SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File No. 001-16197
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-3537895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
158 Route 206 North,
Gladstone, New Jersey 07934
(Address of principal executive offices, including zip code)
(908) 234-0700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer of a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[_] No [X].
Number of shares of Common Stock outstanding as of August 1, 2006:
8,259,942
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition June 30, 2006 and
December 31, 2005 Page 3
Consolidated Statements of Income for the three and six
months ended June 30, 2006 and 2005 Page 4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2006 and 2005 Page 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005 Page 6
Notes to Consolidated Financial Statements Page 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 20
Item 4 Controls and Procedures Page 20
PART 2 OTHER INFORMATION
Item 1A Risk Factors Page 21
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds Page 21
Item 4 Submission of Matters to a Vote of Security Holders Page 21
Item 6 Exhibits Page 22
2
Item 1 Financial Statements (Unaudited)
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2006 2005
----------- -----------
ASSETS
Cash and due from banks $ 30,161 $ 19,573
Federal funds sold 1,660 2,631
Interest-earning deposits 726 1,295
----------- -----------
Total cash and cash equivalents 32,547 23,499
Investment securities held to maturity (approximate market
value $65,668 in 2006 and $77,286 in 2005) 66,958 78,084
Securities available for sale 338,589 341,584
Loans:
Loans secured by real estate 794,813 728,122
Other loans 44,062 40,351
----------- -----------
Total loans 838,875 768,473
Less: Allowance for loan losses 6,514 6,378
----------- -----------
Loans, net 832,361 762,095
Premises and equipment, net 23,374 21,412
Accrued interest receivable 4,940 4,828
Cash surrender value of life insurance 18,317 17,957
Other assets 10,476 5,924
----------- -----------
TOTAL ASSETS $ 1,327,562 $ 1,255,383
=========== ===========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 189,401 $ 185,854
Interest-bearing deposits:
Checking 133,819 176,175
Savings 81,905 90,744
Money market accounts 320,972 281,068
Certificates of deposit over $100,000 123,214 93,903
Certificates of deposit less than $100,000 236,484 214,252
----------- -----------
Total deposits 1,085,795 1,041,996
Other borrowings 100,250 77,500
Federal Home Loan Bank Advances 30,842 31,705
Accrued expenses and other liabilities 11,276 5,027
----------- -----------
TOTAL LIABILITIES 1,228,163 1,156,228
----------- -----------
SHAREHOLDERS' EQUITY
Common stock (no par value; $0.83 per share;
authorized 20,000,000 shares; issued shares, 8,484,507 at
June 30, 2006 and 8,473,718 at December 31, 2005;
outstanding shares, 8,259,942 at June 30, 2006 and
8,284,715 at December 31, 2005) 7,070 7,061
Surplus 89,194 88,973
Treasury stock at cost, 224,565 shares in 2006
and 189,003 shares in 2005 (4,946) (4,022)
Retained earnings 13,725 10,100
Accumulated other comprehensive loss, net of income tax (5,644) (2,957)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 99,399 99,155
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,327,562 $ 1,255,383
=========== ===========
See accompanying notes to consolidated financial statements.
3
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 11,945 $ 9,094 $ 23,194 $ 17,367
Interest on investment securities:
Taxable 277 430 575 928
Tax-exempt 330 307 699 582
Interest on securities available for sale:
Taxable 3,874 3,461 7,641 6,966
Tax-exempt 87 90 174 181
Interest-earning deposits 12 6 21 9
Interest on federal funds sold 56 12 72 23
---------- ---------- ---------- ----------
Total interest income 16,581 13,400 32,376 26,056
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts 3,143 1,949 5,636 3,508
Interest on certificates of deposit over $100,000 1,261 578 2,275 1,077
Interest on other time deposits 2,431 1,318 4,514 2,451
Interest on borrowed funds 1,570 610 3,198 1,048
---------- ---------- ---------- ----------
Total interest expense 8,405 4,455 15,623 8,084
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 8,176 8,945 16,753 17,972
Provision for loan losses 100 197 139 329
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,076 8,748 16,614 17,643
---------- ---------- ---------- ----------
OTHER INCOME
Trust department income 2,078 1,906 4,323 3,920
Service charges and fees 489 469 960 934
Bank owned life insurance 207 201 411 398
Securities gains 5 37 56 335
Other income 212 148 427 324
---------- ---------- ---------- ----------
Total other income 2,991 2,761 6,177 5,911
OTHER EXPENSES
Salaries and employee benefits 3,933 3,765 7,791 7,417
Premises and equipment 1,694 1,663 3,419 3,229
Other expenses 1,759 1,592 3,295 2,947
---------- ---------- ---------- ----------
Total other expenses 7,386 7,020 14,505 13,593
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 3,681 4,489 8,286 9,961
Income tax expense 986 1,271 2,345 3,040
---------- ---------- ---------- ----------
NET INCOME $ 2,695 $ 3,218 $ 5,941 $ 6,921
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.33 $ 0.39 $ 0.72 $ 0.84
Diluted $ 0.32 $ 0.38 $ 0.71 $ 0.82
Average basic shares outstanding 8,270,905 8,297,449 8,275,008 8,279,669
Average diluted shares outstanding 8,373,884 8,418,049 8,385,690 8,400,866
See accompanying notes to consolidated financial statements.
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2006 2005
-------- --------
Balance, beginning of period $ 99,155 $ 94,669
Comprehensive income:
Net income 5,941 6,921
Unrealized holding losses on securities
arising during the period, net of tax (2,651) (1,239)
Less: reclassification adjustment for gains
included in net income, net of tax 36 218
-------- --------
(2,687) (1,457)
-------- --------
Total comprehensive income 3,254 5,464
Common stock options exercised 172 511
Purchase of treasury stock (924) (327)
Cash dividends declared (2,316) (1,823)
Stock-based compensation expense 29 --
Tax benefit on disqualifying and nonqualifying
exercise of stock options 29 310
-------- --------
Balance, June 30, $ 99,399 $ 98,804
======== ========
See accompanying notes to consolidated financial statements.
