FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------
SELECTED YEAR-END DATA: 2007 2006 2005
- -------------------------------------------------------------------------------------
NET INCOME $ 11,862 $ 10,226 $ 13,130
- -------------------------------------------------------------------------------------
TOTAL ASSETS 1,346,976 1,288,376 1,255,383
- -------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,180,267 1,144,736 1,041,996
- -------------------------------------------------------------------------------------
TOTAL SECURITIES 282,083 338,043 412,946
- -------------------------------------------------------------------------------------
TOTAL LOANS 981,180 870,153 768,473
- -------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 107,429 103,763 99,155
- -------------------------------------------------------------------------------------
TRUST DEPARTMENT ASSETS (MARKET VALUE) 2,028,232 1,924,954 1,761,846
- -------------------------------------------------------------------------------------
PER SHARE:
- -------------------------------------------------------------------------------------
EARNINGS-BASIC $ 1.43 $ 1.24 $ 1.58
- -------------------------------------------------------------------------------------
EARNINGS-DILUTED 1.42 1.22 1.56
- -------------------------------------------------------------------------------------
BOOK VALUE 12.94 12.55 11.97
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
FINANCIAL RATIOS:
- -------------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS 0.90% 0.79% 1.12%
- -------------------------------------------------------------------------------------
RETURN ON AVERAGE EQUITY 11.12 10.10 13.49
- -------------------------------------------------------------------------------------
CAPITAL LEVERAGE RATIO 8.59 8.20 8.66
- -------------------------------------------------------------------------------------
RISK BASED CAPITAL:
- -------------------------------------------------------------------------------------
TIER 1 14.92 15.33 16.71
- -------------------------------------------------------------------------------------
TOTAL 15.91 16.31 17.78
- -------------------------------------------------------------------------------------
NET INCOME
IN MILLIONS
- -----------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
-----------------------------------------------------
$12.30 $13.11 $13.13 $10.23 $11.86
TOTAL ASSETS
IN MILLIONS
- ------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
----------------------------------------------------
$968 $1,067 $1,255 $1,288 $1,347
DEPOSITS
IN MILLIONS
- -----------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
----------------------------------------------------
$846 $936 $1,042 $1,145 $1,180
EQUITY CAPITAL
IN MILLIONS
- --------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
--------------------------------------------------
$85.1 $94.7 $99.2 $103.8 $107.4
1
[PEAPACK GLADSTONE BANK LOGO]
DEAR SHAREHOLDERS AND FRIENDS,
We are delighted to report a 16% increase in earnings for the year 2007
and a 28% increase in the fourth quarter of 2007 vs. the same period in 2006. We
have waited patiently for the flat or inverted interest rate yield curve to
correct itself. The Federal Reserve Bank began lowering interest rates in
September and has continued with recent substantial cuts. A real yield curve is
very beneficial to the earnings of our Bank and adds value to the work being
done within our balance sheet.
You will recall previous letters and press releases where we have talked
about the slow and deliberate restructuring currently underway within our
balance sheet. We anticipate growing our commercial lending at a faster rate
than our retail business. We look to grow these portfolios in real terms and as
a percentage of our total loan portfolios.
We believe that our balance sheet is positioned to make the changes
necessary to be successful in this environment. We believe that as we move in
this direction, carefully and deliberately, we will be able to deliver
substantially better results for our shareholders. It is important that we all
understand that a rebalance like this takes time. It does not happen in a few
months or quarters. However, it is very exciting that we are beginning to see
results as we work into our plan. You will find much more detail in Management's
Discussion and Analysis beginning on page 6.
PGB TRUST AND INVESTMENTS
We would also like to write about the great progress in PGB Trust and
Investments. They ended the year with more than $2 billion in assets under
administration and generated in excess of $9,560,000 in fees for the year.
A second business like this in a Bank our size is an extremely rare asset.
The ability to generate substantial non-interest income adds to the quality of
our earnings year after year.
Our clients know the value of straight-forward, no-nonsense investment
management in these volatile times. They expect service levels not available
elsewhere and clear, honest advice to important issues in their lives. Most
combine asset management, tax planning and preparation, banking services and
borrowing all through their primary contact in PGB Trust and Investments.
3
We specialize in managing money today to ensure that your goals are met in
the future. Goals are established through good planning and they are met with
hard work and good execution. It all begins with a phone call to Craig Spengeman
or John Bonk.
BRANCHING
Our beautiful new branch in Summit opened this past April and has exceeded
our growth expectations. Hundreds of new customers have entrusted us with more
than $30,000,000 in new deposits. We are very pleased to be part of this vibrant
community.
We have just opened our new branch on Green Village Road in Chatham
Township. This branch replaces our small, old office with a full service
building, conveniently located just opposite the entrance to Hickory Tree Mall.
Access is easy for drive-up windows, drive-up ATM, safe deposit boxes and much,
much more. Existing and new customers love the upgrade.
Two other branches are expected to open this year. The first is in the
Kings Shopping Center at the intersection of Routes 22 and 523 in Whitehouse and
the second will be on Stelton Road in Piscataway. We believe that both are great
investments for the future.
PGC STOCK
We know that shareholder value is our most important priority. We have
been frustrated by an extremely difficult banking environment and you have been
patient. The good news is that Management and the Board is firmly focused on a
plan that we believe will reward your patience and create value in the years to
come.
The Board increased the quarterly cash dividend in November by $0.01 to
$0.16 per share, per quarter. Over the past six years, your cash dividend has
increased by 114%. It is our hope that our improvement in earnings and our
strong dividend history will motivate current and new shareholders to look
favorably on Peapack-Gladstone Financial Corporation. We think we have a great
story.
OUTLOOK
As we write this letter at the beginning of February, there are many
forces at work in the financial markets. The exact strengths and weaknesses of
the overall economy are currently being debated. Circumstances are changing so
quickly that we do not believe anyone is certain about where we are in this
cycle.
We are sure that sub-prime lending has provided inappropriate, and
sometimes irresponsible, credit to some individuals buying homes. As these loans
reprice, some of the borrowers are not able to afford the debt service. Most of
these loans were packaged together into new securities that have been sold
around the world. The distress to the individuals, the overall real estate
market and the holders of these securities is playing out now. We are sure that
there have been excesses and that they will have to work themselves through the
system before real improvement can begin.
4
We can also reassure shareholders and customers that we did not produce
sub-prime mortgages, nor did we purchase any securities collateralized with
sub-prime mortgages. We say this directly, not to gloat, but to confirm that
sub-prime debt would not have met our longstanding credit standards. The
distinction must always be made between lending to low or moderate income
individuals and sub-prime debt. Lending to low or moderate income individuals
using prudent underwriting standards is great business and we continue to seek
it out.
We have been through many cycles and market adjustments before and we will
not try to predict the extent of this one. We will continue to be careful as we
grow into the future. We are working hard to always exceed your expectations.
Thank you for your continuing support.
/s/ Craig C. Spengeman /s/ Frank A. Kissel /s/ Robert M. Rogers
Craig C. Spengeman Frank A. Kissel Robert M. Rogers
PRESIDENT & CIO CHAIRMAN & CEO PRESIDENT & COO
PGB TRUST & INVESTMENTS
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 22 branches in Somerset, Hunterdon,
Morris and Union counties.
On November 1, 2007, the quarterly cash dividend rate was increased to
$0.16 per share or a 7 percent increase over the previous rate of $0.15 per
share. The cash dividend rate has increased 114 percent in the past six years.
In 2007, the Corporation experienced increasing margins as a result of the
increase in the commercial loan portfolios and the balance sheet restructuring
completed in the third quarter of 2006. The Federal Reserve decreased the
federal funds target rate during the last two quarters of 2007. Loan growth was
strong, increasing more than $111.0 million, while deposits increased $35.5
million and securities declined $55.0 million. Net interest income on a
tax-equivalent basis rose $2.9 million during the year, which is attributable in
large part to increases in interest-earning assets and interest-bearing
liabilities. Highly competitive loan and deposit pricing continue to put
pressure on the net interest margin. Yields on interest-earning assets increased
32 basis points, while yields on interest-bearing liabilities increased 18 basis
points. The net interest margin increased 19 basis points or 7 percent over 2006
levels. As discussed in this Management's Discussion and Analysis section, some
of the highlights include:
o Total average loans increased $82.1 million or 10 percent from 2006,
as average commercial loans increased $60.6 million or 20 percent.
o Net interest margin was 2.95 percent in 2007, an increase of 19
basis points as compared to 2006.
o Total average deposits increased $94.6 million or 9 percent from
2006.
o The Bank opened its 22nd branch, a full-service facility in Summit.
o PGB Trust and Investment assets surpassed $2 billion for the first
time.
o Revenues from trust income increased 14 percent from 2006 levels.
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, 2007, contains a summary of the Corporation's
significant accounting policies.
6
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.
RETURN ON AVERAGE EQUITY
IN PERCENT
- ------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
------------------------------------------------
15.14 14.72 13.49 10.10 11.12
RETURN ON AVERAGE ASSETS
IN PERCENT
- ------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
----------------------------------------------
1.34 1.30 1.12 0.79 0.90
The provision for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's provision
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the
Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
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.
7
EARNINGS SUMMARY: For the year ended December 31, 2007, the Corporation's net
income was $11.9 million, an increase of $1.7 million or 16 percent, as compared
to $10.2 million for the year ended December 31, 2006. Earnings per diluted
share were $1.42 and $1.22 for the years 2007 and 2006, respectively.
In 2007, these results produced a return on average assets of 0.90 percent
as compared to 0.79 percent in 2006 and a return on average shareholders' equity
of 11.12 percent as compared to 10.10 percent in 2006.
The Corporation implemented a long-term business plan in 2007, which calls
for a shift in the asset mix to place more emphasis on commercial loans and
commercial mortgages. The balance sheet is uniquely suited to accommodate a
gradual and significant change. Despite the growth in the commercial business,
the Corporation's conservative underwriting requirements remain unchanged.
NET INTEREST INCOME: Net interest income is the primary source of the
Corporation's operating income. Net interest income 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 2007 as loan delinquencies remained
at low levels.
NET INTEREST INCOME
IN MILLIONS
- -------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
---------------------------------------------------
$31.2 $35.1 $35.3 $32.8 $35.9
Net interest income, on a fully tax-equivalent basis, rose to $36.8
million from $34.0 million in 2006. Average earning assets increased $16.8
million or one percent from the average balances in 2006 and rates earned on
earning assets increased 32 basis points in 2007. Interest expense increased 6
percent over the levels recorded in 2006 on average balances of interest-bearing
liabilities that increased $4.7 million. Rates paid in 2007 on interest-bearing
liabilities rose 18 basis points over those paid in 2006. Although competition
remains strong, interest rates were also influenced by decreases in the federal
funds target rates during the last two quarters of 2007. The net interest margin
rose to 2.95 percent in 2007 from 2.76 percent in 2006.
On a fully tax-equivalent basis, interest income on earning assets was
$73.3 million, an increase of $4.9 million, or 7 percent, over 2006 levels. This
increase was primarily due to higher average loans, which rose $82.1 million,
offset in part by a decline of $74.4 million in average investments. Rates
increased 45 basis points on investments due in part to the maturities of lower
yielding bonds. Rates earned on loans increased 17 basis points, reflecting the
Corporation's increased emphasis on commercial and construction lending, which
yields higher rates.
8
During the year, interest expense rose $2.0 million due to higher rates
paid on interest-bearing deposits. Interest expense on borrowings declined due
to volume, but was offset by increases to interest expense due to increased
volume of interest-bearing deposits. The overall rate paid on interest-bearing
deposits increased 33 basis points to 3.60 percent in 2007 as compared to 3.27
percent in 2006. Rates paid on borrowings declined 74 basis points to 3.92
percent as overall borrowings declined.
On average, our High Yield money market account increased $176.4 million;
offsetting the discontinued Fed Tracker money market accounts, which declined by
$105.2 million. Certificates of deposit grew $39.8 million on average or 11
percent. The traditional money market and savings products declined, on average
$21.6 million and $12.8 million, respectively. Average interest-bearing checking
accounts declined $4.5 million or 3 percent over the comparable period in 2006.
Average noninterest-bearing demand deposits increased $6.3 million or 4 percent
during 2007 as compared to 2006.
Average overnight borrowings decreased $19.5 million during 2007 to $5.4
million. The Corporation decreased short-term borrowings to zero during 2006 as
a result of the restructuring initiative and they remained at zero during 2007.
Average Federal Home Loan Bank advances declined $3.6 million as the result of
maturities and normal principal payments.
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 continues to experience an
improvement in net interest income and net interest margin following the
implementation of the restructuring strategy.
9
THE FOLLOWING TABLE COMPARES THE AVERAGE BALANCE SHEETS, NET INTEREST SPREADS
AND NET INTEREST MARGINS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(FULLY TAX-EQUIVALENT-FTE):
YEAR ENDED DECEMBER 31, 2007
- ----------------------------------------------------------------------------------------------------------------
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE (1) $ 266,977 $ 13,707 5.13%
- ----------------------------------------------------------------------------------------------------------------
TAX-EXEMPT (1) (2) 55,845 2,930 5.25
- ----------------------------------------------------------------------------------------------------------------
LOANS (2) (3) 910,485 55,970 6.15
- ----------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 12,506 656 5.24
- ----------------------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 804 39 4.91
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 1,246,617 $ 73,302 5.88%
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 22,135
- ----------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (6,945)
- ----------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 25,321
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS 26,519
- ----------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 67,030
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,313,647
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
CHECKING $ 133,574 $ 1,076 0.81%
- ----------------------------------------------------------------------------------------------------------------
MONEY MARKETS 383,279 14,700 3.84
- ----------------------------------------------------------------------------------------------------------------
SAVINGS 69,247 466 0.67
- ----------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 391,922 19,004 4.85
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 978,022 35,246 3.60
- ----------------------------------------------------------------------------------------------------------------
BORROWED FUNDS 31,568 1,237 3.92
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 1,009,590 36,483 3.61
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 185,909
- ----------------------------------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 11,485
- ----------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-BEARING LIABILITIES 197,394
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 106,663
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,313,647
================================================================================================================
NET INTEREST INCOME $ 36,819
================================================================================================================
NET INTEREST SPREAD 2. 27
- ----------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN (4) 2. 95%
- ----------------------------------------------------------------------------------------------------------------
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.
