Peapack-Gladstone Financial - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2008

OR

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to

Commission File No. 001-16197

PEAPACK-GLADSTONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

158 Route 206 North

Gladstone, New Jersey 07934

(Address of principal executive offices, including zip code)

(908) 234-0700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý          Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý.

Number of shares of Common Stock outstanding as of August 1, 2008:

8,286,586

PEAPACK-GLADSTONE FINANCIAL CORPORATION

Item 1.  Financial Statements (Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

(Dollars in thousands)

(Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATEDSTATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Certain information and footnote disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the period ended December 31, 2007 for Peapack-Gladstone Financial Corporation (the “Corporation”).

Principles of Consolidation:  The Corporation considers that all adjustments necessary for a fair presentation of the statement of the financial position and results of operations in accordance with U.S. generally accepted accounting principles for these periods have been made.  Results for such interim periods are not necessarily indicative of results for a full year.

The consolidated financial statements of Peapack-Gladstone Financial Corporation are prepared on the accrual basis and include the accounts of the Corporation and its wholly owned subsidiary, Peapack-Gladstone Bank.  All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements.

Allowance for Loan Losses:  The allowance for loan losses is maintained at a level considered adequate to provide for probable incurred loan losses in the Corporation’s loan portfolio.  The allowance is based on management’s evaluation of the loan portfolio considering, among other things, current economic conditions, the volume and nature of the loan portfolio, historical loan loss experience, and individual credit situations.  The allowance is increased by provisions charged to expense and reduced by charge-offs net of recoveries.

Stock Option Plans:  The Corporation has stock option plans that allow the granting of shares of the Corporation’s common stock as incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights to directors, officers, employees and independent contractors of the Corporation and its subsidiaries.  The options granted under these plans are exercisable at a price equal to the fair market value of common stock on the date of grant and expire not more than ten years after the date of grant.  Stock options may vest during a period of up to five years after the date of grant.

For the three months ended June 30, 2008 and 2007, the Corporation recorded total compensation cost for share-based payment arrangements of $81 thousand and $53 thousand, respectively, with a recognized tax benefit of $7 thousand and $3 thousand for the second quarter of 2008 and 2007, respectively.

The Corporation recorded total compensation cost for share-based payment arrangements of $182 thousand and $98 thousand for the six months ended June 30, 2008 and 2007, respectively, with a recognized tax benefit of $13 thousand and $7 thousand for the same periods.

As of June 30, 2008, there was approximately $1.2 million 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 1.8 years.

For the Corporation’s stock option plans, changes in options outstanding during the six months ended June 30, 2008 were as follows:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the second quarter of 2008 and the exercise price, multiplied by the number of in-the-money options).

The aggregate intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $365 thousand and $1.0 million, respectively.

The per share weighted-average fair value of stock options granted during the first six months of 2008 and 2007 for all plans was $10.86 and $10.36, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

Earnings per Common Share – Basic and Diluted:  The following is a reconciliation of the calculation of basic and diluted earnings per share.  Basic net income per common share is calculated by dividing net income to common shareholders by the weighted average common shares outstanding during the reporting period.  Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method.

Stock options with an exercise price below the Corporation’s market price equal to 381,929 and 15,480 shares were not included in the computation of diluted earnings per share in the second quarters of 2008 and 2007, respectively because they were antidilutive.  Stock options with an exercise price below the Corporation’s market price equal to 383,054 and 308,161 shares were not included in the computation of diluted earnings per share in the six months ended June 30, 2008 and 2007, respectively because they would be antidilutive.

Income Taxes:    The Corporation files a consolidated Federal income tax return and separate state income tax returns for each subsidiary based on current laws and regulations.

The Corporation is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2004 or by New Jersey tax authorities for years prior to 2003.  The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next 12 months.

The Corporation recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.  The Corporation did not have any amounts accrued for interest and penalties at January 1, 2008.

Comprehensive Income:  Comprehensive income consists of net income and the change during the period in the Corporation’s pension benefit obligation and the net unrealized gains and losses on securities available for sale during the applicable period of time less adjustments for realized gains and losses.  Total comprehensive income for the second quarter of 2008 was $2.2 million and $1.4 million for the same quarter in 2007.  Total comprehensive income for the six months ended June 30, 2008 and 2007 was $1.9 million and $4.4 million, respectively.

