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Peapack-Gladstone Financial 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
form10q-117431_pgfc.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549




FORM 10-Q

(MARK ONE)

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2011

OR

[   ]           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 o       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, 2011:
8,825,882

 
1

 


PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1  FINANCIAL INFORMATION




PART 2  OTHER INFORMATION





Item 1.  Financial Statements (Unaudited)

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)

   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and due from banks
  $ 8,678     $ 6,490  
Federal funds sold
    100       100  
Interest-earning deposits
    51,606       56,097  
   Total cash and cash equivalents
    60,384       62,687  
                 
Investment securities held to maturity (approximate fair
               
   value $140,589 in 2011 and $138,438 in 2010)
    140,572       140,277  
Securities available for sale
    249,837       275,076  
FHLB and FRB Stock, at cost
    4,704       4,624  
                 
Loans Held for Sale, at fair value
    1,813       -  
                 
Loans
    965,757       932,497  
   Less:  Allowance for loan losses
    14,056       14,282  
   Net Loans
    951,701       918,215  
                 
Premises and equipment
    33,098       33,820  
Other real estate owned
    3,000       4,000  
Accrued interest receivable
    4,391       4,231  
Bank owned life insurance
    27,537       27,074  
Deferred tax assets, net
    24,689       25,725  
Other assets
    9,014       9,696  
     TOTAL ASSETS
  $ 1,510,740     $ 1,505,425  
                 
LIABILITIES
               
Deposits:
               
   Noninterest-bearing demand deposits
  $ 238,788     $ 228,764  
   Interest-bearing deposits:
               
     Checking
    322,801       290,322  
     Savings
    86,828       80,799  
     Money market accounts
    507,159       524,449  
     Certificates of deposit $100,000 and over
    73,186       79,311  
     Certificates of deposit less than $100,000
    132,949       147,901  
Total deposits
    1,361,711       1,351,546  
Federal Home Loan Bank advances
    20,905       24,126  
Capital lease obligation
    6,426       6,304  
Accrued expenses and other liabilities
    6,489       5,733  
     TOTAL LIABILITIES
    1,395,531       1,387,709  
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock (no par value; authorized 500,000 shares; issued 14,341
               
   shares at June 30, 2011 and 21,513 at December 31, 2010;
               
   liquidation preference of $1,000 per share)
    13,898       20,746  
Common stock (no par value; $0.83 per share; authorized 21,000,000
               
   shares; issued shares, 9,234,060 at June 30, 2011 and 9,199,038
               
   at December 31, 2010; outstanding shares 8,825,882 at June
               
   30, 2011 and 8,790,860 at December 31, 2010)
    7,679       7,650  
Surplus
    95,973       95,586  
Treasury stock at cost, 408,178 shares at June 30, 2011 and
               
   408,178 shares at December 31, 2010
    (8,988 )     (8,988 )
Retained earnings
    7,331       4,693  
Accumulated other comprehensive loss, net of income tax
    (684 )     (1,971 )
     TOTAL SHAREHOLDERS’ EQUITY
    115,209       117,716  
     TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
  $ 1,510,740     $ 1,505,425  

See accompanying notes to consolidated financial statements.


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,
 
   
2011
   
2010
   
2011
   
2010
 
INTEREST INCOME
                       
Interest and fees on loans
  $ 11,655     $ 12,756     $ 23,385     $ 25,731  
Interest on investment securities:
                               
   Taxable
    606       542       1,217       1,056  
   Tax-exempt
    91       123       184       264  
Interest on securities available for sale:
                               
   Taxable
    1,603       1,862       3,261       3,858  
   Tax-exempt
    119       139       240       279  
Interest on loans held for sale
    5       -       21       -  
Interest-earning deposits
    20       28       48       52  
   Total interest income
    14,099       15,450       28,356       31,240  
INTEREST EXPENSE
                               