10
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%
- ----------------------------------------------------------------------------------------------------------------
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%
- ----------------------------------------------------------------------------------------------------------------
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 2007 COMPARED WITH 2006 YEAR ENDED 2006 COMPARED WITH 2005
- ------------------------------------------------------------------------------------------------------
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 $ (2,886) $ 873 $ (2,013) $ (900) $ 1,790 $ 890
- ------------------------------------------------------------------------------------------------------
LOANS 5,947 468 6,415 10,225 737 10,962
- ------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 502 8 510 27 46 73
- ------------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS (24) 2 (22) 19 16 35
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 3,539 $ 1,351 $ 4,890 $ 9,371 $ 2,589 $ 11,960
======================================================================================================
LIABILITIES
CHECKING $ (41) $ 73 $ 32 $ (1,521) $ 373 $ (1,148)
- ------------------------------------------------------------------------------------------------------
MONEY MARKET 2,481 264 2,745 2,384 3,958 6,342
- ------------------------------------------------------------------------------------------------------
SAVINGS (85) (16) (101) (124) -- (124)
- ------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 1,837 1,662 3,499 2,907 3,989 6,896
- ------------------------------------------------------------------------------------------------------
BORROWED FUNDS (4,145) 9 (4,136) 1,667 688 2,355
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 47 $ 1,992 $ 2,039 $ 5,313 $ 9,008 $ 14,321
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 3,492 $ (641) $ 2,851 $ 4,058 $ (6,419) $ (2,361)
======================================================================================================
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.
Total loans at December 31, 2007, were $981.2 million as compared to
$870.2 million at December 31, 2006, an increase of $111.0 million or 13
percent. The growth in the portfolios is primarily the result of new business
initiatives and our entry into new market areas. Construction loans totaled
$60.6 million, an increase of $15.8 million, or 35 percent. In 2007, commercial
mortgage loans rose $71.7 million or 43 percent to $237.3 million, while
residential loans secured by first liens on 1-4 family homes declined slightly
by $1.1 million from 2006 levels. Commercial loans also grew by $22.4 million or
21 percent during 2007. The Corporation's long-term strategy calls for an
increased emphasis on construction and commercial lending, which yields higher
returns.
The yield on total loans increased 17 basis points to 6.15 percent for
2007 from the 5.98 percent average yield earned in 2006. The average yield on
the mortgage portfolio rose in 2007 to 5.23 percent from 5.17 percent in 2006.
The average yield on commercial mortgage loans increased 10 basis points to 6.53
percent. In 2007, average yields on commercial loans and commercial construction
loans increased 14 basis points and 31 basis points, respectively. 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) 2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE $ 497,016 $ 498,079 $ 453,635 $ 315,711 $ 218,309
- ---------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE 237,316 165,652 157,672 129,922 109,435
- ---------------------------------------------------------------------------------------
COMMERCIAL LOANS 129,747 107,357 100,787 69,947 56,216
- ---------------------------------------------------------------------------------------
COMMERCIAL-CONSTRUCTION 60,589 44,764 12,703 17,703 9,799
- ---------------------------------------------------------------------------------------
CONSUMER LOANS 37,264 35,836 23,468 19,597 15,218
- ---------------------------------------------------------------------------------------
OTHER LOANS 19,248 18,465 20,208 19,284 18,024
- ---------------------------------------------------------------------------------------
TOTAL LOANS $ 981,180 $ 870,153 $ 768,473 $ 572,164 $ 427,001
=======================================================================================
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. treasury securities, mortgage-backed securities and municipal
obligations. The Corporation's investment securities held to maturity at
amortized cost amounted to $45.1 million at December 31, 2007, compared with
$55.2 million at December 31, 2006.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF INVESTMENT
SECURITIES HELD TO MATURITY AT AMORTIZED COST, AS OF DECEMBER 31, 2007:
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
--% 4.89% --% --% 4.89%
- --------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (1) $ -- $ 2,183 $ 2,985 $ 8,028 $ 13,196
--% 4.76% 5.58% 5.31% 5.28%
- --------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS (2) $ 10,648 $ 19,445 $ 1,350 $ -- $ 31,443
4.14% 4.54% 7.10% --% 4.51%
- --------------------------------------------------------------------------------------------------
TOTAL $ 10,648 $ 22,128 $ 4,335 $ 8,028 $ 45,139
4.14% 4.57% 6.05% 5.31% 4.74%
==================================================================================================
(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.
At December 31, 2007, the Corporation had securities available for sale
with a fair value of $236.9 million, compared with $282.9 million at December
31, 2006. A $4.6 million net unrealized loss (net of income tax) and a $1.4
million net unrealized loss (net of income tax) was included in shareholders'
equity at December 31, 2007 and December 31, 2006, respectively.
13
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF SECURITIES
AVAILABLE FOR SALE, STATED AT FAIR VALUE, AS OF DECEMBER 31, 2007:
AFTER 1 AFTER 5
BUT BUT
WITHIN WITHIN WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SPONSORED AGENCIES $ 10,503 $ 13,549 $ -- $ -- $ 24,052
5.05% 4.60% --% --% 4.79%
- ----------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES(1) $ 59 $ 8,306 $ 22,739 $ 87,389 $ 118,493
5.44% 4.14% 4.32% 5.01% 4.82%
- ----------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS(2) $ -- $ 5,064 $ 2,900 $ 16,659 $ 24,623
--% 5.90% 6.20% 6.45% 6.31%
- ----------------------------------------------------------------------------------------------------
OTHER SECURITIES $ -- $ 893 $ -- $ 64,852 $ 65,745
--% 5.61% --% 6.40% 6.27%
- ----------------------------------------------------------------------------------------------------
$ 10,562 $ 27,812 $ 25,639 $ 168,900 $ 232,913
5.05% 4.73% 4.53% 5.71% 5.44%
- ----------------------------------------------------------------------------------------------------
MARKETABLE EQUITY SECURITIES $ 4,031 $ -- $ -- $ -- $ 4,031
4.21% --% --% --% 4.21%
- ----------------------------------------------------------------------------------------------------
TOTAL $ 14,593 $ 27,812 $ 25,639 $ 168,900 $ 236,944
4.81% 4.73% 4.53% 5.71% 5.42%
====================================================================================================
(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 investments during 2007 was $13.3 million as compared to $4.2
million in 2006.
DEPOSITS: Total deposits at December 31, 2007 were $1.18 billion, an increase of
$35.5 million or 3 percent from $1.14 billion at December 31, 2006. 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 growth in deposits. Total average
deposits increased $94.6 million, or 9 percent in 2007, over 2006 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) 2007 2006 2005
- ---------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND $ 185,909 --% $ 179,597 --% $ 172,692 --%
- ---------------------------------------------------------------------------------------------------
CHECKING 133,574 0.81 138,045 0.76 191,305 1.15
- ---------------------------------------------------------------------------------------------------
SAVINGS 69,247 0.67 82,016 0.69 99,594 0.69
- ---------------------------------------------------------------------------------------------------
MONEY MARKETS 383,279 3.84 317,524 3.77 249,096 2.25
- ---------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 391,922 4.85 352,114 4.40 273,140 3.15
- ---------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 1,163,931 $ 1,069,296 $ 985,827
===================================================================================================
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.
THE FOLLOWING TABLE SHOWS REMAINING MATURITY FOR CERTIFICATES OF DEPOSIT OVER
$100,000 AS OF DECEMBER 31, 2007 (IN THOUSANDS):
THREE MONTHS OR LESS $ 67,633
- --------------------------------------------------------------------------------
OVER THREE MONTHS THROUGH TWELVE MONTHS 79,567
- --------------------------------------------------------------------------------
OVER TWELVE MONTHS 8,210
- --------------------------------------------------------------------------------
TOTAL $ 155,410
================================================================================
14
FEDERAL HOME LOAN BANK ADVANCES: At December 31, 2007 and 2006, Federal Home
Loan Bank (FHLB) advances totaled $29.2 million and $24.0 million, respectively,
with a weighted average interest rate of 3.69 percent and 3.59 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, 2007 have
varying terms and interest rates.
At December 31, 2007, overnight borrowings totaled $15.7 million. There
were no overnight borrowings at December 31, 2006
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses
was $7.5 million at December 31, 2007 as compared to $6.8 million at December
31, 2006. At December 31, 2007, the allowance for loan losses as a percentage of
total loans outstanding was 0.76 percent compared to 0.78 percent at December
31, 2006 and 0.83 percent at December 31, 2005. The provision for loan losses
was $750 thousand for 2007 and $414 thousand for 2006. The allowance as a
percentage of total loans declined in 2007 as compared to 2006, while the
provision increased over the prior year due to loan growth and increases in
commercial-related loans.
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) 2007 2006 2005 2004 2003
- ------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF
YEAR $ 6,768 $ 6,378 $ 5,989 $ 5,439 $ 4,778
- ------------------------------------------------------------------------------------------------
LOANS CHARGED-OFF DURING THE PERIOD
MORTGAGE -- -- -- -- --
- ------------------------------------------------------------------------------------------------
CONSUMER 23 13 14 16 42
- ------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER -- 13 2 62 --
- ------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED-OFF 23 26 16 78 42
- ------------------------------------------------------------------------------------------------
RECOVERIES DURING THE PERIOD
- ------------------------------------------------------------------------------------------------
MORTGAGE -- -- -- -- 37
- ------------------------------------------------------------------------------------------------
CONSUMER 2 1 2 6 40
- ------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 3 1 12 9 34
- ------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 5 2 14 15 111
- ------------------------------------------------------------------------------------------------
NET CHARGE-OFFS/(RECOVERIES) 18 24 2 63 (69)
- ------------------------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 750 414 391 613 592
- ------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT END OF YEAR $ 7,500 $ 6,768 $ 6,378 $ 5,989 $ 5,439
================================================================================================
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) 2007 LOANS 2006 LOANS 2005 LOANS 2004 LOANS 2003 LOANS
- ------------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL $ 2,333 52.5 $ 2,910 59.1 $ 2,888 61.5 $ 2,647 58.4 $ 2,623 55.1
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 4,885 43.7 3,591 36.8 3,327 35.4 3,145 38.2 2,603 41.3
- ------------------------------------------------------------------------------------------------------------------------------
CONSUMER 282 3.8 267 4.1 163 3.1 197 3.4 213 3.6
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,500 100.0 $ 6,768 100.0 $ 6,378 100.0 $ 5,989 100.0 $ 5,439 100.0
==============================================================================================================================
16
NON-PERFORMING ASSETS:
THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF
NON-PERFORMING ASSETS:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2007 2006 2005 2004 2003
- -----------------------------------------------------------------------------------------------
LOANS PAST DUE 90 DAYS OR MORE
AND STILL ACCRUING INTEREST $ -- $ 197 $ 47 $ -- $ 56
- -----------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS 2,131 1,880 339 351 159
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 2,131 2,077 386 351 215
- -----------------------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- -- -- -- --
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $ 2,131 $ 2,077 $ 386 $ 351 $ 215
===============================================================================================
LOAN CHARGE-OFFS $ 23 $ 26 $ 16 $ 78 $ 42
- -----------------------------------------------------------------------------------------------
LOAN RECOVERIES (5) (2) (14) (15) (111)
- -----------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS/(RECOVERIES) $ 18 $ 24 $ 2 $ 63 $ (69)
===============================================================================================
ALLOWANCE FOR LOAN LOSSES $ 7,500 $ 6,768 $ 6,378 $ 5,989 $ 5,439
===============================================================================================
RATIOS:
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/TOTAL LOANS 0.22% 0.24% 0.05% 0.06% 0.05%
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/TOTAL ASSETS 0.16 0.16 0.03 0.03 0.02
- -----------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS/TOTAL ASSETS 0.16 0.16 0.03 0.03 0.02
- -----------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/TOTAL LOANS 0.76 0.78 0.83 1.05 1.27
- -----------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/TOTAL
NON-PERFORMING LOANS 3.5X 3.3X 16.5X 17.1X 25.3X
- -----------------------------------------------------------------------------------------------
Interest income of $149 thousand, $129 thousand and $21 thousand would
have been recognized during 2007, 2006 and 2005, 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,
2007. Further discussion of these commitments is included in the Footnotes to
the Consolidated Financial Statements noted below:
LESS THAN MORE THAN
(IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ----------------------------------------------------------------------------------------------
LOAN COMMITMENTS $ 142,949 $ -- $ -- $ -- $ 142,949
- ----------------------------------------------------------------------------------------------
LONG-TERM DEBT OBLIGATIONS 1,421 15,622 8,908 3,218 29,169
- ----------------------------------------------------------------------------------------------
OPERATING LEASE OBLIGATIONS 2,467 4,582 3,372 11,278 21,699
- ----------------------------------------------------------------------------------------------
PURCHASE OBLIGATIONS 192 -- -- -- 192
- ----------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (1) 1,000 -- -- -- 1,000
- ----------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS $ 148,029 $ 20,204 $ 12,280 $ 14,496 $ 195,009
==============================================================================================
(1) THE CORPORATION ANTICIPATES THAT IT WILL CONTRIBUTE APPROXIMATELY $1.0
MILLION TO THE PENSION PLAN IN 2008, BUT IT DOES NOT HAVE AN ESTIMATE OF THE
ACTUAL PENSION CONTRIBUTION FOR 2009 AND BEYOND.
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. 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, consisting primarily of letters
of credit, as of December 31, 2007. 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 $ 1,056 $ 400 $ -- $ -- $ 1,456
- ---------------------------------------------------------------------------------------
PERFORMANCE LETTERS OF CREDIT 4,754 373 -- -- 5,127
- ---------------------------------------------------------------------------------------
COMMERCIAL LETTERS OF CREDIT 5,809 -- -- 275 6,084
- ---------------------------------------------------------------------------------------
TOTAL LETTERS OF CREDIT $ 11,619 $ 773 $ -- $ 275 $ 12,667
=======================================================================================
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 $14.0 million in 2007, an increase of 37 percent
over 2006 levels. The increase was attributable to increases in trust fees and
other noninterest income, offset in part by a decline in other fee income. In
addition, the Corporation recorded a net gain on securities sold in 2007 as
compared to a net loss on securities sold in 2006.
