XNAS:PGC Peapack Gladstone Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

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, 2012

 

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)

 

 

New Jersey 22-3537895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

 

500 Hills Drive, Suite 300

Bedminster, New Jersey 07921-1538

(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     No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý     No o.

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):

Large accelerated filer o Accelerated filer ý
Non-accelerated filer (do not check if a smaller reporting company) o

Smaller reporting company o

 

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, 2012:

8,875,171

 

1
 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

PART 1 FINANCIAL INFORMATION

 

 

Item 1 Financial Statements (Unaudited) Consolidated Statements of Condition at June 30, 2012 and December 31, 2011 Page 3
  Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 Page 4
  Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011 Page 5
  Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2012 Page 6
  Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 Page 7
  Notes to Consolidated Financial Statements Page 8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations Page 34
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 47
Item 4 Controls and Procedures Page 47

 

 

 

 

 

 

PART 2 OTHER INFORMATION

 

 

 

Item 1A Risk Factors Page 48
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds Page 48
Item 6 Exhibits Page 48
2

Item 1. Financial Statements (Unaudited)

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

(Dollars in thousands)

 

   (unaudited)   (audited) 
   June 30,   December 31, 
   2012   2011 
ASSETS          
Cash and due from banks  $5,639   $7,097 
Federal funds sold   100    100 
Interest-earning deposits   29,024    35,856 
  Total cash and cash equivalents   34,763    43,053 
           
Investment securities held to maturity (fair          
  value $84,627 in 2012 and $99,427 in 2011)   84,779    100,719 
Securities available for sale   257,318    319,520 
FHLB and FRB stock, at cost   4,818    4,569 
           
Loans held for sale, at fair value   2,259    2,841 
           
Loans   1,106,382    1,038,345 
  Less:  Allowance for loan losses   13,686    13,223 
  Net loans   1,092,696    1,025,122 
           
Premises and equipment   30,979    31,941 
Other real estate owned   3,073    7,137 
Accrued interest receivable   3,447    4,078 
Bank owned life insurance   30,688    27,296 
Deferred tax assets, net   26,430    26,731 
Other assets   7,355    7,328 
  TOTAL ASSETS  $1,578,605   $1,600,335 
           
LIABILITIES          
Deposits:          
  Noninterest-bearing demand deposits  $304,651   $297,459 
  Interest-bearing deposits:          
    Checking   323,813    341,180 
    Savings   104,631    92,322 
    Money market accounts   495,929    516,920 
    Certificates of deposit $100,000 and over   78,268    71,783 
    Certificates of deposit less than $100,000   115,793    124,228 
Total deposits   1,423,085    1,443,892 
Federal home loan bank advances   16,451    17,680 
Capital lease obligation   9,076    9,178 
Accrued expenses and other liabilities   15,758    6,614 
  TOTAL LIABILITIES   1,464,370    1,477,364 
SHAREHOLDERS’ EQUITY          
Preferred stock (no par value; authorized 500,000 shares;          
  issued 14,341 at December 31, 2011;          
  liquidation preference of $1,000 per share)       13,979 
Common stock (no par value; $0.83 per share; authorized 21,000,000          
  shares; issued shares, 9,283,349 at June 30, 2012 and 9,240,889          
  at December 31, 2011; outstanding shares, 8,875,171 at June 30, 2012          
  and 8,832,711 at December 31, 2011)   7,720    7,685 
Surplus   96,651    96,323 
Treasury stock at cost, 408,178 shares at June 30, 2012 and December 31, 2011   (8,988)   (8,988)
Retained earnings   18,313    13,868 
Accumulated other comprehensive income, net of income tax   539    104 
  TOTAL SHAREHOLDERS’ EQUITY   114,235    122,971 
  TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY  $1,578,605   $1,600,335 
           
See accompanying notes to consolidated financial statements.          
3

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except share data)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
INTEREST INCOME                    
Interest and fees on loans  $12,098   $11,655   $23,989   $23,385 
Interest on investment securities:                    
  Taxable   376    606    811    1,217 
  Tax-exempt   46    91    112    184 
Interest on securities available for sale:                    
  Taxable   1,394    1,603    3,011    3,261 
  Tax-exempt   156    119    321    240 
Interest on loans held for sale   18    5    41    21 
Interest-earning deposits   14    20    31    48 
  Total interest income   14,102    14,099    28,316    28,356 
INTEREST EXPENSE                    
Interest on savings and interest-bearing deposit                    
  accounts   360    925    806    1,904 
Interest on certificates of deposit over $100,000   222    268    449    553 
Interest on other time deposits   341    445    710    935 
Interest on borrowed funds   168    198    340    401 
Interest on capital lease obligation   108    80    217    159 
  Total interest expense   1,199    1,916    2,522    3,952 
  NET INTEREST INCOME BEFORE                    
  PROVISION FOR LOAN LOSSES   12,903    12,183    25,794    24,404 
Provision for loan losses   1,500    2,000    3,000    4,000 
                     
  NET INTEREST INCOME AFTER                    
  PROVISION FOR LOAN LOSSES   11,403    10,183    22,794    20,404 
OTHER INCOME                    
Trust department income   3,259    2,829    6,435    5,547 
Service charges and fees   702    755    1,379    1,458 
Bank owned life insurance   264    261    528    512 
Securities gains, net   107    277    497    473 
Other income   339    202    555    503 
  Total other income   4,671    4,324    9,394    8,493 
OPERATING EXPENSES                    
Salaries and employee benefits   6,408    5,817    12,521    11,790 
Premises and equipment   2,413    2,386    4,744    4,736 
Other operating expenses (See footnote 8)   2,883    2,832    5,519    5,752 
  Total operating expenses   11,704    11,035    22,784    22,278 
INCOME BEFORE INCOME TAX EXPENSE   4,370    3,472    9,404    6,619 
Income tax expense   1,647    1,304    3,598    2,310 
  NET INCOME   2,723    2,168    5,806    4,309 
Dividends on preferred stock and accretion       219    474    789 
  NET INCOME AVAILABLE TO COMMON                    
  SHAREHOLDERS  $2,723   $1,949   $5,332   $3,520 
EARNINGS PER COMMON SHARE                    
  Basic  $0.31   $0.22   $0.61   $0.40 
  Diluted  $0.31   $0.22   $0.61   $0.40 
WEIGHTED AVERAGE NUMBER OF COMMON                    
  SHARES OUTSTANDING                    
  Basic   8,775,111    8,739,444    8,773,188    8,737,717 
  Diluted   8,820,878    8,739,696    8,806,841    8,738,218 

 

See accompanying notes to consolidated financial statements.

