SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): February 20, 1998
LAKELAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 33-27312 22-2953275
(State or other (Commission (IRS Employer
jurisdiction of File Number) identification
incorporation) Number)
250 Oak Ridge Road, Oak Ridge, New Jersey 07438
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (973) 697-2000
Item 2. Acquisition or Disposition of Assets.
On February 20, 1998, Lakeland Bancorp, Inc. (the "Company" or "Lakeland")
completed the acquisition of Metropolitan State Bank("MSB"). The acquisition was
effectuated by the merger (the "Merger") of a newly formed bank subsidiary of
Lakeland with and into MSB.
Pursuant to the Amended and Restated Agreement and Plan of Reorganization,
dated January 14, 1998 between Lakeland and MSB (the "Merger Agreement"), MSB's
shareholders will be entitled to receive 0.941 shares of Lakeland's Common Stock
in exchange for each share of MSB Common Stock which they own on the effective
date of the Merger. Cash will be paid in lieu of fractional shares.
Lakeland is a bank holding company whose principal operating subsidiary
prior to the Merger described above was Lakeland Bank. Following the Merger,
Lakeland's principal operating subsidiaries will be Lakeland Bank and MSB. The
corporate headquarters of Lakeland and Lakeland Bank are located in Oak Ridge,
New Jersey. MSB is a New Jersey-chartered commercial bank incorporated in 1987.
The main office of MSB is located in Montville, New Jersey.
Item 7. Financial Statements and Exhibits.
The following financial statements and pro forma data are filed with this
Current Report on Form 8-K:
1. Historical Consolidated Financial Statements of MSB:
A. Report of Independent Public Accountants
B. Consolidated Statements of Condition at September 30, 1997(unaudited)
and December 31, 1996 and 1995
C. Consolidated Statements of Income for the Nine Months Ended September
30, 1997 and 1996(unaudited) and the years ended December 31, 1996, 1995
and 1994
D. Consolidated Statements of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 1997 (unaudited) and the years ended
December 31, 1996, 1995 and 1994
E. Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and the years ended December
31, 1996, 1995 and 1994
F. Notes to Consolidated Financial Statements
2. Pro Forma Financial Data:
A. Lakeland Bancorp, Inc. Pro Forma Combined Financial Information.
B. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Balance Sheet
as of September 30, 1997 (unaudited).
C. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Statement of
Income for the Nine Months Ended September 30, 1997 (unaudited).
D. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Statement of
Income for the Nine Months Ended September 30, 1996 (unaudited).
E. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Statement of
Income for the Year Ended December 31, 1996 (unaudited).
F. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Statement of
Income for the Year Ended December 31, 1995 (unaudited).
G. Lakeland Bancorp, Inc. Pro Forma Combined Condensed Statement of
Income for the Year Ended December 31, 1994 (unaudited).
3. Exhibits:
Exhibit 2.1 -Amended and Restated Agreement and Plan of Reorganization,
dated January 14, 1998, between Lakeland and MSB is incorporated by reference to
Appendix A to the Proxy Statement-Prospectus, dated January 15, 1998, contained
in Lakeland's Registration Statement on Form S-4 (No. 333-42851).
Exhibit 23.1 -Consent of Arthur Andersen LLP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LAKELAND BANCORP, INC.
By:/s/ ARTHUR L. ZANDE
-----------------------
Arthur L. Zande,
Executive Vice President
Dated: February 26, 1998
Report of Independent Public Accountants
To the Shareholders and
Board of Directors of
Metropolitan State Bank:
We have audited the accompanying consolidated statements of condition of
Metropolitan State Bank (a New Jersey State Chartered Bank) and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Metropolitan State Bank and
subsidiary as of December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
January 23, 1997
METROPOLITAN STATE BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
September 30, December 31,
ASSETS 1997 1996 1995
---- ---- ----
(Unaudited)
CASH AND DUE FROM BANKS - noninterest bearing............................ $ 6,105,000 $ 3,355,000 $ 4,258,000
FEDERAL FUNDS SOLD....................................................... 8,275,000 6,950,000 9,850,000
--------- --------- ---------
Total cash and cash equivalents..................................... 14,380,000 10,305,000 14,108,000
---------- ---------- ----------
SECURITIES:
Available for sale (Notes 2 and 3) (at fair value) 23,930,000 14,493,000 6,900,000
Held to maturity (Notes 2 and 3) (market value of $5,955,000, $9,569,000
and $10,655,000 in 1997, 1996 and 1995, respectively)............... 5,969,000 9,630,000 10,635,000
--------- ----------- ----------
Total securities.................................................... 29,899,000 24,123,000 17,535,000
---------- ---------- ----------
LOANS (Notes 2, 4 and 5)................................................. 46,921,000 42,596,000 41,342,000
Less
Allowance for possible loan losses................................... 661,000 585,000 560,000
------- ------------ ------------
Net loans........................................................... 46,260,000 42,011,000 40,782,000
---------- ---------- ----------
PREMISES AND EQUIPMENT, net (Notes 2 and 6).............................. 2,515,000 2,524,000 2,513,000
ACCRUED INTEREST RECEIVABLE.............................................. 587,000 551,000 429,000
OTHER REAL ESTATE, net (Note 2).......................................... 214,000 177,000 696,000
OTHER ASSETS............................................................. 573,000 481,000 355,000
------- ------- -------
Total assets........................................................ $ 94,428,000 $ 80,172,000 $ 76,418,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand
Noninterest bearing.............................................. 18,246,000 $17,392,000 $13,954,000
Interest bearing................................................. 24,008,000 19,632,000 18,799,000
Savings.............................................................. 10,193,000 9,249,000 7,632,000
Time (includes deposits $100,000 and over of $14,147,000 at September
30, 1997 and $9,982,000 and $8,808,000 at December 31, 1996 and
1995 respectively)................................................... 29,467,000 23,353,000 23,669,000
---------- ---------- ----------
Total deposits...................................................... 81,914,000 69,626,000 64,054,000
Short-term borrowings.................................................... 4,412,000 3,336,000 5,390,000
Accrued interest payable................................................. 323,000 273,000 307,000
Accrued expenses and other liabilities................................... 424,000 176,000 106,000
------- ------------ ------------
Total liabilities................................................... 87,073,000 73,411,000 69,857,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY (Notes 11 and 12):
Common stock $5.00 par value, 1,500,000 shares authorized; 679,047
shares issued and outstanding in 1997 and 617,315 in 1996 and 1995 3,395,000 3,087,000 3,087,000
Additional paid-in capital............................................. 3,329,000 2,897,000 2,897,000
Retained earnings...................................................... 608,000 806,000 517,000
Unrealized holding gain (loss) on securities available for sale,