Trust fees totaling $9.6 million were realized in 2007, an increase of
$1.2 million, or 14 percent over the levels in 2006. This increase is
attributable to higher fee schedules and an increased volume of business as the
market value of assets under management increased to $2.03 billion in 2007
compared to $1.92 billion in 2006.
Other income of $900 thousand was realized in 2007 on increased cash
surrender value on Bank Owned Life Insurance (BOLI) policies, as compared to
$837 thousand in 2006.
In 2007, the Corporation recognized a pre-tax gain of $548 thousand on the
sale of a non-banking related property and other fixed assets as compared to $15
thousand in 2006.
The Corporation recognized net gains on sales of securities in 2007 of
$254 thousand as compared to net losses on sales of securities in 2006 of $1.8
million. 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.
18
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER INCOME:
(IN THOUSANDS) 2007 2006 2005
- --------------------------------------------------------------------------------
TRUST FEES $ 9,563 $ 8,367 $ 7,640
- --------------------------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 2,021 1,960 1,877
- --------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 900 837 802
- --------------------------------------------------------------------------------
GAINS ON SALES OF FIXED ASSETS 548 15 28
- --------------------------------------------------------------------------------
OTHER NONINTEREST INCOME 428 519 254
- --------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES), NET 254 (1,781) 551
- --------------------------------------------------------------------------------
SAFE DEPOSIT RENTAL FEES 239 233 233
- --------------------------------------------------------------------------------
OTHER FEE INCOME 90 117 110
- --------------------------------------------------------------------------------
TOTAL OTHER INCOME $ 14,043 $ 10,267 $ 11,495
================================================================================
OTHER EXPENSES: In 2007, other expenses totaled $32.1 million as compared to
$28.9 million in 2006, an increase of $3.1 million or 11 percent. This increase
is commensurate with the growth in the overall level of bank and trust business
activity.
Salaries and benefits expense, which accounts for the largest portion of
other expenses, increased $1.8 million, or 12 percent, in 2007 as compared to
2006. In an effort to improve the net interest margin, the Corporation's
strategic plan calls for an increased emphasis on commercial and construction
loans, and accordingly, we hired additional commercial lending officers and
support staff in 2007. In addition to this increase in staff, salary expense
rose due to normal salary increases, trust department and branch expansion and
higher group health insurance. At December 31, 2007, the Corporation's full-time
equivalent staff was 254 compared with 232 at December 31, 2006.
Premises and equipment expense increased to $7.8 million in 2007 from $6.9
million in 2006, an increase of $852 thousand, or 12 percent. The Corporation
opened its 22nd branch in Summit, New Jersey, in April 2007 and began recording
additional depreciation, utility and maintenance expense as a result. The
Corporation also recorded additional maintenance costs for branch upkeep and
increases to expenditures such as utilities and real estate taxes.
Professional and legal fees increased $291 thousand, or 35 percent, over
levels for 2006, due in part to expenses generated by a review of our benefit
plans and higher recruitment fees to fill new lending positions. Advertising
expenses increased $160 thousand, or 22 percent when compared to 2006 due to
additional advertising for the Summit Branch and to promote deposit products.
Excluding the above-mentioned components of other expense, all other expense
categories totaled $4.8 million, an increase of $26 thousand, or less than one
percent. The Corporation strives to operate in an efficient manner and control
costs as a means of producing increased earnings and enhancing shareholder
value.
19
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER EXPENSES:
(IN THOUSANDS) 2007 2006 2004
- --------------------------------------------------------------------------------
SALARIES AND BENEFITS $ 17,511 $ 15,698 $ 14,682
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 7,761 6,909 6,705
- --------------------------------------------------------------------------------
PROFESSIONAL AND LEGAL FEES 1,124 833 565
- --------------------------------------------------------------------------------
ADVERTISING 892 732 936
- --------------------------------------------------------------------------------
TRUST DEPARTMENT 483 467 408
- --------------------------------------------------------------------------------
TELEPHONE 450 396 390
- --------------------------------------------------------------------------------
STATIONERY AND SUPPLIES 440 469 536
- --------------------------------------------------------------------------------
POSTAGE 342 339 286
- --------------------------------------------------------------------------------
OTHER EXPENSES 3,084 3,102 2,984
- --------------------------------------------------------------------------------
TOTAL OTHER EXPENSES $ 32,087 $ 28,945 $ 27,492
================================================================================
INCOME TAXES: Income tax expense for the years ended December 31, 2007 and 2006
was $5.2 million and $3.5 million, respectively. The effective tax rate for the
year ended December 31, 2007 was 30.53 percent compared to 25.53 percent for the
year ended December 31, 2006. Higher taxable income combined with new
regulations adopted by the State of New Jersey, Division of Taxation, relating
to the dividends paid deduction on the Real Estate Investment Trust (REIT)
subsidiary were the primary reasons for the higher effective tax rate.
RESULTS OF OPERATIONS 2006 COMPARED TO 2005: 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 resulting reduced net interest income.
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.
In 2006, other income was $10.3 million, a decline of 11 percent over 2005
levels and was attributable to a net loss on securities sold in 2006 offset, in
part, by increases in trust fees and other noninterest income.
20
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. 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 increased $727 thousand, or 10 percent, to $8.4 million in 2006
as compared to 2005. This increase is attributable to an increased volume of
business as the market value of assets under management increased to $1.92
billion. Other income of $837 thousand was realized in 2006 on increased cash
surrender value on Bank Owned Life Insurance (BOLI) policies, as compared to
$802 thousand in 2005. In 2006, other noninterest income, including net gains on
sales of fixed assets, of $534 thousand was realized, an increase of $252
thousand, or 89 percent and was primarily due to increased non-recurring
commercial and construction loan fee income.
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.
Salaries and benefits expense 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. 123R, "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.
In 2006, premises and equipment expense increased to $6.9 million from
$6.7 million in 2005, an increase of $204 thousand, or 3 percent, due to
increases charged by outside vendors for utilities, real estate taxes and
additional maintenance costs for branch upkeep.
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.
21
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 $3.7
million or 4 percent to $107.4 million at December 31, 2007 as compared with
$103.8 million at December 31, 2006.
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, 2007, unrealized losses on securities, net of taxes, were
$4.6 million as compared to unrealized losses on securities, net of taxes, of
$1.4 million at December 31, 2006.
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 14.92 percent
and 15.91 percent, respectively, at December 31, 2007. The Corporation's capital
leverage ratio was 8.59 percent at December 31, 2007.
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 $28.2 million at December 31, 2007. In
addition, the Corporation has $236.9 million in securities designated as
available for sale. These securities can be sold in response to liquidity
concerns. As of December 31, 2007, investment securities and securities
available for sale maturing within one year amounted to $21.2 million.
22
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.
ASSET/LIABILITY MANAGEMENT: The Corporation's Asset/Liability Committee (ALCO)
is responsible for managing the exposure to changes in market interest rates and
for establishing policies that monitor and coordinate its sources, uses and
pricing of funds.
We have sought to manage our interest rate risk in order to control the
exposure of our earnings and capital to changes in interest rates. As part of
our ongoing asset/liability management, we currently use the following
strategies to manage our interest rate risk:
o Actively market adjustable-rate residential mortgage loans
o Actively market commercial business loans, which tend to have shorter
terms and higher interest rates than residential mortgage loans, and which
generate customer relationships that can result in higher non-interest
bearing demand deposit accounts
o Lengthen the weighted average maturity of our liabilities through retail
deposit pricing strategies and through longer-term wholesale funding
sources such as fixed-rate advances from the Federal Home Loan Bank of New
York
o Invest in shorter to medium-term securities
o Maintain high levels of capital
The Corporation is not engaged in hedging through the use of derivatives
nor does it use interest rate caps and floors.
ALCO uses a simulation model to analyze net interest income sensitivity to
movements in interest rates. The simulation model projects net interest income
based on various interest rate scenarios over a 12 and 24 month period. The
model is based on the actual maturity and repricing characteristics of
rate-sensitive assets and liabilities. The model incorporates certain
assumptions, which management believes to be reasonable, regarding the impact of
changing interest rates and the prepayment assumptions of certain assets and
liabilities as of December 31, 2007. The model assumes changes in interest rates
without any proactive change in the balance sheet by management. In the model,
the forecasted shape of the yield curve remains static as of December 31, 2007.
23
The simulation model is based on market interest rates and prepayment
speeds prevalent in the market as of December 31, 2007. New interest-earning
asset and interest-bearing liability originations and rate spreads are estimated
using the Corporation's budgeted originations for 2008.
THE TABLE SHOWS THE ESTIMATED CHANGES IN THE CORPORATION'S NET PORTFOLIO VALUE
THAT WOULD RESULT FROM AN IMMEDIATE PARALLEL CHANGE IN THE MARKET INTEREST RATES
AT DECEMBER 31, 2007:
ESTIMATED INCREASE/ NPV AS A PERCENTAGE OF
(DOLLARS IN THOUSANDS) DECREASE IN NPV PRESENT VALUE OF ASSETS (2)
- -------------------------------------------------------------------------------
CHANGE IN INCREASE/
INTEREST RATES ESTIMATED NPV (DECREASE)
(BASIS POINTS) NPV (1) AMOUNT PERCENT RATIO (3) (BASIS POINTS)
- -------------------------------------------------------------------------------
+ 300 $ 162,228 $ (14,052) (7.97)% 13.52% (24)
- -------------------------------------------------------------------------------
+ 200 169,315 (6,965) (3.95) 13.79 3
- -------------------------------------------------------------------------------
+ 100 175,297 (983) (0.56) 13.96 20
- -------------------------------------------------------------------------------
-- 176,280 -- -- 13.76 --
- -------------------------------------------------------------------------------
-100 169,039 (7,241) (4.11) 13.00 (76)
- -------------------------------------------------------------------------------
-200 155,417 (20,863) (11.84) 11.82 (194)
- -------------------------------------------------------------------------------
-300 141,833 (34,447) (19.54) 10.65 (311)
- -------------------------------------------------------------------------------
(1) NPV IS THE DISCOUNTED PRESENT VALUE OF EXPECTED CASH FLOWS FROM ASSETS AND
LIABILITIES.
(2) PRESENT VALUE OF ASSETS REPRESENTS THE DISCOUNTED PRESENT VALUE OF INCOMING
CASH FLOWS ON INTEREST-EARNING ASSETS.
(3) NPV RATIO REPRESENTS NPV DIVIDED BY THE PRESENT VALUE OF ASSETS.
Certain shortcomings are inherent in the methodologies used in determining
interest rate risk through changes in net portfolio value. Modeling changes in
net portfolio value require making certain assumptions that may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the net portfolio value tables presented assume
that the composition of our interest-sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
assume that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value tables provide an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on our net interest income and
will differ from actual results.
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.
Real estate prices have declined in the Corporation's trade area and the
values of real estate collateralizing the Corporation's loans could also be
adversely affected. However, the Corporation is monitoring the situation closely
and its results have not been adversely affected.
24
RECENT ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (Statement No. 159). Statement No.
159 provides companies with an option to report selected financial assets and
liabilities at fair value. Statement No. 159's objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Statement No. 159 is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of Statement No. 157. The adoption of Statement No. 159 did not have
a material impact on its financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" (Statement No. 157). Statement No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Statement No. 157 establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007. The
adoption of Statement No. 157 did not have a material impact on its financial
statements.
In September 2006, the FASB Emerging Issues Task Force (EITF) finalized
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements." EITF 06-4
requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants' employment
or retirement. The required accrued liability will be based on either the
post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The adoption of EITF 06-4 will result in an accrued benefit liability
entry of $449 thousand, which will be taken against retained earnings and an
annual expense of approximately $94 thousand in 2008.
In September 2006, the FASB EITF finalized Issue No. 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4" (Accounting for Purchases of
Life Insurance). EITF 06-5 requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be
realized under the insurance contract. EITF 06-5 also requires that if the
contract provides for a greater surrender value if all individual policies in a
group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual
basis. Lastly, EITF 06-5 discusses whether the cash surrender value should be
discounted when the policyholder is contractually limited in its ability to
surrender a policy. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF 06-5 did not have a material impact on
the financial statements.
25
In March 2006, the FASB issued Statement No. 156, "Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140"
(Statement No. 156). Statement No. 156 provides the following: 1) revised
guidance on when a servicing asset and servicing liability should be recognized;
2) requires all separately recognized servicing assets and servicing liabilities
to be initially measured at fair value, if practicable; 3) permits an entity to
elect to measure servicing assets and servicing liabilities at fair value each
reporting date and report changes in fair value in earnings in the period in
which the changes occur; 4) upon initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities for
securities which are identified as offsetting the entity's exposure to changes
in the fair value of servicing assets or liabilities that a servicer elects to
subsequently measure at fair value; and 5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the statement of financial position and additional footnote disclosures.
Statement No. 156 is effective as of the beginning of an entity's first fiscal
year that begins after September 15, 2006 with the effects of initial adoption
being reported as a cumulative-effect adjustment to retained earnings. The
adoption of Statement No. 156 did not have a material impact on the
Corporation's consolidated financial statements.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,
"Written Loan Commitments Recorded at Fair Value through Earnings" (SAB 109).
Previously, SAB 105, "Application of Accounting Principles to Loan Commitments,"
stated that in measuring the fair value of a derivative loan commitment, a
company should not incorporate the expected net future cash flows related to the
associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that
the expected net future cash flows related to the associated servicing of the
loan should be included in measuring fair value for all written loan commitments
that are accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB 109 retains that view.
SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The adoption of SAB 109 did
not have a material impact on the Corporation's consolidated financial
statements.
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 Gladstone, Morristown and
Summit Branches.