4

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Net income  $2,723   $2,168   $5,806   $4,309 
Other comprehensive income:                    
  Unrealized gains on available for sale securities:                    
     Unrealized holding gains arising during the period   1,226    2,572    1,119    2,691 
    Less:  Reclassification adjustment for gains                    
    Included in net income   107    277    497    473 
    1,119    2,295    622    2,218 
 Tax effect   (458)   (934)   (254)   (942)
Net of tax   661    1,361    368    1,276 
                     
Unrealized losses on the noncredit, other-than                    
  temporarily impaired held to maturity securities                    
  and on securities transferred from available for                    
  sale to held to maturity   57    10    113    19 
 Tax effect   (23)   (4)   (46)   (8)
Net of tax   34    6    67    11 
                     
Total comprehensive income  $3,418   $3,535   $6,241   $5,596 

 

See accompanying notes to consolidated financial statements.          
5

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Six Months Ended June 30, 2012
                       Accumulated     
                       Other     
(In thousands, except  Preferred   Common       Treasury   Retained   Comprehensive     
per share data)  Stock   Stock   Surplus   Stock   Earnings   Income   Total 
                             
Balance at January 1, 2012                            
  8,832,711 common shares                                   
  outstanding  $13,979   $7,685   $96,323   $(8,988)  $13,868   $104   $122,971 
                                    
                                    
Net income                       5,806         5,806 
Net change in accumulated                                   
  other comprehensive income                            435    435 
Issuance of restricted stock                                   
  36,263 shares        30    (30)                   
Amortization of restricted stock             221                   221 
Redemption of preferred stock                                   
  14,341 shares   (14,341)                            (14,341)
Warrant repurchase                                   
  150,296 shares             (109)                  (109)
Accretion of discount on                                   
  preferred stock   362                   (362)         
Cash dividends declared on                                   
  common stock                                   
  ($0.05 per share)                       (887)        (887)
Cash dividends declared on                                   
  preferred stock                       (112)        (112)
Common stock option expense             169                   169 
Sales of shares (Dividend                                   
  Reinvestment Program),                                   
  6,197 shares        5    77                   82 
Balance at June 30, 2012                                   
  8,875,171 common shares                                   
  outstanding  $   $7,720   $96,651   $(8,988)  $18,313   $539   $114,235 

 

See accompanying notes to consolidated financial statements.

6

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

   Six Months Ended June 30, 
OPERATING ACTIVITIES:  2012   2011 
Net income:  $5,806   $4,309 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   1,481    1,432 
Amortization of premium and accretion of discount on securities, net   1,147    1,390 
Amortization of restricted stock   221    124 
Provision for loan losses   3,000    4,000 
Provision for deferred taxes       445 
Stock-based compensation   169    212 
Gains on security sales, available for sale   (497)   (473)
Loans originated for sale   (33,273)   (15,616)
Proceeds from sales of loans   34,322    14,050 
Gains on loans sold   (467)   (247)
Loss/(gains) on sale of other real estate owned   84    (47)
(Gain) on disposal of fixed assets   (7)    
Increase in cash surrender value of life insurance, net   (396)   (463)
Decrease/(increase) in accrued interest receivable   631    (153)
(Increase)/Decrease in other assets   (24)   324 
(Increase) in accrued expenses and other liabilities   (70)   (284)
  NET CASH PROVIDED BY OPERATING ACTIVITIES   12,127    9,003 
INVESTING ACTIVITIES:          
Proceeds from maturities of investment securities held to maturity   20,588    12,761 
Proceeds from maturities of securities available for sale   45,261    30,320 
Proceeds from calls of investment securities held to maturity   136    10,105 
Proceeds from calls of securities available for sale   14,848    40,000 
Proceeds from sales of securities available for sale   22,393    33,246 
Purchase of investment securities held to maturity   (2,821)   (23,421)
Purchase of securities available for sale, including FHLB and FRB stock   (20,317)   (81,627)
Net increase in loans   (61,430)   (31,723)
Proceeds from sales of other real estate owned   1,836    1,238 
Purchases of premises and equipment   (512)   (710)
Purchase of life insurance   (2,996)    
  NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES   16,986    (9,811)
FINANCING ACTIVITIES:          
Net (decrease/increase in deposits   (20,807)   10,165 
Net increase in overnight borrowings        
Repayments of Federal Home Loan Bank advances   (1,229)   (3,221)
Redemption of preferred stock   (14,341)   (7,172)
Repurchase of warrants   (109)    
Cash dividends paid on preferred stock   (112)   (465)
Cash dividends paid on common stock   (887)   (882)
Sales of shares (DRIP Program)   82    80 
  NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES   (37,403)   (1,495)
Net decrease in cash and cash equivalents   (8,290)   (2,303)
Cash and cash equivalents at beginning of period   43,053    62,687 
Cash and cash equivalents at end of period  $34,763   $60,384 

 

 

See accompanying notes to consolidated financial statements.          

 

7

 

PEAPACK-GLADSTONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Certain information and footnote disclosures normally included in the audited 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 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, 2011 for Peapack-Gladstone Financial Corporation (the “Corporation”). In the opinion of the Management of the Corporation, the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments necessary to present fairly the financial position as of June 30, 2012 and the results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011.

 

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.

