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 March 31, 2006
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.)
158 Route 206 North,
Gladstone, New Jersey 07934
(Address of principal executive offices, including zip code)
(908) 234-0700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
--------- ---------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer ___ Accelerated filer _X_ Non-accelerated filer___
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes__ No _X_.
Number of shares of Common Stock outstanding as of May 1, 2006:
8,270,252
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition March 31, 2006 and
December 31, 2005 Page 3
Consolidated Statements of Income for the three months ended
March 31, 2006 and 2005 Page 4
Consolidated Statements of Changes in Shareholders' Equity for the
three months ended March 31, 2006 and 2005 Page 5 Consolidated
Statements of Cash Flows for the three months ended March 31, 2006
and 2005 Page 6
Notes to Consolidated Financial Statements Page 7
Item 1A Risk Factors Page 11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations Page 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 17
Item 4 Controls and Procedures Page 18
PART 2 OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds Page 18
Item 6 Exhibits Page 19
2
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
March 31, December 31,
2006 2005
------------ ------------
ASSETS
Cash and due from banks $ 24,012 $ 19,573
Federal funds sold 1,437 2,631
Interest-earning deposits 1,583 1,295
------------ ------------
Total cash and cash equivalents 27,032 23,499
Investment Securities Held to Maturity (approximate
market value $70,715 in 2006 and $77,286 in 2005) 71,771 78,084
Securities Available for Sale 351,742 341,584
Loans:
Loans secured by real estate 749,770 728,122
Other loans 39,717 40,351
------------ ------------
Total loans 789,487 768,473
Less: Allowance for loan losses 6,414 6,378
------------ ------------
Loans, net 783,073 762,095
Premises and equipment, net 22,872 21,412
Accrued interest receivable 5,339 4,828
Cash surrender value of life insurance 18,135 17,957
Other assets 7,477 5,924
------------ ------------
TOTAL ASSETS $ 1,287,441 $ 1,255,383
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 183,791 $ 185,854
Interest-bearing deposits:
Checking 145,846 176,175
Savings 87,934 90,744
Money market accounts 298,835 281,068
Certificates of deposit over $100,000 105,945 93,903
Certificates of deposit less than $100,000 223,848 214,252
------------ ------------
Total deposits 1,046,199 1,041,996
Short-Term Borrowings 103,000 77,500
Long-Term Debt 31,275 31,705
Accrued expenses and other liabilities 7,895 5,027
------------ ------------
TOTAL LIABILITIES 1,188,369 1,156,228
------------ ------------
SHAREHOLDERS' EQUITY
Common stock (no par value; stated value $0.83 per share;
authorized 20,000,000 shares; issued shares, 8,479,942 at
March 31, 2006 and 8,473,718 at December 31, 2005;
outstanding shares, 8,270,155 at March 31, 2006 and
8,284,715 at December 31, 2005) 7,066 7,061
Surplus 89,090 88,973
Treasury Stock at cost, 209,787 shares in 2006
and 189,003 shares in 2005 (4,590) (4,022)
Retained Earnings 12,187 10,100
Accumulated other comprehensive loss, net of income tax (4,681) (2,957)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 99,072 99,155
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,287,441 $ 1,255,383
============ ============
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
March 31,
2006 2005
---------- ----------
INTEREST INCOME
Interest and fees on loans $ 11,248 $ 8,274
Interest on investment securities:
Taxable 298 498
Tax-exempt 369 276
Interest on securities available for sale:
Taxable 3,767 3,505
Tax-exempt 87 90
Interest-earning deposits 9 10
Interest on federal funds sold 16 3
---------- ----------
Total interest income 15,794 12,656
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts 2,492 1,559
Interest on certificates of deposit over $100,000 2,084 498
Interest on other time deposits 1,014 1,135
Interest on borrowed funds 1,628 437
---------- ----------
Total interest expense 7,218 3,629
---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 8,576 9,027
Provision for loan losses 39 131
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,537 8,896
---------- ----------
OTHER INCOME
Trust department income 2,245 2,013
Service charges and fees 472 465
Bank owned life insurance 204 197
Securities gains 51 298
Other income 214 177
---------- ----------
Total other income 3,186 3,150
OTHER EXPENSES
Salaries and employee benefits 3,859 3,652
Premises and equipment 1,725 1,566
Other expense 1,534 1,356
---------- ----------
Total other expenses 7,118 6,574
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 4,605 5,472
Income tax expense 1,359 1,769
---------- ----------
NET INCOME $ 3,246 $ 3,703
========== ==========
EARNINGS PER SHARE
Basic $ 0.39 $ 0.45
Diluted $ 0.39 $ 0.44
Average basic shares outstanding 8,279,156 8,261,692
Average diluted shares outstanding 8,397,319 8,405,073
See accompanying notes to consolidated financial statements.
