Exhibit 13
FINANCIAL HIGHLIGHTS
(In Thousands, Except Per Share Data)
SELECTED YEAR-END DATA: 2006 2005 2004
- --------------------------------------------------------------------------------------------
NET INCOME $ 10,226 $ 13,130 $ 13,109
- --------------------------------------------------------------------------------------------
TOTAL ASSETS 1,288,376 1,255,383 1,067,410
- --------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,144,736 1,041,996 935,666
- --------------------------------------------------------------------------------------------
TOTAL SECURITIES 341,351 419,668 441,314
- --------------------------------------------------------------------------------------------
TOTAL LOANS 870,153 768,473 572,164
- --------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 103,763 99,155 94,669
- --------------------------------------------------------------------------------------------
TRUST DEPARTMENT ASSETS (MARKET VALUE) 1,924,954 1,761,846 1,691,860
- --------------------------------------------------------------------------------------------
PER SHARE:
- --------------------------------------------------------------------------------------------
EARNINGS-BASIC $ 1.24 $ 1.58 $ 1.60
- --------------------------------------------------------------------------------------------
EARNINGS-DILUTED 1.22 1.56 1.56
- --------------------------------------------------------------------------------------------
BOOK VALUE 12.55 11.97 11.48
- --------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
- --------------------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS 0.79% 1.12% 1.30%
- --------------------------------------------------------------------------------------------
RETURN ON AVERAGE EQUITY 10.10 13.49 14.72
- --------------------------------------------------------------------------------------------
CAPITAL LEVERAGE RATIO 8.20 8.66 9.18
- --------------------------------------------------------------------------------------------
RISK BASED CAPITAL:
- --------------------------------------------------------------------------------------------
TIER 1 15.33 16.71 19.02
- --------------------------------------------------------------------------------------------
TOTAL 16.31 17.78 20.25
- --------------------------------------------------------------------------------------------
NET
INCOME
IN MILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$11.93 $12.30 $13.11 $13.13 $10.23
- ----------------------------------------------
'02 '03 '04 '05 '06
TOTAL
ASSETS
IN MILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$860 $968 $1,067 $1,255 $1,288
- ----------------------------------------------
'02 '03 '04 '05 '06
DEPOSITS
IN MILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$770 $846 $936 $1,042 $1,145
- ----------------------------------------------
'02 '03 '04 '05 '06
EQUITY
CAPITAL
IN MILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$77.2 $85.1 $94.7 $99.2 $103.8
- ----------------------------------------------
'02 '03 '04 '05 '06
1
[LOGO OF PEAPACK GLADSTONE BANK]
DEAR SHAREHOLDERS AND FRIENDS,
In last year's Annual Report we wrote of a growing concern that a
protracted flat, and sometimes inverse interest yield curve had begun to squeeze
our interest margin. We felt it would continue to do so until a more normal
interest rate scenario returned. We now know that the Fed would continue to
raise short-term rates at 17 consecutive meetings until they finally paused at
their meeting in August 2006.
The net effect for 2006 was about as anticipated. While we are not able to
report our 10th consecutive record earnings year, we did finish 2006 with net
income of $10,226,000. All of the financial details are in the Management's
Discussion and Analysis section of this report. In addition, we are able to
report several positive steps taken to better position our balance sheet and
improve earnings and we believe for the long term.
IMPORTANT STEPS
1) At the end of the third quarter, we made the important decision to
implement a balance sheet restructuring. We sold $61.6 million of lower yielding
securities, which resulted in an after-tax charge of approximately $1.1 million.
Proceeds from the sale were reinvested into higher yielding adjustable rate
assets and the balance was used to reduce high cost wholesale funding. Our
intention was to improve our net interest margin by almost 25 basis points, and
we have done that.
Another benefit of the program was to reduce overall interest rate risk
within the balance sheet. This, too, was accomplished.
2) You will also notice the beginnings of a change in our balance sheet.
Our strategic objective is to grow our commercial business more quickly than in
the past. We will increase commercial lending in real terms and as a percentage
of our total loan portfolio. A change like this takes time and very deliberate
focus.
We are fortunate to have attracted several new and very talented
Lender/New Business Calling Officers to reinforce our existing team of lenders.
This would be a good place to point out that past due and delinquent loans
remain at near historically low levels.
3
I would like to assure our longtime customers, that our new focus on
business banking will in no way affect our commitment to providing the highest
levels of service available in the market to our individual and family customer
relationships. We can do both, and I guarantee you that we intend to exceed
customer expectations. My phone number is 908-719-4301, Bob Rogers' is
908-719-4302 and Craig Spengeman's is 908-719-3301.
3) In the last few years we have opened fabulous new branches in the
wonderful communities of Bridgewater, Clinton, Hillsborough, Morristown,
Oldwick, and Warren. All are performing ahead of expectations and we anticipate
they will be great investments for the future.
As previously reported we have recently opened a branch within the
Corporate Headquarters of Chubb. We are dedicated only to the financial needs of
their wonderful employees, and we look forward to growing over time.
Looking ahead, our new branches will be located in communities with
outstanding commercial business opportunities. Our new downtown Summit Office
will open during the first quarter of 2007. Ms. Nicole Jefferys has joined our
Bank and will bring her Summit banking experience to us and our new customers.
We hope to begin work soon on an already approved and greatly improved
Branch near the intersection of Shunpike and Green Village Road in Chatham
Township. The new building will provide many new conveniences to our customers
in the area, including drive-up banking and an ATM.
We will continue to look for new locations with great potential.
PGB TRUST AND INVESTMENTS
PGB Trust and Investments completed another outstanding year with assets
under management growing to almost $2,000,000,000. Fees generated by this group
grew 10% to $8,400,000. We never lose sight of how important this constant flow
of fee income is to the quality of earnings of the entire organization.
Craig Spengeman and his staff focus on the objectives of their clients.
Asset management, trust and estate administration, financial and tax planning
all require hard work and dedicated professionals to ensure your goals are
achieved. The financial world is complicated, and many families and
organizations need help in navigating the ever-changing landscape of investment
styles, tax, and financial planning. We have an extraordinary team of 34
professionals ready to help you. You only need to take the first step with a
call to Craig Spengeman at 908-719-3301 or John Bonk at 908-719-3318.
CASH DIVIDEND
Shareholder value is the primary concern of Management and the Board. In
November 2006 the Board increased the quarterly dividend by 7% to 15(cent) per
share. Over the past six years, the dividend has increased by more than 114%.
4
We hope you agree that the strategic changes we have put in motion and the
increased dividends paid over the years will combine to produce shareholder
value. We believe the most important business decisions for the future are made
in the most difficult business environments. We are excited and energized for
all the opportunities the future will bring.
DIRECTORS
As this report is to chronicle all the events of 2006, we again salute the
life and service of T. Leonard Hill who died in March. I cannot imagine a more
dedicated or productive Director or better friend. His spirit lives on, but we
will miss him always.
Also, after thirty years of service on our Board, Jack D. Stine decided
earlier in the year that he would retire as of December 31, 2006. We have been
so fortunate to have the benefit of his wisdom and sense of humor for all these
years. The Board has unanimously elected Mr. Stine as Director Emeritus, and we
look forward to seeing him at an occasional meeting.
We thank our Employees, Directors and Shareholders for their hard work and
great support. Please take every opportunity to refer family, friends and
associates to your Bank. We will do a great job for them.
/s/ Frank A. Kissel /s/ Robert M. Rogers
Frank A. Kissel Robert M. Rogers
Chairman & CEO President & COO
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW: The following discussion and analysis is intended to provide
information about the financial condition and results of operations of
Peapack-Gladstone Financial Corporation and its subsidiaries on a consolidated
basis and should be read in conjunction with the consolidated financial
statements and the related notes and supplemental financial information
appearing elsewhere in this report.
Peapack-Gladstone Financial Corporation (the "Corporation"), formed in
1997, is the parent holding company for Peapack-Gladstone Bank (the "Bank"),
formed in 1921, a commercial bank operating 21 branches in Somerset, Hunterdon
and Morris counties.
During 2006, the quarterly cash dividend rate was increased to $0.15 per
share. This new rate raised the cash dividend rate by 7 percent over the
previous rate of $0.14 per share. The cash dividend rate has increased 100
percent in the past five years.
The Corporation experienced decreasing margins as a result of an inverted
yield curve and five increases in the federal funds target rate by the Federal
Reserve during the year ended December 31, 2006. It was a challenging year for
the Corporation. Although loan and deposit growth was strong, increasing on
average almost $146 million and $83 million, respectively, net interest income
on a tax-equivalent basis declined $2 million during the year. Net interest
income was negatively affected by this very challenging operating environment.
Highly competitive loan and deposit pricing and the inverted yield curve
combined to put pressure on the net interest margin. Yields on interest-bearing
liabilities increased 119 basis points, while yields on interest-earning assets
increased 48 basis points. The net interest margin declined 51 basis points or
16 percent over 2005 levels. As discussed in this Management's Discussion and
Analysis section some of the highlights are as follows:
o The loan portfolio experienced growth of 13 percent.
o PGB Trust and Investments assets exceeded $1.9 billion in market value,
growing more than 9 percent.
o Deposits surpassed the $1.1 billion level, with nearly 10 percent growth.
RETURN ON
AVERAGE EQUITY
IN PERCENT
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
17.06 15.14 14.72 13.49 10.10
- ----------------------------------------------
'02 '03 '04 '05 '06
RETURN ON
AVERAGE ASSETS
IN PERCENT
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
1.53 1.34 1.30 1.12 0.79
- ----------------------------------------------
'02 '03 '04 '05 '06
6
o Total assets of the Corporation reached $1.29 billion this year, almost a
3 percent increase.
o The Corporation sold $61.6 million of available-for-sale securities as
part of a balance sheet restructuring strategy to improve net interest
margin and future net interest income, reduce wholesale funding and
decrease its overall interest rate risk.
Peapack-Gladstone Financial Corporation's common stock trades on the American
Stock Exchange under the symbol "PGC".
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis
of Financial Condition and Results of Operation 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 for the
year ended December 31, 2006, contains a summary of the Corporation's
significant accounting policies. Management believes that 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
NET INTEREST INCOME
IN MILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$31.9 $31.2 $35.1 $35.3 $32.8
- ----------------------------------------------
'02 '03 '04 '05 '06
7
is susceptible to changes in local market conditions and may be adversely
affected should real estate values decline or New Jersey experience an adverse
economic shock. Future adjustments to the provision for loan losses may be
necessary due to economic, operating, regulatory and other conditions beyond the
Corporation's control.
EARNINGS SUMMARY: The Corporation's net income for the year ended December 31,
2006 was $10.2 million compared to $13.1 million for the year ended December 31,
2005, a decline of $2.9 million, or 22 percent. Earnings per diluted share were
$1.22 and $1.56 for the years 2006 and 2005, respectively.
These results produced a return on average assets of 0.79 percent as
compared to 1.12 percent in 2005 and a return on average shareholders' equity of
10.10 percent as compared to 13.49 percent in 2005.
In 2006, the Corporation experienced strong growth in loans and deposits;
however, this was tempered by lower net interest margins and the resultant
reduced net interest income.
NET INTEREST INCOME: The primary source of the Corporation's operating income is
net interest income, which is the difference between interest and dividends
earned on earning assets and fees earned on loans, and interest paid on
interest-bearing liabilities. Earning assets include loans to individuals and
businesses, investment securities, interest-earning deposits and federal funds
sold. Interest-bearing liabilities include interest-bearing checking, savings
and time deposits, Federal Home Loan Bank advances and other borrowings. Net
interest income is determined by the difference between the yields earned on
earning assets and the rates paid on interest-bearing liabilities ("Net Interest
Spread") and the relative amounts of earning assets and interest-bearing
liabilities. The Corporation's net interest spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows and general levels of non-performing assets. Credit quality
remained excellent in 2006 as loan delinquencies were at low levels.
Net interest income, on a fully tax-equivalent basis, declined from $36.3
million in 2005 to $34.0 million in 2006. Average earning assets increased
$117.7 million or 11 percent from the average balances in 2005 and rates earned
on earning assets increased 48 basis points in 2006. Interest expense increased
71 percent over the levels recorded in 2005 on average balances of
interest-bearing liabilities that increased $107.3 million or 12 percent. Rates
paid in 2006 on interest-bearing liabilities rose 119 basis points over those
paid in 2005 as competitive pressure and the influence of rising federal funds
target rates drove rates higher. In 2006, the net interest margin declined to
2.76 percent from 3.27 percent in 2005.
Interest income on earning assets, on a fully tax-equivalent basis, was
$68.4 million, an increase of $12.0 million, or 21 percent, over 2005 levels.
This increase was primarily due to higher average loans, which rose $145.7
million, offset in part by a decline of $29.1 million in average investments.
Rates increased 53 basis points on investments due in part to the sale and
maturities of lower yielding bonds, which were partially replaced with higher
yielding investments. Rates earned on loans increased 33 basis points,
reflecting the Corporation's increased emphasis on commercial and construction
lending, which yields higher rates.
8
During the year, interest expense rose $14.3 million due to higher rates
paid on interest-bearing deposits and increased volume of higher cost money
market accounts, certificates of deposit and short-term borrowings. The overall
rate paid on interest-bearing deposits increased 117 basis points to 3.27
percent in 2006 as compared to 2.10 percent in 2005. Rates paid on borrowings
rose 109 basis points to 4.66 percent. In addition to the pressure on rates due
to the competitive environment of deposit gathering, the Federal Reserve Bank
increased the Federal funds rate five times in 2006.
Interest expense also rose due to the increased volume of higher-paying
liabilities. On average, the High Yield money market account, which was
introduced late in 2005, increased $75.7 million. Fed Tracker money market
accounts and certificates of deposit grew $44.3 million and $79.0 million,
respectively. Shifting of balances occurred between the traditional money market
and savings products, which declined $28.0 million on average, and the High
Yield money market accounts, which yielded higher returns to customers. Average
interest-bearing checking accounts declined $53.3 million or 28 percent over the
comparable period in 2005. The decline was primarily due to the loss of two
large municipal escrow accounts, which required above-market interest rates,
which the Corporation was not willing to pay. Average noninterest-bearing demand
deposits increased $6.9 million or 4 percent during 2006 as compared to 2005.
During 2006, average overnight borrowings decreased $2.3 million to $24.9
million and the Bank increased average short-term borrowings by $35.7 million to
an average of $60.5 million for the year ended December 31, 2006. Average
Federal Home Loan Bank advances declined $2.7 million.
The Corporation completed a balance sheet restructuring in the third
quarter of 2006, selling $61.6 million of available-for-sale securities that
were yielding 4.14 percent. The sale resulted in a before tax charge of
approximately $1.9 million and an after tax charge of $1.1 million, or $0.13 per
diluted share. The Corporation used a majority of the proceeds from the sale to
redeem high cost, short-term borrowings and used approximately $20 million to
purchase floating-rate securities. The Corporation has experienced an
improvement in net interest income and net interest margin following the
implementation of the restructuring strategy. In addition to improving future
net interest income, the Corporation anticipates a decrease in its overall
interest rate risk as a result of the restructuring.
9
THE FOLLOWING TABLE COMPARES THE AVERAGE BALANCE SHEETS, NET INTEREST SPREADS
AND NET INTEREST MARGINS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(FULLY TAX-EQUIVALENT-FTE):
YEAR ENDED DECEMBER 31, 2006
- ---------------------------------------------------------------------------------------
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE (1) $ 345,190 $ 15,857 4.59%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT (1) (2) 52,040 2,793 5.37
- ---------------------------------------------------------------------------------------
LOANS (2) (3) 828,337 49,555 5.98
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 2,939 146 4.96
- ---------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 1,284 61 4.72
=======================================================================================
TOTAL INTEREST-EARNING ASSETS 1,229,790 $ 68,412 5.56%
=======================================================================================
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 22,475
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (6,516)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 23,038
- ---------------------------------------------------------------------------------------
OTHER ASSETS 22,564
=======================================================================================
TOTAL NONINTEREST-EARNING ASSETS 61,561
=======================================================================================
TOTAL ASSETS $ 1,291,351
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
- ---------------------------------------------------------------------------------------
CHECKING $ 138,045 $ 1,044 0.76%
- ---------------------------------------------------------------------------------------
MONEY MARKETS 317,524 11,955 3.77
- ---------------------------------------------------------------------------------------
SAVINGS 82,016 567 0.69
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 352,114 15,505 4.40
=======================================================================================
TOTAL INTEREST-BEARING DEPOSITS 889,699 29,071 3.27
- ---------------------------------------------------------------------------------------
BORROWED FUNDS 115,181 5,373 4.66
=======================================================================================
TOTAL INTEREST-BEARING LIABILITIES 1,004,880 34,444 3.43
=======================================================================================
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 179,597
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 5,659
=======================================================================================
TOTAL NONINTEREST-BEARING LIABILITIES 185,256
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 101,215
=======================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,291,351
=======================================================================================
NET INTEREST INCOME $ 33,968
=======================================================================================
NET INTEREST SPREAD 2.13
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN (4) 2.76%
- ---------------------------------------------------------------------------------------
10
YEAR ENDED DECEMBER 31, 2005
- ---------------------------------------------------------------------------------------
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE (1) $ 373,618 $ 15,210 4.07%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT (1) (2) 52,732 2,550 4.84
- ---------------------------------------------------------------------------------------
LOANS (2) (3) 682,648 38,593 5.65
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 2,253 73 3.26
- ---------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 807 26 3.17
=======================================================================================
TOTAL INTEREST-EARNING ASSETS 1,112,058 $ 56,452 5.08%
=======================================================================================
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 21,411
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (6,271)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 21,124
- ---------------------------------------------------------------------------------------
OTHER ASSETS 24,154
=======================================================================================
TOTAL NONINTEREST-EARNING ASSETS 60,418
=======================================================================================
TOTAL ASSETS $ 1,172,476
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
- ---------------------------------------------------------------------------------------
CHECKING $ 191,305 $ 2,192 1.15%
- ---------------------------------------------------------------------------------------
MONEY MARKETS 249,096 5,613 2.25
- ---------------------------------------------------------------------------------------
SAVINGS 99,594 691 0.69
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 273,140 8,609 3.15
=======================================================================================
TOTAL INTEREST-BEARING DEPOSITS 813,135 17,105 2.10
- ---------------------------------------------------------------------------------------
BORROWED FUNDS 84,490 3,018 3.57
=======================================================================================
TOTAL INTEREST-BEARING LIABILITIES 897,625 20,123 2.24
=======================================================================================
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 172,692
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 4,827
=======================================================================================
TOTAL NONINTEREST-BEARING LIABILITIES 177,519
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 97,332
=======================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,172,476
=======================================================================================
NET INTEREST INCOME $ 36,329
=======================================================================================
NET INTEREST SPREAD 2.84
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN (4) 3.27%
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE (1) $ 418,492 $ 15,992 3.82%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT (1) (2) 42,959 2,155 5.02
- ---------------------------------------------------------------------------------------
LOANS (2) (3) 483,397 27,566 5.70
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 5,122 58 1.13
- ---------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 1,640 19 1.16
=======================================================================================
TOTAL INTEREST-EARNING ASSETS 951,610 $ 45,790 4.81%
=======================================================================================
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 19,832
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (5,710)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 17,785
- ---------------------------------------------------------------------------------------
OTHER ASSETS 26,317
=======================================================================================
TOTAL NONINTEREST-EARNING ASSETS 58,224
=======================================================================================
TOTAL ASSETS $ 1,009,834
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
- ---------------------------------------------------------------------------------------
CHECKING $ 159,043 $ 991 0.62%
- ---------------------------------------------------------------------------------------
MONEY MARKETS 218,141 2,022 0.93
- ---------------------------------------------------------------------------------------
SAVINGS 106,518 664 0.62
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 222,241 4,834 2.18
=======================================================================================
TOTAL INTEREST-BEARING DEPOSITS 705,943 8,511 1.21
- ---------------------------------------------------------------------------------------
BORROWED FUNDS 50,416 1,349 2.68
=======================================================================================
TOTAL INTEREST-BEARING LIABILITIES 756,359 9,860 1.30
=======================================================================================
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 158,151
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 6,243
=======================================================================================
TOTAL NONINTEREST-BEARING LIABILITIES 164,394
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 89,081
=======================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,009,834
=======================================================================================
NET INTEREST INCOME $ 35,930
=======================================================================================
NET INTEREST SPREAD 3.51
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN (4) 3.78%
- ---------------------------------------------------------------------------------------
(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.
