ITEM 1 - Business
GENERAL -------
Lakeland Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company was organized in March of 1989 and commenced operations on May 19, 1989, upon consummation of the acquisition of all of the outstanding stock of Lakeland Bank, formerly named Lakeland State Bank ("LB" or the "Bank"). On February 20, 1998, the Company acquired Metropolitan State Bank, which became a subsidiary of the Company. On July 15, 1999, the Company completed its acquisition of The National Bank of Sussex County ("NBSC"). On January 28, 2000, the Company merged Metropolitan State Bank into LB, with LB as the survivor. The Company's primary business consists of managing and supervising LB and NBSC. The principal source of the Company's income is dividends paid by its subsidiary banks. At December 31, 2000, the Company had consolidated total assets, deposits, and stockholder's equity of approximately $906.6 million, $800.8 million, and $78.6 million, respectively.
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("Forward-Looking Statements"). Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such Forward-Looking Statements. Certain factors which could materially affect such results and the future performance of the Company are described in Exhibit 99.1 to this Annual Report on Form 10-K.
LB was organized as Lakeland State Bank on May 19, 1969. LB is a state banking association, the deposits of which are insured by the Federal Deposit Insurance Corporation ("FDIC"). LB is not a member of the Federal Reserve System. LB is a full-service commercial bank, offering a complete range of consumer, commercial, and trust services. LB's 19 branch offices are located in the following five New Jersey counties: Morris, Passaic, Sussex, Essex, and Bergen.
NBSC was organized as The Branchville National Bank in 1933, and became The National Bank of Sussex County in 1957. It is a federally chartered national banking association and a member of the Federal Reserve System, and its deposits are insured by the FDIC. NBSC is a full service commercial bank with ten branches, an operations center, and an administration center-all within Sussex County, New Jersey. Its customers primarily are individuals who reside in, and small to medium-sized businesses that are located in, northwestern New Jersey.
Commercial Bank Services Through its bank subsidiaries, the Company 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, the Company offers collection, wire transfer, and night depository services. In the second quarter of 2000, LB acquired NIA National Leasing Company. Since its acquisition, this company has operated as a division of LB under the name Lakeland Bank Equipment Leasing Division. This acquisition provides a solution to small and medium sized companies who wish to choose leasing over other financial alternatives.
Consumer Banking The Company 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, and safe deposit services. LB and NBSC also provide brokerage services to their customers through a third party. NBSC also provides insurance services through a joint venture with 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.
Competition The Company 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 the Company's market area. These larger institutions have substantially larger lending capacities and typically offer services which the Company does not offer.
In recent years, the financial services industry has expanded rapidly as barriers to competition within the industry have become less significant. Within this industry, banks must compete not only with other banks and traditional financial institutions, but also with other business corporations that have begun to deliver financial services.
Concentration The Company is 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.
Employees At December 31, 2000, there were 376 persons employed by the Company.
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 a bank 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 of 1994 permits bank holding companies to acquire banks in states other than their home state, regardless of applicable state law. This act also authorizes banks to merge across state lines, thereby creating interstate branches. Under the act, each state had the opportunity either to "opt out" of this provision, thereby prohibiting interstate branching in such state, or to "opt in". 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. New Jersey enacted legislation to authorize 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. However, under federal law, federal savings banks which meet certain conditions may branch de novo into a state, regardless of state law.
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 brokerage services through a third party.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Board 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 other subsidiaries) in connection with any extension of credit or lease or sale of property or furnishing of services.
The policy of the Federal Reserve Board provides that a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support such subsidiary banks in circumstances in which it might not do so absent such policy.
Recent Legislation - ------------------ The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in early 2000. The Modernization Act:
. allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than currently is permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals; . allows insurers and other financial services companies to acquire banks; . removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and . establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.
The Federal Reserve Board also provided regulations on procedures which would be used against financial holding companies that have depository institutions which fall out of compliance with the management or capital criteria. Only financial holding companies can own insurance companies and engage in merchant banking.
The Office of the Comptroller of the Currency has adopted rules to allow national banks to form subsidiaries to engage in financial activities allowed for financial holding companies. Electing national banks must meet the same management and capital standards as financial holding companies, but may not engage in insurance underwriting, real estate development, or merchant banking. Sections 23A and 23B of the Federal Reserve Act apply to financial subsidiaries and the capital invested by a bank in its financial subsidiaries will be eliminated from the bank's capital in measuring all capital ratios.
The Modernization Act also modified other current financial laws, including laws related to financial privacy and community reinvestment.
Lakeland Bank - ------------- LB is a state chartered banking association subject to supervision and examination by the Department of Banking of the State of New Jersey and the FDIC. The regulations of the State of New Jersey and FDIC govern most aspects of LB's business, including reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends, and location of branch offices. LB is subject to certain restrictions imposed by law on, among other things, (i) the maximum amount of obligations of any one person or entity which may be outstanding at any one time, (ii) investments in stock or other securities of the Company or any subsidiary of the Company, and (iii) the taking of such stock or securities as collateral for loans to any borrower.
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a state bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. 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 that record into account in its evaluation of certain applications by the bank. Under the FDIC's CRA evaluation system, the FDIC focuses on three tests: (i) a lending test, to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices.
NBSC - ----
Almost every aspect of NBSC's operations is regulated or supervised by either the Office of the Comptroller of the Currency, the Federal Reserve Board, or the FDIC. These agencies
regulate loans, investments, mergers and acquisitions, borrowings, dividends, location of branch offices, and reserves against deposits. NBSC must also comply with federal banking laws. Among other things, these laws restrict the amount that NBSC may lend a single borrower at one time.
Regulation of Bank Subsidiaries - ------------------------------- There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company's non-bank susidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.
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, 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 to, among other things, 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. A separate fund, the Bank Insurance Fund ("BIF"), was established for banks.
FIRREA and the Crime Control Act of 1990 expanded the enforcement powers available to federal banking regulators including providing greater flexibility to impose enforcement actions, expanding the persons dealing with a bank who are subject to enforcement actions, and increasing the potential civil and criminal penalties.
Under FIRREA, failure to meet capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC. Furthermore, under FIRREA, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository 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. These 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, 2000, the Company's Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio were 13.58% and 14.84%, 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. 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. The Company is subject to similar minimum leverage criteria. The Company's leverage ratio was 8.47% at December 31, 2000.
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".
Dividend Restrictions - --------------------- The Company is a legal entity separate and distinct from LB and NBSC. 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 LB or NBSC. All such dividends are subject to various limitations imposed by federal and state laws and by
regulations and policies adopted by federal and state regulatory agencies. Under State law, a 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 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 these policy statements and guidelines could limit the amount of dividends which the Company and its subsidiary banks 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 "Regulatory Matters" Note of the Notes to Consolidated Financial Statements for further information regarding dividends.
FDICIA - ------ Enacted in December 1991, FDICIA substantially revised the bank regulatory provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of regulatory corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies were required to establish minimum levels of capital (including both a leverage limit and a risk-based capital requirement) and specify for each capital measure the levels at which depository institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized".
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 it 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 it 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. As of December 31, 2000, the Company, LB and NBSC met all regulatory requirements for classification as "well capitalized" under the regulatory framework for prompt corrective action.
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.
BIF Premiums and Recapitalization of SAIF - ----------------------------------------- FDIC insured banks are required to pay FDIC premiums based on the institution's respective risk classification. Based on their risk classifications LB and NBSC did not pay an FDIC premium in 2000. In addition, LB and NBSC and all other members of the Bank Insurance Fund or "BIF" are required to help fund interest payment obligations that the Financing Corporation ("FICO") has assumed to recapitalize the Savings Association Insurance Fund ("SAIF"). During 2000, a FICO premium of approximately two basis points was charged on BIF deposits. Based on this premium, LB and NBSC paid FICO premiums of $102,000 and $50,000 respectively in 2000.
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.
ITEM 2
ITEM 2 - Properties The Company's principal office is located at 250 Oak Ridge Road, Oak Ridge, New Jersey. NBSC operates an administrative center and an operations center, all in Sussex County, New Jersey.
