table sets forth the dollar amount of all commercial and real
estate construction loans due one year or more after December 31, 1996, which
have pre-determined interest rates or adjustable interest rates.
1 to 5 After 5
Years Years Total
------- ------ -------
(In Thousands)
Loans with
fixed rates $28,178 $2,602 $30,780
Loans with
adjustable rates 6,308 158 6,466
------- ------ -------
Total $34,486 $2,760 $37,246
======= ====== =======
RISK ELEMENTS
Commercial loans are placed on a non-accrual status when principal or interest
are 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 non-accrual status at the time when
foreclosure proceedings are commenced except where there exists sufficient
collateral to cover the defaulted principal and interest payments or
management's knowledge of the specific circumstances warrant continued accrual.
Installment loans are regularly charged off when principal and interest payments
are six months in arrears. Interest thereafter on such charged- off installment
loans is taken into income when received.
The following schedule sets forth certain information regarding the Company's
non-accrual, past due and renegotiated loans and other real estate owned as of
December 31, of each of the last five years:
December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In Thousands)
Non-accrual
loans (A) $1,308 $1,545 $1,501 $ 483 $ 213
Past due
loans (B) 1,456 59 554 2,934 3,714
Renegotiated
loans (C) 2,567 2,325 1,740 2,366 --
------ ------ ------ ------ -------
Total
non-accrual
past due and
renegotiated
loans 5,331 3,929 3,795 5,783 3,927
Other real
estate owned -- 255 629 458 --
------ ------ ------ ------ -------
Total $5,331 $4,184 $4,424 $6,241 $3,927
====== ====== ====== ====== =======
(A) Generally represents loans as to which the payment of interest or principal
as 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) At December 31, 1996, 1995, 1994 and 1993, the loan portfolio included loans
whose terms had 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, 1996.
- 21 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
There were no loans at December 31, 1996, other than those in the above table,
where the Company was aware of any credit conditions of any borrowers that would
indicate a strong possibility of the borrowers not complying with the present
terms and conditions of repayment and which may result in such loans being
included as non-accrual, past due or renegotiated at a future date. This
statement, as well as the last sentence in footnote (C) above, constitutes
forward-looking statements under the Private Securities Litigation Reform Act of
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a list of factors which could cause actual results to
differ from management's expectations regarding the performance of loans in the
Company's loan portfolio.
At December 31, 1996, 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 at December 31, 1996, decreased $237,000 to $1,308,000 from
$1,545,000 at December 31, 1995. At December 31, 1996, non-accrual loans
consisted of one home equity loan, five mortgage loans, eight commercial loans,
and one consumer loan. All of these loans are in various stages of litigation,
foreclosure, or workout.
Loans past due ninety days or more and still accruing increased $1,397,000 to
$1,456,000 at December 31, 1996, from $59,000 at December 31, 1995. This
increase relates to three mortgage loans, totalling $224,000, and thirteen
commercial loans, totalling $1,186,000, which are included in this category. The
overall increase in this category is primarily due to financial difficulties
encountered by mainly commercial borrowers. However, all of these loans are
expected to either be restructured or brought current in the near future.
For 1996, 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
$367,000. The amount of interest income actually recorded on those loans for
1996 was $219,000. The resultant income lost of $148,000 for 1996 compares to
$204,000 and $162,000 for 1995 and 1994, respectively.
On January 1, 1995, the Company adopted SFAS 114 ("Accounting by Creditors for
Impairment of a Loan") and SFAS 118 ("Accounting by Creditors for Impairment of
a Loan N Income Recognition and Disclosures") as required by generally accepted
accounting principles. In doing so, the Company has identified loans for which
the provisions of these pronouncements apply and has established criteria to
determine whether such loans are impaired. SFAS 114 provides that the provisions
of such Statement are not applicable to large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment. Accordingly,
management has determined that SFAS 114 and 118 do not apply to the following
groups of smaller-balance homogeneous loans:
CATEGORY INVESTMENT
Mortgage: Residential $350,000 or less
Mortgage: Non-Residential 200,000 or less
Commercial: Unsecured 75,000 or less
Commercial: Secured 200,000 or less
Consumer All loans
Home Equity 100,000 or less
A loan evaluated under SFAS 114 is deemed impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. An insignificant delay, which is defined as up to 90 days by the
Company, will not cause a loan to be classified as impaired. A loan is not
impaired during a period of delay in payment if the Company expects to collect
all amounts due, including interest accrued at the contractual interest rate for
the period of delay. Thus, a demand loan or other loan with no stated maturity
is not impaired if the Company expects to collect all amounts due, including
interest accrued at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated independently. The
Company does not aggregate such loans for evaluation purposes.