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2006 2005
-------- --------
Balance, Beginning of Period $ 99,155 $ 94,669
Comprehensive income:
Net Income 3,246 3,703
Unrealized holding losses on securities
arising during the period, net of tax (1,691) (3,182)
Less: Reclassification adjustment for gains
included in net income, net of tax 33 194
-------- --------
(1,724) (3,376)
-------- --------
Total Comprehensive income 1,522 327
Common Stock Options Exercised 91 243
Purchase of Treasury Stock (568) (209)
Cash Dividends Declared (1,158) (909)
Stock-Based Compensation Expense 14 --
Tax Benefit on Disqualifying and Nonqualifying 16 150
Exercise of Stock Options
-------- --------
Balance, March 31, $ 99,072 $ 94,271
======== ========
See accompanying notes to consolidated financial statements.
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2006 2005
-------- --------
OPERATING ACTIVITIES:
Net Income: $ 3,246 $ 3,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 508 474
Amortization of premium and accretion of
discount on securities, net 151 310
Provision for loan losses 39 131
Gains on security sales (51) (298)
Gain on loans sold (1) (7)
Gain on disposal of fixed assets -- (10)
Increase in cash surrender value of life insurance, net (178) (173)
Increase in accrued interest receivable (511) (997)
Increase in other assets (441) (755)
Increase in accrued expenses and other liabilities 2,862 2,701
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,624 5,079
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 6,339 7,109
Proceeds from maturities of securities available
for sale 14,241 8,173
Proceeds from calls of investment securities -- 3,185
Proceeds from calls of securities available for sale -- 2,000
Proceeds from sales of securities available for sale 228 1,489
Purchase of investment securities (64) (9,073)
Purchase of securities available for sale (27,517) (33,845)
Proceeds from sales of loans 226 607
Purchase of loans (6,448) (28,972)
Net increase in loans (14,794) (13,630)
Purchases of premises and equipment (1,968) (353)
Disposal of premises and equipment -- 21
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (29,757) (63,289)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 4,203 51,016
Net increase in short-term borrowings 25,500 16,750
Repayments of long-term debt (430) (417)
Stock-based compensation 14 --
Cash dividends paid (1,160) (906)
Tax benefit on stock option exercises 16 150
Exercise of stock options 91 243
Purchase of Treasury Stock (568) (209)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,666 66,627
-------- --------
Net increase in cash and cash equivalents 3,533 8,417
Cash and cash equivalents at beginning of period 23,499 16,518
-------- --------
Cash and cash equivalents at end of period $ 27,032 $ 24,935
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,986 $ 3,469
Income taxes -- 943
See accompanying notes to consolidated financial statements.
6
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, 2005 for Peapack-Gladstone
Financial Corporation (the "Corporation").
Principles of Consolidation: The Corporation considers that all adjustments (all
of which are normal recurring accruals) necessary for a fair presentation of the
statement of the financial position and results of operations in accordance with
U.S. generally accepted accounting principles for these periods have been made.
Results for such interim periods are not necessarily indicative of results for a
full year.
The consolidated financial statements of Peapack-Gladstone Financial Corporation
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiary, Peapack-Gladstone Bank. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level considered adequate to provide for probable loan losses inherent in the
Corporation's loan portfolio. The allowance is based on management's evaluation
of the loan portfolio considering, among other things, current economic
conditions, the volume and nature of the loan portfolio, historical loan loss
experience, and individual credit situations. The allowance is increased by
provisions charged to expense and reduced by charge-offs net of recoveries.
Stock Option Plans: The Corporation has incentive and non-qualified stock option
plans that allow the granting of shares of the Corporation's common stock to
employees and non-employee directors. The options granted under these plans are
exercisable at a price equal to the fair market value of common stock on the
date of grant and expire not more than ten years after the date of grant. Stock
options may vest during a period of up to five years after the date of grant.