The Company operates 29 banking locations located in Passaic, Morris, Sussex, Bergen, and Essex Counties, New Jersey. LB's Wantage office is leased under a lease expiring October 31, 2006. LB's Rockaway office is under a lease expiring May 15, 2009. LB's Newton office is under a month-to-month lease which began on October 1, 2000. LB's Wharton Office is under a lease, expiring August 22, 2005. LB's Ringwood office is under a lease, expiring March 1, 2003. LB's Fairfield office is under a lease, expiring February 28, 2002. NBSC's Vernon office is under a lease, expiring September 2001. For information regarding all of the Company's rental obligations, see Notes to Consolidated Financial Statements.
All other offices of the Company are owned and are unencumbered.
ITEM 3
ITEM 3 - Legal Proceedings There are no significant pending legal proceedings involving the Company other than those arising out of routine operations. Lakeland's management does not anticipate that the ultimate outcome of the Company's litigation will have a material adverse effect on the financial condition or results of operations of the Company on a consolidated basis.
ITEM 4
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 2000.
ITEM 4A - Executive Officers of the Registrant The following table sets forth the name and age of each executive officer of the Company. 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.
Name and Age Officer of Position with the Company, its Subsidiary The Company Banks, and Business Experience Since
Roger Bosma 1999 President and Chief Executive Officer Age 58 of the Company (June, 1999 - Present); Executive Vice President, Hudson United Bancorp (May, 1997 - June, 1999); President and Chief Executive Officer, Independence Bank of New Jersey (prior years - May, 1997)
Arthur L. Zande 1971 Vice President and Treasurer of the Age 66 Company (June, 1999 - Present); President and Chief Executive Officer, LB (June, 1999 - Present); Executive Vice President and Chief Executive Officer of the Company and LB (prior years - June, 1999)
Robert A. Vandenbergh 1999 Executive Vice President and Chief Age 49 Lending Officer of the Company (October, 1999 - Present); President, NBSC (November, 1998 - Present); Executive Vice President, NBSC (1997 - November, 1998); Chief Lending Officer, NBSC (prior years - 1997)
Joseph F. Hurley 1999 Executive Vice President and Chief Age 50 Financial Officer of the Company (November, 1999 - Present); Executive Vice President and Chief Financial Officer, Hudson United Bancorp (May, 1997 - November, 1999); Vice President and Chief Accounting Officer, Prudential Insurance Company (prior years - May, 1997)
Jeffrey J. Buonforte 1999 Executive Vice President and Chief Age 49 Retail Officer of the Company (November, 1999 - Present); Director, Business Development, Price Waterhouse Coopers (September, 1998 - November, 1999); Vice President and Senior Regional Manager, Bank of New York (prior years - September, 1998)
Louis E. Luddecke 1999 Executive Vice President and Chief Age 54 Operations Officer of the Company (October, 1999 - Present); Executive Vice President and Chief Financial Officer, Metropolitan State Bank (prior years - October, 1999)
Steven Schachtel 2000 President, Lakeland Band Equipment Age 43 Leasing Division April 2000 - Present); President, NIA National Leasing (prior years - April 2000)
PART II
ITEM 5
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the common stock of Lakeland Bancorp, Inc. have been traded under the symbol LBAI on the NASDAQ National Market since February 22, 2000 and in the over the counter market prior to this date. As of December 31, 2000, there were 3,841 shareholders of record of common stock. The following table sets forth the range of the high and low daily closing prices of the common stock. Bloomberg provides the information prior to February 22, 2000. Nasdaq provides information fot periods after that date. Prices and dividends have been adjusted to reflect the 5% stock dividend paid on November 15, 2000.
(1) Adjusted to reflect the acquisition of High Point Financial Corp.
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, LB, NBSC and bank regulatory policies.
The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of the bank will be unimpaired and the bank will have a surplus of not less than 50% of its capital stock, or, if not, the payment of such dividend will not reduce the surplus of the bank. Under this limitation, approximately $8.0 million was available for payment of dividends from LB to the Company as of December 31, 2000.
NBSC may not declare dividends in excess of the current year's earnings, plus the retained earnings from the prior two years without prior approval from the Office of the Comptroller of the Currency. In addition, if NBSC sustains losses that exceed its aggregate retained earnings, NBSC may not pay dividends until the losses are recovered. Under these limitations approximately $3.3 million was available for the payment of dividends from NBSC to the Company as of December 31, 2000.
Capital guideline and other regulatory requirements may further limit the Company's and its bank subsidiaries' ability to pay dividends. See "Item 1 - Business - Supervision and Regulation - Dividend Restrictions."
ITEM 6
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents a review of Lakeland Bancorp, Inc.'s consolidated results of operations and financial condition. You should read this section in conjunction with the consolidated financial data that is presented on the preceding page as well as the accompanying notes to financial statements. As used in the following discussion, the term "Company" refers to Lakeland Bancorp, Inc. The Company's wholly owned banking subsidiaries--Lakeland Bank (Lakeland) and the National Bank of Sussex County (NBSC)--are collectively referred to as "the Banks." Metropolitan State Bank (Metropolitan) was merged into Lakeland on January 28, 2000.
Statements Regarding Forward-Looking Information
The information disclosed in this document includes various forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to credit quality (including delinquency trends and the allowance for possible loan losses), corporate objectives, and other financial and business matters. The words "anticipates", "projects", "intends", "estimates", "expects", "believes", "plans", "may", "will,", "should", "could", and other similar expressions are intended to identify such forward-looking statements. The Company cautions that these forward-looking statements are necessarily speculative and speak only as of the date made, and are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from such forward-looking statements.
In addition to the factors disclosed by the Company elsewhere in this document, the following factors, among others, could cause the Company's actual results to differ materially and adversely from such forward-looking statements: pricing pressures on loan and deposit products; competition; changes in economic conditions nationally, regionally and in the Company's markets; the extent and timing of actions of the Federal Reserve Board; changes in levels of market interest rates; clients' acceptance of the Company's products and services; credit risks of lending activities and competitive factors; and the extent and timing of legislative and regulatory actions and reforms.
The above-listed risk factors are not necessarily exhaustive, particularly as to possible future events, and new risk factors may emerge from time to time. Certain events may occur that could cause the Company's actual results to be materially different than those described in the Company's periodic filings with the Securities and Exchange Commission. Any statements made by the Company that are not historical facts should be considered to be forward-looking statements. The Company is not obligated to update and does not undertake to update any of its forward-looking statements made herein.
Financial Overview
The year ended December 31, 2000 represented a year of record earnings for the Company as well as a year of growth. The year 2000 was the first full year following the integration of NBSC and Metropolitan. During 2000, the Company acquired a leasing company, acquired a branch, opened a new branch, and planned the opening of three additional branches early in 2001.
In comparing 2000 earnings with results in 1999, merger-related and restructuring charges in 1999 must be considered. Therefore, the reader should consider net income in two ways: 1) Core Earnings which exclude any one-time charges, and 2) Net Income which includes one-time charges.
Net income for 2000 was $10.0 million or $0.75 per diluted share. Return on average assets was 1.16% and return on average equity was 13.43%. In 1999, net income was $5.4 million including merger related charges or $0.40 per diluted share. Return on Average Assets was 0.65% for 1999 and Return on Average Equity was 7.64% for 1999.
Net income for 2000 was 22% higher than Core Earnings in 1999 of $8.2 million or $0.61 per diluted share. In 1999, Return on Average Assets was 0.99% and Return on Average Equity was 11.58% excluding one time charges. For 1998, net income including $324,000 in restructuring charges was $8.0 million or $0.60 per diluted share. Return on Average Assets in 1998 was 1.04% and Return on Average Equity was 11.03%.
Net interest income
Net interest income is the difference between interest income on earning assets and the interest cost of funds supporting those assets. The Company's net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities. Net interest income increases when the Company can use noninterest bearing deposits to fund or support interest-earning assets.
Net interest income for 2000 on a tax equivalent basis was $37.8 million, representing an increase of $2.7 million or 7.7% from the $35.0 million earned in 1999. Net interest income for 1998 on a tax equivalent basis was $32.9 million. Net interest income improved from 1999 to 2000 primarily because earning assets increased by $24.6 million. Similarly, the increase in net interest income in 1999 from 1998 resulted from an increase in earning assets of $71.4 million.
Interest income and expense volume/rate analysis. The following table shows ------------------------------------------------- the impact that changes in average balances of the Company's assets and liabilities and changes in average interest rates have had on the Company's net interest income over the past three years. This information is presented on a tax equivalent basis assuming a 35% tax rate. If a change in interest income or expense is attributable to a change in volume and a change in rate, the amount of the change is allocated proportionately.