Reclassification:  Certain reclassifications have been made in the prior periods’ financial statements in order to conform to the 2008 presentation.

2.  LOANS

Loans outstanding as of June 30, 2008, and December 31, 2007, consisted of the following:

Non-performing assets, which are loans past due in excess of 90 days and still accruing, non-accrual loans and other real estate owned totaled $5.2 million at June 30, 2008 and $2.1 million at December 31, 2007.  Management believes that the value of the real estate exceeds the balance due on the loans and expects no loss.

3.  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of New York (FHLB) totaled $40.4 million and $29.2 million at June 30, 2008 and December 31, 2007, respectively, with a weighted average interest rate of 3.54 percent and 3.69 percent, respectively.  Advances totaling $13.0 million at June 30, 2008, have fixed maturity dates, while advances totaling $4.4 million were amortizing advances with monthly payments of principal and interest.  These advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $217.7 million at June 30, 2008.

At June 30, 2008, the Corporation had $23.0 million in fixed rates advances that are noncallable for one, two or three years and then callable quarterly within final maturities of three, five or ten years.  These advances are secured by pledges of investment securities totaling $25.2 million at June 30, 2008.

Overnight borrowings at June 30, 2008 totaled $25.0 million, while overnight borrowings at December 31, 2007 totaled $15.7 million.  For the three months ended June 30, 2008, overnight borrowings from the FHLB averaged $5.5 million with a weighted average interest rate of 2.25 percent, while there were no average borrowings for the same quarter last year.  For the six months ended June 30, 2008 and 2007, overnight borrowings from the FHLB averaged $3.7 million with a weighted average interest rate of 2.67 percent and $2.1 million with a weighted average interest rate of 5.40 percent, respectively.

The final maturity dates of the advances and other borrowings are scheduled as follows:

4.  BENEFIT PLANS

The Corporation has a defined benefit pension plan covering substantially all of its salaried employees which was discontinued on May 12, 2008.  The plan is fully funded and contributions totaling $450 thousand have been made during 2008.  Employees will be receiving distributions from this plan during the second half of the year.   The Corporation amended its existing 401-K profit-sharing and investment plan to enhance the contributions to its salaried employees starting in May 2008. The impact of the curtailment of the plan was not material to the financial statements.

The net periodic expense for the periods indicated included the following components:

Late in 2007, the Corporation changed internal accounting and reporting processes in order to segregate and assess its results among two operating segments, Banking and Trust and adopted the new processes as of January 1, 2008.  Management uses certain methodologies to allocate income and expense to the business segments.  A funds transfer pricing methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis.  Certain indirect expenses are allocated to segments.  These include support unit expenses such as technology and operations and other support functions.  Taxes are allocated to each segment based on the effective rate for the period shown.

The Banking segment includes commercial, commercial real estate, residential and consumer lending activities; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support and sales.

PGB Trust & Investments includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services including services as trustee for pension and profit sharing plans; and other financial planning and advisory services.

The following table presents the statements of income and total assets for the Corporation’s reportable segments for the three and six months ended June 30, 2008.

Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

GENERAL:  The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are not historical facts and include expressions about management’s view of future interest income and net loans, management’s confidence and strategies and management’s expectations about new and existing programs and products, relationships, opportunities and market conditions.  These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, “will”, or similar statements or variations of such terms.  Actual results may differ materially from such forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities:

The Corporation assumes no responsibility to update such forward-looking statements in the future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Corporation’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  Note 1 to the Corporation’s Audited Consolidated Financial Statements included in the December 31, 2007 Annual Report on Form 10-K, contains a summary of the Corporation’s significant accounting policies.  Management believes the Corporation’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters.  Changes in these judgments, assumptions or estimates could materially impact results of operations.  This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

The provision for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions.  Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change.  Various regulatory agencies, as an integral part of their examination process,

periodically review the Corporation’s provision for loan losses.  Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination.  Furthermore, the majority of the Corporation’s loans are secured by real estate in the State of New Jersey.  Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or should New Jersey experience adverse economic conditions.  Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation’s control.

