-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6bX5bbbYSVqzwr+yFPIH4SRrz6tqdHh3GgZC6uHZghVwdQV26FKIkCMIBu/BL61 u+UFVqJuRi+q3hQii9l0xQ== 0000914317-07-000706.txt : 20070316 0000914317-07-000706.hdr.sgml : 20070316 20070316121216 ACCESSION NUMBER: 0000914317-07-000706 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070316 DATE AS OF CHANGE: 20070316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEAPACK GLADSTONE FINANCIAL CORP CENTRAL INDEX KEY: 0001050743 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 223537895 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16197 FILM NUMBER: 07698789 BUSINESS ADDRESS: STREET 1: 158 ROUTE 206 NORTH CITY: GLADSTONE STATE: NJ ZIP: 07934 BUSINESS PHONE: 9082340700 MAIL ADDRESS: STREET 1: 158 ROUTE 206 NORTH CITY: GLADSTONE STATE: NJ ZIP: 07934 10-K 1 form10k-82161_pgc.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2006 Commission File No. 000-23537 ---------- PEAPACK-GLADSTONE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-2491488 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 158 Route 206 Peapack-Gladstone, New Jersey 07934 (Address of principal executive offices) (Zip Code) Registrant's telephone number (908) 234-0700 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which Registered ------------------- ------------------------------------ Common Stock, No par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K |X|. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|. The aggregate market value of the shares held by unaffiliated stockholders was approximately $203,169,629 on June 30, 2006. As of February 28, 2007, 8,273,335 shares of no par value Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Corporation's 2006 Annual Report (the "2006 Annual Report") and Definitive Proxy Statement for the Corporation's 2007 Annual Meeting of Shareholders (the "2007 Proxy Statement") are incorporated by reference into Parts II and III. FORM 10-K PEAPACK-GLADSTONE FINANCIAL CORPORATION For the Year Ended December 31, 2006 Table of Contents -----------------
PART I Item 1. Business ....................................................................................... 3 Item 1A. Risk Factors ................................................................................... 7 Item 1B. Unresolved Staff Comments ...................................................................... 9 Item 2. Properties ..................................................................................... 9 Item 3. Legal Proceedings .............................................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders ............................................ 10 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........................................................................... 10 Item 6. Selected Financial Data ........................................................................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 12 Item 7A. Quantitative and Qualitative Disclosure About Market Risk ...................................... 12 Item 8. Financial Statements and Supplementary Data .................................................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 12 Item 9A. Controls and Procedures ........................................................................ 12 Item 9B. Other Information .............................................................................. 13 PART III Item 10. Directors, Executive Officers and Corporate Governance ......................................... 13 Item 11. Executive Compensation ......................................................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . 14 Item 13. Certain Relationships and Related Transactions, and Director Independence ...................... 14 Item 14. Principal Accountant Fees and Services ......................................................... 14 PART IV Item 15. Exhibits, Financial Statements and Schedules ................................................... 15 Signatures ..................................................................................... 17
2 This Form 10-K 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 The success of the Corporation's balance sheet restructuring initiative. o Unexpected decline in the direction of the economy in New Jersey. o Unexpected changes in interest rates. o Failure to grow business. o Inability to manage growth. o Unexpected loan prepayment volume. o Exposure to credit risks. o Insufficient allowance for loan losses. o Competition from other financial institutions. o Adverse effects of government regulation. o Decline in the levels of loan quality and origination volume. o Decline in the volume of increase in trust assets or deposits. The Corporation assumes no responsibility to update such forward-looking statements in the future. PART I Item 1. BUSINESS The Corporation Peapack-Gladstone Financial Corporation (the "Corporation") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("Holding Company Act"). The Corporation was organized under the laws of New Jersey in August 1997, by the Board of Directors of Peapack-Gladstone Bank (the "Bank"), its principal subsidiary, to become a holding company for the Bank. The Bank is a state chartered commercial bank founded in 1921 under the laws of the State of New Jersey. Deposits of the Bank are insured for up to $100,000 per depositor by the Bank Insurance Fund administered by the FDIC. The Bank is a member of the Federal Reserve System. The Bank offers financial services through 21 full-service banking offices, and one mini-branch. The Bank maintains nine branches and one auxiliary office in Somerset County, eight in Morris County, three in Hunterdon County and one in Union County. The Bank is primarily dedicated to providing quality, personalized financial, trust and investment services to individuals and small businesses. Commercial loan customers of the Bank are business people, including merchants, architects, doctors, dentists, attorneys and building contractors as well as various service firms and other local retailers. Most forms of commercial lending are offered, including working capital lines of credit, term loans for fixed asset acquisitions, commercial mortgages and other forms of asset-based financing. In addition to commercial lending activities, the Bank offers a wide range of consumer banking services, including: checking and savings accounts, money market and interest-bearing checking accounts, certificates of deposit, and individual retirement accounts held in certificates of deposit. The Bank also offers residential and construction mortgages, home equity lines of credit and other second mortgage loans. For children, the Bank offers a special pony club savings account. New Jersey Consumer Checking Accounts are offered to low income customers. In addition, the Bank provides foreign and domestic travelers' checks, personal money orders, cashier's checks and wire transfers. Automated teller machines are available at 22 locations. Via the automatic teller machine access card issued by the Bank, customers may pay for commodities at point-of-sale merchant locations. Internet banking is available to customers including an on-line bill payment option. The Corporation has no foreign operations. The Bank has a Trust and Investment Department, PGB Trust and Investments, which offers personal investment management services, personal trust administration services, estate settlement, income tax services, custodial services and other financial planning services. Since its inception in 1972, trust assets (market value) have increased to $1.92 billion. 3 The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to such reports, available on its website at www.pgbank.com. Also available on the website are the Corporation's Code of Business Conduct and Ethics, Corporate Governance Principles and charters for the Corporation's Audit Committee, Compensation Committee and Nominating Committee. Employees As of December 31, 2006, the Corporation employed 232 full-time equivalent persons. Management considers relations with employees to be satisfactory. Principal Market Areas The Bank's principal market for its deposit gathering activities includes Somerset, Morris, Hunterdon and Union Counties. The area is composed of upper-income single-family homes, moderate-income properties, some low-income housing and several large corporate campuses. There are numerous small retail businesses in each of the towns as well as offices for various professionals, i.e. attorneys, architects, interior decorators, physicians, etc. A portion of the market area is bisected by Interstate Highways 287 and 78 where numerous corporate offices have relocated over the past 25 years. The Bank has expanded its service areas from one office in 1968 to the present 21 full-service banking locations and one mini-branch location by steadily opening new branches. All of the communities that the Bank serves are demographically similar and contiguous to the main office. Competition The market for banking and bank-related services is highly competitive. The Bank competes with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressure. The Bank competes by offering quality products and convenient services at competitive prices. In order to maintain and enhance its competitive position, the Bank regularly reviews its products, locations and new branching prospects. Governmental Policies and Legislation The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company's cost of doing business and limit the options of its management to deploy assets and maximize income. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in state legislatures and before various bank regulatory agencies. The likelihood of any major changes and the impact such changes might have on the Corporation or the Bank is impossible to predict. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Bank. It is intended only to briefly summarize some material provisions. Capital Requirements The Federal Reserve Board has adopted risk-based capital guidelines for banks and bank holding companies. The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of common stock, retained earnings, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and certain other intangibles ("Tier 1 Capital"). The remainder may consist of other preferred stock, certain other instruments and a portion of the loan loss allowance. At December 31, 2006, the Corporation's Tier 1 Capital and Total Capital ratios were 15.33% and 16.31%, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for banks and bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets of 3% for banks that meet certain specified criteria, including having the highest regulatory rating. All other banks and bank holding companies generally are required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The Corporation's leverage ratio at December 31, 2006 was 8.20%. 4 FDICIA Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. The regulations implementing these provisions of FDICIA provide that a bank is defined to be "well capitalized" if it maintains a leverage ratio of at least 5%, a risk-adjusted Tier 1 capital ratio of at least 6% and a risk-adjusted total capital ratio of at least 10% and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is defined to be "adequately capitalized" if it meets other minimum capital requirements. In addition, a depository institution will be considered "undercapitalized" if it fails to meet any minimum required measure, "significantly undercapitalized" if it is significantly below such measure and "critically undercapitalized" if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. Insurance Funds Legislation The Corporation's wholly-owned subsidiary, the Peapack-Gladstone Bank, is a member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC also maintains another insurance fund, the Savings Association Insurance Fund ("SAIF"), which primarily covers savings and loan association deposits but also covers deposits that are acquired by a BIF-insured institution from a savings and loan association. Restrictions on the Payment of Dividends The holders of the Corporation's common stock are entitled to receive dividends, when, as and if declared by the Board of Directors of the Corporation out of funds legally available. The only statutory limitation is that such dividends may not be paid when the Corporation is insolvent. Since the principal source of income for the Corporation will be dividends on Bank common stock paid to the Corporation by the Bank, the Corporation's ability to pay dividends to its shareholders will depend on whether the Bank pays dividends to it. As a practical matter, restrictions on the ability of the Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by the Corporation. As a New Jersey chartered commercial bank, the Bank is subject to the restrictions on the payment of dividends contained in the New Jersey Banking Act of 1948, as amended (the "Banking Act"). Under the Banking Act, the Bank may pay dividends only out of retained earnings, and out of surplus to the extent that surplus exceeds 50% of stated capital. Under the Financial Institutions Supervisory Act, the FDIC has the authority to prohibit a state-chartered bank from engaging in conduct that, in the FDIC's opinion, constitutes an unsafe or unsound banking practice. Under certain circumstances, the FDIC could claim that the payment of a dividend or other distribution by the Bank to the Corporation constitutes an unsafe or unsound practice. The Corporation is also subject to FRB policies, which may, in certain circumstances, limit its ability to pay dividends. The FRB policies require, among other things, that a bank holding company maintain a minimum capital base. The FRB would most likely seek to prohibit any dividend payment that would reduce a holding company's capital below these minimum amounts. Holding Company Supervision The Corporation is a bank holding company within the meaning of the Holding Company Act. As a bank holding company, the Corporation is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Holding Company Act prohibits the Corporation, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking "as to be a proper incident thereto." The Holding Company Act requires prior approval by the FRB of the acquisition by the Corporation of more than five percent of the voting stock of any additional bank. Satisfactory capital ratios, Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy. Acquisitions through the Bank require the approval of the FDIC and the New Jersey Department of Banking and Insurance ("NJDOBI"). 5 Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides for, among other things: o a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O); o independence requirements for audit committee members; o independence requirements for company auditors; o certification of financial statements within the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the chief executive officer and the chief financial officer; o the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by such officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct; o disclosure of off-balance sheet transactions; o two-business day filing requirements for insiders filing on Form 4; o disclosure of a code of ethics for financial officers and filing a Current Report on Form 8-K for a change in or waiver of such code; o the reporting of securities violations "up the ladder" by both in-house and outside attorneys; o restrictions on the use of non-GAAP financial measures in press releases and SEC filings; o the formation of a public accounting oversight board; o various increased criminal penalties for violations of securities laws; o an assertion by management with respect to the effectiveness of internal control over financial reporting; and o a report by the company's external auditor on management's assertion and the effectiveness of internal control over financial reporting. Each of the national stock exchanges, including the American Stock Exchange (AMEX) where the Corporation's securities are listed, have implemented new corporate governance listing standards, including rules strengthening director independence requirements for boards, and requiring the adoption of charters for the nominating and audit committees. USA PATRIOT Act As part of the USA PATRIOT Act, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "Anti Money Laundering Act"). The Anti Money Laundering Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Anti Money Laundering Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Anti Money Laundering Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. 6 Regulations implementing the due diligence requirements, require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of "concentration accounts," and requires all covered financial institutions to have in place an anti-money laundering compliance program. Federal and state banking agencies have strictly enforced various anti-money laundering and suspicious activity reporting requirements using formal and informal enforcement tools to cause banks to comply with these provisions. The Anti Money Laundering Act amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of any financial institution involved in a proposed merger transaction in combating money laundering activities when reviewing an application under these acts. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Modernization Act") became effective in early 2000. The Modernization Act: o allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; o allows insurers and other financial services companies to acquire banks; o removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and o establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. If a bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals. The Corporation has not elected to become a financial holding company. The Modernization Act modified other financial laws, including laws related to financial privacy and community reinvestment. Item 1A. RISK FACTORS The material risks and uncertainties that management believes affect the Corporation are described below. These risks and uncertainties are not the only ones affecting the Corporation. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Corporation's business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Corporation's financial condition and results of operations could be materially and adversely affected. Changes in interest rates may adversely affect our earnings and financial condition. Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience "gaps" in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. 7 We may not be able to continue to grow our business, which may adversely impact our results of operations. Our business strategy calls for continued expansion. Our ability to continue to grow depends, in part, upon our ability to open new branch locations, successfully attract deposits to existing and new branches, and identify favorable loan and investment opportunities. In the event that we do not continue to grow, our results of operations could be adversely impacted. We may not be able to manage our growth, which may adversely impact our financial results. As part of our expansion strategy, we plan to open new branches in our existing and target markets. However, we may be unable to identify attractive locations on terms favorable to us or to hire qualified management to operate the new branches. In addition, the organizational and overhead costs may be greater than we anticipated or we may not be able to obtain the regulatory approvals necessary to open new branches. New branches may take longer than expected to reach profitability, and we cannot assure that they will become profitable. The additional costs of starting new branches may adversely impact our financial results. Our ability to manage growth successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition. The Corporation is required by Federal regulatory authorities to maintain adequate levels of capital to support its operations. The Corporation may at some point need to raise additional capital to support continued growth. The Corporation's ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the Corporation's control, and on its financial performance. Accordingly, the Corporation cannot assure you of its ability to raise additional capital if needed or on terms acceptable to the Corporation. If the Corporation cannot raise additional capital when needed, the ability to further expand its operations could be materially impaired. Our exposure to credit risk could adversely affect our earnings and financial condition. There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of a loan backed by collateral, risks resulting from uncertainties about the future value of the collateral. Adverse economic and business conditions in our market area may have an adverse effect on our earnings. Substantially all of our business is with customers located within Morris, Somerset and Hunterdon Counties and contiguous counties. Generally, we make loans to small to mid-sized businesses, most of whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions in our market area could reduce our growth rate, affect our borrowers' ability to repay their loans and, consequently, adversely affect our financial condition and performance. Further, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave many of our loans under secured. If we are required to liquidate the collateral to satisfy the debt securing a loan during a period of reduced real estate values, our earnings could be adversely affected. If our allowance for loan losses were not sufficient to cover actual loan losses, our earnings would decrease. We maintain an allowance for loan losses based on, among other things, national and regional economic conditions, and historical loss experience and delinquency trends among loan types. However, we cannot predict loan losses with certainty and we cannot assure you that charge-offs in future periods will not exceed the allowance for loan losses. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan losses could reduce our earnings. 8 Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability. We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, and more accessible branch office locations. In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations and increase our cost of funds. We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition. Government regulation significantly affects our business. The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, and the FDIC deposit insurance funds, not the shareholders of the Corporation. We are subject to regulation and supervision by the New Jersey Department of Banking and Insurance and the Federal Reserve Bank. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. We are subject to various regulatory capital requirements, which involve both quantitative measures of our assets and liabilities and qualitative judgments by regulators regarding risks and other factors. Failure to meet minimum capital requirements or comply with other regulations could result in actions by regulators that could adversely affect our ability to pay dividends or otherwise adversely impact operations. In addition, changes in laws, regulations and regulatory practices affecting the banking industry may limit the manner in which we conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and achieve satisfactory spreads and impose additional costs on us. The Bank is also subject to a number of Federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The Bank's compliance with these laws will be considered by the Federal banking regulators when reviewing bank merger and bank holding company acquisitions or commence new activities or make new investment in reliance on the Gramm-Leach-Bliley Act. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as any rules or regulations promulgated by the SEC or the American Stock Exchange. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES The Corporation owns nine branches and leases 13 branches. The Corporation also owns two properties adjacent to the Main Office in Peapack-Gladstone. The Corporation leases an administrative and operations office building in Peapack-Gladstone and a data center in Bedminster Township. 9 Item 3. LEGAL PROCEEDINGS In the normal course of its business, lawsuits and claims may be brought against the Corporation and its subsidiaries. There is no currently pending or threatened litigation or proceedings against the Corporation or its subsidiaries, which assert claims that if adversely decided, would have a material adverse effect on the Corporation. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Common Stock of Peapack-Gladstone Financial Corporation is traded on the American Stock Exchange under the symbol of PGC. The following table sets forth, for the periods indicated, the reported high and low sale prices on known trades and cash dividends declared per share by the Corporation. DIVIDEND 2006 HIGH LOW PER SHARE -------- -------- --------- 1st QUARTER $ 29.50 $ 24.45 $ 0.14 2nd QUARTER 26.26 23.52 0.14 3rd QUARTER 27.40 24.15 0.15 4th QUARTER 28.10 24.00 0.15 DIVIDEND 2005 HIGH LOW PER SHARE -------- -------- --------- 1st QUARTER $ 31.77 $ 25.94 $ 0.11 2nd QUARTER 30.50 25.50 0.11 3rd QUARTER 30.38 25.81 0.14 4th QUARTER 29.28 25.95 0.14 Future dividends payable by the Corporation will be determined by the Board of Directors after consideration of earnings and financial condition of the Corporation, need for capital and such other matters as the Board of Directors deems appropriate. The payment of dividends is subject to certain restrictions, see Part I, Item 1, "Description of Business - Restrictions on the Payment of Dividends." 10 Total Return Performance The following graph compares the cumulative total return on a hypothetical $100 investment made on December 31, 2001 in (a) the Corporation's common stock; (b) the Russell 3000 Stock Index, and (c) the Keefe, Bruyette & Woods KBW 50 Index (top 50 U.S. banks). The graph is calculated assuming that all dividends are reinvested during the relevant periods. The graph shows how a $100 investment would increase or decrease in value over time, based on dividends (stock or cash) and increases or decreases in the market price of the stock. [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
Period Ending - ------------------------------------------------------------------------------------------------------------------ Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 - ------------------------------------------------------------------------------------------------------------------ Peapack-Gladstone Financial Corporation 100.00 188.10 189.61 215.09 193.67 199.47 Russell 3000 100.00 78.46 102.83 115.11 122.16 141.35 KBW 50 100.00 92.95 124.54 137.11 136.70 159.96
On December 31, 2006, the last reported sale price of the Common Stock was $28.10. Also, on February 28, 2007, there were approximately 849 shareholders of record. 11 Issuer Purchases of Equity Securities The following table sets forth information for the three months ended December 31, 2006, with respect to repurchases of the Corporation's outstanding common shares:
Issuer Purchases of Equity Securities - ------------------------------------------------------------------------------------------------------------------------------------ Total Number of Shares Maximum Number of Total Number Purchases as Part of Shares that may yet Of Shares Average Price Publicly Announced Be Purchased Under the Period Purchased Paid per Share Plans or Programs Plans or Programs - --------------------------- ----------------- ----------------- ------------------------- -------------------------- October 1-31, 2006 -- $ -- -- 89,100 November 1-30, 2006 -- -- -- 89,100 December 1-31, 2006 -- -- -- 89,100 ----------------- ----------------- ------------------------ Total -- $ -- -- ================= ================= ========================
On April 15, 2005, the Board of Directors of Peapack-Gladstone Financial Corporation announced the authorization of a stock repurchase plan. The Board authorized the purchase of up to 150,000 shares of outstanding common stock, to be made from time to time, in the open market or in privately negotiated transactions, at prices not exceeding prevailing market prices. On April 14, 2006, the Board of Directors authorized an extension of the stock buyback program for an additional twelve months to April 15, 2007. Item 6. SELECTED FINANCIAL DATA The information set forth in the 2006 Annual Report under the heading "Selected Consolidated Financial Data" is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in the 2006 Annual Report under the heading "Management's Discussion and Analysis" is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information set forth in the 2006 Annual Report under the heading "Market Risk Sensitive Instruments" is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements set forth in the 2006 Annual Report, together with the report thereon by KPMG LLP and the Notes to the Consolidated Financial Statements, are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES The Corporation's Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Corporation's management, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. The Corporation's Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Corporation's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting during the fourth quarter of 2006. 12 The Corporation's management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, control may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management's Report on Internal Control over Financial Reporting is included in the 2006 Annual Report and is incorporated herein by reference. Item 9B. OTHER INFORMATION None. PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information set forth under the captions "Director Information," "Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2007 Proxy Statement is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information set forth under the captions "Executive Compensation," "Director Compensation" and "Compensation Committee Interlocks and Insider Participation" in the 2007 Proxy Statement is incorporated herein by reference. 13 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table shows information at December 31, 2006 for all equity compensation plans under which shares of our common stock may be issued:
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE NUMBER OF SECURITIES UNDER EQUITY TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES PLAN CATEGORY OUTSTANDING OPTIONS (a) OUTSTANDING OPTIONS (b) REFLECTED IN COLUMN (a) (c) - ---------------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS 603,469 $22.91 496,365 -------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS N/A N/A N/A -------------------------------------------------------------------------------------- TOTAL 603,469 $22.91 496,365 ======================================================================================
The information set forth under the captions "Beneficial Ownership of Common Stock" and "Stock Ownership of Directors and Executive Officers" in the 2007 Proxy Statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information set forth under the captions "Certain Relationships and Related Transactions" and "Corporate Governance" in the 2007 Proxy Statement is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information set forth under the captions "Independent Registered Public Accounting Firm" and "Audit Committee Pre-approval Procedures" in the 2007 Proxy Statement is incorporated herein by reference. 14 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES (a) Financial Statements and Schedules: Those portions of the 2006 Annual Report attached hereto as Exhibit 13 contain the financial statements incorporated herein by reference. All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto contained in the 2006 Annual Report. (10) Exhibits (3) Articles of Incorporation and By-Laws: A. Restated Certificate of Incorporation as in effect on the date of this filing is incorporated herein by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. B. By-Laws of the Registrant as in effect on the date of this filing are incorporated herein by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. (10) Material Contracts: A. "Amended and Restated Change in Control Agreements" dated as of December 11, 2003 by and among the Corporation, the Bank and Frank A. Kissel, Robert M. Rogers, Craig C. Spengeman, Arthur F. Birmingham and Garrett P. Bromley are incorporated by reference to Exhibit 10 (H) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. B. "Split Dollar Plan for Senior Management" dated as of September 7, 2001 for Frank A. Kissel, Robert M. Rogers, Craig C. Spengeman, Arthur F. Birmingham and Garrett P. Bromley is incorporated by reference to Exhibit 10 (I) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. C. "Directors' Retirement Plan" dated as of March 31, 2001 is incorporated by reference to Exhibit 10 (J) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. D. "Directors' Deferral Plan" dated as of March 31, 2001 is incorporated by reference to Exhibit 10 (K) of the Registrant's Form 10-K Annual Report for the year ended December 31, 2003. E. Bonuses paid to executive officers under employment agreements, incorporated herein by reference to the Registrant's Report on Form 8-K filed on December 20, 2006. F. "Employment Agreements" dated as of January 1, 2007 by and among the Corporation, the Bank and Frank A. Kissel, Craig C. Spengeman, Robert M. Rogers, Arthur F. Birmingham and Garrett P. Bromley are incorporated by reference to Exhibit 10.1, Exhibit 10.2, Exhibit 10.3, Exhibit 10.4 and Exhibit 10.5 of the Registrant's Report on Form 8-K filed on December 20, 2006. G. Peapack-Gladstone Financial Corporation Amended and Restated 1998 Stock Option Plan and Peapack-Gladstone Financial Corporation Amended and Restated 2002 Stock Option Plan are incorporated by reference to Exhibit 10.1 and Exhibit 10.2 of the Registrant's Form 8-K Current Report filed on January 13, 2006. H. Peapack-Gladstone Financial Corporation 2006 Long-Term Stock Incentive Plan are incorporated by reference to Exhibit 10 of the Registrant's Form 10-Q Quarterly Report filed on May 10, 2006. (13) Annual Report to Shareholders 15 (21) List of Subsidiaries: (a) Subsidiaries of the Corporation:
Percentage of Voting Jurisdiction Securities Owned by Name of Incorporation the Parent ----------------------------------------------------------------------------------- Peapack-Gladstone Bank New Jersey 100%
(b) Subsidiaries of the Bank:
Name ------------------------------------ Peapack-Gladstone Investment Company, Inc. New Jersey 100% Peapack-Gladstone Financial Services, Inc. (Inactive) New Jersey 100%
(c) Subsidiaries of Peapack-Gladstone Investment Company, Inc.:
Name ------------------------------------ Peapack-Gladstone Mortgage New Jersey 100% Group, Inc.
