UNITED STATES
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, 2007
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 or 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, 2007:
8,322,056
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition June 30, 2007 and
December 31, 2006 Page 3
Consolidated Statements of Income for the three and six months
ended June 30, 2007 and 2006 Page 4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2007 and 2006 Page 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2007 and 2006 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 22
Item 4 Controls and Procedures Page 22
PART 2 OTHER INFORMATION
Item 1A Risk Factors Page 23
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds Page 23
Item 4 Submission of Matters to a Vote of Security Holders Page 24
Item 6 Exhibits Page 24
2
Item 1. Financial Statements (Unaudited)
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2007 2006
------------ ------------
ASSETS
Cash and due from banks $ 22,293 $ 23,190
Federal funds sold 23,665 103
Interest-earning deposits 801 6,965
------------ ------------
Total cash and cash equivalents 46,759 30,258
Investment securities held to maturity (approximate market
value $48,899 in 2007 and $54,523 in 2006) 49,732 55,165
Securities available for sale 267,486 286,186
Loans 902,364 870,153
Less: Allowance for loan losses 6,994 6,768
------------ ------------
Net Loans 895,370 863,385
Premises and equipment 25,263 24,059
Accrued interest receivable 5,040 5,181
Cash surrender value of life insurance 19,070 18,689
Other assets 5,604 5,453
------------ ------------
TOTAL ASSETS $ 1,314,324 $ 1,288,376
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 195,694 $ 196,519
Interest-bearing deposits:
Checking 134,789 142,676
Savings 70,249 73,998
Money market accounts 368,137 366,874
Certificates of deposit over $100,000 148,307 126,014
Certificates of deposit less than $100,000 256,378 238,655
------------ ------------
Total deposits 1,173,554 1,144,736
Borrowings 23,073 23,964
Accrued expenses and other liabilities 11,549 15,913
------------ ------------
TOTAL LIABILITIES 1,208,176 1,184,613
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; $0.83 per share;
authorized 20,000,000 shares; issued shares, 8,566,669 at
June 30, 2007 and 8,497,463 at December 31, 2006;
outstanding shares, 8,314,181 at June 30, 2007 and
8,270,973 at December 31, 2006) 7,139 7,081
Surplus 90,477 89,372
Treasury stock at cost, 252,488 shares at June 30, 2007
and 226,490 shares at December 31, 2006 (5,681) (4,999)
Retained earnings 18,054 15,038
Accumulated other comprehensive loss, net of income tax (3,841) (2,729)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 106,148 103,763
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,314,324 $ 1,288,376
============ ============
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,
2007 2006 2007 2006
------------ ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 13,576 $ 11,945 $ 26,755 $ 23,194
Interest on investment securities held to maturity:
Taxable 217 277 451 575
Tax-exempt 274 330 545 699
Interest on securities available for sale:
Taxable 3,218 3,874 6,493 7,641
Tax-exempt 243 87 488 174
Interest-earning deposits 10 12 21 21
Interest on federal funds sold 357 56 436 72
------------ ------------ ------------ ------------
Total interest income 17,895 16,581 35,189 32,376
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts 4,094 3,143 8,337 5,636
Interest on certificates of deposit over $100,000 1,810 1,261 3,416 2,275
Interest on other time deposits 3,117 2,431 5,975 4,514
Interest on borrowed funds 204 1,570 467 3,198
------------ ------------ ------------ ------------
Total interest expense 9,225 8,405 18,195 15,623
------------ ------------ ------------ ------------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 8,670 8,176 16,994 16,753
Provision for loan losses 100 100 225 139
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,570 8,076 16,769 16,614
------------ ------------ ------------ ------------
OTHER INCOME
Trust department income 2,459 2,078 4,601 4,323
Service charges and fees 513 489 1,003 960
Bank owned life insurance 221 207 437 411
Securities gains 220 5 382 56
Other income 147 212 325 427
------------ ------------ ------------ ------------
Total other income 3,560 2,991 6,748 6,177
------------ ------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 4,360 3,933 8,614 7,791
Premises and equipment 1,748 1,694 3,602 3,419
Other expenses 1,911 1,759 3,361 3,295
------------ ------------ ------------ ------------
Total other expenses 8,019 7,386 15,577 14,505
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,111 3,681 7,940 8,286
Income tax expense 1,298 986 2,435 2,345
------------ ------------ ------------ ------------
NET INCOME $ 2,813 $ 2,695 $ 5,505 $ 5,941
============ ============ ============ ============
EARNINGS PER SHARE
Basic $ 0.34 $ 0.33 $ 0.67 $ 0.72
Diluted $ 0.33 $ 0.32 $ 0.65 $ 0.71
Average basic shares outstanding 8,289,843 8,270,905 8,281,592 8,275,008
Average diluted shares outstanding 8,400,401 8,373,884 8,384,148 8,385,690
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,
2007 2006
------------ ------------
Balance, beginning of period $ 103,763 $ 99,155
Comprehensive income:
Net income 5,505 5,941
Unrealized holding losses on securities
arising during the period, net of tax (864) (2,651)
Less: reclassification adjustment for gains
included in net income, net of tax 248 36
------------ ------------
(1,112) (2,687)
------------ ------------
Total comprehensive income 4,393 3,254
Common stock options exercised 953 172
Purchase of treasury stock (682) (924)
Cash dividends declared (2,488) (2,316)
Stock-based compensation expense 98 29
Tax benefit on disqualifying and nonqualifying
exercise of stock options 111 29
------------ ------------
Balance, June 30, $ 106,148 $ 99,399
============ ============
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,
2007 2006
------------ ------------
OPERATING ACTIVITIES:
Net income: $ 5,505 $ 5,941
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,071 1,021
Amortization of premium and accretion of
discount on securities, net 172 283
Provision for loan losses 225 139
Tax benefit on stock option exercises (111) (29)
Gains on security sales (382) (56)
Gain on loans sold -- (1)
Gain on disposal of fixed assets (3) --
Stock-based compensation 98 29
Increase in cash surrender value of life insurance, net (381) (360)
Decrease/(increase) in accrued interest receivable 141 (112)
Decrease/(increase) in other assets 665 (2,802)
(Decrease)/increase in accrued expenses and other liabilities (4,370) 6,251
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,630 10,304
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 5,799 13,017
Proceeds from maturities of securities available for sale 27,650 30,192
Proceeds from calls of investment securities held to maturity 150 3,000
Proceeds from sales of securities available for sale 2,108 330
Purchase of investment securities held to maturity (568) (1,964)
Purchase of securities available for sale (12,613) (35,089)
Proceeds from sales of loans 2,056 226
Purchase of loans -- (20,770)
Net increase in loans (34,266) (49,860)
Purchases of premises and equipment (2,302) (2,983)
Disposal of premises and equipment 30 --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (11,956) (63,901)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 28,818 43,799
Net increase in other borrowings -- 22,750
Repayments of Federal Home Loan Bank advances (891) (863)
Cash dividends paid (2,482) (2,318)
Tax benefit on stock option exercises 111 29
Exercise of stock options 953 172
Purchase of treasury stock (682) (924)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,827 62,645
------------ ------------
Net increase in cash and cash equivalents 16,501 9,048
Cash and cash equivalents at beginning or period 30,258 23,499
------------ ------------
Cash and cash equivalents at end of period $ 46,759 $ 32,547
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 16,934 $ 14,386
Income taxes 3,170 1,720
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, 2006 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 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 incurred loan losses 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.