EXECUTIVE SUMMARY:  For the second quarter of 2008, the Corporation’s net income was $3.6 million as compared to $2.8 million for the same quarter of 2007, an increase of $766 thousand, or 27.2 percent.  Earnings per share were $0.43 per diluted share in the second quarter of 2008 as compared to $0.33 per diluted share for the second quarter of 2007.  The primary factor contributing to the increase in net income is the improvement in net interest income and the net interest margin, which is explained below.  Annualized return on average assets for the quarter was 1.05 percent and annualized return on average equity was 13.52 percent for the second quarter of 2008.

In the second quarter of 2008, net interest income, on a fully tax-equivalent basis, was $11.7 million, an increase of $2.8 million or 31.6 percent from the second quarter last year and an increase of $939 thousand or 8.7 percent over the first quarter of 2008.  On a fully tax-equivalent basis, the net interest margin was 3.63 percent for the second quarter of 2008 as compared to 2.86 percent for the same period last year and 3.34 percent for the first quarter of 2008.

For the second quarter of 2008, average loans increased $101.1 million or 11.3 percent to $992.0 million.  The Corporation’s long-term plan calls for a substantial shift in the asset mix, with less emphasis on residential mortgages and more emphasis on higher yielding commercial loans and commercial mortgages.  As a result of this strategy, the average commercial loan portfolios grew $98.7 million or 28.7 percent, while the average mortgage loan portfolio increased slightly to $493.9 million.  Loan rates declined 33 basis points from the second quarter of 2007 to 5.77 percent for the same quarter of 2008.

Deposits averaged $1.19 billion in the second quarter of 2008, growing $19.2 million, or 1.6 percent, over the levels of the same year ago period.  Deposit gathering remains highly competitive as short-term market rates have declined in the past few months.  Rates paid for interest-bearing deposits were 2.34 percent in the second quarter of 2008, as compared to 3.67 percent for the same quarter of 2007, a decline of 133 basis points.

The Corporation recorded net income of $7.0 million for the first half of 2008, an increase of $1.5 million or 27.9 percent over the $5.5 million recorded for the same period of 2007.  For the six months ended June 30, 2008 and 2007, earnings per diluted share were $0.84 and $0.65, respectively.  Annualized return on average assets for the year to date was 1.04 percent and annualized return on average equity was 13.16 percent for the first six months of 2008.

Net interest income, on a fully tax-equivalent basis, was $22.5 million for the first six months of 2008, an increase of $5.0 million or 28.9 percent from the first half of last year.  On a fully tax-equivalent basis, the net interest margin, was 3.48 percent and 2.84 percent for the six months ended June 30, 2008 and 2007, respectively.

Average loans for the first half of 2008 totaled $987.3 million as compared to $881.0 million, an increase of $106.4 million or 12.1 percent over the same year ago period.  While the average mortgage loan portfolio remained flat to the first half of 2007, the average commercial loan portfolios rose $105.4 million or 31.8 percent.  Loan rates declined 20 basis points to 5.88 percent for the first six months of 2008 as compared to 2007.

In the six months ended June 30, 2008 and 2007, deposits averaged $1.19 billion and $1.16 billion, respectively, an increase of $37.9 million or 3.3 percent.  Rates paid for interest-bearing deposits declined 100 basis points to 2.65 percent in the first half of 2008.  Borrowings for the six months ended June 30, 2008 averaged $43.5 million, an increase of $17.9 million.  During the first half of 2008, the Corporation borrowed $23.0 million in fixed rates advances that are noncallable for one, two or three years.

Average investments declined $46.5 million for the first six months of 2008 when compared to the same year-to-date period of 2007 and yields on investments remained relatively constant.  In 2007 and for the first six months of 2008, the Corporation followed a strategy of investing the proceeds of maturing and sold securities into higher yielding loans.  Investments include pooled trust preferred securities, principally issued by banks, with an amortized cost of $67.1 million and a fair value of $48.4 million at June 30, 2008.  These securities have been classified in the available-for-sale portfolio since their purchase and are performing in accordance with contractual terms.  The Corporation has the ability and intent to hold these securities until maturity and, accordingly, transferred the securities to the held-to-maturity portfolio in July of 2008.