As of January 1, 2006, the Corporation adopted the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement No. 123
(Revised 2004), Share-Based Payment, (Statement 123R), under the modified
prospective transition method. Statement 123R requires public companies to
recognize compensation expense related to stock-based compensation awards over
the period during which an employee is required to provide service for the
award. Under the modified prospective transition method, the fair value
recognition provisions apply only to new awards or awards modified after January
1, 2006. Additionally, the fair value of existing unvested awards at the date of
adoption is recorded in salaries and benefits expense over the remaining
requisite service period. Results from prior periods have not been restated. The
following table represents the impact of the adoption of Statement 123R on the
Corporation's financial statements for the quarter ended March 31, 2006.
Under Under
(Dollars In Thousands Except Share Data) Statement 123R APB 25 Difference
------------------------------------------ ------------------- ------------ --------------
Net income before income tax expense $ 4,605 $ 4,619 $ 14
Net income 3,246 3,260 14
Earnings per share - Basic $ 0.39 $ 0.39 $ --
Earnings per share - Diluted 0.39 0.39 --
7
Prior to January 1, 2006, the Corporation had accounted for its stock option
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25 (APB 25) and related Interpretations. No stock-based
compensation cost was reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of their underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share for the first quarter of 2005 as if the
Corporation had applied the fair value recognition provisions of Statement No.
123R, to stock-based employee compensation in 2005:
Three Months Ended
(Dollars In Thousands Except Share Data) March 31, 2005
------------------
Net Income:
As Reported $3,703
Less: Total Stock-Based Compensation Expense determined under the
Fair Value Based Method on all Stock Options, Net of Related Tax Effects 98
------
Pro Forma $3,605
Earnings Per Share - As Reported
Basic $ 0.45
Diluted 0.44
Earnings Per Share - Pro Forma
Basic $ 0.44
Diluted 0.43
As of March 31, 2006, there was approximately $192 thousand of unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Corporation's stock incentive plans. That cost is expected to
be recognized over a weighted average period of 1.7 years.
For the Corporation's stock option plans for employees, changes in options
outstanding during the first quarter of 2006 were as follows:
Number Exercise Weighted Aggregate
of Price Average Intrinsic
(Dollars In Thousands Except Share Data) Shares Per Share Exercise Price Value
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 441,363 $11.85-$32.14 $22.61
Granted 1,000 27.90 27.90
Exercised (2,515) 11.85 11.85
Forfeited (22) 27.36 27.36
-------------------------------------------------
Balance, March 31, 2006 439,826 $11.85-$32.14 $22.54 $2,047
==================================================================
Options Exercisable, March 31, 2006 404,050 $2,035
==================================================================
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the first quarter of 2006 and the exercise price,
multiplied by the number of in the money options).
The aggregate intrinsic value of options exercised during the quarters ended
March 31, 2006 and 2005 was $40 thousand and $304 thousand, respectively.
8
The following table summarizes information about stock options outstanding at
March 31, 2006.
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
--------------------------------------------------------------------
< $12.00 65,547 1.4 years 65,547
12.01 - 16.05 17,380 4.9 years 16,280
16.06 - 19.20 120,449 4.0 years 112,690
19.21 - 26.00 2,589 6.8 years 1,301
26.01 - 28.90 217,881 7.8 years 195,996
28.91 - 32.14 15,980 8.5 years 12,236
--------------------------------------------------------------------
$22.54 * 439,826 5.6 years 404,050
====================================================================
* Weighted average exercise price
The Corporation also has non-qualified stock option plans for non-employee
directors. Changes in options outstanding during the first quarter of 2006 were
as follows:
Number Exercise Weighted Aggregate
of Price Average Intrinsic
(Dollars In Thousands Except Share Data) Shares Per Share Exercise Price Value
---------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 197,730 $15.68-$28.89 $22.91
Exercised (3,709) 15.68-17.53 16.62
--------------------------------------------------------------
Balance, March 31, 2006 194,021 $15.68-$28.89 $23.03 $826
==============================================================
Options Exercisable, March 31, 2006 194,021 $826
==============================================================
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the first quarter of 2006 and the exercise price,
multiplied by the number of in the money options).
The aggregate intrinsic value of options exercised during the quarters ended
March 31, 2006 and 2005 was $40 thousand and $367 thousand, respectively.