(23) Consents of Experts: Consent of KPMG LLP (24) Power of Attorney (31.1) Certification of Frank A. Kissel, Chief Executive Officer of Peapack-Gladstone, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Arthur F. Birmingham, Chief Financial Officer of Peapack-Gladstone, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Certification of Frank A. Kissel, Chief Executive Officer of Peapack-Gladstone and Arthur F. Birmingham, Chief Financial Officer of Peapack-Gladstone pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 16 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Peapack-Gladstone Financial Corporation By: /s/ Frank A. Kissel --------------------------------------- Frank A. Kissel Chairman of the Board and Chief Executive Officer By: /s/ Arthur F. Birmingham --------------------------------------- Arthur F. Birmingham Executive Vice President and Chief Financial Officer Dated: March 12, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date - ------------------------------------------------- ----------------------------------------------------- ---------------------- /s/ Frank A. Kissel - ------------------------------------------------- Chairman of the Board, Chief Executive Officer and March 12, 2007 Frank A. Kissel Director /s/ Arthur F. Birmingham - ------------------------------------------------- Executive Vice President and Chief Financial March 12, 2007 Arthur F. Birmingham Officer (Principal Financial Officer) /s/ Anthony J. Consi II - ------------------------------------------------- Director March 12, 2007 Anthony J. Consi II /s/ Pamela Hill - ------------------------------------------------- Director March 12, 2007 Pamela Hill /s/ John D. Kissel - ------------------------------------------------- Director March 12, 2007 John D. Kissel /s/ James R. Lamb - ------------------------------------------------- Director March 12, 2007 James R. Lamb /s/ Edward A. Merton - ------------------------------------------------- Director March 12, 2007 Edward A. Merton /s/ F. Duffield Meyercord - ------------------------------------------------- Director March 12, 2007 F. Duffield Meyercord /s/ John R. Mulcahy - ------------------------------------------------- Director March 12, 2007 John R. Mulcahy /s/ Robert M. Rogers - ------------------------------------------------- Director, President and Chief Operating Officer March 12, 2007 Robert M. Rogers /s/ Philip W. Smith III - ------------------------------------------------- Director March 12, 2007 Philip W. Smith III /s/ Craig C. Spengeman - ------------------------------------------------- Director, President of PGB Trust and Investments March 12, 2007 Craig C. Spengeman
17 EX-13 2 ex13.txt Exhibit 13 FINANCIAL HIGHLIGHTS (In Thousands, Except Per Share Data)
SELECTED YEAR-END DATA: 2006 2005 2004 - -------------------------------------------------------------------------------------------- NET INCOME $ 10,226 $ 13,130 $ 13,109 - -------------------------------------------------------------------------------------------- TOTAL ASSETS 1,288,376 1,255,383 1,067,410 - -------------------------------------------------------------------------------------------- TOTAL DEPOSITS 1,144,736 1,041,996 935,666 - -------------------------------------------------------------------------------------------- TOTAL SECURITIES 341,351 419,668 441,314 - -------------------------------------------------------------------------------------------- TOTAL LOANS 870,153 768,473 572,164 - -------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 103,763 99,155 94,669 - -------------------------------------------------------------------------------------------- TRUST DEPARTMENT ASSETS (MARKET VALUE) 1,924,954 1,761,846 1,691,860 - -------------------------------------------------------------------------------------------- PER SHARE: - -------------------------------------------------------------------------------------------- EARNINGS-BASIC $ 1.24 $ 1.58 $ 1.60 - -------------------------------------------------------------------------------------------- EARNINGS-DILUTED 1.22 1.56 1.56 - -------------------------------------------------------------------------------------------- BOOK VALUE 12.55 11.97 11.48 - -------------------------------------------------------------------------------------------- FINANCIAL RATIOS: - -------------------------------------------------------------------------------------------- RETURN ON AVERAGE ASSETS 0.79% 1.12% 1.30% - -------------------------------------------------------------------------------------------- RETURN ON AVERAGE EQUITY 10.10 13.49 14.72 - -------------------------------------------------------------------------------------------- CAPITAL LEVERAGE RATIO 8.20 8.66 9.18 - -------------------------------------------------------------------------------------------- RISK BASED CAPITAL: - -------------------------------------------------------------------------------------------- TIER 1 15.33 16.71 19.02 - -------------------------------------------------------------------------------------------- TOTAL 16.31 17.78 20.25 - --------------------------------------------------------------------------------------------
NET INCOME IN MILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $11.93 $12.30 $13.11 $13.13 $10.23 - ---------------------------------------------- '02 '03 '04 '05 '06 TOTAL ASSETS IN MILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $860 $968 $1,067 $1,255 $1,288 - ---------------------------------------------- '02 '03 '04 '05 '06 DEPOSITS IN MILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $770 $846 $936 $1,042 $1,145 - ---------------------------------------------- '02 '03 '04 '05 '06 EQUITY CAPITAL IN MILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $77.2 $85.1 $94.7 $99.2 $103.8 - ---------------------------------------------- '02 '03 '04 '05 '06 1 [LOGO OF PEAPACK GLADSTONE BANK] DEAR SHAREHOLDERS AND FRIENDS, In last year's Annual Report we wrote of a growing concern that a protracted flat, and sometimes inverse interest yield curve had begun to squeeze our interest margin. We felt it would continue to do so until a more normal interest rate scenario returned. We now know that the Fed would continue to raise short-term rates at 17 consecutive meetings until they finally paused at their meeting in August 2006. The net effect for 2006 was about as anticipated. While we are not able to report our 10th consecutive record earnings year, we did finish 2006 with net income of $10,226,000. All of the financial details are in the Management's Discussion and Analysis section of this report. In addition, we are able to report several positive steps taken to better position our balance sheet and improve earnings and we believe for the long term. IMPORTANT STEPS 1) At the end of the third quarter, we made the important decision to implement a balance sheet restructuring. We sold $61.6 million of lower yielding securities, which resulted in an after-tax charge of approximately $1.1 million. Proceeds from the sale were reinvested into higher yielding adjustable rate assets and the balance was used to reduce high cost wholesale funding. Our intention was to improve our net interest margin by almost 25 basis points, and we have done that. Another benefit of the program was to reduce overall interest rate risk within the balance sheet. This, too, was accomplished. 2) You will also notice the beginnings of a change in our balance sheet. Our strategic objective is to grow our commercial business more quickly than in the past. We will increase commercial lending in real terms and as a percentage of our total loan portfolio. A change like this takes time and very deliberate focus. We are fortunate to have attracted several new and very talented Lender/New Business Calling Officers to reinforce our existing team of lenders. This would be a good place to point out that past due and delinquent loans remain at near historically low levels. 3 I would like to assure our longtime customers, that our new focus on business banking will in no way affect our commitment to providing the highest levels of service available in the market to our individual and family customer relationships. We can do both, and I guarantee you that we intend to exceed customer expectations. My phone number is 908-719-4301, Bob Rogers' is 908-719-4302 and Craig Spengeman's is 908-719-3301. 3) In the last few years we have opened fabulous new branches in the wonderful communities of Bridgewater, Clinton, Hillsborough, Morristown, Oldwick, and Warren. All are performing ahead of expectations and we anticipate they will be great investments for the future. As previously reported we have recently opened a branch within the Corporate Headquarters of Chubb. We are dedicated only to the financial needs of their wonderful employees, and we look forward to growing over time. Looking ahead, our new branches will be located in communities with outstanding commercial business opportunities. Our new downtown Summit Office will open during the first quarter of 2007. Ms. Nicole Jefferys has joined our Bank and will bring her Summit banking experience to us and our new customers. We hope to begin work soon on an already approved and greatly improved Branch near the intersection of Shunpike and Green Village Road in Chatham Township. The new building will provide many new conveniences to our customers in the area, including drive-up banking and an ATM. We will continue to look for new locations with great potential. PGB TRUST AND INVESTMENTS PGB Trust and Investments completed another outstanding year with assets under management growing to almost $2,000,000,000. Fees generated by this group grew 10% to $8,400,000. We never lose sight of how important this constant flow of fee income is to the quality of earnings of the entire organization. Craig Spengeman and his staff focus on the objectives of their clients. Asset management, trust and estate administration, financial and tax planning all require hard work and dedicated professionals to ensure your goals are achieved. The financial world is complicated, and many families and organizations need help in navigating the ever-changing landscape of investment styles, tax, and financial planning. We have an extraordinary team of 34 professionals ready to help you. You only need to take the first step with a call to Craig Spengeman at 908-719-3301 or John Bonk at 908-719-3318. CASH DIVIDEND Shareholder value is the primary concern of Management and the Board. In November 2006 the Board increased the quarterly dividend by 7% to 15(cent) per share. Over the past six years, the dividend has increased by more than 114%. 4 We hope you agree that the strategic changes we have put in motion and the increased dividends paid over the years will combine to produce shareholder value. We believe the most important business decisions for the future are made in the most difficult business environments. We are excited and energized for all the opportunities the future will bring. DIRECTORS As this report is to chronicle all the events of 2006, we again salute the life and service of T. Leonard Hill who died in March. I cannot imagine a more dedicated or productive Director or better friend. His spirit lives on, but we will miss him always. Also, after thirty years of service on our Board, Jack D. Stine decided earlier in the year that he would retire as of December 31, 2006. We have been so fortunate to have the benefit of his wisdom and sense of humor for all these years. The Board has unanimously elected Mr. Stine as Director Emeritus, and we look forward to seeing him at an occasional meeting. We thank our Employees, Directors and Shareholders for their hard work and great support. Please take every opportunity to refer family, friends and associates to your Bank. We will do a great job for them. /s/ Frank A. Kissel /s/ Robert M. Rogers Frank A. Kissel Robert M. Rogers Chairman & CEO President & COO 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW: The following discussion and analysis is intended to provide information about the financial condition and results of operations of Peapack-Gladstone Financial Corporation and its subsidiaries on a consolidated basis and should be read in conjunction with the consolidated financial statements and the related notes and supplemental financial information appearing elsewhere in this report. Peapack-Gladstone Financial Corporation (the "Corporation"), formed in 1997, is the parent holding company for Peapack-Gladstone Bank (the "Bank"), formed in 1921, a commercial bank operating 21 branches in Somerset, Hunterdon and Morris counties. During 2006, the quarterly cash dividend rate was increased to $0.15 per share. This new rate raised the cash dividend rate by 7 percent over the previous rate of $0.14 per share. The cash dividend rate has increased 100 percent in the past five years. The Corporation experienced decreasing margins as a result of an inverted yield curve and five increases in the federal funds target rate by the Federal Reserve during the year ended December 31, 2006. It was a challenging year for the Corporation. Although loan and deposit growth was strong, increasing on average almost $146 million and $83 million, respectively, net interest income on a tax-equivalent basis declined $2 million during the year. Net interest income was negatively affected by this very challenging operating environment. Highly competitive loan and deposit pricing and the inverted yield curve combined to put pressure on the net interest margin. Yields on interest-bearing liabilities increased 119 basis points, while yields on interest-earning assets increased 48 basis points. The net interest margin declined 51 basis points or 16 percent over 2005 levels. As discussed in this Management's Discussion and Analysis section some of the highlights are as follows: o The loan portfolio experienced growth of 13 percent. o PGB Trust and Investments assets exceeded $1.9 billion in market value, growing more than 9 percent. o Deposits surpassed the $1.1 billion level, with nearly 10 percent growth. RETURN ON AVERAGE EQUITY IN PERCENT [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] 17.06 15.14 14.72 13.49 10.10 - ---------------------------------------------- '02 '03 '04 '05 '06 RETURN ON AVERAGE ASSETS IN PERCENT [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] 1.53 1.34 1.30 1.12 0.79 - ---------------------------------------------- '02 '03 '04 '05 '06 6 o Total assets of the Corporation reached $1.29 billion this year, almost a 3 percent increase. o The Corporation sold $61.6 million of available-for-sale securities as part of a balance sheet restructuring strategy to improve net interest margin and future net interest income, reduce wholesale funding and decrease its overall interest rate risk. Peapack-Gladstone Financial Corporation's common stock trades on the American Stock Exchange under the symbol "PGC". CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis of Financial Condition and Results of Operation is based upon the Corporation's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements for the year ended December 31, 2006, contains a summary of the Corporation's significant accounting policies. Management believes that the Corporation's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors. The provision for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's provision for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation's loan portfolio NET INTEREST INCOME IN MILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $31.9 $31.2 $35.1 $35.3 $32.8 - ---------------------------------------------- '02 '03 '04 '05 '06 7 is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or New Jersey experience an adverse economic shock. Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. EARNINGS SUMMARY: The Corporation's net income for the year ended December 31, 2006 was $10.2 million compared to $13.1 million for the year ended December 31, 2005, a decline of $2.9 million, or 22 percent. Earnings per diluted share were $1.22 and $1.56 for the years 2006 and 2005, respectively. These results produced a return on average assets of 0.79 percent as compared to 1.12 percent in 2005 and a return on average shareholders' equity of 10.10 percent as compared to 13.49 percent in 2005. In 2006, the Corporation experienced strong growth in loans and deposits; however, this was tempered by lower net interest margins and the resultant reduced net interest income. NET INTEREST INCOME: The primary source of the Corporation's operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans to individuals and businesses, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities ("Net Interest Spread") and the relative amounts of earning assets and interest-bearing liabilities. The Corporation's net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of non-performing assets. Credit quality remained excellent in 2006 as loan delinquencies were at low levels. Net interest income, on a fully tax-equivalent basis, declined from $36.3 million in 2005 to $34.0 million in 2006. Average earning assets increased $117.7 million or 11 percent from the average balances in 2005 and rates earned on earning assets increased 48 basis points in 2006. Interest expense increased 71 percent over the levels recorded in 2005 on average balances of interest-bearing liabilities that increased $107.3 million or 12 percent. Rates paid in 2006 on interest-bearing liabilities rose 119 basis points over those paid in 2005 as competitive pressure and the influence of rising federal funds target rates drove rates higher. In 2006, the net interest margin declined to 2.76 percent from 3.27 percent in 2005. Interest income on earning assets, on a fully tax-equivalent basis, was $68.4 million, an increase of $12.0 million, or 21 percent, over 2005 levels. This increase was primarily due to higher average loans, which rose $145.7 million, offset in part by a decline of $29.1 million in average investments. Rates increased 53 basis points on investments due in part to the sale and maturities of lower yielding bonds, which were partially replaced with higher yielding investments. Rates earned on loans increased 33 basis points, reflecting the Corporation's increased emphasis on commercial and construction lending, which yields higher rates. 8 During the year, interest expense rose $14.3 million due to higher rates paid on interest-bearing deposits and increased volume of higher cost money market accounts, certificates of deposit and short-term borrowings. The overall rate paid on interest-bearing deposits increased 117 basis points to 3.27 percent in 2006 as compared to 2.10 percent in 2005. Rates paid on borrowings rose 109 basis points to 4.66 percent. In addition to the pressure on rates due to the competitive environment of deposit gathering, the Federal Reserve Bank increased the Federal funds rate five times in 2006. Interest expense also rose due to the increased volume of higher-paying liabilities. On average, the High Yield money market account, which was introduced late in 2005, increased $75.7 million. Fed Tracker money market accounts and certificates of deposit grew $44.3 million and $79.0 million, respectively. Shifting of balances occurred between the traditional money market and savings products, which declined $28.0 million on average, and the High Yield money market accounts, which yielded higher returns to customers. Average interest-bearing checking accounts declined $53.3 million or 28 percent over the comparable period in 2005. The decline was primarily due to the loss of two large municipal escrow accounts, which required above-market interest rates, which the Corporation was not willing to pay. Average noninterest-bearing demand deposits increased $6.9 million or 4 percent during 2006 as compared to 2005. During 2006, average overnight borrowings decreased $2.3 million to $24.9 million and the Bank increased average short-term borrowings by $35.7 million to an average of $60.5 million for the year ended December 31, 2006. Average Federal Home Loan Bank advances declined $2.7 million. The Corporation completed a balance sheet restructuring in the third quarter of 2006, selling $61.6 million of available-for-sale securities that were yielding 4.14 percent. The sale resulted in a before tax charge of approximately $1.9 million and an after tax charge of $1.1 million, or $0.13 per diluted share. The Corporation used a majority of the proceeds from the sale to redeem high cost, short-term borrowings and used approximately $20 million to purchase floating-rate securities. The Corporation has experienced an improvement in net interest income and net interest margin following the implementation of the restructuring strategy. In addition to improving future net interest income, the Corporation anticipates a decrease in its overall interest rate risk as a result of the restructuring. 9 THE FOLLOWING TABLE COMPARES THE AVERAGE BALANCE SHEETS, NET INTEREST SPREADS AND NET INTEREST MARGINS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (FULLY TAX-EQUIVALENT-FTE):
YEAR ENDED DECEMBER 31, 2006 - --------------------------------------------------------------------------------------- INCOME/ AVERAGE EXPENSE YIELD (IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE) - --------------------------------------------------------------------------------------- ASSETS: INTEREST-EARNING ASSETS: INVESTMENTS: TAXABLE (1) $ 345,190 $ 15,857 4.59% - --------------------------------------------------------------------------------------- TAX-EXEMPT (1) (2) 52,040 2,793 5.37 - --------------------------------------------------------------------------------------- LOANS (2) (3) 828,337 49,555 5.98 - --------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 2,939 146 4.96 - --------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 1,284 61 4.72 ======================================================================================= TOTAL INTEREST-EARNING ASSETS 1,229,790 $ 68,412 5.56% ======================================================================================= NONINTEREST-EARNING ASSETS: CASH AND DUE FROM BANKS 22,475 - --------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES (6,516) - --------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT 23,038 - --------------------------------------------------------------------------------------- OTHER ASSETS 22,564 ======================================================================================= TOTAL NONINTEREST-EARNING ASSETS 61,561 ======================================================================================= TOTAL ASSETS $ 1,291,351 ======================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST-BEARING DEPOSITS: - --------------------------------------------------------------------------------------- CHECKING $ 138,045 $ 1,044 0.76% - --------------------------------------------------------------------------------------- MONEY MARKETS 317,524 11,955 3.77 - --------------------------------------------------------------------------------------- SAVINGS 82,016 567 0.69 - --------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT 352,114 15,505 4.40 ======================================================================================= TOTAL INTEREST-BEARING DEPOSITS 889,699 29,071 3.27 - --------------------------------------------------------------------------------------- BORROWED FUNDS 115,181 5,373 4.66 ======================================================================================= TOTAL INTEREST-BEARING LIABILITIES 1,004,880 34,444 3.43 ======================================================================================= NONINTEREST-BEARING LIABILITIES: DEMAND DEPOSITS 179,597 - --------------------------------------------------------------------------------------- ACCRUED EXPENSES AND OTHER LIABILITIES 5,659 ======================================================================================= TOTAL NONINTEREST-BEARING LIABILITIES 185,256 - --------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 101,215 ======================================================================================= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,291,351 ======================================================================================= NET INTEREST INCOME $ 33,968 ======================================================================================= NET INTEREST SPREAD 2.13 - --------------------------------------------------------------------------------------- NET INTEREST MARGIN (4) 2.76% - ---------------------------------------------------------------------------------------
10
YEAR ENDED DECEMBER 31, 2005 - --------------------------------------------------------------------------------------- INCOME/ AVERAGE EXPENSE YIELD (IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE) - --------------------------------------------------------------------------------------- ASSETS: INTEREST-EARNING ASSETS: INVESTMENTS: TAXABLE (1) $ 373,618 $ 15,210 4.07% - --------------------------------------------------------------------------------------- TAX-EXEMPT (1) (2) 52,732 2,550 4.84 - --------------------------------------------------------------------------------------- LOANS (2) (3) 682,648 38,593 5.65 - --------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 2,253 73 3.26 - --------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 807 26 3.17 ======================================================================================= TOTAL INTEREST-EARNING ASSETS 1,112,058 $ 56,452 5.08% ======================================================================================= NONINTEREST-EARNING ASSETS: CASH AND DUE FROM BANKS 21,411 - --------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES (6,271) - --------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT 21,124 - --------------------------------------------------------------------------------------- OTHER ASSETS 24,154 ======================================================================================= TOTAL NONINTEREST-EARNING ASSETS 60,418 ======================================================================================= TOTAL ASSETS $ 1,172,476 ======================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST-BEARING DEPOSITS: - --------------------------------------------------------------------------------------- CHECKING $ 191,305 $ 2,192 1.15% - --------------------------------------------------------------------------------------- MONEY MARKETS 249,096 5,613 2.25 - --------------------------------------------------------------------------------------- SAVINGS 99,594 691 0.69 - --------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT 273,140 8,609 3.15 ======================================================================================= TOTAL INTEREST-BEARING DEPOSITS 813,135 17,105 2.10 - --------------------------------------------------------------------------------------- BORROWED FUNDS 84,490 3,018 3.57 ======================================================================================= TOTAL INTEREST-BEARING LIABILITIES 897,625 20,123 2.24 ======================================================================================= NONINTEREST-BEARING LIABILITIES: DEMAND DEPOSITS 172,692 - --------------------------------------------------------------------------------------- ACCRUED EXPENSES AND OTHER LIABILITIES 4,827 ======================================================================================= TOTAL NONINTEREST-BEARING LIABILITIES 177,519 - --------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 97,332 ======================================================================================= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,172,476 ======================================================================================= NET INTEREST INCOME $ 36,329 ======================================================================================= NET INTEREST SPREAD 2.84 - --------------------------------------------------------------------------------------- NET INTEREST MARGIN (4) 3.27% - --------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2004 - --------------------------------------------------------------------------------------- INCOME/ AVERAGE EXPENSE YIELD (IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE) - --------------------------------------------------------------------------------------- ASSETS: INTEREST-EARNING ASSETS: INVESTMENTS: TAXABLE (1) $ 418,492 $ 15,992 3.82% - --------------------------------------------------------------------------------------- TAX-EXEMPT (1) (2) 42,959 2,155 5.02 - --------------------------------------------------------------------------------------- LOANS (2) (3) 483,397 27,566 5.70 - --------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 5,122 58 1.13 - --------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 1,640 19 1.16 ======================================================================================= TOTAL INTEREST-EARNING ASSETS 951,610 $ 45,790 4.81% ======================================================================================= NONINTEREST-EARNING ASSETS: CASH AND DUE FROM BANKS 19,832 - --------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES (5,710) - --------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT 17,785 - --------------------------------------------------------------------------------------- OTHER ASSETS 26,317 ======================================================================================= TOTAL NONINTEREST-EARNING ASSETS 58,224 ======================================================================================= TOTAL ASSETS $ 1,009,834 ======================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST-BEARING DEPOSITS: - --------------------------------------------------------------------------------------- CHECKING $ 159,043 $ 991 0.62% - --------------------------------------------------------------------------------------- MONEY MARKETS 218,141 2,022 0.93 - --------------------------------------------------------------------------------------- SAVINGS 106,518 664 0.62 - --------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT 222,241 4,834 2.18 ======================================================================================= TOTAL INTEREST-BEARING DEPOSITS 705,943 8,511 1.21 - --------------------------------------------------------------------------------------- BORROWED FUNDS 50,416 1,349 2.68 ======================================================================================= TOTAL INTEREST-BEARING LIABILITIES 756,359 9,860 1.30 ======================================================================================= NONINTEREST-BEARING LIABILITIES: DEMAND DEPOSITS 158,151 - --------------------------------------------------------------------------------------- ACCRUED EXPENSES AND OTHER LIABILITIES 6,243 ======================================================================================= TOTAL NONINTEREST-BEARING LIABILITIES 164,394 - --------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 89,081 ======================================================================================= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,009,834 ======================================================================================= NET INTEREST INCOME $ 35,930 ======================================================================================= NET INTEREST SPREAD 3.51 - --------------------------------------------------------------------------------------- NET INTEREST MARGIN (4) 3.78% - ---------------------------------------------------------------------------------------