11
RATE/VOLUME ANALYSIS:
THE EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME (ON A
TAX-EQUIVALENT BASIS) FOR THE PERIODS INDICATED ARE SHOWN BELOW:
YEAR ENDED 2006 COMPARED WITH 2005 YEAR ENDED 2005 COMPARED WITH 2004
- ----------------------------------------------------------------------------------------------------
NET NET
DIFFERENCE DUE TO CHANGE IN DIFFERENCE DUE TO CHANGE IN
CHANGE IN: INCOME/ CHANGE IN: INCOME/
(IN THOUSANDS): VOLUME RATE EXPENSE VOLUME RATE EXPENSE
- ----------------------------------------------------------------------------------------------------
ASSETS:
INVESTMENTS $ (900) $ 1,790 $ 890 $ (1,122) $ 735 $ (387)
- ----------------------------------------------------------------------------------------------------
LOANS 10,225 737 10,962 11,239 (212) 11,027
- ----------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 27 46 73 (46) 61 15
- ----------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 19 16 35 (14) 21 7
====================================================================================================
TOTAL INTEREST INCOME $ 9,371 $ 2,589 $ 11,960 $ 10,057 $ 605 $ 10,662
====================================================================================================
LIABILITIES
CHECKING $ (1,521) $ 373 $ (1,148) $ 899 $ 302 $ 1,201
- ----------------------------------------------------------------------------------------------------
MONEY MARKET 2,384 3,958 6,342 2,211 1,380 3,591
- ----------------------------------------------------------------------------------------------------
SAVINGS (124) -- (124) (43) 70 27
- ----------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 2,907 3,989 6,896 1,276 2,499 3,775
- ----------------------------------------------------------------------------------------------------
BORROWED FUNDS 1,667 688 2,355 1,182 487 1,669
====================================================================================================
TOTAL INTEREST EXPENSE $ 5,313 $ 9,008 $ 14,321 $ 5,525 $ 4,738 $ 10,263
====================================================================================================
NET INTEREST INCOME $ 4,058 $(6,419) $ (2,361) $ 4,532 $(4,133) $ 399
====================================================================================================
LOANS: The loan portfolio represents the largest portion of the Corporation's
earning assets and is an important source of interest and fee income. Loans are
primarily originated in the State of New Jersey.
At December 31, 2006, total loans were $870.2 million, an increase of
$101.7 million, or 13 percent from 2005 levels. The growth in our portfolios is
primarily the result of new business initiatives and our entry into new market
areas. Construction loans totaled $46.7 million, an increase of $21.3 million,
or 84 percent. Commercial mortgage loans rose $19.0 million or 10 percent in
2006, while residential loans secured by first liens on 1-4 family homes rose
$43.6 million or 9 percent from 2005 levels. The majority of residential real
estate loan origination was primarily due to the purchase of adjustable rate
loans from a third-party mortgage origination entity. All of the loans purchased
are secured by properties located in the State of New Jersey. Commercial loans
also grew by $5.1 million or 15 percent during 2006. During the past year, the
Corporation has increased its emphasis on construction and commercial lending,
which yields higher rates.
The yield on total loans averaged 5.98 percent for 2006, an increase of 33
basis points from the 5.65 percent average yield earned in 2005. The average
yield on the mortgage portfolio rose in 2006 to 5.49 percent from 5.45 percent
in 2005. The average yield on the commercial loan portfolio increased three
basis points to 6.18 percent. Although short-term interest rates continued to
rise during the year, it did not have a significant impact on loan yields, as
long-term rates remained relatively flat. More significant to the increased
income was the increased volume of loans.
12
THE FOLLOWING TABLE PRESENTS AN ANALYSIS OF OUTSTANDING LOANS AS OF DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
REAL ESTATE-MORTGAGE
1-4 FAMILY RESIDENTIAL
FIRST LIENS $ 508,808 $ 465,228 $ 327,974 $ 226,887 $ 229,679
- ---------------------------------------------------------------------------------------------------
JUNIOR LIENS 30,410 20,316 13,539 11,163 15,211
- ---------------------------------------------------------------------------------------------------
HOME EQUITY 16,072 20,760 20,078 18,251 22,265
- ---------------------------------------------------------------------------------------------------
REAL ESTATE-COMMERCIAL 215,451 196,431 162,166 130,968 109,932
- ---------------------------------------------------------------------------------------------------
REAL ESTATE-CONSTRUCTION 46,684 25,387 17,703 9,799 2,063
- ---------------------------------------------------------------------------------------------------
COMMERCIAL LOANS 38,471 33,322 20,821 16,632 17,859
- ---------------------------------------------------------------------------------------------------
CONSUMER LOANS 9,601 5,014 7,181 10,223 8,206
- ---------------------------------------------------------------------------------------------------
OTHER LOANS 4,656 2,015 2,702 3,078 4,545
===================================================================================================
TOTAL LOANS $ 870,153 $ 768,473 $ 572,164 $ 427,001 $ 409,760
===================================================================================================
INVESTMENT SECURITIES HELD TO MATURITY: Investment securities are those
securities that the Corporation has both the ability and intent to hold to
maturity. These securities are carried at amortized cost. The portfolio consists
primarily of U.S. government agencies, mortgage-backed securities and municipal
obligations. The Corporation's investment securities held to maturity at
amortized cost amounted to $55.2 million at December 31, 2006, compared with
$78.1 million at December 31, 2005.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF INVESTMENT
SECURITIES HELD TO MATURITY AT AMORTIZED COST, AS OF DECEMBER 31, 2006:
AFTER 1 AFTER 5
BUT BUT
WITHIN WITHIN WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- -------------------------------------------------------------------------------------------------------
U.S. TREASURIES $ 500 $ 500 $ -- $ -- $ 1,000
3.248% 4.896% --% --% 4.072%
- -------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (1) $ -- $ 2,731 $ 1,882 $ 12,737 $ 17,350
--% 4.746% 5.797% 4.868% 4.950%
- -------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS (2) $ 11,822 $ 19,274 $ 5,719 $ -- $ 36,815
4.217% 4.288% 5.317% --% 4.423%
=======================================================================================================
TOTAL $ 12,322 $ 22,505 $ 7,601 $ 12,737 $ 55,165
4.178% 4.357% 5.436% 4.868% 4.584%
=======================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY.
(2) YIELDS PRESENTED ON A FULLY TAX-EQUIVALENT BASIS.
SECURITIES AVAILABLE FOR SALE: Securities available for sale are used as a part
of the Corporation's interest rate risk management strategy, and they may be
sold in response to changes in interest rates, liquidity needs, and other
factors. These securities are carried at estimated fair value, and unrealized
changes in fair value are recognized as a separate component of shareholders'
equity, net of income taxes. Realized gains and losses are recognized in income
at the time the securities are sold.
13
At December 31, 2006, the Corporation had securities available for sale
with a market value of $286.2 million, compared with $341.6 million at December
31, 2005. A $1.4 million net unrealized loss (net of income tax) and a $3.0
million net unrealized loss (net of income tax) was included in shareholders'
equity at December 31, 2006 and December 31, 2005, respectively.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF SECURITIES
AVAILABLE FOR SALE, STATED AT MARKET VALUE, AS OF DECEMBER 31, 2006:
AFTER 1 AFTER 5
BUT BUT AFTER
WITHIN WITHIN WITHIN 10
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SPONSORED AGENCIES $ 20,802 $ 36,020 $ -- $ -- $ 56,822
3.299% 4.763% --% --% 4.226%
- ---------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (1) $ -- $ 7,219 $ 29,229 $ 104,288 $ 140,736
--% 4.084% 4.224% 4.861% 4.687%
- ---------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS (2) $ 689 $ 4,695 $ 2,703 $ 15,000 $ 23,087
5.853% 5.907% 6.327% 4.420% 4.984%
- ---------------------------------------------------------------------------------------------------------
OTHER SECURITIES $ 6,605 $ 998 $ -- $ 57,938 $ 65,541
3.677% 5.607% --% 6.591% 6.319%
- ---------------------------------------------------------------------------------------------------------
TOTAL $ 28,096 $ 48,932 $ 31,932 $ 177,226 $ 286,186
3.442% 4.786% 4.394% 5.382% 4.992%
=========================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY.
(2) YIELDS PRESENTED ON A FULLY TAX-EQUIVALENT BASIS.
Federal funds sold and interest-earning deposits are an additional part of
the Corporation's investment and liquidity strategies. The combined average
balance of these vehicles during 2006 was $4.2 million as compared to $3.1
million in 2005.
DEPOSITS: Total deposits at December 31, 2006 were $1.14 billion, an increase of
$102.7 million or 10 percent from $1.04 billion at December 31, 2005. Our
strategy is to fund earning asset growth with core deposits, which is an
important factor in the generation of net interest income. Marketing, sales
efforts and a new branch location all contributed to the strong growth in
deposits. Total average deposits increased $83.5 million, or 8 percent, over
2005 levels.
THE FOLLOWING TABLE SETS FORTH INFORMATION CONCERNING THE COMPOSITION OF
THE CORPORATION'S AVERAGE DEPOSIT BASE AND AVERAGE INTEREST RATES PAID FOR THE
FOLLOWING YEARS:
(IN THOUSANDS) 2006 2005 2004
- ------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND $ 179,597 --% $172,692 --% $158,151 --%
- ------------------------------------------------------------------------------------------------
CHECKING 138,045 0.76 191,305 1.15 159,043 0.62
- ------------------------------------------------------------------------------------------------
SAVINGS 82,016 0.69 99,594 0.69 106,518 0.62
- ------------------------------------------------------------------------------------------------
MONEY MARKETS 317,524 3.77 249,096 2.25 218,141 0.93
- ------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSITS 352,114 4.40 273,140 3.15 222,241 2.18
================================================================================================
TOTAL DEPOSITS $1,069,296 $985,827 $864,094
================================================================================================
Certificates of deposit over $100,000 are generally purchased by local
municipal governments or individuals for periods of one year or less. These
factors translate into a stable customer oriented cost-effective funding source.
14
THE FOLLOWING TABLE SHOWS REMAINING MATURITY FOR CERTIFICATES OF DEPOSIT OVER
$100,000 AS OF DECEMBER 31, 2006 (IN THOUSANDS):
THREE MONTHS OR LESS $ 42,765
- --------------------------------------------------------------------------------
OVER THREE MONTHS THROUGH TWELVE MONTHS 68,178
- --------------------------------------------------------------------------------
OVER TWELVE MONTHS 15,071
- --------------------------------------------------------------------------------
TOTAL $126,014
================================================================================
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: At December 31, 2006 and
2005, Federal Home Loan Bank (FHLB) advances totaled $24.0 million and $31.7
million, respectively, with a weighted average interest rate of 3.59 percent and
3.51 percent, respectively. The Corporation considers FHLB advances an added
source of funding, and accordingly, executes transactions from time to time to
meet its funding requirements. The FHLB advances outstanding at December 31,
2006 have varying terms and interest rates.
The Corporation had no short-term or overnight borrowings at December 31,
2006. At December 31, 2005, short-term borrowings with an average maturity of 90
days or less totaled $65.0 million, while overnight borrowings totaled $12.5
million.
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses
was $6.8 million at December 31, 2006 as compared to $6.4 million at December
31, 2005. At December 31, 2006, the allowance for loan losses as a percentage of
total loans outstanding was 0.78 percent compared to 0.83 percent at December
31, 2005 and 1.05 percent at December 31, 2004. The provision for loan losses
was $414 thousand for 2006 and $391 thousand for 2005. The allowance as a
percentage of total loans declined in 2006 as compared to 2005, while the
provision increased over the prior year as loan growth and increases in
commercial-related loans was offset by relatively low levels of delinquencies
and historical charge-off experience. While the composition of the Bank's loan
portfolio was comprised of a higher percentage of lower risk 1-4 family
mortgages, the Bank's strategy is to increase the commercial loan portfolios. We
anticipate that this strategy will increase the risk in the loan portfolio.
The provision was based upon management's review and evaluation of the
size and composition of the loan portfolio, actual loan loss experience, level
of delinquencies, general market and economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and the
existence and net realizable value of the collateral and guarantees securing the
loans. Although management used 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 allowance
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 market conditions in
the state and may be adversely affected should real estate values decline or
should New Jersey experience an adverse economic downturn. Future adjustments to
the allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Corporation's control.
15
THE FOLLOWING TABLE PRESENTS THE LOAN LOSS EXPERIENCE DURING THE PERIODS ENDED
DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004 2003 2002
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT
BEGINNING OF YEAR $ 6,378 $ 5,989 $ 5,439 $ 4,778 $ 4,023
- ---------------------------------------------------------------------------------------
LOANS CHARGED-OFF DURING THE PERIOD
REAL ESTATE -- -- -- -- --
- ---------------------------------------------------------------------------------------
CONSUMER 13 14 16 42 59
- ---------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 13 2 62 -- 9
=======================================================================================
TOTAL LOANS CHARGED-OFF 26 16 78 42 68
=======================================================================================
RECOVERIES DURING THE PERIOD
- ---------------------------------------------------------------------------------------
REAL ESTATE -- -- -- 37 --
- ---------------------------------------------------------------------------------------
CONSUMER 1 2 6 40 36
- ---------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 1 12 9 34 7
=======================================================================================
TOTAL RECOVERIES 2 14 15 111 43
=======================================================================================
NET CHARGE-OFFS/(RECOVERIES) 24 2 63 (69) 25
=======================================================================================
PROVISION CHARGED TO EXPENSE 414 391 613 592 780
=======================================================================================
ALLOWANCE FOR LOAN LOSSES AT
END OF YEAR $ 6,768 $ 6,378 $ 5,989 $ 5,439 $ 4,778
=======================================================================================
THE FOLLOWING TABLE SHOWS THE ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AND
THE PERCENTAGE OF EACH LOAN CATEGORY TO TOTAL LOANS AS OF DECEMBER 31,
% OF % OF % OF % OF % OF
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
(IN THOUSANDS) 2006 LOANS 2005 LOANS 2004 LOANS 2003 LOANS 2002 LOANS
- ----------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL $ 4,510 78.1 $ 4,448 82.0 $3,942 81.1 $3,238 80.7 $2,860 80.4
- ----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 1,991 17.8 1,767 14.9 1,850 15.5 1,988 15.7 1,696 14.2
- ----------------------------------------------------------------------------------------------------------------------------
CONSUMER 267 4.1 163 3.1 197 3.4 213 3.6 222 5.4
============================================================================================================================
TOTAL $ 6,768 100.0 $ 6,378 100.0 $5,989 100.0 $5,439 100.0 $4,778 100.0
============================================================================================================================
16
NON-PERFORMING ASSETS:
THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF
NON-PERFORMING ASSETS:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------
LOANS PAST DUE 90 DAYS OR MORE
AND STILL ACCRUING INTEREST $ 197 $ 47 $ -- $ 56 $ 203
- -----------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS 1,880 339 351 159 180
===============================================================================================
TOTAL NON-PERFORMING LOANS 2,077 386 351 215 383
- -----------------------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- -- -- -- --
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $ 2,077 $ 386 $ 351 $ 215 $ 383
===============================================================================================
LOAN CHARGE-OFFS $ 26 $ 16 $ 78 $ 42 $ 68
- -----------------------------------------------------------------------------------------------
LOAN RECOVERIES (2) (14) (15) (111) (43)
===============================================================================================
NET LOAN CHARGE-OFFS/(RECOVERIES) $ 24 $ 2 $ 63 $ (69) $ 25
===============================================================================================
ALLOWANCE FOR LOAN LOSSES $ 6,768 $ 6,378 $ 5,989 $ 5,439 $ 4,778
===============================================================================================
RATIOS:
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/TOTAL LOANS 0.24 % 0.05 % 0.06 % 0.05 % 0.09 %
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS/TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04
- -----------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/TOTAL LOANS 0.78 0.83 1.05 1.27 1.17
- -----------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
TOTAL NON-PERFORMING LOANS 3.3X 16.5X 17.1X 25.3X 12.5X
- -----------------------------------------------------------------------------------------------
Interest income of $129 thousand, $21 thousand and $11 thousand would have
been recognized during 2006, 2005 and 2004, respectively, if non-accrual loans
had been current in accordance with their original terms.
CONTRACTUAL OBLIGATIONS: The following table shows the significant contractual
obligations of the Corporation by expected payment period, as of December 31,
2006. Further discussion of these commitments is included in the Footnotes to
the Consolidated Financial Statements noted below (in thousands):
LESS THAN MORE THAN
(IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- -----------------------------------------------------------------------------------------
LONG-TERM DEBT OBLIGATIONS $ 4,000 $ 2,839 $ 13,375 $ 3,750 $23,964
- -----------------------------------------------------------------------------------------
OPERATING LEASE OBLIGATIONS 2,414 4,735 3,870 11,224 22,243
- -----------------------------------------------------------------------------------------
PURCHASE OBLIGATIONS 1,107 192 -- -- 1,299
- -----------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (1) 1,000 -- -- -- 1,000
=========================================================================================
TOTAL $ 8,521 $ 7,766 $ 17,245 $ 14,974 $48,506
=========================================================================================
(1) THE CORPORATION DOES NOT HAVE AN ESTIMATE OF THE ACTUAL PENSION CONTRIBUTION
FOR 2008 AND BEYOND; HOWEVER IT IS ANTICIPATED TO BE APPROXIMATELY $1.0 MILLION
IN 2007.
Short-term and overnight borrowings are borrowings from the Federal Home
Loan Bank with defined terms. Long-term debt obligations include borrowings from
the Federal Home Loan Bank with defined terms. The chart is based on scheduled
repayments of principal.
17
Operating leases represent obligations entered into by the Corporation for
the use of land and premises. The leases generally have escalation terms based
upon certain defined indexes. Common area maintenance charges may also apply and
are adjusted annually based on the terms of the lease agreements.
Purchase obligations represent legally binding and enforceable agreements
to purchase goods and services from third parties and consist of contractual
obligations under data processing service agreements, as well as the contract
for the construction of a new branch in Summit. The Corporation also enters into
various routine rental and maintenance contracts for facilities and equipment.
These contracts are generally for one year and are not significant to the
consolidated financial statements of the Corporation.
OFF-BALANCE SHEET ARRANGEMENTS: The following table shows the amounts and
expected maturities of significant commitments, as of December 31, 2006. Further
discussion of these commitments is included in Note 13 to the Consolidated
Financial Statements:
LESS THAN MORE THAN
(IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------
FINANCIAL LETTERS OF CREDIT $ 793 $ -- $ -- $ -- $ 793
- ---------------------------------------------------------------------------------------
PERFORMANCE LETTERS OF CREDIT 2,361 48 -- -- 2,409
- ---------------------------------------------------------------------------------------
COMMERCIAL LETTERS OF CREDIT 2,990 3,120 -- -- 6,110
=======================================================================================
TOTAL $ 6,144 $ 3,168 $ -- $ -- $ 9,312
=======================================================================================
Commitments under standby letters of credit, both financial and
performance do not necessarily represent future cash requirements, in that these
commitments often expire without being drawn upon.