Interest on savings and interest-bearing deposit
                               
   accounts
    925       1,518       1,904       3,120  
Interest on certificates of deposit over $100,000
    268       419       553       924  
Interest on other time deposits
    445       684       935       1,496  
Interest on borrowed funds
    198       291       401       615  
Interest on capital lease obligation
    80       51       159       51  
   Total interest expense
    1,916       2,963       3,952       6,206  
   NET INTEREST INCOME BEFORE
                               
   PROVISION FOR LOAN LOSSES
    12,183       12,487       24,404       25,034  
Provision for loan losses
    2,000       2,750       4,000       5,150  
                                 
   NET INTEREST INCOME AFTER
                               
   PROVISION FOR LOAN LOSSES
    10,183       9,737       20,404       19,884  
OTHER INCOME
                               
Trust department income
    2,829       2,686       5,547       5,050  
Service charges and fees
    755       691       1,458       1,348  
Bank owned life insurance
    261       219       512       416  
Securities gains/(losses), net
    277       2       473       2  
Other income
    202       188       503       443  
   Total other income
    4,324       3,786       8,493       7,259  
OPERATING EXPENSES
                               
Salaries and employee benefits
    5,817       5,704       11,790       11,413  
Premises and equipment
    2,386       2,588       4,736       4,960  
FDIC insurance expense
    397       552       1,001       1,138  
Other expenses
    2,435       2,161       4,751       4,024  
   Total operating expenses
    11,035       11,005       22,278       21,535  
INCOME BEFORE INCOME TAX EXPENSE
    3,472       2,518       6,619       5,608  
Income tax expense
    1,304       762       2,310       1,727  
   NET INCOME
    2,168       1,756       4,309       3,881  
Dividends on preferred stock and accretion
    219       324       789       1,034  
    NET INCOME AVAILABLE TO COMMON
                               
    SHAREHOLDERS
  $ 1,949     $ 1,432     $ 3,520     $ 2,847  
EARNINGS PER COMMON SHARE
                               
Basic
  $ 0.22     $ 0.16     $ 0.40     $ 0.32  
Diluted
  $ 0.22     $ 0.16     $ 0.40     $ 0.32  
WEIGHTED AVERAGE NUMBER OF COMMON
                               
SHARES OUTSTANDING
                               
Basic
    8,824,169       8,783,615       8,822,125       8,781,203  
Diluted
    8,824,421       8,785,245       8,822,626       8,781,733  
 
 
See accompanying notes to consolidated financial statements.


PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30, 2011


                                 
Accumulated
       
                                 
Other
       
(In Thousands, Except
 
Preferred
   
Common
         
Treasury
   
Retained
   
Comprehensive
       
  Per Share Data)
 
Stock
   
Stock
   
Surplus
   
Stock
   
Earnings
   
Income/(Loss)
   
Total
 
                                           
Balance at January 1, 2011
                                         
  8,790,860 Common Shares
                                         
  Outstanding
  $ 20,746     $ 7,650     $ 95,586     $ (8,988 )   $ 4,693     $ (1,971 )   $ 117,716  
                                                         
Comprehensive Income:
                                                       
  Net Income 2011
                                    4,309               4,309  
  Unrealized  Holding Gains on
                                                       
     Securities Arising During the
                                                       
     Period, Net of Amortization
                                                       
     (Net of Income Tax
                                                       
     Expense of $1,116)
                                            1,594          
  Less: Reclassification
                                                       
    Adjustment for Gain
                                                       
    Included in Net Income (Net
                                                       
    of Income Tax Expense
                                                       
    of $166)
                                            307          
Net Unrealized Holding
                                                       
   Gains on Securities Arising
                                                       
   During the Period (Net of
                                                       
   Income Tax Expense
                                                       
   of $950)
                                            1,287       1,287  
Total Comprehensive Income
                                                    5,596  
Issuance of Restricted Stock
                                                       
28,732 shares
            24       (24 )                             -  
Amortization of Restricted Stock
                    124                               124  
Redemption of Preferred Stock
                                                       