The market value of assets under management at December 31, 2007 was in
excess of $2.03 billion. Fee income generated by PGB Trust and Investments was
$9.6 million, $8.4 million and $7.6 million in 2007, 2006 and 2005,
respectively.
TRUST ASSETS
MARKET VALUE IN BILLIONS
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
-------------------------------------
$1.42 $1.69 $1.76 $1.92 $2.03
26
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 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 Effectiveness of the Corporation's balance sheet restructuring
initiative.
o Unexpected decline in the direction of the economy in New Jersey.
o Unexpected changes in interest rates.
o Failure to grow business.
o Inability to manage growth in commercial loans.
o Unexpected loan prepayment volume.
o Unanticipated exposure to credit risks.
o Insufficient allowance for loan losses.
o Competition from other financial institutions.
o Adverse effects of government regulation or different than
anticipated effects from existing regulations.
o Decline in the levels of loan quality and origination volume.
o Decline in trust assets or deposits.
o Unexpected classification of securities to other-than-temporary
impaired status.
The Corporation assumes no responsibility to update such forward-looking
statements in the future.
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) 2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
SUMMARY EARNINGS:
INTEREST INCOME $ 72,352 $ 67,267 $ 55,414 $ 44,917 $ 41,426
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 36,483 34,444 20,123 9,860 10,262
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 35,869 32,823 35,291 35,057 31,164
- ---------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 750 414 391 613 592
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 35,119 32,409 34,900 34,444 30,572
- ---------------------------------------------------------------------------------------------------------------
OTHER INCOME, EXCLUSIVE OF SECURITIES
GAINS/(LOSSES), NET 13,789 12,048 10,944 9,777 8,788
- ---------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 32,087 28,945 27,492 25,178 22,557
- ---------------------------------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES), NET 254 (1,781) 551 150 1,284
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 17,075 13,731 18,903 19,193 18,087
- ---------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 5,213 3,505 5,773 6,084 5,787
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 11,862 $ 10,226 $ 13,130 $ 13,109 $ 12,300
===============================================================================================================
PER SHARE DATA:
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-BASIC $ 1.43 $ 1.24 $ 1.58 $ 1.60 $ 1.51
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 1.42 1.22 1.56 1.56 1.47
- ---------------------------------------------------------------------------------------------------------------
GASH DIVIDENDS DECLARED 0.62 0.58 0.50 0.42 0.38
- ---------------------------------------------------------------------------------------------------------------
BOOK VALUE END-OF-PERIOD 12.94 12.55 11.97 11.48 10.43
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,299,271 8,268,226 8,286,926 8,200,681 8,122,433
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUIVALENTS (DILUTIVE) 69,754 102,095 116,348 177,412 231,062
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END):
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,346,976 $1,288,376 $1,255,383 $1,067,410 $ 968,154
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES 45,139 55,165 78,084 87,128 97,701
- ---------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 236,944 282,878 334,862 349,656 351,870
- ---------------------------------------------------------------------------------------------------------------
LOANS 981,180 870,153 768,473 572,164 427,001
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES 7,500 6,768 6,378 5,989 5,439
- ---------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,180,267 1,144,736 1,041,996 935,666 845,771
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 107,429 103,763 99,155 94,669 85,054
- ---------------------------------------------------------------------------------------------------------------
TRUST ASSETS (MARKET VALUE) 2,028,232 1,924,954 1,761,846 1,691,860 1,414,591
- ---------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 5,150 4,794 4,143 3,226 2,760
- ---------------------------------------------------------------------------------------------------------------
28
SELECTED PERFORMANCE RATIOS: 2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL ASSETS 0.90% 0.79% 1.12% 1.30% 1.34%
- ---------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL
SHAREHOLDERS' EQUITY 11.12 10.10 13.49 14.72 15.14
- ---------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIO 43.42 46.88 31.56 24.61 22.44
- ---------------------------------------------------------------------------------------------------------------
AVERAGE TOTAL SHAREHOLDERS' EQUITY TO
AVERAGE ASSETS 8.12 7.84 8.30 8.82 8.84
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES TO AVERAGE ASSETS 2.44 2.24 2.34 2.49 2.45
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME TO AVERAGE ASSETS 1.07 0.80 0.98 0.98 1.10
- ---------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS (AT PERIOD END):
- ---------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS TO TOTAL LOANS 0.22% 0.22% 0.04% 0.06% 0.04%
- ---------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS TO TOTAL ASSETS 0.16 0.16 0.03 0.03 0.02
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO
NON-PERFORMING LOANS 3.5X 3.3X 16.5X 17.1X 25.3X
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO
TOTAL LOANS 0.76% 0.78% 0.83% 1.05% 1.27%
- ---------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS/(RECOVERIES) TO AVERAGE
LOANS PLUS OTHER REAL ESTATE OWNED 0.00 0.00 0.00 0.01 (0.02)
- ---------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RATIOS:
- ---------------------------------------------------------------------------------------------------------------
AVERAGE LOANS TO AVERAGE DEPOSITS 78.22% 77.47% 69.25% 55.94% 51.23%
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY
TO TOTAL ASSETS 7.98 8.05 7.90 8.87 8.79
- ---------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL TO RISK WEIGHTED ASSETS 14.92 15.33 16.71 19.02 20.38
- ---------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK WEIGHTED ASSETS 15.91 16.31 17.78 20.25 21.74
- ---------------------------------------------------------------------------------------------------------------
TIER 1 LEVERAGE RATIO 8.59 8.20 8.66 9.18 8.91
- ---------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE
IN DOLLARS
- -------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
--------------------------------------
$0.38 $0.42 $0.50 $0.58 $0.62
BOOK VALUE PER SHARE
IN DOLLARS
- --------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
'03 '04 '05 '06 '07
-------------------------------------------
$10.43 $11.48 $11.97 $12.55 $12.94
29
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR
THE PERIODS INDICATED:
SELECTED 2007 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME $ 17,294 $ 17,895 $ 18,256 $ 18,907
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 8,970 9,225 9,369 8,919
- ----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,324 8,670 8,887 9,988
- ----------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 125 100 125 400
- ----------------------------------------------------------------------------------------------------------------
TRUST FEES 2,142 2,459 2,252 2,710
- ----------------------------------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES), NET 162 220 -- (128)
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME 884 881 912 1,549
- ----------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 7,558 8,019 8,098 8,412
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 3,829 4,111 3,828 5,307
- ----------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,137 1,298 1,179 1,599
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,692 $ 2,813 $ 2,649 $ 3,708
================================================================================================================
EARNINGS PER SHARE-BASIC $ 0.33 $ 0.34 $ 0.32 $ 0.45
- ----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 0.32 0.33 0.32 0.44
- ----------------------------------------------------------------------------------------------------------------
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 LOAN 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
- ----------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------
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, 2007. 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, 2007,
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 29, 2008
31
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION:
We have audited Peapack-Gladstone Financial Corporation's (the Company)
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company'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, included in the accompanying
Management Report of Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company'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, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, 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, Peapack-Gladstone Financial Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the statement of condition
at December 31, 2007 and the related statements of income, changes in
shareholders' equity, and cash flows for the year then ended of
Peapack-Gladstone Financial Corporation and our report dated February 29, 2008
expressed an unqualified opinion on those financial statements.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Livingston, New Jersey
February 29, 2008
33
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION:
We have audited the accompanying statement of condition of
Peapack-Gladstone Financial Corporation as of December 31, 2007, and the related
statements of income, changes in shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007, and the results of its operations and its cash flows for the year then
ended, 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's internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 29, 2008
expressed an unqualified opinion thereon.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Livingston, New Jersey
February 29, 2008
34
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION:
We have audited the accompanying consolidated statement of condition of
Peapack-Gladstone Financial Corporation and subsidiary (the Corporation) as of
December 31, 2006, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the two-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 the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
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
35
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2007 2006
- -------------------------------------------------------------------------------------------
ASSETS
CASH AND DUE FROM BANKS $ 25,443 $ 23,190
- -------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 1,771 103
- -------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 973 6,965
- -------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 28,187 30,258
- -------------------------------------------------------------------------------------------
INVESTMENT SECURITIES HELD TO MATURITY (APPROXIMATE
MARKET VALUE $45,070 IN 2007 AND $54,523 IN 2006) 45,139 55,165
- -------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 236,944 282,878
- -------------------------------------------------------------------------------------------
FHLB AND FRB STOCK, AT COST 4,293 3,308
- -------------------------------------------------------------------------------------------
LOANS 981,180 870,153
- -------------------------------------------------------------------------------------------
LESS: ALLOWANCE FOR LOAN LOSSES 7,500 6,768
- -------------------------------------------------------------------------------------------
NET LOANS 973,680 863,385
- -------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 26,236 24,059
- -------------------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 5,122 5,181
- -------------------------------------------------------------------------------------------
CASH SURRENDER VALUE OF LIFE INSURANCE 19,474 18,689
- -------------------------------------------------------------------------------------------
OTHER ASSETS 7,901 5,453
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,346,976 $ 1,288,376
===========================================================================================
LIABILITIES
DEPOSITS:
NONINTEREST-BEARING DEMAND DEPOSITS $ 199,266 $ 196,519
- -------------------------------------------------------------------------------------------
INTEREST-BEARING DEPOSITS:
- -------------------------------------------------------------------------------------------
CHECKING 145,490 142,676
- -------------------------------------------------------------------------------------------
SAVINGS 64,772 73,998
- -------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNTS 377,544 366,874
- -------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT OVER $100,000 155,410 126,014
- -------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT LESS THAN $100,000 237,785 238,655
- -------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,180,267 1,144,736
- -------------------------------------------------------------------------------------------
OVERNIGHT BORROWINGS 15,650 --
- -------------------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK ADVANCES 29,169 23,964
- -------------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 14,461 15,913
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,239,547 1,184,613
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
COMMON STOCK (NO PAR VALUE; STATED VALUE $0.83 PER SHARE;
AUTHORIZED 20,000,000 SHARES; ISSUED SHARES, 8,577,446 AT
DECEMBER 31, 2007 AND 8,497,463 AT DECEMBER 31, 2006;
OUTSTANDING SHARES, 8,304,486 AT DECEMBER 31, 2007 AND
8,270,973 AT DECEMBER 31, 2006) 7,148 7,081
- -------------------------------------------------------------------------------------------
SURPLUS 90,677 89,372
- -------------------------------------------------------------------------------------------
TREASURY STOCK AT COST, 272,960 SHARES IN 2007 AND 226,490
SHARES IN 2006 (6,255) (4,999)
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS 21,750 15,038
- -------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE Loss,
NET OF INCOME TAX BENEFIT (5,891) (2,729)
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 107,429 103,763
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,346,976 $ 1,288,376
===========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2007 2006 2005
- ---------------------------------------------------------------------------------------
INTEREST INCOME
INTEREST AND FEES ON LOANS $ 55,906 $ 49,510 $ 38,559
- ---------------------------------------------------------------------------------------
INTEREST ON INVESTMENT SECURITIES
HELD TO MATURITY:
TAXABLE 848 1,068 1,591
- ---------------------------------------------------------------------------------------
TAX-EXEMPT 1,062 1,344 1,188
- ---------------------------------------------------------------------------------------
INTEREST AND DIVIDENDS ON SECURITIES
AVAILABLE FOR SALE:
TAXABLE 12,859 14,789 13,619
- ---------------------------------------------------------------------------------------
TAX-EXEMPT 982 349 358
- ---------------------------------------------------------------------------------------
INTEREST ON FEDERAL FUNDS SOLD 656 146 73
- ---------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 39 61 26
- ---------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 72,352 67,267 55,414
- ---------------------------------------------------------------------------------------
INTEREST EXPENSE
- ---------------------------------------------------------------------------------------
INTEREST ON CHECKING ACCOUNTS 1,076 1,044 2,192
- ---------------------------------------------------------------------------------------
INTEREST ON SAVINGS AND MONEY MARKET ACCOUNTS 15,166 12,522 6,304
- ---------------------------------------------------------------------------------------
INTEREST ON CERTIFICATES OF DEPOSIT OVER $100,000 7,134 5,406 2,678
- ---------------------------------------------------------------------------------------
INTEREST ON OTHER CERTIFICATES OF DEPOSIT 11,870 10,099 5,931
- ---------------------------------------------------------------------------------------
INTEREST ON OVERNIGHT AND SHORT-TERM BORROWINGS 272 4,305 1,879
- ---------------------------------------------------------------------------------------
INTEREST ON FEDERAL HOME LOAN BANK ADVANCES 965 1,068 1,139
- ---------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 36,483 34,444 20,123
- ---------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 35,869 32,823 35,291
- ---------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 750 414 391
- ---------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 35,119 32,409 34,900
- ---------------------------------------------------------------------------------------
OTHER INCOME
TRUST FEES 9,563 8,367 7,640
- ---------------------------------------------------------------------------------------
SERVICE CHARGES AND FEES 2,350 2,310 2,220
- ---------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 900 837 802
- ---------------------------------------------------------------------------------------
OTHER INCOME 976 534 282
- ---------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES), NET 254 (1,781) 551
- ---------------------------------------------------------------------------------------
TOTAL OTHER INCOME 14,043 10,267 11,495
- ---------------------------------------------------------------------------------------
OTHER EXPENSES
SALARIES AND EMPLOYEE BENEFITS 17,511 15,698 14,682
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 7,761 6,909 6,705
- ---------------------------------------------------------------------------------------
PROFESSIONAL AND LEGAL FEES 1,124 833 565
- ---------------------------------------------------------------------------------------
ADVERTISING 892 732 936
- ---------------------------------------------------------------------------------------
OTHER EXPENSES 4,799 4,773 4,604
- ---------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 32,087 28,945 27,492
- ---------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 17,075 13,731 18,903
- ---------------------------------------------------------------------------------------