net of income taxes.................................................. 23,000 (29,000) 60,000
------ ------------- ------------
Total shareholders' equity.......................................... 7,355,000 6,761,000 6,561,000
--------- --------- ---------
Total liabilities and shareholders' equity.......................... $ 94,428,000 $ 80,172,000 $ 76,418,000
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
METROPOLITAN STATE BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months ended
September For the Years Ended December 31,
30,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
INTEREST INCOME: (Note 2)
Interest on loans.................................. $3,066,000 $2,677,000 $3,633,000 $3,767,000 $3,503,000
Interest on securities and interest
bearing deposits with banks...................... 1,198,000 987,000 1,351,000 1,189,000 874,000
Interest on Federal funds sold..................... 195,000 179,000 253,000 152,000 136,000
---------- ---------- --------- ---------- ----------
Total interest income.......................... 4,459,000 3,843,000 5,237,000 5,108,000 4,513,000
--------- --------- --------- --------- ---------
INTEREST EXPENSE:
Interest on deposits............................... 1,652,000 1,432,000 1,918,000 1,903,000 1,578,000
Interest on short-term borrowings.................. 104,000 128,000 174,000 227,000 111,000
---------- ---------- ---------- ---------- ---------
Total interest expense......................... 1,756,000 1,560,000 2,092,000 2,130,000 1,689,000
--------- --------- --------- --------- ---------
Net interest income............................ 2,703,000 2,283,000 3,145,000 2,978,000 2,824,000
PROVISION FOR POSSIBLE LOAN LOSSES:
(Notes 2 and 5).................................... 134,000 154,000 374,000 228,000 345,000
---------- ---------- ---------- ----------- -----------
Net interest income after provision
for possible loan losses..................... 2,569,000 2,129,000 2,771,000 2,750,000 2,479,000
--------- --------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts................ 279,000 233,000 331,000 281,000 243,000
Gain on sale of securities......................... 38,000 15,000 23,000 115,000 9,000
Other income....................................... 87,000 81,000 103,000 56,000 61,000
--------- --------- --------- ------------ -----------
Total other income............................. 404,000 329,000 457,000 452,000 313,000
OTHER EXPENSES:
Salaries and employee benefits..................... 1,262,000 1,101,000 1,475,000 1,278,000 1,039,000
Net occupancy expense.............................. 142,000 150,000 201,000 186,000 199,000
Other operating expenses (Note 13)................. 866,000 898,000 1,232,000 1,232,000 1,070,000
---------- ----------- --------- --------- ---------
Total other expense............................ 2,270,000 2,149,000 2,908,000 2,696,000 2,308,000
--------- --------- --------- --------- ---------
Income before provision for
income taxes................................. 703,000 309,000 320,000 506,000 484,000
PROVISION FOR INCOME TAXES: (Note 8).................... 161,000 51,000 31,000 65,000 57,000
--------- ---------- ----------- ----------- -----------
Net income..................................... $ 542,000 $ 258,000 $ 289,000 $ 441,000 $ 427,000
========= ========= ========== ========== =========
NET INCOME PER SHARE: (Note 2).......................... $ .80 $ .38 $ .43 $ .65 $ .69
========= ========= ========== ========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING: (Note 2)........... 679,047 679,047 679,047 679,047 622,031
========= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements.
METROPOLITAN STATE BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Unrealized
Holding
Gain (Loss) on
Additional Securities Total
Common Paid-in Retained Available for Shareholders'
Stock Capital Earnings Sale Equity
BALANCE
December 31, 1993.................. $ 2,207,000 $ 2,206,000 $ 529,000 $ 0 $ 4,942,000
Net income - 1994................ 0 0 427,000 0 427,000
10% stock dividend............. 221,000 97,000 (318,000) 0 0
Issuance of 75,765 shares
of common stock.................. 378,000 313,000 0 0 691,000
Unrealized holding
gain (loss) on securities
available for sale, net of
income taxes..................... 0 0 0 (6,000) (6,000)
------------- ---------- ------------ ------------ ------------
BALANCE
December 31, 1994.................. 2,806,000 2,616,000 638,000 (6,000) 6,054,000
Net income - 1995................ 0 0 441,000 0 441,000
10% stock dividend............... 281,000 281,000 (562,000) 0 0
Change in unrealized
holding gain (loss)
on securities
available for sale, net
of income taxes.................. 0 0 0 66,000 66,000
----------- ------------- ------------ --------- ------------
BALANCE
December 31, 1995.................. 3,087,000 2,897,000 517,000 60,000 6,561,000
Net income - 1996................ 0 0 289,000 0 289,000
Change in unrealized
holding gain (loss)
on securities
available for sale, net
of income taxes.................. 0 0 0 (89,000) (89,000)
----------- ----------- -------- ---------- ----------
BALANCE
December 31, 1996.................. 3,087,000 2,897,000 806,000 (29,000) 6,761,000
Net Income for the nine months 0 0 542,000 0 542,000
ended..
10% stock dividend............... 308,000 432,000 (740,000) 0 0
Change in unrealized holding gain
(loss) on securities available for
sale, net of income taxes........ 0 0 0 52,000 52,000
--------- ---------- --------- -------- ----------
BALANCE
September 30, 1997................. $ 3,395,000 $ 3,329,000 $ 608,000 $ 23,000 $7,355,000
========= =========== ========== ======== =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
METROPOLITAN STATE BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September For the Years ended December 31,
30,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
OPERATING ACTIVITIES
Net income............................ $ 542,000 $ 258,000 $ 289,000 $ 441,000 $ 427,000
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for possible
loan losses..................... 134,000 154,000 374,000 228,000 345,000
Depreciation and amortization..... 83,000 64,000 100,000 136,000 90,000
Deferred taxes.................... 0 0 0 (27,000) (85,000)
Amortization (accretion) of
securities premium (discount), net (5,000) 79,000 77,000 (121,000) 6,000
Gain on sale of
Securities................... (38,000) (15,000) (23,000) (115,000) (9,000)
Loans........................ 0 0 0 0 (30,000)
(Increase) decrease in accrued
interest receivable............. (36,000) (226,000) (122,000) 77,000 (141,000)
(Increase) in other assets........ (92,000) (65,000) (126,000) (78,000) (15,000)
Increase (decrease) in accrued
interest payable................ 50,000 (29,000) (34,000) 80,000 44,000
Increase (decrease) in accrued
expense and other liabilities... 248,000 (80,000) 70,000 (12,000) (34,000)
------- -------- -------- -------- --------
Net cash provided by
operating activities.............. 886,000 140,000 605,000 609,000 598,000
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Available for sale securities
Purchases........................... (23,407,000) (14,057,000) (18,191,000) (12,489,000) (4,154,000)
Sales............................... 6,625,000 3,152,000 4,982,000 9,569,000 2,091,000
Maturities.......................... 7,435,000 790,000 1,040,000 0 0
Held to maturity securities
Purchases........................... (250,000) (4,858,000) (4,858,000) (990,000) (7,775,000)
Maturities.......................... 3,911,000 8,330,000 9,520,000 4,595,000 2,986,000
Net change in loans................. (4,383,000) 309,000 (827,000) 2,766,000 (3,680,000)
(Increase) decrease in other real