 

Securities: Debt securities are classified as held to maturity and carried at amortized cost when Management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent of requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

8

 

Loans: 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, in the opinion of Management, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days or more and collateral, if any, is insufficient to cover principal and interest. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. A nonaccrual loan is returned to accrual status only when interest and principal payments are brought current and future payments are reasonably assured. Commercial loans are generally charged off after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consumer loans are generally charged off after they become 120 days past due. 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 collectability is reasonable assured, loans are returned to accrual status. Mortgage loans are generally charged off when the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Corporation’s loans are secured by real estate in the State of New Jersey.

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charges against the allowance when Management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in Management’s judgment, should be charged off.

 

The allowance consists of specific and general components. The specific component of the allowance relates to loans that are individually classified as impaired.

 

A loan is impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are evaluated for impairment. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

All loans are individually evaluated for impairment when loans are classified as substandard by Management. If a loan is considered impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral less estimated disposition costs if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment while they are performing assets. If and when a residential mortgage is placed on nonaccrual status and in the process of collections, such as through a foreclosure action, then they are evaluated for impairment on a individual basis and the loan is reported, net, at the fair value of the collateral less estimated disposition costs.

9

 

A troubled debt restructuring is a renegotiated loan with concessions made by the lender to a borrower who is experiencing financial difficulty. Troubled debt restructurings are separately identified for impairment and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral, less estimated disposition costs. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component of the allowance covers loans collectively evaluated for impairment and is based primarily on the Bank’s historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation on a weighted average basis over the previous two years. This actual loss experience is adjusted by other qualitative factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

 

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on Federal call report codes. The following portfolio segments have been identified:

 

a) Primary Residential Mortgage – represents all loans collateralized by the borrower’s primary residence. These are closed-end loans secured by 1-4 family residential properties that are secured by first liens. The Bank retains in its portfolio most conventional mortgage loans that have maturities of 15 years or less and generally sells most loans with maturities greater than 15 years.  The Bank does not engage in sub-prime lending.
b) Home Equity Lines of Credit – These are revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit.
c) Junior Lien Loan on Residence – These are closed-end loans secured by 1-4 family residential properties that are secured by junior liens.
d) Multifamily Property – These are loans secured by multifamily (5 or more) residential properties.
e) Owner-Occupied Commercial Real Estate – These are loans secured by owner-occupied nonfarm nonresidential properties.
f) Investment Commercial Real Estate – These are loans secured by nonfarm nonresidential properties that are not owner-occupied.
g) Commercial and Industrial – These are commercial and industrial loans not secured by real estate.
h) Farmland – These are farm residential loans and other improvements on farmland.
i) Agricultural Production – These are loans to finance agricultural production and other loans to farmers.
j) Commercial Construction – These are loans for construction, land development and other land loans.
k) Consumer and Other – These are loans to individuals for household, family and other personal expenditures as well as obligations of states and political subdivisions in the U.S. This also represents all other loans that cannot be categorized in any of the previously mentioned loan segments.

 

Stock-Based Compensation: 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.

10

For the three months ended June 30, 2012 and 2011, the Corporation recorded total compensation cost for stock options of $84 thousand and $105 thousand respectively, with a recognized tax benefit of $15 thousand for the quarter ended June 30, 2012 and $18 thousand for the June 30, 2011 quarter. The Corporation recorded total compensation cost for stock options for the six months ended June 30, 2012 and 2011, of $169 thousand and $212 thousand, respectively, with a recognized tax benefit of $30 thousand for the six months ended June 30, 2012 and $36 thousand for the six months ended June 30, 2011.

 

There was approximately $679 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Corporation’s stock incentive plans at June 30, 2012. That cost is expected to be recognized over a weighted average period of 1.5 years.

 

For the Corporation’s stock option plans, changes in options outstanding during the six months ended June 30, 2012 were as follows:

 

           Weighted     
       Weighted   Average   Aggregate 
       Average   Remaining   Intrinsic 
   Number of   Exercise   Contractual   Value 
   Options   Price   Term   (In Thousands) 
Balance, January 1, 2012   577,782   $23.45           
Granted during 2012   62,360    11.00           
Exercised during 2012   (190)   13.53           
Expired during 2012   (11,437)   25.54           
Forfeited during 2012   (718)   15.35           
Balance, June 30, 2012   627,797   $22.19    4.54 years   $610 
Vested and expected to vest (1)   598,842   $22.69    4.54 years   $419 
Exercisable at June 30, 2012   455,827   $25.59    3.04 years   $80 

  

(1) Does not include shares which are not expected to vest as a result of anticipated forfeitures.

 

The aggregate intrinsic value 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 2012 and the exercise price, multiplied by the number of in-the-money options). The Corporation’s closing stock price on June 30, 2012 was $15.51.

 

For the second quarter of 2012, the per share weighted-average fair value of stock options granted was $5.53 as compared to $4.65 for the same quarter of 2011. The per share weighted-average fair value of stock options granted during the first six months of 2012 and 2011 was $3.90 and $3.92, respectively on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Dividend Yield   1.29%   1.70%   1.47%   1.51%
Expected volatility   39%   38%   39%   30%
Expected life   7 years    7 years    7 years    7 years 
Risk-free interest rate   1.46%   2.84%   1.43%   2.04%
                     

 

11

 

In January 2012 and 2011, the Corporation issued 36,263 and 28,732 restricted stock awards, respectively, at a fair value equal to the market price of the Corporation’s common stock at a date of the grant. The awards vest 40 percent after two years and 20 percent each year thereafter until fully vesting on the fifth anniversary of the grant date. The Corporation recorded total compensation cost for restricted stock awards of $110 thousand for the second quarter of 2012 and $66 thousand for the same quarter of 2011. For the six months ended June 30, 2012 and 2011, the Corporation recorded total compensation cost for restricted stock awards of $221 thousand and $124 thousand, respectively.