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2006 2005
--------- ---------
OPERATING ACTIVITIES:
Net income: $ 5,941 $ 6,921
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,021 965
Amortization of premium and accretion of
discount on securities, net 283 573
Provision for loan losses 139 329
Gains on security sales (56) (82)
Gain on loans sold (1) (13)
Gain on disposal of fixed assets -- (10)
Increase in cash surrender value of life insurance, net (360) (350)
Increase in accrued interest receivable (112) (396)
Increase in other assets (2,831) (2,027)
Increase in accrued expenses and other liabilities 6,251 1,948
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,275 7,858
--------- ---------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 13,017 18,718
Proceeds from maturities of securities available for sale 30,192 17,729
Proceeds from calls of investment securities -- 3,185
Proceeds from calls of securities available for sale 3,000 7,000
Proceeds from sales of securities available for sale 330 26,404
Purchase of investment securities (1,964) (13,991)
Purchase of securities available for sale (35,089) (36,162)
Proceeds from sales of loans 226 1,613
Purchase of loans (20,770) (90,867)
Net increase in loans (49,860) (33,175)
Purchases of premises and equipment (2,983) (2,241)
Disposal of premises and equipment -- 21
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (63,901) (101,766)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 43,799 56,955
Net increase in short-term borrowings 22,750 48,250
Repayments of long-term debt (863) (838)
Stock-based compensation 29 --
Cash dividends paid (2,318) (1,817)
Tax benefit on stock option exercises 29 310
Exercise of stock options 172 511
Purchase of treasury stock (924) (327)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 62,674 103,044
--------- ---------
Net increase in cash and cash equivalents 9,048 9,136
Cash and cash equivalents at beginning or period 23,499 16,518
--------- ---------
Cash and cash equivalents at end of period $ 32,547 $ 25,654
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 14,386 $ 7,577
Income taxes 1,720 5,503
See accompanying notes to consolidated financial statements.
6
PEAPACK-GLADSTONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in the unaudited
consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the period ended December 31, 2005 for Peapack-Gladstone
Financial Corporation (the "Corporation").
Principles of Consolidation: The Corporation considers that all adjustments (all
of which are normal recurring accruals) necessary for a fair presentation of the
statement of the financial position and results of operations in accordance with
U.S. generally accepted accounting principles for these periods have been made.
Results for such interim periods are not necessarily indicative of results for a
full year.
The consolidated financial statements of Peapack-Gladstone Financial Corporation
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiary, Peapack-Gladstone Bank. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level considered adequate to provide for probable loan losses inherent in the
Corporation's loan portfolio. The allowance is based on management's evaluation
of the loan portfolio considering, among other things, current economic
conditions, the volume and nature of the loan portfolio, historical loan loss
experience, and individual credit situations. The allowance is increased by
provisions charged to expense and reduced by charge-offs net of recoveries.
Stock Option Plans: The Corporation has incentive and non-qualified stock option
plans that allow the granting of shares of the Corporation's common stock to
employees and non-employee directors. The options granted under these plans are
exercisable at a price equal to the fair market value of common stock on the
date of grant and expire not more than ten years after the date of grant. Stock
options may vest during a period of up to five years after the date of grant.
As of January 1, 2006, the Corporation adopted the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No. 123
(Revised 2004), Share-Based Payment, (Statement 123R), under the modified
prospective transition method. Statement 123R requires public companies to
recognize compensation expense related to stock-based compensation awards over
the period during which an employee is required to provide service for the
award. Under the modified prospective transition method, the fair value
recognition provisions apply only to new awards or awards modified after January
1, 2006. Additionally, the fair value of existing unvested awards at the date of
adoption is recorded in salaries and benefits expense over the remaining
requisite service period. Results from prior periods have not been restated. The
following table represents the impact of the adoption of Statement 123R on the
Corporation's financial statements for the six months ended June 30, 2006.
Under Under
(Dollars in thousands except share data) Statement 123R APB 25 Difference
-------------- -------------- --------------
Net income before income tax expense $ 8,286 $ 8,315 $ 29
Net income 5,941 5,970 29
Earnings per share - basic $ 0.72 $ 0.72 $ --
Earnings per share - diluted 0.71 0.71 --
7
Prior to January 1, 2006, the Corporation had accounted for its stock option
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25 (APB 25) and related Interpretations. No stock-based
compensation cost was reflected in net income, as all options granted under
those plans had an exercised price equal to the market value of their underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share for the three and six months ended June 30,
2005 as if the Corporation had applied the fair value recognition provisions of
Statement No. 123R, to stock-based employee compensation in 2005:
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
(Dollars in thousands except share data)
Net income:
As reported $ 3,218 $ 6,921
Less: Total stock-based compensation
Expense determined under the
Fair value based method on all stock
Options, net of related tax effects 99 196
------------ ------------
Pro forma $ 3,119 $ 6,725
Earnings per share - as reported
Basic $ 0.39 $ 0.84
Diluted 0.38 0.82
Earnings per share - pro forma
Basic $ 0.38 $ 0.81
Diluted 0.37 0.80
As of June 30, 2006, there was approximately $211 thousand of unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Corporation's stock incentive plans. That cost is expected to
be recognized over a weighted average period of 1.5 years.
For the Corporation's stock option plans for employees, changes in options
outstanding during the six months ended June 30, 2006 were as follows:
Number Exercise Weighted Aggregate
of Price Average Intrinsic
(Dollars in thousands except share data) Shares Per Share Exercise Price Value
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2005 429,316 $11.85-$32.14 $22.47
Granted 3,800 24.57-27.90 25.73
Exercised (2,612) 11.85-15.08 11.97
Forfeited (22) 27.36 27.36
------------------------------------------------------
Balance, June 30, 2006 430,482 $11.85-$32.14 $22.56 $ 2,106
======================================================
Options exercisable, June 30, 2006 405,324 $ 2,094
======================================================
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the second quarter of 2006 and the exercise price,
multiplied by the number of in-the-money options).
The aggregate intrinsic value of options exercised during the six months ended
June 30, 2006 and 2005 was $41 thousand and $489 thousand, respectively.
8
The following table summarizes information about stock options outstanding at
June 30, 2006.
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
--------------------------------------------------------------------------------
<$12.00 65,547 1.13 years 65,547
12.01 - 16.05 16,837 4.54 16,195
16.06 - 19.20 119,917 3.49 119,722
19.21 - 26.00 5,341 8.22 1,665
26.01 - 28.90 206,860 7.37 189,347
28.91 - 32.14 15,980 7.97 12,848
--------------------------------------------------------------------------------
22.56* 430,482 5.26 years 405,324
================================================================================
* Weighted average exercise price
The Corporation also has non-qualified stock option plans for non-employee
directors. Changes in options outstanding during the six months ended June 30,
2006 were as follows:
Number Exercise Weighted Aggregate
of Price Average Intrinsic
(Dollars in thousands except share data) Shares Per Share Exercise Price Value
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 197,730 $15.68-$28.89 $22.91
Exercised (8,177) 15.68-17.53 17.12
-------------------------------------------------------------
Balance, June 30, 2006 189,553 $15.68-$28.89 $23.16 $815
=============================================================
Options exercisable, June 30, 2006 189,553 $815
=============================================================
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the second quarter of 2006 and the exercise price,
multiplied by the number of in-the-money options).
The aggregate intrinsic value of options exercised during the six months ended
June 30, 2006 and 2005 was $72 thousand and $916 thousand, respectively.
The following summarizes information about stock options outstanding at June 30,
2006.
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
-------------------------------------------------------------------------------
<$16.05 28,750 4.69 years 28,750
16.06 - 20.00 61,804 1.96 61,804
20.01 - 28.89 98,999 7.53 98,999
-------------------------------------------------------------------------------
$23.16* 189,553 5.28 years 189,553
===============================================================================
* Weighted average exercise price
The per share weighted-average fair value of stock options granted during the
first six months of 2006 and 2005 for all plans was $7.66 and $9.47,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions:
2006 2005
------------ ------------
Dividend yield 2.17% 1.62%
Expected volatility 28% 37%
Expected life 5 years 5 years
Risk-free interest rate 4.86% 3.78%
9
Earnings per Common Share - Basic and Diluted: Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings per share includes
any additional common shares as if all potentially dilutive common shares were
issued (i.e., stock options) utilizing the treasury stock method.
Comprehensive Income: The difference between the Corporation's net income and
total comprehensive income for the six months ended June 30, 2006 and 2005
relates to the change in the net unrealized gains and losses on securities
available for sale during the applicable period of time less adjustments for
realized gains and losses. Total comprehensive income for the six months ended
June 30, 2006 and 2005 was $3.3 million and $5.5 million, respectively.
Reclassification: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2006 presentation.
2. LOANS
Loans outstanding as of June 30, consisted of the following:
(In thousands) 2006 2005
-------- --------
Loans secured by 1-4 family $536,813 $475,930
Commercial real estate 219,210 167,149
Construction loans 38,790 19,975
Commercial loans 35,049 22,672
Consumer loans 7,531 5,876
Other loans 1,482 3,016
-------- --------
Total loans $838,875 $694,618
======== ========
Non-performing assets, which are loans past due in excess of 90 days and still
accruing and non-accrual loans, totaled $3.9 million at June 30, 2006 and $354
thousand at June 30, 2005. The increase in these assets is primarily due to one
commercial loan of $3.6 million, which is well collateralized by a property with
an appraised value of $5.3 million. No loss of principal or interest is
anticipated. Loans past due in excess of 90 days and still accruing are in the
process of collection and are considered well secured.
3. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $30.8
million and $32.6 million at June 30, 2006 and 2005, respectively, with a
weighted average interest rate of 3.58 percent and 3.45 percent, respectively.
These advances are secured by blanket pledges of certain 1-4 family residential
mortgages totaling $246.7 million at June 30, 2006. Advances totaling $23.0
million at June 30, 2006, have fixed maturity dates, while advances totaling
$7.8 million were amortizing advances with monthly payments of principal and
interest. Included in the total are advances of $6 million that will mature in
the next six months.
Other borrowings at FHLB, with an average maturity of 90 days or less, were
$90.0 million at June 30, 2006 as compared to $25.0 million at June 30, 2005.
The weighted average interest rate for these borrowings for the six months ended
June 30, 2006 and 2005 was 4.83 percent and 3.15 percent, respectively.
Included in other borrowings are overnight borrowings totaling $10.3 million at
June 30, 2006 as compared to overnight borrowings of $23.3 million at June 30,
2005. For the six months ended, June 30, 2006 and 2005, overnight borrowings at
FHLB averaged $22.1 million with a weighted average interest rate of 4.63
percent and $28.9 million with a weighted average interest rate of 2.90 percent,
respectively.
10
The final maturity dates of the advances and other borrowings are scheduled as
follows:
(In thousands)
2006 $ 106,250
2007 4,000
2008 1,146
2009 2,000
2010 13,759
Over 5 years 3,937
----------
Total $ 131,092
==========
4. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of
its salaried employees.
The net periodic expense for the three and six months ended June 30 included the
following components:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
------ ------ ------ ------
Service cost $ 418 $ 351 $ 835 $ 702
Interest cost 165 147 330 293
Expected return on plan assets (225) (134) (449) (267)
Amortization of:
Net loss 18 17 37 34
Unrecognized remaining net assets (1) (1) (3) (3)
------ ------ ------ ------
Net periodic benefit cost $ 375 $ 380 $ 750 $ 759
====== ====== ====== ======
As previously disclosed in the financial statements for the year ended December
31, 2005, the Corporation expects to contribute $1.1 million to its pension plan
in 2006. As of June 30, 2006, contributions of $570 thousand had been made for
the current year.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL: The following discussion and analysis contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about
management's view of future interest income and net loans, management's
confidence and strategies and management's expectations about new and existing
programs and products, relationships, opportunities and market conditions. These
statements may be identified by such forward-looking terminology as "expect",
"look", "believe", "anticipate", "may", "will", or similar statements or
variations of such terms. Actual results may differ materially from such
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities:
o Unanticipated changes or no change in interest rates.
o Competitive pressure in the banking industry causes unanticipated adverse
changes.
o An unexpected decline in the economy of New Jersey causes customers to
default in the payment of their loans or causes loans to become impaired.
o Enforcement of the Highlands Water Protection and Planning Act.
o Loss of key managers or employees.
o Loss of major customers or failure to develop new customers.
o A decrease in loan quality and loan origination volume.
o An increase in non-performing loans.
o A decline in the volume of increase in trust assets or deposits.
The Corporation assumes no responsibility to update such forward-looking
statements in the future.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is based upon the
Corporation's consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires the Corporation to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements
included in the December 31, 2005 Annual Report on Form 10-K, contains a summary
of the Corporation's significant accounting policies. Management believes the
Corporation's policy with respect to the methodology for the determination of
the allowance for loan losses involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. Changes in
these judgments, assumptions or estimates could materially impact results of
operations. This critical policy and its application are periodically reviewed
with the Audit Committee and the Board of Directors.
The provision for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's provision
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the
Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
should New Jersey experience adverse economic conditions. Future adjustments to
the provision for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Corporation's control.
EXECUTIVE SUMMARY: Earnings per share were $0.32 per diluted share in the second
quarter of 2006 as compared to $0.38 per diluted share for the second quarter of
2005. The Corporation's net income for the second quarters of 2006 and 2005 was
$2.7 million and $3.2 million, respectively, a decline of $523 thousand, or 16.3
percent between these periods. For the six months ended June 30, 2006 and 2005,
the Corporation reported earnings per diluted share of $0.71 and $0.82,
respectively. Net income for the year-to-date ended June 30, 2006 was $5.9
million as compared to $6.9 million for the same period of 2005. The primary
factor contributing to the decline in net income in 2006 is the compression of
the net interest margin, which is explained below.
Annualized return on average assets for the quarter was 0.83 percent and
annualized return on average equity was 10.83 percent for the second quarter of
2006. For the six months ended June 30, 2006, annualized return on average
assets was 0.92 percent and annualized return on average equity was 11.94
percent.
Net interest income, on a fully tax-equivalent basis, was $8.5 million in the
second quarter of 2006, a decline of $751 thousand or 8.2 percent from the same
quarter last year and the net interest margin was 2.73 percent for the same
quarter as compared to 3.37 percent for the second quarter of 2005 and 2.94
percent in the first quarter of 2006. For the six months ended June 30, 2006,
net interest income, on a fully tax-equivalent basis, was $17.3 million as
compared to $18.5 million for the same period in 2005, a decline of $1.1 million
or 6.2 percent. The net interest margin was 2.84 percent and 3.45 percent for
the six months ended June 30, 2006 and 2005, respectively.
Average loan growth continued at a strong pace, averaging $809.2 million for the
second quarter of 2006 as compared to $649.7 million for the second quarter of
2005, an increase of $159.4 million or 24.5 percent. The average commercial loan
portfolio grew $46.0 million or 51.6 percent as the Corporation continues to
strive to change the total loan mix toward higher yielding commercial and
construction loans. The average mortgage loan portfolio grew by $105.2 million
or 20.2 percent. A majority of the mortgage loan growth was in adjustable-rate
residential mortgage loans. Loan rates rose 31 basis points from the second
quarter of 2005 to the same quarter of 2006 to 5.91 percent. Longer-term loan
rates have not risen as quickly as shorter-term deposit rates from the second
quarter 2005 to the second quarter 2006 as the yield curve remains basically
flat.
12
In the second quarter of 2006, average deposits grew $81.6 million or 8.3
percent over the levels of the second quarter of 2005, to $1.06 billion.
Short-term market rates continue to rise as deposit gathering remains highly
competitive and is reflected in the rates paid on interest-bearing deposits.
Rates paid in the second quarter of 2006 for interest-bearing deposits were 3.13
percent as compared to 1.92 percent for the second quarter of 2005, an increase
of 121 basis points or 63.0 percent.
EARNINGS ANALYSIS
NET INTEREST INCOME: On a tax-equivalent basis, net interest income before the
provision for loan losses, was $8.5 million for the second quarter of 2006 as
compared to $9.2 million for the second quarter of 2005, a decline of $751
thousand or 8.2 percent. Net interest income and net interest margin continues
to be negatively affected by the continued increase in short-term rates
reflecting the economic policy decisions of the Federal Reserve Board and the
extended flat yield curve. The net interest margin on a fully tax-equivalent
basis was 2.73 percent and 3.37 percent in the second quarter of 2006 and 2005,
respectively, a decrease of 64 basis points. Net interest income for the second
quarter of 2006, when compared to the first quarter of 2006, declined $426
thousand, or 4.8 percent, from $8.9 million on a tax-equivalent basis. The net
interest margin, on a fully tax equivalent basis declined from 2.94 percent in
the first quarter of 2006, to 2.73 percent in the second quarter of 2006, a 21
basis point decrease. Interest rates paid on deposits and borrowings grew at a
faster pace than interest rates earned on assets such as loans and deposits,
which caused net interest income to be negatively affected despite strong loan
and deposit growth for the quarter.
Average interest-earning assets for the second quarter of 2006, were $1.24
billion, an increase of $143.2 million or 13.1 percent as compared to $1.09
billion for the same quarter in 2005. Average loan balances increased $159.4
million, or 24.5 percent, to $809.2 million in the second quarter of 2006
compared to the second quarter of 2005. In contrast, average investment
securities declined $19.3 million, or 4.4 percent, in the second quarter of 2006
compared to the second quarter of 2005. The increase in loan balances during the
second quarter of 2006 was the result of growth in residential real estate,
commercial mortgage, commercial and installment loans. The majority of
residential real estate loan origination was due to the purchase of adjustable
rate loans from a third-party mortgage entity. All of the loans purchased are
secured by properties located in the State of New Jersey and many are within the
Bank's market area.
For the second quarter of 2006, average interest-bearing liabilities totaled
$1.01 billion, an increase of $130.5 million, or 14.9 percent, over the average
for the second quarter of 2005 of $875.1 million. The largest categories of
growth were in money market accounts and certificates of deposit. For the second
quarter of 2006, money market accounts averaged $301.4 million, an increase of
$67.6 million or 28.9 percent over the second quarter of 2005. Average
certificates of deposit for the second quarter of 2006 were $345.0 million as
compared to $259.4 million for the same period in 2005, an increase of $85.6
million or 33.0 percent. The largest decrease for the second quarter of 2006 as
compared to 2005 was in the Bank's escrow checking product, which declined $51.5
million or 80.8 percent, as a result of the Bank's decision to reduce the rate
paid on municipality escrow accounts. Average short-term and overnight
borrowings increased $60.1 million during the second quarter of 2006 as compared
to the same quarter in 2005 to supplement the funding of loan originations.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, rose 45 basis points to 5.45 percent for the second quarter of 2006 from
5.00 percent for the same quarter of 2005. In the second quarter of 2006,
average interest rates earned on loans rose 31 basis points to 5.91 percent from
5.60 percent for the same period in 2005. Average interest rates earned on
investment securities were 4.58 for the second quarter of 2006 as compared to
4.12 percent in the second quarter of 2005, an increase of 46 basis points.
The average interest rate paid on interest-bearing liabilities in the second
quarter of 2006 was 3.34 percent, a 130 basis point increase from 2.04 percent
in the second quarter of 2005. Certificates of deposit paid an average rate of
4.28 percent in the second quarter of 2006 as compared to 2.92 percent in the
same quarter of 2005, an increase of 136 basis points, while average rates paid
on money market accounts increased 167 basis points to 3.66 percent when
compared to 1.99 percent for the same period in 2005. Average rates paid on
certificates of deposit and money markets accounts grew at a faster pace than
any other category of deposit due to the growth in the adjustable-rate Fed Flyer
CD and Fed Tracker Money Market, which are tied to the Federal Funds rate, and
the High-Yield Money Market. The average rates paid on borrowings also increased
from 3.27 percent in the second quarter of 2005 to 4.72 percent in the second
quarter of 2006.
13
For the six months ended June 30, 2006, net interest income on a tax-equivalent
basis, before the provision for loan losses, was $17.3 million compared to $18.5
million for the same period of 2005, a decrease of $1.1 million or 6.2 percent.