The Company's policy concerning non-accrual loans states that, except for loans
which are considered to be fully collectible by virtue of collateral held as
well as other relevant factors, loans are placed on a non-accrual status when
payments are 90 days delinquent or more. Therefore, a loan will be considered to
be impaired, when it is 90 days delinquent and it exceeds the balance guidelines
for SFAS 114 non-applicability stated above. It is, therefore, possible for a
loan to be on non-accrual status and not be classified as impaired if the
balance falls within the above stated guidelines.
SFAS 114 also requires that loans renegotiated, as part of a troubled debt
restructuring, be classified as impaired and measured for impairment by
discounting the total expected cash flow under the renegotiated terms at the
loan's original effective interest rate. This requirement applies only to loans
renegotiated on or after the effective date of SFAS 114.
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
- 22 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
received on impaired loans, as well as all non-accrual loans, the Company
follows FDIC guidelines, which apply any payments to principal as long as there
is doubt as to the collectibility of the loan balance.
As of December 31, 1996, based on the above criteria, the Company classified
three commercial loans, totalling $2,077,000, including one renegotiated loan
and five mortgage loans, totalling $894,000, including four renegotiated
residential mortgage loans, as impaired. The impairment of these loans is
measured using the present value of future cash flows for the five renegotiated
loans and is based on the fair value of the underlying collateral for the
remaining three commercial loans and one mortgage loan. Based upon such
evaluation, $685,000 has been allocated to the allowance for loan losses for
impairment.
The following table sets forth from each of the five years ended December 31,
1996, the historical relationships among the amount of loans outstanding, the
allowance for loan losses, the provision for loan losses, the amount of loans
charged-off and the amount of loan recoveries:
Year Ended December 31,
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance of
allowance at
beginning
of year $2,910 $3,000 $3,000 $2,450 $2,035
------ ------ ------ ------ ------
Charge-offs:
Commercial 321 114 234 57 256
Installment 85 33 85 107 87
Mortgage 70 217 23 35 45
------ ------ ------ ------ ------
Total charge-offs 476 364 342 199 388
------ ------ ------ ------ ------
Recoveries:
Commercial 10 108 69 13 1
Installment 22 37 48 41 13
------ ------ ------ ------ ------
Total recoveries 32 145 117 54 14
------ ------ ------ ------ ------
Net charge-offs 444 219 225 145 374
------ ------ ------ ------ ------
Provision for
loan losses 534 129 225 695 789
------ ------ ------ ------ ------
Balance of
allowance at
end of year $3,000 $2,910 $3,000 $3,000 $2,450
====== ====== ====== ====== ======
Ratio of net
charge-offs
to average loans
outstanding 0.22 % 0.12 % 0.14 % 0.11 % 0.34 %
Balance of
allowance at
end of year as
a percentage of
years end loans 1.33 % 1.53 % 1.71 % 2.01 % 2.02 %
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.
The Company regards the majority of the allowance as a general allowance which
is available to absorb losses from all loans. However, for the purpose of
complying with disclosure requirements of the Commission, the table below
presents an allocation of the allowance among various loan categories and sets
forth the percentage of loans in each category to total loans. The allocation of
the allowance as shown in the table should neither be interpreted as an
indication of future chargeoffs, nor as an indication that charge-offs in future
periods will necessarily occur in these amounts or in the indicated proportions.
- 23 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table sets forth the allocation of the allowance for loan losses
at the date indicated by category of loans.
At December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- -----------------
Percent (1) Percent (1) Percent (1) Percent (1) Percent (1)
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------
(Dollars in Thousands)
Commercial $1,499 33.4 $1,517 34.2 $1,478 32.4 $1,450 30.1 $1,207 32.2
Real estate mortgage 717 42.3 628 43.9 786 44.8 690 46.3 609 50.0
Real estate construction 44 1.0 31 0.8 34 1.0 80 1.8 72 2.4
Home equity and
consumer installment 740 23.3 734 21.1 702 21.8 780 21.8 562 15.4
------ ------ ------ ------ ------ ------ ------ ----- ------ -----
$3,000 100.0 $2,910 100.0 $3,000 100.0 $3,000 100.0 $2,450 100.0
------ ------ ------ ------ ------ ------ ------ ----- ------ -----
(1) Represents the percentage of type of loan to total loans outstanding.