(1) AVERAGE BALANCES FOR AVAILABLE-FOR-SALE SECURITIES ARE BASED ON AMORTIZED COST. (2) INTEREST INCOME IS PRESENTED ON A TAX-EQUIVALENT BASIS USING A 35 PERCENT FEDERAL TAX RATE. (3) LOANS ARE STATED NET OF UNEARNED INCOME AND INCLUDE NON-ACCRUAL LOANS. (4) NET INTEREST INCOME ON A TAX-EQUIVALENT BASIS AS A PERCENTAGE OF TOTAL AVERAGE INTEREST-EARNING ASSETS. 11 RATE/VOLUME ANALYSIS: THE EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME (ON A TAX-EQUIVALENT BASIS) FOR THE PERIODS INDICATED ARE SHOWN BELOW:
YEAR ENDED 2006 COMPARED WITH 2005 YEAR ENDED 2005 COMPARED WITH 2004 - ---------------------------------------------------------------------------------------------------- NET NET DIFFERENCE DUE TO CHANGE IN DIFFERENCE DUE TO CHANGE IN CHANGE IN: INCOME/ CHANGE IN: INCOME/ (IN THOUSANDS): VOLUME RATE EXPENSE VOLUME RATE EXPENSE - ---------------------------------------------------------------------------------------------------- ASSETS: INVESTMENTS $ (900) $ 1,790 $ 890 $ (1,122) $ 735 $ (387) - ---------------------------------------------------------------------------------------------------- LOANS 10,225 737 10,962 11,239 (212) 11,027 - ---------------------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 27 46 73 (46) 61 15 - ---------------------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 19 16 35 (14) 21 7 ==================================================================================================== TOTAL INTEREST INCOME $ 9,371 $ 2,589 $ 11,960 $ 10,057 $ 605 $ 10,662 ==================================================================================================== LIABILITIES CHECKING $ (1,521) $ 373 $ (1,148) $ 899 $ 302 $ 1,201 - ---------------------------------------------------------------------------------------------------- MONEY MARKET 2,384 3,958 6,342 2,211 1,380 3,591 - ---------------------------------------------------------------------------------------------------- SAVINGS (124) -- (124) (43) 70 27 - ---------------------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT 2,907 3,989 6,896 1,276 2,499 3,775 - ---------------------------------------------------------------------------------------------------- BORROWED FUNDS 1,667 688 2,355 1,182 487 1,669 ==================================================================================================== TOTAL INTEREST EXPENSE $ 5,313 $ 9,008 $ 14,321 $ 5,525 $ 4,738 $ 10,263 ==================================================================================================== NET INTEREST INCOME $ 4,058 $(6,419) $ (2,361) $ 4,532 $(4,133) $ 399 ====================================================================================================
LOANS: The loan portfolio represents the largest portion of the Corporation's earning assets and is an important source of interest and fee income. Loans are primarily originated in the State of New Jersey. At December 31, 2006, total loans were $870.2 million, an increase of $101.7 million, or 13 percent from 2005 levels. The growth in our portfolios is primarily the result of new business initiatives and our entry into new market areas. Construction loans totaled $46.7 million, an increase of $21.3 million, or 84 percent. Commercial mortgage loans rose $19.0 million or 10 percent in 2006, while residential loans secured by first liens on 1-4 family homes rose $43.6 million or 9 percent from 2005 levels. The majority of residential real estate loan origination was primarily due to the purchase of adjustable rate loans from a third-party mortgage origination entity. All of the loans purchased are secured by properties located in the State of New Jersey. Commercial loans also grew by $5.1 million or 15 percent during 2006. During the past year, the Corporation has increased its emphasis on construction and commercial lending, which yields higher rates. The yield on total loans averaged 5.98 percent for 2006, an increase of 33 basis points from the 5.65 percent average yield earned in 2005. The average yield on the mortgage portfolio rose in 2006 to 5.49 percent from 5.45 percent in 2005. The average yield on the commercial loan portfolio increased three basis points to 6.18 percent. Although short-term interest rates continued to rise during the year, it did not have a significant impact on loan yields, as long-term rates remained relatively flat. More significant to the increased income was the increased volume of loans. 12 THE FOLLOWING TABLE PRESENTS AN ANALYSIS OF OUTSTANDING LOANS AS OF DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004 2003 2002 - --------------------------------------------------------------------------------------------------- REAL ESTATE-MORTGAGE 1-4 FAMILY RESIDENTIAL FIRST LIENS $ 508,808 $ 465,228 $ 327,974 $ 226,887 $ 229,679 - --------------------------------------------------------------------------------------------------- JUNIOR LIENS 30,410 20,316 13,539 11,163 15,211 - --------------------------------------------------------------------------------------------------- HOME EQUITY 16,072 20,760 20,078 18,251 22,265 - --------------------------------------------------------------------------------------------------- REAL ESTATE-COMMERCIAL 215,451 196,431 162,166 130,968 109,932 - --------------------------------------------------------------------------------------------------- REAL ESTATE-CONSTRUCTION 46,684 25,387 17,703 9,799 2,063 - --------------------------------------------------------------------------------------------------- COMMERCIAL LOANS 38,471 33,322 20,821 16,632 17,859 - --------------------------------------------------------------------------------------------------- CONSUMER LOANS 9,601 5,014 7,181 10,223 8,206 - --------------------------------------------------------------------------------------------------- OTHER LOANS 4,656 2,015 2,702 3,078 4,545 =================================================================================================== TOTAL LOANS $ 870,153 $ 768,473 $ 572,164 $ 427,001 $ 409,760 ===================================================================================================
INVESTMENT SECURITIES HELD TO MATURITY: Investment securities are those securities that the Corporation has both the ability and intent to hold to maturity. These securities are carried at amortized cost. The portfolio consists primarily of U.S. government agencies, mortgage-backed securities and municipal obligations. The Corporation's investment securities held to maturity at amortized cost amounted to $55.2 million at December 31, 2006, compared with $78.1 million at December 31, 2005. THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF INVESTMENT SECURITIES HELD TO MATURITY AT AMORTIZED COST, AS OF DECEMBER 31, 2006:
AFTER 1 AFTER 5 BUT BUT WITHIN WITHIN WITHIN AFTER (IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL - ------------------------------------------------------------------------------------------------------- U.S. TREASURIES $ 500 $ 500 $ -- $ -- $ 1,000 3.248% 4.896% --% --% 4.072% - ------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (1) $ -- $ 2,731 $ 1,882 $ 12,737 $ 17,350 --% 4.746% 5.797% 4.868% 4.950% - ------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS (2) $ 11,822 $ 19,274 $ 5,719 $ -- $ 36,815 4.217% 4.288% 5.317% --% 4.423% ======================================================================================================= TOTAL $ 12,322 $ 22,505 $ 7,601 $ 12,737 $ 55,165 4.178% 4.357% 5.436% 4.868% 4.584% =======================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY. (2) YIELDS PRESENTED ON A FULLY TAX-EQUIVALENT BASIS. SECURITIES AVAILABLE FOR SALE: Securities available for sale are used as a part of the Corporation's interest rate risk management strategy, and they may be sold in response to changes in interest rates, liquidity needs, and other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders' equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold. 13 At December 31, 2006, the Corporation had securities available for sale with a market value of $286.2 million, compared with $341.6 million at December 31, 2005. A $1.4 million net unrealized loss (net of income tax) and a $3.0 million net unrealized loss (net of income tax) was included in shareholders' equity at December 31, 2006 and December 31, 2005, respectively. THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND RATES OF SECURITIES AVAILABLE FOR SALE, STATED AT MARKET VALUE, AS OF DECEMBER 31, 2006:
AFTER 1 AFTER 5 BUT BUT AFTER WITHIN WITHIN WITHIN 10 (IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS YEARS TOTAL - ---------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SPONSORED AGENCIES $ 20,802 $ 36,020 $ -- $ -- $ 56,822 3.299% 4.763% --% --% 4.226% - --------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (1) $ -- $ 7,219 $ 29,229 $ 104,288 $ 140,736 --% 4.084% 4.224% 4.861% 4.687% - --------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS (2) $ 689 $ 4,695 $ 2,703 $ 15,000 $ 23,087 5.853% 5.907% 6.327% 4.420% 4.984% - --------------------------------------------------------------------------------------------------------- OTHER SECURITIES $ 6,605 $ 998 $ -- $ 57,938 $ 65,541 3.677% 5.607% --% 6.591% 6.319% - --------------------------------------------------------------------------------------------------------- TOTAL $ 28,096 $ 48,932 $ 31,932 $ 177,226 $ 286,186 3.442% 4.786% 4.394% 5.382% 4.992% =========================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY. (2) YIELDS PRESENTED ON A FULLY TAX-EQUIVALENT BASIS. Federal funds sold and interest-earning deposits are an additional part of the Corporation's investment and liquidity strategies. The combined average balance of these vehicles during 2006 was $4.2 million as compared to $3.1 million in 2005. DEPOSITS: Total deposits at December 31, 2006 were $1.14 billion, an increase of $102.7 million or 10 percent from $1.04 billion at December 31, 2005. Our strategy is to fund earning asset growth with core deposits, which is an important factor in the generation of net interest income. Marketing, sales efforts and a new branch location all contributed to the strong growth in deposits. Total average deposits increased $83.5 million, or 8 percent, over 2005 levels. THE FOLLOWING TABLE SETS FORTH INFORMATION CONCERNING THE COMPOSITION OF THE CORPORATION'S AVERAGE DEPOSIT BASE AND AVERAGE INTEREST RATES PAID FOR THE FOLLOWING YEARS:
(IN THOUSANDS) 2006 2005 2004 - ------------------------------------------------------------------------------------------------ NONINTEREST-BEARING DEMAND $ 179,597 --% $172,692 --% $158,151 --% - ------------------------------------------------------------------------------------------------ CHECKING 138,045 0.76 191,305 1.15 159,043 0.62 - ------------------------------------------------------------------------------------------------ SAVINGS 82,016 0.69 99,594 0.69 106,518 0.62 - ------------------------------------------------------------------------------------------------ MONEY MARKETS 317,524 3.77 249,096 2.25 218,141 0.93 - ------------------------------------------------------------------------------------------------ CERTIFICATES OF DEPOSITS 352,114 4.40 273,140 3.15 222,241 2.18 ================================================================================================ TOTAL DEPOSITS $1,069,296 $985,827 $864,094 ================================================================================================
Certificates of deposit over $100,000 are generally purchased by local municipal governments or individuals for periods of one year or less. These factors translate into a stable customer oriented cost-effective funding source. 14 THE FOLLOWING TABLE SHOWS REMAINING MATURITY FOR CERTIFICATES OF DEPOSIT OVER $100,000 AS OF DECEMBER 31, 2006 (IN THOUSANDS): THREE MONTHS OR LESS $ 42,765 - -------------------------------------------------------------------------------- OVER THREE MONTHS THROUGH TWELVE MONTHS 68,178 - -------------------------------------------------------------------------------- OVER TWELVE MONTHS 15,071 - -------------------------------------------------------------------------------- TOTAL $126,014 ================================================================================ FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: At December 31, 2006 and 2005, Federal Home Loan Bank (FHLB) advances totaled $24.0 million and $31.7 million, respectively, with a weighted average interest rate of 3.59 percent and 3.51 percent, respectively. The Corporation considers FHLB advances an added source of funding, and accordingly, executes transactions from time to time to meet its funding requirements. The FHLB advances outstanding at December 31, 2006 have varying terms and interest rates. The Corporation had no short-term or overnight borrowings at December 31, 2006. At December 31, 2005, short-term borrowings with an average maturity of 90 days or less totaled $65.0 million, while overnight borrowings totaled $12.5 million. ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses was $6.8 million at December 31, 2006 as compared to $6.4 million at December 31, 2005. At December 31, 2006, the allowance for loan losses as a percentage of total loans outstanding was 0.78 percent compared to 0.83 percent at December 31, 2005 and 1.05 percent at December 31, 2004. The provision for loan losses was $414 thousand for 2006 and $391 thousand for 2005. The allowance as a percentage of total loans declined in 2006 as compared to 2005, while the provision increased over the prior year as loan growth and increases in commercial-related loans was offset by relatively low levels of delinquencies and historical charge-off experience. While the composition of the Bank's loan portfolio was comprised of a higher percentage of lower risk 1-4 family mortgages, the Bank's strategy is to increase the commercial loan portfolios. We anticipate that this strategy will increase the risk in the loan portfolio. The provision was based upon management's review and evaluation of the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, general market and economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and the existence and net realizable value of the collateral and guarantees securing the loans. Although management used the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in market conditions in the state and may be adversely affected should real estate values decline or should New Jersey experience an adverse economic downturn. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. 15 THE FOLLOWING TABLE PRESENTS THE LOAN LOSS EXPERIENCE DURING THE PERIODS ENDED DECEMBER 31,
(IN THOUSANDS) 2006 2005 2004 2003 2002 - --------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR $ 6,378 $ 5,989 $ 5,439 $ 4,778 $ 4,023 - --------------------------------------------------------------------------------------- LOANS CHARGED-OFF DURING THE PERIOD REAL ESTATE -- -- -- -- -- - --------------------------------------------------------------------------------------- CONSUMER 13 14 16 42 59 - --------------------------------------------------------------------------------------- COMMERCIAL AND OTHER 13 2 62 -- 9 ======================================================================================= TOTAL LOANS CHARGED-OFF 26 16 78 42 68 ======================================================================================= RECOVERIES DURING THE PERIOD - --------------------------------------------------------------------------------------- REAL ESTATE -- -- -- 37 -- - --------------------------------------------------------------------------------------- CONSUMER 1 2 6 40 36 - --------------------------------------------------------------------------------------- COMMERCIAL AND OTHER 1 12 9 34 7 ======================================================================================= TOTAL RECOVERIES 2 14 15 111 43 ======================================================================================= NET CHARGE-OFFS/(RECOVERIES) 24 2 63 (69) 25 ======================================================================================= PROVISION CHARGED TO EXPENSE 414 391 613 592 780 ======================================================================================= ALLOWANCE FOR LOAN LOSSES AT END OF YEAR $ 6,768 $ 6,378 $ 5,989 $ 5,439 $ 4,778 =======================================================================================
THE FOLLOWING TABLE SHOWS THE ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AND THE PERCENTAGE OF EACH LOAN CATEGORY TO TOTAL LOANS AS OF DECEMBER 31,
% OF % OF % OF % OF % OF LOAN LOAN LOAN LOAN LOAN CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL (IN THOUSANDS) 2006 LOANS 2005 LOANS 2004 LOANS 2003 LOANS 2002 LOANS - ---------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL $ 4,510 78.1 $ 4,448 82.0 $3,942 81.1 $3,238 80.7 $2,860 80.4 - ---------------------------------------------------------------------------------------------------------------------------- COMMERCIAL AND OTHER 1,991 17.8 1,767 14.9 1,850 15.5 1,988 15.7 1,696 14.2 - ---------------------------------------------------------------------------------------------------------------------------- CONSUMER 267 4.1 163 3.1 197 3.4 213 3.6 222 5.4 ============================================================================================================================ TOTAL $ 6,768 100.0 $ 6,378 100.0 $5,989 100.0 $5,439 100.0 $4,778 100.0 ============================================================================================================================
16 NON-PERFORMING ASSETS: THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF NON-PERFORMING ASSETS:
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------- LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST $ 197 $ 47 $ -- $ 56 $ 203 - ----------------------------------------------------------------------------------------------- NON-ACCRUAL LOANS 1,880 339 351 159 180 =============================================================================================== TOTAL NON-PERFORMING LOANS 2,077 386 351 215 383 - ----------------------------------------------------------------------------------------------- OTHER REAL ESTATE OWNED -- -- -- -- -- - ----------------------------------------------------------------------------------------------- TOTAL NON-PERFORMING ASSETS $ 2,077 $ 386 $ 351 $ 215 $ 383 =============================================================================================== LOAN CHARGE-OFFS $ 26 $ 16 $ 78 $ 42 $ 68 - ----------------------------------------------------------------------------------------------- LOAN RECOVERIES (2) (14) (15) (111) (43) =============================================================================================== NET LOAN CHARGE-OFFS/(RECOVERIES) $ 24 $ 2 $ 63 $ (69) $ 25 =============================================================================================== ALLOWANCE FOR LOAN LOSSES $ 6,768 $ 6,378 $ 5,989 $ 5,439 $ 4,778 =============================================================================================== RATIOS: - ----------------------------------------------------------------------------------------------- TOTAL NON-PERFORMING LOANS/TOTAL LOANS 0.24 % 0.05 % 0.06 % 0.05 % 0.09 % - ----------------------------------------------------------------------------------------------- TOTAL NON-PERFORMING LOANS/TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04 - ----------------------------------------------------------------------------------------------- TOTAL NON-PERFORMING ASSETS/TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04 - ----------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES/TOTAL LOANS 0.78 0.83 1.05 1.27 1.17 - ----------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES/ TOTAL NON-PERFORMING LOANS 3.3X 16.5X 17.1X 25.3X 12.5X - -----------------------------------------------------------------------------------------------
Interest income of $129 thousand, $21 thousand and $11 thousand would have been recognized during 2006, 2005 and 2004, respectively, if non-accrual loans had been current in accordance with their original terms. CONTRACTUAL OBLIGATIONS: The following table shows the significant contractual obligations of the Corporation by expected payment period, as of December 31, 2006. Further discussion of these commitments is included in the Footnotes to the Consolidated Financial Statements noted below (in thousands):
LESS THAN MORE THAN (IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL - ----------------------------------------------------------------------------------------- LONG-TERM DEBT OBLIGATIONS $ 4,000 $ 2,839 $ 13,375 $ 3,750 $23,964 - ----------------------------------------------------------------------------------------- OPERATING LEASE OBLIGATIONS 2,414 4,735 3,870 11,224 22,243 - ----------------------------------------------------------------------------------------- PURCHASE OBLIGATIONS 1,107 192 -- -- 1,299 - ----------------------------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES (1) 1,000 -- -- -- 1,000 ========================================================================================= TOTAL $ 8,521 $ 7,766 $ 17,245 $ 14,974 $48,506 =========================================================================================
(1) THE CORPORATION DOES NOT HAVE AN ESTIMATE OF THE ACTUAL PENSION CONTRIBUTION FOR 2008 AND BEYOND; HOWEVER IT IS ANTICIPATED TO BE APPROXIMATELY $1.0 MILLION IN 2007. Short-term and overnight borrowings are borrowings from the Federal Home Loan Bank with defined terms. Long-term debt obligations include borrowings from the Federal Home Loan Bank with defined terms. The chart is based on scheduled repayments of principal. 17 Operating leases represent obligations entered into by the Corporation for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes. Common area maintenance charges may also apply and are adjusted annually based on the terms of the lease agreements. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist of contractual obligations under data processing service agreements, as well as the contract for the construction of a new branch in Summit. The Corporation also enters into various routine rental and maintenance contracts for facilities and equipment. These contracts are generally for one year and are not significant to the consolidated financial statements of the Corporation. OFF-BALANCE SHEET ARRANGEMENTS: The following table shows the amounts and expected maturities of significant commitments, as of December 31, 2006. Further discussion of these commitments is included in Note 13 to the Consolidated Financial Statements:
LESS THAN MORE THAN (IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL - --------------------------------------------------------------------------------------- FINANCIAL LETTERS OF CREDIT $ 793 $ -- $ -- $ -- $ 793 - --------------------------------------------------------------------------------------- PERFORMANCE LETTERS OF CREDIT 2,361 48 -- -- 2,409 - --------------------------------------------------------------------------------------- COMMERCIAL LETTERS OF CREDIT 2,990 3,120 -- -- 6,110 ======================================================================================= TOTAL $ 6,144 $ 3,168 $ -- $ -- $ 9,312 =======================================================================================
Commitments under standby letters of credit, both financial and performance do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. OTHER INCOME: Other income was $10.3 million in 2006, a decline of 11 percent over 2005 levels. The decline was attributable to a net loss on securities sold in 2006 offset, in part, by increases in trust fees and other noninterest income. As discussed earlier, the Corporation completed a balance sheet restructuring in 2006, selling $61.6 million of available-for-sale securities, which resulted in a before tax charge of approximately $1.9 million and an after tax charge of $1.1 million, or $0.13 per diluted share. The Corporation used a majority of the proceeds from the sale to redeem high cost, short-term borrowings and used approximately $20 million to purchase floating-rate securities. The Corporation has experienced an improvement in net interest income and net interest margin as a result of the restructuring strategy. In addition to improving future net interest income, the Corporation anticipates a decrease in its overall interest rate risk. Net gains on sales of securities were $551 thousand for the year ended December 31, 2005 and included a $253 thousand gain on the non-monetary exchange of equity securities. Trust fees totaling $8.4 million were realized in 2006, an increase of $727 thousand, or 10 percent over the levels in 2005. This increase is attributable to an increased volume of business as the market value of assets under management increased to $1.92 billion. 18 In 2006, other income of $837 thousand was realized on increased cash surrender value on Bank Owned Life Insurance (BOLI) policies, as compared to $802 thousand in 2005. BOLI assists in offsetting the rising costs of employee benefits. Other noninterest income of $534 thousand was realized in 2006, an increase of $252 thousand, or 89 percent and was primarily due to increased non-recurring commercial and construction loan fee income. THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER INCOME: (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- TRUST FEES $ 8,367 $ 7,640 $ 6,720 - -------------------------------------------------------------------------------- SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,960 1,877 1,743 - -------------------------------------------------------------------------------- BANK OWNED LIFE INSURANCE 837 802 793 - -------------------------------------------------------------------------------- OTHER NONINTEREST INCOME 534 282 205 - -------------------------------------------------------------------------------- SAFE DEPOSIT RENTAL FEES 233 233 233 - -------------------------------------------------------------------------------- OTHER FEE INCOME 117 110 83 - -------------------------------------------------------------------------------- SECURITIES (LOSSES)/GAINS, NET (1,781) 551 150 ================================================================================ TOTAL $ 10,267 $ 11,495 $ 9,927 ================================================================================ OTHER EXPENSES: Other expenses totaled $28.9 million in 2006, an increase of $1.5 million or 5 percent compared to $27.5 million in 2005. This increase is commensurate with the growth in the overall level of bank and trust business activity. The Corporation strives to operate in an efficient manner and control costs as a means of producing increased earnings and enhancing shareholder value. Salaries and benefits expense, which accounts for the largest portion of other expenses, increased $1.0 million, or 7 percent, in 2006 as compared to 2005. Normal salary increases, as well as additions to staff, branch expansion and higher group health insurance accounted for the increase. These increases were offset, in part, by lower profit sharing plan contributions. In addition, the Corporation began expensing stock-based compensation as required by Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment, and recorded $59 thousand of expense in 2006. At December 31, 2006, the Corporation's full-time equivalent staff was 232 compared with 228 at December 31, 2005. Premises and equipment expense increased to $6.9 million in 2006 from $6.7 million in 2005, an increase of $204 thousand, or 3 percent, due to increases charged by outside vendors for electric, gas, real estate taxes, etc. and additional maintenance costs for branch upkeep. 19 Advertising expenses decreased $204 thousand, or 22 percent when compared to 2005. In 2005, the Corporation had higher advertising to promote and introduce deposit products. Stationery and supplies expense declined $67 thousand, or 13 percent. Postage expense rose $53 thousand, or 19 percent, due to increases to postal rates and higher customer accounts. Professional and legal fees rose $268 thousand, or 47 percent, over levels for 2005, due to increases in consulting fees to improve compliance with banking laws and regulations and higher recruitment fees to fill new lending positions. THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER EXPENSES: (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- SALARIES AND BENEFITS $ 15,698 $ 14,682 $ 13,898 - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT 6,909 6,705 5,668 - -------------------------------------------------------------------------------- ADVERTISING 732 936 689 - -------------------------------------------------------------------------------- PROFESSIONAL AND LEGAL FEES 833 565 583 - -------------------------------------------------------------------------------- STATIONERY AND SUPPLIES 469 536 605 - -------------------------------------------------------------------------------- TRUST DEPARTMENT 467 408 416 - -------------------------------------------------------------------------------- TELEPHONE 396 390 441 - -------------------------------------------------------------------------------- POSTAGE 339 286 332 - -------------------------------------------------------------------------------- OTHER EXPENSES 3,102 2,984 2,546 ================================================================================ TOTAL $ 28,945 $ 27,492 $ 25,178 ================================================================================ INCOME TAXES: Income tax expense for the years ended December 31, 2006 and 2005 was $3.5 million and $5.8 million, respectively. The effective tax rate for the year ended December 31, 2006 was 25.53 percent compared to 30.54 percent for the year ended December 31, 2005. Taxable income declined from $18.9 million to $13.7 million from December 31, 2005 to December 31, 2006. The effective tax rate in 2006 decreased due to increased tax-exempt income of $164 thousand as well as a decline in state income tax due to higher taxable income in the Real Estate Investment Trust subsidiary, which has a lower effective state tax rate. In addition, the Bank subsidiary recognized a state tax net operating loss benefit, which also contributed to the decline in the effective tax rate for 2006. RESULTS OF OPERATIONS 2005 COMPARED TO 2004: Net income for the year ended December 31, 2005 was $13.13 million compared to $13.11 for the year ended December 31, 2004, an increase of $21 thousand. Earnings per diluted share were $1.56 for both year-end 2005 and 2004. These results produced a return on average assets of 1.12 percent as compared to 1.30 percent in 2004 and a return on average shareholders' equity of 13.49 percent as compared to 14.72 percent in 2004. In 2005, the Corporation experienced strong growth in loans and deposits, however, this was tempered by higher cost of funds and asset yields that remained relatively flat to 2004. Net interest income, on a fully tax-equivalent basis, increased from $35.9 million in 2004 to $36.3 million in 2005. Average earning assets increased $160.4 million, or 17 percent, from the average balances in 2004 and the interest earned on these assets increased 27 basis points in 2005. Interest expense doubled over the levels recorded in 2004 on average balances of interest-bearing liabilities that increased $141.3 million, or 19 percent. Rates paid in 2005 on interest-bearing liabilities rose 94 basis points over 2004 as competitive pressure and the influence of rising federal funds target rates drove rates higher. In 2005, the net interest margin declined to 3.27 percent from 3.78 percent in 2004. 