OTHER INCOME: Other income was $10.3 million in 2006, a decline of 11 percent
over 2005 levels. The decline was attributable to a net loss on securities sold
in 2006 offset, in part, by increases in trust fees and other noninterest
income.
As discussed earlier, the Corporation completed a balance sheet
restructuring in 2006, selling $61.6 million of available-for-sale securities,
which resulted in a before tax charge of approximately $1.9 million and an after
tax charge of $1.1 million, or $0.13 per diluted share. The Corporation used a
majority of the proceeds from the sale to redeem high cost, short-term
borrowings and used approximately $20 million to purchase floating-rate
securities. The Corporation has experienced an improvement in net interest
income and net interest margin as a result of the restructuring strategy. In
addition to improving future net interest income, the Corporation anticipates a
decrease in its overall interest rate risk. Net gains on sales of securities
were $551 thousand for the year ended December 31, 2005 and included a $253
thousand gain on the non-monetary exchange of equity securities.
Trust fees totaling $8.4 million were realized in 2006, an increase of
$727 thousand, or 10 percent over the levels in 2005. This increase is
attributable to an increased volume of business as the market value of assets
under management increased to $1.92 billion.
18
In 2006, other income of $837 thousand was realized on increased cash
surrender value on Bank Owned Life Insurance (BOLI) policies, as compared to
$802 thousand in 2005. BOLI assists in offsetting the rising costs of employee
benefits. Other noninterest income of $534 thousand was realized in 2006, an
increase of $252 thousand, or 89 percent and was primarily due to increased
non-recurring commercial and construction loan fee income.
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER INCOME:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
TRUST FEES $ 8,367 $ 7,640 $ 6,720
- --------------------------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,960 1,877 1,743
- --------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 837 802 793
- --------------------------------------------------------------------------------
OTHER NONINTEREST INCOME 534 282 205
- --------------------------------------------------------------------------------
SAFE DEPOSIT RENTAL FEES 233 233 233
- --------------------------------------------------------------------------------
OTHER FEE INCOME 117 110 83
- --------------------------------------------------------------------------------
SECURITIES (LOSSES)/GAINS, NET (1,781) 551 150
================================================================================
TOTAL $ 10,267 $ 11,495 $ 9,927
================================================================================
OTHER EXPENSES: Other expenses totaled $28.9 million in 2006, an increase of
$1.5 million or 5 percent compared to $27.5 million in 2005. This increase is
commensurate with the growth in the overall level of bank and trust business
activity. The Corporation strives to operate in an efficient manner and control
costs as a means of producing increased earnings and enhancing shareholder
value.
Salaries and benefits expense, which accounts for the largest portion of
other expenses, increased $1.0 million, or 7 percent, in 2006 as compared to
2005. Normal salary increases, as well as additions to staff, branch expansion
and higher group health insurance accounted for the increase. These increases
were offset, in part, by lower profit sharing plan contributions. In addition,
the Corporation began expensing stock-based compensation as required by
Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004),
Share-Based Payment, and recorded $59 thousand of expense in 2006. At December
31, 2006, the Corporation's full-time equivalent staff was 232 compared with 228
at December 31, 2005.
Premises and equipment expense increased to $6.9 million in 2006 from $6.7
million in 2005, an increase of $204 thousand, or 3 percent, due to increases
charged by outside vendors for electric, gas, real estate taxes, etc. and
additional maintenance costs for branch upkeep.
19
Advertising expenses decreased $204 thousand, or 22 percent when compared
to 2005. In 2005, the Corporation had higher advertising to promote and
introduce deposit products. Stationery and supplies expense declined $67
thousand, or 13 percent. Postage expense rose $53 thousand, or 19 percent, due
to increases to postal rates and higher customer accounts. Professional and
legal fees rose $268 thousand, or 47 percent, over levels for 2005, due to
increases in consulting fees to improve compliance with banking laws and
regulations and higher recruitment fees to fill new lending positions.
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER EXPENSES:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
SALARIES AND BENEFITS $ 15,698 $ 14,682 $ 13,898
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 6,909 6,705 5,668
- --------------------------------------------------------------------------------
ADVERTISING 732 936 689
- --------------------------------------------------------------------------------
PROFESSIONAL AND LEGAL FEES 833 565 583
- --------------------------------------------------------------------------------
STATIONERY AND SUPPLIES 469 536 605
- --------------------------------------------------------------------------------
TRUST DEPARTMENT 467 408 416
- --------------------------------------------------------------------------------
TELEPHONE 396 390 441
- --------------------------------------------------------------------------------
POSTAGE 339 286 332
- --------------------------------------------------------------------------------
OTHER EXPENSES 3,102 2,984 2,546
================================================================================
TOTAL $ 28,945 $ 27,492 $ 25,178
================================================================================
INCOME TAXES: Income tax expense for the years ended December 31, 2006 and 2005
was $3.5 million and $5.8 million, respectively. The effective tax rate for the
year ended December 31, 2006 was 25.53 percent compared to 30.54 percent for the
year ended December 31, 2005. Taxable income declined from $18.9 million to
$13.7 million from December 31, 2005 to December 31, 2006. The effective tax
rate in 2006 decreased due to increased tax-exempt income of $164 thousand as
well as a decline in state income tax due to higher taxable income in the Real
Estate Investment Trust subsidiary, which has a lower effective state tax rate.
In addition, the Bank subsidiary recognized a state tax net operating loss
benefit, which also contributed to the decline in the effective tax rate for
2006.
RESULTS OF OPERATIONS 2005 COMPARED TO 2004: Net income for the year ended
December 31, 2005 was $13.13 million compared to $13.11 for the year ended
December 31, 2004, an increase of $21 thousand. Earnings per diluted share were
$1.56 for both year-end 2005 and 2004. These results produced a return on
average assets of 1.12 percent as compared to 1.30 percent in 2004 and a return
on average shareholders' equity of 13.49 percent as compared to 14.72 percent in
2004. In 2005, the Corporation experienced strong growth in loans and deposits,
however, this was tempered by higher cost of funds and asset yields that
remained relatively flat to 2004.
Net interest income, on a fully tax-equivalent basis, increased from $35.9
million in 2004 to $36.3 million in 2005. Average earning assets increased
$160.4 million, or 17 percent, from the average balances in 2004 and the
interest earned on these assets increased 27 basis points in 2005. Interest
expense doubled over the levels recorded in 2004 on average balances of
interest-bearing liabilities that increased $141.3 million, or 19 percent. Rates
paid in 2005 on interest-bearing liabilities rose 94 basis points over 2004 as
competitive pressure and the influence of rising federal funds target rates
drove rates higher. In 2005, the net interest margin declined to 3.27 percent
from 3.78 percent in 2004.
20
Other income was $11.5 million in 2005, an increase of 16 percent over
2004 levels. This increase was attributable to increases in almost all
categories of other income, notably a $920 thousand increase, or 14 percent, in
trust fees. This increase is attributable to increased volume of business as the
market value of assets under management increased to $1.76 billion.
Net gains on sales of securities increased by $401 thousand. This increase
was primarily due to a $560 thousand other-than-temporary non-cash impairment
charge on adjustable rate investment-grade preferred stock in 2004 and a $253
thousand gain on the non-monetary exchange of equity securities in 2005.
Other income of $802 thousand was realized on increased cash surrender
value on BOLI policies in 2005, as compared to $793 thousand in 2004.
In 2005, other expenses totaled $27.5 million, an increase of $2.3
million, or 9 percent compared to $25.2 million in 2004. Salaries and benefits
expense increased $784 thousand, or 6 percent, in 2005 as compared to 2004.
Normal salary increases, as well as additions to staff, branch expansion and
higher group health insurance and pension plan costs accounted for the increase.
These increases were offset, in part, by lower profit sharing plan contributions
and a reduced bonus pool. At December 31, 2005, the full-time equivalent number
of employees was 228 as compared to 219 at December 31, 2004.
Premises and equipment expense increased to $6.7 million in 2005 from $5.7
million in 2004, an increase of $1.0 million, or 18 percent. Occupancy expenses
continue to grow as the Corporation invests in new branches and technological
capacity, both vital to the Corporation's future growth and profitability.
Advertising expenses increased $247 thousand in 2005 due to additional
advertising for the Bridgewater branch and the advertising of deposit products.
Stationery and supplies expense and postage expense declined $69 thousand, or 11
percent, and $46 thousand, or 14 percent, respectively, as cost savings from the
implementation of check imaging of customer checks was realized. Telephone
expense also declined, when compared with 2004, by $51 thousand, or 12 percent.
Professional and legal fees remained relatively constant from 2005 to 2004.
CAPITAL RESOURCES: The solid capital base of the Corporation provides the
ability for future growth and financial strength. Maintaining a strong capital
position supports the Corporation's goal of providing shareholders an attractive
and stable long-term return on investment. Total shareholders' equity grew $4.6
million or 5 percent to $103.8 million at December 31, 2006 as compared with
$99.2 million at December 31, 2005.
The Financial Accounting Standards Board (FASB) issued FASB Statement No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans," which requires the Corporation to recognize on its balance sheet the
funded status of pension and other postretirement benefit plans as of December
31, 2006. As a result, the Corporation recorded an unfunded pension benefit
obligation, net of taxes, of $1.3 million at December 31, 2006.
At December 31, 2006, unrealized losses on securities, net of taxes, were
$1.4 million as compared to unrealized losses on securities, net of taxes, of
$3.0 million at December 31, 2005.
21
In addition, the Corporation recorded an adjustment of $494 thousand, net
of taxes, resulting from the understatement of lease expense, to beginning
retained earnings for 2006. This adjustment was related to the accounting for
operating leases on a cash basis rather than a GAAP basis according to the
guidance issued by the Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB
108 was effective as of the end of the Corporation's 2006 fiscal year, allowing
a one-time transitional cumulative effect adjustment to retained earnings as of
January 1, 2006 for errors that were not previously deemed material, but are
material under the guidance in SAB 108.
Federal regulations require banks to meet target Tier 1 and total capital
ratios of 4 percent and 8 percent, respectively. The Corporation's Tier 1 and
total capital ratios are well in excess of regulatory minimums at 15.33 percent
and 16.31 percent, respectively, at December 31, 2006. The Corporation's capital
leverage ratio was 8.20 percent at December 31, 2006.
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 feels the Corporation's liquidity position is sufficient to
meet future needs. Cash and cash equivalents, including federal funds sold and
interest-earning deposits, totaled $30.3 million at December 31, 2006. In
addition, the Corporation has $286.2 million in securities designated as
available for sale. These securities can be sold in response to liquidity
concerns. As of December 31, 2006, investment securities and securities
available for sale maturing within one year amounted to $40.4 million and cash
and cash equivalents totaled $30.3 million.
Another source of liquidity is borrowing capacity. The Corporation has a
variety of sources of short-term liquidity available, including short and
long-term borrowings from the Federal Home Loan Bank of New York, short-term
borrowings from the Federal Reserve Bank Discount Window, federal funds
purchased from correspondent banks and loan participation or sales of loans. The
Corporation also generates liquidity from the regular principal payments
received on its loan portfolio and on its mortgage-backed security portfolio.
INTEREST RATE SENSITIVITY: Interest rate sensitivity is a measure of the
relationship between interest-earning assets and supporting funds, which are
susceptible to changes in interest rates during comparable time periods.
Interest rate movements on deposits have made managing the Corporation's
interest rate sensitivity increasingly more important as a means of managing net
interest income. The Corporation's Asset/Liability Committee is responsible for
managing the exposure to changes in market interest rates. The "sensitivity" gap
quantifies the repricing mismatch between assets and supporting funds over
various time intervals. The cumulative gap position as a percentage of total
rate-sensitive assets provides one relative measure of the Corporation's
interest rate exposure.
22
The Corporation's ratio of rate-sensitive assets to rate-sensitive
liabilities was approximately 0.72 on December 31, 2006 for the next twelve
months subject to certain assumptions explained in the following paragraph.
Since this ratio is less than 1.00, the Corporation has a "negative gap"
position, which may cause its assets to reprice more slowly than its deposit
liabilities. In a declining interest rate environment, interest costs may be
expected to fall faster than the interest received on earning assets, thus
increasing the net interest spread. If interest rates increase, a negative gap
means that the interest received on earning assets may be expected to increase
more slowly than the interest paid on the Corporation's liabilities, therefore
decreasing the net interest spread. Management does not view this amount as
presenting an unusually high risk potential, although no assurances can be given
that the Corporation is not at risk from interest rate increases or decreases.
Expected maturities are contractual maturities adjusted for all projected
payments of principal. For investment securities, loans and long-term debt,
expected maturities are based upon contractual maturity or call dates, projected
repayments and prepayments of principal. The prepayment experience reflected
herein is based on historical experience combined with market consensus
expectations derived from independent external sources. The actual maturities of
these instruments could vary substantially if future prepayments differ from
historical experience. For non-maturity deposit liabilities, in accordance with
standard industry practice and the Corporation's own historical experience,
"decay factors" were used to estimate deposit runoff.
THE TABLE BELOW PRESENTS THE MATURITY AND REPRICING RELATIONSHIPS BETWEEN
INTEREST-EARNING ASSETS AND INTEREST-BEARING DEPOSITS AS OF DECEMBER 31, 2006
(IN THOUSANDS):
REPRICING OR 0-3 3-12 1-5 OVER 5
MATURITY DATE MONTHS MONTHS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------
ASSETS
SECURITIES $ 73,267 $ 63,570 $139,617 $ 64,897 $ 341,351
- -------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 103 -- -- -- 103
- -------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 6,965 -- -- -- 6,965
- -------------------------------------------------------------------------------------------------
LOANS (1) 173,657 170,110 399,881 124,625 868,273
=================================================================================================
TOTAL INTEREST-SENSITIVE ASSETS $253,992 $233,680 $539,498 $189,522 $1,216,692
=================================================================================================
DEPOSITS
CERTIFICATES OF DEPOSIT $107,979 $203,576 $ 53,114 $ -- $ 364,669
- -------------------------------------------------------------------------------------------------
SAVINGS 19,794 5,822 29,600 18,782 73,998
- -------------------------------------------------------------------------------------------------
MONEY MARKETS 189,658 29,379 146,761 1,076 366,874
- -------------------------------------------------------------------------------------------------
CHECKING 38,163 11,225 57,071 36,217 142,676
- -------------------------------------------------------------------------------------------------
BORROWED FUNDS 496 5,509 16,242 1,717 23,964
- -------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND
DEPOSITS 52,469 15,354 78,383 50,313 196,519
=================================================================================================
TOTAL INTEREST-SENSITIVE
LIABILITIES $408,559 $270,865 $381,171 $108,105 $1,168,700
=================================================================================================
ASSETS/LIABILITIES 0.62 0.86 1.42 1.75 1.04
=================================================================================================
ASSETS/LIABILITIES (CUMULATIVE) 0.62 0.72 0.97 1.04
=================================================================================================
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS.
23
MARKET RISK SENSITIVE INSTRUMENTS: A derivative financial instrument includes
futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps or options. However, the Corporation is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of the customers of the Corporation.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
conditions established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised.
The Corporation's exposure to market risk is reviewed on a regular basis
by the Asset/Liability Committee. Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic losses can
be reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect on net interest
income and to adjust the statement of condition to minimize the inherent risk
while at the same time maximize income. Management realizes certain risks are
inherent and that the goal is to identify and minimize the risks. Tools used by
management include the standard GAP report and interest rate shock simulation
report. The Corporation has no market risk sensitive instruments held for
trading purposes. Management believes the Corporation's market risk is
reasonable at this time.
THE FOLLOWING TABLE PRESENTS THE SCHEDULED MATURITY OF MARKET RISK SENSITIVE
INSTRUMENTS AS OF DECEMBER 31, 2006 (IN THOUSANDS):
AVERAGE
INTEREST WITHIN 1-5 OVER
MATURING IN: RATE 1 YEAR YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------
ASSETS
SECURITIES 4.70% $ 40,418 $ 71,437 $229,496 $ 341,351
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 4.96 103 -- -- 103
- ---------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 4.72 6,965 -- -- 6,965
- ---------------------------------------------------------------------------------------
LOANS (1) 5.98 140,348 363,750 364,175 868,273
=======================================================================================
TOTAL $187,834 $435,187 $593,671 $1,216,692
=======================================================================================
LIABILITIES
SAVINGS, CHECKING
AND MONEY MARKETS 2.52% $583,548 $ -- $ -- $ 583,548
- ---------------------------------------------------------------------------------------
CDS 4.40 311,555 53,114 -- 364,669
- ---------------------------------------------------------------------------------------
BORROWED FUNDS 4.66 4,000 16,214 3,750 23,964
=======================================================================================
TOTAL $899,103 $ 69,328 $ 3,750 $ 972,181
=======================================================================================
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS.
24
EFFECTS OF INFLATION AND CHANGING PRICES: The financial statements and related
financial data presented herein have been prepared in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same magnitude as the prices of goods and services.
The Corporation believes residential real estate values have stabilized,
however, if real estate prices in the Corporation's trade area decrease, the
values of real estate collateralizing the Corporation's loans and real estate
held by the Corporation as other real estate owned could also be adversely
affected.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" (FIN 48), which establishes a recognition threshold
and measurement for income tax positions recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions.
The first step is recognition and the second is measurement. For recognition, an
enterprise judgmentally determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements.
Tax positions that meet the more-likely-than-not recognition threshold at
the effective date of FIN 48 may be recognized or, continue to be recognized,
upon adoption of this Interpretation. The cumulative effect of applying the
provisions of FIN 48 shall be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Accordingly, the Corporation adopted FIN 48
on January 1, 2007. The adoption of FIN 48 did not have a material impact on the
Corporation's consolidated financial statements.
FASB issued FASB Statement No. 157, "Fair Value Measurements," in
September 2006. Statement 157 establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair-value measurements. Statement 157 only applies
to fair-value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. Statement 157 is effective for fair-value measures already
required or permitted by other standards for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. Early application is permissible only if no annual or interim
financial statements have been issued for the earlier periods. The Corporation
does not expect Statement 157 to have a material effect on its consolidated
financial statements at this time.
25
The Emerging Issues Task Force (EITF) approved a Consensus, EITF 06-4,
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements," in September 2006 which
would require that the deferred-compensation or postretirement benefit aspects
of an endorsement-type split-dollar life insurance arrangement be recognized as
a liability by the employer and that the obligation is not effectively settled
by the purchase of a life insurance policy. The liability for future benefits
would be recognized based on the substantive agreement with the employee, which
may be either to provide a future death benefit or to pay for the future cost of
the life insurance. The Corporation has 29 split-dollar life insurance
arrangements that provide a benefit to an employee that extends to
postretirement periods. The Corporation owns and controls these policies, an
endorsement split-dollar arrangement, and splits the insurance policy's death
benefit with the employee.
As ratified, EITF 06-4 will be effective for fiscal years beginning after
December 15, 2007. Early adoption will be permitted as of the beginning of an
entity's fiscal year. Entities adopting EITF 06-4 would choose between
retrospective application to all prior periods or treating the application of
the Consensus as a cumulative-effect adjustment to beginning retained earnings
or to other components of equity or net assets in the statement of financial
position. At the time the FASB staff provides final guidance on determining the
substance of the benefit provided our employees, the Compensation Committee of
the Corporation will decide on whether to amend, discontinue or maintain the
benefit in its current form. The Corporation will disclose this decision in the
accounting period in which it receives final guidance.