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
Commencing with fiscal 1994, the Company has classified its investment
securities into the available for sale and held to maturity categories pursuant
to Statement No. 115 of the Financial Accounting Standards Board "Accounting for
Certain Investments in Debt and Equity Securities" ("Statement No. 115"). For
information regarding Statement No. 115, see Notes to the Company's Consolidated
Financial Statements.
The following table sets forth the carrying value of the Company's investment
securities, both available for sale and held for maturity, as of December 31 for
each of the last three years. Securities available for sale are stated at
estimated fair value while securities held for maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts.
December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
U.S. Treasury $ 58,447 $ 65,668 $ 75,062
U.S. Government agencies 32,471 32,397 25,714
States and political subdivisions 16,668 17,718 19,453
Other debt securities 6,447 7,951 7,783
Equity security 2,926 2,238 1,291
-------- -------- --------
Totals $116,959 $125,972 $129,303
======== ======== ========
The following tables present the estimated fair values and unrealized gains and
losses on investment securities at December 31, 1996:
SECURITIES AVAILABLE FOR SALE
December 31, 1996
-----------------------------------------------------
Amortized Gross Unrealized Estimated
--------------------
Cost Gains Losses Fair Value
------------ ------------ ----------- -----------
(In Thousands)
U.S. Treasury $25,527,311 $ 194,284 $ 1,095 $25,720,500
U.S. Government
agencies 20,803,314 78,340 48,685 20,832,969
States and political
subdivisions 15,329,500 123,655 4,274 15,448,881
Other debt securities 3,606,461 17,706 2,168 3,621,999
Equity security 1,204,882 1,721,260 -- 2,926,142
----------- ---------- --------- -----------
Totals $66,471,468 $2,135,245 $56,222 $68,550,491
=========== ========== ========= ===========
Proceeds from sales and calls of securities available for sale totalled
$4,017,000 and $3,000,000, respectively, during the year ended December 31,
1996. Gross gains of $3,075 and gross losses of $1,950 were realized on those
transactions.
SECURITIES HELD TO MATURITY
December 31, 1996
--------------------------------------------------
Carrying Gross Unrealized Estimated
--------------------
Value Gains Losses Fair Value
--------------------------------------------------
U.S. Treasury $32,725,897 $231,547 $52,819 $32,904,625
U.S. Government
agencies 11,638,493 93,969 26,775 11,705,687
States and political
subdivisions 1,218,945 6,709 -- 1,225,654
Other debt
securities 2,824,709 8,582 1,169 2,832,122
----------- -------- ------- -----------
Totals $48,408,044 $340,807 $80,763 $48,668,088
=========== ======== ======= ===========
- 24 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
LAKELAND BANCORP, INC., AND SUBSIDIARIES
There were no sales of securities held to maturity during the year ended
December 31, 1996. Proceeds from a call of a security held to maturity during
the year ended December 31, 1996, totalled $900,000 and resulted in a gross gain
of $324.
Securities with a carrying value of approximately $ 7,104,000 at December 31,
1996, were pledged to secure public deposits and for other purposes required by
applicable law and regulations.