Given the challenging environment for many banks in the United States, there has been an increase in payment deferrals by issuers of trust preferred securities and a steady decline in the fair value of these securities.  At June 30, 2008, all but one of the trust preferred securities owned by the Corporation had an investment grade rating of A or better.  The rating agencies have recently placed a number of these securities on credit watch while they evaluate the current rating for possible downgrade.  At June 30, 2008, Management does not believe an adverse change in the cash flows of the underlying securities has occurred and, therefore, has not recorded a charge for other-than-temporary impairment.  The Corporation will continue to evaluate these securities in the future.

EARNINGS ANALYSIS

NET INTEREST INCOME:  Net interest income, on a tax-equivalent basis on interest-earning assets and before the provision for loan losses, was $11.7 million for the second quarter of 2008 as compared to $8.9 million for the second quarter of 2007, an increase of $2.8 million or 31.6 percent.  On a fully tax-equivalent basis, the net interest margin was 3.63 percent and 2.86 percent in the second quarters of 2008 and 2007, respectively, an increase of 77 basis points.  When compared to the first quarter of 2008, net interest income for the second quarter of 2008, rose $939 thousand, or 8.7 percent, from $10.8 million on a tax-equivalent basis.  On a fully tax equivalent basis, the net interest margin, increased from 3.34 percent in the first quarter of 2008, to 3.63 percent in the second quarter of 2008.

For the second quarter of 2008, average loans totaled $992.0 million, an increase of $101.1 million or 11.3 percent from $890.9 million for the same quarter of 2007.  While the average mortgage loan portfolio remained flat during this period, the average commercial loan portfolios grew $98.7 million or 28.7 percent.

For the second quarters of 2008 and 2007, average deposits were $1.19 billion and $1.17 billion, respectively, growing $19.2 million, or 1.6 percent.  In the second quarter of 2008, average non-interest bearing demand deposits increased $8.5 million or 4.5 percent to $198.9 million, from the same quarter in 2007.  Average money markets rose $22.7 million or 6.1 percent from the second quarter in 2007, totaling $394.3 million in the second quarter of 2008.  Average certificates of deposit declined $5.8 million or 1.4 percent due to competitive pressure on rates and the maturity of certificates offered at a special rate for the grand opening of the Summit Branch beginning in March 2007.  Average borrowings increased by $22.8 million to $46.0 million in the second quarter of 2008, from $23.2 million in the same quarter of 2007.

Average interest rates on interest-earning assets, on a tax-equivalent basis, declined 27 basis points to 5.55 percent for the second quarter of 2008 from 5.82 percent for the same quarter of 2007.  Average interest rates earned on investment securities declined 14 basis points to 4.95 percent for the second quarter of 2008.  Average interest rates earned on loans declined 33 basis points for the second quarter of 2008 to 5.77 percent from 6.10 percent for the same period in 2007.  Improvement has already been seen in our net interest margin since last year when we implemented our long-term plan, which calls for a substantial shift in our asset mix, with less emphasis on residential mortgages and more emphasis on higher yielding commercial loans and commercial mortgages.  We believe this material shift in our asset mix will deliver substantially superior earnings performance over the coming years.  However, increases this quarter have been offset by lower yields on adjustable-rate products and new loans as market rates and competition drive some rates down.

For the second quarter of 2008, average rates paid on interest-bearing deposits declined 133 basis points to 2.34 percent as compared to 3.67 percent for the same quarter of 2007.  Yields on money market products averaged 1.87 percent, while certificates of deposit yields averaged 3.67 percent for the second quarter of 2008. Although overnight rates have declined since the second quarter of 2007, interest expense on borrowings has increased due to the increase in average overnight borrowings to $5.5 million in the second quarter of 2008.

The cost of funds decreased to 2.00 percent for the second quarter of 2008 as compared to 3.08 percent for the same quarter in 2007.  The net interest income and net interest margin has benefited from the Federal Reserve Board’s decisions to reduce the fed funds target rate 225 basis points since the beginning of the year.