The following table summarizes information about stock options outstanding at
March 31, 2006.
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
-------------------------------------------------------------------------
< $16.00 28,750 4.9 years 28,750
16.01 - 20.00 66,272 2.2 years 66,272
20.01 - 28.89 98,999 8.0 years 98,999
-------------------------------------------------------------------------
$22.91 * 194,021 5.5 years 194,021
=========================================================================
* Weighted average exercise price
The per share weighted-average fair value of stock options granted during the
first quarters of 2006 and 2005 for all plans was $9.50 and $10.23,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions:
2006 2005
------------ -------------
Dividend yield 2.19% 1.63%
Expected volatility 40% 40%
Expected life 5 years 5 years
Risk-free interest rate 4.30% 3.71%
Earnings per Common Share - Basic and Diluted: Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings
9
per share includes any additional common shares as if all potentially dilutive
common shares were issued (i.e., stock options) utilizing the treasury stock
method.
Comprehensive Income: The difference between the Corporation's net income and
total comprehensive income for the three months ended March 31, 2006 and 2005
relates to the change in the net unrealized gains and losses on securities
available for sale during the applicable period of time less adjustments for
realized gains and losses. Total comprehensive income for the three months ended
March 31, 2006 and 2005 was $1.5 million and $327 thousand, respectively.
Reclassification: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2006 presentation.
2. LOANS
Loans outstanding as of March 31, consisted of the following:
(In Thousands) 2006 2005
-------- --------
Loans Secured by 1-4 Family $512,854 $402,732
Commercial Real Estate 205,397 164,399
Construction Loans 31,518 16,246
Commercial Loans 31,947 21,829
Consumer Loans 6,242 6,299
Other Loans 1,529 2,668
-------- --------
Total Loans $789,487 $614,173
======== ========
3. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $31.3
million and $33.0 million at March 31, 2006 and 2005, respectively, with a
weighted average interest rate of 3.56 percent and 3.42 percent, respectively.
These advances are secured by blanket pledges of certain 1-4 family residential
mortgages totaling $232.8 million at March 31, 2006. Advances totaling $23.0
million at March 31, 2006, have fixed maturity dates, while advances totaling
$8.3 million were amortizing advances with monthly payments of principal and
interest.
The final maturity dates of the advances are scheduled as follows:
(In Thousands)
2006 $ 6,000
2007 4,000
2008 1,297
2009 2,000
2010 10,949
Over 5 Years 7,029
-------
Total $31,275
=======
At March 31, 2006, short-term borrowings at FHLB, with an average maturity of 90
days or less, were $95.0 million, while the Corporation had no short-term
borrowings at March 31, 2005. The weighted average interest rate for short-term
borrowings for the quarter ended March 31, 2006 was 4.55 percent.
Overnight borrowings totaled $8.0 million at March 31, 2006 as compared to
overnight borrowings of $16.8 million at March 31, 2005. For the quarters ended,
March 31, 2006 and 2005, overnight borrowings at FHLB averaged $37.9 million
with a weighted average interest rate of 4.53 percent and $23.4 million with a
weighted average interest rate of 2.63 percent, respectively.
10
4. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of
its salaried employees.
The net periodic expense for the three months ended March 31 included the
following components:
Three Months Ended
March 31,
(In Thousands) 2006 2005
-------- --------
Service Cost $ 417 $ 351
Interest Cost 165 146
Expected Return on Plan Assets (224) (133)
Amortization of:
Net Loss 19 17
Unrecognized Prior Service Cost -- --
Unrecognized Remaining Net Assets (2) (2)
-------- --------
Net Periodic Benefit Cost $ 375 $ 379
======== ========
As previously disclosed in the financial statements for the year ended December
31, 2005, the Corporation expects to contribute $1.1 million to its pension plan
in 2006. As of March 31, 2006, contributions of $285 thousand had been made for
the current year.