estate, net........................ (37,000) 233,000 519,000 (23,000) 65,000
Capital expenditures................ (69,000) (62,000) (111,000) (1,922,000) (670,000)
-------- -------- ------------ ----------- ------------
Net cash provided by (used in) investing
activities........................ (10,175,000) (6,163,000) (7,926,000) 1,506,000 (11,137,000)
------------ ----------- ----------- ---------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in
demand deposits and savings
accounts............................ 6,174,000 5,611,000 5,888,000 5,300,000 (1,366,000)
Net increase (decrease) in time deposits 6,114,000 1,294,000 (316,000) 1,765,000 4,909,000
Net increase (decrease) in short-term
borrowings.......................... 1,076,000 (1,164,000) (2,054,000) 609,000 3,201,000
Proceeds from the issuance of common
stock............................... 691,000
-------------- ------------------------------ ------------------------
0 0 0 0
- - - -
Net cash provided by financing
activities.......................... 13,364,000 5,741,000 3,518,000 7,674,000 7,435,000
---------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents.................... 4,075,000 (282,000) (3,803,000) 9,789,000 (3,104,000)
CASH AND CASH EQUIVALENTS,
beginning of year..................... 10,305,000 14,108,000 14,108,000 4,319,000 7,423,000
---------- ---------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of year........................... $14,380,000 $13,826,000 $10,305,000 $14,108,000 $ 4,319,000
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for
Interest............................ $ 1,706,000 $ 1,589,000 $ 2,126,000 $ 2,050,000 $ 1,644,000
---------- ---------- --------- --------- ---------
Income taxes........................ $ 211,000 $ 51,000 $ 30,600 $ 141,000 $ 137,000
----------- ------------ ------------ ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
METROPOLITAN STATE BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Metropolitan State Bank (the Bank, including its investment company) is
a full service community bank, primarily serving Morris and Essex
Counties of New Jersey.
All significant intercompany accounts and transactions are eliminated
in consolidation.
(2) SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the
Preparation of Financial Statements-
The preparation of financial statements in conformity with generally
accepted accounting principles 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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
The consolidated financial statements as of September 30, 1997, and the
nine months ended September 30, 1997 and 1996, are unaudited. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
position and results of operations have been included. The results of
operations for the nine months ended September 30, 1997 and 1996, are
not necessarily indicative of the results that may be attained for an
entire fiscal year.
Securities
The Bank classifies its securities as: (1) held for investment purposes
(held to maturity); (2) available for sale and (3) held for trading
purposes. Securities for which the Bank has the ability and intent to
hold until maturity are classified as held to maturity. These
securities are carried at cost, adjusted for amortization of premiums
and accretion of discounts on a straight-line basis which is not
materially different from the effective interest method.
Securities which are held for indefinite periods of time which
management intends to use as part of its asset/liability strategy, or
that may be sold in response to changes in interest rates, changes in
prepayment risk, increases in capital requirements or other similar
factors, are classified as available for sale and are carried at fair
value. Differences between a security's amortized cost and fair value
is charged/credited directly to shareholders' equity, net of income
taxes. The cost of securities sold is determined on a specific
identification basis. Gains and losses on sales of securities are
recognized in the consolidated statement of income upon sale.
The Bank had no securities held for trading purposes at September 30,
1997, December 31, 1996 and 1995. See Note 3 for additional discussion
of the Bank's securities portfolio.
Allowance For Possible Loan Losses
The Bank's management maintains the allowance for possible loan losses
at a level considered adequate to provide for potential loan losses.
The allowance is increased by provisions charged to expense and reduced
by net charge-offs. The level of the allowance is based on management's
evaluation of potential losses in the loan portfolio after
consideration of appraised collateral values, financial condition of
the borrowers, as well as prevailing and anticipated
economic conditions. Credit reviews of the loan portfolio, designed to
identify potential charges to the allowance, are made on a periodic
basis during the year by senior management.
Premises And Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on the
straight-line method over the estimated useful lives of the assets.
Other Real Estate (ORE)
Real estate acquired in satisfaction of a loan is reported separately
in the consolidated statements of condition. Properties acquired by
foreclosure are ORE and recorded at the lower of recorded investment in
the related loan or fair value based on appraised value at the date
actually or constructively received. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Subsequent adjustments to the carrying values of
ORE properties are charged to operating expense. ORE is stated at the
lower of cost or fair value, less estimated cost to sell.
Interest On Loans
Interest on loans is credited to operations primarily based upon the
principal amount outstanding. When management believes there is
sufficient doubt as to the ultimate collectibility of interest on any
loan, the accrual of applicable interest is discontinued. Net loan
origination fees are deferred and amortized over the life of the
related loan using the level yield method.
Income Taxes
The Bank recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Bank's financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and the tax
basis of assets and liabilities.
Per Share Amounts
Net income per share is based on the weighted average number of common
shares outstanding during the period. All weighted average actual
shares or per share information in the financial statements has been
adjusted retroactively for the effect of stock dividends.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share,
which is effective for financial statements issued after December 15,
1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. The
adoption of SFAS No. 128 will not have a material effect on the Bank's
financial position or results of operations.
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which
is effective for year beginning after December 15, 1997. This new
standard requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive
income consists of net income or loss for the current period and
income, expenses, gains, and losses that bypass the income statement
and are reported directly in a separate component of
equity. The adoption of SFAS No. 130 will not have a material effect
on the Bank's financial position or results of operations.
The FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for all periods
beginning after December 15, 1997. SFAS 131 requires that public
business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate, and their major customers. The adoption of
SFAS No. 131 will not have a material effect on the Bank's financial
position or results of operations.