INCOME TAX EXPENSE 5,213 3,505 5,773
- ---------------------------------------------------------------------------------------
NET INCOME $ 11,862 $ 10,226 $ 13,130
- ---------------------------------------------------------------------------------------
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------
BASIC $ 1.43 $ 1.24 $ 1.58
- ---------------------------------------------------------------------------------------
DILUTED 1.42 1.22 1.56
=======================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT ADJUSTMENT RESULTING
FROM THE ADOPTION OF
SAB No. 108 (NET OF INCOME TAX
BENEFIT OF $341) (494) (494)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2006, AS ADJUSTED $ 7,061 $ 88,973 $ (4,022) $ 9,606 $ (2,957) $ 98,661
- -----------------------------------------------------------------------------------------------------------------------
38
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 2006 10,226 10,226
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE PERIOD (NET
OF INCOME TAX BENEFIT OF $398) 416
LESS: RECLASSIFICATION ADJUSTMENT FOR LOSSES
INCLUDED IN NET INCOME (NET OF INCOME TAX OF $623) (1,158)
--------
NET UNREALIZED HOLDING GAINS ON SECURITIES ARISING
DURING THE PERIOD (NET OF INCOME TAX BENEFIT
OF $1,021) 1,574 1,574
---------
TOTAL COMPREHENSIVE INCOME 11,800
ADJUSTMENT TO INITIALLY APPLY
FAS STATEMENT 158 (NET OF TAX BENEFIT OF $929) (1,346) (1,346)
DIVIDENDS DECLARED ($0.58 PER SHARE) (4,794) (4,794)
COMMON STOCK OPTION EXPENSE 59 59
EXERCISED AND RELATED TAX BENEFITS, 13,742 SHARES 20 340 360
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
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 2007 11,862 11,862
UNREALIZED HOLDING LOSSES ON SECURITIES ARISING DURING
THE PERIOD (NET OF INCOME TAX BENEFIT OF $2,110) (3,076)
LESS: RECLASSIFICATION ADJUSTMENT FOR GAINS INCLUDED
IN NET INCOME (NET OF INCOME TAX OF $89) 165
--------
NET UNREALIZED HOLDING LOSSES ON SECURITIES ARISING
DURING THE PERIOD (NET OF INCOME TAX BENEFIT
OF $2,199) (3,241) (3,241)
PENSION COSTS (NET OF TAX OF $54) 79 79
----------
TOTAL COMPREHENSIVE INCOME 8,700
DIVIDENDS DECLARED ($0.62 PER SHARE) (5,150) (5,150)
COMMON STOCK OPTION EXPENSE 203 203
EXERCISED AND RELATED TAX BENEFITS, 79,983 SHARES 67 1,102 1,169
TREASURY STOCK TRANSACTIONS, 46,470 SHARES (1,256) (1,256)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2007
8,304,486 SHARES OUTSTANDING $ 7,148 $ 90,677 $ (6,255) $ 21,750 $ (5,891) $ 107,429
====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2007 2006 2005
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
NET INCOME $ 11,862 $ 10,226 $ 13,130
- -----------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 2,254 2,068 1,991
- -----------------------------------------------------------------------------------------------------
AMORTIZATION OF PREMIUM AND ACCRETION OF DISCOUNT ON
SECURITIES, NET 313 498 1,009
- -----------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 750 414 391
- -----------------------------------------------------------------------------------------------------
STOCK-BASED COMPENSATION 203 59 --
- -----------------------------------------------------------------------------------------------------
DEFERRED TAX EXPENSE/(BENEFIT) 256 (1,786) (2,008)
- -----------------------------------------------------------------------------------------------------
(GAIN)/LOSS ON SALE OF SECURITIES, NET (254) 1,781 (298)
- -----------------------------------------------------------------------------------------------------
GAIN ON LOANS SOLD (3) (3) (13)
- -----------------------------------------------------------------------------------------------------
GAIN ON DISPOSAL OF PREMISES AND EQUIPMENT (548) (15) (28)
- -----------------------------------------------------------------------------------------------------
INCREASE IN CASH SURRENDER VALUE OF LIFE INSURANCE (785) (732) (704)
- -----------------------------------------------------------------------------------------------------
DECREASE/(INCREASE) IN ACCRUED INTEREST RECEIVABLE 59 (353) (453)
- -----------------------------------------------------------------------------------------------------
(INCREASE)/DECREASE IN OTHER ASSETS (559) 2,434 (2,305)
- -----------------------------------------------------------------------------------------------------
(DECREASE)/INCREASE IN ACCRUED EXPENSES AND
OTHER LIABILITIES (1,407) 7,767 3,792
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,141 22,358 14,504
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES
HELD TO MATURITY 16,435 32,505 35,119
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 60,804 66,093 51,383
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM CALLS OF INVESTMENT SECURITIES
HELD TO MATURITY 150 11,996 5,685
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES AND CALLS OF SECURITIES
AVAILABLE FOR SALE 16,086 60,330 42,225
- -----------------------------------------------------------------------------------------------------
PURCHASE OF INVESTMENT SECURITIES HELD TO MATURITY (6,654) (9,722) (32,000)
- -----------------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE,
INCLUDING FHLB AND FRB STOCK (37,345) (82,569) (88,569)
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES OF LOANS 3,701 622 2,316
- -----------------------------------------------------------------------------------------------------
PURCHASE OF LOANS -- (26,774) (191,842)
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN LOANS (114,743) (75,549) (6,772)
- -----------------------------------------------------------------------------------------------------
PURCHASES OF PREMISES AND EQUIPMENT (4,544) (4,715) (3,259)
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM DISPOSAL OF PREMISES AND EQUIPMENT 661 15 47
- -----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (65,449) (27,768) (185,667)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
NET INCREASE IN DEPOSITS 35,531 102,740 106,330
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN OVERNIGHT BORROWINGS 15,650 -- --
- -----------------------------------------------------------------------------------------------------
NET (DECREASE)/INCREASE IN SHORT-TERM BORROWINGS -- (77,500) 77,500
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM FHLB ADVANCES 11,000 -- --
- -----------------------------------------------------------------------------------------------------
REPAYMENTS OF FHLB ADVANCES (5,795) (7,741) (1,689)
- -----------------------------------------------------------------------------------------------------
DIVIDENDS PAID (5,062) (4,713) (3,891)
- -----------------------------------------------------------------------------------------------------
TAX BENEFIT ON STOCK OPTION EXERCISES 93 29 347
- -----------------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 1,076 331 702
- -----------------------------------------------------------------------------------------------------
PURCHASE OF TREASURY STOCK (1,256) (977) (1,155)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 51,237 12,169 178,144
- -----------------------------------------------------------------------------------------------------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (2,071) 6,759 6,981
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30,258 23,499 16,518
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,187 $ 30,258 $ 23,499
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
- -----------------------------------------------------------------------------------------------------
INTEREST $ 34,578 $ 32,857 $ 18,399
- -----------------------------------------------------------------------------------------------------
INCOME TAXES 4,527 2 222 8,307
- -----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
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 and trust services 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.
Net cash flows are reported for customer loan and deposit transactions and
federal funds purchased and overnight funds.
SECURITIES: Debt securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities with readily determinable fair
values are classified as available for sale. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount.
Premiums and discounts on securities are amortized on the level-yield method
without anticipating prepayments, except for mortgage-backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade
date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other
than temporary are reflected as realized losses and results in a new cost basis
being established. In estimating other-than-temporary losses, management
considers the length of time and
41
extent that fair value has been less than cost; the financial condition and
near-term prospects of the issuer; and the Corporation's ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.
FEDERAL HOME LOAN BANK (FHLB) AND FEDERAL RESERVE BANK (FRB) STOCK: The Bank is
a member of the FHLB system. Members are required to own a certain amount of
stock, based on the level of borrowings and other factors, and may invest in
additional amounts. FHLB stock is carried at cost, classified as a restricted
security and periodically evaluated for impairment based on ultimate recovery of
par value. Cash dividends are reported as income.
The Bank is also a member of the Federal Reserve Bank and required to own
a certain amount of stock. FRB stock is carried at cost and classified as a
restricted security. Cash dividends are reported as income.
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.
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, 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
42
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.
BANK OWNED LIFE INSURANCE (BOLI): The Bank has purchased life insurance policies
on certain key executives. BOLI is recorded at its cash surrender value, which
is the amount that can be realized.
The FASB Emerging Issues Task Force (EITF) finalized Issue No. 06-4,
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements" (EITF 06-4) in September
2006. EITF 06-4 requires that a liability be recorded during the service period
when a split-dollar life insurance agreement continues after participants'
employment or retirement. The required accrued liability will be based on either
the post-employment benefit cost for the continuing life insurance or based on
the future death benefit depending on the contractual terms of the underlying
agreement. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The Corporation adopted EITF 06-4 on January 1, 2008, which resulted in a
cumulative-effect adjustment decreasing retained earnings and increasing
liabilities by $449 thousand as of January 1, 2008.
In September 2006, the FASB EITF finalized Issue No. 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of
Life Insurance)" (EITF 06-5). EITF 06-5 requires that a policyholder consider
contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. EITF 06-5 also requires that if
the contract provides for a greater surrender value if all individual policies
in a group are surrendered at the same time, that the surrender value be
determined based on the assumption that policies will be surrendered on an
individual basis. Lastly, EITF 06-5 discusses whether the cash surrender value
should be discounted when the policyholder is contractually limited in its
ability to surrender a policy. EITF 06-5 is effective for fiscal years beginning
after December 15, 2006. The adoption of EITF 06-5 did not have a material
impact on the financial statements.
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, 2007 and 2006.
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.
43
The Corporation adopted FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes," (FIN 48), as of January 1, 2007. A tax position is
recognized as a benefit only if it is "more likely than not" that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50 percent likely of being realized on examination. For tax
positions not meeting the "more likely than not" test, no tax benefit is
recorded. The adoption had no affect on the Corporation's financial statements.
The Corporation is no longer subject to examination by the U.S. federal
tax authorities for years prior to 2004 or by New Jersey tax authorities for
years prior to 2003.
The Corporation recognizes interest and/or penalties related to income tax
matters in income tax expense.
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; however, tax expense increased in 2007 as a result of
this regulation.
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" (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. Provisions related to changes
in funded status were adopted in 2007 and provisions related to the measurement
date will be adopted in 2008.
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.
Effective January 1, 2006, the Corporation adopted FASB Statement No.
123R, "Share-based Payment," (Statement 123R), using the modified prospective
transition method. Accordingly, the Corporation has recorded stock-based
employee compensation cost using the fair value method starting in 2006. In 2007
and 2006, the Corporation recorded stock-based compensation expense of $203
thousand and $59 thousand, respectively.
44
Prior to January 1, 2006, the Corporation reported employee compensation
expense for its stock option plans using the intrinsic value method; therefore,
no stock-based compensation cost is reflected in net income for the year ended
December 31, 2005, as all options granted had an exercise price equal to the
market value of their underlying common stock on the date of grant. Stock-based
compensation cost, net of related tax effects, would have been $1.6 million
under Statement 123R for the year ended December 31, 2005.
The following table illustrates the effect on net income and earnings per
share for the years ended December 31, 2005 as if the Corporation had applied
the fair value recognition provisions of Statement 123R, to stock-based employee
compensation in that year.
(IN THOUSANDS EXCEPT PER SHARE DATA) 2005
- --------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $ 13,130
- --------------------------------------------------------------------------------
LESS: TOTAL STOCK-BASED COMPENSATION
EXPENSE DETERMINED UNDER THE FAIR VALUE BASED
METHOD ON ALL STOCK OPTIONS, NET OF RELATED
TAX EFFECTS 1,603
- --------------------------------------------------------------------------------
PRO FORMA $ 11,527
================================================================================
EARNINGS PER SHARE:
As REPORTED:
BASIC $ 1.58
- --------------------------------------------------------------------------------
DILUTED 1.56
- --------------------------------------------------------------------------------
PRO FORMA:
BASIC $ 1.39
- --------------------------------------------------------------------------------
DILUTED 1.37
- --------------------------------------------------------------------------------
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, 2007, 2006 and 2005:
(IN THOUSANDS EXCEPT PER SHARE DATA) 2007 2006 2005
- --------------------------------------------------------------------------------------
NET INCOME $ 11,862 $ 10,226 $ 13,130
- --------------------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,299,271 8,268,226 8,286,926
- --------------------------------------------------------------------------------------
PLUS: COMMON STOCK EQUIVALENTS 69,754 102,095 116,348
- --------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,369,026 8,370,321 8,403,274
======================================================================================
EARNINGS PER SHARE:
BASIC $ 1.43 $ 1.24 $ 1.58
- --------------------------------------------------------------------------------------
DILUTED 1.42 1.22 1.56
- --------------------------------------------------------------------------------------
Stock options for 375,638, 317,209 and 325,814 were not considered in
computing diluted earnings per share for 2007, 2006 and 2005, respectively,
because they were antidilutive.
45
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.
NEW ACCOUNTING POLICIES: In February 2007, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" (Statement No. 159). Statement No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value. Statement No. 159's objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Statement No. 159 is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of Statement No. 157. The adoption of Statement No. 159 did not have
a material impact on its financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" (Statement No. 157). Statement No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Statement No. 157 establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007. The
adoption of Statement No. 157 did not have a material impact on its financial
statements.
RECLASSIFICATION: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2007 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, 2007 and 2006 follows:
2007
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------
U.S. TREASURY $ 500 $ 14 $ -- $ 514
- -------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 13,196 84 (88) 13,192
- -------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 31,443 58 (137) 31,364
- -------------------------------------------------------------------------------------
TOTAL $ 45,139 $ 156 $ (225) $ 45,070
=====================================================================================
2006
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
(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
=====================================================================================
46
The amortized cost and approximate fair value of investment securities
held to maturity as of December 31, 2007, 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. Securities not due at a single maturity,
mortgage-backed securities, are shown separately.
MATURING IN: APPROXIMATE
(IN THOUSANDS) AMORTIZED COST FAIR VALUE
- --------------------------------------------------------------------------------
ONE YEAR OR LESS $ 10,648 $ 10,604
- --------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 19,945 19,897
- --------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 1,350 1,377
- --------------------------------------------------------------------------------
31,943 31,878
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 13,196 13,192
- --------------------------------------------------------------------------------
TOTAL $ 45,139 $ 45,070
================================================================================
Securities having an approximate carrying value of $300 thousand as of
December 31, 2007 and 2006 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 fair value of
these investments as of December 31, 2007 and 2006.