The decline in net interest income was primarily the result of higher deposit
and borrowing balances, higher rates paid on liabilities and lower investment
volume offset in part by higher loan volume and higher rates earned on
investments and loans. Rates on liabilities continue to rise at a faster pace
than rates on assets, which negatively affected net interest income and net
interest margin. The net interest margin on a fully tax-equivalent basis was
2.84 percent in the first six months of 2006, a decrease of 61 basis points as
compared to 3.45 percent for the same six months of 2005.
For the year-to-date 2006, average interest-earning assets were $1.22 billion,
rising $151.4 million, or 14.1 percent, as compared to $1.07 billion for the
same period in 2005. Rising $170.6 million from the first six months of 2005, or
27.5 percent, average loan balances were $792.2 million for the six months ended
June 30, 2006. Average investment securities declined $20.8 million, or 4.6
percent, to $427.0 million. In addition to increased deposit and borrowing
balances, the runoff in investments was used to fund loan growth. As noted
above, most of the increase in loan balances was the result of growth in
residential real estate, commercial mortgage and commercial loans.
For the first six months of 2006, average interest-bearing liabilities increased
$137.9 million or 16.1 percent, to $997.0 million from $859.1 million in the
same period in 2005. Average balances of money market accounts were $292.3
million, an increase of $61.3 million or 26.5 percent and certificates of
deposits were $333.9 million, rising $78.2 million or 30.6 percent. Average
interest-bearing checking deposits declined $59.9 million or 29.5 percent, while
average savings deposits declined $17.5 million or 16.9 percent. The Fed Tracker
Money Market and Fed Flyer CD products experienced the greatest growth in the
first six months of 2006 as compared to the same period of 2005. In addition, a
High Yield Money Market product was introduced this year that has been well
received by customers. For the first six months of 2006, overnight borrowings
averaged $22.1 million as compared to $28.9 million for the first six months of
2005, declining, in part, to the Corporation's use of short-term borrowings with
a slightly lower rate than the overnight borrowings. Short-term borrowings
averaged $88.2 million for the six months ended June 30, 2006 and were used to
fund loan growth. Average non-interest-bearing demand deposits totaled $181.6
million and $171.8 million for the first six months of 2006 and 2005,
respectively, an increase of $9.8 million or 5.7 percent.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, rose 43 basis points to 5.39 percent for the first six months of 2006
from 4.96 percent for the first six months of 2005. Average interest rates
earned on loans rose 27 basis points in the first six months of 2006 to 5.86
percent from 5.59 percent for the same period in 2005, despite a flattened yield
curve and competitive pressure. For the six months ended June 30, 2006, the
average interest rates earned on investment securities increased to 4.52
percent, rising 43 basis points from 4.09 percent in the same period in 2005.
The average interest rate paid on interest-bearing liabilities in the first six
months of 2006 and 2005 was 3.13 percent and 1.88 percent, respectively, a 125
basis point increase. The average rate paid on certificates of deposit in the
first six months of 2006 rose 131 basis points to 4.07 percent while average
rates paid on money market accounts increased 162 basis points to 3.36 percent
when compared to 1.74 percent for the same period in 2005. While almost all
categories of liabilities are paying higher rates, certificates of deposit and
money markets accounts grew at a faster pace due to the growth in the
adjustable-rate Fed Flyer CD, Fed Tracker Money Market and High-Yield Money
Market products. Rates for the first two products are tied to the Federal Funds
rate, which increased many times during 2005 and has continued to rise in 2006.
Average rates paid on checking deposits declined 51 basis points to 0.61 percent
for the first six months of 2006 as compared to the same period of 2005 due to
the decline in the Bank's escrow checking balances as a result of the Bank's
decision to reduce the rate paid on municipality escrow accounts.
For the six months ended June 30, 2006, the average rate paid on borrowings was
4.52 percent as compared to 3.19 percent for the same period in 2005, an
increase of 133 basis points. As a result of rising short-term interest rates,
average short-term borrowing rates increased from 3.15 percent for the first six
months of 2005 to 4.83 percent in the first six months of 2006, while average
overnight borrowing rates increased 173 basis points to 4.63 percent in the six
months ended June 30, 2006. The cost of funds for the first six months increased
to 2.65 percent as compared to 1.57 percent for the same period in 2005. Net
interest income continues to be negatively affected by the narrow gap between
short and long term interest rates despite strong loan and deposit growth.
14
The following tables reflect the components of net interest income for the three
and six months ended June 30, 2006 and 2005:
Average Balance Sheet
Unaudited
Quarters Ended
(Tax-Equivalent Basis, Dollars in Thousands)
June 30, 2006 June 30, 2005
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 370,962 $ 4,151 4.48% $ 385,908 $ 3,891 4.03%
Tax-exempt (1) (2) 51,478 688 5.35 55,881 655 4.69
Loans (2) (3) 809,161 11,957 5.91 649,733 9,101 5.60
Federal funds sold 4,684 56 4.80 1,719 12 2.90
Interest-earning deposits 949 12 4.91 776 6 3.02
----------- ----------------------- ----------- ------------------------
Total interest-earning assets 1,237,234 $ 16,864 5.45% 1,094,017 $ 13,665 5.00%
----------- ----------------------- ----------- ------------------------
Noninterest -earning assets:
Cash and due from banks 22,514 21,641
Allowance for loan losses (6,416) (6,166)
Premises and equipment 23,232 21,155
Other assets 23,492 23,703
----------- -----------
Total noninterest-earning assets 62,822 60,333
----------- -----------
Total assets $ 1,300,056 $ 1,154,350
=========== ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 141,999 $ 240 0.68% $ 205,237 $ 609 1.19%
Money markets 301,391 2,758 3.66 233,823 1,164 1.99
Savings 84,177 145 0.69 101,952 177 0.69
Certificates of deposit 344,959 3,692 4.28 259,392 1,895 2.92
----------- ----------------------- ----------- ------------------------
Total interest-bearing deposits 872,526 6,835 3.13 800,404 3,845 1.92
Borrowings 133,020 1,570 4.72 74,668 610 3.27
----------- ----------------------- ----------- ------------------------
Total interest-bearing liabilities 1,005,546 8,405 3.34 875,072 4,455 2.04