For the six months ended June 30, 2008, net interest income, on a fully tax-equivalent basis and before the provision for loan losses, was $22.5 million as compared to $17.5 million for the same period in 2007, an increase of $5.0 million or 28.9 percent.  The net interest margin, on a fully tax-equivalent basis, was 3.48 percent and 2.84 percent in the first six months of 2008 and 2007, respectively, an increase of 64 basis points.  Net interest income has mostly benefited from the reduction in short-term market rates as liability costs have declined $4.2 million when compared to the first half of 2007.

Average loans for the six months ended June 30, 2008 and 2007 totaled $987.3 million and $881.0 million, respectively, an increase of $106.4 million or 12.1 percent.  The average commercial loan portfolios grew to $436.8 million for the first half of 2008 from $331.4 million for the same period in 2007, an increase of $105.4 million or 31.8 percent.  The average mortgage loan portfolio remained flat during this same period.  Average investments declined $46.5 million or 13.9 percent to $286.9 million as maturities in this portfolio were reinvested in the loan portfolio.

For the first six months of 2008, average deposits were $1.19 billion, an increase of $37.9 million or 3.3 percent.  Average non-interest bearing demand deposits increased to $192.4 million for the first half of 2008 from $185.4 million for the same year ago period, rising $7.0 million or 3.8 percent.  Average money markets rose $25.3 million or 6.8 percent from the six months ended June 30, 2007, totaling $400.2 million in the first half of 2008.  Average certificates of deposit rose $12.8 million or 3.3 percent to $400.4 million for the first six months of 2008.  For the same six months of 2008, average borrowings increased by $17.9 million to $43.5 million from $25.6 million in the same period a year ago.  The reason for the increase is $23.0 million in fixed rates advances that the Corporation has borrowed in the past year.  These advances are noncallable for one, two or three years and then callable quarterly within final maturities of three, five or ten years.

On a tax-equivalent basis, average interest rates on assets, for the first six months of 2008 and 2007 were 5.65 percent and 5.79 percent, respectively, declining 14 basis points between 2008 and 2007.  Average interest rates earned on loans accounted for much of this decrease, declining 20 basis points for the period in 2008 to 5.88 percent from 6.08 percent for the same period in 2007.

For the six months ended June 30, 2008, average rates paid on interest-bearing deposits declined 100 basis points to 2.65 percent as compared to 3.65 percent for the same period in 2007.  Yields on money market products averaged 2.25 percent, while certificates of deposit yields averaged 4.07 percent for the first half of 2008.  Average rates paid on borrowings declined 15 basis points, yielding 3.50 percent and 3.65 percent for the first half of 2008 and 2007, respectively.

The cost of funds for the first half of 2008 also declined to 2.27 percent from 3.08 percent for the same year ago period.  The net interest income and net interest margin has benefited from the Federal Reserve Board’s decisions to reduce the fed funds target rate 225 basis points since the beginning of the year.

 

 

 

The following tables reflect the components of net interest income for the periods indicated:

Average Balance Sheet

Unaudited

Quarters Ended

(Tax-Equivalent Basis, Dollars in Thousands)

Average Balance Sheet

Unaudited

Year-To-Date

(Tax-Equivalent Basis, Dollars in Thousands)

OTHER INCOME:  Other income was $3.7 million and $3.6 million in the second quarters of 2008 and 2007, respectively, an increase of $101 thousand, or 2.8 percent.  In the second quarter of 2008, PGB Trust and Investments, the Bank’s trust division, generated $2.7 million in fee income, an increase of $206 thousand or 8.4 percent over the same quarter of 2007 due in part to higher levels of overall business and higher estate fees.  At June 30, 2008 the market value of trust assets under administration for PGB Trust and Investments was over $1.91 billion.

In the second quarters of 2008 and 2007, the Corporation recorded securities gains of $69 thousand and $220 thousand, respectively.  The Corporation closed the New Vernon Branch in the second quarter resulting in a loss on disposal of fixed assets of $82 thousand.