For the three months ended June 30, 2007 and 2006, the Corporation recorded
total compensation expense for share-based payment arrangements of $53 thousand
and $15 thousand, respectively, with a recognized tax benefit of $3 thousand for
the three months ended June 30, 2007. There was no recognized tax benefit for
the three months ended June 30, 2006.
For the six months ended June 30, 2007 and 2006, the Corporation recorded total
compensation expense for share-based payment arrangements of $98 thousand and
$29 thousand, respectively, with a recognized tax benefit of $7 thousand for the
six months ended June 30, 2007, while there was no recognized tax benefit for
the six months ended June 30, 2006.
As of June 30, 2007, there was approximately $732 thousand of unrecognized
compensation expense related to non-vested share-based compensation arrangements
granted under the Corporation's stock incentive plans. This expense is expected
to be recognized over a weighted average period of 2.1 years.
7
For the Corporation's stock option plans for employees, changes in options
outstanding during the six months ended June 30, 2007 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, 2006 413,916 $11.85-$32.14 $22.79
Granted 47,245 26.30-31.01 28.18
Exercised (48,611) 11.85-26.65 12.34
Forfeited (2,961) 16.86-29.50 23.20
-----------------------------------------------------
Balance, June 30, 2007 409,589 $11.85-$32.14 $24.65 $1,440
=====================================================
Options exercisable, June 30, 2007 344,315 $1,432
=====================================================
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 2007 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, 2007 and 2006 was $774 thousand and $41 thousand, respectively.
The Corporation also has non-qualified stock option plans for non-employee
directors. Changes in options outstanding during the six months ended June 30,
2007 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, 2006 189,553 $15.68-$28.89 $23.16
Granted 17,600 28.10 28.10
Exercised (20,595) 15.68-17.53 17.15
---------------------------------------------------
Balance, June 30, 2007 186,558 $15.68-$28.89 $24.29 $718
===================================================
Options exercisable, June 30, 2007 168,958 $718
===================================================
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 2007 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, 2007 and 2006 was $242 thousand and $72 thousand, respectively.
The per share weighted-average fair value of stock options granted during the
first six months of 2007 and 2006 for all plans was $10.36 and $7.66,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions:
2007 2006
------- -------
Dividend yield 2.00% 2.17%
Expected volatility 43% 28%
Expected life 5 years 5 years
Risk-free interest rate 4.57% 4.86%
8
Earnings per Common Share - Basic and Diluted: The following is a reconciliation
of the calculation of basic and diluted earnings per share. Basic net income per
common share is calculated by dividing net income to common shareholders by the
weighted average common shares outstanding during the reporting period. Diluted
net income per common share is computed similarly to that of basic net income
per common share, except that the denominator is increased to include the number
of additional common shares that would have been outstanding if all potentially
dilutive common shares, principally stock options, were issued during the
reporting period utilizing the Treasury stock method.
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands, except per share data) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Net Income to Common Shareholders $ 2,813 $ 2,695 $ 5,505 $ 5,941
Basic Weighted-Average Common Shares Outstanding 8,289,843 8,270,905 8,281,592 8,275,008
Plus: Common Stock Equivalents 110,558 102,979 102,556 110,682
---------- ---------- ---------- ----------
Diluted Weighted-Average Common Shares Outstanding 8,400,401 8,373,884 8,384,148 8,385,690
Net Income Per Common Share
Basic $ 0.34 $ 0.33 $ 0.67 $ 0.72
Diluted 0.33 0.32 0.65 0.71
Options to purchase 15,480 shares of common stock at a weighted average price of
$29.97 per share were outstanding and were not included in the computation of
diluted earnings per share in the second quarter of 2007 because the option
price was greater than the average market price. Options to purchase 325,454
shares of common stock at a weighted average price of $28.86 per share were
outstanding and were not included in the computation of diluted earnings per
share in the second quarter of 2006 because the option price was greater than
the average market price.