   7,172 shares
    (7,172 )                                             (7,172 )
Accretion of Discount on
                                                       
   Preferred Stock
    324                               (324 )             -  
Cash Dividends Declared on
                                                       
   Common Stock
                                    (882 )             (882 )
   ($0.05 per share)
                                                       
Cash Dividends Declared on
                                                       
   Preferred Stock
                                    (465 )             (465 )
Common Stock Option Expense
                    212                               212  
Sales of Shares (Dividend
                                                       
   Reinvestment Program),
                                                       
   6,290 shares
            5       75                               80  
Balance at June 30, 2011
                                                       
  8,825,882 Common Shares
                                                       
  Outstanding
  $ 13,898     $ 7,679     $ 95,973     $ (8,988 )   $ 7,331     $ (684 )   $ 115,209  
                                                         



PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income:
  $ 4,309     $ 3,881  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    1,432       1,695  
Amortization of premium and accretion of discount on securities, net
    1,390       69  
Amortization of restricted stock
    124       76  
Provision for loan losses
    4,000       5,150  
Provision for deferred taxes
    445       (559 )
Stock-based compensation
    212       151  
Gains on security sales, available for sale
    (473 )     (2 )
Loans originated for sale
    (15,616 )     (25,965 )
Proceeds from sales of loans
    14,050       26,238  
Gains on loans sold
    (247 )     (273 )
Gains on sale of other real estate owned
    (47 )     (15 )
Increase in cash surrender value of life insurance, net
    (463 )     (380 )
Increase in accrued interest receivable
    (153 )     (89 )
Decrease/(increase) in other assets
    324       (787 )
(Decrease)/increase in accrued expenses and other liabilities
    (284 )     8,810  
   NET CASH PROVIDED BY OPERATING ACTIVITIES
    9,003       18,000  
INVESTING ACTIVITIES:
               
Proceeds from maturities of investment securities held to maturity
    12,761       9,205  
Proceeds from maturities of securities available for sale
    30,320       19,094  
Proceeds from calls of investment securities held to maturity
    10,105       11,458  
Proceeds from calls of securities available for sale
    40,000       99,326  
Proceeds from sales of securities available for sale
    33,246       1,763  
Purchase of investment securities held to maturity
    (23,421 )     (32,837 )
Purchase of securities available for sale
    (81,627 )     (98,296 )
Net (increase)/decrease in loans
    (31,723 )     19,795  
Proceeds from sales of other real estate owned
    1,238       335  
Purchases of premises and equipment
    (710 )     (2,483 )
   NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES
    (9,811 )     27,360  
FINANCING ACTIVITIES:
               
Net increase/(decrease) in deposits
    10,165       (38,314 )
Repayments of Federal Home Loan Bank advances
    (3,221 )     (8,157 )
Redemption of preferred stock
    (7,172 )     (7,172 )
Cash dividends paid on preferred stock
    (465 )     (588 )
Cash dividends paid on common stock
    (882 )     (878 )
Sales of shares (DRIP Program)
    80       69  
   NET CASH USED IN FINANCING ACTIVITIES
    (1,495 )     (55,040 )
Net decrease in cash and cash equivalents
    (2,303 )     (9,680 )
Cash and cash equivalents at beginning of period
    62,687       79,972  
Cash and cash equivalents at end of period
  $ 60,384     $ 70,292  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
   Interest
  $ 3,970     $ 6,560  
   Income taxes
    2,208       3,120  
Transfer of loans to other real estate owned
    191       170  
Acquisition of leased premises
    -       6,097  
Security purchases settled in subsequent period
    1,162       -  
                 
See accompanying notes to consolidated financial statements.
               


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 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, 2010 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.


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 or 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.



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 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 non-accrual 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 reasonably assured, loans are returned to accrual status. Mortgage loans are generally charged off when the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Corporation’s loans are secured by real estate in the State of New Jersey.


The 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 collection, such as through a foreclosure action, then they are evaluated for impairment on an individual basis and the loan is reported, net, at the fair value of the collateral less estimated disposition costs.