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS
(tax equivalent basis, in thousands)
The following table reflects the components of the Company's net interest income, setting forth for the years presented, (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest-earning assets
and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities and (5) the Company's net yield on interest-earning assets. Rates are computed on a tax equivalent basis.
CONSOLIDATED STATISTICS ON A TAX EQUIVALENT BASIS
(A) Includes nonaccrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. (B) Includes certificates of deposits and interest-bearing cash accounts. (C) Net interest income divided by interest earning assets.
Total interest income on a tax equivalent basis increased from $55.3 million in 1999 to $59.5 million in 2000, an increase of $4.2 million. The increase in interest income in 2000 was due to a $24.6 million increase in interest-earning assets and a 31 basis point increase in the yield on interest-earning assets. The increase in yield reflected an increase in the overall rate environment in 2000 and also reflected a more favorable mix in earning assets. The increase in interest-earning assets was due to growth in the loan and investment portfolios.
The increase in interest income from $52.8 million in 1998 to $55.3 million in 1999 resulted from a $71.4 million increase in earning assets which was partially offset by a 38 basis point decline in the yield on earning assets caused by the decline in rates which occurred in 1998 and in the first half of 1999.
Total interest expense increased from $20.2 million in 1999 to $21.7 million in 2000 as a result of a $9.7 million increase in interest-bearing liabilities and a 19 basis point increase in the Company's cost of funds. The increase in the cost of funds resulted from the increase of the overall interest rate environment in the year 2000 and from an increase in time deposits. Total interest expense increased from $19.9 million in 1998 to $20.2 million in
1999 as a result of a $54.4 million increase in interest-bearing liabilities partially offset by a 28 basis point decrease in the cost of funds.
Net Interest Margin
Net interest margin is calculated by dividing net interest income on a fully taxable equivalent basis by average interest-earning assets. The Company's net interest margin was 4.77%, 4.56% and 4.72% for 2000, 1999 and 1998, respectively. The increase in the net interest margin from 1999 to 2000 results from higher rates earned on loans and investment securities which more than offset higher rates paid on deposits. The loan yield increased 21 basis points, the yield on taxable investment securities increased 28 basis points, and the yield on the tax-exempt investment portfolio increased 28 basis points. The cost of funds increased 19 basis points. The decrease in the net interest margin from 1998 to 1999 resulted from a 18 basis point decline in yields in the taxable investment portfolio and a 43 basis point decline in the yield on the loan portfolio.
The average cost of the Company's deposits was 2.73%, 2.64% and 2.86%, for 2000, 1999 and 1998, respectively.
Provision For Possible Loan Losses
In determining the provision for possible loan losses, management considers historical loan loss experience, changes in composition and volume of the portfolio, the level and composition of non-performing loans, the adequacy of the allowance for possible loan losses, and prevailing economic conditions. The provision for possible loan losses was $2.0 million in 2000, $1.8 million in 1999, and $698,000 in 1998. The increase in the provision from 1999 to 2000 was due to management's evaluation of the loan portfolio. For more information, see Financial Condition--Risk Elements below. Net charge-offs decreased from $2.1 million in 1999 to $778,000 in 2000. Net charge-offs as a percent of average loans outstanding decreased from 0.45% in 1999 to 0.16% in 2000.
The 1999 provision for possible loan losses at $1.8 million increased from $698,000 in 1998. The increase in the 1999 provision for possible loan losses was due to an increase in net charge-offs from 1998 to 1999 and included a $440,000 provision made to conform provisioning policies among subsidiary banks. The ratio of net charge-offs to average loans outstanding was 0.23% in 1998.
Noninterest Income
Noninterest income increased $1.4 million or 22.3% to $7.7 million in 2000 from $6.3 million in 1999 and represented 17.5% of total income for 2000. Total income includes net interest income plus noninterest income. The primary source of this increase was $1.5 million in gains on sales of leases generated from the Company's leasing division which was purchased early in second quarter 2000. Also contributing to the increase in noninterest income were higher service charges collected on deposit accounts. Commissions and fees increased from $904,000 in 1999 to $1.2 million in 2000. The increase in commissions and fees resulted primarily from an increase in loan fees and in commissions and fees on investment services. Other income decreased from $1.2 million in 1999 to $820,000 in 2000 as a result of decreases in gains on sales of loans. Noninterest income increased $207,000 or 3.4% to $6.3 million in 1999 from $6.1 million in 1998 and represented 15.8% of total income for 1999. Noninterest income increased from 1998 to 1999 as a result of increased service fees collected on deposit accounts and due to fees generated by the introduction of a debit card at one of the Company's subsidiaries.
Noninterest Expense
Noninterest expenses in 2000 decreased $2.7 million or 8.9% over 1999. Included in the 1999 expense is $3.5 million in merger related and restructuring charges. Excluding merger related charges, noninterest expense increased from $26.7 million to $27.5 million, an $829,000 or 3.1% increase. Salaries and benefits, the largest component of noninterest expense, increased by $98,000 or 0.7%. Normal merit increases and costs related to the addition of the leasing division were offset by decreased medical expenses and declines in staffing related to the acquisitions of NBSC and Metropolitan as positions were consolidated. Other expense categories increased in the aggregate by $731,000 or 6.2%. Other expenses increased due to increased costs of occupancy, furniture
and equipment related to the addition of new branches, costs related to the leasing division and improvements in technology.
Noninterest expense in 1999 increased $5.2 million or 20.7% over 1998. Included in 1999 noninterest expense were $3.5 million in one-time merger related charges related to the acquisitions of NBSC and Metropolitan. Salaries and benefits increased by $1.4 million or 10.4% resulting from increased medical claim expense, normal salary increases and the addition of new people to the executive management team. Other expense categories increased in the aggregate by $594,000 or 6.2% resulting from costs related to operating and disposing of other real estate and from increases in telephone expenses and marketing expense.
The efficiency ratio is calculated by dividing total noninterest expense by total revenue. In 2000, the Company's efficiency ratio improved to 61.9% from 66.4% in 1999 (excluding merger-related charges) and 65.8% in 1998 due to cost savings following the merger of Metropolitan and NBSC.
Income Taxes
The Company's effective income tax rate was 31.9%, 33.4% and 35.7%, in the years ended December 31, 2000, 1999 and 1998, respectively. The Company's effective tax rate dropped from 33.4% in 1999 to 31.9% in 2000 due to merger related expenses recorded in 1999 which were not tax deductible.
Financial Condition
Total assets increased from $830.2 million on December 31, 1999 to $906.7 million on December 31, 2000, an increase of $76.5 million, or 9.2%, resulting from growth in the loan portfolio and investment portfolio. Total assets at year-end 1999 increased $27.2 million or 3.4% from year-end 1998.
Loans
The Banks primarily serve Bergen, Morris, Passaic, Sussex and Essex counties in Northern New Jersey and the surrounding areas. All of the Bank's borrowers are U.S. residents or entities.
Total loans increased from $476.3 million on December 31, 1999 to $521.0 million on December 31, 2000, an increase of $44.7 million or 9.4%. The increase in loans generally was in the consumer portfolio which increased from $106.9 million in 1999 to $137.8 million in 2000, an increase of $30.9 million or 28.9%. In 2000, the Company purchased approximately $20 million in consumer loan portfolios which contributed to this increase. The real estate mortgage portfolio also increased $11.5 million or 8.4%. In 1999, total loans increased $26.2 million to $476.3 million as a result of mortgage growth generated by Metropolitan which began offering mortgages for the first time.
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:
The following table shows the percentage distributions of loans by category as of December 31 for each of the last five years.
At December 31, 2000, there were no concentrations of loans exceeding 10% of total loans outstanding other than loans that are secured by real estate. 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.
The following table sets forth certain categories of loans as of December 31, 2000, in terms of contractual maturity due:
Risk Elements
Commercial loans are placed on a non-accrual status with all accrued interest and unpaid interest reversed if (a) because of the deterioration in the financial position of the borrower they are maintained on a cash basis (which means payments are applied when and as received rather than on a regularly scheduled basis), (b) payment in full of interest or principal is not expected, or (c) principal and interest has been in default for a period of 90 days or more unless the obligation is both well secured and in process of collection. Residential 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, and management's knowledge of the specific circumstances warrant continued accrual. Consumer loans are generally charged off when principal and interest payments are four months in arrears. Interest thereafter on such charged-off consumer 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, for each of the last five years:
(A) Generally represents loans as to which the payment of interest or principal is in arrears for a period of more than ninety days. Current policy requires that interest previously accrued on these loans and not yet paid be reversed and charged against interest income during the current period.