TRUST ASSETS
MARKET VALUE IN BILLIONS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$1.24 $1.42 $1.69 $1.76 $1.92
- ----------------------------------------------
'02 '03 '04 '05 '06
PGB TRUST AND INVESTMENTS: PGB Trust and Investments, a division of the Bank,
since its inception in 1972 has served in the roles of executor and trustee
while providing investment management, custodial, tax, retirement and financial
services to its growing client base. Officers from PGB Trust and Investments are
available to provide investment services at the Bank's Morristown and Gladstone
Branches.
The book value of assets under management in PGB Trust and Investments
increased from $1.29 billion at December 31, 2005 to $1.38 billion at December
31, 2006, an increase of 7 percent. The corresponding market value at December
31, 2006 was in excess of $1.92 billion. Fee income generated by PGB Trust and
Investments was $8.4 million, $7.6 million and $6.7 million in 2006, 2005 and
2004, respectively.
FORWARD LOOKING STATEMENTS:
The foregoing contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the Corporation. Such
statements are not historical facts and include expressions about the
Corporation's confidence, strategies and expectations about earnings, new
26
and existing programs and products, relationships, opportunities, technology and
market conditions. These statements may be identified by forward-looking
terminology such as "expect," "believe," or "anticipate," or expressions of
confidence like "strong," or "on-going," or similar statements or variations of
such terms. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities:
o The success 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 business.
o Inability to manage growth.
o Unexpected loan prepayment volume.
o Exposure to credit risks.
o Insufficient allowance for loan losses.
o Competition from other financial institutions.
o Adverse effects of government regulation.
o Decline in the levels of loan quality and origination volume.
o Decline in the volume of increase in trust assets or deposits.
The Corporation assumes no responsibility to update such forward-looking
statements in the future.
DIVIDENDS PER SHARE
IN DOLLARS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$0.33 $0.38 $0.42 $0.50 $0.58
- ----------------------------------------------
'02 '03 '04 '05 '06
BOOK VALUE PER SHARE
IN DOLLARS
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
$9.52 $10.43 $11.48 $11.97 $12.55
- ----------------------------------------------
'02 '03 '04 '05 '06
27
SELECTED CONSOLIDATED FINANCIAL DATA: The following is selected consolidated
financial data for the Corporation and its subsidiaries for the years indicated.
This information is derived from the historical consolidated financial
statements and should be read in conjunction with the Consolidated Financial
Statements and Notes.
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
SUMMARY EARNINGS:
Interest Income $ 67,267 $ 55,414 $ 44,917 $ 41,426 $ 43,947
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense 34,444 20,123 9,860 10,262 12,055
========================================================================================================================
Net Interest Income 32,823 35,291 35,057 31,164 31,892
========================================================================================================================
Provision for Loan Losses 414 391 613 592 780
========================================================================================================================
Net Interest Income After
Provision for Loan Losses 32,409 34,900 34,444 30,572 31,112
========================================================================================================================
Other Income,
Exclusive of Securities
(Losses)/gains, Net 12,048 10,944 9,777 8,788 7,642
- ------------------------------------------------------------------------------------------------------------------------
Other Expenses 28,945 27,492 25,178 22,557 21,081
- ------------------------------------------------------------------------------------------------------------------------
Securities (Losses)/gains, Net (1,781) 551 150 1,284 52
========================================================================================================================
Income Before Income
Tax Expense 13,731 18,903 19,193 18,087 17,725
- ------------------------------------------------------------------------------------------------------------------------
Income Tax Expense 3,505 5,773 6,084 5,787 5,800
========================================================================================================================
Net Income $ 10,226 $ 13,130 $ 13,109 $ 12,300 $ 11,925
========================================================================================================================
PER SHARE DATA: 2006 2005 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-BASIC $ 1.24 $ 1.58 $ 1.60 $ 1.51 $ 1.48
- ------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 1.22 1.56 1.56 1.47 1.45
- ------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 0.58 0.50 0.42 0.38 0.33
- ------------------------------------------------------------------------------------------------------------------------
BOOK VALUE END-OF-PERIOD 12.55 11.97 11.48 10.43 9.52
- ------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,268,226 8,286,926 8,200,681 8,122,433 8,083,088
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUIVALENTS
(DILUTIVE) 102,095 116,348 177,412 231,062 165,453
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END): 2006 2005 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,288,376 $1,255,383 $1,067,410 $ 968,154 $ 859,828
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES 55,165 78,084 87,128 97,701 168,066
- ------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 286,186 341,584 354,186 355,998 212,259
- ------------------------------------------------------------------------------------------------------------------------
LOANS 870,153 768,473 572,164 427,001 409,760
- ------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES 6,768 6,378 5,989 5,439 4,778
- ------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,144,736 1,041,996 935,666 845,771 769,688
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 103,763 99,155 94,669 85,054 77,158
- ------------------------------------------------------------------------------------------------------------------------
TRUST ASSETS (MARKET VALUE) 1,924,954 1,761,846 1,691,860 1,414,591 1,238,754
- ------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 4,794 4,143 3,226 2,760 2,207
- ------------------------------------------------------------------------------------------------------------------------
28
SELECTED PERFORMANCE RATIOS: 2006 2005 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL ASSETS 0.79% 1.12% 1.30% 1.34% 1.53%
- ------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL
SHAREHOLDERS' EQUITY 10.10 13.49 14.72 15.14 17.06
- ------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIO 46.88 31.56 24.61 22.44 18.51
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE TOTAL SHAREHOLDERS'
EQUITY TO AVERAGE ASSETS 7.84 8.30 8.82 8.84 8.95
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
TO AVERAGE ASSETS 2.24 2.34 2.49 2.45 2.70
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
TO AVERAGE ASSETS 0.80 0.98 0.98 1.10 0.99
- ------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS (AT PERIOD END):
- ------------------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS TO TOTAL LOANS 0.22% 0.04% 0.06% 0.04% 0.04%
- ------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS TO
TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04
- ------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOANS LOSSES TO
NON-PERFORMING LOANS 3.3X 16.5X 17.1X 25.3X 12.5X
- ------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOANS LOSSES TO
TOTAL LOANS 0.78% 0.83% 1.05% 1.27% 1.17%
- ------------------------------------------------------------------------------------------------------------------------
NET (RECOVERIES)/CHARGE-OFFS
TO AVERAGE LOANS PLUS
OTHER REAL ESTATE OWNED 0.00 0.00 0.01 (0.02) 0.01
- ------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RATIOS:
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE LOANS TO AVERAGE DEPOSITS 77.47% 69.25% 55.94% 51.23% 61.09%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY TO
TOTAL ASSETS 8.05 7.90 8.87 8.79 8.97
- ------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL TO RISK
WEIGHTED ASSETS 15.33 16.71 19.02 20.38 19.51
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK
WEIGHTED ASSETS 16.31 17.78 20.25 21.74 20.81
- ------------------------------------------------------------------------------------------------------------------------
TIER 1 LEVERAGE RATIO 8.20 8.66 9.18 8.91 9.19
- ------------------------------------------------------------------------------------------------------------------------
29
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR
THE PERIODS INDICATED:
SELECTED 2006 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------
INTEREST INCOME $ 15,794 $ 16,581 $ 17,524 $ 17,368
- ---------------------------------------------------------------------------------------
INTEREST EXPENSE 7,218 8,405 9,669 9,152
=======================================================================================
NET INTEREST INCOME 8,576 8,176 7,855 8,216
- ---------------------------------------------------------------------------------------
PROVISION FOR LOANS LOSSES 39 100 125 150
- ---------------------------------------------------------------------------------------
TRUST FEES 2,245 2,078 1,872 2,172
- ---------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES), NET 51 5 (1,837) --
- ---------------------------------------------------------------------------------------
OTHER INCOME 890 908 880 1,003
- ---------------------------------------------------------------------------------------
OTHER EXPENSES 7,118 7,386 7,210 7,231
- ---------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAX EXPENSE 4,605 3,681 1,435 4,010
- ---------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,359 986 44 1,116
=======================================================================================
NET INCOME $ 3,246 $ 2,695 $ 1,391 $ 2,894
=======================================================================================
EARNINGS PER SHARE-BASIC $ 0.39 $ 0.33 $ 0.17 $ 0.35
- ---------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 0.39 0.32 0.17 0.34
- ---------------------------------------------------------------------------------------
SELECTED 2005 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------
INTEREST INCOME $ 12,656 $ 13,400 $ 14,266 $ 15,092
- ---------------------------------------------------------------------------------------
INTEREST EXPENSE 3,629 4,455 5,504 6,535
=======================================================================================
NET INTEREST INCOME 9,027 8,945 8,762 8,557
- ---------------------------------------------------------------------------------------
PROVISION FOR LOANS LOSSES 131 197 150 (87)
- ---------------------------------------------------------------------------------------
TRUST FEES 2,013 1,906 1,895 1,826
- ---------------------------------------------------------------------------------------
SECURITIES GAINS, NET 298 37 216 --
- ---------------------------------------------------------------------------------------
OTHER INCOME 839 818 828 819
- ---------------------------------------------------------------------------------------
OTHER EXPENSES 6,574 7,020 6,861 7,037
=======================================================================================
NET INCOME BEFORE INCOME TAX EXPENSE 5,472 4,489 4,690 4,252
- ---------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,769 1,271 1,475 1,258
- ---------------------------------------------------------------------------------------
NET INCOME $ 3,703 $ 3,218 $ 3,215 $ 2,994
=======================================================================================
EARNINGS PER SHARE-BASIC $ 0.45 $ 0.39 $ 0.39 $ 0.36
- ---------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 0.44 0.38 0.38 0.36
- ---------------------------------------------------------------------------------------
30
MANAGEMENT REPORT
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Corporation's internal control system was designed to provide reasonable
assurance to the Corporation's management and board of directors regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of the Corporation's internal
control over financial reporting as of December 31, 2006. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based upon our assessment we believe that, as of December 31, 2006,
the Corporation's internal control over financial reporting is effective based
upon those criteria. The Corporation's independent auditors have issued an audit
report on our assessment of, and the effective operation of, the Corporation's
internal control over financial reporting. This report begins on the next page.
/s/ Frank A. Kissel /s/ Arthur F. Birmingham
Frank A. Kissel Arthur F. Birmingham
Chairman of the Board and Executive Vice President,
Chief Executive Officer Chief Financial Officer and
Chief Accounting Officer
February 27, 2007
31
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that
Peapack-Gladstone Financial Corporation and subsidiary (the "Corporation")
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Corporation's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
32
In our opinion, management's assessment that Peapack-Gladstone Financial
Corporation and subsidiary maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Also,
in our opinion, Peapack-Gladstone Financial Corporation and subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of condition of Peapack-Gladstone Financial Corporation and subsidiary as of
December 31, 2006 and 2005, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006, and our report dated February 27,
2007 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
33
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of condition of
Peapack-Gladstone Financial Corporation and subsidiary (the "Corporation") as of
December 31, 2006 and 2005, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2006
and 2005, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Peapack-Gladstone Financial Corporation and subsidiary's internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
27, 2007 expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.
As discussed in Note 14 to the consolidated financial statements,
effective January 1, 2006, the Corporation adopted SEC Staff Accounting Bulletin
No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements".
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
34
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005
- -------------------------------------------------------------------------------------------
ASSETS
CASH AND DUE FROM BANKS $ 23,190 $ 19,573
- -------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 103 2,631
- -------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 6,965 1,295
===========================================================================================
TOTAL CASH AND CASH EQUIVALENTS 30,258 23,499
===========================================================================================
INVESTMENT SECURITIES HELD TO MATURITY (APPROXIMATE
MARKET VALUE $54,523 IN 2006 AND $77,286 IN 2005) 55,165 78,084
- -------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 286,186 341,584
- -------------------------------------------------------------------------------------------
LOANS 870,153 768,473
===========================================================================================
LESS: ALLOWANCE FOR LOAN LOSSES 6,768 6,378
===========================================================================================
NET LOANS 863,385 762,095
- -------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 24,059 21,412
- -------------------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 5,181 4,828
- -------------------------------------------------------------------------------------------
CASH SURRENDER VALUE OF LIFE INSURANCE 18,689 17,957
- -------------------------------------------------------------------------------------------
OTHER ASSETS 5,453 5,924
===========================================================================================
TOTAL ASSETS $ 1,288,376 $ 1,255,383
===========================================================================================
LIABILITIES
DEPOSITS:
NONINTEREST-BEARING DEMAND DEPOSITS $ 196,519 $ 185,854
- -------------------------------------------------------------------------------------------
INTEREST-BEARING DEPOSITS:
CHECKING 142,676 176,175
- -------------------------------------------------------------------------------------------
SAVINGS 73,998 90,744
- -------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNTS 366,874 281,068
- -------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT OVER $100,000 126,014 93,903
- -------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT LESS THAN $100,000 238,655 214,252
===========================================================================================
TOTAL DEPOSITS 1,144,736 1,041,996
- -------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS -- 77,500
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT 23,964 31,705
- -------------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 15,913 5,027
===========================================================================================
TOTAL LIABILITIES 1,184,613 1,156,228
===========================================================================================
SHAREHOLDERS' EQUITY
COMMON STOCK (NO PAR VALUE; STATED VALUE $0.83
PER SHARE; AUTHORIZED 20,000,000 SHARES;
ISSUED SHARES, 8,497,463 AT DECEMBER 31, 2006 AND 8,473,718
AT DECEMBER 31, 2005; OUTSTANDING SHARES, 8,270,973 AT
DECEMBER 31, 2006 AND 8,284,715 AT DECEMBER 31, 2005) 7,081 7,061
- -------------------------------------------------------------------------------------------
SURPLUS 89,372 88,973
- -------------------------------------------------------------------------------------------
TREASURY STOCK AT COST, 226,490 SHARES IN 2006
- -------------------------------------------------------------------------------------------
AND 189,003 SHARES IN 2005 (4,999) (4,022)
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS 15,038 10,100
- -------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF INCOME TAX BENEFIT (2,729) (2,957)
===========================================================================================
TOTAL SHAREHOLDERS' EQUITY 103,763 99,155
===========================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,288,376 $ 1,255,383
===========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2004
- ------------------------------------------------------------------------------------
INTEREST INCOME
INTEREST AND FEES ON LOANS $ 49,510 $ 38,559 $ 27,542
- ------------------------------------------------------------------------------------
INTEREST ON INVESTMENT SECURITIES
HELD TO MATURITY:
TAXABLE 1,068 1,591 2,650
- ------------------------------------------------------------------------------------
TAX-EXEMPT 1,344 1,188 943
- ------------------------------------------------------------------------------------
INTEREST AND DIVIDENDS ON SECURITIES
AVAILABLE FOR SALE:
TAXABLE 14,789 13,619 13,342
- ------------------------------------------------------------------------------------
TAX-EXEMPT 349 358 363
- ------------------------------------------------------------------------------------
INTEREST ON FEDERAL FUNDS SOLD 146 73 58
- ------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 61 26 19
====================================================================================
TOTAL INTEREST INCOME 67,267 55,414 44,917
====================================================================================
INTEREST EXPENSE
INTEREST ON CHECKING ACCOUNTS 1,044 2,192 991
- ------------------------------------------------------------------------------------
INTEREST ON SAVINGS AND MONEY MARKET ACCOUNTS 12,522 6,304 2,686
- ------------------------------------------------------------------------------------
INTEREST ON CERTIFICATES OF DEPOSIT OVER $100,000 5,406 2,678 1,320
- ------------------------------------------------------------------------------------
INTEREST ON OTHER CERTIFICATES OF DEPOSIT 10,099 5,931 3,514
- ------------------------------------------------------------------------------------
INTEREST ON SHORT-TERM BORROWINGS 4,305 1,879 345
- ------------------------------------------------------------------------------------
INTEREST ON LONG-TERM DEBT 1,068 1,139 1,004
====================================================================================
TOTAL INTEREST EXPENSE 34,444 20,123 9,860
====================================================================================
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 32,823 35,291 35,057
====================================================================================
PROVISION FOR LOAN LOSSES 414 391 613
====================================================================================
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 32,409 34,900 34,444
- ------------------------------------------------------------------------------------
OTHER INCOME
TRUST FEES 8,367 7,640 6,720
- ------------------------------------------------------------------------------------
SERVICE CHARGES AND FEES 2,310 2,220 2,059
- ------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 837 802 793
- ------------------------------------------------------------------------------------
OTHER INCOME 534 282 205
- ------------------------------------------------------------------------------------
SECURITIES (LOSSES)/GAINS, NET (1,781) 551 150
====================================================================================
TOTAL OTHER INCOME 10,267 11,495 9,927
====================================================================================
OTHER EXPENSES
SALARIES AND EMPLOYEE BENEFITS 15,698 14,682 13,898
- ------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 6,909 6,705 5,668
- ------------------------------------------------------------------------------------
OTHER EXPENSES 6,338 6,105 5,612
====================================================================================
TOTAL OTHER EXPENSES 28,945 27,492 25,178
====================================================================================
INCOME BEFORE INCOME TAX EXPENSE 13,731 18,903 19,193
- ------------------------------------------------------------------------------------
INCOME TAX EXPENSE 3,505 5,773 6,084
====================================================================================
NET INCOME $ 10,226 $ 13,130 $ 13,109
====================================================================================
EARNINGS PER SHARE
BASIC $ 1.24 $ 1.58 $ 1.60
- ------------------------------------------------------------------------------------
DILUTED 1.22 1.56 1.56
====================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003
7,416,031 SHARES OUTSTANDING $ 6,274 $ 61,959 $ (2,391) $ 16,557 $ 2,655 $ 85,054
- -------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 2004 13,109 13,109
UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME
TAX BENEFIT OF $796) (1,119)
LESS: RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $52) 98
--------
NET UNREALIZED HOLDING
LOSSES ON SECURITIES ARISING
DURING THE PERIOD (NET OF
INCOME TAX BENEFIT OF $848) (1,217) (1,217)
------------
TOTAL COMPREHENSIVE INCOME 11,892
DIVIDENDS DECLARED
($0.42 PER SHARE) (3,226) (3,226)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS, 83,002 SHARES 85 1,340 1,425
COMMON STOCK DIVIDEND
(TEN PERCENT), 747,009 SHARES 635 24,692 (25,327) --
TREASURY STOCK TRANSACTIONS,
15,289 SHARES (476) (476)
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004
8,246,042 SHARES OUTSTANDING $ 6,994 $ 87,991 $ (2,867) $ 1,113 $ 1,438 $ 94,669
- -------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 2005 13,130 13,130
UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME
TAX BENEFIT OF $2,504) (4,037)
LESS: RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $193) 358
---------
NET UNREALIZED HOLDING
LOSSES ON SECURITIES ARISING
DURING THE PERIOD (NET OF
INCOME TAX BENEFIT OF
$2,697) (4,395) (4,395)
------------
TOTAL COMPREHENSIVE INCOME 8,735
DIVIDENDS DECLARED
($0.50 PER SHARE) (4,143) (4,143)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS, 68,673 SHARES 67 982 1,049
TREASURY STOCK TRANSACTIONS
41,420 SHARES (1,155) (1,155)
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005
8,284,715 SHARES OUTSTANDING $ 7,061 $ 88,973 $ (4,022) $ 10,100 $ (2,957) $ 99,155
- -------------------------------------------------------------------------------------------------------------------
37
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY CONTINUED
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL
- --------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT ADJUSTMENT
RESULTING FROM THE ADOPTION OF
SAB NO. 108, NET OF INCOME
TAX BENEFIT $341 (494) (494)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2006,
AS ADJUSTED $ 7,061 $ 88,973 $ (4,022) $ 9,606 $ (2,957) $ 98,661
- --------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 2006 10,226 10,226
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME
TAX OF $398) 416
LESS: RECLASSIFICATION
ADJUSTMENT FOR LOSSES
INCLUDED IN NET INCOME
(NET OF INCOME TAX
BENEFIT OF $623) (1,158)
---------
NET UNREALIZED HOLDING
GAINS ON SECURITIES ARISING
DURING THE PERIOD (NET OF
INCOME TAX OF $1,021) 1,574 1,574
---------
TOTAL COMPREHENSIVE INCOME 11,800
ADJUSTMENT TO INITIALLY APPLY
FAS STATEMENT 158 (NET OF TAX (1,346) (1,346)
BENEFIT OF $929)
DIVIDENDS DECLARED
($0.58 PER SHARE) (4,794) (4,794)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS, 13,742 SHARES 20 399 419
TREASURY STOCK TRANSACTIONS,
37,484 SHARES (977) (977)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2006
8,270,973 SHARES OUTSTANDING $ 7,081 $ 89,372 $ (4,999) $ 15,038 $ (2,729) $ 103,763
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
NET INCOME $ 10,226 $ 13,130 $ 13,109
- --------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 2,068 1,991 1,658
- --------------------------------------------------------------------------------------------------
AMORTIZATION OF PREMIUM AND ACCRETION OF DISCOUNT ON
SECURITIES, NET 498 1,009 1,450
- --------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 414 391 613
- --------------------------------------------------------------------------------------------------
DEFERRED TAXES (1,786) (2,008) (291)
- --------------------------------------------------------------------------------------------------
LOSS/(GAIN) ON SALE OF SECURITIES, NET 1,781 (298) (150)
- --------------------------------------------------------------------------------------------------
GAIN ON LOANS SOLD (3) (13) (4)
- --------------------------------------------------------------------------------------------------
GAIN ON DISPOSAL OF FIXED ASSETS (15) (28) --
- --------------------------------------------------------------------------------------------------
INCREASE IN CASH SURRENDER VALUE OF LIFE INSURANCE (732) (704) (705)
- --------------------------------------------------------------------------------------------------
INCREASE IN ACCRUED INTEREST RECEIVABLE (353) (453) (80)
- --------------------------------------------------------------------------------------------------
DECREASE/(INCREASE) IN OTHER ASSETS 2,434 (2,305) 1,662
- --------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN ACCRUED EXPENSES AND
OTHER LIABILITIES 7,767 3,792 (2,569)
==================================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,299 14,504 14,693
==================================================================================================
INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES
HELD TO MATURITY 32,505 35,119 25,669
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 66,093 51,383 42,859
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM CALLS OF INVESTMENT SECURITIES
HELD TO MATURITY 11,996 5,685 2,495
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES AND CALLS OF SECURITIES
AVAILABLE FOR SALE 60,330 42,225 102,706
- --------------------------------------------------------------------------------------------------
PURCHASE OF INVESTMENT SECURITIES HELD TO MATURITY (9,722) (32,000) (18,036)\
- --------------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (82,569) (88,569) (146,673)
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES OF LOANS 622 2,316 769
- --------------------------------------------------------------------------------------------------
PURCHASE OF LOANS (26,774) (191,842) (74,452)
- --------------------------------------------------------------------------------------------------
NET INCREASE IN LOANS (75,549) (6,772) (71,539)
- --------------------------------------------------------------------------------------------------
PURCHASES OF PREMISES AND EQUIPMENT (4,715) (3,259) (6,689)
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM DISPOSAL OF PREMISES AND EQUIPMENT 15 47 --
==================================================================================================
NET CASH USED IN INVESTING ACTIVITIES (27,768) (185,667) (142,891)
==================================================================================================
FINANCING ACTIVITIES:
NET INCREASE IN DEPOSITS 102,740 106,330 89,895
- --------------------------------------------------------------------------------------------------
NET (DECREASE)/INCREASE IN SHORT-TERM BORROWINGS (77,500) 77,500 --
- --------------------------------------------------------------------------------------------------
PROCEEDS FROM LONG-TERM DEBT -- -- 8,000
- --------------------------------------------------------------------------------------------------
REPAYMENTS OF LONG-TERM DEBT (7,741) (1,689) (4,638)
- --------------------------------------------------------------------------------------------------
DIVIDENDS PAID (4,713) (3,891) (3,134)
- --------------------------------------------------------------------------------------------------
STOCK-BASED COMPENSATION 59 -- --
- --------------------------------------------------------------------------------------------------
TAX BENEFIT ON STOCK OPTION EXERCISES 29 347 477
- --------------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 331 702 948
- --------------------------------------------------------------------------------------------------
PURCHASE OF TREASURY STOCK (977) (1,155) (476)
==================================================================================================
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,228 178,144 91,072
==================================================================================================
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 6,759 6,981 (37,126)
==================================================================================================
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,499 16,518 53,644
==================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,258 $ 23,499 $ 16,518
==================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
INTEREST $ 32,857 $ 18,399 $ 9,578
- --------------------------------------------------------------------------------------------------
INCOME TAXES 2,222 8,307 6,437
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION: The consolidated financial
statements of Peapack-Gladstone Financial Corporation (the "Corporation") are
prepared on the accrual basis and include the accounts of the Corporation and
its wholly-owned subsidiary, Peapack-Gladstone Bank. The consolidated statements
also include the Bank's wholly-owned subsidiary, Peapack-Gladstone Investment
Company and its wholly-owned subsidiary, Peapack-Gladstone Mortgage Group, Inc.