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of all
debt securities, both available for sale and held to maturity, as of December
31, 1996:
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
-------- ---------- ---------- -------- -------
(Dollars In Thousands)
U.S. Treasury
securities:
Book value $23,451 $34,995 $ -- $ -- $58,447
Yield 5.97% 6.38% -- % -- % 6.22%
Obligations of
U.S. Government
Agencies:
Book value $ 9,416 $23,055 $ -- $ -- % $32,471
Yield 6.26% 6.45% -- % -- % 6.39%
Obligations of
States and
Political
Subdivisions:
Book value $ 3,764 $12,869 $ 35 $ -- $16,668
Yield 6.42% 6.00% 9.66% -- % 6.10%
Other securities:
Book value $ 3,438 $ 2,809 $ 200 $ -- $ 6,447
Yield 6.08% 6.34% 6.50% -- % 6.21%
-------- ---------- ---------- -------- --------
Total book
value $40,069 $73,728 $ 235 $ -- $114,032
======== ========== ========== ======== ========
Weighted
average yield 6.09% 6.33% 6.97% -- % 6.25%
======== ========== ========== ======== ========
The following table sets forth the maturity distribution and weighted average
yields (calculated on the basis of the stated yields to maturity, considering
applicable premium or discount), on a fully taxable equivalent basis, of debt
securities available for sale as of December 31, 1996:
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
-------- ---------- ---------- -------- -------
(Dollars In Thousands)
U.S. Treasury
securities:
Book value $13,859 $11,861 $ -- $ -- $25,720
Yield 6.43% 6.41% -- -- % 6.42%
Obligations of
U.S. Government
Agencies:
Book value $ 6,494 $14,339 $ -- $ -- $20,833
Yield 6.39% 6.31% -- % -- % 6.34%
Obligations of
States and
Political
Subdivisions:
Book value $ 3,764 $11,650 $ 35 $ -- $15,449
Yield 6.42% 6.01% 9.66 % -- % 6.12%
Other securities:
Book value $ 1,316 $ 2,306 $ -- $ -- $ 3,622
Yield 6.08% 6.46% % % 6.32%
-------- ---------- ---------- -------- -------
Total book
value $25,433 $40,156 $ 35 $ -- $65,624
======== ========== ========== ======== =======
Weighted
average yield 6.40% 6.26% 9.66% -- % 6.32%
======== ========== ========== ======== =======
- 25 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
LAKELAND BANCORP, INC., and SUBSIDIARIES
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, 1996:
After After
1 Year 5 Years
Within But Within But Within After 10
1 Year 5 Years 10 Years Years Total
-------- ---------- ---------- -------- -------
(Dollars In Thousands)
U.S. Treasury
securities:
Book value $ 9,592 $23,134 $ -- $ -- $32,726
Yield 5.31% 6.37% -- % -- % 6.06%
Obligations of
U.S. Government
Agencies:
Book value $ 2,922 $ 8,716 $ -- $ -- $11,638
Yield 5.95% 6.67% -- % -- % 6.49%
Obligations of
States and
Political
Subdivisions:
Book value $ -- $ 1,219 $ -- $ $ 1,219
Yield -- % 5.87% -- % -- % 5.87%
Other securities:
Book value $ 2,122 $ 503 $ 200 $ -- $ 2,825
Yield 6.07% 5.85% 6.50% -- % 6.07%
-------- ---------- ---------- -------- -------
Total book
value $14,636 $33,572 $ 200 $ $48,408
======== ========== ========== ======== =======
Weighted
average yield 5.55% 6.42% 6.50% -- % 6.16%
======== ========== ========== ======== =======
For further information regarding the Company's investment securities, see Notes
to the Company's Consolidated Financial Statements.
Deposits
The following table sets forth the average amounts of various types of deposits
for each of the three years ended December 31:
1996 1995 1994
-------- -------- --------
(In Thousands)
Non-interest-bearing
demand deposits $ 61,884 $ 56,840 $ 49,609
Interest-bearing
demand deposits 56,750 53,128 60,794
Savings deposits 105,817 108,734 138,681
Time deposits 101,494 88,169 54,884
-------- -------- --------
Total $325,945 $306,871 $303,968
======== ======== ========
As of December 31, 1996, 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 $ 6,958
Over three months through six months 1,759
Over six months through twelve months 1,826
Over twelve months 3,393
-------
Total $13,936
=======
LIQUIDITY
The Company's primary sources of liquidity are deposits, asset maturities, and
funds provided from operations. At December 31, 1996, liquid assets, consisting
of cash and due from banks, federal funds sold and investment securities that
mature within one year, amounted to $63.2 million. The maturity schedule of the
investment portfolio, at carrying value, indicates that 35.1% of the debt
securities included in the portfolio mature within one year, and 99.79% mature
within five years. For additional information regarding the investment
portfolio, see Notes to Consolidated Financial Statements.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating activities, investing activities and financing activities.