 

As of June 30, 2012, there was approximately $900 thousand of unrecognized compensation cost related to non-vested restricted stock awards granted under the Corporation’s stock incentive plans. That cost is expected to be recognized over a weighted average period of 1.6 years.

 

Changes in non-vested, restricted common shares for 2012 were as follows:

 

       Weighted 
       Average 
   Number of   Grant Date 
   Shares   Fair Value 
Balance, January 1, 2012   84,725   $13.46 
Granted during 2012   36,263    10.72 
Vested during 2012   (22,393)   10.75 
Balance, June 30, 2012   98,595   $13.07 

 

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 available 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 common shares underlying potentially dilutive stock options were issued during the reporting period utilizing the Treasury stock method.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(In thousands, except per share data)  2012   2011   2012   2011 
                 
Net income to common shareholders  $2,723   $1,949   $5,332   $3,520 
                     
Basic weighted-average common shares outstanding   8,775,111    8,739,444    8,773,188    8,737,717 
Plus:  common stock equivalents   45,767    252    33,653    501 
Diluted weighted-average common shares outstanding   8,820,878    8,739,696    8,806,841    8,738,218 
Net income per common share                    
Basic  $0.31   $0.22   $0.61   $0.40 
Diluted   0.31    0.22    0.61    0.40 
                     

Stock options and restricted stock totaling 570,301 and 591,635 shares were not included in the computation of diluted earnings per share in the second quarters of 2012 and 2011, respectively, because they were considered antidilutive. Stock options and restricted stock totaling 595,018 and 574,995 shares were not included in the computation of diluted earnings per share in the six months ended June 30, 2012 and 2011, respectively, because they were considered antidilutive.

 

 

12

 

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 2008 or by New Jersey tax authorities for years prior to 2007.

 

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 June 30, 2012.

 

Reclassification: Certain reclassifications may have been made in the prior periods’ financial statements in order to conform to the 2012 presentation.

 

2. INVESTMENT SECURITIES HELD TO MATURITY

 

A summary of amortized cost and estimated fair value of investment securities held to maturity included in the consolidated statements of condition as of June 30, 2012 and December 31, 2011 follows:

 

   June 30, 2012 
       Gross   Gross     
   Carrying   Unrecognized   Unrecognized   Fair 
(In thousands)  Amount   Gains   Losses   Value 
Mortgage-backed securities – residential  $56,849   $1,755   $   $58,604 
State and political subdivisions   19,483    22        19,505 
Trust preferred pooled securities   8,447    2,380    (4,309)   6,518 
  Total  $84,779   $4,157   $(4,309)  $84,627 

 

   December 31, 2011 
       Gross   Gross     
   Carrying   Unrecognized   Unrecognized   Fair 
(In thousands)  Amount   Gains   Losses   Value 
Mortgage-backed securities – residential  $67,394   $1,393   $(1)  $68,786 
State and political subdivisions   24,608    52        24,660 
Trust preferred pooled securities   8,717    2,170    (4,906)   5,981 
  Total  $100,719   $3,615   $(4,907)  $99,427 

 

The following tables present the Corporation’s investment securities held to maturity with continuous unrealized losses and the estimated fair value of these investments as of June 30, 2012 and December 31, 2011.

 

   June 30, 2012 
   Duration of Unrealized Loss 
   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrecognized   Fair   Unrecognized   Fair   Unrecognized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
Trust preferred pooled securities  $   $   $3,232   $(4,309)  $3,232   $(4,309)
  Total  $   $   $3,232   $(4,309)  $3,232   $(4,309)

  

   December 31, 2011 
   Duration of Unrealized Loss 
   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrecognized   Fair   Unrecognized   Fair   Unrecognized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
Mortgage-backed securities-                              
  residential  $3,194   $(1)  $   $   $3,194   $(1)
Trust preferred pooled securities           2,729    (4,906)   2,729    (4,906)
  Total  $3,194   $(1)  $2,729   $(4,906)  $5,923   $(4,907)

 

13

The trust preferred pooled securities within the Corporation’s held to maturity investment portfolio are collateralized by trust preferred securities issued primarily by individual bank holding companies, but also by insurance companies and real estate investment trusts. There has been little or no active trading in these securities for several years; therefore the Corporation has determined these securities to be illiquid and fair value was calculated by utilizing non-binding broker quotes. As of December 31, 2008, to estimate fair value, and determine whether the securities were other-than-temporarily impaired, the Corporation retained and worked with a third party to review the issuers (the collateral) underlying each of the securities. Among the factors analyzed were the issuers’ profitability, credit quality, asset mix, capital adequacy, leverage and liquidity position, as well as an overall assessment of credit, profitability and capital trends within the portfolio’s issuer universe. These factors provided an assessment of the portion of the collateral of each security which was likely to default in future periods. The cash flows associated with the collateral likely to default, together with the cash flows associated with collateral which had already deferred or defaulted, were then eliminated. In addition, the Corporation assumed constant rates of default in excess of those based upon the historic performance of the underlying collateral. The resulting cash flows were then discounted to the current period to determine fair value for each security. The discount rate utilized was based on a risk-free rate (LIBOR) plus spreads appropriate for the product, which include consideration of liquidity and credit uncertainty.

 

Each quarter since December 2008, to periodically assess the credit assumptions and related input data that could affect the cash flows of each security, Management compared actual deferrals and defaults to the assumed deferrals and defaults included in the valuation model.

 

As of each year end since December 2008, the Corporation again worked with a third party to model the securities and review its cash flows. The modeling process and related assumptions were similar to the process and related assumptions employed as of December 31, 2008. No additional impairment charges were recorded for the three and six months ended June 30, 2012.

 

Further significant downturns in the real estate markets and/or the economy could cause additional issuers to defer paying dividends on these securities and/or ultimately default. Such occurrences, if beyond those assumed in the current valuation, could cause an additional write-down of the portfolio, with a negative impact on earnings; however, the Corporation has already recorded a substantial write-down of its trust preferred pooled securities portfolio. We do not expect that an additional write-down would have a material effect on the cash flows from the securities or on our liquidity position.