While the following footnotes include the collective results of
Peapack-Gladstone Financial Corporation and Peapack-Gladstone Bank, these
footnotes primarily reflect the Bank's and its subsidiaries' activities. All
significant intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements.
BUSINESS: Peapack-Gladstone Bank, the subsidiary of the Corporation, provides a
full range of banking services to individual and corporate customers through its
branch operations in central New Jersey. The Bank is subject to competition from
other financial institutions, is regulated by certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the statement of condition and revenues and expenses for that period. Actual
results could differ from those estimates.
SEGMENT INFORMATION: Substantially all of the Corporation's business is
conducted through its banking subsidiary and involves the delivery of loan and
deposit products to customers. The Corporation makes operating decisions and
assesses performance based on an ongoing review of these banking operations,
which constitute the only operating segment for financial reporting.
CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, cash
and cash equivalents include cash and due from banks, interest-earning deposits
and federal funds sold. Generally, federal funds are sold for one-day periods.
SECURITIES: Investment securities are comprised of debt securities that the
Corporation has the positive intent and ability to hold to maturity. Such
securities are stated at cost, adjusted for amortization of premium and
accretion of discount on the level-yield method, over the term of the
investments.
Securities that cannot be categorized as investment securities are
classified as securities available for sale. Such securities include debt
securities to be held for indefinite periods of time and not intended to be held
to maturity, as well as marketable equity securities. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes. Securities
available for sale are carried at estimated market value and unrealized holding
gains and losses (net of related tax effects) on such securities are excluded
from earnings, but are included in Shareholders' Equity as Accumulated Other
Comprehensive Income/(Loss). Upon realization, such gains or losses are included
in earnings on a trade-date basis using the specific identification method.
40
A decline in the estimated market value of any security below cost that is
deemed other-than-temporary results in a reduction in the carrying amount to
estimated market value. The impairment loss is charged to earnings and a new
cost basis of the security is established. In determining whether an impairment
is other-than temporary, the Corporation considers, among other things, the
duration of the impairment, changes in value subsequent to year end, forecasted
performance of the issuer and the Corporation's intent and ability to hold the
security until a market price recovery.
Debt securities that are purchased and held primarily for the purpose of
being sold in the near term are classified as trading. Trading securities are
carried at market value with realized and unrealized gains and losses reported
in non-interest income. There were no trading securities at December 31, 2006 or
2005.
LOANS: Loans are stated at the principal amount outstanding. Interest on loans
is recognized based upon the principal amount outstanding. Loans are stated at
face value, less unearned income and net deferred fees. Loan origination fees
and certain direct loan origination costs are deferred and recognized over the
life of the loan as an adjustment, on a level-yield method, to the loan's yield.
Loans are considered past due when they are not paid in accordance with
contractual terms. The accrual of income on loans, including impaired loans, is
discontinued if certain factors indicate reasonable doubt as to the timely
collectibility of such interest, generally when the loan becomes over 90 days
delinquent. A non-accrual loan is not returned to an accrual status until
factors indicating doubtful collection no longer exist. Commercial loans are
generally charged off after an analysis is completed which indicates that
collectibility of the full principal balance is in doubt. Consumer loans are
generally charged off after they become 120 days past due. Mortgage loans are
not generally placed on a nonaccrual status unless the value of the real estate
has deteriorated to the point that a potential loss of principal or interest
exists. Subsequent payments are credited to income only if collection of
principal is not in doubt. If principal and interest payments are brought
contractually current and future collectibility is reasonably assured, loans are
returned to accrual status. Mortgage loans are generally charged off when the
value of the underlying collateral does not cover the outstanding principal
balance. The majority of the Corporation's loans are secured by real estate in
the State of New Jersey.
The Corporation defines an impaired loan as an investment in a loan that
is on non-accrual status with a principal outstanding balance in excess of $100
thousand. Residential mortgage loans, a group of homogeneous loans that are
collectively evaluated for impairment, and consumer loans are excluded. At
December 31, 2006, there were two impaired loans to one customer totaling $1.5
million. There were no impaired loans for the years ended December 31, 2005 and
2004.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level considered adequate to provide for probable loan losses inherent in the
portfolio. The allowance is based on management's evaluation of the loan
portfolio considering 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
41
process, periodically review the allowance for loan losses. Such agencies may
require the Corporation to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
fair value of the collateral. Impairment losses are included in the allowance
for loan losses through provisions charged to operations.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation charges are computed using the
straight-line method. Equipment and other fixed assets are depreciated over the
estimated useful lives, which range from three to ten years. Premises are
depreciated over the estimated useful life of 40 years, while leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the term of the lease. Expenditures for maintenance
and repairs are expensed as incurred. The cost of major renewals and
improvements are capitalized. Gains or losses realized on routine dispositions
are recorded as other income or other expense.
OTHER REAL ESTATE OWNED: Other real estate owned is carried at fair value minus
estimated costs to sell, based on an independent appraisal. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Any subsequent write-downs that may be
required to the carrying value of the properties or losses on the sale of
properties are charged to the valuation allowance on other real estate owned or
to other expense. The Corporation had no other real estate owned as of December
31, 2006 and 2005.
INCOME TAXES: The Corporation files a consolidated Federal income tax return.
Separate State income tax returns are filed for each subsidiary based on current
laws and regulations.
The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in its
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on the enacted tax rates applicable to taxable income for
the years in which these temporary differences are expected to be recovered or
settled. Such tax assets and liabilities are adjusted for the effect of a change
in tax rates in the period of enactment.
In February 2006, the State of New Jersey Division of Taxation adopted new
regulations relating to the dividends paid by Real Estate Investment Trusts
(REIT). Dividends received from a REIT are now ineligible for inclusion in the
dividends received deduction for corporations. This regulation applies to
dividends paid on or after February 6, 2006. This new regulation did not have a
material impact on the Corporation's financial condition or results of
operations during 2006.
BENEFIT PLANS: The Corporation has a defined benefit pension plan covering
substantially all of its salaried employees, which is more fully described in
Note 11. The benefits are based on an employee's compensation during the five
years before retirement, age at retirement and years of service. The Corporation
makes annual contributions to the plan equal to the maximum amount that can be
deducted for income tax purposes.
Effective December 31, 2006, the Corporation adopted FASB Statement No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans"
42
(Statement No. 158), which requires employers to recognize on their balance
sheets the funded status of pension and other postretirement benefit plans.
Statement 158 will also require fiscal-year-end measurements of plan assets and
benefit obligations, eliminating the use of earlier measurement dates currently
permissible. The new measurement-date requirement will not be effective until
fiscal years ending after December 15, 2008 and the Corporation will comply with
this requirement at that time. Statement 158 amends Statements 87, 88, 106 and
132R, but retains most of their measurement and disclosure guidance and will not
change the amounts recognized in the income statement as net periodic benefit
cost. The Corporation recorded $2.3 million as unfunded pension benefit
obligation at December 31, 2006.
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, which are more fully described in Note 12.
The options granted under these plans are exercisable at a price equal to the
fair market value of common stock on the date of grant and expire not more than
ten years after the date of grant. Stock options may vest during a period of up
to five years after the date of grant.
As of January 1, 2006, the Corporation adopted the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No. 123
(Revised 2004), Share-Based Payment, (Statement 123R), under the modified
prospective transition method. Statement 123R requires public companies to
recognize compensation expense related to stock-based compensation awards over
the period during which an employee is required to provide service for the
award. Under the modified prospective transition method, the fair value
recognition provisions apply only to new awards or awards modified after January
1, 2006. Additionally, the fair value of existing unvested awards at the date of
adoption is recorded in salaries and benefits expense over the remaining
requisite service period. Results from prior periods have not been restated.
The following table represents the impact of the adoption of Statement
123R on the Corporation's financial statements.
UNDER UNDER
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) STATEMENT 123R APB 25 DIFFERENCE
- ----------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAX EXPENSE $ 13,731 $ 13,790 $ 59
- ----------------------------------------------------------------------------------
NET INCOME 10,226 10,285 59
- ----------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC $ 1.24 $ 1.24 $ --
- ----------------------------------------------------------------------------------
EARNINGS PER SHARE - DILUTED 1.22 1.22 --
- ----------------------------------------------------------------------------------
Prior to January 1, 2006, the Corporation had accounted for its stock
option plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25 (APB 25) and related Interpretations. No
stock-based compensation cost was reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of
their underlying common stock on the date of grant.
On December 8, 2005, the Board of Directors accelerated the vesting of
116,928 of unvested stock options awarded to outside directors and senior
officers under the Corporation's 1998 and 2002 Stock Option Plans and 1998 and
2002 Stock Option Plans for Outside Directors. All but 1,000 of the total
accelerated options had an exercise price greater than $28.25, the closing price
of the Corporation's common stock on the American Stock Exchange on December 8,
2005. As a result of the acceleration,
43
options to acquire the shares, with exercise prices ranging from $26.73 per
share to $30.00 per share, which otherwise would have vested from time to time
over the next four and one-half years, became immediately exercisable.
The Board's decision to accelerate the vesting of these options was in
response to a review of the Corporation's long-term incentive compensation
programs in light of changes in market practices and recently issued changes in
accounting rules resulting from the issuance by the FASB of Statement 123(R),
which the Corporation has adopted effective January 1, 2006. Management believed
that accelerating the vesting of these options prior to the adoption of
Statement 123(R) resulted in the Corporation not being required to recognize
aggregate compensation expense of $1.21 million for the five years ending
December 31, 2010.
The following table illustrates the effect on net income and earnings per
share for the years ended December 31, 2005 and 2004 as if the Corporation had
applied the fair value recognition provisions of Statement 123R, to stock-based
employee compensation in those years.
(IN THOUSANDS EXCEPT PER SHARE DATA) 2005 2004
- --------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $ 13,130 $ 13,109
- --------------------------------------------------------------------------------
LESS: TOTAL STOCK-BASED COMPENSATION
EXPENSE DETERMINED UNDER THE FAIR VALUE BASED
METHOD ON ALL STOCK OPTIONS, NET OF RELATED
TAX EFFECTS 1,603 1,559
================================================================================
PRO FORMA $ 11,527 $ 11,550
================================================================================
EARNINGS PER SHARE:
AS REPORTED
- --------------------------------------------------------------------------------
BASIC $ 1.58 $ 1.60
- --------------------------------------------------------------------------------
DILUTED 1.56 1.56
- --------------------------------------------------------------------------------
PRO FORMA
- --------------------------------------------------------------------------------
BASIC $ 1.39 $ 1.41
- --------------------------------------------------------------------------------
DILUTED 1.37 1.38
- --------------------------------------------------------------------------------
EARNINGS PER SHARE: In calculating earnings per share, there are no adjustments
to net income, which is the numerator of both the Basic and Diluted EPS. The
weighted average number of shares outstanding used in the denominator for
Diluted EPS is increased over the denominator used for Basic EPS by the effect
of potentially dilutive common stock equivalents utilizing the treasury stock
method. Common stock equivalents are common stock options outstanding.
The following table shows the calculation of both Basic and Diluted
earnings per share for the years ended December 31, 2006, 2005 and 2004:
(IN THOUSANDS EXCEPT PER SHARE DATA) 2006 2005 2004
- -------------------------------------------------------------------------------------
NET INCOME $ 10,226 $ 13,130 $ 13,109
=====================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,268,226 8,286,926 8,200,681
- -------------------------------------------------------------------------------------
PLUS: COMMON STOCK EQUIVALENTS 102,095 116,348 177,412
- -------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,370,321 8,403,274 8,378,093
=====================================================================================
EARNINGS PER SHARE:
BASIC $ 1.24 $ 1.58 $ 1.60
- -------------------------------------------------------------------------------------
DILUTED 1.22 1.56 1.56
- -------------------------------------------------------------------------------------
Options to purchase 317,209 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 2006 because the option price was
greater than the average
44
market price. Options to purchase 325,814 shares of common stock at a weighted
average price of $28.94 per share were outstanding and were not included in the
computation of diluted earnings per share in 2005 because the option price was
greater than the average market price. Options to purchase 12,510 shares of
common stock at a weighted average price of $30.05 per share were outstanding
and were not included in the computation of diluted earnings per share in 2004
because the option price was greater than the average market price.
TREASURY STOCK: Treasury stock is recorded using the cost method and is
presented as an unallocated reduction of shareholders' equity.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and the change
during the period in net unrealized gains (losses) on securities available for
sale, net of tax, and is presented in the consolidated statements of changes in
shareholders' equity.
RECLASSIFICATION: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2006 presentation.
2. INVESTMENT SECURITIES HELD TO MATURITY
A summary of amortized cost and approximate market value of investment
securities held to maturity included in the consolidated statements of condition
as of December 31, 2006 and 2005 follows:
2006
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------
U.S. TREASURY $ 1,000 $ 2 $ (1) $ 1,001
- ---------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 17,350 60 (245) 17,165
- ---------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 36,815 29 (487) 36,357
=================================================================================
TOTAL $ 55,165 $ 91 $ (733) $54,523
=================================================================================
2005
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------
U.S. TREASURY $ 499 $ -- $ (6) $ 493
- -----------------------------------------------------------------------------------
U.S. GOVERNMENT-SPONSORED AGENCIES 1,497 12 -- 1,509
- -----------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 21,435 96 (271) 21,260
- -----------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 54,653 39 (668) 54,024
- -----------------------------------------------------------------------------------
TOTAL $ 78,084 $ 147 $ (945) $77,286
===================================================================================
The amortized cost and approximate market value of investment securities
held to maturity as of December 31, 2006, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
MATURING IN: APPROXIMATE
(IN THOUSANDS) AMORTIZED COST MARKET VALUE
- --------------------------------------------------------------------------------
ONE YEAR OR LESS $ 12,322 $ 12,274
- --------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 19,774 19,408
- --------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 5,719 5,676
================================================================================
37,815 37,358
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 17,350 17,165
================================================================================
TOTAL $ 55,165 $ 54,523
================================================================================
45
Securities having an approximate carrying value of $300 thousand as of
December 31, 2006 and 2005 were pledged to secure public funds and for other
purposes required or permitted by law.