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 un-impaired loans 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 – comprised of conventional 1-4 family residential mortgage loans and commercial loans or other consumer purpose loans secured by a residential mortgage.
 
 
b)
Home equity lines of credit
 
 
c)
Junior lien loan on residence – comprised of loans secured by junior liens on residences of which the majority were for consumer purposes and the remaining were for commercial business purposes.
 
 
d)
Multifamily property – comprised of loans secured by apartment buildings.
 
 
e)
Owner-occupied commercial real estate – comprised of loans secured by primary commercial mortgages where the borrower used all or a majority of the property to conduct its own business or the business of a related entity.
 
 
f)
Investment commercial real estate – comprised of loans secured by primary commercial mortgages where all or most of the property was not being used by the borrower or a related entity. These properties consist of office buildings, retail stores, warehouses and mixed-use properties.
 
 
g)
Commercial and industrial – comprised of loans to business entities which were secured by the assets of the business.
 
 
h)
Commercial construction – comprised of construction loans for the development of commercial projects such as office buildings, retail shopping centers and apartments.
 
 
i)
Consumer and other – comprised of consumer loans, loans to government entities and loans to not-for-profit entities.



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.

For the three months ended June 30, 2011 and 2010, the Corporation recorded total compensation cost for stock options of $105 thousand and $76 thousand respectively, with a recognized tax benefit of $18 thousand for the quarter ended June 30, 2011 and $12 thousand for the June 30, 2010 quarter. The Corporation recorded total compensation cost for stock options for the six months ended June 30, 2011 and 2010, of $212 thousand and $151 thousand, respectively, with a recognized tax benefit of $36 thousand for the six months ended June 30, 2011 and $25 thousand for the six months ended June 30, 2010.

There was approximately $823 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Corporation’s stock incentive plans at June 30, 2011. 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, 2011 were as follows:

   
Number
   
Exercise
   
Weighted
   
Aggregate
 
   
of
   
Price
   
Average
   
Intrinsic
 
(Dollars in thousands except share data)
 
Shares
   
Per Share
   
Exercise Price
   
Value
 
Balance, January 1, 2011
    578,763     $ 10.83-$31.43     $ 23.75        
Granted
    58,400       12.79-13.62       13.52        
Expired
    (66,875 )     12.97-27.51       15.78        
Forfeited
    (2,791 )     13.00-27.00       15.21        
Balance, June 30, 2011
    567,497     $ 10.83-$31.43     $ 23.70     $ 0  
Vested and Expected to Vest (1)
    541,962     $ 10.83-$31.43     $ 24.06     $ 3  
Exercisable at June 30, 2011
    417,293     $ 11.05-$31.43     $ 26.39     $ 0  

 
(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 2011 and the exercise price, multiplied by the number of in-the-money options).  The Corporation’s closing stock price on June 30, 2011 was $11.78; therefore, there was almost no intrinsic value in the stock options outstanding at that date.

There were no stock options exercised during the six months ended June 30, 2011 or 2010.

The per share weighted-average fair value of stock options granted during the first six months of 2011 and 2010 for all plans was $3.92 and $7.89, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

   
2011
 
2010
Dividend yield
    1.51 %     1.30 %
Expected volatility
    30 %     72 %
Expected life
 
7 years
 
7 years
Risk-free interest rate
    2.04 %     2.94 %



In January 2011 and 2010, the Corporation issued 28,732 and 55,993 restricted stock awards, respectively, at a fair value equal to the market price of the Corporation’s common stock at the date of the grant. The awards fully vest on the fifth anniversary of the grant date. The Corporation recorded total compensation cost for restricted stock awards of $66 thousand for the second quarter of 2011 and $37 thousand for the same quarter of 2010.  For the six months ended June 30, 2011 and 2010, the Corporation recorded total compensation cost for restricted stock awards of $124 thousand and $75 thousand respectively.