(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 if collection of the debt is proceeding in due course and collection efforts are reasonably expected to result in repayment of the debt or in its restoration to a current status.
(C) The loan portfolio includes loans whose terms have been renegotiated due to financial difficulties of borrowers. All such loans are reviewed quarterly to determine if they are performing in accordance with the renegotiated terms.
Non-accrual loans decreased $397,000 to $2.6 million at December 31, 2000, from $3.0 million at December 31, 1999. All of these loans are in various stages of litigation, foreclosure, or workout. Loans past due ninety days or more and still accruing decreased $218,000 to $2.0 million at December 31, 2000, from $2.2 million at December 31, 1999.
For 2000, 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, is approximately $517,000. The amount of interest income actually recorded on those loans for 2000 was $446,000. The resultant income loss of $71,000 for 2000 compares to losses of $138,000 and gains of $13,000 for 1999 and 1998, respectively.
Loans specifically evaluated are deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreements. Loans which are in process of collection will not be classified as impaired. A loan is not impaired during the process of collection of payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate. All commercial loans identified as impaired are evaluated by an independent loan review consultant. The Company aggregates consumer loans and residential mortgages 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 and in the process of collection, loans are placed on a non-accrual status when payments are 90 days delinquent or more. It is possible for a loan to be on non-accrual status and not be classified as impaired if the balance of such loan is relatively small and, therefore, that loan has not been specifically reviewed for impairment.
Loans, or portions thereof, are charged off in the period that the loss is identified. Until such time, an allowance for loan loss is maintained for estimated losses. With regard to interest income recognition for payments received on impaired loans, as well as all non-accrual loans, the Company follows regulatory 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, 2000, based on the above criteria, the Company had impaired loans totaling $4.5 million (including $2.5 million in non-accrual loans). The impairment of these loans is based on the fair value of the underlying collateral for these loans. Based upon such evaluation, $839,000 has been allocated to the allowance for possible loan losses for impairment. At December 31, 2000, the Company also had $4.8 million in loans that were rated substandard that were not classified as non-performing or impaired.
There were no loans at December 31, 2000, other than those designated non-performing, impaired or substandard, 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.
The following table sets forth for each of the five years ended December 31, 2000, the historical relationships among the amount of loans outstanding, the allowance for possible loan losses, the provision for possible loan losses, the amount of loans charged off and the amount of loan recoveries:
The ratio of the allowance for possible loan losses to loans outstanding reflects management's evaluation of the underlying credit risk inherent in the loan portfolio. The determination of the adequacy of the allowance for possible loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management. The evaluation process is undertaken on a quarterly basis.
Methodology employed for assessing the adequacy of the allowance consists of the following criteria:
. The establishment of reserve amounts for all specifically identified criticized loans that have been designated as requiring attention by the Company's external loan review program.
. The establishment of reserves for pools of homogeneous types of loans not subject to specific review, including 1 - 4 family residential mortgages, and consumer loans.
. The establishment of reserve amounts for the non-criticized loans in each portfolio based upon the historical average loss experience for these portfolios.
. An allocation for all off-balance sheet exposures.
Consideration is given to the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company's lending staff, underwriting policies, loss histories, delinquency trends, and the cyclical nature of economic and business conditions. Since many of the Company's loans depend on the sufficiency of collateral as a secondary source of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company from loss.
Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for possible loan losses to be adequate at December 31, 2000.
The following table shows how the allowance for possible loan losses is allocated among the various types of loans that the Company has outstanding. This allocation is based on management's specific review of the credit risk of the outstanding loans in each category as well as historical trends.
Investment Securities
The Company has classified its investment securities into the available for sale and held to maturity categories pursuant to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
The following table sets forth the carrying value of the Company's investment securities, both available for sale and held to maturity, as of December 31 for each of the last three years. Investment securities available for sale are stated at fair value while securities held for maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts.
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 investment securities available for sale as of December 31, 2000:
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 investment securities held to maturity as of December 31, 2000:
Deposits
Total deposits increased from $736.7 million on December 31, 1999 to $800.8 million on December 31, 2000, a growth of $64.1 million, or 8.7%. Total deposits in 1999 increased $24.9 million or 3.5% from December 31, 1998.
As of December 31, 2000, 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):
Maturity - --------------- Within 3 months $29,009 Over 3 through 6 months 10,478 Over 6 through 12 months 15,907 Over 12 months 5,642 ---------- Total $61,036 ==========
Liquidity
"Liquidity" measures whether an entity has sufficient cash flow to meet its financial obligations and commitments on a timely basis. The Company is liquid when its subsidiary banks have the cash available to meet the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned expenditures and satisfy its debt obligations.
Liquidity at the bank subsidiaries. The subsidiary banks fund loan demand ----------------------------------- and operation expenses from five sources:
. Net income.
. Deposits. The subsidiary banks can offer new products or change their rate structure in order to increase deposits. In 2000, the Company generated $64.0 million in funds in net deposit growth.
. Sales of securities and overnight funds. At year-end 2000, the Company had $187.9 million in securities designated "available for sale" and $6.6 million in overnight funds.
. Overnight credit lines. Lakeland and NBSC are members of the Federal Home Loan Bank of New York (FHLB). One membership benefit is that members can borrow overnight funds. Lakeland and NBSC have respective credit lines of $57.1 million and $29.7 million at the FHLB. Lakeland has overnight federal funds lines available for it to borrow up to $11.5 million.
Management of the subsidiary banks believe that their current level of liquidity is sufficient to meet their current and anticipated operational needs.
The Banks anticipate that they will have sufficient funds available to meet their current loan commitments and deposit maturities. At December 31, 2000, the Banks had outstanding loan origination commitments of $74.9 million. Time deposits that mature in one year or less, at December 31, 2000, totaled $218.9 million. The first sentence in this paragraph constitutes a Forward Looking Statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from anticipated results due to a variety of factors, including uncertainties relating to general economic conditions; unanticipated decreases in deposits; changes in or failure to comply with governmental regulations; and uncertainties relating to the analysis of the Company's assessment of rate sensitive assets and rate sensitive liabilities and relating to the extent to which market factors indicate that a financial institution such as Lakeland should match such assets and liabilities.
Interest Rate Risk
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.
As a financial institution, the Company's potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Based upon the Company's nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Company does not own any trading assets and does not have any hedging transactions in place, such as interest rate swaps and caps.
The Company's Board of Directors has adopted an Asset/Liability Policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. The Company's performance as compared to the Asset/Liability Policy is monitored by its Board of Directors. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Chief Retail Officer and certain other senior officers. This committee meets monthly to review the Company's financial results and to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.
The Company monitors and controls interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as "gap analysis") and an interest rate risk management model. With the interest rate risk management model, the Company projects future net interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Company's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or "interest rate sensitivity gap") between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates; future cash flows and discount rates.
Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures.
The following table sets forth the estimated maturity/repricing structure of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2000. 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 majority of interest-bearing demand deposits and savings deposits are assumed to be "core" deposits, or deposits that will remain at the Company regardless of market interest rates. Therefore, 80% of the interest-bearing deposits and 75% of the savings deposits are shown as maturing or repricing in the "after 1 but within 5 years" column. Lakeland has assumed that all interest-bearing demand accounts and
savings accounts will reprice or mature within five years. The table does not assume any prepayment of fixed-rate loans.
The table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities, for example, prepayments of loans and withdrawal of deposits, is beyond the Company's control. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels.
Changes in estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the impact of general interest rate movements on the Company's net interest income or net portfolio value.
Because of the limitations in the gap analysis discussed above, members of the Company's Asset/Liability Management Committee believe that the interest sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet including the effects of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the probability of interest rate changes and the behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance sheet items.
The starting point (or "base case") for the following table is an estimate of the Company's net portfolio value at December 31, 2000 using current discount rates, and an estimate of net interest income for 2001 assuming that both interest rates and the Company's interest-sensitive assets and liabilities remain at December 31, 2000 levels. The "rate shock" information in the table shows estimates of net portfolio value at December 31, 2000 and net interest income for 2001 assuming fluctuations or "rate shocks" of plus 100 and 200 basis points and minus 100
and 200 basis points. Rate shocks assume that current interest rates change immediately. The information set forth in the following table is based on significant estimates and assumptions, and constitutes a forward looking statement within the meaning of that term set forth in Rule 173 of the Securities Act of 1933 and Rule 3-6 of the Securities Exchange Act of 1934.