----------- ----------------------- ----------- ------------------------
Noninterest bearing liabilities
Demand deposits 186,769 177,270
Accrued expenses and
other liabilities 8,242 5,297
----------- -----------
Total noninterest-bearing
liabilities 195,011 182,567
Shareholders' equity 99,499 96,711
----------- -----------
Total liabilities and
shareholders' equity $ 1,300,056 $ 1,154,350
=========== ===========
Net Interest income
(tax-equivalent basis) 8,459 9,210
Net interest spread 2.11% 2.96%
======== ========
Net interest margin (4) 2.73% 3.37%
======== ========
Tax equivalent adjustment (283) (265)
----------- -----------
Net interest income $ 8,176 $ 8,945
=========== ===========
15
Average Balance Sheet
Unaudited
Year-to-Date
(Tax-Equivalent Basis, Dollars in Thousands)
June 30, 2006 June 30, 2005
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 372,494 $ 8,216 4.41% $ 393,963 $ 7,894 4.01%
Tax-exempt (1) (2) 54,540 1,440 5.28 53,823 1,259 4.68
Loans (2) (3) 792,182 23,219 5.86 621,555 17,382 5.59
Federal funds sold 3,090 72 4.67 1,745 23 2.64
Interest-earning deposits 927 21 4.48 700 9 2.65
----------- ----------------------- ----------- ------------------------
Total interest-earning assets 1,223,233 $ 32,968 5.39% 1,071,786 $ 26,567 4.96%
----------- ----------------------- ----------- ------------------------
Noninterest -earning assets:
Cash and due from banks 22,205 21,306
Allowance for loan losses (6,458) (6,097)
Premises and equipment 22,478 20,668
Other assets 23,304 24,451
----------- -----------
Total noninterest-earning assets 61,529 60,328
----------- -----------
Total assets $ 1,284,762 $ 1,132,114
=========== ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 143,153 $ 436 0.61% $ 203,050 $ 1,137 1.12%
Money markets 292,257 4,905 3.36 230,961 2,013 1.74
Savings 86,274 295 0.68 103,816 358 0.69
Certificates of deposit 333,866 6,789 4.07 255,620 3,528 2.76
----------- ----------- -------- ----------- ----------- --------
Total interest-bearing deposits 855,550 12,425 2.90 793,447 7,036 1.77
Borrowings 141,490 3,198 4.52 65,652 1,048 3.19
----------- ----------- -------- ----------- ----------- --------
Total interest-bearing liabilities 997,040 15,623 3.13 859,099 8,084 1.88
----------- ----------- -------- ----------- ----------- --------
Noninterest bearing liabilities
Demand deposits 181,612 171,835
Accrued expenses and
other liabilities 6,577 5,069
----------- -----------
Total noninterest-bearing
liabilities 188,189 176,904
Shareholders' equity 99,533 96,111
----------- -----------
Total liabilities and
shareholders' equity $ 1,284,762 $ 1,132,114
=========== ===========
Net Interest income
(tax-equivalent basis) 17,345 18,483
Net interest spread 2.26% 3.08%
======== ========
Net interest margin (4) 2.84% 3.45%
======== ========
Tax equivalent adjustment (592) (511)
----------- -----------
Net interest income $ 16,753 $ 17,972
=========== ===========
(1) Average balances for available-for sale securities are based on amortized
cost.
(2) Interest income is presented on a tax-equivalent basis using a 35 percent
federal tax rate.
(3) Loans are stated net of unearned income and include non-accrual loans.
(4) Net interest income on a tax-equivalent basis as a percentage of total
average interest-earning assets.
16
OTHER INCOME: For the second quarter of 2006, other income was $2.99 million as
compared to $2.76 million in the second quarter of 2005, an increase of $230
thousand or 8.3 percent. Income from PGB Trust and Investments, the Bank's trust
division, was $2.08 million, an increase of $172 thousand or 9.0 percent over
last year's second quarter. The market value of trust assets increased $91.1
million or 5.5 percent from the second quarter of 2005 to 2006. Other
non-interest income increased $63 thousand from the second quarter of 2005 to
$130 thousand in the second quarter of 2006, primarily due to higher
construction loan fees, which increased $52 thousand.
For the six months ended June 30, 2006, other income increased $266 thousand, or
4.5 percent, to $6.2 million as compared to the same six months of 2005. PGB
Trust and Investments recorded 2006 year-to-date income of $4.3 million as
compared to $3.9 million for the same period of 2005, an increase of $403
thousand or 10.3 percent. The Corporation recorded service charges and fees of
$960 thousand and $934 thousand in the first six months of 2006 and 2005,
respectively, an increase of $26 thousand or 2.8 percent.
Security gains totaled $56 thousand in the first half of 2006 as compared to
$335 thousand in the first half of 2005. This decrease was primarily due to a
$253 thousand gain on the non-monetary exchange of equity securities in 2005.
The following table presents the components of other income for the three and
six months ended June 30, 2006 and 2005:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
------ ------ ------ ------
Trust department income $2,078 $1,906 $4,323 $3,920
Service charges and fees 489 469 960 934
Bank owned life insurance 207 201 411 398
Other non-interest income 130 67 238 152
Safe deposit rental fees 55 54 118 116
Fees for other services 27 27 71 56
Securities gains 5 37 56 335
------ ------ ------ ------
Total other income $2,991 $2,761 $6,177 $5,911
====== ====== ====== ======
OTHER EXPENSES: Other expenses rose to $7.39 million for the second quarter of
2006 from $7.02 million, a $366 thousand or 5.2 percent when compared to the
second quarter of 2005. During the second quarter of 2006, salaries and benefits
expense was $3.93 million as compared to $3.77 million for the second quarter of
2005, an increase of $168 thousand or 4.5 percent. In the past year, the Bank
has added new lenders who have contributed to the growth in the commercial and
construction loan portfolios. In addition, normal salary increases, branch
expansion, higher group health insurance and pension plan costs were partially
offset by lower profit sharing plan and bonus accruals.
Premises and equipment expense recorded in the second quarter of 2006 was $1.69
million as compared to $1.66 million recorded in the same period in 2005, an
increase of $31 thousand or 1.9 percent. Advertising expense decreased $110
thousand or 32.6 percent to $227 thousand in the second quarter of 2006 when
compared to the same period in 2005.
For the first half of 2006, other expenses totaled $14.51 million as compared to
$13.59 million for the same period in 2005, an increase of $912 million or 6.7
percent. During the six months ended June 30, 2006, salaries and benefits
expense rose to $7.79 million from $7.42 million during the first six months of
2005, an increase of $374 thousand or 5.0 percent. For the first half of 2006,
the Corporation recorded $3.42 million in premises and equipment expense, a $190
thousand, or 5.9 percent, increase over the $3.23 million recorded for the first
half of 2005.