20 Other income was $11.5 million in 2005, an increase of 16 percent over 2004 levels. This increase was attributable to increases in almost all categories of other income, notably a $920 thousand increase, or 14 percent, in trust fees. This increase is attributable to increased volume of business as the market value of assets under management increased to $1.76 billion. Net gains on sales of securities increased by $401 thousand. This increase was primarily due to a $560 thousand other-than-temporary non-cash impairment charge on adjustable rate investment-grade preferred stock in 2004 and a $253 thousand gain on the non-monetary exchange of equity securities in 2005. Other income of $802 thousand was realized on increased cash surrender value on BOLI policies in 2005, as compared to $793 thousand in 2004. In 2005, other expenses totaled $27.5 million, an increase of $2.3 million, or 9 percent compared to $25.2 million in 2004. Salaries and benefits expense increased $784 thousand, or 6 percent, in 2005 as compared to 2004. Normal salary increases, as well as additions to staff, branch expansion and higher group health insurance and pension plan costs accounted for the increase. These increases were offset, in part, by lower profit sharing plan contributions and a reduced bonus pool. At December 31, 2005, the full-time equivalent number of employees was 228 as compared to 219 at December 31, 2004. Premises and equipment expense increased to $6.7 million in 2005 from $5.7 million in 2004, an increase of $1.0 million, or 18 percent. Occupancy expenses continue to grow as the Corporation invests in new branches and technological capacity, both vital to the Corporation's future growth and profitability. Advertising expenses increased $247 thousand in 2005 due to additional advertising for the Bridgewater branch and the advertising of deposit products. Stationery and supplies expense and postage expense declined $69 thousand, or 11 percent, and $46 thousand, or 14 percent, respectively, as cost savings from the implementation of check imaging of customer checks was realized. Telephone expense also declined, when compared with 2004, by $51 thousand, or 12 percent. Professional and legal fees remained relatively constant from 2005 to 2004. CAPITAL RESOURCES: The solid capital base of the Corporation provides the ability for future growth and financial strength. Maintaining a strong capital position supports the Corporation's goal of providing shareholders an attractive and stable long-term return on investment. Total shareholders' equity grew $4.6 million or 5 percent to $103.8 million at December 31, 2006 as compared with $99.2 million at December 31, 2005. The Financial Accounting Standards Board (FASB) issued FASB Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which requires the Corporation to recognize on its balance sheet the funded status of pension and other postretirement benefit plans as of December 31, 2006. As a result, the Corporation recorded an unfunded pension benefit obligation, net of taxes, of $1.3 million at December 31, 2006. At December 31, 2006, unrealized losses on securities, net of taxes, were $1.4 million as compared to unrealized losses on securities, net of taxes, of $3.0 million at December 31, 2005. 21 In addition, the Corporation recorded an adjustment of $494 thousand, net of taxes, resulting from the understatement of lease expense, to beginning retained earnings for 2006. This adjustment was related to the accounting for operating leases on a cash basis rather than a GAAP basis according to the guidance issued by the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was effective as of the end of the Corporation's 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Federal regulations require banks to meet target Tier 1 and total capital ratios of 4 percent and 8 percent, respectively. The Corporation's Tier 1 and total capital ratios are well in excess of regulatory minimums at 15.33 percent and 16.31 percent, respectively, at December 31, 2006. The Corporation's capital leverage ratio was 8.20 percent at December 31, 2006. LIQUIDITY: Liquidity refers to an institution's ability to meet short-term requirements in the form of loan requests, deposit withdrawals and maturing obligations. Principal sources of liquidity include cash, temporary investments and securities available for sale. Management feels the Corporation's liquidity position is sufficient to meet future needs. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled $30.3 million at December 31, 2006. In addition, the Corporation has $286.2 million in securities designated as available for sale. These securities can be sold in response to liquidity concerns. As of December 31, 2006, investment securities and securities available for sale maturing within one year amounted to $40.4 million and cash and cash equivalents totaled $30.3 million. Another source of liquidity is borrowing capacity. The Corporation has a variety of sources of short-term liquidity available, including short and long-term borrowings from the Federal Home Loan Bank of New York, short-term borrowings from the Federal Reserve Bank Discount Window, federal funds purchased from correspondent banks and loan participation or sales of loans. The Corporation also generates liquidity from the regular principal payments received on its loan portfolio and on its mortgage-backed security portfolio. INTEREST RATE SENSITIVITY: Interest rate sensitivity is a measure of the relationship between interest-earning assets and supporting funds, which are susceptible to changes in interest rates during comparable time periods. Interest rate movements on deposits have made managing the Corporation's interest rate sensitivity increasingly more important as a means of managing net interest income. The Corporation's Asset/Liability Committee is responsible for managing the exposure to changes in market interest rates. The "sensitivity" gap quantifies the repricing mismatch between assets and supporting funds over various time intervals. The cumulative gap position as a percentage of total rate-sensitive assets provides one relative measure of the Corporation's interest rate exposure. 22 The Corporation's ratio of rate-sensitive assets to rate-sensitive liabilities was approximately 0.72 on December 31, 2006 for the next twelve months subject to certain assumptions explained in the following paragraph. Since this ratio is less than 1.00, the Corporation has a "negative gap" position, which may cause its assets to reprice more slowly than its deposit liabilities. In a declining interest rate environment, interest costs may be expected to fall faster than the interest received on earning assets, thus increasing the net interest spread. If interest rates increase, a negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Corporation's liabilities, therefore decreasing the net interest spread. Management does not view this amount as presenting an unusually high risk potential, although no assurances can be given that the Corporation is not at risk from interest rate increases or decreases. Expected maturities are contractual maturities adjusted for all projected payments of principal. For investment securities, loans and long-term debt, expected maturities are based upon contractual maturity or call dates, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on historical experience combined with market consensus expectations derived from independent external sources. The actual maturities of these instruments could vary substantially if future prepayments differ from historical experience. For non-maturity deposit liabilities, in accordance with standard industry practice and the Corporation's own historical experience, "decay factors" were used to estimate deposit runoff. THE TABLE BELOW PRESENTS THE MATURITY AND REPRICING RELATIONSHIPS BETWEEN INTEREST-EARNING ASSETS AND INTEREST-BEARING DEPOSITS AS OF DECEMBER 31, 2006 (IN THOUSANDS):
REPRICING OR 0-3 3-12 1-5 OVER 5 MATURITY DATE MONTHS MONTHS YEARS YEARS TOTAL - ------------------------------------------------------------------------------------------------- ASSETS SECURITIES $ 73,267 $ 63,570 $139,617 $ 64,897 $ 341,351 - ------------------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 103 -- -- -- 103 - ------------------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 6,965 -- -- -- 6,965 - ------------------------------------------------------------------------------------------------- LOANS (1) 173,657 170,110 399,881 124,625 868,273 ================================================================================================= TOTAL INTEREST-SENSITIVE ASSETS $253,992 $233,680 $539,498 $189,522 $1,216,692 ================================================================================================= DEPOSITS CERTIFICATES OF DEPOSIT $107,979 $203,576 $ 53,114 $ -- $ 364,669 - ------------------------------------------------------------------------------------------------- SAVINGS 19,794 5,822 29,600 18,782 73,998 - ------------------------------------------------------------------------------------------------- MONEY MARKETS 189,658 29,379 146,761 1,076 366,874 - ------------------------------------------------------------------------------------------------- CHECKING 38,163 11,225 57,071 36,217 142,676 - ------------------------------------------------------------------------------------------------- BORROWED FUNDS 496 5,509 16,242 1,717 23,964 - ------------------------------------------------------------------------------------------------- NONINTEREST-BEARING DEMAND DEPOSITS 52,469 15,354 78,383 50,313 196,519 ================================================================================================= TOTAL INTEREST-SENSITIVE LIABILITIES $408,559 $270,865 $381,171 $108,105 $1,168,700 ================================================================================================= ASSETS/LIABILITIES 0.62 0.86 1.42 1.75 1.04 ================================================================================================= ASSETS/LIABILITIES (CUMULATIVE) 0.62 0.72 0.97 1.04 =================================================================================================
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS. 23 MARKET RISK SENSITIVE INSTRUMENTS: A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps or options. However, the Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of the customers of the Corporation. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. The Corporation's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the statement of condition to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and interest rate shock simulation report. The Corporation has no market risk sensitive instruments held for trading purposes. Management believes the Corporation's market risk is reasonable at this time. THE FOLLOWING TABLE PRESENTS THE SCHEDULED MATURITY OF MARKET RISK SENSITIVE INSTRUMENTS AS OF DECEMBER 31, 2006 (IN THOUSANDS):
AVERAGE INTEREST WITHIN 1-5 OVER MATURING IN: RATE 1 YEAR YEARS 5 YEARS TOTAL - --------------------------------------------------------------------------------------- ASSETS SECURITIES 4.70% $ 40,418 $ 71,437 $229,496 $ 341,351 - --------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 4.96 103 -- -- 103 - --------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 4.72 6,965 -- -- 6,965 - --------------------------------------------------------------------------------------- LOANS (1) 5.98 140,348 363,750 364,175 868,273 ======================================================================================= TOTAL $187,834 $435,187 $593,671 $1,216,692 ======================================================================================= LIABILITIES SAVINGS, CHECKING AND MONEY MARKETS 2.52% $583,548 $ -- $ -- $ 583,548 - --------------------------------------------------------------------------------------- CDS 4.40 311,555 53,114 -- 364,669 - --------------------------------------------------------------------------------------- BORROWED FUNDS 4.66 4,000 16,214 3,750 23,964 ======================================================================================= TOTAL $899,103 $ 69,328 $ 3,750 $ 972,181 =======================================================================================
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS. 24 EFFECTS OF INFLATION AND CHANGING PRICES: The financial statements and related financial data presented herein have been prepared in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same magnitude as the prices of goods and services. The Corporation believes residential real estate values have stabilized, however, if real estate prices in the Corporation's trade area decrease, the values of real estate collateralizing the Corporation's loans and real estate held by the Corporation as other real estate owned could also be adversely affected. RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48), which establishes a recognition threshold and measurement for income tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN 48 may be recognized or, continue to be recognized, upon adoption of this Interpretation. The cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Corporation adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Corporation's consolidated financial statements. FASB issued FASB Statement No. 157, "Fair Value Measurements," in September 2006. Statement 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. Statement 157 only applies to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. Statement 157 is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early application is permissible only if no annual or interim financial statements have been issued for the earlier periods. The Corporation does not expect Statement 157 to have a material effect on its consolidated financial statements at this time. 25 The Emerging Issues Task Force (EITF) approved a Consensus, EITF 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," in September 2006 which would require that the deferred-compensation or postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer and that the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits would be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. The Corporation has 29 split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods. The Corporation owns and controls these policies, an endorsement split-dollar arrangement, and splits the insurance policy's death benefit with the employee. As ratified, EITF 06-4 will be effective for fiscal years beginning after December 15, 2007. Early adoption will be permitted as of the beginning of an entity's fiscal year. Entities adopting EITF 06-4 would choose between retrospective application to all prior periods or treating the application of the Consensus as a cumulative-effect adjustment to beginning retained earnings or to other components of equity or net assets in the statement of financial position. At the time the FASB staff provides final guidance on determining the substance of the benefit provided our employees, the Compensation Committee of the Corporation will decide on whether to amend, discontinue or maintain the benefit in its current form. The Corporation will disclose this decision in the accounting period in which it receives final guidance. TRUST ASSETS MARKET VALUE IN BILLIONS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $1.24 $1.42 $1.69 $1.76 $1.92 - ---------------------------------------------- '02 '03 '04 '05 '06 PGB TRUST AND INVESTMENTS: PGB Trust and Investments, a division of the Bank, since its inception in 1972 has served in the roles of executor and trustee while providing investment management, custodial, tax, retirement and financial services to its growing client base. Officers from PGB Trust and Investments are available to provide investment services at the Bank's Morristown and Gladstone Branches. The book value of assets under management in PGB Trust and Investments increased from $1.29 billion at December 31, 2005 to $1.38 billion at December 31, 2006, an increase of 7 percent. The corresponding market value at December 31, 2006 was in excess of $1.92 billion. Fee income generated by PGB Trust and Investments was $8.4 million, $7.6 million and $6.7 million in 2006, 2005 and 2004, respectively. FORWARD LOOKING STATEMENTS: The foregoing contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Corporation. Such statements are not historical facts and include expressions about the Corporation's confidence, strategies and expectations about earnings, new 26 and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by forward-looking terminology such as "expect," "believe," or "anticipate," or expressions of confidence like "strong," or "on-going," or similar statements or variations of such terms. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: o The success of the Corporation's balance sheet restructuring initiative. o Unexpected decline in the direction of the economy in New Jersey. o Unexpected changes in interest rates. o Failure to grow business. o Inability to manage growth. o Unexpected loan prepayment volume. o Exposure to credit risks. o Insufficient allowance for loan losses. o Competition from other financial institutions. o Adverse effects of government regulation. o Decline in the levels of loan quality and origination volume. o Decline in the volume of increase in trust assets or deposits. The Corporation assumes no responsibility to update such forward-looking statements in the future. DIVIDENDS PER SHARE IN DOLLARS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $0.33 $0.38 $0.42 $0.50 $0.58 - ---------------------------------------------- '02 '03 '04 '05 '06 BOOK VALUE PER SHARE IN DOLLARS [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] $9.52 $10.43 $11.48 $11.97 $12.55 - ---------------------------------------------- '02 '03 '04 '05 '06 27 SELECTED CONSOLIDATED FINANCIAL DATA: The following is selected consolidated financial data for the Corporation and its subsidiaries for the years indicated. This information is derived from the historical consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements and Notes.
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ SUMMARY EARNINGS: Interest Income $ 67,267 $ 55,414 $ 44,917 $ 41,426 $ 43,947 - ------------------------------------------------------------------------------------------------------------------------ Interest Expense 34,444 20,123 9,860 10,262 12,055 ======================================================================================================================== Net Interest Income 32,823 35,291 35,057 31,164 31,892 ======================================================================================================================== Provision for Loan Losses 414 391 613 592 780 ======================================================================================================================== Net Interest Income After Provision for Loan Losses 32,409 34,900 34,444 30,572 31,112 ======================================================================================================================== Other Income, Exclusive of Securities (Losses)/gains, Net 12,048 10,944 9,777 8,788 7,642 - ------------------------------------------------------------------------------------------------------------------------ Other Expenses 28,945 27,492 25,178 22,557 21,081 - ------------------------------------------------------------------------------------------------------------------------ Securities (Losses)/gains, Net (1,781) 551 150 1,284 52 ======================================================================================================================== Income Before Income Tax Expense 13,731 18,903 19,193 18,087 17,725 - ------------------------------------------------------------------------------------------------------------------------ Income Tax Expense 3,505 5,773 6,084 5,787 5,800 ======================================================================================================================== Net Income $ 10,226 $ 13,130 $ 13,109 $ 12,300 $ 11,925 ======================================================================================================================== PER SHARE DATA: 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE-BASIC $ 1.24 $ 1.58 $ 1.60 $ 1.51 $ 1.48 - ------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE-DILUTED 1.22 1.56 1.56 1.47 1.45 - ------------------------------------------------------------------------------------------------------------------------ CASH DIVIDENDS DECLARED 0.58 0.50 0.42 0.38 0.33 - ------------------------------------------------------------------------------------------------------------------------ BOOK VALUE END-OF-PERIOD 12.55 11.97 11.48 10.43 9.52 - ------------------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE SHARES OUTSTANDING 8,268,226 8,286,926 8,200,681 8,122,433 8,083,088 - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCK EQUIVALENTS (DILUTIVE) 102,095 116,348 177,412 231,062 165,453 - ------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (AT PERIOD END): 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,288,376 $1,255,383 $1,067,410 $ 968,154 $ 859,828 - ------------------------------------------------------------------------------------------------------------------------ INVESTMENT SECURITIES 55,165 78,084 87,128 97,701 168,066 - ------------------------------------------------------------------------------------------------------------------------ SECURITIES AVAILABLE FOR SALE 286,186 341,584 354,186 355,998 212,259 - ------------------------------------------------------------------------------------------------------------------------ LOANS 870,153 768,473 572,164 427,001 409,760 - ------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES 6,768 6,378 5,989 5,439 4,778 - ------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 1,144,736 1,041,996 935,666 845,771 769,688 - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 103,763 99,155 94,669 85,054 77,158 - ------------------------------------------------------------------------------------------------------------------------ TRUST ASSETS (MARKET VALUE) 1,924,954 1,761,846 1,691,860 1,414,591 1,238,754 - ------------------------------------------------------------------------------------------------------------------------ CASH DIVIDENDS DECLARED 4,794 4,143 3,226 2,760 2,207 - ------------------------------------------------------------------------------------------------------------------------
28
SELECTED PERFORMANCE RATIOS: 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ RETURN ON AVERAGE TOTAL ASSETS 0.79% 1.12% 1.30% 1.34% 1.53% - ------------------------------------------------------------------------------------------------------------------------ RETURN ON AVERAGE TOTAL SHAREHOLDERS' EQUITY 10.10 13.49 14.72 15.14 17.06 - ------------------------------------------------------------------------------------------------------------------------ DIVIDEND PAYOUT RATIO 46.88 31.56 24.61 22.44 18.51 - ------------------------------------------------------------------------------------------------------------------------ AVERAGE TOTAL SHAREHOLDERS' EQUITY TO AVERAGE ASSETS 7.84 8.30 8.82 8.84 8.95 - ------------------------------------------------------------------------------------------------------------------------ NON-INTEREST EXPENSES TO AVERAGE ASSETS 2.24 2.34 2.49 2.45 2.70 - ------------------------------------------------------------------------------------------------------------------------ NON-INTEREST INCOME TO AVERAGE ASSETS 0.80 0.98 0.98 1.10 0.99 - ------------------------------------------------------------------------------------------------------------------------ ASSET QUALITY RATIOS (AT PERIOD END): - ------------------------------------------------------------------------------------------------------------------------ NON-ACCRUAL LOANS TO TOTAL LOANS 0.22% 0.04% 0.06% 0.04% 0.04% - ------------------------------------------------------------------------------------------------------------------------ NON-PERFORMING ASSETS TO TOTAL ASSETS 0.16 0.03 0.03 0.02 0.04 - ------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOANS LOSSES TO NON-PERFORMING LOANS 3.3X 16.5X 17.1X 25.3X 12.5X - ------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOANS LOSSES TO TOTAL LOANS 0.78% 0.83% 1.05% 1.27% 1.17% - ------------------------------------------------------------------------------------------------------------------------ NET (RECOVERIES)/CHARGE-OFFS TO AVERAGE LOANS PLUS OTHER REAL ESTATE OWNED 0.00 0.00 0.01 (0.02) 0.01 - ------------------------------------------------------------------------------------------------------------------------ LIQUIDITY AND CAPITAL RATIOS: - ------------------------------------------------------------------------------------------------------------------------ AVERAGE LOANS TO AVERAGE DEPOSITS 77.47% 69.25% 55.94% 51.23% 61.09% - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY TO TOTAL ASSETS 8.05 7.90 8.87 8.79 8.97 - ------------------------------------------------------------------------------------------------------------------------ TIER 1 CAPITAL TO RISK WEIGHTED ASSETS 15.33 16.71 19.02 20.38 19.51 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITAL TO RISK WEIGHTED ASSETS 16.31 17.78 20.25 21.74 20.81 - ------------------------------------------------------------------------------------------------------------------------ TIER 1 LEVERAGE RATIO 8.20 8.66 9.18 8.91 9.19 - ------------------------------------------------------------------------------------------------------------------------
29 THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR THE PERIODS INDICATED:
SELECTED 2006 QUARTERLY DATA: (IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - --------------------------------------------------------------------------------------- INTEREST INCOME $ 15,794 $ 16,581 $ 17,524 $ 17,368 - --------------------------------------------------------------------------------------- INTEREST EXPENSE 7,218 8,405 9,669 9,152 ======================================================================================= NET INTEREST INCOME 8,576 8,176 7,855 8,216 - --------------------------------------------------------------------------------------- PROVISION FOR LOANS LOSSES 39 100 125 150 - --------------------------------------------------------------------------------------- TRUST FEES 2,245 2,078 1,872 2,172 - --------------------------------------------------------------------------------------- SECURITIES GAINS/(LOSSES), NET 51 5 (1,837) -- - --------------------------------------------------------------------------------------- OTHER INCOME 890 908 880 1,003 - --------------------------------------------------------------------------------------- OTHER EXPENSES 7,118 7,386 7,210 7,231 - --------------------------------------------------------------------------------------- NET INCOME BEFORE INCOME TAX EXPENSE 4,605 3,681 1,435 4,010 - --------------------------------------------------------------------------------------- INCOME TAX EXPENSE 1,359 986 44 1,116 ======================================================================================= NET INCOME $ 3,246 $ 2,695 $ 1,391 $ 2,894 ======================================================================================= EARNINGS PER SHARE-BASIC $ 0.39 $ 0.33 $ 0.17 $ 0.35 - --------------------------------------------------------------------------------------- EARNINGS PER SHARE-DILUTED 0.39 0.32 0.17 0.34 - ---------------------------------------------------------------------------------------
SELECTED 2005 QUARTERLY DATA: (IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - --------------------------------------------------------------------------------------- INTEREST INCOME $ 12,656 $ 13,400 $ 14,266 $ 15,092 - --------------------------------------------------------------------------------------- INTEREST EXPENSE 3,629 4,455 5,504 6,535 ======================================================================================= NET INTEREST INCOME 9,027 8,945 8,762 8,557 - --------------------------------------------------------------------------------------- PROVISION FOR LOANS LOSSES 131 197 150 (87) - --------------------------------------------------------------------------------------- TRUST FEES 2,013 1,906 1,895 1,826 - --------------------------------------------------------------------------------------- SECURITIES GAINS, NET 298 37 216 -- - --------------------------------------------------------------------------------------- OTHER INCOME 839 818 828 819 - --------------------------------------------------------------------------------------- OTHER EXPENSES 6,574 7,020 6,861 7,037 ======================================================================================= NET INCOME BEFORE INCOME TAX EXPENSE 5,472 4,489 4,690 4,252 - --------------------------------------------------------------------------------------- INCOME TAX EXPENSE 1,769 1,271 1,475 1,258 - --------------------------------------------------------------------------------------- NET INCOME $ 3,703 $ 3,218 $ 3,215 $ 2,994 ======================================================================================= EARNINGS PER SHARE-BASIC $ 0.45 $ 0.39 $ 0.39 $ 0.36 - --------------------------------------------------------------------------------------- EARNINGS PER SHARE-DILUTED 0.44 0.38 0.38 0.36 - ---------------------------------------------------------------------------------------