ITEM 1A. Risk Factors
There were no material changes in the Corporation's risk factors during the
three months ended March 31, 2006 from the risk factors disclosed in Part I,
Item 1A of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2005.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL: The following discussion and analysis contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about
management's view of future interest income and net loans, management's
confidence and strategies and management's expectations about new and existing
programs and products, relationships, opportunities and market conditions. These
statements may be identified by such forward-looking terminology as "expect",
"look", "believe", "anticipate", "may", "will", or similar statements or
variations of such terms. Actual results may differ materially from such
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities:
o Unanticipated changes or no change in interest rates.
o Competitive pressure in the banking industry causes unanticipated
adverse changes.
o An unexpected decline in the economy of New Jersey causes customers
to default in the payment of their loans or causes loans to become
impaired.
o Enforcement of the Highlands Water Protection and Planning Act
o Loss of key managers or employees.
o Loss of major customers or failure to develop new customers.
o A decrease in loan quality and loan origination volume.
o An increase in non-performing loans.
o A decline in the volume of increase in trust assets or deposits.
The Corporation assumes no responsibility to update such forward-looking
statements in the future.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is based upon the
Corporation's consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires the Corporation to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements
included in the December 31, 2005 Annual Report on Form 10-K, contains a summary
of the Corporation's significant accounting policies. Management believes the
Corporation's policy with respect to the methodology for the determination of
the allowance for loan losses involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. Changes in
these judgments, assumptions or estimates could materially impact results of
operations. This critical policy and its application are periodically reviewed
with the Audit Committee and the Board of Directors.
The provision for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's provision
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the
Corporation's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
should New Jersey experience adverse economic conditions. Future adjustments to
the provision for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Corporation's control.
OVERVIEW: The Corporation realized earnings of $0.39 per diluted share in the
first quarter of 2006 as compared to $0.44 per diluted share for the first
quarter of 2005. Net income for the first quarters of 2006 and 2005 was $3.2
million and $3.7 million, respectively, a decline of $457 thousand, or 12.3
percent between these periods. Annualized return on average assets for the
quarter was 1.02 percent and annualized return on average equity was 13.04
percent for the first quarter of 2006.
EARNINGS ANALYSIS
NET INTEREST INCOME: Net interest income, on a tax-equivalent basis, before the
provision for loan losses, was $8.9 million for the first quarter of 2006 as
compared to $9.3 million for the first quarter of 2005, a decline of $386
thousand or 4.2 percent. The decline in net interest income during the quarter
was primarily the result of higher rates paid on deposits, higher deposit and
borrowings balances offset in part by higher loan volume and slightly higher
rates earned on loans. The net interest margin on a fully tax-equivalent basis
was 2.94 percent and 3.53 percent in the first quarter of 2006 and 2005,
respectively, a decrease of 59 basis points. Net interest income for the first
quarter of 2006, when compared to the fourth quarter of 2005, increased $62
thousand, or 0.7 percent, from $8.8 million on a tax-equivalent basis. This
increase marks the first sequential quarterly gain in net interest income since
the fourth quarter of 2004. The net interest margin, on a fully tax equivalent
basis declined from 3.02 percent in the fourth quarter of 2005, to 2.94 percent
in the first quarter of 2006, an eight basis point decrease.
For the first quarter of 2006, average interest-earning assets increased $159.8
million or 15.2 percent to $1.21 billion as compared to $1.05 billion for the
same quarter in 2005. This was due to the increase in average loan balances of
$182.0 million, or 30.7 percent, in the first quarter of 2006 compared to the
first quarter of 2005, offset in part by a decline in average investment
securities, federal funds sold and interest-earning deposits balances of $22.2
million, or 4.9 percent, in the first quarter of 2006 compared to the first
quarter of 2005. The increase in loan balances during the first quarter of 2006
was the result of growth in residential real estate, commercial mortgage,
commercial and installment loans. The majority of residential real estate loan
origination was due to the purchase of adjustable rate loans from a third-party
mortgage origination entity. All of the loans purchased are secured by
properties located in the State of New Jersey and many are within the Bank's
market area.
12
Average interest-bearing liabilities increased $145.5 million or 17.3 percent
for the quarter ended March 31, 2006, to $988.4 million from $842.9 million in
the same quarter in 2005. Average balances of money market accounts increased
$55.0 million or 24.1 percent and certificate of deposits rose $70.8 million or
28.1 percent. Average interest-bearing checking deposits declined $56.5 million
or 28.1 percent, while average savings deposits declined $17.3 million or 16.4
percent. In addition to opening two new branches since first quarter 2005,
several new deposit products have been introduced in the past year, which have
been well received by customers, including the Fed Flyer CD and the Fed Tracker
Money Market Account. For the first quarter of 2006, Federal Home Loan Bank
advances averaged $150.1 million as compared to $56.5 million for the first
quarter of 2005. Average non-interest-bearing demand deposits totaled $176.4
million and $166.3 million for the first quarters of 2006 and 2005,
respectively, a $10.1 million or 6.0 percent increase.