Other income, excluding trust fee income and the gains and losses noted above, totaled $1.0 million and $881 thousand for the three months ended June 30, 2008 and 2007, respectively.  In the first quarter of 2008, the Bank invested in an additional $5.0 million of Bank Owned Life Insurance, which resulted in additional income of $83 thousand in the second quarter of 2008.  Also included in other income in the second quarter of 2008 is fee income from the sale of mortgage loans of $18 thousand.

For the first half of 2008, other income was $7.4 million, an increase of $642 thousand or 9.5 percent when compared to the $6.7 million recorded in the same period a year ago.  PGB Trust and Investments generated fee income of $5.2 million and $4.6 million in the first six months of 2008 and 2007, respectively.

Securities gains for the first half of 2008 totaled $379 thousand as compared to $382 thousand in the same period a year ago.  Included in securities gains in 2008 was a gain of $81 thousand from the mandatory redemption of Class B Visa shares in conjunction with Visa’s initial public offering.

Relocating the Shunpike Branch to Green Village Road and closing the New Vernon Branch in 2008 resulted in a $153 thousand loss on disposal of fixed assets.  All other income, excluding trust fee income and gains and losses, for the first half of 2008, totaled $2.0 million, an increase of $252 thousand or 14.3 percent over the other income recorded in the first half of 2007.  Income from Bank Owned Life Insurance increased $136 thousand or 31.1 percent to $573 thousand for the six months ended June 30, 2008 when compared to the year ago period.  Also included in other income in the first six months of 2008 and 2007 is fee income from the sale of mortgage loans of $80 thousand and $18 thousand, respectively.

The following table presents the components of other income for the periods indicated:

OTHER EXPENSES:  For the second quarter of 2008, other expenses totaled $9.1 million as compared to $8.0 million recorded in the second quarter of 2007, an increase of $1.1 million or 13.8 percent.  Salaries and benefits, the Corporation’s largest non-interest expense, was $4.8 million for the second quarter of 2008 as compared to $4.4 million for the same quarter of 2007, an increase of $473 thousand or 10.9 percent. This increase is due to the addition of new commercial lending officers and support staff to carry out the Corporation’s strategic plan to grow the commercial and construction loan portfolios, as well as normal salary increases, branch expansion, higher group health insurance and pension plan costs.  Also, the Corporation expensed $82 thousand of stock-based compensation expense in the second quarter of 2008 as compared to $53 thousand in the same quarter of 2007.

Premises and equipment expense increased $360 thousand, or 20.6 percent, from the second quarter in 2007 to $2.1 million for the second quarter of 2008.  The increase is due in part to the additional expenses associated with new branches and additional employees.  New branches are vital to our future growth and profitability.  Deposit and loan growth continues as we add new markets and expand our staff to include professional commercial lenders.  The Corporation continues to strive to operate in an efficient manner.

Stationery and supplies and telephone expense also rose due to the addition of new branches, totaling $132 thousand, an increase of $15 thousand or 12.8 percent and $117 thousand, an increase of $12 thousand or 11.4 percent, respectively.  Advertising expenses were $280 thousand for the second quarter of 2008 as compared to $401 thousand for the same quarter in 2007.  Professional services increased $33 thousand or 9.4 percent for the second quarter of 2008 when compared to the same quarter last year and includes increased legal expenses related to nonperforming loans.

Other expenses totaled $17.7 million for the first six months of 2008, an increase of $2.2 million or 13.9 percent over the $15.6 million recorded for the same period of 2007.  For the six months ended June 30, 2008, salaries and benefits expense was $9.7 million, an increase of $1.1 million or 13.1 percent over the expense recorded year to date June 30, 2007.  As noted above, the Corporation has hired additional commercial lending officers and support staff in order to increase the commercial and construction loan portfolios.  In addition, branch expansion, normal salary increases and higher group health insurance and pension plan costs contributed to the increase.

The Corporation recorded $4.1 million of premises and equipment expense in the six months ended June 30, 2008 as compared to $3.6 million for the same period a year ago, an increase of $546 thousand or 15.2 percent.  The increase is due in part to the additional expenses, such as depreciation, utilities and various equipment associated with a new branch and additional employees.

The following table presents the components of other expense for the periods indicated: