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 September 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 November 1, 2007:
8,313,089
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition September 30, 2007 and
December 31, 2006 Page 3
Consolidated Statements of Income for the three and nine months
ended September 30, 2007 and 2006 Page 4
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2007 and 2006 Page 5
Consolidated Statements of Cash Flows for the nine months
ended September 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 6 Exhibits Page 24
2
Item 1. Financial Statements (Unaudited)
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
September 30, December 31,
2007 2006
------------- ------------
ASSETS
Cash and due from banks $ 22,763 $ 23,190
Federal funds sold 1,620 103
Interest-earning deposits 883 6,965
------------- -------------
Total cash and cash equivalents 25,266 30,258
Investment securities held to maturity (approximate market
value $49,233 in 2007 and $54,523 in 2006) 49,684 55,165
Securities available for sale 266,420 286,186
Loans 943,356 870,153
Less: Allowance for loan losses 7,112 6,768
------------- -------------
Net Loans 936,244 863,385
Premises and equipment 25,726 24,059
Accrued interest receivable 5,920 5,181
Cash surrender value of life insurance 19,265 18,689
Other assets 6,428 5,453
------------- -------------
TOTAL ASSETS $ 1,334,953 $ 1,288,376
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 184,725 $ 196,519
Interest-bearing deposits:
Checking 121,406 142,676
Savings 68,961 73,998
Money market accounts 387,137 366,874
Certificates of deposit over $100,000 146,895 126,014
Certificates of deposit less than $100,000 242,273 238,655
------------- -------------
Total deposits 1,151,397 1,144,736
Borrowings 64,923 23,964
Accrued expenses and other liabilities 11,496 15,913
------------- -------------
TOTAL LIABILITIES 1,227,816 1,184,613
------------- -------------
SHAREHOLDERS' EQUITY
Common stock (no par value; $0.83 per share;
authorized 20,000,000 shares; issued shares, 8,576,598 at
September 30, 2007 and 8,497,463 at December 31, 2006;
outstanding shares, 8,313,138 at September 30, 2007 and
8,270,973 at December 31, 2006) 7,147 7,081
Surplus 90,638 89,372
Treasury stock at cost, 263,460 shares at September 30, 2007
and 226,490 shares at December 31, 2006 (6,016) (4,999)
Retained earnings 19,369 15,038
Accumulated other comprehensive loss, net of income tax (4,001) (2,729)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 107,137 103,763
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,334,953 $ 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 Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 14,163 $ 13,040 $ 40,918 $ 36,235
Interest on investment securities held to maturity:
Taxable 204 251 655 825
Tax-exempt 259 336 804 1,035
Interest on securities available for sale:
Taxable 3,227 3,758 9,720 11,399
Tax-exempt 245 88 733 262
Interest-earning deposits 9 21 30 42
Interest on federal funds sold 149 30 585 102
----------- ----------- ----------- -----------
Total interest income 18,256 17,524 53,445 49,900
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts 4,150 3,794 12,487 9,430
Interest on certificates of deposit over $100,000 1,826 1,520 5,242 3,796
Interest on other time deposits 3,029 2,719 9,004 7,232
Interest on borrowed funds 364 1,636 831 4,834
----------- ----------- ----------- -----------
Total interest expense 9,369 9,669 27,564 25,292
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 8,887 7,855 25,881 24,608
Provision for loan losses 125 64 350 264
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,762 7,791 25,531 24,344
----------- ----------- ----------- -----------
OTHER INCOME
Trust department income 2,252 1,872 6,853 6,195
Service charges and fees 494 503 1,497 1,463
Bank owned life insurance 223 210 660 622
Securities gains/(losses) -- (1,837) 382 (1,781)
Other income 195 167 520 593
----------- ----------- ----------- -----------
Total other income 3,164 915 9,912 7,092
----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,402 3,908 13,016 11,700
Premises and equipment 1,981 1,792 5,583 5,211
Other expenses 1,715 1,571 5,076 4,804
----------- ----------- ----------- -----------
Total other expenses 8,098 7,271 23,675 21,715
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 3,828 1,435 11,768 9,721
Income tax expense 1,179 44 3,614 2,389
----------- ----------- ----------- -----------
NET INCOME $ 2,649 $ 1,391 $ 8,154 $ 7,332
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.32 $ 0.17 $ 0.98 $ 0.89
Diluted $ 0.32 $ 0.17 $ 0.97 $ 0.88
Average basic shares outstanding 8,321,702 8,260,047 8,295,563 8,269,966
Average diluted shares outstanding 8,406,966 8,373,440 8,386,512 8,379,264
See accompanying notes to consolidated financial statements.
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2007 2006
----------- -----------
Balance, beginning of period $ 103,763 $ 99,155
Comprehensive income:
Net income 8,154 7,332
Unrealized holding (losses)/gains on securities
arising during the period, net of tax (1,024) 2,405
Less: reclassification adjustment for gains/(losses)
included in net income, net of tax 248 (1,194)
----------- -----------
(1,272) 1,211
----------- -----------
Total comprehensive income 6,882 8,543
Common stock options exercised 1,070 176
Purchase of treasury stock (1,017) (924)
Cash dividends declared (3,823) (3,553)
Stock-based compensation expense 151 43
Tax benefit on disqualifying and nonqualifying
exercise of stock options 111 29
----------- -----------
Balance, September 30, $ 107,137 $ 103,469
=========== ===========
See accompanying notes to consolidated financial statements.