Options to purchase 308,161 shares of common stock at a weighted average price
of $28.95 per share were outstanding and were not included in the computation of
diluted earnings per share in the first six months of 2007 because the option
price was greater than the average market price. Options to purchase 321,113
shares of common stock at a weighted average price of $28.91 per share were
outstanding and were not included in the computation of diluted earnings per
share in the first six months of 2006 because the option price was greater than
the average market price.
Income Taxes:The Company adopted Financial Accounting Standards Board (FASB)
Interpretation 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) as of
January 1, 2007. A tax position is recognized as a benefit only if it is "more
likely than not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50 percent likely of being
realized on examination. For tax positions not meeting the "more likely than
not" test, no tax benefit is recorded. The adoption had no affect on the
Corporation's financial statements nor has anything changed significantly in the
six months since adoption.
The Corporation and its subsidiaries are subject to U.S. federal income tax as
well as income tax of the State of New Jersey. The Corporation is no longer
subject to examination by taxing authorities for years before 2002. The
Corporation does not expect the total amount of unrecognized tax benefits to
significantly increase in the next 12 months.
The Corporation recognizes interest related to income tax matters as interest
expense and penalties related to income tax matters as other expense. The
Corporation did not have any amounts accrued for interest and penalties at
January 1, 2007.
Comprehensive Income: The difference between the Corporation's net income and
total comprehensive income for the three and six months ended June 30, 2007 and
2006 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 second quarter of
2007 was $1.4 million and $1.7 million for the same quarter in 2006. Total
comprehensive income for the six months ended June 30, 2007 and 2006 was $4.4
million and $3.3 million, respectively.
9
Reclassification: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2007 presentation.
2. LOANS
Loans outstanding as of June 30, consisted of the following:
(In thousands) 2007 2006
------------ ------------
Residential real estate $ 489,720 $ 484,844
Commercial real estate 190,667 159,527
Commercial loans 117,220 104,371
Construction loans 48,559 39,191
Consumer loans 36,885 31,055
Other loans 19,313 19,887
------------ ------------
Total loans $ 902,364 $ 838,875
============ ============
Non-performing assets, which include other real estate owned (OREO), loans past
due in excess of 90 days and still accruing and non-accrual loans, totaled $5.9
million at June 30, 2007 and $3.9 million at June 30, 2006. Loans past due in
excess of 90 days and still accruing are in the process of collection and are
collateralized by real estate.
3. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $23.1
million and $30.8 million at June 30, 2007 and 2006, respectively, with a
weighted average interest rate of 3.49 percent and 3.58 percent, respectively.
These advances are secured by blanket pledges of certain 1-4 family residential
mortgages totaling $256.5 million at June 30, 2007. At June 30, 2007, advances
totaling $17.0 million have fixed maturity dates, while advances totaling $6.1
million were amortizing advances with monthly payments of principal and
interest.
There were no short-term borrowings from the FHLB at June 30, 2007; however,
short-term borrowings totaled $90.0 million at June 30, 2006. For the six months
ended June 30, 2007 there were no average short-term borrowings, while
short-term borrowings averaged $88.2 million with a weighted average interest
rate of 4.83 percent for the same period in 2006.
There were no overnight borrowings at June 30, 2007, while overnight borrowings
totaled $10.3 million at June 30, 2006. For the six months ended June 30, 2007
and 2006, overnight borrowings from the FHLB averaged $2.1 million with a
weighted average interest rate of 5.40 percent and $22.1 million with a weighted
average interest rate of 4.63 percent, respectively.
The final maturity dates of the advances and other borrowings are scheduled as
follows:
(In thousands)
2007 $ 4,000
2008 527
2009 2,000
2010 9,986
2011 3,000
Over 5 years 3,560
----------
Total $ 23,073
==========
10
4. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of
its salaried employees.
The net periodic expense for the periods indicated included the following
components:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2007 2006 2007 2006
-------- -------- -------- --------
Service cost $ 439 $ 418 $ 877 $ 835
Interest cost 194 165 389 330
Expected return on plan assets (252) (225) (504) (449)
Amortization of:
Net loss 8 18 17 37
Unrecognized remaining net assets (1) (1) (3) (3)
-------- -------- -------- --------
Net periodic benefit cost $ 388 $ 375 $ 776 $ 750
======== ======== ======== ========
As previously disclosed in the financial statements for the year ended December
31, 2006, the Corporation expects to contribute $1.0 million to its pension plan
in 2007. As of June 30, 2007, contributions of $540 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 Unexpected decline in the direction of the economy in New Jersey.
o Unexpected changes in interest rates.
o Failure to grow commercial loans.
o Inability to manage growth in commercial loans.
o Unexpected loan prepayment volume.
o Unanticipated exposure to credit risks.
o Insufficient allowance for loan losses.
o Competition from other financial institutions.
o Adverse effects of new government regulation or different than
anticipated effects from existing regulations.
o Decline in the levels of loan quality and origination volume.
o Decline 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, 2006 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: The Corporation's net income for the second quarter of 2007
was $2.8 million, an increase of $118 thousand or 4.4 percent compared to $2.7
million for the same period last year. This increase was primarily due to higher
net interest income and other income offset in part by higher other expenses.
Diluted earnings per share were $0.33 for the second quarter of 2007 and $0.32
for the second quarter of 2006. The annualized return on average assets was 0.86
percent and the annualized return on average equity was 10.57 percent for the
second quarter of 2007.
Net interest income, on a fully tax-equivalent basis, was $8.9 million in the
second quarter of 2007, an increase of $448 thousand or 5.3 percent from the
second quarter last year and the net interest margin was 2.86 percent for the
second quarter as compared to 2.73 percent for the same quarter of 2006 and 2.82
percent in the first quarter of 2007.
Average loans for the second quarter of 2007 increased $81.8 million, or 10.1
percent, to $890.9 million from $809.2 million for the second quarter of 2006.