 

14

 

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

 

A summary of amortized cost and approximate fair value of securities available for sale included in the consolidated statements of condition as of June 30, 2012 and December 31, 2011 follows:

 

   June 30, 2012 
       Gross   Gross     
   Amortized   Unrecognized   Unrecognized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
U.S. government-sponsored entities  $32,400   $209   $   $32,609 
Mortgage-backed securities – residential   184,969    5,140    (14)   190,095 
State and political subdivisions   27,698    1,225        28,923 
Other securities   5,999    73    (595)   5,477 
Marketable equity securities   210    4        214 
  Total  $251,276   $6,651   $(609)  $257,318 

 

 

   December 31, 2011 
       Gross   Gross     
   Amortized   Unrecognized   Unrecognized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
U.S. government-sponsored entities  $46,729   $149   $   $46,878 
Mortgage-backed securities – residential   232,240    4,891    (147)   236,984 
State and political subdivisions   28,539    1,314    (2)   29,851 
Other securities   5,999    40    (832)   5,207 
Marketable equity securities   593    7        600 
  Total  $314,100   $6,401   $(981)  $319,520 

 

The following tables present the Corporation’s available for sale securities with continuous unrealized losses and the approximate fair value of these investments as of June 30, 2012 and December 31, 2011.

 

   June 30, 2012 
   Duration of Unrealized Loss 
   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrecognized   Fair   Unrecognized   Fair   Unrecognized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
Mortgage-backed securities -                              
 residential  $708   $(6)  $89   $(8)  $797   $(14)
Other securities           2,404    (595)   2,404    (595)
  Total  $708   $(6)  $2,493   $(603)  $3,201   $(609)

 

 

   December 31, 2011 
   Duration of Unrealized Loss 
   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrecognized   Fair   Unrecognized   Fair   Unrecognized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
Mortgage-backed securities-                              
  residential  $32,931   $(120)  $317   $(27)  $33,248   $(147)
State and political subdivisions   736    (2)           736    (2)
Other securities           2,167    (832)   2,167    (832)
  Total  $33,667   $(122)  $2,484   $(859)  $36,151   $(981)

 

Management believes that the unrealized losses on investment securities available for sale are temporary and due to interest rate fluctuations and/or volatile market conditions rather than the creditworthiness of the issuers. The Corporation does not intend to sell these securities nor is it likely that it will be required to sell the securities before their anticipated recovery; however, Management also closely monitors market conditions and may sell the securities if it determines it would be beneficial to do so.

 

15

 

At June 30, 2012, the unrealized loss on other securities, $595 thousand, is related to a debt security issued by a large bank holding company that has experienced declines in all its securities due to the turmoil in the financial markets and a merger. The security, a single-issuer trust preferred security, was downgraded to below investment grade by Moody’s and is currently rated Ba1. Management monitors the performance of the issuer on a quarterly basis to determine if there are any credit events that could result in deferral or default of the security. Management believes the depressed valuation is a result of the nature of the security, a trust preferred bond, and the bond’s very low yield. As Management does not intend to sell this security nor is it likely that it will be required to sell the security before its anticipated recovery, the security is not considered other-than-temporarily impaired at June 30, 2012.

 

4. LOANS

 

Loans outstanding, by general ledger classification, as of June 30, 2012 and December 31, 2011, consisted of the following:

       % of       % of 
   June 30,   Total   December 31,   Total 
(In thousands)  2012   Loans   2011   Loans 
Residential mortgage  $526,726    47.61%  $498,482    48.01%
Commercial mortgage   384,289    34.73    330,559    31.84 
Commercial loans   116,493    10.53    123,845    11.93 
Construction loans   6,804    0.62    13,713    1.32 
Home equity lines of credit   49,057    4.43    50,291    4.84 
Consumer loans, including fixed                    
  rate home equity loans   20,885    1.89    19,439    1.87 
Other loans   2,128    0.19    2,016    0.19 
  Total loans  $1,106,382    100.00%  $1,038,345    100.00%

 

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal call report codes. The following portfolio classes have been identified as of June 30, 2012 and December 31, 2011:

  

       % of       % of 
   June 30,   Total   December 31,   Total 
(In thousands)  2012   Loans   2011   Loans 
Primary residential mortgage  $540,043    48.96%  $511,418    49.40%
Home equity lines of credit   49,057    4.45    50,394    4.87 
Junior lien loan on residence   12,773    1.16    13,053    1.26 
Multifamily property   126,515    11.47    104,056    10.05 
Owner-occupied commercial real estate   105,149    9.53    107,852    10.42 
Investment commercial real estate   228,344    20.70    186,998    18.06 
Commercial and industrial   21,022    1.90    29,825    2.88 
Secured by farmland   210    0.02        N/A 
Agricultural production loans   16    N/A    18    N/A 
Commercial construction loans   6,798    0.62    19,208    1.85 
Consumer and other loans   13,135    1.19    12,516    1.21 
  Total loans  $1,103,062    100.00%  $1,035,338    100.00%
Net deferred fees   3,320         3,007      
  Total loans including net deferred costs  $1,106,382        $1,038,345      

 

Included in the totals above for June 30, 2012 are $355 thousand of unamortized discount as compared to $691 thousand of unamortized discount for December 31, 2011.