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2007 2006
----------- -----------
OPERATING ACTIVITIES:
Net income: $ 8,154 $ 7,332
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,650 1,539
Amortization of premium and accretion of
discount on securities, net 244 406
Provision for loan losses 350 264
Tax benefit on stock option exercises (111) (29)
(Gains)/losses on security sales (382) 1,781
Gain on loans sold -- (3)
Proceeds from sales of loans 2,821 622
Gain on disposal of fixed assets (3) (16)
Stock-based compensation 151 43
Increase in cash surrender value of life insurance, net (576) (544)
Increase in accrued interest receivable (739) (387)
(Increase)/decrease in other assets 3 421
(Decrease)/increase in accrued expenses and other liabilities (4,510) 2,180
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,052 13,609
----------- -----------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 7,000 17,816
Proceeds from maturities of securities available for sale 37,748 53,744
Proceeds from calls of investment securities held to maturity 150 --
Proceeds from calls of securities available for sale 3,000 6,000
Proceeds from sales of securities available for sale 2,108 60,330
Purchase of investment securities held to maturity (1,743) (2,463)
Purchase of securities available for sale (25,017) (54,820)
Purchase of loans -- (26,774)
Net increase in loans (76,030) (66,724)
Purchases of premises and equipment (3,344) (3,689)
Disposal of premises and equipment 30 16
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (56,098) (16,564)
----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 6,661 44,538
Net increase/(decrease) in other borrowings 34,300 (33,000)
Proceeds from Federal Home Loan Bank advances 8,000 --
Repayments of Federal Home Loan Bank advances (1,341) (1,301)
Cash dividends paid (3,730) (3,474)
Tax benefit on stock option exercises 111 29
Exercise of stock options 1,070 176
Purchase of treasury stock (1,017) (924)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 44,054 6,044
----------- -----------
Net increase in cash and cash equivalents (4,992) 3,089
Cash and cash equivalents at beginning or period 30,258 23,499
----------- -----------
Cash and cash equivalents at end of period $ 25,266 $ 26,588
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 26,606 $ 24,068
Income taxes 4,501 2,031
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 September 30, 2007 and 2006, the Corporation recorded
total compensation expense for share-based payment arrangements of $53 thousand
and $14 thousand, respectively, with a recognized tax benefit of $3 thousand on
non-qualified stock option grants for the three months ended September 30, 2007.
There was no recognized tax benefit for the three months ended September 30,
2006.
For the nine months ended September 30, 2007 and 2006, the Corporation recorded
total compensation expense for share-based payment arrangements of $151 thousand
and $43 thousand, respectively, with a recognized tax benefit of $10 thousand on
non-qualified stock option grants for the nine months ended September 30, 2007.
There was no recognized tax benefit for the nine months ended September 30,
2006.
As of September 30, 2007, there was approximately $686 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 2.0 years.
7
For the Corporation's stock option plans for employees, changes in options
outstanding during the nine months ended September 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 $22.80 $2,376
Granted 48,445 25.10-31.01 28.12
Exercised (58,540) 11.85-26.65 12.26
Forfeited (3,061) 16.86-29.50 23.20
----------------------------------------------------------------
Balance, September 30, 2007 400,760 $12.86-$32.14 $24.97 $1,077
================================================================
Options exercisable, September 30, 2007 335,079 $1,074
================================================================
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 third quarter of 2007 and the weighted average
exercise price, multiplied by the number of in-the-money options).
The aggregate intrinsic value of options exercised during the nine months ended
September 30, 2007 and 2006 was $922 thousand and $44 thousand, respectively.
The Corporation also has non-qualified stock option plans for non-employee
directors. Changes in options outstanding during the nine months ended September
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 $1,015
Granted 17,600 28.10 28.10
Exercised (20,595) 15.68-17.53 17.15
----------------------------------------------------------------
Balance, September 30, 2007 186,558 $15.68-$28.89 $24.29 $609
================================================================
Options exercisable, September 30, 2007 168,958 $609
================================================================
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 third quarter of 2007 and the weighted average
exercise price, multiplied by the number of in-the-money options).