30 MANAGEMENT REPORT INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control system was designed to provide reasonable assurance to the Corporation's management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon our assessment we believe that, as of December 31, 2006, the Corporation's internal control over financial reporting is effective based upon those criteria. The Corporation's independent auditors have issued an audit report on our assessment of, and the effective operation of, the Corporation's internal control over financial reporting. This report begins on the next page. /s/ Frank A. Kissel /s/ Arthur F. Birmingham Frank A. Kissel Arthur F. Birmingham Chairman of the Board and Executive Vice President, Chief Executive Officer Chief Financial Officer and Chief Accounting Officer February 27, 2007 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND SHAREHOLDERS PEAPACK-GLADSTONE FINANCIAL CORPORATION: We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Peapack-Gladstone Financial Corporation and subsidiary (the "Corporation") maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Corporation's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 32 In our opinion, management's assessment that Peapack-Gladstone Financial Corporation and subsidiary maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, Peapack-Gladstone Financial Corporation and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated February 27, 2007 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Short Hills, New Jersey February 27, 2007 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND SHAREHOLDERS PEAPACK-GLADSTONE FINANCIAL CORPORATION: We have audited the accompanying consolidated statements of condition of Peapack-Gladstone Financial Corporation and subsidiary (the "Corporation") as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Peapack-Gladstone Financial Corporation and subsidiary's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. As discussed in Note 14 to the consolidated financial statements, effective January 1, 2006, the Corporation adopted SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements". /s/ KPMG LLP Short Hills, New Jersey February 27, 2007 34 CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 - ------------------------------------------------------------------------------------------- ASSETS CASH AND DUE FROM BANKS $ 23,190 $ 19,573 - ------------------------------------------------------------------------------------------- FEDERAL FUNDS SOLD 103 2,631 - ------------------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 6,965 1,295 =========================================================================================== TOTAL CASH AND CASH EQUIVALENTS 30,258 23,499 =========================================================================================== INVESTMENT SECURITIES HELD TO MATURITY (APPROXIMATE MARKET VALUE $54,523 IN 2006 AND $77,286 IN 2005) 55,165 78,084 - ------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE 286,186 341,584 - ------------------------------------------------------------------------------------------- LOANS 870,153 768,473 =========================================================================================== LESS: ALLOWANCE FOR LOAN LOSSES 6,768 6,378 =========================================================================================== NET LOANS 863,385 762,095 - ------------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT 24,059 21,412 - ------------------------------------------------------------------------------------------- ACCRUED INTEREST RECEIVABLE 5,181 4,828 - ------------------------------------------------------------------------------------------- CASH SURRENDER VALUE OF LIFE INSURANCE 18,689 17,957 - ------------------------------------------------------------------------------------------- OTHER ASSETS 5,453 5,924 =========================================================================================== TOTAL ASSETS $ 1,288,376 $ 1,255,383 =========================================================================================== LIABILITIES DEPOSITS: NONINTEREST-BEARING DEMAND DEPOSITS $ 196,519 $ 185,854 - ------------------------------------------------------------------------------------------- INTEREST-BEARING DEPOSITS: CHECKING 142,676 176,175 - ------------------------------------------------------------------------------------------- SAVINGS 73,998 90,744 - ------------------------------------------------------------------------------------------- MONEY MARKET ACCOUNTS 366,874 281,068 - ------------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT OVER $100,000 126,014 93,903 - ------------------------------------------------------------------------------------------- CERTIFICATES OF DEPOSIT LESS THAN $100,000 238,655 214,252 =========================================================================================== TOTAL DEPOSITS 1,144,736 1,041,996 - ------------------------------------------------------------------------------------------- SHORT-TERM BORROWINGS -- 77,500 - ------------------------------------------------------------------------------------------- LONG-TERM DEBT 23,964 31,705 - ------------------------------------------------------------------------------------------- ACCRUED EXPENSES AND OTHER LIABILITIES 15,913 5,027 =========================================================================================== TOTAL LIABILITIES 1,184,613 1,156,228 =========================================================================================== SHAREHOLDERS' EQUITY COMMON STOCK (NO PAR VALUE; STATED VALUE $0.83 PER SHARE; AUTHORIZED 20,000,000 SHARES; ISSUED SHARES, 8,497,463 AT DECEMBER 31, 2006 AND 8,473,718 AT DECEMBER 31, 2005; OUTSTANDING SHARES, 8,270,973 AT DECEMBER 31, 2006 AND 8,284,715 AT DECEMBER 31, 2005) 7,081 7,061 - ------------------------------------------------------------------------------------------- SURPLUS 89,372 88,973 - ------------------------------------------------------------------------------------------- TREASURY STOCK AT COST, 226,490 SHARES IN 2006 - ------------------------------------------------------------------------------------------- AND 189,003 SHARES IN 2005 (4,999) (4,022) - ------------------------------------------------------------------------------------------- RETAINED EARNINGS 15,038 10,100 - ------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF INCOME TAX BENEFIT (2,729) (2,957) =========================================================================================== TOTAL SHAREHOLDERS' EQUITY 103,763 99,155 =========================================================================================== TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,288,376 $ 1,255,383 ===========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2004 - ------------------------------------------------------------------------------------ INTEREST INCOME INTEREST AND FEES ON LOANS $ 49,510 $ 38,559 $ 27,542 - ------------------------------------------------------------------------------------ INTEREST ON INVESTMENT SECURITIES HELD TO MATURITY: TAXABLE 1,068 1,591 2,650 - ------------------------------------------------------------------------------------ TAX-EXEMPT 1,344 1,188 943 - ------------------------------------------------------------------------------------ INTEREST AND DIVIDENDS ON SECURITIES AVAILABLE FOR SALE: TAXABLE 14,789 13,619 13,342 - ------------------------------------------------------------------------------------ TAX-EXEMPT 349 358 363 - ------------------------------------------------------------------------------------ INTEREST ON FEDERAL FUNDS SOLD 146 73 58 - ------------------------------------------------------------------------------------ INTEREST-EARNING DEPOSITS 61 26 19 ==================================================================================== TOTAL INTEREST INCOME 67,267 55,414 44,917 ==================================================================================== INTEREST EXPENSE INTEREST ON CHECKING ACCOUNTS 1,044 2,192 991 - ------------------------------------------------------------------------------------ INTEREST ON SAVINGS AND MONEY MARKET ACCOUNTS 12,522 6,304 2,686 - ------------------------------------------------------------------------------------ INTEREST ON CERTIFICATES OF DEPOSIT OVER $100,000 5,406 2,678 1,320 - ------------------------------------------------------------------------------------ INTEREST ON OTHER CERTIFICATES OF DEPOSIT 10,099 5,931 3,514 - ------------------------------------------------------------------------------------ INTEREST ON SHORT-TERM BORROWINGS 4,305 1,879 345 - ------------------------------------------------------------------------------------ INTEREST ON LONG-TERM DEBT 1,068 1,139 1,004 ==================================================================================== TOTAL INTEREST EXPENSE 34,444 20,123 9,860 ==================================================================================== NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 32,823 35,291 35,057 ==================================================================================== PROVISION FOR LOAN LOSSES 414 391 613 ==================================================================================== NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,409 34,900 34,444 - ------------------------------------------------------------------------------------ OTHER INCOME TRUST FEES 8,367 7,640 6,720 - ------------------------------------------------------------------------------------ SERVICE CHARGES AND FEES 2,310 2,220 2,059 - ------------------------------------------------------------------------------------ BANK OWNED LIFE INSURANCE 837 802 793 - ------------------------------------------------------------------------------------ OTHER INCOME 534 282 205 - ------------------------------------------------------------------------------------ SECURITIES (LOSSES)/GAINS, NET (1,781) 551 150 ==================================================================================== TOTAL OTHER INCOME 10,267 11,495 9,927 ==================================================================================== OTHER EXPENSES SALARIES AND EMPLOYEE BENEFITS 15,698 14,682 13,898 - ------------------------------------------------------------------------------------ PREMISES AND EQUIPMENT 6,909 6,705 5,668 - ------------------------------------------------------------------------------------ OTHER EXPENSES 6,338 6,105 5,612 ==================================================================================== TOTAL OTHER EXPENSES 28,945 27,492 25,178 ==================================================================================== INCOME BEFORE INCOME TAX EXPENSE 13,731 18,903 19,193 - ------------------------------------------------------------------------------------ INCOME TAX EXPENSE 3,505 5,773 6,084 ==================================================================================== NET INCOME $ 10,226 $ 13,130 $ 13,109 ==================================================================================== EARNINGS PER SHARE BASIC $ 1.24 $ 1.58 $ 1.60 - ------------------------------------------------------------------------------------ DILUTED 1.22 1.56 1.56 ====================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMMON TREASURY RETAINED COMPREHENSIVE (IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2003 7,416,031 SHARES OUTSTANDING $ 6,274 $ 61,959 $ (2,391) $ 16,557 $ 2,655 $ 85,054 - ------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME: NET INCOME 2004 13,109 13,109 UNREALIZED HOLDING LOSSES ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX BENEFIT OF $796) (1,119) LESS: RECLASSIFICATION ADJUSTMENT FOR GAINS INCLUDED IN NET INCOME (NET OF INCOME TAX OF $52) 98 -------- NET UNREALIZED HOLDING LOSSES ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX BENEFIT OF $848) (1,217) (1,217) ------------ TOTAL COMPREHENSIVE INCOME 11,892 DIVIDENDS DECLARED ($0.42 PER SHARE) (3,226) (3,226) COMMON STOCK OPTIONS EXERCISED AND RELATED TAX BENEFITS, 83,002 SHARES 85 1,340 1,425 COMMON STOCK DIVIDEND (TEN PERCENT), 747,009 SHARES 635 24,692 (25,327) -- TREASURY STOCK TRANSACTIONS, 15,289 SHARES (476) (476) - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2004 8,246,042 SHARES OUTSTANDING $ 6,994 $ 87,991 $ (2,867) $ 1,113 $ 1,438 $ 94,669 - ------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME: NET INCOME 2005 13,130 13,130 UNREALIZED HOLDING LOSSES ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX BENEFIT OF $2,504) (4,037) LESS: RECLASSIFICATION ADJUSTMENT FOR GAINS INCLUDED IN NET INCOME (NET OF INCOME TAX OF $193) 358 --------- NET UNREALIZED HOLDING LOSSES ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX BENEFIT OF $2,697) (4,395) (4,395) ------------ TOTAL COMPREHENSIVE INCOME 8,735 DIVIDENDS DECLARED ($0.50 PER SHARE) (4,143) (4,143) COMMON STOCK OPTIONS EXERCISED AND RELATED TAX BENEFITS, 68,673 SHARES 67 982 1,049 TREASURY STOCK TRANSACTIONS 41,420 SHARES (1,155) (1,155) - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2005 8,284,715 SHARES OUTSTANDING $ 7,061 $ 88,973 $ (4,022) $ 10,100 $ (2,957) $ 99,155 - -------------------------------------------------------------------------------------------------------------------
37 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONTINUED
ACCUMULATED OTHER COMMON TREASURY RETAINED COMPREHENSIVE (IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL - -------------------------------------------------------------------------------------------------------------------- CUMULATIVE EFFECT ADJUSTMENT RESULTING FROM THE ADOPTION OF SAB NO. 108, NET OF INCOME TAX BENEFIT $341 (494) (494) - -------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2006, AS ADJUSTED $ 7,061 $ 88,973 $ (4,022) $ 9,606 $ (2,957) $ 98,661 - -------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME: NET INCOME 2006 10,226 10,226 UNREALIZED HOLDING GAINS ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX OF $398) 416 LESS: RECLASSIFICATION ADJUSTMENT FOR LOSSES INCLUDED IN NET INCOME (NET OF INCOME TAX BENEFIT OF $623) (1,158) --------- NET UNREALIZED HOLDING GAINS ON SECURITIES ARISING DURING THE PERIOD (NET OF INCOME TAX OF $1,021) 1,574 1,574 --------- TOTAL COMPREHENSIVE INCOME 11,800 ADJUSTMENT TO INITIALLY APPLY FAS STATEMENT 158 (NET OF TAX (1,346) (1,346) BENEFIT OF $929) DIVIDENDS DECLARED ($0.58 PER SHARE) (4,794) (4,794) COMMON STOCK OPTIONS EXERCISED AND RELATED TAX BENEFITS, 13,742 SHARES 20 399 419 TREASURY STOCK TRANSACTIONS, 37,484 SHARES (977) (977) - -------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2006 8,270,973 SHARES OUTSTANDING $ 7,081 $ 89,372 $ (4,999) $ 15,038 $ (2,729) $ 103,763 ====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 38 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: NET INCOME $ 10,226 $ 13,130 $ 13,109 - -------------------------------------------------------------------------------------------------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION 2,068 1,991 1,658 - -------------------------------------------------------------------------------------------------- AMORTIZATION OF PREMIUM AND ACCRETION OF DISCOUNT ON SECURITIES, NET 498 1,009 1,450 - -------------------------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES 414 391 613 - -------------------------------------------------------------------------------------------------- DEFERRED TAXES (1,786) (2,008) (291) - -------------------------------------------------------------------------------------------------- LOSS/(GAIN) ON SALE OF SECURITIES, NET 1,781 (298) (150) - -------------------------------------------------------------------------------------------------- GAIN ON LOANS SOLD (3) (13) (4) - -------------------------------------------------------------------------------------------------- GAIN ON DISPOSAL OF FIXED ASSETS (15) (28) -- - -------------------------------------------------------------------------------------------------- INCREASE IN CASH SURRENDER VALUE OF LIFE INSURANCE (732) (704) (705) - -------------------------------------------------------------------------------------------------- INCREASE IN ACCRUED INTEREST RECEIVABLE (353) (453) (80) - -------------------------------------------------------------------------------------------------- DECREASE/(INCREASE) IN OTHER ASSETS 2,434 (2,305) 1,662 - -------------------------------------------------------------------------------------------------- INCREASE/(DECREASE) IN ACCRUED EXPENSES AND OTHER LIABILITIES 7,767 3,792 (2,569) ================================================================================================== NET CASH PROVIDED BY OPERATING ACTIVITIES 22,299 14,504 14,693 ================================================================================================== INVESTING ACTIVITIES: PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES HELD TO MATURITY 32,505 35,119 25,669 - -------------------------------------------------------------------------------------------------- PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 66,093 51,383 42,859 - -------------------------------------------------------------------------------------------------- PROCEEDS FROM CALLS OF INVESTMENT SECURITIES HELD TO MATURITY 11,996 5,685 2,495 - -------------------------------------------------------------------------------------------------- PROCEEDS FROM SALES AND CALLS OF SECURITIES AVAILABLE FOR SALE 60,330 42,225 102,706 - -------------------------------------------------------------------------------------------------- PURCHASE OF INVESTMENT SECURITIES HELD TO MATURITY (9,722) (32,000) (18,036)\ - -------------------------------------------------------------------------------------------------- PURCHASE OF SECURITIES AVAILABLE FOR SALE (82,569) (88,569) (146,673) - -------------------------------------------------------------------------------------------------- PROCEEDS FROM SALES OF LOANS 622 2,316 769 - -------------------------------------------------------------------------------------------------- PURCHASE OF LOANS (26,774) (191,842) (74,452) - -------------------------------------------------------------------------------------------------- NET INCREASE IN LOANS (75,549) (6,772) (71,539) - -------------------------------------------------------------------------------------------------- PURCHASES OF PREMISES AND EQUIPMENT (4,715) (3,259) (6,689) - -------------------------------------------------------------------------------------------------- PROCEEDS FROM DISPOSAL OF PREMISES AND EQUIPMENT 15 47 -- ================================================================================================== NET CASH USED IN INVESTING ACTIVITIES (27,768) (185,667) (142,891) ================================================================================================== FINANCING ACTIVITIES: NET INCREASE IN DEPOSITS 102,740 106,330 89,895 - -------------------------------------------------------------------------------------------------- NET (DECREASE)/INCREASE IN SHORT-TERM BORROWINGS (77,500) 77,500 -- - -------------------------------------------------------------------------------------------------- PROCEEDS FROM LONG-TERM DEBT -- -- 8,000 - -------------------------------------------------------------------------------------------------- REPAYMENTS OF LONG-TERM DEBT (7,741) (1,689) (4,638) - -------------------------------------------------------------------------------------------------- DIVIDENDS PAID (4,713) (3,891) (3,134) - -------------------------------------------------------------------------------------------------- STOCK-BASED COMPENSATION 59 -- -- - -------------------------------------------------------------------------------------------------- TAX BENEFIT ON STOCK OPTION EXERCISES 29 347 477 - -------------------------------------------------------------------------------------------------- EXERCISE OF STOCK OPTIONS 331 702 948 - -------------------------------------------------------------------------------------------------- PURCHASE OF TREASURY STOCK (977) (1,155) (476) ================================================================================================== NET CASH PROVIDED BY FINANCING ACTIVITIES 12,228 178,144 91,072 ================================================================================================== NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 6,759 6,981 (37,126) ================================================================================================== CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,499 16,518 53,644 ================================================================================================== CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,258 $ 23,499 $ 16,518 ================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: INTEREST $ 32,857 $ 18,399 $ 9,578 - -------------------------------------------------------------------------------------------------- INCOME TAXES 2,222 8,307 6,437 - --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND ORGANIZATION: The consolidated financial statements of Peapack-Gladstone Financial Corporation (the "Corporation") are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Peapack-Gladstone Bank. The consolidated statements also include the Bank's wholly-owned subsidiary, Peapack-Gladstone Investment Company and its wholly-owned subsidiary, Peapack-Gladstone Mortgage Group, Inc. While the following footnotes include the collective results of Peapack-Gladstone Financial Corporation and Peapack-Gladstone Bank, these footnotes primarily reflect the Bank's and its subsidiaries' activities. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements. BUSINESS: Peapack-Gladstone Bank, the subsidiary of the Corporation, provides a full range of banking services to individual and corporate customers through its branch operations in central New Jersey. The Bank is subject to competition from other financial institutions, is regulated by certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of condition and revenues and expenses for that period. Actual results could differ from those estimates. SEGMENT INFORMATION: Substantially all of the Corporation's business is conducted through its banking subsidiary and involves the delivery of loan and deposit products to customers. The Corporation makes operating decisions and assesses performance based on an ongoing review of these banking operations, which constitute the only operating segment for financial reporting. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits and federal funds sold. Generally, federal funds are sold for one-day periods. SECURITIES: Investment securities are comprised of debt securities that the Corporation has the positive intent and ability to hold to maturity. Such securities are stated at cost, adjusted for amortization of premium and accretion of discount on the level-yield method, over the term of the investments. Securities that cannot be categorized as investment securities are classified as securities available for sale. Such securities include debt securities to be held for indefinite periods of time and not intended to be held to maturity, as well as marketable equity securities. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. Securities available for sale are carried at estimated market value and unrealized holding gains and losses (net of related tax effects) on such securities are excluded from earnings, but are included in Shareholders' Equity as Accumulated Other Comprehensive Income/(Loss). Upon realization, such gains or losses are included in earnings on a trade-date basis using the specific identification method. 40 A decline in the estimated market value of any security below cost that is deemed other-than-temporary results in a reduction in the carrying amount to estimated market value. The impairment loss is charged to earnings and a new cost basis of the security is established. In determining whether an impairment is other-than temporary, the Corporation considers, among other things, the duration of the impairment, changes in value subsequent to year end, forecasted performance of the issuer and the Corporation's intent and ability to hold the security until a market price recovery. Debt securities that are purchased and held primarily for the purpose of being sold in the near term are classified as trading. Trading securities are carried at market value with realized and unrealized gains and losses reported in non-interest income. There were no trading securities at December 31, 2006 or 2005. LOANS: Loans are stated at the principal amount outstanding. Interest on loans is recognized based upon the principal amount outstanding. Loans are stated at face value, less unearned income and net deferred fees. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment, on a level-yield method, to the loan's yield. Loans are considered past due when they are not paid in accordance with contractual terms. The accrual of income on loans, including impaired loans, is discontinued if certain factors indicate reasonable doubt as to the timely collectibility of such interest, generally when the loan becomes over 90 days delinquent. A non-accrual loan is not returned to an accrual status until factors indicating doubtful collection no longer exist. Commercial loans are generally charged off after an analysis is completed which indicates that collectibility of the full principal balance is in doubt. Consumer loans are generally charged off after they become 120 days past due. Mortgage loans are not generally placed on a nonaccrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to income only if collection of principal is not in doubt. If principal and interest payments are brought contractually current and future collectibility is reasonably assured, loans are returned to accrual status. Mortgage loans are generally charged off when the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Corporation's loans are secured by real estate in the State of New Jersey. The Corporation defines an impaired loan as an investment in a loan that is on non-accrual status with a principal outstanding balance in excess of $100 thousand. Residential mortgage loans, a group of homogeneous loans that are collectively evaluated for impairment, and consumer loans are excluded. At December 31, 2006, there were two impaired loans to one customer totaling $1.5 million. There were no impaired loans for the years ended December 31, 2005 and 2004. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the portfolio. The allowance is based on management's evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations. The allowance is increased by provisions charged to expense and reduced by charge-offs net of recoveries. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination 41 process, periodically review the allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral. Impairment losses are included in the allowance for loan losses through provisions charged to operations. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation charges are computed using the straight-line method. Equipment and other fixed assets are depreciated over the estimated useful lives, which range from three to ten years. Premises are depreciated over the estimated useful life of 40 years, while leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Expenditures for maintenance and repairs are expensed as incurred. The cost of major renewals and improvements are capitalized. Gains or losses realized on routine dispositions are recorded as other income or other expense. OTHER REAL ESTATE OWNED: Other real estate owned is carried at fair value minus estimated costs to sell, based on an independent appraisal. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the allowance for loan losses. Any subsequent write-downs that may be required to the carrying value of the properties or losses on the sale of properties are charged to the valuation allowance on other real estate owned or to other expense. The Corporation had no other real estate owned as of December 31, 2006 and 2005. INCOME TAXES: The Corporation files a consolidated Federal income tax return. Separate State income tax returns are filed for each subsidiary based on current laws and regulations. The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on the enacted tax rates applicable to taxable income for the years in which these temporary differences are expected to be recovered or settled. Such tax assets and liabilities are adjusted for the effect of a change in tax rates in the period of enactment. In February 2006, the State of New Jersey Division of Taxation adopted new regulations relating to the dividends paid by Real Estate Investment Trusts (REIT). Dividends received from a REIT are now ineligible for inclusion in the dividends received deduction for corporations. This regulation applies to dividends paid on or after February 6, 2006. This new regulation did not have a material impact on the Corporation's financial condition or results of operations during 2006. BENEFIT PLANS: The Corporation has a defined benefit pension plan covering substantially all of its salaried employees, which is more fully described in Note 11. The benefits are based on an employee's compensation during the five years before retirement, age at retirement and years of service. The Corporation makes annual contributions to the plan equal to the maximum amount that can be deducted for income tax purposes. Effective December 31, 2006, the Corporation adopted FASB Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" 42 (Statement No. 158), which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans. Statement 158 will also require fiscal-year-end measurements of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. The new measurement-date requirement will not be effective until fiscal years ending after December 15, 2008 and the Corporation will comply with this requirement at that time. Statement 158 amends Statements 87, 88, 106 and 132R, but retains most of their measurement and disclosure guidance and will not change the amounts recognized in the income statement as net periodic benefit cost. The Corporation recorded $2.3 million as unfunded pension benefit obligation at December 31, 2006. STOCK OPTION PLANS: The Corporation has incentive and non-qualified stock option plans that allow the granting of shares of the Corporation's common stock to employees and non-employee directors, which are more fully described in Note 12. The options granted under these plans are exercisable at a price equal to the fair market value of common stock on the date of grant and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant. As of January 1, 2006, the Corporation adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123 (Revised 2004), Share-Based Payment, (Statement 123R), under the modified prospective transition method. Statement 123R requires public companies to recognize compensation expense related to stock-based compensation awards over the period during which an employee is required to provide service for the award. Under the modified prospective transition method, the fair value recognition provisions apply only to new awards or awards modified after January 1, 2006. Additionally, the fair value of existing unvested awards at the date of adoption is recorded in salaries and benefits expense over the remaining requisite service period. Results from prior periods have not been restated. The following table represents the impact of the adoption of Statement 123R on the Corporation's financial statements.
UNDER UNDER (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) STATEMENT 123R APB 25 DIFFERENCE - ---------------------------------------------------------------------------------- NET INCOME BEFORE INCOME TAX EXPENSE $ 13,731 $ 13,790 $ 59 - ---------------------------------------------------------------------------------- NET INCOME 10,226 10,285 59 - ---------------------------------------------------------------------------------- EARNINGS PER SHARE - BASIC $ 1.24 $ 1.24 $ -- - ---------------------------------------------------------------------------------- EARNINGS PER SHARE - DILUTED 1.22 1.22 -- - ----------------------------------------------------------------------------------
Prior to January 1, 2006, the Corporation had accounted for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB 25) and related Interpretations. No stock-based compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of their underlying common stock on the date of grant. On December 8, 2005, the Board of Directors accelerated the vesting of 116,928 of unvested stock options awarded to outside directors and senior officers under the Corporation's 1998 and 2002 Stock Option Plans and 1998 and 2002 Stock Option Plans for Outside Directors. All but 1,000 of the total accelerated options had an exercise price greater than $28.25, the closing price of the Corporation's common stock on the American Stock Exchange on December 8, 2005. As a result of the acceleration, 43 options to acquire the shares, with exercise prices ranging from $26.73 per share to $30.00 per share, which otherwise would have vested from time to time over the next four and one-half years, became immediately exercisable. The Board's decision to accelerate the vesting of these options was in response to a review of the Corporation's long-term incentive compensation programs in light of changes in market practices and recently issued changes in accounting rules resulting from the issuance by the FASB of Statement 123(R), which the Corporation has adopted effective January 1, 2006. Management believed that accelerating the vesting of these options prior to the adoption of Statement 123(R) resulted in the Corporation not being required to recognize aggregate compensation expense of $1.21 million for the five years ending December 31, 2010. The following table illustrates the effect on net income and earnings per share for the years ended December 31, 2005 and 2004 as if the Corporation had applied the fair value recognition provisions of Statement 123R, to stock-based employee compensation in those years. (IN THOUSANDS EXCEPT PER SHARE DATA) 2005 2004 - -------------------------------------------------------------------------------- NET INCOME: AS REPORTED $ 13,130 $ 13,109 - -------------------------------------------------------------------------------- LESS: TOTAL STOCK-BASED COMPENSATION EXPENSE DETERMINED UNDER THE FAIR VALUE BASED METHOD ON ALL STOCK OPTIONS, NET OF RELATED TAX EFFECTS 1,603 1,559 ================================================================================ PRO FORMA $ 11,527 $ 11,550 ================================================================================ EARNINGS PER SHARE: AS REPORTED - -------------------------------------------------------------------------------- BASIC $ 1.58 $ 1.60 - -------------------------------------------------------------------------------- DILUTED 1.56 1.56 - -------------------------------------------------------------------------------- PRO FORMA - -------------------------------------------------------------------------------- BASIC $ 1.39 $ 1.41 - -------------------------------------------------------------------------------- DILUTED 1.37 1.38 - -------------------------------------------------------------------------------- EARNINGS PER SHARE: In calculating earnings per share, there are no adjustments to net income, which is the numerator of both the Basic and Diluted EPS. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock equivalents utilizing the treasury stock method. Common stock equivalents are common stock options outstanding. The following table shows the calculation of both Basic and Diluted earnings per share for the years ended December 31, 2006, 2005 and 2004:
(IN THOUSANDS EXCEPT PER SHARE DATA) 2006 2005 2004 - ------------------------------------------------------------------------------------- NET INCOME $ 10,226 $ 13,130 $ 13,109 ===================================================================================== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,268,226 8,286,926 8,200,681 - ------------------------------------------------------------------------------------- PLUS: COMMON STOCK EQUIVALENTS 102,095 116,348 177,412 - ------------------------------------------------------------------------------------- DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,370,321 8,403,274 8,378,093 ===================================================================================== EARNINGS PER SHARE: BASIC $ 1.24 $ 1.58 $ 1.60 - ------------------------------------------------------------------------------------- DILUTED 1.22 1.56 1.56 - -------------------------------------------------------------------------------------
Options to purchase 317,209 shares of common stock at a weighted average price of $28.89 per share were outstanding and were not included in the computation of diluted earnings per share in 2006 because the option price was greater than the average 44 market price. Options to purchase 325,814 shares of common stock at a weighted average price of $28.94 per share were outstanding and were not included in the computation of diluted earnings per share in 2005 because the option price was greater than the average market price. Options to purchase 12,510 shares of common stock at a weighted average price of $30.05 per share were outstanding and were not included in the computation of diluted earnings per share in 2004 because the option price was greater than the average market price. TREASURY STOCK: Treasury stock is recorded using the cost method and is presented as an unallocated reduction of shareholders' equity. COMPREHENSIVE INCOME: Comprehensive income consists of net income and the change during the period in net unrealized gains (losses) on securities available for sale, net of tax, and is presented in the consolidated statements of changes in shareholders' equity. RECLASSIFICATION: Certain reclassifications have been made in the prior periods' financial statements in order to conform to the 2006 presentation. 2. INVESTMENT SECURITIES HELD TO MATURITY A summary of amortized cost and approximate market value of investment securities held to maturity included in the consolidated statements of condition as of December 31, 2006 and 2005 follows:
2006 GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------- U.S. TREASURY $ 1,000 $ 2 $ (1) $ 1,001 - --------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 17,350 60 (245) 17,165 - --------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 36,815 29 (487) 36,357 ================================================================================= TOTAL $ 55,165 $ 91 $ (733) $54,523 =================================================================================
2005 GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------- U.S. TREASURY $ 499 $ -- $ (6) $ 493 - ----------------------------------------------------------------------------------- U.S. GOVERNMENT-SPONSORED AGENCIES 1,497 12 -- 1,509 - ----------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 21,435 96 (271) 21,260 - ----------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 54,653 39 (668) 54,024 - ----------------------------------------------------------------------------------- TOTAL $ 78,084 $ 147 $ (945) $77,286 ===================================================================================
The amortized cost and approximate market value of investment securities held to maturity as of December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
MATURING IN: APPROXIMATE (IN THOUSANDS) AMORTIZED COST MARKET VALUE - -------------------------------------------------------------------------------- ONE YEAR OR LESS $ 12,322 $ 12,274 - -------------------------------------------------------------------------------- AFTER ONE YEAR THROUGH FIVE YEARS 19,774 19,408 - -------------------------------------------------------------------------------- AFTER FIVE YEARS THROUGH TEN YEARS 5,719 5,676 ================================================================================ 37,815 37,358 - -------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 17,350 17,165 ================================================================================ TOTAL $ 55,165 $ 54,523 ================================================================================
45 Securities having an approximate carrying value of $300 thousand as of December 31, 2006 and 2005 were pledged to secure public funds and for other purposes required or permitted by law. The following table presents the Corporation's investment securities held to maturity with continuous unrealized losses and the approximate market value of these investments as of December 31, 2006 and 2005.
2006 DURATION OF UNREALIZED LOSS LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL - ---------------------------------------------------------------------------------------------------------------------- APPROXIMATE APPROXIMATE APPROXIMATE MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES - ---------------------------------------------------------------------------------------------------------------------- U.S TREASURY $ -- $ -- $ 499 $ (1) $ 499 $ (1) - ---------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 1,298 (14) 9,202 (231) 10,500 (245) - ---------------------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 7,753 (30) 24,850 (457) 32,603 (487) ====================================================================================================================== TOTAL $ 9,051 $ (44) $ 34,551 $ (689) $ 43,602 $ (733) ======================================================================================================================
2005 DURATION OF UNREALIZED LOSS LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL - ---------------------------------------------------------------------------------------------------------------------- APPROXIMATE APPROXIMATE APPROXIMATE MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES - ---------------------------------------------------------------------------------------------------------------------- U.S TREASURY $ 493 $ (6) $ -- $ -- $ 493 $ (6) - ---------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 7,331 (95) 6,757 (176) 14,088 (271) - ---------------------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 34,879 (278) 14,316 (390) 49,195 (668) ====================================================================================================================== TOTAL $ 42,703 $ (379) $ 21,073 $ (566) $ 63,776 $ (945) ======================================================================================================================
Management has determined that these unrealized losses for debt securities are temporary and due to interest rate fluctuations rather than the credit ratings of the issuers. The Corporation has a policy to purchase only from issuers with an investment grade credit rating and monitors credit ratings periodically. The unrealized losses on investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. government-sponsored agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the intent to hold these investments until maturity, these investments are not considered other-than-temporarily impaired. Most of the securities issued by state and political subdivisions in the table above are issued by municipalities located in New Jersey. These investments represent purchases in municipal bonds, which generally have lower coupons; however many are not taxable by the Federal government and their effective yield is higher. Because the Corporation intends to hold these securities to mature at par, no loss is anticipated. 46 3. SECURITIES AVAILABLE FOR SALE A summary of amortized cost and approximate market value of securities available for sale included in the consolidated statements of condition as of December 31, 2006 and 2005 follows:
2006 GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------- U.S. GOVERNMENT-SPONSORED AGENCIES $ 57,265 $ 46 $ (489) $ 56,822 - ---------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 143,680 25 (2,969) 140,736 - ---------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 22,998 99 (10) 23,087 - ---------------------------------------------------------------------------------------- OTHER SECURITIES 61,179 1,293 (239) 62,233 ======================================================================================== TOTAL DEBT SECURITIES 285,122 1,463 (3,707) 282,878 - ---------------------------------------------------------------------------------------- FRB AND FHLB STOCK 3,308 -- -- 3,308 ======================================================================================== TOTAL $ 288,430 $ 1,463 $ (3,707) $ 286,186 ========================================================================================
2005 GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------- U.S. GOVERNMENT-SPONSORED AGENCIES $ 114,442 $ 162 $ (1,983) $ 112,621 - ---------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 185,226 34 (3,820) 181,440 - ---------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS 8,909 163 (10) 9,062 - ---------------------------------------------------------------------------------------- OTHER SECURITIES 31,124 801 (186) 31,739 ======================================================================================== TOTAL DEBT SECURITIES 339,701 1,160 (5,999) 334,862 - ---------------------------------------------------------------------------------------- FRB AND FHLB STOCK 6,722 -- -- 6,722 ======================================================================================== TOTAL $ 346,423 $ 1,160 $ (5,999) $ 341,584 ========================================================================================
The amortized cost and approximate market value of debt securities available for sale as of December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. MATURING IN: APPROXIMATE (IN THOUSANDS) AMORTIZED COST MARKET VALUE - -------------------------------------------------------------------------------- ONE YEAR OR LESS $ 27,368 $ 28,096 - -------------------------------------------------------------------------------- AFTER ONE YEAR THROUGH FIVE YEARS 41,932 41,713 - -------------------------------------------------------------------------------- AFTER FIVE YEARS THROUGH TEN YEARS 2,644 2,703 - -------------------------------------------------------------------------------- AFTER TEN YEARS 69,498 69,630 ================================================================================ 141,442 142,142 - -------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 143,680 140,736 ================================================================================ TOTAL $ 285,122 $ 282,878 ================================================================================ Securities having an approximate carrying value of $9.5 million and $19.2 million as of December 31, 2006 and December 31, 2005, respectively, were pledged to secure public funds and for other purposes required or permitted by law. Gross gains on sales of securities of $83 thousand, $443 thousand and $747 thousand and gross losses on 47 sales of securities of $1.9 million, $145 thousand and $37 thousand were realized in 2006, 2005 and 2004, respectively. In 2005, the Corporation recognized $253 thousand in gains on the non-monetary exchange of equity securities. In 2004, the Corporation recognized a non-cash charge of $560 thousand related to an other-than-temporary impairment charge for Fannie Mae (FNMA) and Freddie Mac (FHLMC) preferred stock with a cost of $2.0 million. The following table presents the Corporation's available for sale securities with continuous unrealized losses and the approximate market value of these investments.
2006 DURATION OF UNREALIZED LOSS LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL - --------------------------------------------------------------------------------------------------- APPROXIMATE APPROXIMATE APPROXIMATE MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES - --------------------------------------------------------------------------------------------------- U.S. GOVERNMENT- SPONSORED AGENCIES $ 2,985 $ (14) $ 41,775 $ (475) $ 44,760 $ (489) - --------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 18,905 (123) 113,178 (2,846) 132,083 (2,969) - --------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS -- -- 328 (10) 328 (10) - --------------------------------------------------------------------------------------------------- OTHER SECURITIES 11,128 (78) 3,401 (99) 14,529 (177) - --------------------------------------------------------------------------------------------------- MARKETABLE EQUITY SECURITIES 437 (40) 174 (22) 611 (62) =================================================================================================== TOTAL $33,455 $ (255) $ 158,856 $ (3,452) $ 192,311 $ (3,707) ===================================================================================================
2005 DURATION OF UNREALIZED LOSS LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL - ---------------------------------------------------------------------------------------------------------- APPROXIMATE APPROXIMATE APPROXIMATE MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE OSSES - ---------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT- SPONSORED AGENCIES $ 29,333 $ (316) $ 70,081 $ (1,667) $ 99,414 $ (1,983) - ---------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 122,849 (2,189) 49,319 (1,631) 172,168 (3,820) - ---------------------------------------------------------------------------------------------------------- STATE AND POLITICAL SUBDIVISIONS -- -- 332 (10) 332 (10) - ---------------------------------------------------------------------------------------------------------- OTHER SECURITIES 4,935 (65) 1,473 (27) 6,408 (92) - ---------------------------------------------------------------------------------------------------------- MARKETABLE EQUITY SECURITIES 772 (62) 328 (32) 1,100 (94) ========================================================================================================== TOTAL $ 157,889 $ (2,632) $ 121,533 $ (3,367) $ 279,422 $ (5,999) ==========================================================================================================
Management has determined that these unrealized losses for debt securities are temporary and due to interest rate fluctuations and volatility rather than the credit ratings of the issuers. The Corporation has a policy to purchase debt securities only from issuers with an investment grade credit rating and monitors credit ratings periodically. 48 The unrealized losses on investments in U.S. government-sponsored agency bonds were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Corporation has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. The unrealized losses on investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. government-sponsored agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. The other securities with unrealized losses caused by interest rate increases are adjustable and will price to par at the time of the rate reset. The Corporation has the ability and intent to hold these investments until a market price recovery or maturity; therefore these investments are not considered other-than-temporarily impaired. The marketable equity securities with unrealized losses are evaluated on an individual issuer basis. The Corporation evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation's ability and intent to hold these securities for a reasonable period of time sufficient for a price recovery, the Corporation does not consider these securities to be other-than-temporarily impaired. The sale of investment securities at a loss during the restructuring initiative undertaken in 2006 does not change management's assertion that the Bank has the ability and intent to hold temporarily impaired securities to recovery. The Bank's Asset/Liability Committee decided to execute a restructuring of the investment portfolio as a result of the unusual interest rate environment, an inverted yield curve. The transaction was executed in reaction to changes in market conditions to improve performance, reduce leverage and reduce interest rate risk. Management's decision on the total amount of the program was driven by the goal of reducing the overnight borrowings position by approximately 50 percent or $60 million. 4. LOANS Loans outstanding as of December 31, consisted of the following: (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- LOANS SECURED BY 1-4 FAMILY $ 555,290 $ 506,304 - -------------------------------------------------------------------------------- COMMERCIAL REAL ESTATE 215,451 196,431 - -------------------------------------------------------------------------------- CONSTRUCTION LOANS 46,684 25,387 - -------------------------------------------------------------------------------- COMMERCIAL LOANS 38,471 33,322 - -------------------------------------------------------------------------------- CONSUMER LOANS 9,601 5,014 - -------------------------------------------------------------------------------- OTHER LOANS 4,656 2,015 ================================================================================ TOTAL LOANS $ 870,153 $ 768,473 ================================================================================ Included in the totals above for December 31, 2006 is $3.3 million of unamortized discount and $3.1 million of deferred origination costs net of deferred origination fees as compared to $3.9 million of unamortized discount and $3.1 million of deferred origination costs net of deferred origination fees for December 31, 2005. 49 Nonaccrual loans totaled $1.9 million and $339 thousand at December 31, 2006 and 2005, respectively. At December 31, 2006 there were $197 thousand of loans past due 90 days or more and still accruing interest. At December 31, 2005, there were $47 thousand of loans past due 90 days or more and still accruing interest. The amount of interest income recognized on year-end non-accrual loans totaled $212 thousand, $6 thousand and $14 thousand in 2006, 2005 and 2004, respectively. Interest income of $129 thousand, $21 thousand and $11 thousand would have been recognized during 2006, 2005 and 2004, respectively, under contractual terms for such nonaccrual loans. At December 31, 2006, the impaired loan portfolio consisted of two commercial loans for $1.5 million for which there was $378 thousand of specific allocation in the allowance for loan losses. At December 31, 2005 and 2004 there were no impaired loans. The average balance of impaired loans for the year ended December 31, 2006 was $12 thousand. At December 31, 2006, there were no commitments to lend additional funds to borrowers whose loans are classified as nonperforming. In the ordinary course of business, the Corporation, through the Bank, may extend credit to officers, directors or their associates. These loans are subject to the Corporation's normal lending policy and Federal Reserve Bank Regulation O. All loans are performing. The following table shows the changes in loans to officers, directors or their associates: (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- BALANCE BEGINNING OF YEAR $ 1,949 $ 2,383 - -------------------------------------------------------------------------------- NEW LOANS 2,182 357 - -------------------------------------------------------------------------------- REPAYMENTS (1,224) (791) ================================================================================ BALANCE AT END OF YEAR $ 2,907 $ 1,949 ================================================================================ 5. ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses for the years indicated follows: YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 6,378 $ 5,989 $ 5,439 - -------------------------------------------------------------------------------- PROVISION CHARGED TO EXPENSE 414 391 613 - -------------------------------------------------------------------------------- LOANS CHARGED-OFF (26) (16) (78) - -------------------------------------------------------------------------------- RECOVERIES 2 14 15 ================================================================================ BALANCE, END OF YEAR $ 6,768 $ 6,378 $ 5,989 ================================================================================ 6. PREMISES AND EQUIPMENT Premises and equipment as of December 31, follows: (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- LAND $ 5,154 $ 3,518 - -------------------------------------------------------------------------------- BUILDINGS 8,612 8,554 - -------------------------------------------------------------------------------- FURNITURE AND EQUIPMENT 15,545 14,717 - -------------------------------------------------------------------------------- LEASEHOLD IMPROVEMENTS 8,246 7,905 - -------------------------------------------------------------------------------- PROJECTS IN PROGRESS 3,276 1,545 ================================================================================ 40,833 36,239 - -------------------------------------------------------------------------------- LESS: ACCUMULATED DEPRECIATION 16,774 14,827 ================================================================================ TOTAL $ 24,059 $ 21,412 ================================================================================ 50 Depreciation expense amounted to $2.1 million, $2.0 million and $1.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. 7. DEPOSITS Interest expense on time deposits of $100,000 or more totaled $5.4 million, $2.7 million and $1.3 million in 2006, 2005 and 2004, respectively. The scheduled maturities of time deposits are as follows: (IN THOUSANDS) - -------------------------------------------------------------------------------- 2007 $ 311,555 - -------------------------------------------------------------------------------- 2008 36,109 - -------------------------------------------------------------------------------- 2009 5,658 - -------------------------------------------------------------------------------- 2010 6,103 - -------------------------------------------------------------------------------- 2011 5,244 ================================================================================ TOTAL $ 364,669 ================================================================================ 8. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Advances from the Federal Home Loan Bank of New York (FHLB) totaled $24.0 million and $31.7 million at December 31, 2006 and 2005, respectively, with a weighted average interest rate of 3.59 percent and 3.51 percent, respectively. These advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $279.0 million at December 31, 2006 and $239.3 million at December 31, 2005. Advances totaling $17.0 million at December 31, 2006, have fixed maturity dates, while advances totaling $7.0 million were amortizing advances with monthly payments of principal and interest. The final maturity dates of the advances are scheduled as follows: (IN THOUSANDS) - -------------------------------------------------------------------------------- 2007 $ 4,000 - -------------------------------------------------------------------------------- 2008 839 - -------------------------------------------------------------------------------- 2009 2,000 - -------------------------------------------------------------------------------- 2010 10,375 - -------------------------------------------------------------------------------- 2011 3,000 - -------------------------------------------------------------------------------- OVER 5 YEARS 3,750 ================================================================================ TOTAL $ 23,964 ================================================================================ The Corporation had no short-term borrowings at December 31, 2006, while at December 31, 2005, short-term borrowings with an average maturity of 90 days or less, totaled $65.0 million with an average interest rate of 3.84 percent. For the year ended December 31, 2006, short-term borrowings averaged $60.5 million with a weighted average interest rate of 5.02 percent as compared to average balances of $24.7 million and a weighted average interest rate of 3.84 percent for the year ended December 31, 2005. There were no overnight borrowings at December 31, 2006 as compared to overnight borrowings of $12.5 million at December 31, 2005. Overnight borrowings at FHLB averaged $24.9 million with a weighted average interest rate of 5.10 percent for the year ended December 31, 2006 and $27.3 million with a weighted average 51 interest rate of 3.40 percent for the year ended December 31, 2005. The maximum amount outstanding at any month end during 2006 and 2005 was $44.5 million and $59.0 million, respectively. At December 31, 2006, unused short-term or overnight borrowings commitments totaled $191.2 million from FHLB and $58.0 million from correspondent banks. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation discloses estimated fair values for its significant financial instruments. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used to estimate the fair value of each class of significant financial instruments: CASH AND SHORT-TERM INVESTMENTS - The carrying amount of cash and short-term investments is considered to be fair value. SECURITIES - The fair value of securities is based upon quoted market prices. LOANS - The fair value of loans is estimated by discounting the future cash flows using the buildup approach consisting of four components: the risk-free rate, credit quality, operating expense and prepayment option price. DEPOSITS - The fair value of deposits with no stated maturity, such as demand deposits, checking accounts, savings and money market accounts, is equal to the carrying amount. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. OVERNIGHT AND SHORT-TERM BORROWINGS - The carrying amount of overnight and short-term borrowings is considered to be fair value. LONG-TERM DEBT - The fair value of FHLB advances is based on the discounted value of estimated cash flows. The discount rate is estimated using the rates currently offered for similar remaining advance terms. The following table summarizes carrying amounts and fair values for financial instruments at December 31:
2006 2005 - --------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------- FINANCIAL ASSETS: CASH AND CASH EQUIVALENTS $ 30,258 $ 30,258 $ 23,499 $ 23,499 - --------------------------------------------------------------------------------------- INVESTMENT SECURITIES 55,165 54,523 78,084 77,286 - --------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE 286,186 286,186 341,584 341,584 - --------------------------------------------------------------------------------------- LOANS, NET OF ALLOWANCE FOR LOANS LOSSES 863,385 854,585 762,095 753,922 - --------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: DEPOSITS 1,144,736 1,143,170 1,041,996 1,039,659 - --------------------------------------------------------------------------------------- OVERNIGHT AND SHORT-TERM BORROWINGS -- -- 77,500 77,500 - --------------------------------------------------------------------------------------- LONG-TERM DEBT 23,964 22,909 31,705 30,431 - ---------------------------------------------------------------------------------------
52 10. INCOME TAXES The income tax expense included in the consolidated financial statements for the years ended December 31, is allocated as follows:
(IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- FEDERAL: CURRENT EXPENSE $ 4,963 $ 7,570 $ 6,079 - -------------------------------------------------------------------------------- DEFERRED EXPENSE/(BENEFIT) (645) (1,637) (102) - -------------------------------------------------------------------------------- STATE: CURRENT EXPENSE 328 211 296 - -------------------------------------------------------------------------------- DEFERRED BENEFIT (1,141) (371) (189) ================================================================================ TOTAL INCOME TAX EXPENSE $ 3,505 $ 5,773 $ 6,084 ================================================================================ SHAREHOLDERS' EQUITY: DEFERRED EXPENSE/(BENEFIT) ON UNREALIZED (LOSS)/GAIN ON AVAILABLE FOR SALE $ 1,021 $ (2,697) $ (848) - -------------------------------------------------------------------------------- LEASE ADJUSTMENT (341) -- -- - -------------------------------------------------------------------------------- UNFUNDED PENSION BENEFIT (929) -- -- ================================================================================ TOTAL DEFERRED BENEFIT $ (249) $ (2,697) $ (848) ================================================================================
Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35 percent to income before taxes as a result of the following: (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- COMPUTED "EXPECTED" TAX EXPENSE $ 4,806 $ 6,616 $ 6,717 - -------------------------------------------------------------------------------- INCREASE/(DECREASE) IN TAXES RESULTING FROM: TAX-EXEMPT INCOME (509) (492) (516) - -------------------------------------------------------------------------------- STATE INCOME TAXES (529) (104) 70 - -------------------------------------------------------------------------------- BANK OWNED LIFE INSURANCE INCOME (254) (244) (244) - -------------------------------------------------------------------------------- OTHER (9) (3) 57 ================================================================================ TOTAL INCOME TAX EXPENSE $ 3,505 $ 5,773 $ 6,084 ================================================================================ 53 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows: (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS: ALLOWANCE FOR LOANS LOSSES $ 2,707 $ 2,598 - -------------------------------------------------------------------------------- UNFUNDED PENSION BENEFIT 929 -- - -------------------------------------------------------------------------------- UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE 861 1,882 - -------------------------------------------------------------------------------- STATE NET OPERATING LOSS CARRY FORWARD 569 100 - -------------------------------------------------------------------------------- LEASE ADJUSTMENT 312 -- - -------------------------------------------------------------------------------- POST RETIREMENT BENEFITS 294 166 - -------------------------------------------------------------------------------- PREPAID ALTERNATIVE MINIMUM ASSESSMENT 283 164 - -------------------------------------------------------------------------------- CONTRIBUTION LIMITATION 37 37 - -------------------------------------------------------------------------------- CAPITAL LOSS CARRYOVER 23 24 - -------------------------------------------------------------------------------- OTHER -- 40 ================================================================================ TOTAL GROSS DEFERRED TAX ASSETS $ 6,015 $ 5,011 ================================================================================ DEFERRED TAX LIABILITIES: - -------------------------------------------------------------------------------- BANK PREMISES AND EQUIPMENT, PRINCIPALLY DUE TO DIFFERENCE IN DEPRECIATION $ 681 $ 1,430 - -------------------------------------------------------------------------------- DEFERRED LOAN ORIGINATION COSTS AND FEES 633 605 - -------------------------------------------------------------------------------- NONMONETARY GAIN 95 95 - -------------------------------------------------------------------------------- INVESTMENT SECURITIES, PRINCIPALLY DUE TO THE ACCRETION OF BOND DISCOUNT 81 78 - -------------------------------------------------------------------------------- DEFERRED REIT DIVIDEND 28 -- ================================================================================ TOTAL GROSS DEFERRED TAX LIABILITIES 1,518 2,208 ================================================================================ NET DEFERRED TAX ASSET $ 4,497 $ 2,803 ================================================================================ Based upon taxes paid and projected future taxable income, management believes that it is more likely than not that the gross deferred tax assets will be realized. 11. BENEFIT PLANS PENSION PLAN: As discussed in Note 1, the Corporation adopted FASB Statement No. 158 effective December 31, 2006. The following table details the impact of the adoption of FASB Statement No. 158 on individual line items in the consolidated Statement of Condition at December 31, 2006:
BEFORE AFTER APPLICATION OF APPLICATION OF (DOLLARS IN THOUSANDS) STATEMENT 158 ADJUSTMENTS STATEMENT 158 - ------------------------------------------------------------------------------------- DEFERRED TAX ASSETS $ 3,568 $ 929 $ 4,497 - ------------------------------------------------------------------------------------- TOTAL ASSETS 1,287,447 929 1,288,376 - ------------------------------------------------------------------------------------- LIABILITY FOR PENSION BENEFITS 290 2,275 2,565 - ------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,182,338 2,275 1,184,613 - ------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS (1,383) (1,346) (2,729) - ------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 105,109 (1,346) 103,763 - -------------------------------------------------------------------------------------
54 The following table shows the change in benefit obligation, the change in plan assets and the funded status for the plan at December 31: (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION BENEFIT OBLIGATION AT BEGINNING OF YEAR $ 12,383 $ 10,228 - -------------------------------------------------------------------------------- SERVICE COST 1,670 1,404 - -------------------------------------------------------------------------------- INTEREST COST 659 586 - -------------------------------------------------------------------------------- ACTUARIAL LOSS (659) 602 - -------------------------------------------------------------------------------- BENEFITS PAID (111) (437) ================================================================================ BENEFIT OBLIGATION AT END OF YEAR $ 13,942 $ 12,383 ================================================================================ CHANGE IN PLAN ASSETS - -------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 9,450 $ 8,092 - -------------------------------------------------------------------------------- ACTUAL RETURN ON PLAN ASSETS 794 483 - -------------------------------------------------------------------------------- EMPLOYER CONTRIBUTION 1,244 1,312 - -------------------------------------------------------------------------------- BENEFITS PAID (111) (437) ================================================================================ FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 11,377 $ 9,450 ================================================================================ FUNDED STATUS AT END OF YEAR $ (2,565) $ (2,933) ================================================================================ The components of accumulated other comprehensive loss related to the pension plan, on a pre-tax basis, at December 31, 2006, are summarized in the following table. We expect that $36 thousand in net actuarial loss and under $1 thousand in prior service cost will be recognized as components of net periodic cost in 2007. (IN THOUSANDS) - -------------------------------------------------------------------------------- UNRECOGNIZED NET ACTUARIAL LOSS $ 2,296 - -------------------------------------------------------------------------------- UNRECOGNIZED TRANSITION ASSET (19) - -------------------------------------------------------------------------------- UNRECOGNIZED PRIOR SERVICE COST (2) ================================================================================ TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $ 2,275 ================================================================================ Information concerning the funded status of our defined benefit pension plan and the net amount recognized in the consolidated statement of condition at December 31, 2005, prior to adoption of Statement No. 158 is summarized below. (IN THOUSANDS) - -------------------------------------------------------------------------------- FUNDED STATUS $ (2,933) - -------------------------------------------------------------------------------- UNRECOGNIZED NET ACTUARIAL LOSS 2,926 - -------------------------------------------------------------------------------- UNRECOGNIZED TRANSITION ASSET (25) - -------------------------------------------------------------------------------- UNRECOGNIZED PRIOR SERVICE COST (2) ================================================================================ ACCRUED BENEFIT COST $ (34) ================================================================================ The accumulated benefit obligation for the pension plan was $10.5 million and $9.0 million at December 31, 2006 and 2005, respectively. The unfunded pension benefit of $2.6 million at December 31, 2006 is included in accrued expense and other liabilities in the consolidated Statement of Condition. The measurement date for the defined benefit pension plan is September 30, 2006. 55 Net periodic expense for the years ended December 31, included the following components: (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- SERVICE COST $ 1,670 $ 1,404 $ 1,098 - -------------------------------------------------------------------------------- INTEREST COST 659 586 504 - -------------------------------------------------------------------------------- EXPECTED RETURN ON PLAN ASSETS (897) (534) (468) - -------------------------------------------------------------------------------- AMORTIZATION OF: NET LOSS 75 68 23 - -------------------------------------------------------------------------------- UNRECOGNIZED PRIOR SERVICE COST -- -- 1 - -------------------------------------------------------------------------------- TRANSITION ASSET (7) (7) (7) ================================================================================ NET PERIODIC BENEFIT COST $ 1,500 $ 1,517 $ 1,151 ================================================================================ The following table shows the actuarial assumptions applied for the valuation of plan obligations at December 31: 2006 2005 2004 - -------------------------------------------------------------------------------- DISCOUNT RATE 5.75% 5.50% 5.75% - -------------------------------------------------------------------------------- RATE OF INCREASE ON FUTURE COMPENSATION 3.00 3.00 3.00 - -------------------------------------------------------------------------------- The Discount Rate was obtained using a high-quality (AA rated), corporate bond rate at year end. The following table shows the actuarial assumptions applied for the net periodic expense at December 31: 2006 2005 2004 - -------------------------------------------------------------------------------- DISCOUNT RATE 5.50% 5.75% 6.00% - -------------------------------------------------------------------------------- RATE OF INCREASE ON FUTURE COMPENSATION 3.00 3.00 3.00 - -------------------------------------------------------------------------------- EXPECTED LONG-TERM RATE OF RETURN ON PLAN ASSETS 8.50 5.75 6.00 - -------------------------------------------------------------------------------- The Corporation's overall expected long-term rate of return on assets is 8.50 percent. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual assets categories. The weighted-average asset allocation of the Corporation's pension benefits plan assets at December 31, were as follows: 2006 2005 - -------------------------------------------------------------------------------- EQUITY SECURITIES 59.7% 63.4% - -------------------------------------------------------------------------------- DEBT SECURITIES 37.3 32.2 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS 3.0 4.4 ================================================================================ TOTAL 100.0% 100.0% ================================================================================ The Plan's Trustees are granted full discretion to buy, sell, invest and reinvest in accordance with the pension plan's investment policy. The Trustees establish target asset allocations for equity and debt securities at their regular committee meetings. Cash equivalents are invested in money market funds or in other high quality investments approved by the Trustees of the Plan. The Corporation expects to contribute $1.0 million to its pension plan in 2007. 56 The following table shows the estimated future pension benefit payments. (IN THOUSANDS) - -------------------------------------------------------------------------------- 2007 $ 185 - -------------------------------------------------------------------------------- 2008 245 - -------------------------------------------------------------------------------- 2009 268 - -------------------------------------------------------------------------------- 2010 443 - -------------------------------------------------------------------------------- 2011 504 - -------------------------------------------------------------------------------- 2012-2016 4,556 - -------------------------------------------------------------------------------- SAVINGS AND PROFIT SHARING PLANS In addition to the retirement plan, the Corporation sponsors a profit sharing plan and a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all salaried employees over the age of 21 with at least 12 months service. Under the savings portion of the plan, employee contributions are partially matched by the Corporation. Expense for the savings plan was approximately $45 thousand, $42 thousand and $37 thousand in 2006, 2005 and 2004, respectively. Contributions to the profit sharing portion are made at the discretion of the Board of Directors and all funds are invested solely in Peapack-Gladstone Corporation common stock. The contribution to the profit sharing plan was $100 thousand in 2006, $225 thousand in 2005 and $425 thousand in 2004. 12. STOCK OPTION PLANS The Corporation's incentive stock option plans allow the granting of up to 798,229 shares of the Corporation's common stock to certain key employees. The options granted under these plans are, in general, exercisable not earlier than one year after the date of grant, at a price equal to the fair market value of the common stock on the date of grant, and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant. Some options granted to officers at or above the senior vice president level were immediately exercisable at the date of grant. Changes in options outstanding during the past three years were as follows:
WEIGHTED AGGREGATE NUMBER OF EXERCISE PRICE AVERAGE INTRINSIC SHARES PER SHARE EXERCISE PRICE VALUE - --------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003 303,225 $5.56-$28.85 $ 14.49 ======================================================================================= GRANTED DURING 2004 224,965 27.36-32.14 28.95 - --------------------------------------------------------------------------------------- EXERCISED DURING 2004 (53,115) 5.56-24.17 12.00 - --------------------------------------------------------------------------------------- FORFEITED DURING 2004 (4,885) 13.68-28.89 21.74 ======================================================================================= BALANCE, DECEMBER 31, 2004 470,190 $5.56-$32.14 $ 21.61 ======================================================================================= GRANTED DURING 2005 9,150 26.73-29.50 28.54 - --------------------------------------------------------------------------------------- EXERCISED DURING 2005 (35,399) 5.56-18.66 10.71 - --------------------------------------------------------------------------------------- FORFEITED DURING 2005 (14,625) 13.68-30.59 27.24 ======================================================================================= BALANCE, DECEMBER 31, 2005 429,316 $11.85-$32.14 $ 22.47 ======================================================================================= GRANTED DURING 2006 6,300 24.35-27.90 25.83 - --------------------------------------------------------------------------------------- EXERCISED DURING 2006 (15,568) 11.85-17.89 12.56 - --------------------------------------------------------------------------------------- FORFEITED DURING 2006 (6,132) 25.08-29.50 28.77 ======================================================================================= BALANCE, DECEMBER 31, 2006 413,916 $11.85-$32.14 $ 22.80 $ 2,376 =======================================================================================
57 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options). The aggregate intrinsic value of options exercised during 2006, 2005 and 2004 was $216 thousand, $603 thousand and $939 thousand, respectively. The following table summarizes information about stock options outstanding at December 31, 2006. SHARES REMAINING SHARES EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - -------------------------------------------------------------------------------- < $12.00 54,697 0.6 YEARS 54,697 - -------------------------------------------------------------------------------- 12.01 - 16.05 16,677 4.0 YEARS 16,434 - -------------------------------------------------------------------------------- 16.06 - 19.20 117,971 3.0 YEARS 117,776 - -------------------------------------------------------------------------------- 19.21 - 26.00 6,341 8.1 YEARS 1,762 - -------------------------------------------------------------------------------- 26.01 - 28.90 202,330 7.1 YEARS 184,461 - -------------------------------------------------------------------------------- 28.91 - 32.14 15,900 7.5 YEARS 13,032 ================================================================================ $22.80 * 413,916 5.0 YEARS 388,162 ================================================================================ * Weighted average exercise price The Corporation has non-qualified stock option plans for non-employee directors. The plans allow the granting of up to 398,796 shares of the Corporation's common stock. The options granted under these plans are, in general, exercisable not earlier than one year after the date of grant, at a price equal to the fair market value of the common stock on the date of grant, and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant. As noted in Footnote 1, the Board of Directors accelerated the vesting of 79,200 of the unvested stock options awarded to outside directors under the Corporation's 1998 and 2002 Stock Option Plans for Outside Directors on December 8, 2005. Changes in options outstanding during the past three years were as follows:
WEIGHTED AGGREGATE NUMBER OF EXERCISE PRICE AVERAGE INTRINSIC (DOLLARS IN THOUSANDS) SHARES PER SHARE EXERCISE PRICE VALUE - --------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003 195,980 $5.56-$17.53 $ 12.54 ======================================================================================= GRANTED DURING 2004 98,999 28.89 28.89 - --------------------------------------------------------------------------------------- EXERCISED DURING 2004 (52,555) 5.56-17.53 6.40 ======================================================================================= BALANCE, DECEMBER 31, 2004 242,424 $5.56-$28.89 $ 20.04 ======================================================================================= EXERCISED DURING 2005 (44,694) 5.56-17.53 7.33 ======================================================================================= BALANCE, DECEMBER 31, 2005 197,730 $15.68-$28.89 $ 22.91 ======================================================================================= EXERCISED DURING 2006 (8,177) 15.68-17.53 17.12 ======================================================================================= BALANCE, DECEMBER 31, 2006 189,553 $15.68-$28.89 $ 23.16 $ 1,015 =======================================================================================
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options). The aggregate intrinsic value of options exercised during 2006, 2005 and 2004 was $72 thousand, $917 thousand and $1.2 million, respectively. 58 The following table summarizes information about stock options outstanding at December 31, 2006. EXERCISE SHARES REMAINING SHARES PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - -------------------------------------------------------------------------------- < $16.05 28,750 4.0 years 28,750 - -------------------------------------------------------------------------------- 16.01 - 20.00 61,804 1.5 years 61,804 - -------------------------------------------------------------------------------- 20.01 - 28.89 98,999 6.6 years 98,999 ================================================================================ $23.16 * 189,553 4.5 years 189,553 ================================================================================ * WEIGHTED AVERAGE EXERCISE PRICE At December 31, 2006, there were 96,365 additional shares available for grant under the Plans. In addition, 400,000 shares approved by shareholders on April 25, 2006, are available for issue as incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights to directors, officers, employees and independent contractors of the Corporation and its Subsidiaries. The per share weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $8.56, $9.51 and $10.32 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 2006 2005 2004 - -------------------------------------------------------------------------------- DIVIDEND YIELD 2.19% 1.69% 1.18% - -------------------------------------------------------------------------------- EXPECTED VOLATILITY 37% 40% 40% - -------------------------------------------------------------------------------- EXPECTED LIFE 5 YEARS 5 YEARS 5 YEARS - -------------------------------------------------------------------------------- RISK-FREE INTEREST RATE 4.76% 3.79% 3.26% - -------------------------------------------------------------------------------- The expected life of the option is the typical vesting period of the Corporation's options. The risk-free interest rate is the rate on a five year treasury bond. The volatility, or beta, is the performance the stock has experienced in the last five years as the S&P 500 moved one percent up or down. A beta above one is more volatile than the overall market, while a beta below one is less volatile. As of December 31, 2006, there was approximately $187 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Corporation's stock incentive plans. That cost is expected to be recognized over a weighted average period of 1.6 years. 13. COMMITMENTS The Corporation, in the ordinary course of business, is a party to litigation arising from the conduct of its business. Management does not consider that these actions depart from routine legal proceedings and believes that such actions will not affect its financial position or results of its operations in any material manner. There are various outstanding commitments and contingencies, such as guarantees and credit extensions, including loan commitments of $124.4 million and $110.0 million at December 31, 2006 and 2005, respectively, which are not included in the accompanying consolidated financial statements. These commitments include unused commercial and home equity lines of credit. The Corporation issues financial standby letters of credit that are within the scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for 59 Guarantees, Including Indirect Guarantees of Indebtedness of Others." These are irrevocable undertakings by the Corporation to guarantee payment of a specified financial obligation. Most of the Corporation's financial standby letters of credit arise in connection with lending relationships and have terms of one year of less. The maximum potential future payments the Corporation could be required to make equals the contract amount of the standby letters of credit and amounted to $9.3 million and $7.4 million at December 31, 2006 and 2005, respectively. The Corporation's recognized liability for financial standby letters of credit was insignificant at December 31, 2006. For commitments to originate loans, the Corporation's maximum exposure to credit risk is represented by the contractual amount of those instruments. Those commitments represent ultimate exposure to credit risk only to the extent that they are subsequently drawn upon by customers. The Corporation uses the same credit policies and underwriting standards in making loan commitments as it does for on-balance-sheet instruments. For loan commitments, the Corporation would generally be exposed to interest rate risk from the time a commitment is issued with a defined contractual interest rate. At December 31, 2006, the Corporation was obligated under non-cancelable operating leases for certain premises. Rental expense aggregated $2.3 million, $2.1 million and $2.0 million for the years ended December 31, 2006, 2005 and 2004, respectively, which is included in premises and equipment expense in the consolidated statements of income. The minimum annual lease payments under the terms of the lease agreements, as of December 31, 2006, were as follows: (IN THOUSANDS) - -------------------------------------------------------------------------------- 2007 $ 2,414 - -------------------------------------------------------------------------------- 2008 2,402 - -------------------------------------------------------------------------------- 2009 2,333 - -------------------------------------------------------------------------------- 2010 2,213 - -------------------------------------------------------------------------------- 2011 1,657 - -------------------------------------------------------------------------------- THEREAFTER 11,224 ================================================================================ TOTAL $22,243 ================================================================================ The Corporation is also obligated under legally binding and enforceable agreements to purchase goods and services from third parties, including data processing service agreements and the contract for the construction of a new branch in Summit. 14. SEC STAFF ACCOUNTING BULLETIN NO. 108 In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that the Corporation quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB 108 was effective as of the end of the Corporation's 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. The Corporation has several operating leases that have been previously accounted for on a cash basis, which is not in accordance with the straight-line basis requirements 60 of FASB Statement No. 13, "Accounting for Leases." In prior years, the Corporation had evaluated the impact of this error on an annual basis and determined that the difference was not material in each of the respective years. Upon the adoption of SAB 108, which requires that the impact of the error be evaluated on a cumulative basis, the Corporation determined that the error was material and therefore, recorded a correction to the rent liability of $835 thousand and a cumulative effect adjustment, net of tax, of $494 thousand to Shareholders' Equity at the beginning of 2006. 15. REGULATORY CAPITAL The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation and the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2006, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2006, the Corporation and the Bank met all requirements to be considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. The Corporation's actual capital amounts and ratios are presented in the table.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ADEQUACY (IN THOUSANDS) ACTUAL ACTION PROVISIONS PURPOSES - --------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - --------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2006: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) $112,663 16.31% $69,071 10.00% $55,257 8.00% - --------------------------------------------------------------------------------------- TIER I CAPITAL (TO RISK-WEIGHTED ASSETS) 105,895 15.33 41,443 6.00 27,629 4.00 - --------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS) 105,895 8.20 64,539 5.00 38,724 3.00 ======================================================================================= AS OF DECEMBER 31, 2005: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) $108,011 17.78% $60,744 10.00% $48,595 8.00% - --------------------------------------------------------------------------------------- TIER I CAPITAL (TO RISK-WEIGHTED ASSETS) 101,509 16.71 36,446 6.00 24,298 4.00 - --------------------------------------------------------------------------------------- TIER I CAPITAL (TO AVERAGE ASSETS) 101,509 8.66 58,596 5.00 35,157 3.00 =======================================================================================
61 16. CONDENSED FINANCIAL STATEMENTS OF PEAPACK-GLADSTONE FINANCIAL CORPORATION (PARENT COMPANY ONLY) The following information of the parent company only financial statements should be read in conjunction with the notes to the consolidated financial statements. STATEMENTS OF CONDITION DECEMBER 31, (IN THOUSANDS) 2006 2005 - -------------------------------------------------------------------------------- ASSETS: CASH $ 147 $ 91 - -------------------------------------------------------------------------------- INTEREST-EARNING DEPOSITS 7,266 6,985 - -------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE 15,057 13,175 - -------------------------------------------------------------------------------- INVESTMENT IN SUBSIDIARY 82,728 79,861 - -------------------------------------------------------------------------------- OTHER ASSETS 182 321 ================================================================================ TOTAL ASSETS $ 105,380 $ 100,433 ================================================================================ LIABILITIES: OTHER LIABILITIES $ 1,617 $ 1,278 ================================================================================ TOTAL LIABILITIES 1,617 1,278 ================================================================================ SHAREHOLDERS' EQUITY COMMON STOCK 7,081 7,061 - -------------------------------------------------------------------------------- SURPLUS 89,372 88,973 - -------------------------------------------------------------------------------- TREASURY STOCK (4,999) (4,022) - -------------------------------------------------------------------------------- RETAINED EARNINGS 15,038 10,100 - -------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE - -------------------------------------------------------------------------------- LOSS, NET OF INCOME TAX BENEFIT (2,729) (2,957) ================================================================================ TOTAL SHAREHOLDERS' EQUITY 103,763 99,155 ================================================================================ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 105,380 $ 100,433 ================================================================================ STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- INCOME DIVIDEND FROM BANK $ 6,250 $ 6,000 $ 5,750 - -------------------------------------------------------------------------------- OTHER INCOME 854 627 452 - -------------------------------------------------------------------------------- SECURITIES GAINS, NET 83 395 236 ================================================================================ TOTAL INCOME 7,187 7,022 6,438 ================================================================================ EXPENSES OTHER EXPENSES 106 109 105 ================================================================================ TOTAL EXPENSES 106 109 105 ================================================================================ INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 7,081 6,913 6,333 - -------------------------------------------------------------------------------- INCOME TAX EXPENSE 268 318 196 ================================================================================ NET INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 6,813 6,595 6,137 - -------------------------------------------------------------------------------- EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 3,413 6,535 6,972 ================================================================================ NET INCOME $ 10,226 $ 13,130 $ 13,109 ================================================================================ 62 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2006 2005 2004 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 10,226 $ 13,130 $ 13,109 - -------------------------------------------------------------------------------- LESS EQUITY IN UNDISTRIBUTED EARNINGS (3,413) (6,535) (6,972) - -------------------------------------------------------------------------------- AMORTIZATION AND ACCRETION ON SECURITIES (1) 11 13 - -------------------------------------------------------------------------------- GAIN ON SECURITIES AVAILABLE FOR SALE (83) (142) (236) - -------------------------------------------------------------------------------- DECREASE/(INCREASE) IN OTHER ASSETS 139 (93) (145) - -------------------------------------------------------------------------------- INCREASE/(DECREASE) IN OTHER LIABILITIES 53 21 (182) ================================================================================ NET CASH PROVIDED BY OPERATING ACTIVITIES 6,921 6,392 5,587 ================================================================================ CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 1,580 4,855 5,476 - -------------------------------------------------------------------------------- PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 2,001 1,500 1,950 - -------------------------------------------------------------------------------- PURCHASE OF SECURITIES AVAILABLE FOR SALE (4,835) (6,130) (9,356) ================================================================================ NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (1,254) 225 (1,930) ================================================================================ CASH FLOWS FROM FINANCING ACTIVITIES: DIVIDENDS PAID (4,713) (3,891) (3,134) - -------------------------------------------------------------------------------- TAX BENEFIT ON STOCK OPTION EXERCISES 29 347 477 - -------------------------------------------------------------------------------- EXERCISE OF STOCK OPTIONS 331 702 948 - -------------------------------------------------------------------------------- TREASURY STOCK TRANSACTIONS (977) (1,155) (476) ================================================================================ NET CASH USED IN FINANCING ACTIVITIES (5,330) (3,997) (2,185) ================================================================================ NET INCREASE IN CASH 337 2,620 1,472 - -------------------------------------------------------------------------------- CASH AT BEGINNING OF PERIOD 7,076 4,456 2,984 ================================================================================ CASH AT END OF PERIOD $ 7,413 $ 7,076 $ 4,456 ================================================================================ COMMON STOCK PRICES (UNAUDITED) The following table shows the 2006 and 2005 range of prices paid on known trades of Peapack-Gladstone Financial Corporation common stock. DIVIDEND 2006 HIGH LOW PER SHARE - -------------------------------------------------------------------------------- 1ST QUARTER $ 29.50 $ 24.45 $ 0.14 - -------------------------------------------------------------------------------- 2ND QUARTER 26.26 23.52 0.14 - -------------------------------------------------------------------------------- 3RD QUARTER 27.40 24.15 0.15 - -------------------------------------------------------------------------------- 4TH QUARTER 28.10 24.00 0.15 - -------------------------------------------------------------------------------- DIVIDEND 2005 HIGH LOW PER SHARE - -------------------------------------------------------------------------------- 1ST QUARTER $ 31.77 $ 25.94 $ 0.11 - -------------------------------------------------------------------------------- 2ND QUARTER 30.50 25.50 0.11 - -------------------------------------------------------------------------------- 3RD QUARTER 30.38 25.81 0.14 - -------------------------------------------------------------------------------- 4TH QUARTER 29.28 25.95 0.14 - -------------------------------------------------------------------------------- 63
OFFICERS - --------------------------------------------------------------------------------------------------- LOAN AND ADMINISTRATION FRANK A. KISSEL CHAIRMAN OF THE BOARD & CEO* ------------------------------------------------------------------ GLADSTONE ROBERT M. ROGERS PRESIDENT & COO * ------------------------------------------------------------------ ARTHUR F. BIRMINGHAM EXECUTIVE VICE PRESIDENT & CFO * ------------------------------------------------------------------ GARRETT P. BROMLEY EXECUTIVE VICE PRESIDENT & CHIEF LENDING OFFICER ------------------------------------------------------------------ PAUL W. BELL SENIOR VICE PRESIDENT & FACILITIES MANAGER ------------------------------------------------------------------ ROBERT A. BUCKLEY SENIOR VICE PRESIDENT & BRANCH ADMINISTRATOR ------------------------------------------------------------------ FINN M.W. CASPERSEN, JR SENIOR VICE PRESIDENT & GENERAL COUNSEL & CHIEF RISK OFFICER ------------------------------------------------------------------ MICHAEL J. GIACOBELLO SENIOR VICE PRESIDENT & SENIOR COMMERCIAL LOAN OFFICER ------------------------------------------------------------------ BRIDGET J. WALSH SENIOR VICE PRESIDENT & HUMAN RESOURCES DIRECTOR ------------------------------------------------------------------ STEPHANIE M. ADKINS VICE PRESIDENT ------------------------------------------------------------------ TODD T. BRUNGARD VICE PRESIDENT & BANK SECRECY ACT COMPLIANCE OFFICER ------------------------------------------------------------------ JOYCE M. EVANS VICE PRESIDENT ------------------------------------------------------------------ KAREN M. FERRARO VICE PRESIDENT ------------------------------------------------------------------ DIRK H. GRAHAM VICE PRESIDENT ------------------------------------------------------------------ JOHN G. HARITON VICE PRESIDENT & CORPORATE TRAINER ------------------------------------------------------------------ CHARLES T. KIRK VICE PRESIDENT ------------------------------------------------------------------ VALERIE L. KODAN VICE PRESIDENT ------------------------------------------------------------------ KATHERINE M. KREMINS VICE PRESIDENT ------------------------------------------------------------------ MARC R. MAGLIARO VICE PRESIDENT ------------------------------------------------------------------ DENISE M. PACE VICE PRESIDENT & MARKETING OFFICER ------------------------------------------------------------------ DENISE L. PARELLA VICE PRESIDENT & BUSINESS DEVELOPMENT OFFICER ------------------------------------------------------------------ CHRISTOPHER P. POCQUAT VICE PRESIDENT ------------------------------------------------------------------ MARY M. RUSSELL VICE PRESIDENT & COMPTROLLER ------------------------------------------------------------------ SCOTT T. SEARLE VICE PRESIDENT ------------------------------------------------------------------ JAMES S. STADTMUELLER VICE PRESIDENT ------------------------------------------------------------------ MARGARET O. VOLK VICE PRESIDENT & MORTGAGE OFFICER ------------------------------------------------------------------ JESSE D. WILLIAMS VICE PRESIDENT ------------------------------------------------------------------ RANDALL J. WILLIAMS VICE PRESIDENT ------------------------------------------------------------------ *Denotes a Holding Company Officer
64 BETTY J. CARIELLO ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ LYNDA A. CROSS ASSISTANT VICE PRESIDENT & SECURITY OFFICER ------------------------------------------------------------------ E. SUE GIANETTI ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ ELAINE MULDOWNEY ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ SUSAN K. SMITH ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ SHERYL L. CAPPA ASSISTANT CASHIER ------------------------------------------------------------------ MARJORIE A. DZWONCZYK ASSISTANT CASHIER & CRA AND COMPLIANCE OFFICER ------------------------------------------------------------------ ALEXANDRA A. GARMS ASSISTANT CASHIER ------------------------------------------------------------------ LISA A. LOUGH ASSISTANT CASHIER ------------------------------------------------------------------ ERAM F. MIRZA ASSISTANT CASHIER ------------------------------------------------------------------ DAVID L. PETRY ASSISTANT CASHIER ------------------------------------------------------------------ MICHELE RAVO ASSISTANT CASHIER ------------------------------------------------------------------ ANA P. RIBEIRO ASSISTANT CASHIER ------------------------------------------------------------------ LAURA M. WATT ASSISTANT CASHIER ------------------------------------------------------------------ ANTOINETTE ROSELL CORPORATE SECRETARY * - --------------------------------------------------------------------------------------------------- OPERATIONS HUBERT P. CLARKE SENIOR VICE PRESIDENT & CHIEF BEDMINSTER INFORMATION OFFICER ------------------------------------------------------------------ V. SHERRI LICATA VICE PRESIDENT ------------------------------------------------------------------ DIANE M. RIDOLFI VICE PRESIDENT ------------------------------------------------------------------ FRANK C. WALDRON VICE PRESIDENT ------------------------------------------------------------------ GREGORY T. ADAMS ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ SANDRA L. BORNGESSER ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ KRISTIN A. ROMEO ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ MARGARET A. TRIMMER ASSISTANT VICE PRESIDENT ------------------------------------------------------------------ CAROL L. BEHLER ASSISTANT CASHIER ------------------------------------------------------------------ VITA M. PARISI ASSISTANT CASHIER - --------------------------------------------------------------------------------------------------- AUDIT KAREN M. CHIARELLO VICE PRESIDENT & AUDITOR ------------------------------------------------------------------ CHESTER LISA S. HAGEN ASSISTANT CASHIER - --------------------------------------------------------------------------------------------------- LOAN JOHN A. SCERBO VICE PRESIDENT ------------------------------------------------------------------ MORRISTOWN NANCY L. WYNANT VICE PRESIDENT - --------------------------------------------------------------------------------------------------- *Denotes a Holding Company Officer
65 PGB TRUST & INVESTMENTS CRAIG C. SPENGEMAN PRESIDENT & CHIEF INVESTMENT GLADSTONE OFFICER * ------------------------------------------------------------------ BRYANT K. ALFORD FIRST VICE PRESIDENT & SENIOR TRUST OFFICER ------------------------------------------------------------------ JOHN M. BONK FIRST VICE PRESIDENT & DIRECTOR OF BUSINESS DEVELOPMENT ------------------------------------------------------------------ JOHN C. KAUTZ FIRST VICE PRESIDENT & SENIOR INVESTMENT OFFICER ------------------------------------------------------------------ MICHAEL PYLYPYSHYN FIRST VICE PRESIDENT & SENIOR TRUST OPERATIONS OFFICER ------------------------------------------------------------------ JOHN E. CREAMER VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ CATHERINE M. DENNING VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ GLENN C. GUERIN VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ MICHAEL E. HERRMANN VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ JAMES R. HOUSMAN VICE PRESIDENT & DIRECTOR OF TAX ------------------------------------------------------------------ EDWARD P. NICOLICCHIA VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ KATHERINE S. QUAY VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ ANNE M. SMITH VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ KURT G. TALKE VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ SCOTT A. MARSHMAN ASSISTANT VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ DAVID C. O'MEARA ASSISTANT VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ CATHERINE A. MCCATHARN TRUST OFFICER & ASSISTANT CORPORATE SECRETARY * ------------------------------------------------------------------ PATRICIA K. SAWKA TRUST OFFICER ------------------------------------------------------------------ MARIBETH A. BROWN ASSISTANT TRUST OFFICER - --------------------------------------------------------------------------------------------------- MORRISTOWN ROBERT M. FIGURELLI VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ JOHN J. LEE VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ MICHAEL T. TORMEY VICE PRESIDENT & TRUST OFFICER ------------------------------------------------------------------ THOMAS S. DIEMAR TRUST OFFICER - --------------------------------------------------------------------------------------------------- *Denotes a Holding Company Officer
66 BRANCHES - ----------------------------------------------------------------------------------------------- BERNARDSVILLE CHARLES A. STUDDIFORD, III VICE PRESIDENT -------------------------------------------------------------- CAROL E. RITZER ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- BRIDGEWATER TODD E. YOUNG VICE PRESIDENT - ----------------------------------------------------------------------------------------------- CALIFON ANN W. KALLAM VICE PRESIDENT - ----------------------------------------------------------------------------------------------- CHATHAM - MAIN MARY ANNE MALONEY VICE PRESIDENT -------------------------------------------------------------- LISA A. TREICH ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- CHATHAM - SHUNPIKE DONNA I. GISONE VICE PRESIDENT - ----------------------------------------------------------------------------------------------- CHESTER JOAN S. WYCHULES VICE PRESIDENT - ----------------------------------------------------------------------------------------------- CLINTON CAROLYN I. SEPKOWSKI VICE PRESIDENT - ----------------------------------------------------------------------------------------------- FAR HILLS ROHINTON E. MADON ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- FELLOWSHIP JANET E. BATTAGLIA ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- GLADSTONE THOMAS N. KASPER VICE PRESIDENT -------------------------------------------------------------- ANNETTE F. MALANGA ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- HILLSBOROUGH TERESA M. LAWLER ASSISTANT VICE PRESIDENT - ----------------------------------------------------------------------------------------------- LONG VALLEY AMY E. GLASER VICE PRESIDENT -------------------------------------------------------------- THERESE TADOLINI ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- MENDHAM LINDA S. ZIROPOULOS VICE PRESIDENT -------------------------------------------------------------- ANNA M. MENTES ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- MORRISTOWN VALERIE A. OLPP VICE PRESIDENT - ----------------------------------------------------------------------------------------------- NEW VERNON DONNA I. GISONE VICE PRESIDENT - ----------------------------------------------------------------------------------------------- OLDWICK DEBORAH J. KREHELY ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- PLUCKEMIN LEE ANN HUNT VICE PRESIDENT - ----------------------------------------------------------------------------------------------- POTTERSVILLE TRACEY L. TODD ASSISTANT CASHIER - ----------------------------------------------------------------------------------------------- SUMMIT - DEFOREST M. NICOLE JEFFERYS VICE PRESIDENT - ----------------------------------------------------------------------------------------------- WARREN RONALD F. FIELD ASSISTANT VICE PRESIDENT -------------------------------------------------------------- JAMES CICCONE ASSISTANT CASHIER - -----------------------------------------------------------------------------------------------
67 DIRECTORS - -------------------------------------------------------------------------------- ANTHONY J. CONSI, II Senior Vice President, Weichert Realtors Morris Plains, NJ - -------------------------------------------------------------------------------- PAMELA HILL President, Ferris Corp Gladstone, NJ - -------------------------------------------------------------------------------- FRANK A. KISSEL Chairman of the Board & Chief Executive Officer - -------------------------------------------------------------------------------- JOHN D. KISSEL Turpin Realty, Inc. Far Hills, NJ - -------------------------------------------------------------------------------- JAMES R. LAMB, ESQ. James R. Lamb, P.C. Morristown, NJ - -------------------------------------------------------------------------------- EDWARD A. MERTON President, Merton Excavating & Paving Co. Chester, NJ - -------------------------------------------------------------------------------- F. DUFFIELD MEYERCORD Managing Director and Partner, Carl Marks Consulting Group, LLC Bedminster, NJ - -------------------------------------------------------------------------------- JOHN R. MULCAHY Far Hills, NJ - -------------------------------------------------------------------------------- ROBERT M. ROGERS President & Chief Operating Officer - -------------------------------------------------------------------------------- PHILIP W. SMITH, III President, Phillary Management, Inc. Far Hills, NJ - -------------------------------------------------------------------------------- CRAIG C. SPENGEMAN President, PGB Trust and Investments - -------------------------------------------------------------------------------- JACK D. STINE Director Emeritus Pluckemin, NJ - -------------------------------------------------------------------------------- 68 OFFICES - -------------------------------------------------------------------------------- LOAN & ADMINISTRATION BUILDING 158 ROUTE 206 NORTH, GLADSTONE, NJ 07934 (908) 234-0700 - -------------------------------------------------------------------------------- PGB TRUST & INVESTMENTS 190 MAIN STREET, GLADSTONE, NJ 07934 (908) 719-4360 - -------------------------------------------------------------------------------- BERNARDSVILLE 36 MORRISTOWN ROAD, BERNARDSVILLE, NJ 07924 (908) 766-1711 - -------------------------------------------------------------------------------- BRIDGEWATER 619 EAST MAIN STREET, BRIDGEWATER, NJ 08807 (908) 429-9988 - -------------------------------------------------------------------------------- CALIFON 438 ROUTE 513, CALIFON, NJ 07830 (908) 832-5131 - -------------------------------------------------------------------------------- CHATHAM - MAIN STREET 311 MAIN STREET, CHATHAM, NJ 07928 (973) 635-8500 - -------------------------------------------------------------------------------- CHATHAM - SHUNPIKE 650 SHUNPIKE ROAD, CHATHAM TOWNSHIP, NJ 07928 (973) 377-0081 - -------------------------------------------------------------------------------- CHESTER 350 MAIN STREET, CHESTER, NJ 07930 (908) 879-8115 - -------------------------------------------------------------------------------- CHUBB CORPORATE HEADQUARTERS 15 MOUNTAIN VIEW ROAD, WARREN, NJ 07059 (908) 903-2597 - -------------------------------------------------------------------------------- CLINTON 189 CENTER STREET, CLINTON, NJ 08809 (908) 238-1935 - -------------------------------------------------------------------------------- FAR HILLS 26 DUMONT ROAD, FAR HILLS, NJ 07931 (908) 781-1018 - -------------------------------------------------------------------------------- FELLOWSHIP VILLAGE 8000 FELLOWSHIP ROAD, BASKING RIDGE, NJ 07920 (908) 719-4332 - -------------------------------------------------------------------------------- GLADSTONE (MAIN OFFICE) 190 MAIN STREET, GLADSTONE, NJ 07934 (908) 719-4360 - -------------------------------------------------------------------------------- HILLSBOROUGH 417 ROUTE 206 NORTH, HILLSBOROUGH, NJ 08844 (908) 281-1031 - -------------------------------------------------------------------------------- LONG VALLEY 59 EAST MILL ROAD (ROUTE 24), LONG VALLEY, NJ 07853 (908) 876-3300 - -------------------------------------------------------------------------------- MENDHAM 17 EAST MAIN STREET, MENDHAM, NJ 07945 (973) 543-6499 - -------------------------------------------------------------------------------- MORRISTOWN 233 SOUTH STREET, MORRISTOWN, NJ 07960 (973) 455-1118 - -------------------------------------------------------------------------------- NEW VERNON VILLAGE ROAD, NEW VERNON, NJ 07976 (973) 540-0444 - -------------------------------------------------------------------------------- OLDWICK 169 LAMINGTON ROAD, OLDWICK, NJ 08858 (908) 439-2320 - -------------------------------------------------------------------------------- PLUCKEMIN 468 ROUTE 206 NORTH, BEDMINSTER, NJ 07921 (908) 658-4500 - -------------------------------------------------------------------------------- POTTERSVILLE 11 POTTERSVILLE ROAD, POTTERSVILLE, NJ 07979 (908) 439-2265 - -------------------------------------------------------------------------------- SUMMIT - DEFOREST 48 DEFOREST AVENUE, SUMMIT, NJ 07901 (908) 273-2890 - -------------------------------------------------------------------------------- WARREN 58 MOUNTAIN BOULEVARD, WARREN, NJ 07059 (908) 757-2805 - -------------------------------------------------------------------------------- 69 SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- CORPORATE ADDRESS - -------------------------------------------------------------------------------- 158 Route 206, North Gladstone, New Jersey 07934 (908) 234-0700 www.pgbank.com STOCK LISTING - -------------------------------------------------------------------------------- Peapack-Gladstone Financial Corporation common stock is traded on the American Stock Exchange under the symbol PGC and reported in the Wall Street Journal and most major newspapers. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- KPMG LLP 150 John F. Kennedy Parkway Short Hills, New Jersey 07078 TRANSFER AGENT - -------------------------------------------------------------------------------- Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 SHAREHOLDER RELATIONS - -------------------------------------------------------------------------------- Arthur F. Birmingham, Executive Vice President and Chief Financial Officer (908) 719-4308 birmingham@pgbank.com ANNUAL MEETING - -------------------------------------------------------------------------------- The annual meeting of shareholders of Peapack-Gladstone Financial Corporation will be held on April 24, 2007 at 2:00 p.m. at Hamilton Farm Golf Club in Gladstone. 70 EX-23 3 ex23.txt Exhibit 23 Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- The Board of Directors Peapack-Gladstone Financial Corporation: We consent to incorporation by reference in the registration statements No. 333-133591, No. 333-86986, No. 333-51187 and No. 333-53001 on Form S-8 of Peapack-Gladstone Financial Corporation (the Corporation) of our reports dated February 27, 2007, with respect to the consolidated statements of condition of Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2006 and 2005 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports are incorporated by reference in the December 31, 2006 Annual Report on Form 10-K of Peapack-Gladstone Financial Corporation. Our report referred to the Corporation's adoption of SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" on January 1, 2006. /S/ KPMG LLP Short Hills, New Jersey March 12, 2007 18 EX-24 4 ex24.txt Exhibit 24 POWER OF ATTORNEY We, the undersigned directors and officers of Peapack-Gladstone Financial Corporation, hereby severally constitute and lawfully appoint Frank A. Kissel and Arthur F. Birmingham, and each of them singly, our true and lawful attorneys-in-fact with full power to them and each of them to sign for us, in our names in the capacities indicated below, the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 of Peapack-Gladstone Financial Corporation and any and all amendments thereto, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date - --------------------------------------------- -------------------------------------------- ------------------- /s/ Frank A. Kissel - --------------------------------------------- Chairman of the Board, Chief Executive March 12, 2007 Frank A. Kissel Officer and Director /s/ Arthur F. Birmingham - --------------------------------------------- Executive Vice President and Chief Financial March 12, 2007 Arthur F. Birmingham Officer (Principal Financial Officer) /s/ Anthony J. Consi II - --------------------------------------------- Director March 12, 2007 Anthony J. Consi II /s/ Pamela Hill - --------------------------------------------- Director March 12, 2007 Pamela Hill /s/ John D. Kissel - --------------------------------------------- Director March 12, 2007 John D. Kissel /s/ James R. Lamb - --------------------------------------------- Director March 12, 2007 James R. Lamb /s/ Edward A. Merton - --------------------------------------------- Director March 12, 2007 Edward A. Merton /s/ F. Duffield Meyercord - --------------------------------------------- Director March 12, 2007 F. Duffield Meyercord /s/ John R. Mulcahy - --------------------------------------------- Director March 12, 2007 John R. Mulcahy /s/ Robert M. Rogers - --------------------------------------------- Director, President and Chief Operating March 12, 2007 Robert M. Rogers Officer /s/ Philip W. Smith III - --------------------------------------------- Director March 12, 2007 Philip W. Smith III /s/ Craig C. Spengeman - --------------------------------------------- Director, President of PGB Trust and March 12, 2007 Craig C. Spengeman Investments
19 EX-31.1 5 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, Frank A. Kissel, certify that: 1. I have reviewed this annual report on Form 10-K of Peapack-Gladstone Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2007 By: /s/ Frank A. Kissel --------------------------------- Name: Frank A. Kissel Title: Chairman of the Board and Chief Executive Officer 20 EX-31.2 6 ex31-2.txt Exhibit 31.2 CERTIFICATIONS I, Arthur F. Birmingham, certify that: 1. I have reviewed this annual report on Form 10-K of Peapack-Gladstone Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2007 By: /s/ Arthur F. Birmingham --------------------------------- Name: Arthur F. Birmingham Title: Executive Vice President and Chief Financial Officer 21 EX-32 7 ex32.txt Exhibit 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Peapack-Gladstone Financial Corporation, (the "Corporation") for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Frank A. Kissel, as Chief Executive Officer of the Corporation, and Arthur F. Birmingham, as Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Frank A. Kissel - --------------------------------- Name: Frank A. Kissel Title: Chief Executive Officer Date: March 12, 2007 /s/ Arthur F. Birmingham - --------------------------------- Name: Arthur F. Birmingham Title: Chief Financial Officer Date: March 12, 2007 22 -----END PRIVACY-ENHANCED MESSAGE-----