16

 

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan losses as of June 30, 2012 and December 31, 2011:

 

June 30, 2012
   Total   Ending ALLL   Total   Ending ALLL         
   Loans   Attributable   Loans   Attributable         
   Individually   to Loans   Collectively   to Loans         
   Evaluated   Individually   Evaluated   Collectively       Total 
   for   Evaluated for   for   Evaluated for   Total   Ending 
(In thousands)  Impairment   Impairment   Impairment   Impairment   Loans   ALLL 
Primary                        
  residential                              
  mortgage  $8,868   $430   $531,175   $2,172   $540,043   $2,602 
Home equity lines                              
  of credit   98        48,959    208    49,057    208 
Junior lien loan                              
  on residence   466        12,307    55    12,773    55 
Multifamily                              
  property   107        126,408    839    126,515    839 
Owner-occupied                              
  commercial                              
  real estate   10,686    554    94,463    2,864    105,149    3,418 
Investment commercial                              
  real estate   5,687    384    222,657    4,400    228,344    4,784 
Commercial and                              
  industrial   746    46    20,276    871    21,022    917 
Secured by farmland           210    3    210    3 
Agricultural                              
  production           16    1    16    1 
Commercial                              
  construction           6,798    234    6,798    234 
Consumer and                              
  other           13,135    77    13,135    77 
Unallocated               548        548 
Total ALLL  $26,658   $1,414   $1,076,404   $12,272   $1,103,062   $13,686 

 

 

December 31, 2011
   Total   Ending ALLL   Total   Ending ALLL         
   Loans   Attributable   Loans   Attributable         
   Individually   to Loans   Collectively   to Loans         
   Evaluated   Individually   Evaluated   Collectively       Total 
   for   Evaluated for   for   Evaluated for   Total   Ending 
(In thousands)  Impairment   Impairment   Impairment   Impairment   Loans   ALLL 
Primary                              
  residential                              
  mortgage  $8,878   $345   $502,540   $2,069   $511,418   $2,414 
Home equity lines                              
  of credit   489        49,905    204    50,394    204 
Junior lien loan                              
  on residence   680    9    12,373    55    13,053    64 
Multifamily                              
  property   550    52    103,506    653    104,056    705 
Owner-occupied                              
  commercial                              
  real estate   9,054    322    98,798    2,786    107,852    3,108 
Investment commercial                              
  real estate   5,986    509    181,012    3,672    186,998    4,181 
Commercial and                              
  industrial   576    51    29,249    1,240    29,825    1,291 
Agricultural                              
  production           18    1    18    1 
Commercial                              
  construction           19,208    669    19,208    669 
Consumer and                              
  other           12,516    78    12,516    78 
Unallocated               508        508 
Total ALLL  $26,213   $1,288   $1,009,125   $11,935   $1,035,338   $13,223 

 

17

 

Impaired loans include nonaccrual loans of $19.0 million at June 30, 2012 and $18.9 million at December 31, 2011. Impaired loans also include performing commercial mortgage and commercial troubled debt restructured loans of $6.1 million at June 30, 2012 and $7.3 million at December 31, 2011. The allowance allocated to troubled debt restructured loans which are nonaccrual totaled $300 thousand as of June 30, 2012 and $280 thousand at December 31, 2011, respectively. All accruing troubled debt restructured loans were paying in accordance with restructured terms as of June 30, 2012. The Corporation has not committed to lend additional amounts as of June 30, 2012 to customers with outstanding loans that are classified as loan restructurings.

 

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011:

 

June 30, 2012
   Unpaid           Average   Interest 
   Principal   Recorded   Specific   Impaired   Income 
(In thousands)  Balance   Investment   Reserves   Loans   Recognized 
With no related allowance recorded:                         
  Primary residential mortgage  $7,895   $5,647   $   $6,514   $50 
  Multifamily property   264    107        337     
  Owner-occupied commercial real estate   9,313    7,844        7,736    127 
  Investment commercial real estate   1,183    738        895    3 
  Commercial and industrial   723    656        634    16 
  Home equity lines of credit   98    98        346    5 
  Junior lien loan on residence   655    466        774     
    Total loans with no related allowance  $20,131   $15,556   $   $17,236   $201 
With related allowance recorded:                         
  Primary residential mortgage  $3,409   $3,221   $430   $2,893   $40 
  Owner-occupied commercial real estate   3,291    2,842    554    1,729    19 
  Investment commercial real estate   4,949    4,949    384    4,949    162 
  Commercial and industrial   90    90    46    99    4 
  Junior lien loan on residence                   7 
    Total loans with related allowance  $11,739   $11,102   $1,414   $9,670   $232 
Total loans individually evaluated for                         
  impairment  $31,870   $26,658   $1,414   $26,906   $433 

 

 

December 31, 2011
   Unpaid           Average   Interest 
   Principal   Recorded   Specific   Impaired   Income 
(In thousands)  Balance   Investment   Reserves   Loans   Recognized 
With no related allowance recorded:                         
  Primary residential mortgage  $7,586   $5,844   $   $4,721   $87 
  Multifamily property   312    286        243     
  Owner-occupied commercial real estate   10,630    7,049        5,575    158 
  Investment commercial real estate   397    299        322    20 
  Commercial and industrial   475    475        433    24 
  Home equity lines of credit   595    489        66    18 
  Junior lien loan on residence   682    555        453    9 
    Total loans with no related allowance  $20,677   $14,997   $   $11,813   $316 
With related allowance recorded:                         
  Primary residential mortgage  $3,083   $3,034   $345   $1,496   $99 
  Multifamily property   264    264    52    71    13 
  Owner-occupied commercial real estate   2,020    2,005    322    1,254    66 
  Investment commercial real estate   5,979    5,687    509    2,865    373 
  Commercial and industrial   101    101    51    495    9 
  Junior lien loan on residence   138    125    9    128     
  Commercial construction               995     
    Total loans with related allowance  $11,585   $11,216   $1,288   $7,304   $560 
Total loans individually evaluated for                         
  impairment  $32,262   $26,213   $1,288   $19,117   $876 

 

18

The Corporation did not recognize any income on nonaccruing impaired loans for the three and six months ended June 30, 2012.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2012 and December 31, 2011:

   June 30, 2012 
       Loans Past Due 
       Over 90 Days 
       And Still 
       Accruing 
(In thousands)  Nonaccrual   Interest 
Primary residential mortgage  $7,273   $ 
Home equity lines of credit   98     
Junior lien loan on residence   217     
Multifamily property   107     
Owner-occupied commercial real estate   10,279     
Investment commercial real estate   737     
Commercial and industrial   300     
Total  $19,011   $ 