On a tax-equivalent basis, average interest rates earned on interest-earning
assets rose 41 basis points to 5.33 percent for the first quarter of 2006, from
4.92 percent for the first quarter of 2005. Average interest rates earned on
loans rose 23 basis points in the first quarter of 2006 to 5.81 percent from
5.58 percent for the same quarter in 2005, despite a flattened yield curve and
competitive pressure. For the quarter ended March 31, 2006, the average interest
rates earned on investment securities rose 40 basis points to 4.46 percent from
4.06 percent in the same period in 2005. The average interest rate paid on
interest-bearing liabilities in the first quarter of 2006 and 2005 was 2.92
percent and 1.72 percent, respectively, a 120 basis point increase. The average
rate paid on certificate of deposits in the first quarter of 2006 rose 125 basis
points to 3.84 percent while average rates paid on money market accounts
increased 154 basis points to 3.03 percent when compared with the same quarter
in 2005. While almost all categories of liabilities are paying higher rates,
certificates of deposit and money markets accounts grew at a faster pace due to
the growth in the adjustable-rate Fed Flyer CD and the Fed Tracker Money Market
products. Rates for these two products are tied to the Federal Funds rate, which
increased many times during 2005 and has continued to rise in 2006. The cost of
funds for the quarter increased to 2.48 percent as compared to 1.44 percent for
the first quarter of 2005. Net interest income also continues to be negatively
affected by the narrowing gap between short and long term interest rates despite
strong loan and deposit growth.
13
The following tables reflect the components of net interest income for the three
months ended March 31, 2006 and 2005:
Average Balance Sheet
Unaudited
Year-to-Date
(Tax-Equivalent Basis, Dollars in Thousands)
March 31, 2006 March 31, 2005
-------------- --------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
ASSETS:
Interest-Earning Assets:
Investments:
Taxable (1) $ 374,043 $ 4,065 4.35% $ 402,107 $ 4,003 3.98%
Tax-Exempt (1) (2) 57,635 752 5.22 51,741 603 4.66
Loans (2) (3) 775,015 11,261 5.81 593,063 8,280 5.58
Federal Funds Sold 1,479 16 4.33 1,772 11 2.48
Interest-Earning Deposits 904 9 4.03 622 3 1.93
----------- ------------------ ----------- ----------------
Total Interest-Earning Assets 1,209,076 $ 16,103 5.33% 1,049,305 $ 12,900 4.92%
----------- ------------------ ----------- ----------------
Noninterest-Earning Assets:
Cash and Due from Banks 21,893 20,968
Allowance for Loan Losses (6,501) (6,027)
Premises and Equipment 21,716 20,176
Other Assets 23,113 25,203
----------- -----------
Total Noninterest-Earning Assets 60,221 60,320
----------- -----------
Total Assets $ 1,269,297 $ 1,109,625
=========== ===========
LIABILITIES:
Interest-Bearing Deposits
Checking $ 144,319 $ 196 0.54% $ 200,839 $ 528 1.05%
Money Markets 283,022 2,146 3.03 228,065 849 1.49
Savings 88,395 150 0.68 105,701 182 0.69
Certificates of Deposit 322,649 3,098 3.84 251,807 1,633 2.59
----------- ------------------ ----------- ----------------
Total Interest-Bearing Deposits 838,385 5,590 2.67 786,412 3,192 1.62
Borrowings 150,054 1,628 4.34 56,536 437 3.09
----------- ------------------ ----------- ----------------
Total Interest-Bearing Liabilities 988,439 7,218 2.92 842,948 3,629 1.72
----------- ------------------ ----------- ----------------
Noninterest Bearing
Liabilities
Demand Deposits 176,398 166,339
Accrued Expenses and
Other Liabilities 4,893 4,833
----------- -----------
Total Noninterest-Bearing
Liabilities 181,291 171,172
Shareholders' Equity 99,567 95,505
----------- -----------
Total Liabilities and
Shareholders' Equity $ 1,269,297 $ 1,109,625
=========== ===========
Net Interest Income
(tax-equivalent basis) 8,885 9,271
Net Interest Spread 2.41% 3.20%
====== =====
Net Interest Margin (4) 2.94% 3.53%
====== =====
Tax equivalent adjustment (309) (244)
--------- ---------
Net Interest Income $ 8,576 $ 9,027
========= =========
(1) Average balances for available-for-sale securities are based on amortized
cost.