The Corporation's long-term plan calls for a substantial shift in the asset mix,
with more emphasis on higher yielding commercial loans and commercial mortgages
and less emphasis on residential mortgages. The average commercial loan and
commercial mortgage portfolios grew $51.4 million or 17.6 percent, accounting
for almost 63 percent of the total loan growth. The average mortgage loan
portfolio grew by $23.7 million or 5.0 percent. Loan rates rose 19 basis points
from the second quarter of 2006 to 6.10 percent for the same quarter of 2007.
For the second quarter of 2007, average deposits grew $114.3 million, or 10.8
percent, to $1.17 billion from $1.06 billion for the same quarter of 2006. Rates
paid for interest-bearing deposits in the second quarter of 2007 were 3.67
percent as compared to 3.13 percent for the same period in 2006, an increase of
54 basis points. The continued increase in funding costs was due to the very
competitive market for retail deposits and the corresponding change in the
funding mix into higher cost products.
12
For the first six months of 2007, net income was $5.5 million as compared to
$5.9 million for the same period in 2006, a decline of $436 thousand or 7.3
percent. This decline is primarily the result of increased other expenses and
provision for loan losses offset in part by higher net interest income and other
income. Diluted earnings per share were $0.65 for the first half of 2007
compared to $0.71 for the same period in 2006. The return on average assets was
0.85 percent and the return on average equity was 10.43 percent for the first
six months of 2007.
On a fully tax-equivalent basis, net interest income for the six months ended
June 30, 2007 was $17.5 million as compared to $17.3 million for the same six
months of 2006, an increase of $123 thousand, or 0.7 percent. The net interest
margin was 2.84 percent for both periods.
Loans averaged $881.0 million for the first six months of 2007, an increase of
$88.8 million, or 11.2 percent, over the same period in 2006. For the six months
ended June 30, 2007, the average commercial loan and commercial mortgage
portfolios grew $48.7 million or 17.2 percent, to $331.4 million from $282.7
million for the same period of 2006. The average mortgage loan portfolio was
$496.0 million and $463.7 million for the six months ended June 30, 2007 and
2006, respectively, a $32.4 million increase or 7.0 percent. The average rate on
the loan portfolio rose 22 basis points from 5.86 percent for the year-to-date
ended June 30, 2006 to 6.08 percent for the same six months in 2007.
Average deposits were $1.16 billion for the six months ended June 30, 2007, a
$119.8 million increase, or 11.5 percent, over the average of $1.04 billion for
the same period in 2006. Interest-bearing deposits increased $116.0 million to
$971.6 million on average for the six months ended June 30, 2007 as compared to
the same period in 2006. Rates paid on interest-bearing deposits increased 75
basis points to 3.65 percent for the six months ended June 30, 2007 from the
same period last year. Average borrowings for the first half of 2007 decreased
$115.9 million compared to the first half of 2006 to $25.6 million as
higher-cost borrowings were eliminated in the third quarter of 2006.
EARNINGS ANALYSIS
NET INTEREST INCOME: Net interest income, on a tax-equivalent basis and before
the provision for loan losses, for the second quarter of 2007 was $8.9 million
as compared to $8.5 million for the same quarter of 2006, an increase of $448
thousand or 5.3 percent. On a fully tax-equivalent basis, the net interest
margin was 2.86 percent and 2.73 percent in the second quarter of 2007 and 2006,
respectively, an increase of 13 basis points. For the second quarter of 2007,
net interest income was $345 thousand, or 4.0 percent, higher when compared to
the first quarter of 2007 on a tax-equivalent basis. The net interest margin, on
a fully tax-equivalent basis, increased from 2.82 percent in the first quarter
of 2007, to 2.86 percent in the second quarter of 2007. In the past year,
funding costs have increased as strong competition for retail deposits and a
changing deposit mix to more higher-paying deposits continued.
Average loans for the second quarter of 2007 increased $81.8 million or 10.1
percent to $890.9 million from $809.2 million in the same period of 2006. The
mortgage loan portfolio grew, on average, by $23.7 million or 5.0 percent,
during this period, while the average commercial loan and commercial mortgage
portfolios grew $51.4 million or 17.6 percent. In the second quarter of 2007,
installment loans averaged a $7.1 million, or 24.9 percent increase, when
compared with the same quarter in 2006. While the emphasis is to grow the
commercial loan portfolios, new initiatives have also been instituted to
increase the installment loan portfolios.
Average deposits grew $114.3 million, or 10.8 percent, in the second quarter of
2007, to $1.17 billion from $1.06 billion for the same period in 2006. Money
markets and certificates of deposit remain the Corporation's fastest growing
categories of deposits, as well as being the highest cost, averaging 3.95
percent and 4.89 percent, respectively, for the second quarter of 2007. For the
second quarter of 2007, money market accounts averaged $371.6 million, an
increase of $70.2 million, or 23.3 percent, over the same period in 2006, in
large part due to the increase in the high yield money market account. Average
certificates of deposit for the second quarter of 2007 and 2006 were $402.8
million and $345.0 million,
13
respectively, an increase of $57.8 million or 16.8 percent. Higher promotional
rates were offered for certificates of deposit opened at the new Summit Branch
and other rates have remained competitive.
Average short-term borrowings declined $95.5 million to zero for the second
quarter of 2007 from the same period last year, a result of the strategic
decision to reduce exposure to high-cost, short-term borrowings and reduce
interest rate risk. Overnight funds have also declined to zero for the second
quarter of 2007 as compared to an average of $6.5 million for the same quarter
of 2006. Average demand deposits increased $3.7 million or 2.0 percent in the
second quarter of 2007 from the year ago period.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, rose 37 basis points to 5.82 percent for the second quarter of 2007 from
5.45 percent for the same quarter of 2006. Average interest rates earned on
investment securities were 5.09 percent for the second quarter of 2007 as
compared to 4.58 percent in the second quarter of 2006, an increase of 51 basis
points. In the second quarter of 2007, average interest rates earned on loans
were 6.10 percent, rising 19 basis points over the prior year's second quarter.