(3) SECURITIES
Information with regard to the Bank's securities portfolio is as
follows:
METROPOLITAN STATE BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As of September 30, 1997
-------------------------------------------------------------------------------------
(Unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies......................... $10,783,000 $35,000 $(11,000) $10,807,000
Mortgage backed securities
of U.S. Government Agencies.......... 5,669,000 17,000 (28,000) 5,658,000
Municipal bonds........................ 7,044,000 39,000 (17,000) 7,066,000
Other securities....................... 399,000 0 0 399,000
------------ ----------- ----------- -----------
$23,895,000 $91,000 $(56,000) $23,930,000
========== ====== ======= ==========
Held to Maturity
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies......................... $2,462,000 $3,000 $(30,000) $2,435,000
Mortgage backed securities of
U.S. Government Agencies............. 2,434,000 27,000 (30,000) 2,431,000
Municipal bonds........................ 1,073,000 18,000 (2,000) 1,089,000
--------- ------ ------- ---------
$ 5,969,000 $ 48,000 $ (62,000) $ 5,955,000
=========== ======== ========== ===========
December 31, 1996
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies......................... $ 3,800,000 $ 0 $ (11,000) $ 3,789,000
Mortgage backed securities
of U.S. Government Agencies.......... 5,290,000 0 (26,000) 5,264,000
Municipal bonds........................ 5,197,000 11,000 (17,000) 5,191,000
Other securities....................... 249,000 0 0 249,000
------- ------------ ------------- -------------
$14,536,000 $ 11,000 $ (54,000) $ 14,493,000
========== ======== ========== ===========
Held to Maturity
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies......................... $5,581,000 $ 3,000 $ (45,000) $ 5,539,000
Mortgage backed securities of
U.S. Government Agencies............. 2,770,000 1,000 (25,000) 2,746,000
Municipal bonds........................ 1,079,000 5,000 1,084,000
Other securities....................... 200,000 0 0 200,000
----------- -------- ------------- ----------
$ 9,630,000 $ 9,000 $ (70,000) $9,569,000
=========== ======= ========== =========
December 31, 1995
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies........................... $ 613,000 $ 6,000 $ 0 $ 619,000
Mortgage backed securities
of U.S. Government Agencies............ 1,254,000 25,000 0 1,279,000
Municipal bonds.......................... 4,707,000 46,000 0 4,753,000
Other securities......................... 249,000 0 0 249,000
---------- ---------- --------- ----------
$6,823,000 $77,000 $ 0 $6,900,000
========= ====== --------- =========
Held to Maturity
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies........................... $ 5,709,000 $ 13,000 $ 0 $ 5,722,000
Mortgage backed securities of
U.S. Government Agencies............... 4,438,000 66,000 (63,000) 4,441,000
Municipal bonds.......................... 238,000 0 0 238,000
Other securities......................... 250,000 4,000 0 254,000
------------ ------- ----------- ------------
$10,635,000 $ 83,000 $ (63,000) $10,655,000
========== ========= =========== ==========
In March 1995, based on a recommendation by the Bank's regulators, the Bank
transferred $13,698,000 of securities from held to maturity to available for
sale. A portion of those securities were subsequently sold. Under the provisions
of Statement of Financial Accounting Standards No. 115, all of the remaining
securities in the held to maturity portfolio were required to be classified as
available for sale. In December 1995, as then permitted by certain accounting
standards, the Bank transferred available for sale securities with a fair value
of $9,248,000 to held to maturity. The amount transferred approximated the
carrying value of the securities.
The amortized cost and estimated market value of securities at September 30,
1997 and December 31, 1996 by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or repayment
penalties.
September 30, 1997
----------------------------------------------------------
Amortized Estimated
Cost Market Value
(Unaudited)
Available for Sale
Due in one year or less $ 2,224,000 $ 2,224,000
Due after one year through five years 7,968,000 7,985,000
Due after five years through ten years 4,161,000 4,164,000
Due after ten years 3,873,000 3,899,000
--------- ---------
$ 18,226,000 18,272,000
Mortgage backed securities of U.S.
Government Agencies 5,669,000 5,658,000
------------ ------------
$ 23,895,000 $ 23,930,000
============ ============
Held to Maturity
Due after one year through five years $ 1,022,000 $ 1,026,000
Due after five years through ten years 2,413,000 2,394,000
Due after ten years 100,000 104,000
---------- ----------
3,535,000 3,524,000
Mortgaged backed securities of U.S.
Government Agencies 2,434,000 2,431,000
--------- ---------
$ 5,969,000 $ 5,955,000
========== ===========
December 31, 1996
--------------------------------------------------------------
Amortized Estimated
Cost Market Value
Available for Sale
Due in one year or less $ 2,101,000 $ 2,100,000
Due after one year through five years 5,565,000 5,544,000
Due after five years through ten years 1,580,000 1,585,000
--------- ---------
9,246,000 9,229,000
Mortgage backed securities of U.S.
Government Agencies 5,290,000 5,264,000
----------- -----------
$14,536,000 $14,493,000
========== ==========
Held to Maturity
Due in one year or less $ 3,444,000 $ 3,444,000
Due after one year through five years 1,267,000 1,263,000
Due after five years through ten years 2,149,000 2,116,000
--------- ---------
6,860,000 6,823,000
Mortgaged backed securities of U.S.
Government Agencies 2,770,000 2,746,000
--------- ---------
$ 9,630,000 $ 9,569,000
========= =========
As of December 31, 1996 and 1995, securities having a book value of $5,993,000
and $4,734,000, respectively, were pledged to secure public deposits, repurchase
agreements and for other purposes as required by law.
(4) LOANS:
The Bank's loans are primarily to businesses and individuals in Morris
and Essex Counties of New Jersey. Loans outstanding by classification are as
follows:
September 30, December 31,
---------------------------- ----------------------------------------------
1997 1996 1995
--------------------------- ----------------------- -----------------------
(Unaudited)
Loans secured by real estate-
Construction and land development $ 1,345,000 $ 287,000 $ 562,000
Secured by residential properties 23,908,000 22,380,000 22,248,000
Secured by nonresidential properties 11,457,000 8,600,000 7,170,000
Commercial and industrial loans 6,497,000 7,597,000 6,152,000
Loans to individuals 3,714,000 3,632,000 5,057,000
All other loans 0 100,000 153,000
------------- ------------ -----------
$ 46,921,000 $ 42,596,000 $ 41,342,000
============= ============ ===========
Activity related to loans to directors, executive officers and their
affiliated interests for the year ended December 31, 1996, all of which are
current as to principal and interest payments, is as follows-
Balance, beginning of year $ 1,553,000
Loans granted 1,187,000
Repayments of loans (1,094,000)
-----------
Balance, end of year $ 1,646,000
=========
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are reflected
in operations in the periods in which they become known.
An analysis of the allowance for possible loan losses is as follows:
Nine Months Ended
September 30, Years Ended December 31,
---------------------------------- -----------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Balance, beginning of year $ 585,000 $ 560,000 $ 560,000 $ 547,000 $ 455,000
Provision charged to expense 134,000 154,000 374,000 228,000 345,000
Charge-offs (87,000) (88,000) (373,000) (263,000) (270,000)
Recoveries 29,000 9,000 24,000 48,000 17,000
-------- -------- ---------- --------- ---------
Balance, end of year $ 661,000 $ 635,000 $ 585,000 $ 560,000 $ 547,000
======== ======== ======= ======= =======
Certain additional information with regard to the Bank's loan portfolio is as follows-
September 30, December 31,
------------- ------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(unaudited)
Non-accrual loans $ 568,000 $ 1,003,000 $ 537,000 $ 821,000 $ 1,157,000
Additional loans past due
90 days or more $ 854,000 $ 634,000 $ 744,000 $ 620,000 $ 485,000
Interest income that would have been recorded in the financial statements had
the non-accrual loans been performing in accordance with their terms would have
been $43,000 and 42,000 at September 30, 1997 and 1996, respectively, and
$34,000, $67,000 and $72,000 in 1996, 1995 and 1994, respectively.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," the Bank utilized the
following information when measuring the allowance for possible loan losses. A
loan is considered impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. These loans consist primarily of nonaccrual loans but may include
performing loans to the extent that situations arise which would reduce the
probability of collection in accordance with the contractual terms. The Bank's
recorded investment in impaired loans and the related valuation allowance were
$564,000 and $170,000, respectively, as of September 30, 1997, $1,291,000 and
$160,000, respectively, as of December 31, 1996 and $1,481,000 and $235,000,
respectively, as of December 31, 1995. This valuation allowance is included in
the allowance for possible loan losses in the accompanying consolidated
statement of condition.