Capital Resources
Stockholders' equity increased $6.3 million to $78.6 million at December 31, 2000, from $72.3 million at December 31, 1999, reflecting net income during the year of $10.0 million, cash dividends to stockholders of $3.9 million, an unrealized securities gain, net of deferred income taxes, of $2.1 million and net proceeds from the exercise of stock options of $236,000.
Book value per share (total stockholders' equity divided by the number of shares outstanding) increased from $5.44 on December 31, 1999 to $5.99 on December 31, 2000 as a result of increased income and a reduction of the unrealized loss on securities available for sale. Book value per share was $5.56 on December 31, 1998.
The $9.3 million deficit in undivided profits contained in the December 31, 1998 consolidated financial statements is the result of a bookkeeping entry charging undivided profits $15.8 million in connection with the Company's accounting for its 2 for 1 stock split effected in the form of a 100% stock dividend distributed on October 1, 1998. In accordance with New Jersey corporate law, the Company's Board of Directors on March 10, 1999, approved the reversing of this accounting treatment of the stock dividend, thereby moving $10.8 million from the capital stock account to the undivided profits account to more accurately reflect the Company's financial condition. This reclassification was made in the first quarter of 1999.
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 possible loan losses. The Federal Reserve Board has adopted a similar risk-based capital guideline for the Company which is computed on a consolidated basis.
In addition, the bank regulators have adopted minimum leverage ratio guidelines (Tier I capital to average quarterly assets, less goodwill) for financial institutions. These guidelines provide for a minimum leverage ratio of 3% for financial institutions that meet certain specified criteria, including that they have the highest regulatory rating. All other holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The following table reflects capital ratios of the Company and its subsidiaries as of December 31, 2000 and 1999:
N/A - Metropolitan was merged into Lakeland on January 28, 2000.
Recent Accounting Pronouncements
In June 1998, the SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" was amended in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 effective January 1, 2001. No adjustment was required as a result of the change in accounting principle.
Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS No. 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2000, 1999 or 1998.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which replaces SFAS No.125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.
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 rate sensitive assets and interest rate sensitive liabilities. Lakeland attempts to structure its assets and liabilities and manage its gap to protect against substantial changes in interest rate scenarios, thus minimizing the potential effects of inflation.
ITEM 7A
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risks
See "Management's Discussion and Analysis of Financial Condition and Results of Operations"
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants --------------------------------------------------
Board of Directors and Stockholders Lakeland Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Lakeland Bancorp, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lakeland Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania January 18, 2001
Lakeland Bancorp, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
Lakeland Bancorp, Inc. and Subsidiaries CONSOLIDATED INCOME STATEMENTS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements
Lakeland Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements
Lakeland Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
Lakeland Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Lakeland Bancorp, Inc. (the Company) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiaries, Lakeland Bank (Lakeland) and The National Bank of Sussex County (NBSC) (collectively, the Banks). Metropolitan State Bank (Metropolitan) was fully merged into Lakeland on January 28, 2000. The Banks combine to generate commercial, mortgage and consumer loans and to receive deposits from customers located primarily in Northern New Jersey. The Banks also provide securities brokerage services, including mutual funds and variable annuities. Lakeland operates under a state bank charter and provides full banking services and, as a state bank, is subject to regulation by the New Jersey Department of Banking and Insurance. NBSC is a federally chartered national banking association and a member of the Federal Reserve System.
The Banks operate as commercial banks offering a wide variety of commercial loans and, to a lesser degree, consumer credits. Their primary future strategic aim is to establish a reputation and market presence as the "small and middle market business bank" in their principal markets. The Banks fund their loans primarily by offering time, savings and money market, and demand deposit accounts to both commercial enterprises and individuals. Additionally, the Banks originate residential mortgage loans, and service such loans which are owned by other investors. Lakeland also has a leasing division which provides equipment lease financing to small and medium sized business clients.
The Company and the Banks are subject to regulations of certain state and federal agencies and, accordingly, they are periodically examined by those regulatory authorities. As a consequence of the extensive regulation of commercial banking activities, the Banks' business is particularly susceptible to being affected by state and federal legislation and regulations.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company and the Banks conform with accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company, Lakeland, NBSC, Lakeland Investment Corp., NBSC Investment Company, and, prior to January 28, 2000, Metropolitan. All intercompany balances and transactions have been eliminated. As described in Note 2, the Company's acquisitions of NBSC in 1999, and Metropolitan in 1998, were accounted for under the pooling of interests method of accounting. Accordingly, all prior period amounts have been restated to reflect the acquisitions.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates implicit in these financial statements are as follows.
The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for possible loan losses and other real estate owned.
The evaluation of the adequacy of the allowance for possible loan losses includes, among other factors, an analysis of historical loss rates, by category, applied to current loan totals. However, actual losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and hold assets, and about major customers, regardless of whether that information is used in making operating decisions.
The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.
Investment Securities
The Company accounts for its investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires investments in securities to be classified in one of three categories: held to maturity, trading, or available for sale. Investments in debt and equity securities, for which management has both the ability and intent to hold to maturity, are carried at cost, adjusted for the amortization of premiums and accretion of discounts computed by the interest method. Investments in debt and equity securities, which management believes may be sold prior to maturity due to changes in interest rates, prepayment risk and equity, liquidity requirements, or other factors, are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are reported as other comprehensive income (loss) and excluded from the determination of net income. The Company does not engage in security trading. Gains or losses on disposition of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method.
Loans and Allowance for Possible Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal and are net of unearned discount, unearned loan fees and an allowance for possible loan losses. The allowance for possible loan losses is established through a provision for possible loan losses charged to expense. Loan principal considered to be uncollectible by management is charged against the allowance for possible loan losses. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the loan portfolio, overall portfolio quality, specific problem loans, and current and future economic conditions which may affect the borrowers' ability to pay. The evaluation also details historical losses by loan category, the resulting loss rates for which are projected at current loan total amounts. Loss estimates for specified problem loans are also detailed.
Interest income is accrued as earned on a simple interest basis. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. When a loan is placed on such non-accrual status, all accumulated accrued interest receivable applicable to periods prior to the current year is charged
off to the allowance for possible loan losses. Interest which had accrued in the current year is reversed out of current period income. Loans 90 days or more past due and still accruing interest must have both principal and accruing interest adequately secured and must be in the process of collection.
The Company accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the terms of the related leases.
Other Real Estate Owned
Other real estate owned (OREO), representing property acquired through foreclosure, is carried at the lower of the principal balance of the secured loan or fair value less estimated disposal costs of the acquired property. Costs relating to holding the assets are charged to expense. An allowance for OREO has been established, through charges to OREO expense, to maintain properties at the lower of cost or fair value less estimated cost to sell. Operating results of OREO, including rental income, operating expenses and gains and losses realized from the sale of properties owned, are included in other expenses.
Mortgage Servicing
The Company performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received for these services. At December 31, 2000 and 1999, the Banks were servicing approximately $36.1 million and $39.7 million, respectively, of loans for others.
The Company follows SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," which provides accounting guidance on transfers of financial assets, servicing of financial assets and extinguishments of liabilities. The Company originates mortgages under a definitive plan to sell or securitize those loans and service the loans owned by the investor. Upon the transfer of the mortgage loans in a sale or a securitization, the Company records the servicing assets retained in accordance with SFAS No. 125. The Company records mortgage servicing rights and the loans based on relative fair values at the date of origination. In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued and replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are also accounted for in accordance with SFAS No. 134, "Accounting for Mortgage Securities Retained after the securitizations of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This new statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitizations of a mortgage loan held for sale, based upon its ability and intent to sell or hold these investments.
Long-lived Assets
The Company accounts for long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of.
Restrictions On Cash And Due From Banks
The Banks are required to maintain reserves against customer demand deposits by keeping cash on hand or balances with the Federal Reserve Bank of New York in a non-interest bearing account. The amounts of those reserves and cash balances at December 31, 2000 and 1999 were approximately $300,000 each year.
Earnings Per Common Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share," which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. All weighted average, actual shares or per share information in the financial statements have been adjusted retroactively for the effect of stock dividends.