The aggregate intrinsic value of options exercised during the nine months ended
September 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 nine months of 2007 and 2006 for all plans was $10.38 and $7.91,
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% 2.08%
Expected volatility 43% 34%
Expected life 5 years 5 years
Risk-free interest rate 4.56% 4.83%
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 Nine Months Ended
September 30, September 30,
(In Thousands, except per share data) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Net Income to Common Shareholders $ 2,649 $ 1,391 $ 8,154 $ 7,332
Basic Weighted-Average Common Shares Outstanding 8,321,702 8,260,047 8,295,563 8,269,966
Plus: Common Stock Equivalents 85,264 113,393 90,949 109,298
---------- ---------- ---------- ----------
Diluted Weighted-Average Common Shares Outstanding 8,406,966 8,373,440 8,386,512 8,379,264
Net Income Per Common Share
Basic $ 0.32 $ 0.17 $ 0.98 $ 0.89
Diluted 0.32 0.17 0.97 0.88
Options to purchase 379,708 shares of common stock at a weighted average price
of $28.78 per share were outstanding and were not included in the computation of
diluted earnings per share in the third quarter of 2007 because the option price
was greater than the average market price. Options to purchase 318,941 shares of
common stock at a weighted average price of $28.89 per share were outstanding
and were not included in the computation of diluted earnings per share in the
third quarter of 2006 because the option price was greater than the average
market price.
Options to purchase 375,268 shares of common stock at a weighted average price
of $28.80 per share were outstanding and were not included in the computation of
diluted earnings per share in the nine months ended September 30, 2007 because
the option price was greater than the average market price. Options to purchase
318,641 shares of common stock at a weighted average price of $28.89 per share
were outstanding and were not included in the computation of diluted earnings
per share in the first nine 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 nine months ended September 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
third quarter of 2007 was $2.5 million and $5.3 million for the same quarter in
2006. Total comprehensive income for the nine months ended September 30, 2007
and 2006 was $6.9 million and $8.5 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 September 30, consisted of the following:
(In thousands) 2007 2006
----------- -----------
Residential real estate $ 497,640 $ 496,516
Commercial real estate 207,871 161,316
Commercial loans 124,042 104,559
Construction loans 59,722 44,941
Consumer loans 36,688 35,300
Other loans 17,393 18,707
----------- -----------
Total loans $ 943,356 $ 861,339
=========== ===========
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 $5.6
million at September 30, 2007 and $615 thousand at September 30, 2006. The
balance of non-performing assets at September 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.
3. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $30.6
million and $30.4 million at September 30, 2007 and 2006, respectively, with a
weighted average interest rate of 3.61 percent and 3.60 percent, respectively.
Advances totaling $22.6 million are secured by blanket pledges of certain 1-4
family residential mortgages totaling $245.0 million and advances totaling $8.0
million are secured by pledges of investment securities totaling $9.2 million at
September 30, 2007. At September 30, 2007, advances totaling $25.0 million have
fixed maturity dates, while advances totaling $5.6 million were amortizing
advances with monthly payments of principal and interest.
There were no short-term borrowings from the FHLB at September 30, 2007 or 2006,
nor were there any short-term borrowings during 2007. However, for the nine
months ended September 30, 2006 short-term borrowings averaged $78.0 million
with a weighted average interest rate of 4.99 percent.
Overnight borrowings at September 30, 2007 and 2006 totaled $34.3 million and
$44.5 million, respectively. For the nine months ended September 30, 2007 and
2006, overnight borrowings from the FHLB averaged $3.9 million with a weighted
average interest rate of 5.25 percent and $28.6 million with a weighted average
interest rate of 5.03 percent, respectively.
The final maturity dates of the advances and other borrowings are scheduled as
follows:
(In thousands)
2007 $ 4,000
2008 370
2009 2,000
2010 14,183
2011 3,000
Over 5 years 7,070
----------
Total $ 30,623
==========
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 Nine Months Ended
September 30, September 30,
(In thousands) 2007 2006 2007 2006
----------- ----------- ----------- -----------
Service cost $ 438 $ 417 $ 1,315 $ 1,252
Interest cost 195 164 584 494
Expected return on plan assets (252) (224) (756) (673)
Amortization of:
Net loss 10 19 27 56
Unrecognized remaining net assets (2) (2) (5) (5)
----------- ----------- ----------- -----------
Net periodic benefit cost $ 389 $ 374 $ 1,165 $ 1,124
=========== =========== =========== ===========
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 September 30, 2007, contributions of $810 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 Effectiveness of the Corporation's balance sheet restructuring
initiative
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 located 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 was $2.6 million for the third
quarter of 2007, an increase of $1.3 million or 90.4 percent compared to the
same period last year. Diluted earnings per share were $0.32 for the third
quarter of 2007 and $0.17 for the third quarter of 2006. This is primarily due
to the impact of the 2006 balance sheet restructuring initiative that resulted
in an after-tax charge of $1.1 million, or $0.13 per diluted share. The
annualized return on average assets was 0.81 percent and the annualized return
on average equity was 9.91 percent for the third quarter of 2007.
Net income was $8.2 million, for the nine months ended September 30, 2007, as
compared to $7.3 million for the same period in 2006, an increase of $822
thousand or 11.2 percent. Diluted earnings per share were $0.97 for the
nine-month period of 2007 compared to $0.88 for the same period in 2006. The
return on average assets was 0.83 percent and the return on average equity was
10.25 percent for the nine months ended September 30, 2007.