The average recorded investment in impaired loans for the nine month period
ended September 30, 1997 was $928,000 and for the period ended December 31, 1996
and 1995 was approximately $1,567,000 and $1,785,000, respectively.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal. The Bank
recognized interest income on impaired loans of $0 and $11,000 for the nine
months ended September 30, 1997 and 1996, respectively, and $82,000 and $66,000
for the years ended December 31, 1996 and 1995, respectively.
(6) PREMISES AND EQUIPMENT:
Premises and equipment consists of the following-
September 30, December 31,
------------- ------------
1997 1996 1995
---- ---- ----
(unaudited)
Land $ 971,000 $ 971,000 $ 971,000
Premises and improvements......................... 1,209,000 1,203,000 1,195,000
Furniture and equipment........................... 844,000 775,000 672,000
---------- ---------- ----------
3,024,000 2,949,000 2,838,000
Less-Accumulated depreciation
and amortization............................... 509,000 425,000 325,000
----------- ------------ -----------
$ 2,515,000 $ 2,524,000 $ 2,513,000
=========== =========== ===========
(7) SHORT-TERM BORROWINGS:
Short-term borrowings during the year consisted of securities sold under
agreements to repurchase. Securities underlying the agreements were under the
Bank's control.
September 30, December 31,
1997 1996 1995
(unaudited)
Balance outstanding 4,412,000 3,336,000 5,390,000
Weighted average interest
rate at end of period 4.98% 4.84% 4.48%
-------------- -------------- --------------
Nine Months
Ended September 30, Year Ended December 31
------------------- ----------------------
1997 1996 1995
---- ---- ----
(Unaudited)
Average daily balance outstanding $ 2,887,000 $ 3,750,000 $ 5,054,000
Weighted average interest rate 4.80% 4.63% 4.49%
--------- ---------- ---------
Highest month-end outstanding balance $ 5,038,200 $ 4,888,000 $ 7,363,000
========= ========== =========
Federal Home Loan Bank Advances
As of September 30, 1997, the Company has a line of credit for $8.2
million with the Federal Home Loan Bank (FHLB) which is collateralized by FHLB
stock in proportion to the balance outstanding. Borrowings under this
arrangement have an interest rate that fluctuates based on market conditions and
customer demand. As of September 30, 1997, December 31, 1996 and 1995, there
were no outstanding borrowings.
(8) INCOME TAXES:
The components of the provision for income taxes are as follows-
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Federal income taxes-
Current $ 162,000 $ 42,000 $ 17,200 $ 72,000 $ 119,000
Deferred (30,000) 0 0 (27,000) (85,000)
State income taxes 29,000 9,000 13,800 20,000 23,000
------ ----- ------ ------ ------
$ 161,000 $ 51,000 $ 31,000 $ 65,000 $ 57,000
======== ======== ====== ====== ======
A reconciliation of the provision for Federal income taxes, as reported, with
the Federal income tax at the statutory rate of 34 percent is as follows:
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Tax at statutory rate........................ $ 240,000 $ 106,000 $ 109,000 $ 172,000 $ 145,000
Increase (decrease) in taxes resulting from
Tax-exempt income.......................... (70,000) (59,000) (76,500) (119,000) (113,000)
State income taxes, net of Federal
income tax benefit....................... (10,000) (3,000) (4,700) (7,000) (8,000)
Other, net................................... (28,000) (2,000) (10,600) (1,000) 10,000
-------- ------- -------- ------- ------
Provision for Federal income taxes........... $ 132,000 $ 42,000 $ 17,200 $ 45,000 $ 34,000
======= ====== ====== ====== ======
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of the Bank's assets and
liabilities. Cumulative temporary differences are as follows:
September 30, December 31,
------------- ------------
1997 1996 1995
---- ---- ----
(Unaudited)
Deferred tax assets (liabilities):
Allowance for possible losses on other real estate.......... $ 37,300 $ 37,300 $ 58,000
Allowance for possible loan losses.......................... 110,000 77,400 50,000
Depreciation and amortization............................... 31,000 37,900 62,000
Other....................................................... 6,700 2,400 (15,000)
----- ----- --------
Net deferred tax asset.................................. $ 185,000 $ 155,000 $ 155,000
======= ======= =======
In order to fully realize the deferred tax asset, the Bank will need to generate
future taxable income during periods in which existing deductible temporary
differences reverse. Based upon the Bank's historical and current pretax
earnings, management believes it is more likely than not that the Bank will
generate future net taxable income in sufficient amounts to realize its net
deferred tax asset at September 30, 1997 and December 31, 1996; however, there
can be no assurance that the Bank will generate any earnings or any specific
level of continuing earnings. The Bank did not record any valuation allowance
against its net deferred tax asset at September 30, 1997, December 31, 1996 or
December 31, 1995.
(9) BENEFIT PLANS:
In January 1996, the Bank entered into an agreement with its Chief Executive
Officer, which provides for an annual retirement benefit of $35,000 for a
15-year period. Although there are certain provisions for early retirement, it
is expected that the officer will remain in the employment of the Bank until his
retirement date in 2000 at age 65. The present value of this obligation is being
charged to operations over the officer's remaining period of service. During the
first nine months of 1997 and in 1996, the Bank charged $0 and $40,000,
respectively, to operations related to this obligation.
The Bank has a noncontributory 401(k) savings plan covering substantially all
employees. As of January 1, 1997, the Bank matches 50% of employee contributions
for all participants, not to exceed 5% of their total salary. The Bank does not
currently provide any pos-tretirement benefits to its employees. Contributions
made by the Bank for the nine months ended September 30, 1997 were $20,000.
(10) COMMITMENTS AND CONTINGENCIES:
The Bank leases a branch at an annual rental of $36,000 under a lease agreement
expiring in 2002. The lease is subject to periodic adjustments to a current
market value rental.
As of December 31, 1996, future minimum rental payments are as follows-
1997..............................................................$ 40,000
1998................................................................42,000
1999................................................................44,096
2000................................................................46,298
2001................................................................48,608
Thereafter.......................................................... 8,166
Total minimum future rental payments........................$229,168
The above amount represents minimum rentals not adjusted for possible future
increases due to escalation provisions and assumes that all option periods will
be exercised by the Bank.