Employee Benefit Plans
The Banks have certain employee benefit plans covering substantially all employees. The Banks accrue such costs as incurred.
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. The Company's stock option plans are accounted for under APB Opinion No. 25.
Statement Of Cash Flows
Cash and cash equivalents are defined as cash on hand, cash items in the process of collection, amounts due from banks and federal funds sold with an original maturity of three months or less. Cash paid for income taxes was $4.2 million, $2.8 million and $4.2 million in 2000, 1999 and 1998, respectively. Cash paid for interest was $20.8 million, $20.3 million and $19.8 million in 2000, 1999 and 1998, respectively.
Comprehensive Income
The Company follows the disclosure provisions of SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
Other Information
In June 1998, the SFAS No. 133, ("SFAS No. 133") "Accounting for Derivative Instruments and Hedging Activities" was amended in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 effective January 1, 2001. No adjustment was required
as a result of the change in accounting principle.
Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS No. 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2000, 1999 or 1998.
Goodwill
Goodwill resulting from the acquisition of NIA leasing in 2000 is being amortized on a straight line basis over approximately 15 years and is included in other assets. The unamortized balance at December 31, 2000 was $2.5 million. Amortization expense for the year ended December 31, 2000 was $131,000.
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the 2000 presentation.
NOTE 2 - ACQUISITIONS
On April 4, 2000, Lakeland Bank purchased NIA National Leasing Inc. (NIA). NIA leases equipment to small to medium size businesses. The transaction was accounted for under the purchase method of accounting. Lakeland recorded $2.6 million of goodwill to be amortized over 15 years. The results of operations for the period April 4, 2000 through December 31, 2000 are included in the Company's income. NIA was merged into Lakeland Bank and is a division of Lakeland Bank.
On July 15, 1999, the Company completed a merger with High Point Financial Corp. (High Point). Under the terms of the merger, each share of High Point common stock not previously owned by the Company was converted into 1.20 shares of Company common stock, resulting in the issuance of 4,368,708 shares of the Company's common stock and The National Bank of Sussex County (NBSC) became a wholly-owned subsidiary of the Company. This merger was accounted for under the pooling of interests method of accounting.
The results of operations of previous separate companies follow:
On February 20, 1998, the Company completed a merger with Metropolitan State Bank (Metropolitan). Under the terms of the merger, each share of Metropolitan common stock was converted into 0.941 shares of Company common stock, resulting in the issuance of 703,466 shares of the Company's common stock and Metropolitan become a wholly-owned subsidiary of the Company. This merger was accounted for under the pooling of interests method of accounting. As of January 28, 2000, Metropolitan was merged into Lakeland. There was no impact on results of operations.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the fair value of the Company's available for sale and held to maturity securities are as follows:
The following table lists maturities of debt and equity securities at December 31, 2000 classified as available for sale and held to maturity:
Securities with a carrying value of approximately $29.5 million and $29.2 million at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
NOTE 4 - LOANS
Changes in the allowance for possible loan losses are as follows:
The balance of impaired loans was $4.5 million and $4.3 million at December 31, 2000 and 1999, respectively. The Banks identify a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The allowance for possible loan losses associated with impaired loans was $839,000, $511,000 and $638,000 at December 31, 2000, 1999 and 1998, respectively. The average recorded investment on impaired loans was $4.6 million, $4.3 million and $5.9 million during 2000, 1999 and 1998, respectively, and the income recognized, primarily on the cash basis, on impaired loans was $585,000, $325,000 and $621,000 during 2000, 1999 and 1998, respectively. Interest which would have been accrued on impaired loans during 2000, 1999 and 1998 was $517,000, $486,000 and $593,000, respectively. The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks recognize income on non-accrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks; if these factors do not exist, the Banks will not recognize income.
Non-performing loans consist of loans past due 90 days or more, non-accrual loans and renegotiated loans. Loans past due 90 days or more are those loans as to which payment of interest or principal is in arrears for a period of 90 days or more but is adequately collateralized as to interest and principal or is in the process of collection. Non-accrual loans are those on which income under the accrual method has been discontinued with subsequent interest payments credited to interest income when received, or if ultimate collectibility of principal is in doubt, applied as principal reductions. Renegotiated loans are loans whose contractual interest rates have been reduced or where other significant modifications have been made due to borrowers' financial difficulties. Interest on these loans is either accrued or credited directly to interest income. Non-performing loans were as follows:
December 31, --------------------------------- 2000 1999 1998 --------------------------------- (In thousands) Non-performing loans: Non-accrual loans $2,564 $2,961 $3,281 Past due loans 90 days or more 1,992 2,210 4,265 Renegotiated loans --- 389 399 --------------------------------- $4,556 $5,560 $7,945 =================================
The impact of the above non-performing loans on interest income is as follows:
The Banks have entered into lending transactions in the ordinary course of business with directors, executive officers, principal stockholders and affiliates of such persons on the same terms as those prevailing for comparable transactions with other borrowers. These loans at December 31, 2000, were current as to principal and interest payments, and do not involve more than normal risk of collectibility. At December 31, 2000, loans to these related parties amounted to $14.2 million. An analysis of activity in loans to related parties at December 31, 2000, resulted in new loans of $9.4 million and repayments of $11.8 million.
NOTE 5 - PREMISES AND EQUIPMENT
NOTE 6 - DEPOSITS
At December 31, 2000, the schedule of maturities of certificates of deposit is as follows (in thousands):
Year - ----
2001 $218,872 2002 32,741 2003 8,347 2004 4,268 2005 724 Thereafter 1,672 ----------- $266,624 -----------
NOTE 7 - DEBT
Lines of Credit
As of December 31, 2000, Lakeland and NBSC had approved but unused borrowing capacity with the Federal Home Loan Bank (FHLB), collateralized by FHLB stock, of $57.1 million and $29.7 million, respectively. Borrowings under this arrangement have an interest rate that fluctuates based on market conditions and customer demand. As of December 31, 2000 and 1999, there were no related outstanding borrowings.
Securities Sold Under Agreements to Repurchase
Borrowed money at December 31, 2000 and 1999 consisted of short-term securities sold under agreements to repurchase. Securities underlying the agreements were under NBSC's and Metropolitan's control. The table below summarizes information relating to those securities sold for 2000, 1999 and 1998. For purposes of the table, the average amount outstanding was calculated based on a daily average.
Long-Term Debt
NBSC sold $10 million in securities under an agreement to repurchase to the Federal Home Loan Bank (the FHLB) of New York. The securities bear an interest rate of 5.77% and have a maturity date of November 8, 2010, subject to the FHLB's option to convert this advance on November 6, 2002 and quarterly thereafter. If the Company chooses not to replace the funding, the Company will repay the convertible advance including any accrued interest on the optional conversion date.
Lakeland has a $1 million five year convertible advance with the FHLB of New York. The borrowing has an interest rate of 5.03% and a maturity date of April 13, 2004, subject to the FHLB's option to convert this advance on April 13, 2001 and quarterly thereafter. The FHLB may convert the advance with four business days notice for the same or less principal amount at the then current market rates. If the Company chooses not to replace the funding, the Company will repay the convertible advance including any accrued interest on the optional conversion date.
NBSC sold $5 million in securities under an agreement to repurchase to the FHLB . The securities had an interest rate of 5.98% and a maturity date of August 20, 2002, subject to the FHLB's option to convert this advance on August 20, 2000 and quarterly thereafter. The FHLB chose to convert this advance on August 20, 2000 and NBSC repaid the advance and did not replace the funding.
NOTE 8 - STOCKHOLDERS' EQUITY
In January 2001, the Company announced a stock repurchase program for the purchase of up to 250,000 shares of the Company's outstanding common stock over the next year.
In March 2000, the Company approved a stock repurchase plan of 210,000 shares of its common stock. During 2000, the Company purchased 206,781 shares of its outstanding common stock under the program at an average price of $10.78 per share for an aggregate cost of $2.2 million.
On October 11, 2000, the Company's Board of Directors authorized a 5% stock dividend, which was distributed on November 15, 2000.
On July 19, 1999, the Corporation amended its Certificate of Incorporation to increase the number of authorized common shares from 14,806,718 shares with a par value of $2.50 to 40,000,000 shares with no par value. As a result, the additional paid in capital account has been combined with the common stock account as presented in the consolidated statement of changes in stockholders' equity.