These activities are summarized below:
Year Ended
December 31,
------------------
1996 1995
-------- ------
(In Thousands)
Cash and cash equivalents at
beginning of period $ 33,773 $ 17,511
-------- --------
Operating activities:
Net income 5,061 4,796
Adjustments to reconcile net income
to net cash provided by operating
activities 2,549 3,006
-------- --------
Net cash provided by operating
activities 7,610 7,802
Net cash used in investing activities (30,049) (11,444)
Net cash provided by financing
activities 11,811 19,904
-------- --------
Net (decrease) increase in cash and
equivalents (10,628) 16,262
-------- --------
Cash and cash equivalents at
end of period $ 23,145 $ 33,773
======== ========
- 26 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
LAKELAND BANCORP, INC., and SUBSIDIARIES
Cash and cash equivalents decreased by $10.6 million during 1996. The bulk of
such decrease resulted from investing activities, which used $30.0 million in
cash flow. $35.8 million was invested in the loan portfolio and $2.4 million was
invested in premises and equipment. This was partially offset by a $7.8 million
net cash inflow produced from the investment portfolio.
Operating activities produced $7.6 million of cash flow, $5.1 million of which
was derived from net income.
A total of $11.8 million was provided from financing activities during 1996. A
net increase in deposits of $12.1 million and $1.4 million in proceeds received
from sales of common stock issued pursuant to the Company's dividend
reinvestment and optional cash payment plan were partially offset by cash
dividends paid of $1.7 million.
The Company anticipates that it will have sufficient funds available to meet its
current loan commitments and deposit maturities. At December 31, 1996, the
Company has out-standing loan origination commitments of $8.2 million. Time
deposits that mature in one year or less, at December 31, 1996, totalled $77.4
million. Management believes that a substantial portion of such deposits will
remain with the Company.
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. At
December 31, 1996, the Company had a positive interest gap at the one year or
less time period.
- 27 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
LAKELAND BANCORP, INC., and SUBSIDIARIES
The following table sets forth the estimated maturity/repricing structure of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1996. Except as stated below, the amounts of assets or liabilities shown
which reprice or mature during a particular period were determined in accordance
with the contractual terms of each asset or liability. The table does not assume
any prepayment of fixed-rate loans. The Company has assumed that all interest-
bearing demand accounts and savings accounts will reprice or mature within five
years. The table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the repricing of
certain categories of assets and liabilities, for example, prepayments of loan
and withdrawal of deposits, is beyond the Company's control. As a result,
certain assets and liabilities indicated as repricing within a stated period may
in fact reprice at different times and at different rate levels.
December 31, 1996
-------------------------------------------------
More
Than More
Three Than
Three Months 1 Year More
Months Through Through Than
Or Less One Year 5 Years 5 Years Total
------- --------- ------- ------- -----
(Dollars in Thousands)
Interest-earning assets:
Loans (1)
Adjustable and floating rate commercial $29,848 $ -- $ -- $ -- $ 29,848
Fixed rate commercial 5,067 9,888 28,178 2,602 45,735
Real estate mortgage 3,361 7,297 41,741 42,696 95,095
Real estate construction 1,272 914 -- -- 2,186
Installment and other 8,298 7,535 25,722 11,530 53,085
Investment securities 14,271 28,724 73,729 235 116,959
Other investments (2) 3,612 -- -- -- 3,612
------- -------- -------- -------- --------
Total interest-earning assets 65,729 54,358 169,370 57,063 346,520
------- ------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Interest-bearing demand 2,835 5,802 49,387 -- 58,024
Savings 5,282 10,640 89,718 -- 105,640
Time 35,801 41,581 31,691 -- 109,073
------- ------- -------- -------- --------
Total interest-bearing liabilities 43,918 58,023 170,796 -- 272,737
------- ------- -------- -------- --------
GAP during the period $21,811 $(3,665) $ (1,426) $57,063 $ 73,783
======= ======= ======== ======= ========
Cumulative GAP $21,811 $18,146 $ 16,720 $73,783
======= ======= ======== =======
Interest-sensitive assets as a percent of interest-
sensitive liabilities (cumulative) 153.15% 117.80% 106.13% 127.05%
Cumulative interest-sensitive assets as
a percent of total assets 17.41 31.81 76.67 91.78
Ratio of GAP to total assets 5.78 (0.97) (0.38) 15.11
Ratio of cumulative GAP to total assets 5.78 4.81 4.43 19.54
(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 $4.8 million to $36.8 million at December 31,
1996, from $32.0 million at December 31, 1995, reflecting net proceeds of $1.4
million from issuances of common stock, net income during the year of $5.1
million, dividends to stockholders of $1.7 million, and an unrealized gain, net
of deferred income taxes, on securities available for sale of $49,000.