The consolidated statements of condition do not reflect various commitments
relating to financial instruments which are used in the normal course of
business. Management does not anticipate that the settlement of those financial
instruments will have a material adverse effect on the Bank's financial
position. These instruments include commitments to extend credit and letters of
credit. These financial instruments carry various degrees of credit risk, which
is defined as the possibility that a loss may occur from the failure of another
party to perform according to the terms of the contract.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Bank was committed to advance
$10,581,000 and $6,491,000 to its borrowers as of December 31, 1996 and 1995,
respectively, which commitments generally expire within one year.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Bank
has entered into standby letters of credit contracts with its customers totaling
$632,000 at both December 31, 1996 and 1995, which generally expire within one
year.
The Bank may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business. In management's judgment, the financial
position of the Bank will not be affected materially by the final outcome of any
present legal proceedings.
(11) STOCK OPTION PLAN:
The Bank's shareholders have approved a stock option plan for key employees, and
entered into an employment agreement with additional options awarded to its
President. The Bank accounts for the various stock option agreements in
accordance with Accounting Principles Board Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for these options been determined consistent with FASB
Statement No. 123, the Bank's net income and net income per share for 1996 would
have been the same because Statement No. 123 method of accounting has not been
applied to the options granted prior to January 1, 1995, and no options were
granted subsequent to January 1, 1995.
During 1989, the shareholders approved a stock option plan (the "Plan") for
officers and key employees of the Bank. In accordance with the Plan, options for
the purchase of 33,275 shares of the Bank's common stock may be granted. As of
September 30, 1997, options to purchase 19,965 shares and 12,856 shares of the
Bank's common stock at a price of $7.51 per share have been granted to the
Bank's President and Executive Vice President, respectively. All such options
are currently exercisable and expire 10 years from date of grant which was 1989.
No options have been exercised through September 30, 1997. The weighted average
remaining contractual life of outstanding stock options is 2.5 years.
(12) REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1997 and December
31, 1996 and 1995, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk based, Tier I
risk based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
Actual Amount Ratio Amount Ratio
Amount Ratio (Equal to or greater than) (Equal to or greater than)
As of September 30, 1997 (Unaudited)
Total Capital
(to Risk Weighted Assets) $7,993,000 14.52% $4,403,000 8.00% $5,504,000 10.00%
Tier I Capital
(to Risk Weighted Assets) $7,332,000 13.32% $2,201,000 4.00% $3,302,000 6.00%
Tier I Capital
(to average assets) $7,332,000 8.69% $3,617,000 4.00% $4,521,000 5.00%
As of December 31, 1996-
Total Capital
(to Risk Weighted Assets) $7,374,000 15.18% $3,886,000 8.00% $4,858,000 10.00%
Tier I Capital
(to Risk Weighted Assets) $6,789,000 13.98% $1,942,000 4.00% $2,914,000 6.00%
Tier I Capital
(to Average Assets) $6,789,000 8.69% $3,125,000 4.00% $3,906,000 5.00%
As of December 31, 1995-
Total Capital
(to Risk Weighted Assets) $7,061,000 9.23% $6,120,000 8.00% $7,650,000 10.00%
Tier I Capital
(to Risk Weighted Assets) $6,561,000 8.51% $3,084,000 4.00% $4,626,000 6.00%
Tier I Capital
(to Average Assets) $6,561,000 9.23% $2,843,000 4.00% $3,554,000 5.00%
(13) OTHER OPERATING EXPENSES:
The components of other operating expenses are as follows:
Nine Months Ended
September 30, Years Ended December 31,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Advertising............................................... $ 23,000 $ 44,000 $ 53,000 $ 112,000 $ 96,000
Computer services......................................... 167,000 165,000 209,000 208,000 193,000
Regulatory, professional and other fees................... 192,000 153,000 220,000 285,000 174,000
Deposit and other insurance............................... 52,000 65,000 76,000 150,000 185,000
Office expense............................................ 88,000 81,000 99,000 87,000 55,000
Equipment expense......................................... 120,000 112,000 153,000 149,000 135,000
Postage and delivery expense.............................. 65,000 63,000 85,000 79,000 81,000
Loan/collection expense................................... 43,000 43,000 57,000 56,000 42,000
(Income) loss from operation of
other real estate................................... 15,000 47,000 107,000 (11,000) 27,000
Other..................................................... 101,000 125,000 173,000 117,000 82,000
------- -------- -------- --------- -----------
$ 866,000 $ 898,000 $1,232,000 $1,232,000 $1,070,000
========= ========= ========== ========== ==========
(14) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following is a summary of fair value versus the carrying value of the Bank's
financial instruments. For the Bank, as for most financial institutions, the
bulk of its assets and liabilities are considered financial instruments. Many of
the Bank's financial instruments lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. It is also the Bank's general practice and intent to hold its
financial instruments to maturity and not engage in trading or sales activities.
Therefore, significant estimations and present value calculations were used by
the Bank for the purpose of this disclosure.
Estimated fair values have been determined by the Bank using the best available
data and an estimation methodology suitable for each category of financial
instruments. Financial instruments actively traded in the secondary market have
been valued using available market prices.
The estimation methodologies used, the estimated fair values, and carrying
values, were as follows:
December 31, 1996 December 31, 1995
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Cash and cash equivalents..................... $ 10,305,000 $ 10,305,000 $ 14,108,000 $ 14,108,000
Securities available for sale................. 14,493,000 14,493,000 6,900,000 6,900,000
Securities held to maturity................... 9,630,000 9,569,000 10,635,000 10,655,000
Accrued interest receivable................... 551,000 551,000 429,000 429,000
Accrued interest payable...................... 273,000 273,000 307,000 307,000
Securities sold under
agreement to repurchase .................... 3,336,000 3,336,000 5,390,000 5,390,000
Financial instruments with stated maturities have been valued using a present
value discounted cash flow with a discount rate approximating current market for
similar assets and liabilities. For those loans and deposits with floating
interest rates, it is assumed that estimated fair values generally approximate
the recorded book balances.
December 31, 1996 December 31, 1995
------------------------------------ -----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Gross loans................................... $ 42,596,000 $ 42,821,000 $ 41,342,000 $ 40,934,000
Deposits...................................... 69,626,000 69,524,000 64,054,000 64,116,000
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet unfunded loan commitments which totaled
$10,581,000 and $6,491,000 at December 31, 1996 and 1995, respectively. Standby
letters of credit totaling $632,000 as of both December 31, 1996 and 1995 are
based on fees charged for similar agreements; accordingly, the estimated fair
value of standby letters of credit is nominal. See also Note 10 for additional
discussion relating to these off-balance sheet activities.