The average interest rate paid on interest-bearing liabilities in the second
quarter of 2007 and 2006 was 3.67 percent and 3.34 percent, an increase of 33
basis points. While average rates paid on certificates of deposit increased 61
basis points and money market accounts increased 29 basis points to 4.89 percent
and 3.95 percent, respectively, for the second quarter of 2007 when compared to
the same quarter in 2006, average rates paid on borrowings declined 121 basis
points to 3.51 percent. On average, the High-Yield Money Market account has
grown by $202.9 million since the second quarter of 2006 and paid on average
4.16 percent in the second quarter of 2007. This growth has been offset, in
part, by the $124.9 million decline in the Fed Tracker money market product,
which was discontinued earlier this year, and paid on average 4.33 percent in
the second quarter of 2006. The overall borrowing rate decline is mostly due to
the repayment of short-term and overnight borrowings.
The cost of funds increased to 3.08 percent for the second quarter of 2007 as
compared to 2.82 percent for the same period in 2006. Despite strong loan and
deposit growth, the continued increase in funding costs was due to the very
competitive market for retail deposits and the corresponding change in the
funding mix into higher cost products.
On a tax-equivalent basis, net interest income for the six months ended June 30,
2007, before the provision for loan losses, was $17.5 million compared to $17.3
million for the same period of 2006, an increase of $123 thousand or 0.7
percent. The slight increase was primarily the result of higher loan volume and
higher rates earned on investments and loans offset by higher rates paid on
liabilities and lower investment volume. As noted above, rates on liabilities
continue to rise and the mix of deposits has changed to include higher
interest-bearing balances, which negatively affected net interest income.
However, for the six months ended June 30, 2007, the change in the mix of
interest-earning assets has increased the net interest income. The net interest
margin on a fully tax-equivalent basis was 2.84 percent in the first six months
of 2007 and 2006.
Average interest-earning assets were $1.23 billion for the six months ended June
30, 2007 as compared to $1.22 billion for the same period in 2006, and increase
of $8.4 million, or 0.7 percent. For the first six months of 2007, average loan
balances were $881.0 million, an increase of $88.8 million or 11.2 percent over
the average of $792.2 million for the same six months in 2006. Average
investment securities declined $93.7 million, or 21.9 percent, to $333.3
million, which is due to the balance sheet restructuring that occurred in the
third quarter of 2006 and maturities. The average commercial loan and commercial
mortgage portfolios grew $48.7 million or 17.2 percent, to $331.4 million for
the six months ended June 30, 2007, from $282.7 million for the same period of
2006. The average mortgage loan portfolio was $496.0 million and $463.7 million
for the six months ended June 30, 2007 and 2006, respectively, a $32.4 million,
or 7.0 percent, Increase between such periods.
14
Average interest-bearing liabilities remained flat at $997.0 million for the six
months ended June 30, 2007 and 2006, while the rates and the mix were
responsible for the increase in interest expense. Average balances of money
market accounts were $374.8 million and $292.3 million for the six months ended
June 30, 2007 and 2006, respectively, an increase of $82.6 million or 28.3
percent. The Fed Tracker Money Market was discontinued earlier in 2007, but a
High Yield Money Market product has been well received by customers and
accounted for much of the growth in money market products. Average balances of
certificates of deposits grew to $387.6 million for the first six months of
2007, an increase of $53.8 million or 16.1 percent over the average balances of
$333.9 million during the same period in 2006. Average savings deposits declined
$14.9 million or 17.2 percent and average interest-bearing checking deposits
declined $5.4 million or 3.8 percent. Average non-interest-bearing demand
deposits totaled $185.4 million and $181.6 million for the six months ended June
30, 2007 and 2006, respectively, an increase of $3.8 million or 2.1 percent.
For six months ended June 30, 2007, short-term borrowings averaged $2.1 million
as compared to $110.3 million for the same period of 2006. This decline is a
result of the strategic decision to reduce exposure to high-cost, short-term
borrowings and reduce interest rate risk. Long-term borrowings averaged $23.4
million for the six months ended June 30, 2007 as compared to $31.2 million for
the same period in 2006, a decline of $7.8 million or 24.9 percent, which was
the result of maturities and repayments.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, rose 40 basis points to 5.79 percent for the first six months of 2007
from 5.39 percent for the first six months of 2006. Average interest rates
earned on loans rose 22 basis points in the first six months of 2007 to 6.08
percent from 5.86 percent for the same period in 2006, despite a flattened yield
curve and competitive pressure. For the six months ended June 30, 2007, the
average interest rates earned on investment securities increased to 5.05
percent, rising 53 basis points from 4.52 percent in the same period in 2006.
The average interest rate paid on interest-bearing liabilities in the first six
months of 2007 and 2006 was 3.65 percent and 3.13 percent, respectively, a 52
basis point increase. The average rate paid on certificates of deposit in the
first six months of 2007 rose 78 basis points to 4.85 percent while average
rates paid on money market accounts increased 65 basis points to 4.01 percent
when compared to 3.36 percent for the same period in 2006. Average rates paid on
checking deposits increased 24 basis points to 0.85 percent for the first six
months of 2007 as compared to the same period of 2006 due to the increase in the
rates paid on the interest-bearing checking products.
For the six months ended June 30, 2007, the average rate paid on borrowings was
3.65 percent as compared to 4.52 percent for the same period in 2006, a decline
of 87 basis points, due to the reduction in the balances on the higher cost
short-term and overnight borrowings. Average overnight borrowing rates increased
77 basis points to 5.40 percent in the six months ended June 30, 2007 as
compared to 4.63 percent in the year ago period. The cost of funds for the first
six months of 2007 increased to 3.08 percent as compared to 2.65 percent for the
same period in 2006.