The FDIC's risk-based capital policy statement imposes a minimum capital
standard on insured banks. The minimum ratio of risk-based capital to risk-
weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. At least half of the total capital is to be comprised
of common stock equity and qualifying perpetual preferred stock, less goodwill
("Tier I capital"). The remainder ("Tier II capital") may consist of mandatory
convertible debt securities, qualifying subordinated debt, other preferred stock
and a portion of the allowance for loan losses. The Federal Reserve Board has
adopted a similar risk-based capital guideline for the Company which is computed
on a consolidated basis.
- 28 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
LAKELAND BANCORP, INC., and SUBSIDIARIES
In addition, the bank regulators have adopted minimum leverage ratio guidelines
(Tier I capital to average quarterly assets, less goodwill) for financial
institutions. These guidelines provide for a minimum leverage ratio of 3% for
financial institutions that meet certain specified criteria, including that they
have the highest regulatory rating. All other holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points.
The following table reflects the Company's capital ratios as of December 31,
1996:
Risk-Based Capital Ratios:
Amount Ratio
------- -----
Actual Tier I Capital $35,576 17.01%
Tier I Capital minimum amount 8,365 4.00
------- -----
Excess $27,211 13.01%
------- -----
Actual Combined Tier I and
Tier II Capital $38,195 18.26%
Combined Tier I and Tier II
Capital minimum requirement 16,730 8.00
------- -----
Excess $21,465 10.26%
======= =====
Leverage Ratio:
Actual Tier I Capital to average
fourth quarter assets $35,576 9.53%
Minimum leverage target * * *
-------- -----
Excess $ * * %
======== =====
* No formal minimum leverage target (other than the three percent floor
described above) has been established for the Company or the Bank as of December
31, 1996.
EFFECTS OF INFLATION
The impact of inflation, as it affects banks, differs substantially from the
impact on non-financial institutions. Banks have assets which are primarily
monetary in nature and which tend to move with inflation. This is especially
true for banks with a high percentage of rate sensitive interest earning assets
and interest bearing liabilities. A bank can further reduce the impact of
inflation with proper management of its rate sensitivity gap. This gap
represents the difference between interest sensitive assets and interest rate
sensitive liabilities. The Company attempts to structure its assets and
liabilities and manage its gap to protect against substantial changes in
interest rate scenarios, thus minimizing the potential effects of inflation.
- 29 -
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Condition LAKELAND BANCORP, INC., and SUBSIDIARIES
- --------------------------------------------------------------------------------
December 31,
------------------------------
ASSETS 1996 1995
------------------------------
Cash and due from banks $ 20,395,240 $ 16,448,253
Federal funds sold 2,750,000 17,325,000
Cash and cash equivalents 23,145,240 33,773,253
Securities available for sale,
at estimated fair value 68,550,491 79,197,499
Securities held to maturity;
estimated fair value of
$48,668,000 in 1996 and $47,416,000 in 1995 48,408,044 46,774,150
Loans 222,949,524 187,812,123
Premises and equipment 9,798,976 8,170,123
Accrued interest receivable 3,485,531 3,626,861
Other assets 1,206,974 1,307,159
------------ ------------
Total assets $377,544,780 $360,661,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest-bearing demand $ 67,346,528 $ 62,590,393
Savings and interest-bearing demand 161,746,887 162,567,499
Club accounts 1,917,278 2,306,027
Time 95,137,066 86,398,671
Time of $100,000 and over 13,935,937 14,079,311
------------ ------------
Total deposits 340,083,696 327,941,901
============ ============
Other liabilities 641,729 679,446
------------ ------------
Total liabilities 340,725,425 328,621,347
============ ============
Commitments -- --
STOCKHOLDERS' EQUITY
Common stock (par value $2.50 per share):
Authorized shares 7,050,819 in 1996
and 6,912,568 in 1995;
issued and outstanding shares 3,375,590
in 1996 and 3,246,954 in 1995 8,438,975 8,117,385
Surplus 19,190,852 16,551,493
Undivided profits 7,946,013 6,176,754
Unrealized gain on securities available for
sale, net 1,243,515 1,194,189
------------ ------------
Total stockholders' equity 36,819,355 32,039,821
============ ============
Total liabilities and stockholders'
------------ ------------
equity $377,544,780 $360,661,168