(15) STOCK DIVIDEND:
On February 15, 1997, the Bank paid a 10% stock dividend to shareholders of
record as of January 15, 1997.
(16) DEPOSITS (UNAUDITED):
At September 30, 1997, the schedule of maturities of Certificates of
Deposit is as follows:
1997...................................................... $12,818,000
1998...................................................... 9,822,000
1999...................................................... 2,357,000
2000...................................................... 2,993,000
2001 and thereafter....................................... 1,477,000
---------
$29,467,000
(17) SUBSEQUENT EVENTS (UNAUDITED):
Agreement and Plan Of Reorganization
On September 16, 1997, the Bank entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Lakeland Bancorp, Inc. ("Lakeland")
which provides for the merger of the Bank and a newly formed subsidiary bank of
Lakeland (the "Merger"). The shareholders of the Bank will be entitled to
receive a specified number of shares of Lakeland common stock in exchange for
each share of the Bank's common stock owned on the effective date of the Merger
(the "Exchange Number"). The Exchange Number is determined by dividing $26.20 by
the market value of Lakeland common stock (the "Market Value") if the Market
Value is between $22.50 and $31.00 per share. If the Market Value is greater
than $31.00 per share, the Merger Agreement provides that the Exchange Number
will be .845. If the Market Value is less than $22.50 per share, the Exchange
Number will be 1.164. Both Lakeland and the Bank have the right to terminate the
Merger in the event the Market Value of Lakeland common stock is less than
$22.50 per share. The Agreement and Plan of Reorganization is subject to
regulatory and shareholder approval.
Stock Option Plan
On October 27, 1997, the Bank's President and Executive Vice President
exercised all 32,821 of their stock options as described in Note 11.
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma financial information takes into account
Lakeland's pending acquisition of MSB. The Merger pursuant to which Lakeland
will acquire MSB is intended to be accounted for as a pooling of interests.
Under the pooling of interests method of accounting, Lakeland's consolidated
financial statements will be retroactively adjusted after the Merger to combine
the consolidated results of operations of Lakeland and MSB for periods prior to
the Effective Time.
The following unaudited Pro Forma Combined Condensed Balance Sheet of
Lakeland and MSB at September 30, 1997 gives effect to the Merger as if it had
been consummated on such date, based on certain adjustments described therein.
This Proxy Statement-Prospectus also presents unaudited Pro Forma Combined
Condensed Statements of Income, covering (i) the nine months ended September 30,
1997 (the "1997 Interim Pro Forma Statement"), (ii) the nine months ended
September 30, 1996 (the "1996 Interim Pro Forma Statement"), (iii) the year
ended December 31, 1996 (the "1996 Pro Forma Statement"), (iv) the year ended
December 31, 1995 (the "1995 Pro Forma Statement") and (v) the year ended
December 31, 1994 (the "1994 Pro Forma Statement"). These unaudited Pro Forma
Combined Condensed Statements of Income reflect the following:
The 1997 Interim Pro Forma Statement gives effect to the Merger as if
such transaction had occurred on January 1, 1997. The 1997 Interim Pro
Forma Statement combines the results of operations of (i) Lakeland for
the nine months ended September 30, 1997 and (ii) MSB for the nine
months ended September 30, 1997, subject to the adjustments described
therein.
The 1996 Interim Pro Forma Statement gives effect to the Merger as if
such transaction had occurred on January 1, 1996. The 1996 Interim Pro
Forma Statement combines the results of operations of (i) Lakeland for
the nine months ended September 30, 1996 and (ii) MSB for the nine
months ended September 30, 1996, subject to the adjustments described
therein.
The 1996 Pro Forma Statement, the 1995 Pro Forma Statement and the
1994 Pro Forma Statement give effect to the Merger as if such
transaction had occurred on January 1, 1996, January 1, 1995 and
January 1, 1994, respectively, and combine the results of operations
of Lakeland and MSB for the years ended December 31, 1996, December
31, 1995 and December 31, 1994, respectively, subject to the
adjustments described therein.
The unaudited pro forma information presented herein has been prepared by
Lakeland management based upon the historical financial statements and related
notes thereto of Lakeland and MSB included herein or incorporated herein by
reference. The unaudited pro forma information should be read in conjunction
with such historical financial statements and notes. The Pro Forma Combined
Condensed Statements of Income are not necessarily indicative of the results of
operations which would have been achieved had the Merger been consummated as of
the beginning of such periods for which such data are presented and should not
be construed as being representative of future periods.
These Pro Forma Combined Financial Statements are based on an Exchange
Number of 0.941, as set forth in the Merger Agreement.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1997
(unaudited)
Lakeland Metropolitan Pro
(historical) (historical) Adjustments(1)(3) Forma
(in thousands)
ASSETS:
Cash and due from banks................ $20,737 $6,105 $26,842
Federal funds sold..................... 3,500 8,275 11,775
Securities available for sale,
at estimated fair value.............. 78,914 23,930 102,844
Securities held to maturity............ 49,973 5,969 55,942
Loans, net............................. 230,355 46,260 276,615
Premises and equipment................. 11,364 2,515 13,879
Accrued interest receivable............ 3,391 587 3,978
Other assets........................... 965 787 1,752
---------- -------- --------
Total assets........................ $399,199 $94,428 $493,627
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities
Deposits............................... $357,904 $81,914 $439,818
Other Liabilities...................... 1,025 5,159 6,184
--------- ------- ---------
Total liabilities................. 358,929 87,073 446,002
------- ------ -------
Shareholders' equity
Common Stock........................... 8,904 3,395 $ (3,395) 10,501
1,597
Surplus................................ 23,641 3,329 1,798 28,768
Retained earnings...................... 5,883 608 6,491
Unrealized gain on securities
available for sale, net.............. 1,842 23 1,865
--------- --------- ---------
Total shareholders' equity............. 40,270 7,355 47,625
-------- ------- --------
Total liabilities and
shareholders' equity................. $399,199 $94,428 $493,627
======= ====== =======
(1) Historical and pro forma common stock outstanding as of September 30, 1997 were as follows:
Lakeland Metropolitan Pro
(historical) (historical) Adjustments(3) Forma
(in thousands, except share amounts)
Common Stock Lakeland.................... $ 8,904 $8,904
Common Stock MSB....................... 3,395 (3,395)
Common shares outstanding 679,047
Common shares times ..............
Exchange Number(2)............ 638,983 1,597 1,597
------------ --------------- ------- -------
Total.................................. $10,501
======
(2) Represents the common shares outstanding of MSB multiplied by an Exchange
Number of 0.941.