Excluding salaries and benefits and premises and equipment expenses, all other
expense categories in total increased to $3.30 million from $2.95 million, an
increase of $348 thousand, or 11.8 percent. Postage increased from $138 thousand
for the six months ended June 30, 2005 to $169 thousand for the same six months
in 2006, a $31 thousand or 22.5 percent increase, due to the increase in postal
rates at the beginning of 2006 and increases
17
in statement volume due to new customers. In addition, loan expense increased
$25 thousand or 32.1 percent to $103 thousand for the first six months of 2006
as compared to the same period of 2005 due to increases in loan volume. Rebated
foreign ATM fees were $89 thousand and $60 thousand for the first six months of
2006 and 2005, respectively, rising $29 thousand or 48.3 percent as the Bank
continues to offer customers the opportunity to use other banks' ATMs without
charge, up to four transactions per month.
While the Corporation strives to control costs, new branches are vital to our
future growth and profitability. Deposit and loan growth continues as we add new
markets and expand our staff to include professional commercial lenders. The
Corporation continues to try to operate in an efficient manner.
The following table presents the components of other expense for the three and
six months ended June 30, 2006 and 2005:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2006 2005 2006 2005
------- ------- ------- -------
Salaries and employee benefits $ 3,933 $ 3,765 $ 7,791 $ 7,417
Premises and equipment 1,694 1,663 3,419 3,229
Advertising 227 337 410 492
Professional fees 163 146 359 242
Trust department expense 122 103 237 209
Stationery and supplies 115 139 223 298
Telephone 105 90 197 192
Postage 84 70 169 138
Other expense 943 707 1,700 1,376
------- ------- ------- -------
Total other expense $ 7,386 $ 7,020 $14,505 $13,593
======= ======= ======= =======
NON-PERFORMING ASSETS: Other real estate owned (OREO), loans past due in excess
of 90 days and still accruing, and non-accrual loans are considered
non-performing assets. These assets totaled $3.9 million and $354 thousand at
June 30, 2006 and 2005 respectively. The increase in non-performing assets in
the second quarter is primarily the result of one commercial loan of $3.6
million, which is well collateralized by a property with an appraised value of
$5.3 million. No loss of principal or interest is anticipated. Loans past due in
excess of 90 days and still accruing are in the process of collection and are
considered well secured.
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
June 30,
(In thousands) 2006 2005
--------- ---------
Loans past due in excess of 90 days and still accruing 2 --
Non-accrual loans 3,874 354
--------- ---------
Total non-performing assets $ 3,876 $ 354
========= =========
Non-performing loans as a % of total loans 0.46% 0.05%
Non-performing assets as a % of total loans plus other
real estate owned 0.46% 0.05%
Allowance as a % of total loans 0.78% 0.92%
PROVISION FOR LOAN LOSSES: The provision for loan losses was $100 thousand for
the second quarter of 2006 as compared to $197 thousand for the same quarter in
2005. The amount of the loan loss provision and the level of the allowance for
loan losses are based upon a number of factors including management's evaluation
of probable losses inherent in the portfolio, after consideration of appraised
collateral values, financial condition and past credit history of the borrowers
as well as prevailing economic conditions. For the six months ended June 30,
2006, the provision for loan losses was $139 thousand as compared to $329
thousand for the same six-month period last year.
18
For the second quarter of 2006, there were no charge-offs or recoveries as
compared to net recoveries of $5 thousand during the second quarter of 2005. Net
charge-offs for the six months ended June 30, 2006 were $3 thousand as compared
to net recoveries of $12 thousand for the six months ended June 30, 2005.
A summary of the allowance for loan losses for the six-month periods ended June
30 follows:
(In thousands) 2006 2005
------- -------
Balance, January 1, $ 6,378 $ 5,989
Provision charged to expense 139 329
Charge-offs (4) (1)
Recoveries 1 13
------- -------
Balance, June 30, $ 6,514 $ 6,330
======= =======
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 26.8
percent and 28.3 percent for the three months ended June 30, 2006 and 2005
respectively. On a year to date basis, income tax expense as a percentage of
pre-tax income was 28.3 percent in 2006 and 30.5 percent in 2005. Taxable income
declined from $10.0 million for the first six months of 2005 to $8.3 million for
the first six months of 2006. The effective tax rate in 2006 decreased due to
increased tax-exempt income, as well as, a decline in state income tax due to a
higher proportion of revenue being generated at a lower effective state tax
rate.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At June 30, 2006, total shareholders' equity, including net unrealized
losses on securities available for sale, was $99.4 million, representing an
increase in total shareholders' equity recorded at December 31, 2005, of $244
thousand or 0.2 percent. The Federal Reserve Board has adopted risk-based
capital guidelines for banks. The minimum guideline for the ratio of total
capital to risk-weighted assets is 8 percent. Tier 1 Capital consists of common
stock, retained earnings, minority interests in the equity accounts of
consolidated subsidiaries, non-cumulative preferred stock, less goodwill and
certain other intangibles. The remainder may consist of other preferred stock,
certain other instruments and a portion of the allowance for loan loss. At June
30, 2006, the Corporation's Tier 1 Capital and Total Capital ratios were 15.57
percent and 16.54 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines. These guidelines provide for a minimum ratio of Tier 1 Capital to
average total assets of 3 percent for banks that meet certain specified
criteria, including having the highest regulatory rating. All other banks are
generally required to maintain a leverage ratio of at least 3 percent plus an
additional 100 to 200 basis points. The Corporation's leverage ratio at June 30,
2006, was 8.13 percent.
LIQUIDITY: Liquidity refers to an institution's ability to meet short-term
requirements in the form of loan requests, deposit withdrawals and maturing
obligations. Principal sources of liquidity include cash, temporary investments
and securities available for sale.
Management's opinion is that the Corporation's liquidity position is sufficient
to meet future needs. Cash and cash equivalents, interest earning deposits and
federal funds sold totaled $32.5 million at June 30, 2006. In addition, the
Corporation has $338.6 million in securities designated as available for sale.
These securities can be sold in response to liquidity concerns or pledged as
collateral for borrowings as discussed below. Book value as of June 30, 2006, of
investment securities and securities available for sale maturing within one year
amounted to $20.9 million and $18.6 million, respectively.
The primary source of funds available to meet liquidity needs is the
Corporation's core deposit base, which excludes certificates of deposit greater
than $100 thousand. As of June 30, 2006, core deposits equaled $962.6 million.
Another source of liquidity is borrowing capacity. The Corporation has a variety
of sources of short-term liquidity available, including federal funds purchased
from correspondent banks, short-term and long-term borrowings from the Federal
Home Loan Bank of New York, access to the Federal Reserve Bank discount window
and loan participations of sales of loans. The Corporation also generates
liquidity from the regular principal payments made on its mortgage-backed
security and loan portfolios.
19
RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" (FIN 48), which establishes a recognition threshold
and measurement for income tax positions recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions.
The first step is recognition and the second is measurement. For recognition, an
enterprise judgmentally determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements.