2007
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ---------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ---------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES $ 1,235 $ (2) $ 6,025 $ (86) $ 7,260 $ (88)
- ---------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 5,449 (30) 15,634 (107) 21,083 (137)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,684 $ (32) $ 21,659 $ (193) $ 28,343 $ (225)
=====================================================================================================================
2006
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ---------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
FAIR UNREALIZED FAIR UNREALIZED FAIR 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)
=====================================================================================================================
Management has determined that these unrealized losses on 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 and recent volatile market conditions in the
mortgage-backed securities market. These securities are all rated AAA. The
Corporation has the ability and intent to hold these securities for a period of
time sufficient to recover all gross unrealized losses.
47
3. SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate fair value of securities
available for sale included in the consolidated statements of condition as of
December 31, 2007 and 2006 follows:
2007
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
U.S. GOVERNMENT-SPONSORED AGENCIES $ 23,999 $ 60 $ (7) $ 24,052
- ---------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 119,073 204 (784) 118,493
- ---------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 24,926 192 (495) 24,623
- ---------------------------------------------------------------------------------------
OTHER SECURITIES 76,631 349 (7,204) 69,776
- ---------------------------------------------------------------------------------------
TOTAL $ 244,629 $805 $(8,490) $236,944
=======================================================================================
2006
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
(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 $285,122 $1,463 $(3,707) $282,878
=======================================================================================
The amortized cost and approximate fair value of securities available for
sale as of December 31, 2007, 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 FAIR VALUE
- --------------------------------------------------------------------------------
ONE YEAR OR LESS $ 10,499 $ 10,503
- --------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 19,509 19,506
- --------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 2,768 2,900
- --------------------------------------------------------------------------------
AFTER TEN YEARS 88,673 81,511
- --------------------------------------------------------------------------------
121,449 114,420
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 119,073 118,493
- --------------------------------------------------------------------------------
MARKETABLE EQUITY SECURITIES 4,107 4,031
- --------------------------------------------------------------------------------
TOTAL $244,629 $236,944
================================================================================
Securities having an approximate carrying value of $17.5 million and $9.5
million as of December 31, 2007 and December 31, 2006, respectively, were
pledged to secure public funds and for other purposes required or permitted by
law.
Gross gains on sales of securities of $498 thousand, $83 thousand and $443
thousand and gross losses on sales of securities of $272 thousand, $1.9 million
and $145 thousand were realized in 2007, 2006 and 2005, respectively. In 2007,
the Corporation recognized $28 thousand in gains on the non-monetary exchange of
equity securities. Also, the Corporation recognized $253 thousand in gains on
the non-monetary exchange of equity securities in 2005.
48
The following table presents the Corporation's available for sale
securities with continuous unrealized losses and the approximate fair value of
these investments.
2007
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT-SPONSORED AGENCIES $ -- $ -- $ 1,491 $ (7) $ 1,491 $ (7)
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 14,492 (57) 59,266 (727) 73,758 (784)
- -------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 16,363 (491) 328 (4) 16,691 (495)
- -------------------------------------------------------------------------------------------------------------------
OTHER SECURITIES 53,297 (6,310) 3,459 (538) 56,756 (6,848)
- -------------------------------------------------------------------------------------------------------------------
MARKETABLE EQUITY SECURITIES 2,350 (309) 176 (47) 2,526 (356)
- -------------------------------------------------------------------------------------------------------------------
TOTAL $86,502 $(7,167) $64,720 $(1,323) $151,222 $(8,490)
===================================================================================================================
2006
DURATION OF UNREALIZED LOSS
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
FAIR UNREALIZED FAIR UNREALIZED FAIR 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)
===================================================================================================================
Management has determined that these unrealized losses on 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.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases and recent volatile market conditions in the
mortgage-backed securities market. These securities are all rated AAA. The
Corporation has the ability and intent to hold these securities for a period of
time sufficient to recover all gross unrealized losses.
The investments in the other securities category consist primarily of
pools of trust preferred securities. Most of these securities are adjustable
with the rate resetting on a quarterly basis. These securities were investment
grade at the time of purchase and remain investment grade at this time. The
securities continue to perform according to their contractual terms and all
interest payments are current. The Corporation has the ability and intent to
hold these investments until a market recovery or maturity. Accordingly, the
Corporation has not recognized any other-than-temporary impairment on these
securities.
49
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
substantially.
4. LOANS
Loans outstanding as of December 31, consisted of the following:
(IN THOUSANDS) 2007 2006
- --------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE $497,016 $498,079
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE 237,316 165,652
- --------------------------------------------------------------------------------
COMMERCIAL LOANS 129,747 107,357
- --------------------------------------------------------------------------------
CONSTRUCTION LOANS 60,589 44,764
- --------------------------------------------------------------------------------
CONSUMER LOANS 37,264 35,836
- --------------------------------------------------------------------------------
OTHER LOANS 19,248 18,465
- --------------------------------------------------------------------------------
TOTAL $981,180 $870,153
================================================================================
Included in the totals above for December 31, 2007 is $3.4 million of
unamortized discount and $2.8 million of deferred origination costs net of
deferred origination fees as compared to $3.3 million of unamortized discount
and $3.1 million of deferred origination costs net of deferred origination fees
for December 31, 2006.
Non-accrual loans totaled $2.1 million and $1.9 million at December 31,
2007 and 2006, respectively. At December 31, 2007 there were no loans past due
90 days or more and still accruing interest. At December 31, 2006 there were
$197 thousand of loans past due 90 days or more and still accruing interest.
At December 31, 2007, the impaired loan portfolio consisted of four
commercial loans for $1.8 million for which there was $111 thousand of specific
allocation in the allowance for loan losses. 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 there were no impaired loans. At December 31, 2007, there
were no commitments to lend additional funds to borrowers whose loans are
classified as nonperforming.
(IN THOUSANDS) 2007 2006 2005
- --------------------------------------------------------------------------------
AVERAGE OF INDIVIDUALLY IMPAIRED
LOANS DURING YEAR $4,686 $12 $ --
- --------------------------------------------------------------------------------
INTEREST INCOME RECOGNIZED DURING IMPAIRMENT 341 -- --
- --------------------------------------------------------------------------------
CASH-BASIS INTEREST INCOME RECOGNIZED 341 -- --
- --------------------------------------------------------------------------------
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 currently performing.
50
The following table shows the changes in loans to officers, directors or
their associates:
(IN THOUSANDS) 2007 2006
- --------------------------------------------------------------------------------
BALANCE BEGINNING OF YEAR $ 2,907 $ 1,949
- --------------------------------------------------------------------------------
NEW LOANS 2,706 2,182
- --------------------------------------------------------------------------------
REPAYMENTS (1,240) (1,224)
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 4,373 $ 2,907
================================================================================
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) 2007 2006 2005
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $6,768 $ 6,378 $ 5,989
- --------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 750 414 391
- --------------------------------------------------------------------------------
LOANS GHARGED-OFF (23) (26) (16)
- --------------------------------------------------------------------------------
RECOVERIES 5 2 14
- --------------------------------------------------------------------------------
BALANCE, END OF YEAR $7,500 $ 6,768 $ 6,378
================================================================================
6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, follows:
(IN THOUSANDS) 2007 2006
- --------------------------------------------------------------------------------
LAND $ 6,027 $ 5,154
- --------------------------------------------------------------------------------
BUILDINGS 11,316 8,612
- --------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 16,268 15,545
- --------------------------------------------------------------------------------
LEASEHOLD IMPROVEMENTS 8,284 8,246
- --------------------------------------------------------------------------------
PROJECTS IN PROGRESS 2,586 3,276
- --------------------------------------------------------------------------------
44,481 40,833
- --------------------------------------------------------------------------------
LESS: ACCUMULATED DEPRECIATION 18,245 16,774
- --------------------------------------------------------------------------------
TOTAL $26,236 $ 24,059
================================================================================
Depreciation expense amounted to $2.3 million, $2.1 million and $2.0
million for the years ended December 31, 2007, 2006 and 2005, respectively.
7. DEPOSITS
The scheduled maturities of time deposits are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2008 $364,307
- --------------------------------------------------------------------------------
2009 15,058
- --------------------------------------------------------------------------------
2010 5,678
- --------------------------------------------------------------------------------
2011 4,668
- --------------------------------------------------------------------------------
2012 3,484
- --------------------------------------------------------------------------------
TOTAL $393,195
================================================================================
51
8. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $29.2
million and $24.0 million at December 31, 2007 and 2006, respectively, with a
weighted average interest rate of 3.69 percent and 3.59 percent, respectively.
Advances totaling $13.0 million at December 31, 2007, have fixed maturity
dates, while advances totaling $5.2 million were amortizing advances with
monthly payments of principal and interest. These advances are secured by
blanket pledges of certain 1-4 family residential mortgages totaling $237.2
million at December 31, 2007 and $279.0 million at December 31, 2006.
At December 31, 2007, the Corporation had $11 million in fixed rate
advances that are noncallable for one or two years and then callable quarterly
with final maturities of three, five or ten years. These advances are secured by
pledges of investment securities totaling $13.1 million at December 31, 2007.
The scheduled repayments of advances are as follows:
(In Thousands)
- -------------------------------------------------------------------------------
2008 $ 1,421
- -------------------------------------------------------------------------------
2009 3,249
- -------------------------------------------------------------------------------
2010 12,373
- -------------------------------------------------------------------------------
2011 3,446
- -------------------------------------------------------------------------------
2012 5,462
- -------------------------------------------------------------------------------
Over 5 Years 3,218
- -------------------------------------------------------------------------------
Total $29,169
===============================================================================
At December 31, 2007, overnight borrowings with FHLB totaled $15.7 million
at a rate of 4.11 percent as compared to no overnight borrowings at December 31,
2006. At December 31, 2007, unused short-term or overnight borrowings
commitments totaled $184.4 million from FHLB and $58.0 million from
correspondent banks.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of significant financial instruments:
The carrying amount of cash, cash equivalents, interest-bearing deposits,
Federal Home Loan Bank and Federal Reserve Bank stock and overnight borrowings
is considered to be fair value. The carrying amount of deposits with no stated
maturity, such as demand deposits, checking accounts, savings and money market
accounts, is equal to fair value.
The fair value of securities is based upon market prices or dealer quotes.
If no such information is available, fair value is based on the rate and term of
the security and information about the issuer.
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.
The fair value of certificates of deposit is based on the discounted value
of the contractual cash flows.
The fair value of FHLB advances is based on current rates for similar
financing.
52
The following table summarizes carrying amounts and fair values for
financial instruments at December 31:
2007 2006
- --------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS $ 28,187 $ 28,187 $ 30,258 $ 30,258
- --------------------------------------------------------------------------------------
INVESTMENT SECURITIES 45,139 45,070 55,165 54,523
- --------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 236,944 236,944 282,878 282,878
- --------------------------------------------------------------------------------------
FHLB AND FRB STOCK 4,293 4,293 3,308 3,308
- --------------------------------------------------------------------------------------
LOANS, NET OF ALLOWANCE FOR
LOAN LOSSES 973,680 980,126 863,385 854,585
- --------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
- --------------------------------------------------------------------------------------
DEPOSITS 1,180,267 1,180,724 1,144,736 1,143,170
- --------------------------------------------------------------------------------------
OVERNIGHT BORROWINGS 15,650 15,650 -- --
- --------------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK ADVANCES 29,169 28,675 23,964 22,909
- --------------------------------------------------------------------------------------
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) 2007 2006 2005
- ------------------------------------------------------------------------------------
FEDERAL:
CURRENT EXPENSE $ 3,986 $ 4,963 $ 7,570
- ------------------------------------------------------------------------------------
DEFERRED EXPENSE/(BENEFIT) 878 (645) (1,637)
- ------------------------------------------------------------------------------------
STATE:
CURRENT EXPENSE 971 328 211
- ------------------------------------------------------------------------------------
DEFERRED BENEFIT (622) (1,141) (371)
- ------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,213 $ 3,505 $ 5,773
====================================================================================
SHAREHOLDERS' EQUITY:
DEFERRED EXPENSE/(BENEFIT) ON
UNREALIZED (LOSS)/GAIN ON AVAILABLE FOR SALE $ (3,060) $ 1,021 $ (2,697)
- ------------------------------------------------------------------------------------
LEASE ADJUSTMENT -- (341) --
- ------------------------------------------------------------------------------------
UNFUNDED PENSION BENEFIT (875) (929) --
- ------------------------------------------------------------------------------------
TOTAL DEFERRED BENEFIT $ (3,935) $ (249) $ (2,697)
====================================================================================
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) 2007 2006 2005
- ------------------------------------------------------------------------------------
COMPUTED "EXPECTED" TAX EXPENSE $ 5,976 $ 4,806 $ 6,616
- ------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN TAXES RESULTING FROM:
- ------------------------------------------------------------------------------------
TAX-EXEMPT INCOME (746) (509) (492)
- ------------------------------------------------------------------------------------
STATE INCOME TAXES 225 (529) (104)
- ------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE INCOME (270) (254) (244)
- ------------------------------------------------------------------------------------
OTHER 28 (9) (3)
- ------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,213 $ 3,505 $ 5,773
====================================================================================
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) 2007 2006
- ---------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
ALLOWANCE FOR LOAN LOSSES $ 3,006 $ 2,707
- ---------------------------------------------------------------------------------------------
UNFUNDED PENSION BENEFIT 875 929
- ---------------------------------------------------------------------------------------------
UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE 3,060 861
- ---------------------------------------------------------------------------------------------
STATE NET OPERATING LOSS CARRY FORWARD 1,131 569
- ---------------------------------------------------------------------------------------------
LEASE ADJUSTMENT 267 312
- ---------------------------------------------------------------------------------------------
POST RETIREMENT BENEFITS 483 294
- ---------------------------------------------------------------------------------------------
PREPAID ALTERNATIVE MINIMUM ASSESSMENT 283 283
- ---------------------------------------------------------------------------------------------
CONTRIBUTION LIMITATION 34 37
- ---------------------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER -- 23
- ---------------------------------------------------------------------------------------------
OTHER 7 --
- ---------------------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX ASSETS $ 9,146 $ 6,015
- ---------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
- ---------------------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT, PRINCIPALLY DUE TO DIFFERENCE
IN DEPRECIATION $ 1,751 $ 681
- ---------------------------------------------------------------------------------------------
DEFERRED LOAN ORIGINATION COSTS AND FEES 702 633
- ---------------------------------------------------------------------------------------------
NONMONETARY GAIN 84 95
- ---------------------------------------------------------------------------------------------
DEFERRED INCOME 133 --
- ---------------------------------------------------------------------------------------------
INVESTMENT SECURITIES, PRINCIPALLY DUE TO THE ACCRETION OF
BOND DISCOUNT 89 81
- ---------------------------------------------------------------------------------------------
DEFERRED REIT DIVIDEND -- 28
- ---------------------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES 2,759 1,518
- ---------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ 6,387 $ 4,497
=============================================================================================
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
The Corporation has a defined benefit pension plan covering substantially
all of its salaried employees. The benefits are based on an employee's
compensation during the five years before retirement, age at retirement, and
years of service. The Corporation used a December 14 measurement date for its
pension plans.