(3) Subsequent to September 30, 1997, members of MSB's management exercised
options covering 32,821 shares of MSB Common Stock which would result in an
additional 30,885 shares of Lakeland Common Stock being issued in the
Merger. These additional shares are not included in the share information
presented in these Pro Forma Combined Financial Statements.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(unaudited)
Lakeland MSB
(historical) (historical) Adjustment Pro Forma
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans and fees...................... $ 14,311 $ 3,066 $ 17,377
Federal funds sold.................. 525 195 720
Investment securities............... 5,453 1,198 6,651
----------- ------- ---------
Total interest income............ 20,289 4,459 24,748
---------- ------- --------
INTEREST EXPENSE:
Deposits................................ 7,860 1,652 9,512
Borrowed money.......................... 10 104 114
------------ -------- ----------
Total interest expense............... 7,870 1,756 9,626
---------- ------- ---------
Net interest income.................. 12,419 2,703 15,122
PROVISION FOR POSSIBLE LOAN
LOSSES.................................. 157 134 291
----------- ------- ----------
Net interest income after provision
for possible loan losses............ 12,262 2,569 14,831
Other income........................... 1,785 404 2,189
Other expenses......................... 8,123 2,270 10,393
---------- ------- ---------
INCOME BEFORE INCOME
TAXES.............................. 5,924 703 6,627
INCOME TAXES.............................. 2,022 161 2,183
---------- -------- ---------
NET INCOME................................ $ 3,902 $ 542 $ 4,444
========== ======== =========
Per Share Data:
Net income per common share............... $ 1.10 $ .80 $ 1.06
Average number of common shares........... 3,555,003 679,047 (40,064) 4,193,986
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
Lakeland MSB
(historical) (historical) Adjustment Pro Forma
(Dollars in thousands, except for per share data)
INTEREST INCOME:
Loans and fees....................... $ 13,086 $ 2,677 $ 15,763
Federal funds sold................... 402 179 581
Investment securities................ 5,474 987 6,461
------ ---------- ----------
Total interest income............. 18,962 3,843 22,805
------ ---------- ---------
INTEREST EXPENSE:
Deposits............................. 7,248 1,432 8,680
Borrowed money....................... - 128 128
----------- ----------- ----------
Total interest expense............. 7,248 1,560 8,808
--------- ---------- ---------
Net interest income................ 11,714 2,283 13,997
PROVISION FOR POSSIBLE LOAN
LOSSES.................................. 169 154 323
---------- ----------- ----------
Net interest income after
provision for possible loan losses 11,545 2,129 13,674
Other income......................... 1,581 329 1,910
Other expenses....................... 7,225 2,149 9,374
--------- ---------- ----------
INCOME BEFORE INCOME
TAXES............................. 5,901 309 6,210
INCOME TAXES.............................. 2,021 51 2,072
--------- ----------- ----------
NET INCOME................................ $ 3,880 $ 258 $ 4,138
============ ========== ==========
Per Share Data:
Net income per common share............... $ 1.11 $ .38 $ 1.00
Average number of common shares........... 3,503,985 679,047 (40,064) 4,142,968
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(unaudited)
Lakeland MSB
(historical) (historical) Adjustment Pro Forma
(Dollar in thousands, except per share data)
INTEREST INCOME:
Loans and fees............................ $ 17,790 $ 3,633 $ 21,423
Federal funds sold........................ 488 253 741
Investment securities..................... 7,197 1,351 8,548
------- ----- --------
Total interest income................ 25,475 5,237 30,712
------ ------ -------
INTEREST EXPENSE:
Deposits.................................... 9,696 1,918 11,614
Borrowed money.............................. - 174 174
--------- ------ --------
Total interest expense................. 9,696 2,092 11,788
----- ------ ------
Net interest income.................... 15,779 3,145 18,924
PROVISION FOR POSSIBLE LOAN
LOSSES.................................... 534 374 908
-------- ------ --------
Net interest income after
provision for possible loan losses.. 15,245 2,771 18,016
Other income........................... 2,234 457 2,691
Other expenses......................... 9,784 2,908 12,692
------- ------ -------
INCOME BEFORE INCOME
TAXES............................. 7,695 320 8,015
INCOME TAXES................................ 2,634 31 2,665
------- -------- --------
NET INCOME.................................. $ 5,061 $ 289 $ 5,350
======= ======= ========
Per share data:
Net income per common share-primary......... $ 1.44 $ .43 $ 1.29
Average number of common shares............. 3,513,088 679,047 (40,064) 4,152,071
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(unaudited)
Lakeland MSB
(historical) (historical) Adjustment Pro Forma
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans and fees.............................. $ 15,917 $ 3,767 $ 19,684
Federal funds sold.......................... 556 152 708
Investment securities....................... 7,375 1,189 8,564
------- --------- -------
Total interest income.................. 23,848 5,108 28,956
------ --------- ------
INTEREST EXPENSE:
Deposits.................................... 9,101 1,903 11,004
Borrowed money.............................. 13 227 240
--------- ---------- -------
Total interest expense............. 9,114 2,130 11,244
------- --------- ------
Net interest income................ 14,734 2,978 17,712
PROVISION FOR POSSIBLE LOAN
LOSSES.................................. 129 228 357
-------- --------- -------
Net interest income after
provision for loan losses............ 14,605 2,750 17,355
Other income.......................... 1,983 452 2,435
Other interest expenses............... 9,505 2,696 12,201
------- ------ ------
INCOME BEFORE INCOME
TAXES................................. 7,083 506 7,589
INCOME TAXES............................... 2,287 65 $ 2,352
------- -------- -------
NET INCOME................................. $ 4,796 $ 441 $ 5,237
======= ========== =======
Per share data:
Net income per common share................. $ 1.39 $ .65 $ 1.28
Average number of common shares............. 3,454,682 679,047 (40,064) 4,093,665
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(unaudited)
Lakeland MSB
(historical) (historical) Adjustment Pro Forma
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans and fees............................... $ 13,752 $ 3,503 $ 17,255
Federal funds sold........................... 326 136 462
Investment securities........................ 8,106 874 8,980
------- --- -------
Total interest income............... 22,184 4,513 26,697
------ ----- ------
INTEREST EXPENSE:
Deposits.................................... 7,604 1,578 9,182
Borrowed money.............................. 3 111 114
---------- -------- -------
Total interest expense............. 7,607 1,689 9,296
----- ----- -----
Net interest income................ 14,577 2,824 17,401
PROVISION FOR POSSIBLE LOAN
LOSSES.................................... 225 345 570
-------- -------- -------
Net interest income after
provision for loan losses....... 14,352 2,479 16,831
Other income....................... 1,912 313 2,225
Other expenses..................... 9,258 2,308 11,566
-------- ------- ------
INCOME BEFORE INCOME
TAXES................................. 7,006 484 7,490
INCOME TAXES................................ 2,175 57 2,232
-------- --------- --------
NET INCOME.................................. $ 4,831 $ 427 $ 5,258
======== ======== ========
Per share data:
Net income per common share................. $ 1.41 $ .69 $ 1.31
Average number of common shares............. 3,419,617 622,031 (36,700) 4,004,948