On August 26, 1998, the Company's Board of Directors authorized a 2 for 1 stock split effected in the form of a 100% stock dividend, which was distributed on October 1, 1998. The deficit in undivided profits contained in the December 31, 1998 consolidated financial statements is primarily the result of a bookkeeping entry charging undivided profits $10.8 million in connection with the Company's accounting for its 2 for 1 stock split effected in the form of a 100% stock dividend distributed October 1, 1998. In accordance with New Jersey corporate law, the Company's Board of Directors on March 10, 1999, approved the reversing of this accounting treatment of the stock dividend, thereby moving the $10.8 million from the capital stock account to the undivided profits account to more
accurately reflect the Company's financial condition. This reclassification was reflected in the Company's consolidated statement of changes in stockholders' equity as of December 31, 1999.
NOTE 9 - INCOME TAXES
The components of income taxes are as follows:
The income tax provision reconciled to the income taxes that would have been computed at the statutory federal rate is as follows:
The net deferred tax asset consisted of the following:
NOTE 10 - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS No. 128 is as follows:
NOTE 11 - EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
Lakeland has a profit sharing plan for all its eligible employees. Lakeland's annual contribution to the plan is determined by Lakeland's Board of Directors. Annual contributions are allocated to participants on a point basis with accumulated benefits payable at retirement, or, at the discretion of the plan committee, upon termination of employment. Contributions made by the Company were approximately $250,000 for each of the years ended December 31, 2000 and 1999, and $200,000 for the year ended December 31, 1998.
Salary Continuation Agreements
NBSC entered into a salary continuation agreement during 1996 with its Chief Executive Officer and its President which entitle them to certain payments upon their retirement. As part of the merger, Lakeland placed in trusts amounts equal to the present value of the amounts that would be owed to them in their retirement. These amounts would be $722,000 for the Chief Executive Officer and $381,000 for the President. Lakeland has no further obligation to pay additional amounts pursuant to these agreements.
Former CEO Retirement Benefits
Metropolitan entered into an agreement in January 1997 with its former Chief Executive Officer (CEO), which provides for an annual retirement benefit of $35,000 for a 15-year period. In February 1999, the Company entered into an additional agreement with this CEO. Such agreement provides for an additional retirement benefit of $35,000 per annum for a fifteen year period as well as certain retiree medical benefits. The present value of this obligation was charged to operations. During 2000, 1999 and 1998, $35,000, $179,000 and $154,000, respectively, was charged to operations related to these obligations.
Retirement Savings Plans (401K plans)
NBSC has a retirement savings plan (commonly known as a "401(k)") covering qualified employees. NBSC's contributions to the 401(k) totaled $83,000 in 2000, $86,000 in 1999 and $76,000 in 1998.
Prior to its merger into Lakeland, Metropolitan had a 401(k) plan covering substantially all employees. Beginning January 1, 1998, Metropolitan matched 50% of employee contributions for all participants, not to exceed 5% of their total salary. Contributions made by Metropolitan were $26,000 and $27,000, respectively, for the years ended December 31, 1999 and 1998.
Employee Stock Ownership Plan
NBSC has an Employee Stock Ownership Plan ("ESOP"). NBSC's contributions to the ESOP totaled $200,000 each year ended December 31, 1999 and 1998. No contributions were made in the year ended December 31, 2000.
Postretirement Health Care Benefits
In 2000, the Company instituted postretirement health care benefits and life insurance coverage to its employees who meet certain predefined criteria. The expected cost of these benefits is charged to expense during the years that eligible employees render service. Prior to 2000, NBSC provided post retirement benefits to its eligible employees. All information prior to 2000 is for NBSC only.
The accumulated postretirement benefit obligations (APBO's) as of December 31, 2000 and 1999 were as follows:
Because the Company's postretirement benefit plan reduced the number of employees eligible for postretirement benefits and reduced the time period for which they would be eligible, a curtailment gain is being recognized in 2000.
The components of net periodic post retirement benefit cost are as follows:
The discount rate used to determine the Company's APBO for 2000 was 7.75%, for 1999 was 7.25% and for 1998 was 6.75%. The rate of increase projected for future compensation levels was 4.0%. The Company projected that the cost of medical benefits would increase at the following rates: 8.0% in 2001 grading down to 5.0% in 2006 and each year thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:
Deferred Compensation Arrangements
High Point had established deferred compensation arrangements for certain directors and executives of High Point and NBSC. The deferred compensation plans differ, but generally provide for annual payments for ten to fifteen years following retirement. The Company's liabilities under these arrangements are being accrued from the commencement of the plans over the participants' remaining periods of service. The Company intends to fund its obligations under the deferred compensation arrangements with the proceeds of life insurance policies that it has purchased on the respective participants. The deferred compensation plans do not hold any assets.
NOTE 12 - DIRECTORS RETIREMENT PLAN
The Company provides a plan that any director who completes ten years of service may retire and continue to be paid for a period of ten years at a rate of $5,000, $7,500, $10,000 or $12,500 per annum, depending upon years of credited service. This plan is unfunded. The following tables present the status of the plan and the components of net periodic plan cost for the years then ended.
A discount rate of 7% was assumed in the plan valuation. As the benefit amount is not dependent upon compensation levels, a rate of increase in compensation assumption was not utilized in the plan valuation.
NOTE 13 - STOCK OPTION PLANS
Employee Incentive Stock Option Plans
In February 2000, the Company established the 2000 Equity Compensation Program which authorizes the granting of incentive stock options and supplemental stock options to employees of the Company which includes those employees serving as officers and directors of the Company. The program also provides for the automatic grant of stock options to independent directors of the Company. The plan covers options to purchase up to 997,500 shares of common stock of the Company.
During 2000, the Company granted supplemental options to purchase 288,750 shares of common stock to the non-employee directors of Lakeland Bancorp. These are exercisable in five equal installments beginning on the date of grant and continuing on the next four anniversaries of the date of grant.
During 2000, the Company granted options to purchase 202,105 shares of common stock to key employees. The shares are exercisable in four equal installments on the first, second, third and fourth anniversary of the date of grant.
In addition to the 2000 Equity Compensation program, the Company has assumed the outstanding options granted under three employee stock option plans established by High Point (the High Point Plans). The 1997 plan covers options to purchase up to 170,000 shares; the 1990 plan covers options to purchase up to 63,000 shares; and the 1987 plan covers options to purchase up to 63,068 shares. As of December 31, 2000, 68,980 options are outstanding under the High Point Plans.
Non-employee Director Stock Option Plan
The Company has assumed outstanding options granted under the 1996 Non-employee Director Stock Option Plan established by High Point. Options granted under this plan were at fair market value as of the date of grant. These options vest at a rate of 20% a year for five years. As of December 31, 2000, 20,680 options under the 1996 Director Stock Option Plan were outstanding.
Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants before 1995.
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 2000: dividend rate of 3%, expected volatility of 28%, risk-free interest rate of 5.50%, and expected lives of 7 years. There were no options granted in 1998 or 1999.
A summary of the status of the Company's option plans as of December 31, 2000, 1999 and 1998 and the changes during the years ending on those dates is represented below:
The following table summarizes information about options outstanding at December 31, 2000:
NOTE 14 - RELATED PARTY TRANSACTIONS
In 1988, NBSC sold certain banking and other premises to FMI, Inc. The banking premises were leased back to the Company (as the successor of High Point) for periods ranging from 10 to 15 years. The Company (as the successor of High Point) realized a gain on this transaction, which was deferred and was amortized into income over the applicable lease terms. As of December 31, 1997, the unamortized deferred gain was approximately $216,000. In July 1998, NBSC repurchased those branches and other premises sold to FMI, Inc. for $3.2 million, the fair market value at the time of the transaction. The unamortized deferred gain of $150,000 was used to reduce the cost basis of the property. FMI, Inc. is a wholly owned subsidiary of Franklin Mutual Insurance Co. The president of FMI, Inc. was a member of High Point's Board of Directors and is currently a member of the Company's Board of Directors.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Obligations
Rentals under long-term operating leases amounted to approximately $342,000, $325,000 and $511,000 for the years ended December 31, 2000, 1999 and 1998, respectively, including rent expense to related parties of $33,000 in 2000, $58,000 in 1999, and $335,000 in 1998. At December 31, 2000, the minimum commitments, which include rental, real estate tax and other related amounts, under all noncancellable leases with remaining terms of more than one year and expiring through 2008 are as follows(in thousands):
December 31, ------------
2001 $465 2002 477 2003 444 2004 461 2005 474 Thereafter 2,393 ------
$4,714 ------ Litigation
From time to time, the Company and its subsidiaries are defendants in legal proceedings relating to their respective businesses. Management does not believe that the outcome of any legal proceeding that was pending as of December 31, 2000, or any other contingent liability or commitment, will materially affect the Company's consolidated financial position or results of operations.