54
The following table shows the change in benefit obligation and plan assets
of the defined benefit pension plan at December 31:
(IN THOUSANDS) 2007 2006
- -------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
BENEFIT OBLIGATION AT BEGINNING OF YEAR $ 13,942 $ 12,383
- -------------------------------------------------------------------------------------------
SERVICE COST 1,753 1,670
- -------------------------------------------------------------------------------------------
INTEREST COST 779 659
- -------------------------------------------------------------------------------------------
ACTUARIAL GAIN (295) (659)
- -------------------------------------------------------------------------------------------
BENEFITS PAID (140) (111)
- -------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 16,039 $ 13,942
- -------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 11,377 $ 9,450
- -------------------------------------------------------------------------------------------
ACTUAL RETURN ON PLAN ASSETS 817 794
- -------------------------------------------------------------------------------------------
EMPLOYER CONTRIBUTION 1,100 1,244
- -------------------------------------------------------------------------------------------
BENEFITS PAID (140) (111)
- -------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 13,154 $ 11,377
- -------------------------------------------------------------------------------------------
FUNDED STATUS AT END OF YEAR $ (2,885) $ (2,565)
===========================================================================================
Amounts recognized in other comprehensive income at December 31 consist
of:
(IN THOUSANDS) 2007 2006
- -------------------------------------------------------------------------------------------
UNRECOGNIZED NET ACTUARIAL LOSS $ 2,157 $ 2,296
- -------------------------------------------------------------------------------------------
UNRECOGNIZED TRANSITION ASSET (13) (19)
- -------------------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST (2) (2)
- -------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $ 2,142 $ 2,275
===========================================================================================
The accumulated benefit obligation was $12.4 million and $10.5 million at
December 31, 2007 and 2006.
Net periodic expense for the years ended December 31, included the
following components:
2007 2006 2005
- -------------------------------------------------------------------------------------------
SERVICE COST $ 1,753 $ 1,670 $ 1,404
- -------------------------------------------------------------------------------------------
INTEREST COST 779 659 586
- -------------------------------------------------------------------------------------------
EXPECTED RETURN ON PLAN ASSETS (1,008) (897) (534)
- -------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST 1,524 1,432 1,456
- -------------------------------------------------------------------------------------------
AMORTIZATION OF:
NET LOSS 35 75 68
- -------------------------------------------------------------------------------------------
TRANSITION ASSET (7) (7) (7)
- -------------------------------------------------------------------------------------------
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME 28 68 61
- -------------------------------------------------------------------------------------------
TOTAL RECOGNIZED IN NET PERIODIC BENEFIT
COST AND OTHER COMPREHENSIVE INCOME $ 1,552 $ 1,500 $ 1,517
===========================================================================================
The estimated net actuarial gain and prior service costs that will be
recognized as components of net periodic benefit cost over in 2008 are $33
thousand and $7 thousand, respectively.
55
The following table shows the actuarial assumptions applied for the
valuation of plan obligations at December 31:
2007 2006 2005
- --------------------------------------------------------------------------------
DISCOUNT RATE 5.75% 5.75% 5.50%
- --------------------------------------------------------------------------------
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:
2007 2006 2005
- --------------------------------------------------------------------------------
DISCOUNT RATE 5.75% 5.50% 5.75%
- --------------------------------------------------------------------------------
RATE OF INCREASE ON FUTURE COMPENSATION 3.00 3.00 3.0
- --------------------------------------------------------------------------------
EXPECTED LONG-TERM RATE OF RETURN ON PLAN ASSETS 8.50 8.50 5.75
- --------------------------------------------------------------------------------
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 asset allocation of the Corporation's pension benefits plan assets at
December 31, were as follows:
2007 2006
- --------------------------------------------------------------------------------
EQUITY SECURITIES 58.3% 59.7%
- --------------------------------------------------------------------------------
DEBT SECURITIES 36.8 37.3
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 4.9 3.0
- --------------------------------------------------------------------------------
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
2008.
The following table shows the estimated future pension benefit payments.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2008 $ 246
- --------------------------------------------------------------------------------
2009 270
- --------------------------------------------------------------------------------
2010 432
- --------------------------------------------------------------------------------
2011 493
- --------------------------------------------------------------------------------
2012 629
- --------------------------------------------------------------------------------
2013-2017 5,346
- --------------------------------------------------------------------------------
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 $51 thousand, $45 thousand and $42 thousand in 2007, 2006
and 2005, respectively. Contributions to the profit sharing plan 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 2007, $100 thousand in 2006 and $225 thousand
in 2005.
56
12. STOCK OPTION PLANS
The Corporation's stock option plans allow the granting of shares of the
Corporation's common stock 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 total number available to grant in active plans was 1,046,961
shares. There are no shares remaining for issuance with respect to stock option
plans approved in 1995; however, shares granted under those plans are still
included in the numbers below.
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.
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 2007 were as follows:
WEIGHTED AGGREGATE
AVERAGE INTRINSIC
NUMBER OF EXERCISE PRICE EXERCISE VALUE
SHARES PER SHARE PRICE (IN THOUSANDS)
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 603,469 $11.85-$32.14 $22.91
- --------------------------------------------------------------------------------
GRANTED DURING 2007 66,045 25.10-31.01 28.12
- --------------------------------------------------------------------------------
EXERCISED DURING 2007 (79,983) 11.85-26.65 13.54
- --------------------------------------------------------------------------------
FORFEITED DURING 2007 (5,719) 16.86-31.01 23.70
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2007 583,812 $13.62-$32.14 $24.77 $1,476
================================================================================
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 2007 and the exercise price, multiplied by the
number of in-the-money options).
The aggregate intrinsic value of options exercised during 2007, 2006 and
2005 was $1.2 million, $288 thousand and $1.5 million, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2007.
SHARES REMAINING SHARES
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- --------------------------------------------------------------------------------
< $18.00 137,615 2.2 YEARS 137,615
- --------------------------------------------------------------------------------
18.01 - 28.00 75,369 2.3 YEARS 67,576
- --------------------------------------------------------------------------------
28.01 - 28.50 63,930 9.0 YEARS 868
- --------------------------------------------------------------------------------
28.51 - 29.00 290,438 5.9 YEARS 282,575
- --------------------------------------------------------------------------------
29.01 - 32.14 16,460 6.6 YEARS 13,536
- --------------------------------------------------------------------------------
$24.77 * 583,812 4.9 YEARS 502,170
================================================================================
* Weighted average exercise price
At December 31, 2007, there were 435,286 additional shares available for
grant under the Plans.
The per share weighted-average fair value of stock options granted during
2007, 2006
57
and 2005 was $10.38, $8.56 and $9.51, respectively, on the date of grant using
the Black Scholes option-pricing model with the following weighted average
assumptions:
2007 2006 2005
- -------------------------------------------------------------------------------
DIVIDEND YIELD 2.00% 2.19% 1.69%
- -------------------------------------------------------------------------------
EXPECTED VOLATILITY 43% 37% 40%
- -------------------------------------------------------------------------------
EXPECTED LIFE 5 YEARS 5 YEARS 5 YEARS
- -------------------------------------------------------------------------------
RISK-FREE INTEREST RATE 4.56% 4.76% 3.79%
- -------------------------------------------------------------------------------
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 of December 31, 2007, there was approximately $629 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 2.0 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 mostly
variable-rate loan commitments of $142.9 million and $124.4 million at December
31, 2007 and 2006, 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 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 $12.7 million and $9.3 million at December 31,
2007 and 2006, respectively. The Corporation's recognized liability for
financial standby letters of credit was insignificant at December 31, 2007.
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.
58
At December 31, 2007, the Corporation was obligated under non-cancelable
operating leases for certain premises. Rental expense aggregated $2.5 million,
$2.3 million and $2.1 million for the years ended December 31, 2007, 2006 and
2005, 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, 2007, were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2008 $ 2,467
- --------------------------------------------------------------------------------
2009 2,352
- --------------------------------------------------------------------------------
2010 2,230
- --------------------------------------------------------------------------------
2011 1,684
- --------------------------------------------------------------------------------
2012 1,688
- --------------------------------------------------------------------------------
THEREAFTER 11,278
- --------------------------------------------------------------------------------
TOTAL $21,699
================================================================================
The Corporation is also obligated under legally binding and enforceable
agreements to purchase goods and services from third parties, including data
processing service agreements.
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 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.
59
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, 2007, that the Corporation and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 2007, 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
following 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, 2007:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 120,229 15.91% $ 75,570 10.00% $ 60,456 8.00%
- --------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 112,729 14.92 45,342 6.00 30,228 4.00
- --------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 112,729 8.59 65,654 5.00 39,393 3.00
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
60
The Bank's actual capital amounts and ratios are presented in the
following 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, 2007:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 99,254 10.53% $ 94,271 10.00% $ 75,417 8.00%
- ------------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 91,753 9.73 56,563 6.00 37,708 4.00
- ------------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 91,753 6.90 66,491 5.00 39,895 3.00
- ------------------------------------------------------------------------------------------
As OF DECEMBER 31, 2006:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 92,214 13.55% $ 68,070 10.00% $ 54,456 8.00%
- ------------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 85,446 12.55 40,842 6.00 27,228 4.00
- ------------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 85,446 6.76 63,175 5.00 37,905 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) 2007 2006
- -----------------------------------------------------------------------------------
ASSETS:
CASH $ 207 $ 147
- -----------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 11,057 7,266
- -----------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 11,264 7,413
- -----------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 10,418 15,057
- -----------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARY 86,543 82,728
- -----------------------------------------------------------------------------------
OTHER ASSETS 779 182
- -----------------------------------------------------------------------------------
TOTAL ASSETS $ 109,004 $ 105,380
===================================================================================
LIABILITIES:
OTHER LIABILITIES $ 1,575 $ 1,617
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES 1,575 1,617
- -----------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
COMMON STOCK 7,148 7,081
- -----------------------------------------------------------------------------------
SURPLUS 90,677 89,372
- -----------------------------------------------------------------------------------
TREASURY STOCK (6,255) (4,999)
- -----------------------------------------------------------------------------------
RETAINED EARNINGS 21,750 15,038
- -----------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF INCOME
TAX BENEFIT (5,891) (2,729)
- -----------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 107,429 103,763
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 109,004 $ 105,380
===================================================================================
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2007 2006 2005
- --------------------------------------------------------------------------------------
INCOME
DIVIDEND FROM BANK $ 5,000 $ 6,250 $ 6,000
- --------------------------------------------------------------------------------------
OTHER INCOME 978 854 627
- --------------------------------------------------------------------------------------
SECURITIES GAINS, NET 233 83 395
- --------------------------------------------------------------------------------------
TOTAL INCOME 6,211 7,187 7,022
- --------------------------------------------------------------------------------------
EXPENSES
OTHER EXPENSES 98 106 109
- --------------------------------------------------------------------------------------
TOTAL EXPENSES 98 106 109
- --------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANK 6,113 7,081 6,913
- --------------------------------------------------------------------------------------
INCOME TAX EXPENSE 356 268 318
- --------------------------------------------------------------------------------------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
BANK 5,757 6,813 6,595
- --------------------------------------------------------------------------------------
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 6,105 3,413 6,535
- --------------------------------------------------------------------------------------
NET INCOME $11,862 $10,226 $13,130
======================================================================================
62
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2007 2006 2005
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 11,862 $ 10,226 $ 13,130
- -----------------------------------------------------------------------------------------------
LESS EQUITY IN UNDISTRIBUTED EARNINGS (6,105) (3,413) (6,535)
- -----------------------------------------------------------------------------------------------
AMORTIZATION AND ACCRETION ON SECURITIES (3) (1) 11
- -----------------------------------------------------------------------------------------------
GAIN ON SECURITIES AVAILABLE FOR SALE (233) (83) (142)
- -----------------------------------------------------------------------------------------------
(INCREASE)/DECREASE IN OTHER ASSETS (527) 139 (93)
- -----------------------------------------------------------------------------------------------
INCREASE IN OTHER LIABILITIES 200 53 21
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,194 6,921 6,392
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES AND CALLS OF SECURITIES AVAILABLE FOR
SALE 4,024 1,580 4,855
- -----------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 1,002 2,001 1,500
- -----------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (1,220) (4,835) (6,130)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES 3,806 (1,254) 225
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
DIVIDENDS PAID (5,062) (4,713) (3,891)
- -----------------------------------------------------------------------------------------------
TAX BENEFIT ON STOCK OPTION EXERCISES 93 29 347
- -----------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 1,076 331 702
- -----------------------------------------------------------------------------------------------
TREASURY STOCK TRANSACTIONS (1,256) (977) (1,155)
- -----------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,149) (5,330) (3,997)
- -----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,851 337 2,620
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,413 7,076 4,456
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,264 $ 7,413 $ 7,076
===============================================================================================
63
COMMON STOCK PRICES (UNAUDITED)
The following table shows the 2007 and 2006 range of prices paid on known
trades of Peapack-Gladstone Financial Corporation common stock.