As of June 30, 2011, there was approximately $867 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 1.9 years.


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In Thousands, except per share data)
 
2011
   
2010
   
2011
   
2010
 
                         
Net Income to Common Shareholders
  $ 1,949     $ 1,432     $ 3,520     $ 2,847  
                                 
Basic Weighted-Average Common
                               
  Shares Outstanding
    8,824,169       8,783,615       8,822,125       8,781,203  
Plus:  Common Stock Equivalents
    252       1,630       501       530  
Diluted Weighted-Average Common
                               
  Shares Outstanding
    8,824,421       8,785,245       8,822,626       8,881,733  
Net Income Per Common Share
                               
Basic
  $ 0.22     $ 0.16     $ 0.40     $ 0.32  
Diluted
    0.22       0.16       0.40       0.32  

Stock options and warrants with an exercise price below the Corporation’s market price equal to 717,793 and 674,584 shares were not included in the computation of diluted earnings per share in the second quarters of 2011 and 2010, respectively, because they were antidilutive to the earnings per share calculation.  Stock options and warrants with an exercise price below the Corporation’s market price equal to 717,793 and 729,370 shares were not included in the computation of diluted earnings per share in the six months ended June 30, 2011 and 2010, respectively, because they were antidilutive to the earnings per share calculation.


The Corporation is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2007 or by New Jersey tax authorities for years prior to 2006.

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, 2011.



Comprehensive Income:  >Comprehensive income consists of net income and the change during the period in the Corporation’s net unrealized gains and losses on securities available for sale during the applicable period of time less adjustments for realized gains and losses, net amortization of the unrealized loss on securities transferred to held to maturity from available for sale and accretion of the non-credit component on certain held to maturity securities with other-than-temporary impairment charges in previous periods. Total comprehensive income for the second quarter of 2011 was $3.5 million as compared to total comprehensive income of $2.6 million for the same quarter in 2010. Total comprehensive income for the six months ended June 30, 2011 was $5.6 million and the total comprehensive income for the same period in 2010 was $4.8 million.

Reclassification:  >Certain reclassifications have been made in the prior periods’ financial statements in order to conform to the 2011 presentation.

 
2.  INVESTMENT SECURITIES HELD TO MATURITY

A summary of amortized cost and approximate fair value of investment securities held to maturity included in the consolidated statements of condition as of June 30, 2011 and December 31, 2010 follows:

   
June 30, 2011
 
         
Gross
   
Gross
   
Approximate
 
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
(In Thousands)
 
Amount
   
Gains
   
Losses
   
Value
 
U.S. Government-Sponsored Entities
  $ 52,387     $ 17     $ (103 )   $ 52,301  
Mortgage-Backed Securities -
                               
   Residential
    60,180       1,186       (167 )     61,199  
State and Political Subdivisions
    18,899       140       -       19,039  
Trust Preferred Pooled Securities
    9,106       -       (1,056 )     8,050  
    Total
  $ 140,572     $ 1,343     $ (1,326 )   $ 140,589  

   
December 31, 2010
 
         
Gross
   
Gross
   
Approximate
 
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
(In Thousands)
 
Amount
   
Gains
   
Losses
   
Value
 
U.S. Government-Sponsored Entities
  $ 45,485     $ 11     $ (790 )   $ 44,706  
Mortgage-Backed Securities -
                               
   Residential
    67,745       921       (494 )     68,172  
State and Political Subdivisions
    17,671       184       (31 )     17,824  
Trust Preferred Pooled Securities
    9,376       -       (1,640 )     7,736  
    Total
  $ 140,277     $ 1,116     $ (2,955 )   $ 138,438  



The following tables present the Corporation’s investment securities held to maturity with continuous unrealized losses and the approximate fair value of these investments as of June 30, 2011 and December 31, 2010.