The following table presents the Corporation's investment securities held
to maturity with continuous unrealized losses and the approximate market value
of these investments as of December 31, 2006 and 2005.
2006
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ----------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ----------------------------------------------------------------------------------------------------------------------
U.S TREASURY $ -- $ -- $ 499 $ (1) $ 499 $ (1)
- ----------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 1,298 (14) 9,202 (231) 10,500 (245)
- ----------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS 7,753 (30) 24,850 (457) 32,603 (487)
======================================================================================================================
TOTAL $ 9,051 $ (44) $ 34,551 $ (689) $ 43,602 $ (733)
======================================================================================================================
2005
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ----------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ----------------------------------------------------------------------------------------------------------------------
U.S TREASURY $ 493 $ (6) $ -- $ -- $ 493 $ (6)
- ----------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 7,331 (95) 6,757 (176) 14,088 (271)
- ----------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS 34,879 (278) 14,316 (390) 49,195 (668)
======================================================================================================================
TOTAL $ 42,703 $ (379) $ 21,073 $ (566) $ 63,776 $ (945)
======================================================================================================================
Management has determined that these unrealized losses for debt securities
are temporary and due to interest rate fluctuations rather than the credit
ratings of the issuers. The Corporation has a policy to purchase only from
issuers with an investment grade credit rating and monitors credit ratings
periodically.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government-sponsored agencies. It is expected
that the securities would not be settled at a price substantially less than the
amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because
the Corporation has the intent to hold these investments until maturity, these
investments are not considered other-than-temporarily impaired.
Most of the securities issued by state and political subdivisions in the
table above are issued by municipalities located in New Jersey. These
investments represent purchases in municipal bonds, which generally have lower
coupons; however many are not taxable by the Federal government and their
effective yield is higher. Because the Corporation intends to hold these
securities to mature at par, no loss is anticipated.
46
3. SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate market value of securities
available for sale included in the consolidated statements of condition as of
December 31, 2006 and 2005 follows:
2006
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT-SPONSORED
AGENCIES $ 57,265 $ 46 $ (489) $ 56,822
- ----------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 143,680 25 (2,969) 140,736
- ----------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS 22,998 99 (10) 23,087
- ----------------------------------------------------------------------------------------
OTHER SECURITIES 61,179 1,293 (239) 62,233
========================================================================================
TOTAL DEBT SECURITIES 285,122 1,463 (3,707) 282,878
- ----------------------------------------------------------------------------------------
FRB AND FHLB STOCK 3,308 -- -- 3,308
========================================================================================
TOTAL $ 288,430 $ 1,463 $ (3,707) $ 286,186
========================================================================================
2005
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT-SPONSORED
AGENCIES $ 114,442 $ 162 $ (1,983) $ 112,621
- ----------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 185,226 34 (3,820) 181,440
- ----------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 8,909 163 (10) 9,062
- ----------------------------------------------------------------------------------------
OTHER SECURITIES 31,124 801 (186) 31,739
========================================================================================
TOTAL DEBT SECURITIES 339,701 1,160 (5,999) 334,862
- ----------------------------------------------------------------------------------------
FRB AND FHLB STOCK 6,722 -- -- 6,722
========================================================================================
TOTAL $ 346,423 $ 1,160 $ (5,999) $ 341,584
========================================================================================
The amortized cost and approximate market value of debt securities
available for sale as of December 31, 2006, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
MATURING IN: APPROXIMATE
(IN THOUSANDS) AMORTIZED COST MARKET VALUE
- --------------------------------------------------------------------------------
ONE YEAR OR LESS $ 27,368 $ 28,096
- --------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 41,932 41,713
- --------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 2,644 2,703
- --------------------------------------------------------------------------------
AFTER TEN YEARS 69,498 69,630
================================================================================
141,442 142,142
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 143,680 140,736
================================================================================
TOTAL $ 285,122 $ 282,878
================================================================================
Securities having an approximate carrying value of $9.5 million and $19.2
million as of December 31, 2006 and December 31, 2005, respectively, were
pledged to secure public funds and for other purposes required or permitted by
law. Gross gains on sales of securities of $83 thousand, $443 thousand and $747
thousand and gross losses on
47
sales of securities of $1.9 million, $145 thousand and $37 thousand were
realized in 2006, 2005 and 2004, respectively. In 2005, the Corporation
recognized $253 thousand in gains on the non-monetary exchange of equity
securities. In 2004, the Corporation recognized a non-cash charge of $560
thousand related to an other-than-temporary impairment charge for Fannie Mae
(FNMA) and Freddie Mac (FHLMC) preferred stock with a cost of $2.0 million.
The following table presents the Corporation's available for sale
securities with continuous unrealized losses and the approximate market value of
these investments.
2006
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ---------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ---------------------------------------------------------------------------------------------------
U.S. GOVERNMENT-
SPONSORED AGENCIES $ 2,985 $ (14) $ 41,775 $ (475) $ 44,760 $ (489)
- ---------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 18,905 (123) 113,178 (2,846) 132,083 (2,969)
- ---------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS -- -- 328 (10) 328 (10)
- ---------------------------------------------------------------------------------------------------
OTHER SECURITIES 11,128 (78) 3,401 (99) 14,529 (177)
- ---------------------------------------------------------------------------------------------------
MARKETABLE EQUITY
SECURITIES 437 (40) 174 (22) 611 (62)
===================================================================================================
TOTAL $33,455 $ (255) $ 158,856 $ (3,452) $ 192,311 $ (3,707)
===================================================================================================
2005
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE OSSES
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT-
SPONSORED AGENCIES $ 29,333 $ (316) $ 70,081 $ (1,667) $ 99,414 $ (1,983)
- ----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 122,849 (2,189) 49,319 (1,631) 172,168 (3,820)
- ----------------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS -- -- 332 (10) 332 (10)
- ----------------------------------------------------------------------------------------------------------
OTHER SECURITIES 4,935 (65) 1,473 (27) 6,408 (92)
- ----------------------------------------------------------------------------------------------------------
MARKETABLE EQUITY
SECURITIES 772 (62) 328 (32) 1,100 (94)
==========================================================================================================
TOTAL $ 157,889 $ (2,632) $ 121,533 $ (3,367) $ 279,422 $ (5,999)
==========================================================================================================
Management has determined that these unrealized losses for debt securities
are temporary and due to interest rate fluctuations and volatility rather than
the credit ratings of the issuers. The Corporation has a policy to purchase debt
securities only from issuers with an investment grade credit rating and monitors
credit ratings periodically.
48
The unrealized losses on investments in U.S. government-sponsored agency
bonds were caused by interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because the Corporation has the
ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government-sponsored agencies. It is expected
that the securities would not be settled at a price substantially less than the
amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because
the Corporation has the ability and intent to hold these investments until a
market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
The other securities with unrealized losses caused by interest rate
increases are adjustable and will price to par at the time of the rate reset.
The Corporation has the ability and intent to hold these investments until a
market price recovery or maturity; therefore these investments are not
considered other-than-temporarily impaired.
The marketable equity securities with unrealized losses are evaluated on
an individual issuer basis. The Corporation evaluated the near-term prospects of
the issuer in relation to the severity and duration of the impairment. Based on
that evaluation and the Corporation's ability and intent to hold these
securities for a reasonable period of time sufficient for a price recovery, the
Corporation does not consider these securities to be other-than-temporarily
impaired.
The sale of investment securities at a loss during the restructuring
initiative undertaken in 2006 does not change management's assertion that the
Bank has the ability and intent to hold temporarily impaired securities to
recovery. The Bank's Asset/Liability Committee decided to execute a
restructuring of the investment portfolio as a result of the unusual interest
rate environment, an inverted yield curve. The transaction was executed in
reaction to changes in market conditions to improve performance, reduce leverage
and reduce interest rate risk. Management's decision on the total amount of the
program was driven by the goal of reducing the overnight borrowings position by
approximately 50 percent or $60 million.
4. LOANS
Loans outstanding as of December 31, consisted of the following:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
LOANS SECURED BY 1-4 FAMILY $ 555,290 $ 506,304
- --------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE 215,451 196,431
- --------------------------------------------------------------------------------
CONSTRUCTION LOANS 46,684 25,387
- --------------------------------------------------------------------------------
COMMERCIAL LOANS 38,471 33,322
- --------------------------------------------------------------------------------
CONSUMER LOANS 9,601 5,014
- --------------------------------------------------------------------------------
OTHER LOANS 4,656 2,015
================================================================================
TOTAL LOANS $ 870,153 $ 768,473
================================================================================
Included in the totals above for December 31, 2006 is $3.3 million of
unamortized discount and $3.1 million of deferred origination costs net of
deferred origination fees as compared to $3.9 million of unamortized discount
and $3.1 million of deferred origination costs net of deferred origination fees
for December 31, 2005.
49
Nonaccrual loans totaled $1.9 million and $339 thousand at December 31,
2006 and 2005, respectively. At December 31, 2006 there were $197 thousand of
loans past due 90 days or more and still accruing interest. At December 31,
2005, there were $47 thousand of loans past due 90 days or more and still
accruing interest. The amount of interest income recognized on year-end
non-accrual loans totaled $212 thousand, $6 thousand and $14 thousand in 2006,
2005 and 2004, respectively. Interest income of $129 thousand, $21 thousand and
$11 thousand would have been recognized during 2006, 2005 and 2004,
respectively, under contractual terms for such nonaccrual loans.
At December 31, 2006, the impaired loan portfolio consisted of two
commercial loans for $1.5 million for which there was $378 thousand of specific
allocation in the allowance for loan losses. At December 31, 2005 and 2004 there
were no impaired loans. The average balance of impaired loans for the year ended
December 31, 2006 was $12 thousand. At December 31, 2006, there were no
commitments to lend additional funds to borrowers whose loans are classified as
nonperforming.
In the ordinary course of business, the Corporation, through the Bank, may
extend credit to officers, directors or their associates. These loans are
subject to the Corporation's normal lending policy and Federal Reserve Bank
Regulation O. All loans are performing.
The following table shows the changes in loans to officers, directors or
their associates:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
BALANCE BEGINNING OF YEAR $ 1,949 $ 2,383
- --------------------------------------------------------------------------------
NEW LOANS 2,182 357
- --------------------------------------------------------------------------------
REPAYMENTS (1,224) (791)
================================================================================
BALANCE AT END OF YEAR $ 2,907 $ 1,949
================================================================================
5. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses for the years
indicated follows:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 6,378 $ 5,989 $ 5,439
- --------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 414 391 613
- --------------------------------------------------------------------------------
LOANS CHARGED-OFF (26) (16) (78)
- --------------------------------------------------------------------------------
RECOVERIES 2 14 15
================================================================================
BALANCE, END OF YEAR $ 6,768 $ 6,378 $ 5,989
================================================================================
6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, follows:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
LAND $ 5,154 $ 3,518
- --------------------------------------------------------------------------------
BUILDINGS 8,612 8,554
- --------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 15,545 14,717
- --------------------------------------------------------------------------------
LEASEHOLD IMPROVEMENTS 8,246 7,905
- --------------------------------------------------------------------------------
PROJECTS IN PROGRESS 3,276 1,545
================================================================================
40,833 36,239
- --------------------------------------------------------------------------------
LESS: ACCUMULATED DEPRECIATION 16,774 14,827
================================================================================
TOTAL $ 24,059 $ 21,412
================================================================================
50
Depreciation expense amounted to $2.1 million, $2.0 million and $1.7
million for the years ended December 31, 2006, 2005 and 2004, respectively.
7. DEPOSITS
Interest expense on time deposits of $100,000 or more totaled $5.4
million, $2.7 million and $1.3 million in 2006, 2005 and 2004, respectively.
The scheduled maturities of time deposits are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2007 $ 311,555
- --------------------------------------------------------------------------------
2008 36,109
- --------------------------------------------------------------------------------
2009 5,658
- --------------------------------------------------------------------------------
2010 6,103
- --------------------------------------------------------------------------------
2011 5,244
================================================================================
TOTAL $ 364,669
================================================================================
8. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $24.0
million and $31.7 million at December 31, 2006 and 2005, respectively, with a
weighted average interest rate of 3.59 percent and 3.51 percent, respectively.
These advances are secured by blanket pledges of certain 1-4 family residential
mortgages totaling $279.0 million at December 31, 2006 and $239.3 million at
December 31, 2005. Advances totaling $17.0 million at December 31, 2006, have
fixed maturity dates, while advances totaling $7.0 million were amortizing
advances with monthly payments of principal and interest.
The final maturity dates of the advances are scheduled as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2007 $ 4,000
- --------------------------------------------------------------------------------
2008 839
- --------------------------------------------------------------------------------
2009 2,000
- --------------------------------------------------------------------------------
2010 10,375
- --------------------------------------------------------------------------------
2011 3,000
- --------------------------------------------------------------------------------
OVER 5 YEARS 3,750
================================================================================
TOTAL $ 23,964
================================================================================
The Corporation had no short-term borrowings at December 31, 2006, while
at December 31, 2005, short-term borrowings with an average maturity of 90 days
or less, totaled $65.0 million with an average interest rate of 3.84 percent.
For the year ended December 31, 2006, short-term borrowings averaged $60.5
million with a weighted average interest rate of 5.02 percent as compared to
average balances of $24.7 million and a weighted average interest rate of 3.84
percent for the year ended December 31, 2005.
There were no overnight borrowings at December 31, 2006 as compared to
overnight borrowings of $12.5 million at December 31, 2005. Overnight borrowings
at FHLB averaged $24.9 million with a weighted average interest rate of 5.10
percent for the year ended December 31, 2006 and $27.3 million with a weighted
average
51
interest rate of 3.40 percent for the year ended December 31, 2005. The maximum
amount outstanding at any month end during 2006 and 2005 was $44.5 million and
$59.0 million, respectively. At December 31, 2006, unused short-term or
overnight borrowings commitments totaled $191.2 million from FHLB and $58.0
million from correspondent banks.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation discloses estimated fair values for its significant
financial instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of significant financial instruments:
CASH AND SHORT-TERM INVESTMENTS - The carrying amount of cash and short-term
investments is considered to be fair value.
SECURITIES - The fair value of securities is based upon quoted market prices.
LOANS - The fair value of loans is estimated by discounting the future cash
flows using the buildup approach consisting of four components: the risk-free
rate, credit quality, operating expense and prepayment option price.
DEPOSITS - The fair value of deposits with no stated maturity, such as demand
deposits, checking accounts, savings and money market accounts, is equal to the
carrying amount. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows.
OVERNIGHT AND SHORT-TERM BORROWINGS - The carrying amount of overnight and
short-term borrowings is considered to be fair value.
LONG-TERM DEBT - The fair value of FHLB advances is based on the discounted
value of estimated cash flows. The discount rate is estimated using the rates
currently offered for similar remaining advance terms.
The following table summarizes carrying amounts and fair values for
financial instruments at December 31:
2006 2005
- ---------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS $ 30,258 $ 30,258 $ 23,499 $ 23,499
- ---------------------------------------------------------------------------------------
INVESTMENT SECURITIES 55,165 54,523 78,084 77,286
- ---------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 286,186 286,186 341,584 341,584
- ---------------------------------------------------------------------------------------
LOANS, NET OF ALLOWANCE FOR
LOANS LOSSES 863,385 854,585 762,095 753,922
- ---------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
DEPOSITS 1,144,736 1,143,170 1,041,996 1,039,659
- ---------------------------------------------------------------------------------------
OVERNIGHT AND SHORT-TERM
BORROWINGS -- -- 77,500 77,500
- ---------------------------------------------------------------------------------------
LONG-TERM DEBT 23,964 22,909 31,705 30,431
- ---------------------------------------------------------------------------------------
52
10. INCOME TAXES
The income tax expense included in the consolidated financial statements
for the years ended December 31, is allocated as follows:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
FEDERAL:
CURRENT EXPENSE $ 4,963 $ 7,570 $ 6,079
- --------------------------------------------------------------------------------
DEFERRED EXPENSE/(BENEFIT) (645) (1,637) (102)
- --------------------------------------------------------------------------------
STATE:
CURRENT EXPENSE 328 211 296
- --------------------------------------------------------------------------------
DEFERRED BENEFIT (1,141) (371) (189)
================================================================================
TOTAL INCOME TAX EXPENSE $ 3,505 $ 5,773 $ 6,084
================================================================================
SHAREHOLDERS' EQUITY:
DEFERRED EXPENSE/(BENEFIT) ON
UNREALIZED (LOSS)/GAIN ON
AVAILABLE FOR SALE $ 1,021 $ (2,697) $ (848)
- --------------------------------------------------------------------------------
LEASE ADJUSTMENT (341) -- --
- --------------------------------------------------------------------------------
UNFUNDED PENSION BENEFIT (929) -- --
================================================================================
TOTAL DEFERRED BENEFIT $ (249) $ (2,697) $ (848)
================================================================================
Total income tax expense differed from the amounts computed by applying
the U.S. Federal income tax rate of 35 percent to income before taxes as a
result of the following:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
COMPUTED "EXPECTED" TAX EXPENSE $ 4,806 $ 6,616 $ 6,717
- --------------------------------------------------------------------------------
INCREASE/(DECREASE) IN TAXES
RESULTING FROM:
TAX-EXEMPT INCOME (509) (492) (516)
- --------------------------------------------------------------------------------
STATE INCOME TAXES (529) (104) 70
- --------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE INCOME (254) (244) (244)
- --------------------------------------------------------------------------------
OTHER (9) (3) 57
================================================================================
TOTAL INCOME TAX EXPENSE $ 3,505 $ 5,773 $ 6,084
================================================================================
53
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are as follows:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
ALLOWANCE FOR LOANS LOSSES $ 2,707 $ 2,598
- --------------------------------------------------------------------------------
UNFUNDED PENSION BENEFIT 929 --
- --------------------------------------------------------------------------------
UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE 861 1,882
- --------------------------------------------------------------------------------
STATE NET OPERATING LOSS CARRY FORWARD 569 100
- --------------------------------------------------------------------------------
LEASE ADJUSTMENT 312 --
- --------------------------------------------------------------------------------
POST RETIREMENT BENEFITS 294 166
- --------------------------------------------------------------------------------
PREPAID ALTERNATIVE MINIMUM ASSESSMENT 283 164
- --------------------------------------------------------------------------------
CONTRIBUTION LIMITATION 37 37
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER 23 24
- --------------------------------------------------------------------------------
OTHER -- 40
================================================================================
TOTAL GROSS DEFERRED TAX ASSETS $ 6,015 $ 5,011
================================================================================
DEFERRED TAX LIABILITIES:
- --------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT,
PRINCIPALLY DUE TO DIFFERENCE IN DEPRECIATION $ 681 $ 1,430
- --------------------------------------------------------------------------------
DEFERRED LOAN ORIGINATION COSTS AND FEES 633 605
- --------------------------------------------------------------------------------
NONMONETARY GAIN 95 95
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES, PRINCIPALLY DUE TO
THE ACCRETION OF BOND DISCOUNT 81 78
- --------------------------------------------------------------------------------
DEFERRED REIT DIVIDEND 28 --
================================================================================
TOTAL GROSS DEFERRED TAX LIABILITIES 1,518 2,208
================================================================================
NET DEFERRED TAX ASSET $ 4,497 $ 2,803
================================================================================
Based upon taxes paid and projected future taxable income, management
believes that it is more likely than not that the gross deferred tax assets will
be realized.
11. BENEFIT PLANS
PENSION PLAN:
As discussed in Note 1, the Corporation adopted FASB Statement No. 158
effective December 31, 2006.