DIVIDEND
2007 HIGH LOW PER SHARE
- ------------------------------------------------------
1ST QUARTER $31.03 $25.62 $0.15
- ------------------------------------------------------
2ND QUARTER 32.47 26.78 0.15
- ------------------------------------------------------
3RD QUARTER 27.80 24.80 0.16
- ------------------------------------------------------
4TH QUARTER 26.35 24.45 0.16
- ------------------------------------------------------
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
- ------------------------------------------------------
64
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
-----------------------------------------------------------------------
FINN M.W. CASPERSEN, JR. EXECUTIVE VICE PRESIDENT & GENERAL
COUNSEL
-----------------------------------------------------------------------
PAUL W. BELL SENIOR VICE PRESIDENT & FACILITIES
MANAGER
-----------------------------------------------------------------------
ROBERT A. BUCKLEY SENIOR VICE PRESIDENT & BRANCH
ADMINISTRATOR
-----------------------------------------------------------------------
MICHAEL J. GIACOBELLO SENIOR VICE PRESIDENT & SENIOR
COMMERCIAL LOAN OFFICER
-----------------------------------------------------------------------
BRIDGET J. WALSH SENIOR VICE PRESIDENT & HUMAN RESOURCES
DIRECTOR
-----------------------------------------------------------------------
TODD T. BRUNGARD VICE PRESIDENT & BANK SECRECY ACT
COMPLIANCE OFFICER
-----------------------------------------------------------------------
ROBERT G. DI IENNO VICE PRESIDENT
-----------------------------------------------------------------------
STEPHANIE M. DIXON-ADKINS VICE PRESIDENT
-----------------------------------------------------------------------
KAREN M. FERRARO VICE PRESIDENT
-----------------------------------------------------------------------
DIRK H. GRAHAM VICE PRESIDENT
-----------------------------------------------------------------------
THOMAS N. KASPER VICE PRESIDENT
-----------------------------------------------------------------------
CHARLES T. KIRK VICE PRESIDENT
-----------------------------------------------------------------------
VALERIE L. KODAN VICE PRESIDENT
-----------------------------------------------------------------------
KATHERINE M. KREMINS VICE PRESIDENT & RISK MANAGEMENT
ADMINISTRATOR
-----------------------------------------------------------------------
DOREEN A. MACCHIAROLA VICE PRESIDENT & CORPORATE TRAINER
-----------------------------------------------------------------------
STEPHEN S. MILLER VICE PRESIDENT
-----------------------------------------------------------------------
ELAINE MULDOWNEY VICE PRESIDENT
-----------------------------------------------------------------------
DENISE M. PACE VICE PRESIDENT & MARKETING DIRECTOR
-----------------------------------------------------------------------
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
-----------------------------------------------------------------------
VERONICA V. VALENTINE VICE PRESIDENT & BUSINESS DEVELOPMENT
OFFICER
-----------------------------------------------------------------------
MARGARET O. VOLK VICE PRESIDENT & MORTGAGE OFFICER
-----------------------------------------------------------------------
JESSE D. WILLIAMS VICE PRESIDENT
-----------------------------------------------------------------------
RANDALL J. WILLIAMS VICE PRESIDENT
-----------------------------------------------------------------------
JULIE A. BURT ASSISTANT VICE PRESIDENT
-----------------------------------------------------------------------
BETTY J. CARIELLO ASSISTANT VICE PRESIDENT &
ASSISTANT COMPTROLLER
-----------------------------------------------------------------------
LYNDA A. CROSS ASSISTANT VICE PRESIDENT & SECURITY
OFFICER
-----------------------------------------------------------------------
E. SUE GIANETTI ASSISTANT VICE PRESIDENT
-----------------------------------------------------------------------
* DENOTES A HOLDING COMPANY OFFICER
65
- ----------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------
ANNETTE HANSON 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 &
BEDMINSTER CHIEF INFORMATION OFFICER
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V. SHERRI LICATA VICE PRESIDENT
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DIANE M. RIDOLFI VICE PRESIDENT
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FRANK C. WALDRON VICE PRESIDENT
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GREGORY T. ADAMS ASSISTANT VICE PRESIDENT
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KRISTIN A. ROMEO ASSISTANT VICE PRESIDENT
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MARGARET A. TRIMMER ASSISTANT VICE PRESIDENT
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CAROL L. BEHLER ASSISTANT CASHIER
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NANCY A. MURPHY ASSISTANT CASHIER
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VITA M. PARISI ASSISTANT CASHIER
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AUDIT KAREN M. CHIARELLO VICE PRESIDENT & AUDITOR
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CHESTER LISA S. HAGEN ASSISTANT CASHIER
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LOANS MARC R. MAGLIARO VICE PRESIDENT
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MORRISTOWN JOHN P. PENKRAT VICE PRESIDENT
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JOHN A. SCERBO VICE PRESIDENT
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NANCY J. WYNANT VICE PRESIDENT
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* DENOTES A HOLDING COMPANY OFFICER
66
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PGB TRUST & CRAIG C. SPENGEMAN PRESIDENT & CHIEF INVESTMENT
INVESTMENTS OFFICER *
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GLADSTONE BRYANT K. ALFORD FIRST VICE PRESIDENT & SENIOR
TRUST OFFICER
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JOHN M. BONK FIRST VICE PRESIDENT & DIRECTOR OF
BUSINESS DEVELOPMENT
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JOHN E. CREAMER FIRST VICE PRESIDENT &
SENIOR PORTFOLIO MANAGER
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JOHN C. KAUTZ FIRST VICE PRESIDENT &
SENIOR INVESTMENT OFFICER
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MICHAEL PYLYPYSHYN FIRST VICE PRESIDENT &
SENIOR TRUST OPERATIONS OFFICER
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CATHERINE M. DENNING VICE PRESIDENT & TRUST OFFICER
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GLENN C. GUERIN VICE PRESIDENT & TRUST OFFICER
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MICHAEL E. HERRMANN VICE PRESIDENT & TRUST OFFICER
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JAMES R. HOUSMAN VICE PRESIDENT & DIRECTOR OF TAX
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PETER T. LILLARD VICE PRESIDENT & TRUST OFFICER
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SCOTT A. MARSHMAN VICE PRESIDENT & TRUST OFFICER
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EDWARD P. NICOLICCHIA VICE PRESIDENT & TRUST OFFICER
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KATHERINE S. QUAY VICE PRESIDENT & TRUST OFFICER
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ANNE M. SMITH VICE PRESIDENT & TRUST OFFICER
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MJ SULLY VICE PRESIDENT & TRUST OFFICER
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KURT G. TALKE VICE PRESIDENT & TRUST OFFICER
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THOMAS S. DIEMAR ASSISTANT VICE PRESIDENT & TRUST OFFICER
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DAVID C. O'MEARA ASSISTANT VICE PRESIDENT & TRUST OFFICER
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CATHERINE A. MCCATHARN TRUST OFFICER & ASSISTANT CORPORATE
SECRETARY *
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PATRICIA K. SAWKA TRUST OFFICER
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MORRISTOWN JOHN J. LEE VICE PRESIDENT & TRUST OFFICER
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MICHAEL T. TORMEY VICE PRESIDENT & TRUST OFFICER
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* DENOTES A HOLDING COMPANY OFFICER
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BRANCHES
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BERNARDSVILLE CHARLES A. STUDDIFORD, III VICE PRESIDENT
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CAROL E. RITZER ASSISTANT VICE PRESIDENT
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BRIDGEWATER TODD E. YOUNG VICE PRESIDENT
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CALIFON ANN W. KALLAM VICE PRESIDENT
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JACQUELINE R. MILLER ASSISTANT CASHIER
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CHATHAM MARY ANNE MALONEY VICE PRESIDENT
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LISA A. TREICH ASSISTANT CASHIER
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CHESTER JOAN S. WYCHULES VICE PRESIDENT
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LOUISE TAKACS ASSISTANT CASHIER
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CHUBB CORPORATE AMY A. MESSLER ASSISTANT CASHIER
HEADQUARTERS
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CLINTON CAROLYN I. SEPKOWSKI VICE PRESIDENT
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HEATHER L. BEGASSE ASSISTANT CASHIER
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FAR HILLS ROHINTON E. MADON ASSISTANT CASHIER
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FELLOWSHIP JANET E. BATTAGLIA ASSISTANT CASHIER
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GLADSTONE ANNETTE F. MALANGA ASSISTANT VICE PRESIDENT
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GREEN VILLAGE DONNA I. GISONE VICE PRESIDENT
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HILLSBOROUGH TERESA M. LAWLER ASSISTANT VICE PRESIDENT
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LONG VALLEY AMY E. GLASER VICE PRESIDENT
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THERESE TADOLINI ASSISTANT CASHIER
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MENDHAM LINDA S. ZIROPOULOS VICE PRESIDENT
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ANNA M. MENTES ASSISTANT CASHIER
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MORRISTOWN VALERIE A. OLPP VICE PRESIDENT
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OLDWICK DEBORAH J. KREHELY ASSISTANT VICE PRESIDENT
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PLUCKEMIN LEE ANN HUNT VICE PRESIDENT
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POTTERSVILLE TRACEY L. TODD ASSISTANT CASHIER
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SUMMIT - DEFOREST M. NICOLE JEFFERYS VICE PRESIDENT
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WARREN RONALD F. FIELD ASSISTANT VICE PRESIDENT
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JAMES CICCONE ASSISTANT CASHIER
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DIRECTORS
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ANTHONY J. CONSI, II
CHESTER, NJ
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PAMELA HILL
PRESIDENT, FERRIS CORP
GLADSTONE, NJ
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FRANK A. KISSEL
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER
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JOHN D. KISSEL
TURPIN REALTY, INC.
FAR HILLS, NJ
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JAMES R. LAMB, ESQ.
JAMES R. LAMB, P.C.
MORRISTOWN, NJ.
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EDWARD A. MERTON
PRESIDENT, MERTON EXCAVATING & PAVING CO.
CHESTER, NJ
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F. DUFFIELD MEYERCORD
MANAGING DIRECTOR AND PARTNER, CARL MARKS CONSULTING GROUP, LLC
BEDMINSTER, NJ
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JOHN R. MULCAHY
FAR HILLS, NJ
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ROBERT M. ROGERS
PRESIDENT & CHIEF OPERATING OFFICER
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PHILIP W. SMITH, III
PRESIDENT, PHILLARY MANAGEMENT, INC.
FAR HILLS, NJ
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CRAIG C. SPENGEMAN
PRESIDENT, PGB TRUST AND INVESTMENTS
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JACK D. STINE
DIRECTOR EMERITUS
PLUCKEMIN, NJ
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69
OFFICES
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LOAN & ADMINISTRATION BUILDING
158 Route 206 North, Gladstone, NJ 07934 (908) 234-0700
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PGB TRUST & INVESTMENTS
190 Main Street, Gladstone, NJ 07934 (908) 719-4360
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BERNARDSVILLE
36 Morristown Road, Bernardsville, NJ 07924 (908) 766-1711
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BRIDGEWATER
619 East Main Street, Bridgewater, NJ 08807 (908) 429-9988
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GALIFON
438 Route 513, Califon, NJ 07830 (908) 832-5131
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CHATHAM
311 Main Street, Chatham, NJ 07928 (973) 635-8500
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CHESTER
350 Main Street, Chester, NJ 07930 (908) 879-8115
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CHUBB CORPORATE HEADQUARTERS
15 Mountain View Road, Warren, NJ 07059 (908) 903-2597
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CLINTON
189 Center Street, Clinton, NJ 08809 (908) 238-1935
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FAR HILLS
26 Dumont Road, Far Hills, NJ 07931 (908) 781-1018
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FELLOWSHIP VILLAGE
8000 Fellowship Road, Basking Ridge, NJ 07920 (908) 719-4332
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GLADSTONE (Main Office)
190 Main Street, Gladstone, NJ 07934 (908) 719-4360
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GREEN VILLAGE
278 Green Village Road, Green Village, NJ 07935 (973) 377-0081
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HILLSBOROUGH
417 Route 206 North, Hillsborough, NJ 08844 (908) 281-1031
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LONG VALLEY
59 East Mill Road (Route 24), Long Valley, NJ 07853 (908) 876-3300
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MENDHAM
17 East Main Street, Mendham, NJ 07945 (973) 543-6499
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MORRISTOWN
233 South Street, Morristown, NJ 07960 (973) 455-1118
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NEW VERNON
Village Road, New Vernon, NJ 07976 (973) 540-0444
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OLDWICK
169 Lamington Road, Oldwick, NJ 08858 (908) 439-2320
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PLUCKEMIN
468 Route 206 North, Bedminster, NJ 07921 (908) 658-4500
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POTTERSVILLE
11 Pottersville Road, Pottersville, NJ 07979 (908) 439-2265
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SUMMIT - DEFOREST
48 DeForest Avenue, Summit, NJ 07901 (908) 273-2890
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WARREN
58 Mountain Boulevard, Warren, NJ 07059 (908) 757-2805
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SHAREHOLDER INFORMATION
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CORPORATE ADDRESS
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158 Route 206, North
Gladstone, New Jersey 07934
(908) 234-0700
www.pgbank.com
STOCK LISTING
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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
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Crowe Chizek and Company LLC
354 Eisenhower Parkway, Plaza 1
Livingston, New Jersey 07039-1027
TRANSFER AGENT
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Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
SHAREHOLDER RELATIONS
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Arthur F. Birmingham, Executive Vice President and Chief Financial Officer
(908) 719-4308
birmingham@pgbank.com
ANNUAL MEETING
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The annual meeting of shareholders of Peapack-Gladstone Financial Corporation
will be held on April 22, 2008 at 2:00 p.m. at Fiddler's Elbow Country Club in
Bedminster Township.
71
NOTES
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72