Tax positions that meet the more-likely-than-not recognition threshold at the
effective date of FIN 48 may be recognized or, continue to be recognized, upon
adoption of this Interpretation. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Accordingly, the Corporation plans to adopt
FIN 48 on January 1, 2007. The Corporation does not expect the adoption of FIN
48 to have a material impact on its financial statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim financial
statements (June 30, 2006).
ITEM 4. Controls and Procedures
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that have materially affected, or is reasonable
likely to materially affect, the Corporation's internal control over financial
reporting.
The Corporation's management, including the CEO and CFO, does not expect that
our disclosure controls and procedures of our internal controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, provides reasonable, not absolute, assurance that the objectives of
the control system are met. The design of a control system reflects resource
constraints; the benefits of controls must be considered relative to their
costs. Because there are inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Corporation have been or will be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty that breakdowns occur because of simple error or
mistake. Controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all future conditions; over time,
control may become inadequate because of changes in conditions or deterioration
in the degree of compliance with the policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
20
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
There were no material changes in the Corporation's risk factors during the six
months ended June 30, 2006 from the risk factors disclosed in Part I, Item 1A of
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of
Shares Maximum Number
Total Purchased as Of Shares That May
Number of Average Part of Publicly Yet be Purchased
Shares Price Paid Announced Plans Under the Plans or
Period Purchased Per Share Or Programs Programs
------------------------ ----------------- ---------------- ------------------ ------------------
April 1-30, 2006 - $ - - 102,500
May 1-31, 2006 - - - 102,500
June 1-30, 2006 14,778 24.21 13,400 89,100
----------------- ---------------- ------------------
Total 14,778 $ 24.21 13,400
================= ================= ==================
On April 15, 2005, the Board of Directors of Peapack-Gladstone Financial
Corporation announced the authorization of a stock repurchase plan. The Board
authorized the purchase of up to 150,000 shares of outstanding common stock, to
be made from time to time, in the open market or in privately negotiated
transactions, at prices not exceeding prevailing market prices. On April 14,
2006, the Board of Directors authorized an extension of the stock buyback
program for an additional twelve months to April 15, 2007.
Note: All shares not purchased as part of the 2005 stock repurchase plan were
repurchased as a result of the cashless exercise of employee and director stock
options as provided in the Corporation's Stock Option Plans.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of shareholders held on April 25, 2006, in Bedminster
Township, New Jersey, the following persons were elected as directors of
Peapack-Gladstone Financial Corporation for a term of one year:
DIRECTORS FOR WITHHELD
Anthony J. Consi II 6,615,981 44,071
Pamela Hill 6,622,527 37,523
T. Leonard Hill 6,611,103 48,949
Frank A. Kissel 6,640,910 19,142
John D. Kissel 6,637,543 22,509
James R. Lamb 6,640,910 19,142
Edward A. Merton 6,601,854 58,198
F. Duffield Meyercord 6,616,981 43,071
John R. Mulcahy 6,601,854 58,198
Robert M. Rogers 6,640,800 19,252
Philip W. Smith III 6,610,794 49,258
Craig C. Spengeman 6,640,510 19,542
Jack D. Stine 6,392,245 267,807
(2) The approval of the Peapack-Gladstone Financial Corporation 2006 Long-Term
Stock Incentive Plan.
FOR: 5,022,546 AGAINST: 438,846 ABSTAIN: 316,957
BROKER NON-VOTE TOTAL: 881,703
21
ITEM 6. Exhibits
3 Articles of Incorporation and By-Laws:
A. Restated Certificate of Incorporation as in effect on the
date of this filing is incorporated herein
by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
2003.
B. By-Laws of the Registrant as in effect on the date of
this filing are incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
10 Material Contracts
A. "Change in Control Agreement" dated as of December 11,
2003 by and among the Corporation, the Bank and Paul W.
Bell is filed herewith.
B. "Change in Control Agreement" dated as of December 11,
2003 by and among the Corporation, the Bank and Hubert
P. Clarke is filed herewith.
C. "Change in Control Agreement" dated as of January 9,
2004 by and among the Corporation, the Bank and Michael
J. Giacobello is filed herewith.
D. "Change in Control Agreement" dated as of March 29, 2005
by and among the Corporation, the Bank and Finn M.W.
Caspersen, Jr. is filed herewith.
E. "Change in Control Agreement" dated as of January 2,
2006 by and among the Corporation, the Bank and Robert
A. Buckley is filed herewith.
31.1 Certification of Frank A. Kissel, Chief Executive Officer
of the Corporation, pursuant to Securities Exchange Act Rule
13a-14(a).
31.2 Certification of Arthur F. Birmingham, Chief Financial
Officer of the Corporation, pursuant to Securities Exchange
Act Rule 13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002,
signed by Frank A. Kissel, Chief Executive Officer of the
Corporation, And Arthur F. Birmingham, Chief Financial Officer
of the Corporation.
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 thereunto duly authorized.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Registrant)
DATE: August 8, 2006 By: /s/ Frank A. Kissel
----------------------------------------------------
Frank A. Kissel
Chairman of the Board and Chief Executive Officer
DATE: August 8, 2006 By: /s/ Arthur F. Birmingham
----------------------------------------------------
Arthur F. Birmingham
Executive Vice President and Chief Financial Officer
22
EXHIBIT INDEX
Number Description
------ -----------
3 Articles of Incorporation and By-Laws:
A. Restated Certificate of Incorporation as in effect on the date of
this filing is incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.
B. By-Laws of the Registrant as in effect on the date of this filing
are incorporated herein by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003.
10 A. "Change in Control Agreement" dated as of December 11, 2003 by
and among the Corporation, the Bank and Paul W. Bell is filed
herewith.
B. "Change in Control Agreement" dated as of December 11, 2003 by
and among the Corporation, the Bank and Hubert P. Clarke is filed
herewith.
C. "Change in Control Agreement" dated as of January 9, 2004 by and
among the Corporation, the Bank and Michael J. Giacobello is
filed herewith.
D. "Change in Control Agreement" dated as of March 29, 2005 by and
among the Corporation, the Bank and Finn M.W. Caspersen, Jr. is
filed herewith.
E. "Change in Control Agreement" dated as of January 2, 2006 by and
among the Corporation, the Bank and Robert A. Buckley is filed
herewith.
31.1 Certification of Frank A. Kissel, Chief Executive Officer of the
Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2 Certification of Arthur F. Birmingham, Chief Financial Officer of
the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002, signed by
Frank A. Kissel, Chief Executive Officer of the Corporation, And
Arthur F. Birmingham, Chief Financial Officer of the Corporation.
23