15
The following tables reflect the components of net interest income for the
periods indicated:
Average Balance Sheet
Unaudited
Quarters Ended
(Tax-Equivalent Basis, Dollars in Thousands)
June 30, 2007 June 30, 2006
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 271,494 $ 3,435 5.06% $ 370,962 $ 4,151 4.47%
Tax-exempt (1) (2) 56,597 740 5.23 51,478 688 5.35
Loans (2) (3) 890,939 13,590 6.10 809,161 11,957 5.91
Federal funds sold 26,935 357 5.30 4,684 56 4.80
Interest-earning deposits 718 10 5.77 949 12 4.91
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,246,683 $ 18,132 5.82% 1,237,234 $ 16,864 5.45%
----------- ----------- ----------- ----------- ----------- -----------
Noninterest -earning assets:
Cash and due from banks 22,727 22,514
Allowance for loan losses (6,896) (6,416)
Premises and equipment 25,121 23,232
Other assets 26,851 23,492
----------- -----------
Total noninterest-earning assets 67,803 62,822
----------- -----------
Total assets $ 1,314,486 $ 1,300,056
=========== ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 138,530 $ 303 0.87% $ 141,999 $ 240 0.68%
Money markets 371,605 3,669 3.95 301,391 2,758 3.66
Savings 70,232 122 0.69 84,177 145 0.69
Certificates of deposit 402,787 4,927 4.89 344,959 3,692 4.28
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits 983,154 9,021 3.67 872,526 6,835 3.13
Borrowings 23,224 204 3.51 133,020 1,570 4.72
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,006,378 9,225 3.67 1,005,546 8,405 3.34
----------- ----------- ----------- ----------- ----------- -----------
Noninterest bearing liabilities
Demand deposits 190,432 186,769
Accrued expenses and
other liabilities 11,235 8,242
----------- -----------
Total noninterest-bearing
liabilities 201,667 195,011
Shareholders' equity 106,441 99,499
----------- -----------
Total liabilities and
shareholders' equity $ 1,314,486 $ 1,300,056
=========== ===========
Net Interest income
(tax-equivalent basis) 8,907 8,459
Net interest spread 2.15% 2.11%
=========== ===========
Net interest margin (4) 2.86% 2.73%
=========== ===========
Tax equivalent adjustment (237) (283)
----------- -----------
Net interest income $ 8,670 $ 8,176
=========== ===========
16
Average Balance Sheet
Unaudited
Year-To Date
(Tax-Equivalent Basis, Dollars in Thousands)
June 30, 2007 June 30, 2006
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 276,786 $ 6,944 5.02% $ 372,494 $ 8,216 4.41%
Tax-exempt (1) (2) 56,549 1,479 5.23 54,540 1,440 5.28
Loans (2) (3) 880,978 26,783 6.08 792,182 23,219 5.86
Federal funds sold 16,468 436 5.30 3,090 72 4.67
Interest-earning deposits 807 21 5.36 927 21 4.48
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,231,588 $ 35,663 5.79% 1,223,233 $ 32,968 5.39%
----------- ----------- ----------- ----------- ----------- -----------
Noninterest -earning assets:
Cash and due from banks 22,926 22,205
Allowance for loan losses (6,833) (6,458)
Premises and equipment 24,765 22,478
Other assets 26,748 23,304
----------- -----------
Total noninterest-earning assets 67,606 61,529
----------- -----------
Total assets $ 1,299,194 $ 1,284,762
=========== ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 137,740 $ 585 0.85% $ 143,153 $ 436 0.61%
Money markets 374,825 7,506 4.01 292,257 4,905 3.36
Savings 71,397 246 0.69 86,274 295 0.68
Certificates of deposit 387,618 9,391 4.85 333,866 6,789 4.07
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits 971,580 17,728 3.65 855,550 12,425 2.90
Borrowings 25,564 467 3.65 141,490 3,198 4.52
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 997,144 18,195 3.65 997,040 15,623 3.13
----------- ----------- ----------- ----------- ----------- -----------
Noninterest bearing liabilities
Demand deposits 185,368 181,612
Accrued expenses and
other liabilities 11,101 6,577
----------- -----------
Total noninterest-bearing
liabilities 196,469 188,189
Shareholders' equity 105,581 99,533
----------- -----------
Total liabilities and
shareholders' equity $ 1,299,194 $ 1,284,762
=========== ===========
Net Interest income
(tax-equivalent basis) 17,468 17,345
Net interest spread 2.14% 2.26%
=========== ===========
Net interest margin (4) 2.84% 2.84%
=========== ===========
Tax equivalent adjustment (474) (592)
----------- -----------
Net interest income $ 16,994 $ 16,753
=========== ===========
(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.
17
OTHER INCOME: In the second quarter of 2007, other income was $3.6 million as
compared to $3.0 million in the second quarter of 2006, an increase of $569
thousand, or 19.0 percent. PGB Trust and Investments, the Bank's trust division,
generated $2.5 million in fee income in the second quarter of 2007, an increase
of $381 thousand or 18.3 percent over the same quarter of 2006. At June 30,
2007, the market value of trust assets under administration was in excess of
$2.0 billion, an increase of $259.8 million or 14.7 percent over the market
value at June 30, 2006.
The Corporation recorded $220 thousand of securities gains in the second quarter
of 2007 as compared to $5 thousand in the same quarter of 2006. Other income,
excluding trust fee income and securities gains, totaled $881 thousand for the
second quarter in 2007 as compared to $908 thousand for the same period a year
ago.
Other income for the first six months in 2007 and 2006 was $6.7 million and $6.2
million, respectively, a $571 thousand, or 9.2 percent, increase between such
periods. PGB Trust and Investments generated fee income of $4.6 million for the
first half of 2007 as compared to $4.3 million for the same period in 2006, an
increase of 278 thousand or 6.4 percent. While all other income categories in
2007 remained flat to the first six months of 2006 at $1.8 million, the
Corporation recorded $382 thousand of securities gains in the first half of 2007
as compared to $56 thousand in the same six months of 2006.
The following table presents the components of other income for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Trust department income $ 2,459 $ 2,078 $ 4,601 $ 4,323
Service charges and fees 513 489 1,003 960
Bank owned life insurance 221 207 437 411
Other non-interest income 68 130 162 238
Safe deposit rental fees 56 55 121 118
Fees for other services 23 27 42 71
Securities gains 220 5 382 56
---------- ---------- ---------- ----------
Total other income $ 3,560 $ 2,991 $ 6,748 $ 6,177
========== ========== ========== ==========
OTHER EXPENSES: Other expenses totaled $8.0 million for the second quarter of
2007, as compared to $7.4 million recorded in the same quarter of 2006, an
increase of $633 thousand or 8.6 percent. Salaries and benefits, the
Corporation's largest non-interest expense, was $4.4 million for the second
quarter of 2007 as compared to $3.9 million for the same period of 2006, an
increase of $427 thousand or 10.9 percent. In the past year, the Bank has added
new lenders who have contributed to the growth in the commercial and
construction loan portfolios as well as new Trust officers who have contributed
to the growth in PGB Trust and Investments. In addition, normal salary
increases, branch expansion, higher group health insurance and pension plan
costs contributed to the increase.
Premises and equipment expense increased $54 thousand, or 3.2 percent, from the
second quarter of 2006 to $1.7 million in the second quarter in 2007. Excluding
salaries and benefits and premises and equipment expenses, all other expense
categories in total rose to $1.9 million from $1.8 million, an increase of $152
thousand, or 8.6 percent. For the three months ended June 30, 2007, professional
services increased $187 thousand, more than doubling due to increased legal and
other professional fees, as well as higher recruitment fees to fill new lending
positions. Advertising expense rose $174 thousand, or 76.7 percent, to $401
thousand for the second quarter of 2007 as compared to the same period a year
ago due to the additional advertising for the new Summit Branch and trust
advertising. Expenses, including stationery and supplies, delivery, postage,
telephone, etc., declined $209 thousand or 15.3 percent to $1.2 million for the
first half of 2007 as compared to the same period in 2006.
18
For the six months ended June 30, 2007, other expenses totaled $15.6 million, an
increase of $1.1 million or 7.4 percent over the same period in 2006. Salaries
and benefits expense was $8.6 million for the first half of 2007 as compared to
$7.8 million for the same six months in 2006, an increase of $823 thousand or
10.6 percent. This year-to-date increase continues to reflect the Bank's
investment in additional commercial lenders and Trust officers who have
contributed to the growth in their respective departments.
For the first half of 2007, premises and equipment expense was $3.6 million as
compared to $3.4 million for the same period in 2006, an increase of $184
thousand, or 5.4 percent. The increase is due in part to the additional
expenses, such as depreciation, utilities and various equipment associated with
a new branch and additional employees.
Excluding salaries and benefits and premises and equipment expenses, all other
expense categories totaled $3.4 million and $3.3 million for the six months
ended June 30, 2007 and 2006, respectively, an increase of $65 thousand, or 2.0
percent. For this year-to-date period, professional services increased $264
thousand, or 73.5 percent, as compared to the first six months of 2006, due to
increased legal, recruitment and other professional fees. Advertising expense
rose $104 thousand, or 25.4 percent, to $514 thousand for the second quarter of
2007 as compared to the same period a year ago due to the additional advertising
for the new Summit Branch and trust advertising. These increases were offset, in
part, by decreases in other expense categories, stationery and supplies,
delivery, postage, telephone, etc. These other expenses totaled $2.2 million and
$2.5 million for the six months ended June 30, 2007 and 2006, respectively.
Although postage remained flat for the first half of the year, we anticipate it
increasing comparatively, in the coming quarters due to the postage increase
that took effect in May.
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 strive to operate in an efficient manner.
The following table presents the components of other expense for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Salaries and employee benefits $ 4,360 $ 3,933 $ 8,614 $ 7,791
Premises and equipment 1,748 1,694 3,603 3,419
Professional fees 350 163 623 359
Advertising 401 227 514 410
Telephone 105 105 211 197
Trust department expense 131 122 230 237
Postage 82 84 166 169
Stationery and supplies 117 115 195 223
Other expense 725 943 1,421 1,700
---------- ---------- ---------- ----------
Total other expense $ 8,019 $ 7,386 $ 15,577 $ 14,505
========== ========== ========== ==========
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 $5.9 million and $3.9 million at
June 30, 2007 and 2006 respectively. Loans past due in excess of 90 days and
still accruing are in the process of collection and we believe to be well
secured. The balance of non-performing assets at June 30, 2007 includes two
commercial loans totaling $5.3 million. These loans are both well collateralized
by properties with appraised values in excess of the loan amounts.
Peapack-Gladstone Bank has no sub-prime loans or other higher-interest rate
loans to consumers with impaired or non-existent credit histories in its
mortgage loan portfolio.
19
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
June 30,
(In thousands) 2007 2006
--------- ---------
Loans past due in excess of 90 days and still accruing $ 237 $ 2
Non-accrual loans 5,674 3,874
--------- ---------
Total non-performing assets $ 5,911 $ 3,876
========= =========
Non-performing loans as a % of total loans 0.66% 0.46%
Non-performing assets as a % of total loans plus
other real estate owned 0.66% 0.46%
Allowance as a % of total loans 0.78% 0.78%
PROVISION FOR LOAN LOSSES: The provision for loan losses was $100 thousand for
the second quarters of 2007 and 2006, while the provision for loan losses for
the first six months of 2007 and 2006 was $225 thousand and $139 thousand,
respectively. In 2006, the provision for loan losses was offset by $61 thousand,
representing the provision for losses on letters of credit and unfunded lines of
credit, which was recorded in other expenses.
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 second quarter of 2007 and the second quarter of 2006, there were no net
charge-offs or recoveries. Net recoveries for the six months ended June 30, 2007
was $1 thousand as compared to net charge-offs of $3 thousand for the six months
ended June 30, 2006.
A summary of the allowance for loan losses for the periods indicated:
(In thousands) 2007 2006
---------- ----------
Balance, January 1, $ 6,768 $ 6,378
Provision charged to expense 225 139
Charge-offs (2) (4)
Recoveries 3 1
---------- ----------
Balance, June 30, $ 6,994 $ 6,514
========== ==========
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 31.6
percent and 26.8 percent for the quarters ended June 30, 2007 and 2006,
respectively. Pre-tax income increased to $4.1 million for the second quarter in
2007 from $3.7 million for the same period in of 2006. For the first six months
in 2007 and 2006, income tax expense as a percentage of pre-tax income was 30.7
percent and 28.3 percent, respectively. The higher effective tax rate in both
periods in 2007 is primarily due to a higher effective state tax rate paid by
the Real Estate Investment Trust subsidiary.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At June 30, 2007, total shareholders' equity, including net unrealized
losses on securities available for sale, was $106.1 million, representing an
increase in total shareholders' equity from what was recorded at December 31,
2006, of $2.4 million or 2.3 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 and 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, 2007, the Corporation's Tier 1 Capital and Total Capital ratios were 15.43
percent and 16.42 percent, respectively.
20
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,
2007, was 8.42 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 $46.8 million at June 30, 2007. In addition, the
Corporation has $267.5 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, 2007, of
investment securities and securities available for sale maturing within one year
amounted to $10.8 million and $18.4 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, 2007, core deposits were in excess of $1.0
billion.
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
securities and loan portfolios.
RECENT ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." Statement 159 provides companies
with an option to report selected financial assets and liabilities at fair
value. Statement 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. Statement 159 is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of Statement 157. The Corporation
is still evaluating the impact the adoption of Statement No. 159 will have on
its future consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
Statement 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. Statement 157
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. The Corporation is still evaluating the
impact the adoption of Statement No. 157 will have on its future consolidated
financial statements.
In September 2006, the FASB Emerging Issues Task Force (EITF) finalized Issue
No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements." EITF 06-4
requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants' employment
or retirement. The required accrued liability will be based on either the
post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The Corporation is still evaluating the impact of the adoption of EITF
06-4.
21
In September 2006, the FASB EITF finalized Issue No. 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4" (Accounting for Purchases of
Life Insurance). EITF 06-5 requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be
realized under the insurance contract. EITF 06-5 also requires that if the
contract provides for a greater surrender value if all individual policies in a
group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual
basis. Lastly, EITF 06-5 discusses whether the cash surrender value should be
discounted when the policyholder is contractually limited in its ability to
surrender a policy. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF 06-5 did not have a material impact on
the financial statements.
In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140." Statement 156
provides the following: 1) revised guidance on when a servicing asset and
servicing liability should be recognized; 2) requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable; 3) permits an entity to elect to measure servicing assets
and servicing liabilities at fair value each reporting date and report changes
in fair value in earnings in the period in which the changes occur; 4) upon
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities for securities which are identified as
offsetting the entity's exposure to changes in the fair value of servicing
assets or liabilities that a servicer elects to subsequently measure at fair
value; and 5) requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional footnote disclosures. Statement 156 is effective as of
the beginning of an entity's first fiscal year that begins after September 15,
2006 with the effects of initial adoption being reported as a cumulative-effect
adjustment to retained earnings. The adoption of Statement 156 did not have a
material impact on the Corporation's consolidated 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, 2007).
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.
22
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.
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, 2007 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,
2006.
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, 2007 -- $ -- -- 89,100
May 1-31, 2007 -- -- -- 89,100
June 1-30, 2007 -- -- -- 89,100
---------- ------------ ------------------
Total -- $ -- --
========== ============ ==================
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 19,
2007, the Board of Directors authorized another extension of the stock buyback
program for an additional twelve months to April 19, 2008.
23
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of shareholders held on April 24, 2007, in the Borough of
Peapack-Gladstone, 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 6,704,850 105,101
Pamela Hill 6,715,301 94,650
Frank A. Kissel 6,744,031 65,920
John D. Kissel 6,741,309 68,642
James R. Lamb 6,539,713 270,238
Edward A. Merton 6,712,284 97,667
F. Duffield Meyercord 6,735,837 74,114
John R. Mulcahy 6,699,556 110,395
Robert M. Rogers 6,744,373 65,578
Philip W. Smith III 6,736,959 72,992
Craig C. Spengeman 6,738,166 71,785
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. Amended By-Laws of the Registrant as in effect on the
date of this filing are incorporated herein by
reference to the Registrant's Current Report on Form
8-K filed on April 27, 2007.
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.
24
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 9, 2007 By: /s/ Frank A. Kissel
----------------------------------------------------
Frank A. Kissel
Chairman of the Board and Chief Executive Officer
DATE: August 9, 2007 By: /s/ Arthur F. Birmingham
----------------------------------------------------
Arthur F. Birmingham
Executive Vice President and Chief Financial Officer
25
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. Amended By-Laws of the Registrant as in effect on the
date of this filing are incorporated herein by
reference to the Registrant's Current Report on Form
8-K filed on April 27, 2007.
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.
26