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.
Unless noted otherwise, the Banks do not require collateral or other security to support financial instruments with credit risk. The approximate contract amounts are as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold residential or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 2000 and 1999 varies up to 100%.
The Banks grant loans primarily to customers in their immediately adjacent suburban counties which include Bergen, Morris, Passaic, Sussex and Essex counties in Northern New Jersey and surrounding areas. Although the Banks have diversified loan portfolios, a large portion of their loans are secured by commercial or residential real property. The Banks do not generally engage in non-recourse lending and typically will require the principals of any commercial borrower to obligate themselves personally on the loan. Although the Banks have diversified loan portfolios, a substantial portion of their debtors' ability to honor their contracts is dependent upon the economic sector. Commercial and standby letters of credit were granted primarily to commercial borrowers.
NOTE 17 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 2000 and 1999 are outlined below.
For cash and cash equivalents and interest bearing deposits with banks, the recorded book values approximate fair values. The estimated fair values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market prices of comparable instruments if quoted market prices are not available.
The net loan portfolio at December 31, 2000 and 1999 has been valued using a present value discounted cash flow where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value of accrued interest approximates fair value.
The estimated fair values of demand deposits (i.e. interest (checking) and non-interest bearing demand accounts, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts of variable rate accounts approximate their fair values at the reporting date. For fixed maturity certificates of deposit, fair value was estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
The fair value of securities sold under agreements to repurchase and long-term debt are based upon discounted value of contractual cash flows. The Company estimates the discount rate using the rates currently offered for similar borrowing arrangements.
The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.
The carrying values and estimated fair values of the Company's financial instruments are as follows:
NOTE 18 - REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the Company can pay. Accordingly, dividends should generally only be paid out of current earnings, as defined.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on the capital stock of New Jersey chartered banks. Accordingly, no dividends shall be paid by such banks on their capital stock unless, following the payment of such dividends, the capital stock of the banks will be unimpaired, and (1) the banks will have a surplus, as defined, of not less than 50% of their capital, or, if not, (2) the payment of such dividend will not reduce the surplus, as defined, of the banks. Under these limitations, approximately $8.0 million was available for payment of dividends from Lakeland to the Company as of December 31, 2000.
NBSC may not declare dividends in excess of the current year's earnings, plus the retained earnings from the prior two years, without prior approval from the Office of the Comptroller of the Currency. In addition, if NBSC sustains losses that exceed its aggregate retained earnings, NBSC may not pay dividends until the losses are recovered. Under these limitations approximately $3.3 million was available for the payment of dividends from NBSC to the Company as of December 31, 2000.
The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Banks' consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's and the Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2000, that the Company and the Banks met all capital adequacy requirements to which they are subject.
As of December 31, 2000, the Company and the Banks met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' category.
As of December 31, 2000 and 1999, the Company and the Banks have the following capital ratios:
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company, which in the opinion of management reflected all adjustments, consisting only of nonrecurring adjustments, necessary for a fair presentation of the Company's results of operations.
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY:
BALANCE SHEETS
INCOME STATEMENTS
ITEM 9
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company changed accountants from Radics & Co., LLC to Grant Thornton LLP during the Company's two most recent fiscal years. Information concerning this change was previously filed in Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed with the SEC on June 8, 1999.
PART III --------
ITEM 10
ITEM 10 - Directors and Executive Officers of the Registrant The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company's definitive proxy statement for its 2001 Annual Meeting of Shareholders.
ITEM 11
ITEM 11 - Executive Compensation The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company's definitive proxy statement for its 2001 Annual Meeting of Shareholders.
ITEM 12
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company's definitive proxy statement for its 2001 Annual Meeting of Shareholders.
ITEM 13
ITEM 13 - Certain Relationships and Related Transactions The Company responds to this Item by incorporating by reference the material responsive to this Item in the Company's definitive proxy statement for its 2001 Annual Meeting of Shareholders.
PART IV -------
ITEM 14
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The following portions of the Company's consolidated financial statements are set forth in Item 8 of this Annual Report.
(i) Consolidated Balance Sheet as of December 31, 2000 and 1999. (ii) Consolidated Statements of Income for each of the three years in the period ended December 31, 2000, 1999 and 1998. (iii) Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000, 1999, and 1998. (iv) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000, 1999 and 1998.
(v) Notes to Consolidated Financial Statements (vi) Report of Grant Thornton LLP
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable, is presented in the consolidated financial statements or notes thereto.
(a) 3. Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended, is incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 3.2 By-Laws of the Registrant are incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-3 filed by the Registrant with the Commission on March 30, 1990. 10.1 Amended and Restated Agreement and Plan of Reorganization, dated as of January 14, 1998, by and between the Registrant and Metropolitan State Bank is incorporated by reference to Appendix A to the Proxy Statement -- Prospectus, dated January 15, 1998, contained in the Registant's Registration Statement on Form S-4 (No. 333-42851). 10.2 Lakeland Bank Directors' Deferred Compensation Plan. 10.3 Agreement and Plan of Merger, dated as of December 7, 1998, by and between the Registrant and High Point Financial Corp., is incorporated by reference to Annex A, the joint proxy statement prospectus, dated June 8, 1999, contained in the Registrant's Registration Statement on Form S-4 (No 333-79907). 10.4 Stock Option Agreement, dated as of December 7, 1998, by and between the Registrant and High Point Financial Corp., is incorporated by reference to Annex D, the joint proxy statement prospectus, dated June 8, 1999, contained in the Registrant's Registration Statement on Form S-4 (No.333-79907). 10.5 Lakeland Bancorp, Inc. 2000 Equity Compensation Program 10.6 Employment Agreement - Change in Control, Severance and Employment Agreement for Roger Bosma, dated as of January 1, 2000, among Lakeland Bancorp, Inc., Lakeland Bank and Roger Bosma, is incorporated by reference to exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.7 Amended and Restated Agreement and Plan of Merger, made as of December 8, 1999, between LB and MSB, is incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. 10.8 Change of Control Agreement dated March 1, 2001, among Lakeland Bancorp, Inc., Lakeland Bank and Joseph F. Hurley. 10.9 Change of Control Agreement dated March 1, 2001, among Lakeland Bancorp, Inc., Lakeland Bank and Robert A. Vandenbergh. 10.10 Change of Control Agreement dated March 6, 2001, among Lakeland Bancorp, Inc., Lakeland Bank and Louis E. Luddecke. 10.11 Change of Control Agreement dated March 7, 2001, among Lakeland Bancorp, Inc., Lakeland Bank and jeffery J. Buonforte. 16.1 Letter re: Change in Accountant is incorporated by reference to Exhibit 16 to the Registrant's Current Report on Form 8-K, filed with the Commission on February 18, 1999.
21.1 Subsidiaries of Registrant. 23.1 Consent of Grant Thornton LLP Independent Certified Public Accountants. 24.1 Power of Attorney. 99.1 Forward-looking Statement Information.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during the fourth quarter of 2000.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAKELAND BANCORP, INC.
Dated: March 29, 2001 By /s/ Roger Bosma --------------- --------------------------- Roger Bosma President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ----
* - ---------------------------- Director, Chief Executive Roger Bosma Officer, and President
* - ---------------------------- Director Robert B. Nicholson
* - ---------------------------- Director John W. Fredericks
* - ---------------------------- Director Bruce G. Bohuny
* - ---------------------------- Director Mary Ann Deacon
* - ---------------------------- Director Mark J. Fredericks
* - ---------------------------- Director John Pier, Jr.
* - ---------------------------- Director Paul P. Lubertazzi
* - ---------------------------- Director Joseph P. O'Dowd
* - ---------------------------- Director Arthur L. Zande
* - ---------------------------- Director Michael A. Dickerson
* - ---------------------------- Director Charles L. Tice
* - ---------------------------- Director George H. Guptill, Jr.
* - ---------------------------- Executive Vice President Joseph F. Hurley and Chief Financial Officer
*By: /s/ Roger Bosma ------------------------- Roger Bosma Attorney-in-Fact