The following table details the impact of the adoption of FASB Statement
No. 158 on individual line items in the consolidated Statement of Condition at
December 31, 2006:
BEFORE AFTER
APPLICATION OF APPLICATION OF
(DOLLARS IN THOUSANDS) STATEMENT 158 ADJUSTMENTS STATEMENT 158
- -------------------------------------------------------------------------------------
DEFERRED TAX ASSETS $ 3,568 $ 929 $ 4,497
- -------------------------------------------------------------------------------------
TOTAL ASSETS 1,287,447 929 1,288,376
- -------------------------------------------------------------------------------------
LIABILITY FOR PENSION BENEFITS 290 2,275 2,565
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,182,338 2,275 1,184,613
- -------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,383) (1,346) (2,729)
- -------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 105,109 (1,346) 103,763
- -------------------------------------------------------------------------------------
54
The following table shows the change in benefit obligation, the change in
plan assets and the funded status for the plan at December 31:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
BENEFIT OBLIGATION AT BEGINNING OF YEAR $ 12,383 $ 10,228
- --------------------------------------------------------------------------------
SERVICE COST 1,670 1,404
- --------------------------------------------------------------------------------
INTEREST COST 659 586
- --------------------------------------------------------------------------------
ACTUARIAL LOSS (659) 602
- --------------------------------------------------------------------------------
BENEFITS PAID (111) (437)
================================================================================
BENEFIT OBLIGATION AT END OF YEAR $ 13,942 $ 12,383
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 9,450 $ 8,092
- --------------------------------------------------------------------------------
ACTUAL RETURN ON PLAN ASSETS 794 483
- --------------------------------------------------------------------------------
EMPLOYER CONTRIBUTION 1,244 1,312
- --------------------------------------------------------------------------------
BENEFITS PAID (111) (437)
================================================================================
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 11,377 $ 9,450
================================================================================
FUNDED STATUS AT END OF YEAR $ (2,565) $ (2,933)
================================================================================
The components of accumulated other comprehensive loss related to the
pension plan, on a pre-tax basis, at December 31, 2006, are summarized in the
following table. We expect that $36 thousand in net actuarial loss and under $1
thousand in prior service cost will be recognized as components of net periodic
cost in 2007.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
UNRECOGNIZED NET ACTUARIAL LOSS $ 2,296
- --------------------------------------------------------------------------------
UNRECOGNIZED TRANSITION ASSET (19)
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST (2)
================================================================================
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $ 2,275
================================================================================
Information concerning the funded status of our defined benefit pension
plan and the net amount recognized in the consolidated statement of condition at
December 31, 2005, prior to adoption of Statement No. 158 is summarized below.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FUNDED STATUS $ (2,933)
- --------------------------------------------------------------------------------
UNRECOGNIZED NET ACTUARIAL LOSS 2,926
- --------------------------------------------------------------------------------
UNRECOGNIZED TRANSITION ASSET (25)
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST (2)
================================================================================
ACCRUED BENEFIT COST $ (34)
================================================================================
The accumulated benefit obligation for the pension plan was $10.5 million
and $9.0 million at December 31, 2006 and 2005, respectively. The unfunded
pension benefit of $2.6 million at December 31, 2006 is included in accrued
expense and other liabilities in the consolidated Statement of Condition. The
measurement date for the defined benefit pension plan is September 30, 2006.
55
Net periodic expense for the years ended December 31, included the
following components:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
SERVICE COST $ 1,670 $ 1,404 $ 1,098
- --------------------------------------------------------------------------------
INTEREST COST 659 586 504
- --------------------------------------------------------------------------------
EXPECTED RETURN ON PLAN ASSETS (897) (534) (468)
- --------------------------------------------------------------------------------
AMORTIZATION OF:
NET LOSS 75 68 23
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST -- -- 1
- --------------------------------------------------------------------------------
TRANSITION ASSET (7) (7) (7)
================================================================================
NET PERIODIC BENEFIT COST $ 1,500 $ 1,517 $ 1,151
================================================================================
The following table shows the actuarial assumptions applied for the
valuation of plan obligations at December 31:
2006 2005 2004
- --------------------------------------------------------------------------------
DISCOUNT RATE 5.75% 5.50% 5.75%
- --------------------------------------------------------------------------------
RATE OF INCREASE ON FUTURE COMPENSATION 3.00 3.00 3.00
- --------------------------------------------------------------------------------
The Discount Rate was obtained using a high-quality (AA rated), corporate
bond rate at year end.
The following table shows the actuarial assumptions applied for the net
periodic expense at December 31:
2006 2005 2004
- --------------------------------------------------------------------------------
DISCOUNT RATE 5.50% 5.75% 6.00%
- --------------------------------------------------------------------------------
RATE OF INCREASE ON FUTURE COMPENSATION 3.00 3.00 3.00
- --------------------------------------------------------------------------------
EXPECTED LONG-TERM RATE OF RETURN ON
PLAN ASSETS 8.50 5.75 6.00
- --------------------------------------------------------------------------------
The Corporation's overall expected long-term rate of return on assets is
8.50 percent. The expected long-term rate of return is based on the portfolio as
a whole and not on the sum of the returns on individual assets categories.
The weighted-average asset allocation of the Corporation's pension
benefits plan assets at December 31, were as follows:
2006 2005
- --------------------------------------------------------------------------------
EQUITY SECURITIES 59.7% 63.4%
- --------------------------------------------------------------------------------
DEBT SECURITIES 37.3 32.2
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 3.0 4.4
================================================================================
TOTAL 100.0% 100.0%
================================================================================
The Plan's Trustees are granted full discretion to buy, sell, invest and
reinvest in accordance with the pension plan's investment policy. The Trustees
establish target asset allocations for equity and debt securities at their
regular committee meetings. Cash equivalents are invested in money market funds
or in other high quality investments approved by the Trustees of the Plan.
The Corporation expects to contribute $1.0 million to its pension plan in
2007.
56
The following table shows the estimated future pension benefit payments.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2007 $ 185
- --------------------------------------------------------------------------------
2008 245
- --------------------------------------------------------------------------------
2009 268
- --------------------------------------------------------------------------------
2010 443
- --------------------------------------------------------------------------------
2011 504
- --------------------------------------------------------------------------------
2012-2016 4,556
- --------------------------------------------------------------------------------
SAVINGS AND PROFIT SHARING PLANS
In addition to the retirement plan, the Corporation sponsors a profit
sharing plan and a savings plan under Section 401(k) of the Internal Revenue
Code, covering substantially all salaried employees over the age of 21 with at
least 12 months service. Under the savings portion of the plan, employee
contributions are partially matched by the Corporation. Expense for the savings
plan was approximately $45 thousand, $42 thousand and $37 thousand in 2006, 2005
and 2004, respectively. Contributions to the profit sharing portion are made at
the discretion of the Board of Directors and all funds are invested solely in
Peapack-Gladstone Corporation common stock. The contribution to the profit
sharing plan was $100 thousand in 2006, $225 thousand in 2005 and $425 thousand
in 2004.
12. STOCK OPTION PLANS
The Corporation's incentive stock option plans allow the granting of up to
798,229 shares of the Corporation's common stock to certain key employees. The
options granted under these plans are, in general, exercisable not earlier than
one year after the date of grant, at a price equal to the fair market value of
the 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. Some options granted to officers at or above the senior
vice president level were immediately exercisable at the date of grant.
Changes in options outstanding during the past three years were as
follows:
WEIGHTED AGGREGATE
NUMBER OF EXERCISE PRICE AVERAGE INTRINSIC
SHARES PER SHARE EXERCISE PRICE VALUE
- ---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 303,225 $5.56-$28.85 $ 14.49
=======================================================================================
GRANTED DURING 2004 224,965 27.36-32.14 28.95
- ---------------------------------------------------------------------------------------
EXERCISED DURING 2004 (53,115) 5.56-24.17 12.00
- ---------------------------------------------------------------------------------------
FORFEITED DURING 2004 (4,885) 13.68-28.89 21.74
=======================================================================================
BALANCE, DECEMBER 31, 2004 470,190 $5.56-$32.14 $ 21.61
=======================================================================================
GRANTED DURING 2005 9,150 26.73-29.50 28.54
- ---------------------------------------------------------------------------------------
EXERCISED DURING 2005 (35,399) 5.56-18.66 10.71
- ---------------------------------------------------------------------------------------
FORFEITED DURING 2005 (14,625) 13.68-30.59 27.24
=======================================================================================
BALANCE, DECEMBER 31, 2005 429,316 $11.85-$32.14 $ 22.47
=======================================================================================
GRANTED DURING 2006 6,300 24.35-27.90 25.83
- ---------------------------------------------------------------------------------------
EXERCISED DURING 2006 (15,568) 11.85-17.89 12.56
- ---------------------------------------------------------------------------------------
FORFEITED DURING 2006 (6,132) 25.08-29.50 28.77
=======================================================================================
BALANCE, DECEMBER 31, 2006 413,916 $11.85-$32.14 $ 22.80 $ 2,376
=======================================================================================
57
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 2006 and the exercise price, multiplied by the
number of in-the-money options).
The aggregate intrinsic value of options exercised during 2006, 2005 and 2004
was $216 thousand, $603 thousand and $939 thousand, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2006.
SHARES REMAINING SHARES
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------------------------------------------------------------------------
< $12.00 54,697 0.6 YEARS 54,697
- --------------------------------------------------------------------------------
12.01 - 16.05 16,677 4.0 YEARS 16,434
- --------------------------------------------------------------------------------
16.06 - 19.20 117,971 3.0 YEARS 117,776
- --------------------------------------------------------------------------------
19.21 - 26.00 6,341 8.1 YEARS 1,762
- --------------------------------------------------------------------------------
26.01 - 28.90 202,330 7.1 YEARS 184,461
- --------------------------------------------------------------------------------
28.91 - 32.14 15,900 7.5 YEARS 13,032
================================================================================
$22.80 * 413,916 5.0 YEARS 388,162
================================================================================
* Weighted average exercise price
The Corporation has non-qualified stock option plans for non-employee
directors. The plans allow the granting of up to 398,796 shares of the
Corporation's common stock. The options granted under these plans are, in
general, exercisable not earlier than one year after the date of grant, at a
price equal to the fair market value of the common stock on the date of grant,
and expire not more than ten years after the date of grant. Stock options may
vest during a period of up to five years after the date of grant. As noted in
Footnote 1, the Board of Directors accelerated the vesting of 79,200 of the
unvested stock options awarded to outside directors under the Corporation's 1998
and 2002 Stock Option Plans for Outside Directors on December 8, 2005.
Changes in options outstanding during the past three years were as
follows:
WEIGHTED AGGREGATE
NUMBER OF EXERCISE PRICE AVERAGE INTRINSIC
(DOLLARS IN THOUSANDS) SHARES PER SHARE EXERCISE PRICE VALUE
- ---------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 195,980 $5.56-$17.53 $ 12.54
=======================================================================================
GRANTED DURING 2004 98,999 28.89 28.89
- ---------------------------------------------------------------------------------------
EXERCISED DURING 2004 (52,555) 5.56-17.53 6.40
=======================================================================================
BALANCE, DECEMBER 31, 2004 242,424 $5.56-$28.89 $ 20.04
=======================================================================================
EXERCISED DURING 2005 (44,694) 5.56-17.53 7.33
=======================================================================================
BALANCE, DECEMBER 31, 2005 197,730 $15.68-$28.89 $ 22.91
=======================================================================================
EXERCISED DURING 2006 (8,177) 15.68-17.53 17.12
=======================================================================================
BALANCE, DECEMBER 31, 2006 189,553 $15.68-$28.89 $ 23.16 $ 1,015
=======================================================================================
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 2006 and the exercise price, multiplied by the
number of in-the-money options).
The aggregate intrinsic value of options exercised during 2006, 2005 and
2004 was $72 thousand, $917 thousand and $1.2 million, respectively.
58
The following table summarizes information about stock options outstanding
at December 31, 2006.
EXERCISE SHARES REMAINING SHARES
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------------------------------------------------------------------------
< $16.05 28,750 4.0 years 28,750
- --------------------------------------------------------------------------------
16.01 - 20.00 61,804 1.5 years 61,804
- --------------------------------------------------------------------------------
20.01 - 28.89 98,999 6.6 years 98,999
================================================================================
$23.16 * 189,553 4.5 years 189,553
================================================================================
* WEIGHTED AVERAGE EXERCISE PRICE
At December 31, 2006, there were 96,365 additional shares available for
grant under the Plans. In addition, 400,000 shares approved by shareholders on
April 25, 2006, are available for issue as incentive stock options, nonqualified
stock options, restricted stock awards and stock appreciation rights to
directors, officers, employees and independent contractors of the Corporation
and its Subsidiaries.
The per share weighted-average fair value of stock options granted during
2006, 2005 and 2004 was $8.56, $9.51 and $10.32 on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions:
2006 2005 2004
- --------------------------------------------------------------------------------
DIVIDEND YIELD 2.19% 1.69% 1.18%
- --------------------------------------------------------------------------------
EXPECTED VOLATILITY 37% 40% 40%
- --------------------------------------------------------------------------------
EXPECTED LIFE 5 YEARS 5 YEARS 5 YEARS
- --------------------------------------------------------------------------------
RISK-FREE INTEREST RATE 4.76% 3.79% 3.26%
- --------------------------------------------------------------------------------
The expected life of the option is the typical vesting period of the
Corporation's options. The risk-free interest rate is the rate on a five year
treasury bond. The volatility, or beta, is the performance the stock has
experienced in the last five years as the S&P 500 moved one percent up or down.
A beta above one is more volatile than the overall market, while a beta below
one is less volatile.
As of December 31, 2006, there was approximately $187 thousand of
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Corporation's stock incentive plans. That cost is
expected to be recognized over a weighted average period of 1.6 years.
13. COMMITMENTS
The Corporation, in the ordinary course of business, is a party to
litigation arising from the conduct of its business. Management does not
consider that these actions depart from routine legal proceedings and believes
that such actions will not affect its financial position or results of its
operations in any material manner. There are various outstanding commitments and
contingencies, such as guarantees and credit extensions, including loan
commitments of $124.4 million and $110.0 million at December 31, 2006 and 2005,
respectively, which are not included in the accompanying consolidated financial
statements. These commitments include unused commercial and home equity lines of
credit.
The Corporation issues financial standby letters of credit that are within
the scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for
59
Guarantees, Including Indirect Guarantees of Indebtedness of Others." These are
irrevocable undertakings by the Corporation to guarantee payment of a specified
financial obligation. Most of the Corporation's financial standby letters of
credit arise in connection with lending relationships and have terms of one year
of less. The maximum potential future payments the Corporation could be required
to make equals the contract amount of the standby letters of credit and amounted
to $9.3 million and $7.4 million at December 31, 2006 and 2005, respectively.
The Corporation's recognized liability for financial standby letters of credit
was insignificant at December 31, 2006.
For commitments to originate loans, the Corporation's maximum exposure to
credit risk is represented by the contractual amount of those instruments. Those
commitments represent ultimate exposure to credit risk only to the extent that
they are subsequently drawn upon by customers. The Corporation uses the same
credit policies and underwriting standards in making loan commitments as it does
for on-balance-sheet instruments. For loan commitments, the Corporation would
generally be exposed to interest rate risk from the time a commitment is issued
with a defined contractual interest rate.
At December 31, 2006, the Corporation was obligated under non-cancelable
operating leases for certain premises. Rental expense aggregated $2.3 million,
$2.1 million and $2.0 million for the years ended December 31, 2006, 2005 and
2004, respectively, which is included in premises and equipment expense in the
consolidated statements of income.
The minimum annual lease payments under the terms of the lease agreements,
as of December 31, 2006, were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2007 $ 2,414
- --------------------------------------------------------------------------------
2008 2,402
- --------------------------------------------------------------------------------
2009 2,333
- --------------------------------------------------------------------------------
2010 2,213
- --------------------------------------------------------------------------------
2011 1,657
- --------------------------------------------------------------------------------
THEREAFTER 11,224
================================================================================
TOTAL $22,243
================================================================================
The Corporation is also obligated under legally binding and enforceable
agreements to purchase goods and services from third parties, including data
processing service agreements and the contract for the construction of a new
branch in Summit.
14. SEC STAFF ACCOUNTING BULLETIN NO. 108
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), to address diversity in practice in quantifying financial
statement misstatements. SAB 108 requires that the Corporation quantify
misstatements based on their impact on each of its financial statements and
related disclosures. SAB 108 was effective as of the end of the Corporation's
2006 fiscal year, allowing a one-time transitional cumulative effect adjustment
to retained earnings as of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in SAB 108.
The Corporation has several operating leases that have been previously
accounted for on a cash basis, which is not in accordance with the straight-line
basis requirements
60
of FASB Statement No. 13, "Accounting for Leases." In prior years, the
Corporation had evaluated the impact of this error on an annual basis and
determined that the difference was not material in each of the respective years.
Upon the adoption of SAB 108, which requires that the impact of the error be
evaluated on a cumulative basis, the Corporation determined that the error was
material and therefore, recorded a correction to the rent liability of $835
thousand and a cumulative effect adjustment, net of tax, of $494 thousand to
Shareholders' Equity at the beginning of 2006.
15. REGULATORY CAPITAL
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2006, that the Corporation and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 2006, the Corporation and the Bank met all requirements
to be considered well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Corporation and
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table.
The Corporation's actual capital amounts and ratios are presented in the
table.
TO BE WELL
CAPITALIZED UNDER FOR CAPITAL
PROMPT CORRECTIVE ADEQUACY
(IN THOUSANDS) ACTUAL ACTION PROVISIONS PURPOSES
- ---------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2006:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $112,663 16.31% $69,071 10.00% $55,257 8.00%
- ---------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 105,895 15.33 41,443 6.00 27,629 4.00
- ---------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 105,895 8.20 64,539 5.00 38,724 3.00
=======================================================================================
AS OF DECEMBER 31, 2005:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $108,011 17.78% $60,744 10.00% $48,595 8.00%
- ---------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 101,509 16.71 36,446 6.00 24,298 4.00
- ---------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 101,509 8.66 58,596 5.00 35,157 3.00
=======================================================================================
61
16. CONDENSED FINANCIAL STATEMENTS OF PEAPACK-GLADSTONE
FINANCIAL CORPORATION (PARENT COMPANY ONLY)
The following information of the parent company only financial statements
should be read in conjunction with the notes to the consolidated financial
statements.
STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
ASSETS:
CASH $ 147 $ 91
- --------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 7,266 6,985
- --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 15,057 13,175
- --------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARY 82,728 79,861
- --------------------------------------------------------------------------------
OTHER ASSETS 182 321
================================================================================
TOTAL ASSETS $ 105,380 $ 100,433
================================================================================
LIABILITIES:
OTHER LIABILITIES $ 1,617 $ 1,278
================================================================================
TOTAL LIABILITIES 1,617 1,278
================================================================================
SHAREHOLDERS' EQUITY
COMMON STOCK 7,081 7,061
- --------------------------------------------------------------------------------
SURPLUS 89,372 88,973
- --------------------------------------------------------------------------------
TREASURY STOCK (4,999) (4,022)
- --------------------------------------------------------------------------------
RETAINED EARNINGS 15,038 10,100
- --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE
- --------------------------------------------------------------------------------
LOSS, NET OF INCOME TAX BENEFIT (2,729) (2,957)
================================================================================
TOTAL SHAREHOLDERS' EQUITY 103,763 99,155
================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 105,380 $ 100,433
================================================================================
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
INCOME
DIVIDEND FROM BANK $ 6,250 $ 6,000 $ 5,750
- --------------------------------------------------------------------------------
OTHER INCOME 854 627 452
- --------------------------------------------------------------------------------
SECURITIES GAINS, NET 83 395 236
================================================================================
TOTAL INCOME 7,187 7,022 6,438
================================================================================
EXPENSES
OTHER EXPENSES 106 109 105
================================================================================
TOTAL EXPENSES 106 109 105
================================================================================
INCOME BEFORE INCOME TAX EXPENSE AND
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 7,081 6,913 6,333
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE 268 318 196
================================================================================
NET INCOME BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF BANK 6,813 6,595 6,137
- --------------------------------------------------------------------------------
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 3,413 6,535 6,972
================================================================================
NET INCOME $ 10,226 $ 13,130 $ 13,109
================================================================================
62
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 10,226 $ 13,130 $ 13,109
- --------------------------------------------------------------------------------
LESS EQUITY IN UNDISTRIBUTED EARNINGS (3,413) (6,535) (6,972)
- --------------------------------------------------------------------------------
AMORTIZATION AND ACCRETION ON SECURITIES (1) 11 13
- --------------------------------------------------------------------------------
GAIN ON SECURITIES AVAILABLE FOR SALE (83) (142) (236)
- --------------------------------------------------------------------------------
DECREASE/(INCREASE) IN OTHER ASSETS 139 (93) (145)
- --------------------------------------------------------------------------------
INCREASE/(DECREASE) IN OTHER LIABILITIES 53 21 (182)
================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,921 6,392 5,587
================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES
AVAILABLE FOR SALE 1,580 4,855 5,476
- --------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 2,001 1,500 1,950
- --------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (4,835) (6,130) (9,356)
================================================================================
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (1,254) 225 (1,930)
================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
DIVIDENDS PAID (4,713) (3,891) (3,134)
- --------------------------------------------------------------------------------
TAX BENEFIT ON STOCK OPTION EXERCISES 29 347 477
- --------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 331 702 948
- --------------------------------------------------------------------------------
TREASURY STOCK TRANSACTIONS (977) (1,155) (476)
================================================================================
NET CASH USED IN FINANCING ACTIVITIES (5,330) (3,997) (2,185)
================================================================================
NET INCREASE IN CASH 337 2,620 1,472
- --------------------------------------------------------------------------------
CASH AT BEGINNING OF PERIOD 7,076 4,456 2,984
================================================================================
CASH AT END OF PERIOD $ 7,413 $ 7,076 $ 4,456
================================================================================
COMMON STOCK PRICES (UNAUDITED)
The following table shows the 2006 and 2005 range of prices paid on known
trades of Peapack-Gladstone Financial Corporation common stock.
DIVIDEND
2006 HIGH LOW PER SHARE
- --------------------------------------------------------------------------------
1ST QUARTER $ 29.50 $ 24.45 $ 0.14
- --------------------------------------------------------------------------------
2ND QUARTER 26.26 23.52 0.14
- --------------------------------------------------------------------------------
3RD QUARTER 27.40 24.15 0.15
- --------------------------------------------------------------------------------
4TH QUARTER 28.10 24.00 0.15
- --------------------------------------------------------------------------------
DIVIDEND
2005 HIGH LOW PER SHARE
- --------------------------------------------------------------------------------
1ST QUARTER $ 31.77 $ 25.94 $ 0.11
- --------------------------------------------------------------------------------
2ND QUARTER 30.50 25.50 0.11
- --------------------------------------------------------------------------------
3RD QUARTER 30.38 25.81 0.14
- --------------------------------------------------------------------------------
4TH QUARTER 29.28 25.95 0.14
- --------------------------------------------------------------------------------
63
OFFICERS
- ---------------------------------------------------------------------------------------------------
LOAN AND
ADMINISTRATION FRANK A. KISSEL CHAIRMAN OF THE BOARD & CEO*
------------------------------------------------------------------
GLADSTONE ROBERT M. ROGERS PRESIDENT & COO *
------------------------------------------------------------------
ARTHUR F. BIRMINGHAM EXECUTIVE VICE PRESIDENT & CFO *
------------------------------------------------------------------
GARRETT P. BROMLEY EXECUTIVE VICE PRESIDENT & CHIEF
LENDING OFFICER
------------------------------------------------------------------
PAUL W. BELL SENIOR VICE PRESIDENT &
FACILITIES MANAGER
------------------------------------------------------------------
ROBERT A. BUCKLEY SENIOR VICE PRESIDENT & BRANCH
ADMINISTRATOR
------------------------------------------------------------------
FINN M.W. CASPERSEN, JR SENIOR VICE PRESIDENT & GENERAL
COUNSEL & CHIEF RISK OFFICER
------------------------------------------------------------------
MICHAEL J. GIACOBELLO SENIOR VICE PRESIDENT & SENIOR
COMMERCIAL LOAN OFFICER
------------------------------------------------------------------
BRIDGET J. WALSH SENIOR VICE PRESIDENT & HUMAN
RESOURCES DIRECTOR
------------------------------------------------------------------
STEPHANIE M. ADKINS VICE PRESIDENT
------------------------------------------------------------------
TODD T. BRUNGARD VICE PRESIDENT & BANK SECRECY
ACT COMPLIANCE OFFICER
------------------------------------------------------------------
JOYCE M. EVANS VICE PRESIDENT
------------------------------------------------------------------
KAREN M. FERRARO VICE PRESIDENT
------------------------------------------------------------------
DIRK H. GRAHAM VICE PRESIDENT
------------------------------------------------------------------
JOHN G. HARITON VICE PRESIDENT & CORPORATE
TRAINER
------------------------------------------------------------------
CHARLES T. KIRK VICE PRESIDENT
------------------------------------------------------------------
VALERIE L. KODAN VICE PRESIDENT
------------------------------------------------------------------
KATHERINE M. KREMINS VICE PRESIDENT
------------------------------------------------------------------
MARC R. MAGLIARO VICE PRESIDENT
------------------------------------------------------------------
DENISE M. PACE VICE PRESIDENT & MARKETING
OFFICER
------------------------------------------------------------------
DENISE L. PARELLA VICE PRESIDENT & BUSINESS
DEVELOPMENT OFFICER
------------------------------------------------------------------
CHRISTOPHER P. POCQUAT VICE PRESIDENT
------------------------------------------------------------------
MARY M. RUSSELL VICE PRESIDENT & COMPTROLLER
------------------------------------------------------------------
SCOTT T. SEARLE VICE PRESIDENT
------------------------------------------------------------------
JAMES S. STADTMUELLER VICE PRESIDENT
------------------------------------------------------------------
MARGARET O. VOLK VICE PRESIDENT & MORTGAGE
OFFICER
------------------------------------------------------------------
JESSE D. WILLIAMS VICE PRESIDENT
------------------------------------------------------------------
RANDALL J. WILLIAMS VICE PRESIDENT
------------------------------------------------------------------
*Denotes a Holding Company Officer
64
BETTY J. CARIELLO ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
LYNDA A. CROSS ASSISTANT VICE PRESIDENT &
SECURITY OFFICER
------------------------------------------------------------------
E. SUE GIANETTI ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
ELAINE MULDOWNEY ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
SUSAN K. SMITH ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
SHERYL L. CAPPA ASSISTANT CASHIER
------------------------------------------------------------------
MARJORIE A. DZWONCZYK ASSISTANT CASHIER & CRA AND
COMPLIANCE OFFICER
------------------------------------------------------------------
ALEXANDRA A. GARMS ASSISTANT CASHIER
------------------------------------------------------------------
LISA A. LOUGH ASSISTANT CASHIER
------------------------------------------------------------------
ERAM F. MIRZA ASSISTANT CASHIER
------------------------------------------------------------------
DAVID L. PETRY ASSISTANT CASHIER
------------------------------------------------------------------
MICHELE RAVO ASSISTANT CASHIER
------------------------------------------------------------------
ANA P. RIBEIRO ASSISTANT CASHIER
------------------------------------------------------------------
LAURA M. WATT ASSISTANT CASHIER
------------------------------------------------------------------
ANTOINETTE ROSELL CORPORATE SECRETARY *
- ---------------------------------------------------------------------------------------------------
OPERATIONS HUBERT P. CLARKE SENIOR VICE PRESIDENT & CHIEF
BEDMINSTER INFORMATION OFFICER
------------------------------------------------------------------
V. SHERRI LICATA VICE PRESIDENT
------------------------------------------------------------------
DIANE M. RIDOLFI VICE PRESIDENT
------------------------------------------------------------------
FRANK C. WALDRON VICE PRESIDENT
------------------------------------------------------------------
GREGORY T. ADAMS ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
SANDRA L. BORNGESSER ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
KRISTIN A. ROMEO ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
MARGARET A. TRIMMER ASSISTANT VICE PRESIDENT
------------------------------------------------------------------
CAROL L. BEHLER ASSISTANT CASHIER
------------------------------------------------------------------
VITA M. PARISI ASSISTANT CASHIER
- ---------------------------------------------------------------------------------------------------
AUDIT KAREN M. CHIARELLO VICE PRESIDENT & AUDITOR
------------------------------------------------------------------
CHESTER LISA S. HAGEN ASSISTANT CASHIER
- ---------------------------------------------------------------------------------------------------
LOAN JOHN A. SCERBO VICE PRESIDENT
------------------------------------------------------------------
MORRISTOWN NANCY L. WYNANT VICE PRESIDENT
- ---------------------------------------------------------------------------------------------------
*Denotes a Holding Company Officer
65
PGB TRUST & INVESTMENTS CRAIG C. SPENGEMAN PRESIDENT & CHIEF INVESTMENT
GLADSTONE OFFICER *
------------------------------------------------------------------
BRYANT K. ALFORD FIRST VICE PRESIDENT & SENIOR
TRUST OFFICER
------------------------------------------------------------------
JOHN M. BONK FIRST VICE PRESIDENT & DIRECTOR
OF BUSINESS DEVELOPMENT
------------------------------------------------------------------
JOHN C. KAUTZ FIRST VICE PRESIDENT & SENIOR
INVESTMENT OFFICER
------------------------------------------------------------------
MICHAEL PYLYPYSHYN FIRST VICE PRESIDENT & SENIOR
TRUST OPERATIONS OFFICER
------------------------------------------------------------------
JOHN E. CREAMER VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
CATHERINE M. DENNING VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
GLENN C. GUERIN VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
MICHAEL E. HERRMANN VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
JAMES R. HOUSMAN VICE PRESIDENT & DIRECTOR OF TAX
------------------------------------------------------------------
EDWARD P. NICOLICCHIA VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
KATHERINE S. QUAY VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
ANNE M. SMITH VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
KURT G. TALKE VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
SCOTT A. MARSHMAN ASSISTANT VICE PRESIDENT & TRUST
OFFICER
------------------------------------------------------------------
DAVID C. O'MEARA ASSISTANT VICE PRESIDENT & TRUST
OFFICER
------------------------------------------------------------------
CATHERINE A. MCCATHARN TRUST OFFICER & ASSISTANT
CORPORATE SECRETARY *
------------------------------------------------------------------
PATRICIA K. SAWKA TRUST OFFICER
------------------------------------------------------------------
MARIBETH A. BROWN ASSISTANT TRUST OFFICER
- ---------------------------------------------------------------------------------------------------
MORRISTOWN ROBERT M. FIGURELLI VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
JOHN J. LEE VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
MICHAEL T. TORMEY VICE PRESIDENT & TRUST OFFICER
------------------------------------------------------------------
THOMAS S. DIEMAR TRUST OFFICER
- ---------------------------------------------------------------------------------------------------
*Denotes a Holding Company Officer
66
BRANCHES
- -----------------------------------------------------------------------------------------------
BERNARDSVILLE CHARLES A. STUDDIFORD, III VICE PRESIDENT
--------------------------------------------------------------
CAROL E. RITZER ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
BRIDGEWATER TODD E. YOUNG VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
CALIFON ANN W. KALLAM VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
CHATHAM - MAIN MARY ANNE MALONEY VICE PRESIDENT
--------------------------------------------------------------
LISA A. TREICH ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
CHATHAM - SHUNPIKE DONNA I. GISONE VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
CHESTER JOAN S. WYCHULES VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
CLINTON CAROLYN I. SEPKOWSKI VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
FAR HILLS ROHINTON E. MADON ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
FELLOWSHIP JANET E. BATTAGLIA ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
GLADSTONE THOMAS N. KASPER VICE PRESIDENT
--------------------------------------------------------------
ANNETTE F. MALANGA ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
HILLSBOROUGH TERESA M. LAWLER ASSISTANT VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
LONG VALLEY AMY E. GLASER VICE PRESIDENT
--------------------------------------------------------------
THERESE TADOLINI ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
MENDHAM LINDA S. ZIROPOULOS VICE PRESIDENT
--------------------------------------------------------------
ANNA M. MENTES ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
MORRISTOWN VALERIE A. OLPP VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
NEW VERNON DONNA I. GISONE VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
OLDWICK DEBORAH J. KREHELY ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
PLUCKEMIN LEE ANN HUNT VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
POTTERSVILLE TRACEY L. TODD ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
SUMMIT - DEFOREST M. NICOLE JEFFERYS VICE PRESIDENT
- -----------------------------------------------------------------------------------------------
WARREN RONALD F. FIELD ASSISTANT VICE PRESIDENT
--------------------------------------------------------------
JAMES CICCONE ASSISTANT CASHIER
- -----------------------------------------------------------------------------------------------
67
DIRECTORS
- --------------------------------------------------------------------------------
ANTHONY J. CONSI, II
Senior Vice President, Weichert Realtors
Morris Plains, NJ
- --------------------------------------------------------------------------------
PAMELA HILL
President, Ferris Corp
Gladstone, NJ
- --------------------------------------------------------------------------------
FRANK A. KISSEL
Chairman of the Board & Chief Executive Officer
- --------------------------------------------------------------------------------
JOHN D. KISSEL
Turpin Realty, Inc.
Far Hills, NJ
- --------------------------------------------------------------------------------
JAMES R. LAMB, ESQ.
James R. Lamb, P.C.
Morristown, NJ
- --------------------------------------------------------------------------------
EDWARD A. MERTON
President, Merton Excavating & Paving Co.
Chester, NJ
- --------------------------------------------------------------------------------
F. DUFFIELD MEYERCORD
Managing Director and Partner, Carl Marks Consulting Group, LLC
Bedminster, NJ
- --------------------------------------------------------------------------------
JOHN R. MULCAHY
Far Hills, NJ
- --------------------------------------------------------------------------------
ROBERT M. ROGERS
President & Chief Operating Officer
- --------------------------------------------------------------------------------
PHILIP W. SMITH, III
President, Phillary Management, Inc.
Far Hills, NJ
- --------------------------------------------------------------------------------
CRAIG C. SPENGEMAN
President, PGB Trust and Investments
- --------------------------------------------------------------------------------
JACK D. STINE
Director Emeritus
Pluckemin, NJ
- --------------------------------------------------------------------------------
68
OFFICES
- --------------------------------------------------------------------------------
LOAN & ADMINISTRATION BUILDING
158 ROUTE 206 NORTH, GLADSTONE, NJ 07934 (908) 234-0700
- --------------------------------------------------------------------------------
PGB TRUST & INVESTMENTS
190 MAIN STREET, GLADSTONE, NJ 07934 (908) 719-4360
- --------------------------------------------------------------------------------
BERNARDSVILLE
36 MORRISTOWN ROAD, BERNARDSVILLE, NJ 07924 (908) 766-1711
- --------------------------------------------------------------------------------
BRIDGEWATER
619 EAST MAIN STREET, BRIDGEWATER, NJ 08807 (908) 429-9988
- --------------------------------------------------------------------------------
CALIFON
438 ROUTE 513, CALIFON, NJ 07830 (908) 832-5131
- --------------------------------------------------------------------------------
CHATHAM - MAIN STREET
311 MAIN STREET, CHATHAM, NJ 07928 (973) 635-8500
- --------------------------------------------------------------------------------
CHATHAM - SHUNPIKE
650 SHUNPIKE ROAD, CHATHAM TOWNSHIP, NJ 07928 (973) 377-0081
- --------------------------------------------------------------------------------
CHESTER
350 MAIN STREET, CHESTER, NJ 07930 (908) 879-8115
- --------------------------------------------------------------------------------
CHUBB CORPORATE HEADQUARTERS
15 MOUNTAIN VIEW ROAD, WARREN, NJ 07059 (908) 903-2597
- --------------------------------------------------------------------------------
CLINTON
189 CENTER STREET, CLINTON, NJ 08809 (908) 238-1935
- --------------------------------------------------------------------------------
FAR HILLS
26 DUMONT ROAD, FAR HILLS, NJ 07931 (908) 781-1018
- --------------------------------------------------------------------------------
FELLOWSHIP VILLAGE
8000 FELLOWSHIP ROAD, BASKING RIDGE, NJ 07920 (908) 719-4332
- --------------------------------------------------------------------------------
GLADSTONE (MAIN OFFICE)
190 MAIN STREET, GLADSTONE, NJ 07934 (908) 719-4360
- --------------------------------------------------------------------------------
HILLSBOROUGH
417 ROUTE 206 NORTH, HILLSBOROUGH, NJ 08844 (908) 281-1031
- --------------------------------------------------------------------------------
LONG VALLEY
59 EAST MILL ROAD (ROUTE 24), LONG VALLEY, NJ 07853 (908) 876-3300
- --------------------------------------------------------------------------------
MENDHAM
17 EAST MAIN STREET, MENDHAM, NJ 07945 (973) 543-6499
- --------------------------------------------------------------------------------
MORRISTOWN
233 SOUTH STREET, MORRISTOWN, NJ 07960 (973) 455-1118
- --------------------------------------------------------------------------------
NEW VERNON
VILLAGE ROAD, NEW VERNON, NJ 07976 (973) 540-0444
- --------------------------------------------------------------------------------
OLDWICK
169 LAMINGTON ROAD, OLDWICK, NJ 08858 (908) 439-2320
- --------------------------------------------------------------------------------
PLUCKEMIN
468 ROUTE 206 NORTH, BEDMINSTER, NJ 07921 (908) 658-4500
- --------------------------------------------------------------------------------
POTTERSVILLE
11 POTTERSVILLE ROAD, POTTERSVILLE, NJ 07979 (908) 439-2265
- --------------------------------------------------------------------------------
SUMMIT - DEFOREST
48 DEFOREST AVENUE, SUMMIT, NJ 07901 (908) 273-2890
- --------------------------------------------------------------------------------
WARREN
58 MOUNTAIN BOULEVARD, WARREN, NJ 07059 (908) 757-2805
- --------------------------------------------------------------------------------
69
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
CORPORATE ADDRESS
- --------------------------------------------------------------------------------
158 Route 206, North
Gladstone, New Jersey 07934
(908) 234-0700
www.pgbank.com
STOCK LISTING
- --------------------------------------------------------------------------------
Peapack-Gladstone Financial Corporation common stock is traded on the
American Stock Exchange under the symbol PGC and reported in the Wall Street
Journal and most major newspapers.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
KPMG LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
TRANSFER AGENT
- --------------------------------------------------------------------------------
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
SHAREHOLDER RELATIONS
- --------------------------------------------------------------------------------
Arthur F. Birmingham, Executive Vice President and Chief Financial Officer
(908) 719-4308
birmingham@pgbank.com
ANNUAL MEETING
- --------------------------------------------------------------------------------
The annual meeting of shareholders of Peapack-Gladstone Financial Corporation
will be held on April 24, 2007 at 2:00 p.m. at Hamilton Farm Golf Club in
Gladstone.
70