   
June 30, 2011
 
         
Duration of Unrealized Loss
       
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Approximate
         
Approximate
         
Approximate
       
   
Fair
   
Unrecognized
   
Fair
   
Unrecognized
   
Fair
   
Unrecognized
 
(In Thousands)
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
U.S. Government-
                                   
  Sponsored
                                   
  Entities
  $ 40,995     $ (103 )   $ -     $ -     $ 40,995     $ (103 )
Mortgage-Backed
                                               
  Securities -
                                               
  Residential
    12,142       (167 )     -       -       12,142       (167 )
Trust Preferred
                                               
  Pooled Securities
    -       -       2,210       (1,056 )     2,210       (1,056 )
Total
  $ 53,137     $ (270 )   $ 2,210     $ (1,056 )   $ 55,347     $ (1,326 )

   
December 31, 2010
 
         
Duration of Unrealized Loss
       
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Approximate
         
Approximate
         
Approximate
       
   
Fair
   
Unrecognized
   
Fair
   
Unrecognized
   
Fair
   
Unrecognized
 
(In Thousands)
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
U.S. Government-
                                   
  Sponsored
                                   
  Entities
  $ 39,707     $ (790 )   $ -     $ -     $ 39,707     $ (790 )
Mortgage-Backed
                                               
  Securities -
                                               
  Residential
    32,553       (494 )     -       -       32,553       (494 )
State & Political
                                               
  Subdivisions
    9,667       (31 )     -       -       9,667       (31 )
Trust Preferred
                                               
  Pooled Securities
    -       -       1,782       (1,640 )     1,782       (1,640 )
Total
  $ 81,927     $ (1,315 )   $ 1,782     $ (1,640 )   $ 83,709     $ (2,955 )

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 believes in most cases it is more appropriate to estimate fair value using discounted cash flow analysis. 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 fair value 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 valuation.  The modeling process and related assumptions were similar to the process and related assumptions employed as of December 31, 2008. In 2010, as a result of this process additional impairment charges of $581 thousand were recorded on three trust preferred pooled securities for the year ended December 31, 2010. No additional impairment charges were recorded for the quarter ended June 30, 2011.

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.

At June 30, 2011, other-than-temporary impairment recognized in accumulated other comprehensive income totaled $3.0 million.

Management has determined that any unrecognized losses on the U.S. Government-sponsored entities and mortgage-backed securities held to maturity at June 30, 2011, are temporary and due to interest rate fluctuations and/or volatile market conditions, rather than the creditworthiness of the issuers.  The Corporation monitors creditworthiness of issuers periodically, including issuers of trust preferred securities on a quarterly basis.  The Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

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, 2011 and December 31, 2010 follows:

   
June 30, 2011
 
         
Gross
   
Gross
   
Approximate
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In Thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Government-Sponsored
                       
  Entities
  $ 7,299     $ 14     $ (19 )   $ 7,294  
Mortgage-Backed Securities -
                               
   Residential
    219,205       4,945       (182 )     223,968  
State and Political Subdivisions
    13,570       422       (2 )     13,990  
Other Securities
    4,499       14       (565 )     3,948  
Marketable Equity Securities
    593       45       (1 )     637  
Total
  $ 245,166     $ 5,440     $ (769 )   $ 249,837  

   
December 31, 2010
 
         
Gross
   
Gross
   
Approximate
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
(In Thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Treasury and U.S.
                       
  Government-Sponsored
                       
  Entities
  $ 50,926     $ 209     $ -     $ 51,135  
Mortgage-Backed Securities -
                               
  Residential
    199,099       4,179       (1,188 )     202,090  
State and Political Subdivisions
    16,418       243       (48 )     16,613  
Other Securities
    5,499       -       (999 )     4,500  
Marketable Equity Securities
    680       58       -       738  
Total
  $ 272,622     $ 4,689     $ (2,235 )   $ 275,076  




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, 2011 and December 31, 2010.
 
   
June 30, 2011
 
         
Duration of Unrealized Loss
       
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Approximate
         
Approximate
         
Approximate
       
   
Fair
   
Unrealized
   
Fair
   
Unrealized