 

   December 31, 2011 
       Loans Past Due 
       Over 90 Days 
       And Still 
       Accruing 
(In thousands)  Nonaccrual   Interest 
Primary residential mortgage  $7,468   $ 
Home equity lines of credit   489     
Junior lien loan on residence   680     
Multifamily property   550     
Owner-occupied commercial real estate   8,641     
Investment commercial real estate   1,037     
Commercial and industrial       345 
Total  $18,865   $345 

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

19

 

The following tables present the aging of the recorded investment in past due loans as of June 30, 2012 and December 31, 2011 by class of loans, excluding nonaccrual loans:

June 30, 2012
   30-59   60-89   Greater Than     
   Days   Days   90 Days   Total 
(In thousands)  Past Due   Past Due   Past Due   Past Due 
Primary residential mortgage  $1,490   $470   $   $1,960 
Junior lien loan on residence       28        28 
Investment commercial real estate   605    238        843 
Consumer and other   5            5 
  Total  $2,100   $736   $   $2,836 

 

December 31, 2011
   30-59   60-89   Greater Than     
   Days   Days   90 Days   Total 
(In thousands)  Past Due   Past Due   Past Due   Past Due 
Primary residential mortgage  $4,857   $898   $   $5,755 
Home equity lines of credit   565    19        584 
Junior lien loan on residence   399            399 
Multifamily property   395            395 
Owner-occupied commercial real estate   3,381            3,381 
Investment commercial real estate   242            242 
Commercial and industrial   368        345    713 
Commercial construction   500            500 
Consumer and other   8            8 
  Total  $10,715   $917   $345   $11,977 

 

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. The risk rating analysis of loans is performed (i) when the loan is initially underwritten, (ii) annually for loans in excess of $500,000, (iii) on a random quarterly basis from either internal reviews with the Senior Credit Officer or externally through an independent loan review firm, or (iv) whenever Management otherwise identifies a potentially negative trend or issue relating to a borrower. In addition, for all loan types, the Corporation evaluates credit quality based on the aging status of the loan, which was previously presented.

20

 

The Corporation uses the following definitions for risk ratings:

Special Mention: Loans subject to special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weakness inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of June 30, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

       Special         
(In thousands)  Pass   Mention   Substandard   Doubtful 
Primary residential mortgage  $529,663   $2,200   $8,180   $ 
Home equity lines of credit   48,959        98     
Junior lien loan on residence   12,264    43    466     
Multifamily property   125,380    641    494     
Farmland   210             
Owner-occupied commercial real estate   82,038    5,135    17,976     
Investment commercial real estate   193,247    16,047    19,050     
Agricultural production loans   16             
Commercial and industrial   19,491    693    838     
Commercial construction   5,194    1,604         
Consumer and other loans   12,649    486         
  Total  $1,029,111   $26,849   $47,102   $ 

 

As of December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

       Special         
(In thousands)  Pass   Mention   Substandard   Doubtful 
Primary residential mortgage  $496,815   $5,437   $9,166   $ 
Home equity lines of credit   49,905        489     
Junior lien loan on residence   12,244    129    680     
Multifamily property   102,948    163    945     
Owner-occupied commercial real estate   81,797    9,524    16,531     
Investment commercial real estate   157,579    9,599    19,820     
Agricultural production loans   18             
Commercial and industrial   28,020    835    970     
Commercial construction   18,474    234    500     
Consumer and other loans   12,021    495         
  Total  $959,821   $26,416   $49,101   $ 

 

At June 30, 2012, $26.7 million of the $47.1 million of the substandard loans were also considered impaired as compared to December 31, 2011, when $26.2 million of the $49.1 million of the substandard loans were also impaired.

 

21

The activity in the allowance for loan losses for the three months ended June 30, 2012 is summarized below:

   April 1,               June 30, 
   2012               2012 
   Beginning               Ending 
(In thousands)  ALLL   Charge-Offs   Recoveries   Provision   ALLL 
Primary residential mortgage  $2,533   $(427)  $1   $495   $2,602 
Home equity lines of credit   203            5    208 
Junior lien loan on residence   59    (1)   4    (7)   55 
Multifamily property   789    (21)       71    839 
Farmland   3                3 
Owner-occupied commercial real estate   3,544    (804)   13    665    3,418 
Investment commercial real estate   4,341        9    434    4,784 
Agricultural production loans   1                1 
Commercial and industrial   1,044    (67)   2    (62)   917 
Commercial construction   360    (19)       (107)   234 
Consumer and other loans   74    (3)   3    3    77 
Unallocated   545            3    548 
  Total ALLL  $13,496   $(1,342)  $32   $1,500   $13,686 

 

The activity in the allowance for loan losses for the six months ended June 30, 2012 is summarized below:

   January 1,               June 30, 
   2012               2012 
   Beginning               Ending 
(In thousands)  ALLL   Charge-Offs   Recoveries   Provision   ALLL 
Primary residential mortgage  $2,414   $(988)  $1   $1,175   $2,602 
Home equity lines of credit   204    (91)       95    208 
Junior lien loan on residence   64    (57)   4    44    55 
Multifamily property   705    (375)       509    839 
Farmland               3    3 
Owner-occupied commercial real estate   3,108    (916)   126    1,100    3,418 
Investment commercial real estate   4,181    (56)   9    650    4,784 
Agricultural production loans   1                1 
Commercial and industrial   1,291    (112)   4    (266)   917 
Commercial construction   669    (72)       (363)   234 
Consumer and other loans   78    (20)   6    13    77 
Unallocated   508            40    548 
  Total ALLL  $13,223   $(2,687)  $150   $3,000   $13,686 

 

22

 

The activity in the allowance for loan losses for the three months ended June 30, 2011 is summarized below:

   April 1,               June 30, 
   2011               2011 
   Beginning               Ending 
(In thousands)  ALLL   Charge-Offs   Recoveries   Provision   ALLL 
Primary residential mortgage  $1,574   $(115)  $   $204   $1,663 
Home equity lines of credit   174            11    185 
Junior lien loan on residence   207    (1)   14    (12)   208 
Multifamily property   367            96    463 
Farmland                    
Owner-occupied commercial real estate   3,387    (1,555)   39    1,650    3,521 
Investment commercial real estate   4,712    (618)   1    4    4,099 
Agricultural production loans                    
Commercial and industrial   2,451    (29)   24    (47)   2,399 
Commercial construction   903    (86)       (23)   794 
Consumer and other loans   90    (4)       13    99 
Unallocated   521            104    625 
  Total ALLL  $14,386   $(2,408)  $78   $2,000   $14,056 

 

The activity in the allowance for loan losses for the six months ended June 30, 2011 is summarized below:

   January 1,               June 30, 
   2011               2011 
   Beginning               Ending 
(In thousands)  ALLL   Charge-Offs   Recoveries   Provision   ALLL 
Primary residential mortgage  $1,502   $(287)  $   $448   $1,663 
Home equity lines of credit   160    (60)       85    185 
Junior lien loan on residence   228    (13)   14    (21)   208 
Multifamily property   303    (26)   8    178    463 
Farmland                    
Owner-occupied commercial real estate   2,777    (1,555)   39    2,260    3,521 
Investment commercial real estate   4,759    (1,691)   1    1,030    4,099 
Agricultural production loans                    
Commercial and industrial   2,719    (96)   26    (250)   2,399 
Commercial construction   1,246    (586)   11    123    794 
Consumer and other loans   66    (11)       44    99 
Unallocated   522            103    625 
  Total ALLL  $14,282   $(4,325)  $99   $4,000   $14,056 

 

Troubled Debt Restructurings:

The Corporation has allocated $709 thousand and $707 thousand of specific reserves, on accruing TDR’s, to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the six month period ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower that the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

23

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending June 30, 2012:

       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
(Dollars in thousands)  Contracts   Investment   Investment 
Primary residential mortgage   2   $260   $260 
Junior lien on residence            
Owner-occupied commercial real estate            
  Total   4   $260   $260 

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2012:

       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number of   Recorded   Recorded 
(Dollars in thousands)  Contracts   Investment   Investment 
Primary residential mortgage   4   $610   $610 
Junior lien on residence   1    249    249 
Owner-occupied commercial real estate   1    2,197    2,197 
  Total   6   $3,056   $3,056 

 

The identification of the troubled debt restructured loans did not have a significant impact on the allowance for loan losses. In addition, there were no charge-offs as a result of the classification of these loans as troubled debt restructuring during the quarter ended June 30, 2012. The primary residential mortgages were modified by reducing the interest rates. The junior lien on residence loan was modified through the deferral of certain scheduled principal payments. The owner-occupied commercial real estate loan was modified through a rate change, revised amortization and partial forgiveness of principal, which had previously been charged off.

The primary residential mortgages were modified by reducing the interest rates or extending the maturity date. The junior lien on residence loan was modified through the deferral of certain scheduled principal payments. The owner-occupied commercial real estate loans were modified with rate reductions and revised amortization schedules; one also had a partial forgiveness of principal which had been previously charged off. The investment commercial real estate loan was modified through rate reduction and deferral of principal amortization.

The following table presents loans by class modified as troubled debt restructurings on accrual as of June 30, 2012:

       Pre-   Post-     
       Modification   Modification     
       Outstanding   Outstanding     
   Number of   Recorded   Recorded   Specific 
(Dollars in thousands)  Contracts   Investment   Investment   Reserves 
Primary residential mortgage   4   $1,596   $1,596   $279 
Junior lien on residence   1    249    249     
Owner-occupied commercial real estate   1    406    406     
Investment commercial real estate   1    4,949    4,949    384 
Commercial and industrial   3    447    447    46 
  Total   10   $7,647   $7,647   $709 

 

24

There are nine loans totaling $6.1 million that have been categorized as troubled debt restructurings that are also included in loans that are on nonaccrual. Four of these loans consist of owner-occupied commercial real estate and total $5.2 million. Four are residential first mortgages totaling $598 thousand and one is a commercial mortgage totaling $299 thousand on a mixed use investment property.

The following table presents loans by class modified as troubled debt restructurings from July 1, 2011 through June 30, 2012 for which there was a payment default during the same period:

   Number of   Recorded 
(Dollars in thousands  Contracts   Investment 
Owner-occupied commercial real estate   1   $406 
  Total   1   $406 

 

For troubled debt restructured loans identified during the quarter ended June 30, 2012, there were no payment defaults during the three months ended June 30, 2012.

The terms of certain other potential problem loans were modified during the three month period ending June 30, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment at June 30, 2012 of $2.0 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of New York (FHLB) totaled $16.5 million and $17.7 million at June 30, 2012 and December 31, 2011, respectively, with a weighted average interest rate of 3.51 percent and 3.50 percent, respectively. At June 30, 2012 advances totaling $451 thousand with a weighted average interest rate of 3.73 percent 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 $58.3 million at June 30, 2012.

Also at June 30, 2012, the Corporation had $16.0 million in variable rate advances, with a weighted average interest rate of 3.45 percent, that are noncallable for one, two or three years and then callable quarterly with final maturities of five, seven or ten years from the original date of the advance. All of these advances are beyond their initial noncallable periods. These advances are secured by pledges of investment securities totaling $17.0 million at June 30, 2012.

There were no overnight borrowings at June 30, 2012 and December 31, 2011. Overnight borrowings from the FHLB averaged $19.6 million with a weighted average interest rate of 0.37 percent for the six months ended June 30, 2012.

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

(In thousands)     
2012  $4,233 
2013   218 
2014    
2015    
2016    
Over 5 years   12,000 
  Total  $16,451 

25
6. BUSINESS SEGMENTS

The Corporation assesses its results among two operating segments, Banking and PGB Trust and Investments. 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. 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.

Banking

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.