Excluding the 2006 restructuring impact on quarterly earnings, the Corporation
would have reported income of $2.5 million in the third quarter of 2006 as
compared to $2.6 million in the third quarter of 2007, an increase of $140
thousand, or 5.6 percent. Diluted earnings per share excluding the restructuring
charge were $0.30 in the third quarter of 2006 as compared to $0.32 in the same
quarter of 2007. Net income for the first nine months of 2007 declined $296
thousand, or 3.5 percent, when compared to $8.5 million for the first nine
months of 2006 excluding the impact of the restructuring initiative. Diluted
earnings per share excluding the restructuring charge were $1.01 for the nine
months ended September 30, 2006. The Corporation considers the securities loss
as a result of the balance sheet restructuring initiative in 2006 to be an
unusual transaction and comparing net income without considering securities
losses and gains provides a better analysis of net income trends.
12
Net interest income, on a fully tax-equivalent basis, was $9.1 million in the
third quarter of 2007, an increase of $980 thousand or 12.0 percent from the
same quarter last year. The net interest margin was 2.92 percent for the third
quarter as compared to 2.59 percent for the same quarter of 2006 and 2.86
percent in the second quarter of 2007.
For the third quarter of 2007, average loans increased $61.5 million, or 7.2
percent, to $917.6 million from $856.1 million for the same 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. Most of the loan growth this quarter
was in the commercial loan portfolios. While the Corporation believes that it
has been successful in growing the commercial business, its conservative
underwriting requirements have not changed materially. Loan rates increased
eight basis points from the third quarter of 2006 to 6.18 percent for the same
quarter of 2007.
For the third quarter of 2007, average deposits grew $77.4 million, or 7.2
percent, to $1.16 billion from $1.08 billion for the third quarter of 2006.
Rates paid for interest-bearing deposits in the third quarter of 2007 were 3.69
percent as compared to 3.55 percent for the same period in 2006, an increase of
14 basis points. The market for retail deposits remains very competitive and the
positive effect of higher deposits was offset in part by a change in the funding
mix into higher cost products. On a fully tax-equivalent basis, net interest
income for the nine months ended September 30, 2007 was $26.6 million as
compared to $25.5 million for the same year-to-date period of 2006, an increase
of $1.1 million, or 4.3 percent. The net interest margin was 2.86 percent and
2.75 percent for the nine months ended September 30, 2007 and 2006,
respectively.
For the first nine months of 2007, loans averaged $893.3 million, an increase of
$79.6 million, or 9.8 percent, over the same period in 2006. For the nine months
ended September 30, 2007, the average commercial loan and commercial mortgage
portfolios grew $52.1 million or 17.9 percent, to $343.5 million from $291.4
million for the same period of 2006. The average mortgage loan portfolio was
$495.7 million and $473.9 million for the nine months ended September 30, 2007
and 2006, respectively, a $21.7 million increase or 4.6 percent. The average
rate on the loan portfolio increased 17 basis points from 5.94 percent for the
year-to-date ended September 30, 2006 to 6.11 percent for the same nine months
in 2007.
Average deposits were $1.16 billion for the nine months ended September 30,
2007, a $105.5 million increase, or 10.0 percent, over the average of $1.05
billion for the same period in 2006. Interest-bearing deposits increased $100.4
million to $973.0 million on average for the nine months ended September 30,
2007 as compared to the same period in 2006. Rates paid on interest-bearing
deposits increased 53 basis points to 3.66 percent for the nine months ended
September 30, 2007 from the same period last year. Average borrowings for the
first nine months of 2007 decreased $108.7 million compared to the same period
of 2006 to $28.9 million as higher-cost borrowings were eliminated in the third
quarter of 2006 as part of the balance-sheet restructuring initiative.
EARNINGS ANALYSIS
NET INTEREST INCOME: On a tax-equivalent basis and before the provision for loan
losses, net interest income, for the third quarter of 2007 was $9.1 million as
compared to $8.1 million for the third quarter of 2006, an increase of $980
thousand or 12.0 percent. The net interest margin, on a fully tax-equivalent
basis, was 2.92 percent and 2.59 percent in the third quarter of 2007 and 2006,
respectively, an increase of 33 basis points. For the third quarter of 2007, net
interest income was $209 thousand, or 2.3 percent, higher when compared to the
second quarter of 2007 on a tax-equivalent basis. The net interest margin, on a
fully tax-equivalent basis, increased from 2.86 percent in the second quarter of
2007, to 2.92 percent in the third 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 were $917.6 million for the third quarter of 2007, an increase of
$61.5 million, or 7.2 percent, from $856.1 million in the same period of 2006.
The average commercial loan and commercial mortgage
13
portfolios grew $58.6 million or 19.0 percent in the third quarter of 2007. The
average installment loan portfolio grew by $3.3 million or 9.8 percent, during
this period. 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 $77.4 million, or 7.2 percent, in the third quarter of
2007, to $1.16 billion from $1.08 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 3.94
percent and 4.09 percent, respectively, for the third quarter of 2007. For the
third quarter of 2007 and 2006, money market accounts averaged $384.0 million
and $327.4 million, respectively, increasing $56.6 million, or 17.3 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 third
quarter of 2007 were $396.5 million as compared to $365.6 million for the same
quarter of 2006, an increase of $30.9 million or 8.5 percent.
There were no average short-term borrowings for the third quarter of 2007 while
average short-term borrowings for the same period last year were $58.0 million.
Average overnight funds declined $34.1 million to $7.3 million for the third
quarter of 2007 as compared to an average of $41.4 million for the same quarter
of 2006. Average demand deposits increased $7.6 million or 4.3 percent in the
third quarter of 2007 from the year ago period.
For the third quarter of 2007, on a tax-equivalent basis, average interest rates
earned on interest-earning assets increased 26 basis points to 5.92 percent from
5.66 percent for the same quarter of 2006. Average interest rates earned on
investment securities were 5.21 percent and 4.74 for the third quarters of 2007
and 2006, respectively, an increase of 47 basis points. Average interest rates
earned on loans in the third quarter of 2007, were 6.18 percent, rising eight
basis points over the prior year's third quarter.
The average interest rate paid on interest-bearing liabilities in the third
quarter of 2007 and 2006 was 3.71 percent and 3.73 percent. Average rates paid
on certificates of deposit were 4.90 percent in the third quarter of 2007,
increasing 26 basis points from 4.64 percent for the same quarter last year.
Money market accounts paid an average rate of 3.94 percent and 4.09 percent for
the third quarters of 2007 and 2006, respectively. When compared to the same
quarter in 2006, average rates paid on borrowings declined 94 basis points to
4.09 percent. Deposit rates were lowered late in the third quarter of 2007 as
the Federal Reserve lowered the federal funds target rate by 50 basis points and
in response, the Corporation lowered certain rates accordingly. On average, the
High-Yield Money Market account has grown by $180.3 million since the third
quarter of 2006 and paid on average 4.15 percent in the third quarter of 2007.
This growth has been offset, in part, by the $122.5 million decline in the Fed
Tracker money market product, which was discontinued earlier this year, and paid
on average 4.73 percent in the third quarter of 2006. The overall borrowing rate
decline is mostly due to the repayment of short-term and overnight borrowings as
part of last year's restructuring initiative.
The cost of funds decreased to 3.14 percent for the third quarter of 2007 as
compared to 3.19 percent for the same period in 2006. Reducing the Corporation's
dependence on borrowings has been offset by the continued increase in the cost
of interest-bearing deposits.
Net interest income for the nine months ended September 30, 2007, on a
tax-equivalent basis and before the provision for loan losses, was $26.6 million
compared to $25.5 million for the same period of 2006, an increase of $1.1
million or 4.3 percent. The 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. For the nine months ended September 30, 2007,
the change in the mix of interest-earning assets has increased the Corporation's
net interest income. The Corporation believes that the intended effects of the
balance sheet restructuring initiative undertaken in the third quarter of 2006,
enhancing net interest margin and decreasing overall interest rate risk, are
being realized. The net interest margin on a fully tax-equivalent basis was 2.86
percent and 2.75 percent in the first nine months of 2007 and 2006, respectively
14
For the nine months ended September 30, 2007, average interest-earning assets
were $1.24 billion as compared to $1.23 billion for the same period in 2006, an
increase of $2.3 million, or 0.2 percent. Average loan balances for the first
nine months of 2007 were $893.3 million, an increase of $79.6 million or 9.8
percent over the average of $813.7 million for the same period in 2006. Average
investment securities declined $88.7 million, or 21.3 percent, to $328.4
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 $52.1 million or 17.9 percent, to $343.5 million for
the nine months ended September 30, 2007. The average mortgage loan portfolio
was $495.7 million and $473.9 million for the nine months ended September 30,
2007 and 2006, respectively, a $21.7 million, or 4.6 percent, Increase between
such periods.
Average interest-bearing liabilities decreased $8.2 million, or 0.8 percent, to
$1.00 billion for the nine months ended September 30, 2007. Interest expense
increased due to the increase in deposit rates and the change in the deposit
mix, offset in part by the decrease in borrowings. Average balances of money
market accounts were $377.9 million and $304.1 million for the nine months ended
September 30, 2007 and 2006, respectively, an increase of $73.8 million or 24.3
percent. For the first nine months of 2007, average balances of certificates of
deposits increased $46.1 million, or 13.4 percent, to $390.6 million. Average
savings deposits declined $13.6 million or 16.2 percent and average
interest-bearing checking deposits declined $5.8 million or 4.2 percent. Average
non-interest-bearing demand deposits totaled $184.7 million and $179.7 million
for the nine months ended September 30, 2007 and 2006, respectively, an increase
of $5.1 million or 2.8 percent.
There were no short-term borrowings for nine months ended September 30, 2007 as
compared to an average of $78.0 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 $25.1 million for the nine months ended September 30, 2007 as compared
to $31.0 million for the same period in 2006, a decline of $5.9 million or 19.1
percent, which was the result of maturities and repayments offset by $8 million
of additional borrowings in the third quarter of 2007.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, increased 36 basis points to 5.84 percent for the first nine months of
2007 from 5.48 percent for the same nine months of 2006. Average interest rates
earned on loans increased 17 basis points during this same nine-month period of
2007 to 6.11 percent from 5.94 percent for the same period in 2006 despite a
flattened yield curve and competitive pressure. The average interest rates
earned on investment securities for the nine months ended September 30, 2007
were 5.10 percent, an increase of 51 basis points from 4.59 percent in the same
period in 2006.
In the first nine months of 2007, the average interest rate paid on
interest-bearing liabilities was 3.67 percent as compared to 3.34 percent, a 33
basis point increase over the same period in 2006. The average rate paid on
certificates of deposit in the nine months ended September 30, 2007 rose 59
basis points to 4.86 percent while average rates paid on money market accounts
increased 36 basis points to 3.98 percent from the same period in 2006. For the
first nine months of 2007, average rates paid on checking deposits increased 13
basis points to 0.84 percent as compared to the same period of 2006.
The average rate paid on borrowings was 3.83 percent for the nine months ended
September 30, 2007, as compared to 4.68 percent for the same period in 2006, a
decline of 85 basis points, due to the reduction in the balances on the higher
cost short-term and overnight borrowings. Average overnight borrowing rates
increased 22 basis points to 5.25 percent in the nine months ended September 30,
2007 as compared to 5.03 percent in the year ago period. The cost of funds for
the first nine months of 2007 increased to 3.10 percent as compared to 2.83
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)
September 30, 2007 September 30, 2006
------------------ ------------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 263,636 $ 3,431 5.21% $ 346,130 $ 4,009 4.63%
Tax-exempt (1) (2) 55,041 717 5.21 51,543 699 5.42
Loans (2) (3) 917,599 14,179 6.18 856,142 13,046 6.10
Federal funds sold 11,116 149 5.36 2,298 30 5.25
Interest-earning deposits 706 9 4.99 1,724 21 5.04
----------- ----------------- ----------- ------------------
Total interest-earning assets 1,248,098 $ 18,485 5.92% 1,257,837 $ 17,805 5.66%
----------- ------------ ---- ----------- ------------------
Noninterest -earning assets:
Cash and due from banks 20,510 22,414
Allowance for loan losses (6,996) (6,515)
Premises and equipment 25,591 23,527
Other assets 26,015 22,204
----------- -----------
Total noninterest-earning assets 65,120 61,630
----------- -----------
Total assets $ 1,313,218 $ 1,319,467
=========== ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 126,506 $ 254 0.80% $ 133,207 $ 307 0.92%
Money markets 384,013 3,778 3.94 327,374 3,348 4.09
Savings 68,796 118 0.69 79,881 139 0.70
Certificates of deposit 396,529 4,855 4.90 365,602 4,239 4.64
----------- ----------------- ----------- ------------------
Total interest-bearing deposits 975,844 9,005 3.69 906,064 8,033 3.55
Borrowings 35,578 364 4.09 129,966 1,636 5.04
----------- ----------------- ----------- ------------------
Total interest-bearing liabilities 1,011,422 9,369 3.71 1,036,030 9,669 3.73
----------- ----------------- ----------- ------------------
Noninterest bearing liabilities
Demand deposits 183,500 175,892
Accrued expenses and
other liabilities 11,365 6,543
----------- -----------
Total noninterest-bearing
liabilities 194,865 182,435
Shareholders' equity 106,931 101,002
----------- -----------
Total liabilities and
shareholders' equity $ 1,313,218 $ 1,319,467
=========== ===========
Net Interest income
(tax-equivalent basis) 9,116 8,136
Net interest spread 2.21% 1.93%
======= ======
Net interest margin (4) 2.92% 2.59%
======= ======
Tax equivalent adjustment (229) (281)
-------- ---------
Net interest income $ 8,887 $ 7,855
======== =========
16
Average Balance Sheet
Unaudited
Year-To-Date
(Tax-Equivalent Basis, Dollars in Thousands)
September 30, 2007 September 30, 2006
------------------ ------------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-earnings assets:
Investments:
Taxable (1) $ 272,355 $ 10,375 5.08% $ 363,609 $ 12,224 4.48%
Tax-exempt (1) (2) 56,041 2,196 5.22 53,530 2,140 5.33
Loans (2) (3) 893,319 40,962 6.11 813,736 36,265 5.94
Federal funds sold 14,664 585 5.32 2,823 102 4.84
Interest-earning deposits 773 30 5.25 1,195 42 4.74
------------ ------------------- ----------- ------------------
Total interest-earning assets 1,237,152 $ 54,148 5.84% 1,234,893 $ 50,773 5.48%
------------ ------------------- ----------- ------------------
Noninterest -earning assets:
Cash and due from banks 22,112 22,276
Allowance for loan losses (6,888) (6,477)
Premises and equipment 25,044 22,832
Other assets 26,500 22,045
Total noninterest-earning assets 66,768 60,676
------------ -----------
Total assets $ 1,303,920 $ 1,295,569
============ ===========
LIABILITIES:
Interest-bearing deposits:
Checking $ 133,954 $ 839 0.84% $ 139,801 $ 743 0.71%
Money markets 377,922 11,283 3.98 304,092 8,252 3.62
Savings 70,520 365 0.69 84,120 435 0.69
Certificates of deposit 390,621 14,246 4.86 344,561 11,028 4.27
------------ ------------------- ----------- ------------------
Total interest-bearing deposits 973,017 26,733 3.66 872,574 20,458 3.13
Borrowings 28,939 831 3.83 137,606 4,834 4.68
------------ ------------------- ----------- ------------------
Total interest-bearing liabilities 1,001,956 27,564 3.67 1,010,180 25,292 3.34
------------ ------------------- ----------- ------------------
Noninterest bearing liabilities
Demand deposits 184,738 179,684
Accrued expenses and
other liabilities 11,190 5,677
Total noninterest-bearing
liabilities 195,928 185,361
Shareholders' equity 106,036 100,028
------------ -----------
Total liabilities and
shareholders' equity $ 1,303,920 $ 1,295,569
============ ===========
Net Interest income
(tax-equivalent basis) 26,584 25,481
Net interest spread 2.17% 2.14%
====== ======
Net interest margin (4) 2.86% 2.75%
====== ======
Tax equivalent adjustment (703) (873)
--------- ---------
Net interest income $ 25,881 $ 24,608
========= =========
(1) Average balances for available-for sale securities are based on amo rtized
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: The Corporation recorded other income of $3.2 million in the third
quarter of 2007 as compared to $915 thousand in the third quarter of 2006, an
increase of $2.2 million. Excluding the loss on securities sales of $1.8
million, which was the result of the balance sheet restructuring, recorded in
the third quarter of 2006, other income rose $412 thousand, or 15.0 percent.
PGB Trust and Investments, the Bank's trust division, generated $2.3 million in
fee income in the third quarter of 2007, an increase of $380 thousand or 20.3
percent over the same quarter of 2006. At September 30, 2007, the market value
of trust assets under administration was in excess of $2.06 billion, an increase
of $261.2 million or 14.4 percent over the market value at September 30, 2006.
The Corporation recorded no securities gains or losses in the third quarter of
2007 as compared to a loss on sale of securities of $1.8 million in the same
quarter of 2006. Other income, excluding trust fee income and securities gains,
totaled $912 thousand for the third quarter in 2007 as compared to $880 thousand
for the same period a year ago, an increase of $32 thousand or 3.6 percent.
Other income for the nine months ended September 30, 2007 and 2006 was $9.9
million and $7.1 million, respectively, a $2.8 million, or 39.8 percent,
increase between such periods. PGB Trust and Investments generated fee income of
$6.9 million for the first nine months of 2007 as compared to $6.2 million for
the same period in 2006, an increase of $658 thousand or 10.6 percent. The
reason for the increase in other income in 2007 was the $382 thousand in
securities gains in the first nine months of 2007 as compared to securities
losses of $1.8 million in the same period of 2006. All other income categories
in 2007 remained flat compared to the first nine months of 2006 at $2.7 million.
The Corporation considers the securities loss as a result of the balance sheet
restructuring initiative in 2006 to be an unusual transaction and comparing
other income without considering securities losses and gains provides a better
analysis of other income trends. Management also internally uses this non-GAAP
financial measure to evaluate its operating performance on a comparative basis.
The following table presents the components of other income for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2007 2006 2007 2006
----------- ----------- ----------- -----------
Trust department income $ 2,252 $ 1,872 $ 6,853 6,195
Service charges and fees 494 503 1,497 1,463
Bank owned life insurance 223 210 660 622
Other non-interest income 113 81 274 319
Safe deposit rental fees 59 61 181 178
Fees for other services 23 25 65 96
Securities gains/(losses) -- (1,837) 382 (1,781)
----------- ----------- ----------- -----------
Total other income $ 3,164 $ 915 $ 9,912 7,092
=========== =========== =========== ===========
OTHER EXPENSES: For the third quarter of 2007, other expenses totaled $8.1
million as compared to $7.3 million recorded in the same quarter of 2006, an
increase of $827 thousand or 11.4 percent. Salaries and benefits, the
Corporation's largest non-interest expense, was $4.4 million for the third
quarter of 2007 as compared to $3.9 million for the same period of 2006, an
increase of $494 thousand or 12.6 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 in salaries and benefits expense.
18
Premises and equipment expense totaled $2.0 million for the third quarter of
2007, increasing $189 thousand, or 10.6 percent, from the third quarter of 2006.
Excluding salaries and benefits and premises and equipment expenses, all other
expense categories in total increased $144 thousand, or 9.2 percent to $1.7
million. Advertising expense rose $113 thousand, or 70.0 percent, to $275
thousand for the third quarter of 2007 as compared to the same period a year ago
due to the additional advertising for the new Summit Branch and trust division
advertising. For the third quarter of 2007 and 2006, professional fees totaled
$191 thousand and $200 thousand, respectively. Other expenses, including
stationery and supplies, delivery, postage, telephone, etc., increased $40
thousand or 3.3 percent, remaining relatively constant at $1.2 million for the
nine-month periods.
Other expenses totaled $23.7 million for the nine months ended September 30,
2007, an increase of $2.0 million or 9.0 percent over the $21.7 million recorded
for the same period in 2006. Salaries and benefits expense was $13.0 million for
the first nine months of 2007 as compared to $11.7 million for the same nine
months in 2006, an increase of $1.3 million or 11.3 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 nine months of 2007, premises and equipment expense was $5.6
million as compared to $5.2 million for the same period in 2006, an increase of
$372 thousand, or 7.1 percent. The increase is due in part to the additional
expenses, such as depreciation, utilities and various equipment associated with
the new Summit Branch and additional employees.
All other expense categories, excluding salaries and benefits and premises and
equipment expenses, totaled $5.1 million and $4.8 million for the nine months
ended September 30, 2007 and 2006, respectively, an increase of $271 thousand,
or 5.6 percent. Professional services increased $254 thousand, or 45.4 percent,
for the nine months ended September 30, 2007 as compared to the same period of
2006, due to increased legal, recruitment and other professional fees.
Advertising expense rose $217 thousand, or 37.9 percent, to $789 thousand for
the nine months period 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,
such as stationery and supplies, delivery, postage and trust department expense.
These other expenses totaled $3.5 million and $3.7 million for the nine months
ended September 30, 2007 and 2006, respectively, a decline of $200 thousand or
5.4 percent.
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 and control
operating expenses.
The following table presents the components of other expense for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2007 2006 2007 2006
----------- ----------- ----------- -----------
Salaries and employee benefits $ 4,402 $ 3,908 $ 13,016 $ 11,700
Premises and equipment 1,981 1,792 5,583 5,211
Professional fees 191 200 814 560
Advertising 275 162 789 572
Telephone 122 103 333 300
Trust department expense 102 113 332 351
Stationery and supplies 108 102 303 325
Postage 90 93 256 261
Other expense 827 798 2,249 2,435
----------- ----------- ----------- -----------
Total other expense $ 8,098 $ 7,271 $ 23,675 $ 21,715
=========== =========== =========== ===========
19
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 $5.6 million and $615 thousand at
September 30, 2007 and 2006 respectively, primarily due to two non-performing
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.
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
September 30,
(In thousands) 2007 2006
----------- -----------
Loans past due in excess of 90 days and still accruing $ -- $ 550
Non-accrual loans 5,613 65
----------- -----------
Total non-performing assets $ 5,613 $ 615
=========== ===========
Non-performing loans as a % of total loans 0.60% 0.07%
Non-performing assets as a % of total loans plus
other real estate owned 0.60% 0.07%
Allowance as a % of total loans 0.75% 0.77%
PROVISION FOR LOAN LOSSES: The provision for loan losses was $125 thousand for
the third quarter of 2007 and $64 thousand for the same quarter of 2006, while
the provision for loan losses for the first nine months of 2007 and 2006 was
$350 thousand and $264 thousand, respectively. In 2006, the provision for loan
losses was offset by $59 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 third quarter of 2007 and 2006, there were net charge-offs of $7
thousand and $10 thousand, respectively. Net charge-offs for the nine months
ended September 30, 2007 were $6 thousand as compared to net charge-offs of $13
thousand for the nine months ended September 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 350 264
Charge-offs (10) (15)
Recoveries 4 2
----------- -----------
Balance, September 30, $ 7,112 $ 6,629
=========== ===========
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 30.8
percent and 3.1 percent for the quarters ended September 30, 2007 and 2006,
respectively. For the nine months ended September 30, 2007 and 2006, income tax
expense as a percentage of pre-tax income was 30.7 percent and 24.6 percent,
respectively. Pre-tax income increased to $3.8 million for the third quarter in
2007 from $1.4 million for the same period in of 2006, due in part to the loss
on sale of available-for-sale securities of $1.8 million in 2006. In addition,
the effective tax rate is higher in both periods in 2007 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 September 30, 2007, total shareholders' equity, including net
unrealized losses on securities available for
20
sale, was $107.1 million, representing an increase in total shareholders' equity
from what was recorded at December 31, 2006, of $3.4 million or 3.3 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 September 30, 2007, the Corporation's Tier 1 Capital
and Total Capital ratios were 14.95 percent and 15.91 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
September 30, 2007, was 8.48 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 $25.3 million at September 30, 2007. In addition, the
Corporation has $266.4 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 of investment
securities and securities available for sale maturing within one year amounted
to $12.2 million and $22.9 million, respectively, as of September 30, 2007.
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 September 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 or 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.
21
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.
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 (September 30, 2007).
22
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.
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
There were no material changes in the Corporation's risk factors during the nine
months ended September 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.
23
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
------------------------------ --------- --------- ---------------- -------------------
July 1-31, 2007 0 $ -- 0 89,100
August 1-31, 2007 1,750 25.36 1,750 87,350
September 1-30, 2007 10,250 25.59 10,250 77,100
------ ------------ ------
Total 12,000 $ 25.56 12,000
====== ============ ======
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.
24
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.
25
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: November 9, 2007 By: /s/ Frank A. Kissel
----------------------------------------------------
Frank A. Kissel
Chairman of the Board and Chief Executive Officer
DATE: November 9, 2007 By: /s/ Arthur F. Birmingham
----------------------------------------------------
Arthur F. Birmingham
Executive Vice President and Chief Financial Officer
26
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.
27