(2) Interest income is presented on a tax-equivalent basis using a 35 percent
federal tax rate.
(3) Loans are stated net of unearned income and include non-accrual loans.
(4) Net interest income on a tax-equivalent basis as a percentage of total
average interest-earning assets.
14
OTHER INCOME: For the first quarter of 2006, other income was $3.19 million as
compared to $3.15 million in the first quarter of 2005, an increase of $36
thousand or 1.1 percent. Income from PGB Trust and Investments, the Bank's trust
division, was $2.25 million, an increase of $232 thousand or 11.5 percent over
last year's first quarter. The market value of trust assets increased $112.7
million or 6.8 percent from the first quarter of 2005 to 2006. Other
non-interest income increased from $86 thousand in the first quarter of 2005 to
$107 thousand in the first quarter of 2006, in part due to nonrecurring
commercial and construction loan fees of $60 thousand.
Security gains of $51 thousand were recorded in the first quarter of 2006 as
compared to $298 thousand for the same quarter of 2005. The first quarter of
2005 included the recognition of a $249 thousand gain on the non-monetary
exchange of an equity security.
The following table presents the components of other income for the three months
ended March 31, 2006 and 2005:
Three Months Ended
March 31,
(In Thousands) 2006 2005
------ ------
Trust department income $2,245 $2,013
Service charges and fees 472 465
Bank owned life insurance 204 197
Other non-interest income 107 86
Safe deposit rental fees 63 61
Securities gains 51 298
Fees for other services 44 30
------ ------
Total other income $3,186 $3,150
====== ======
OTHER EXPENSES: For the first quarter of 2006, other expenses increased $544
thousand or 8.3 percent to $7.12 million compared to $6.57 million for the first
quarter of 2005. During the first quarter of 2006, salaries and benefits expense
was $3.86 million as compared to $3.65 million for the first quarter of 2005, an
increase of $207 thousand or 5.7 percent. Normal salary increases, branch
expansion, higher group health insurance and pension plan costs, offset in part
by lower profit sharing plan contributions, accounted for the increase.
Premises and equipment expense recorded in the first quarter of 2006 was $1.73
million as compared to $1.57 million recorded in the same period in 2005, an
increase of $159 thousand or 10.2 percent. In the past year, premises and
equipment expenses have increased due to the investment in new branches and
equipment.
Professional fees have increased for the first quarter of 2006 to $197 thousand
from $96 thousand for the first quarter of 2005 due to additional accruals for
audits, regulatory exams and professional services related to employee benefits.
Advertising expense increased $29 thousand or 18.8 percent to $183 thousand in
the first quarter of 2006 when compared to the same period in 2005 as the Bank
continues to advertise deposit products and branch openings. The Corporation
strives to operate in an efficient manner and control costs as a means of
increasing earnings.
15
The following table presents the components of other expense for the three
months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
(In Thousands) 2006 2005
------ ------
Salaries and employee benefits $3,859 $3,652
Premises and equipment 1,725 1,566
Professional fees 197 96
Advertising 183 154
Trust department expense 115 107
Stationery and supplies 107 158
Telephone 92 103
Postage 85 68
Other expense 755 670
------ ------
Total other expense $7,118 $6,574
====== ======
NON-PERFORMING ASSETS: Other real estate owned (OREO), loans past due in excess
of 90 days and still accruing, and non-accrual loans are considered
non-performing assets. These assets totaled $106 thousand and $255 thousand at
March 31, 2006 and 2005, respectively. Loans past due in excess of 90 days and
still accruing are in the process of collection and are considered well secured.
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
March 31,
(In thousands) 2006 2005
--------------------
Other real estate owned $ -- $ --
Loans past due in excess of 90 days and still accruing 38 12
Non-accrual loans 68 243
-------- --------
Total non-performing assets $ 106 $ 255
======== ========
Non-performing loans as a % of total loans 0.01% 0.04%
Non-performing assets as a % of total
loans plus other real estate owned 0.01% 0.04%
Allowance as a % of total loans 0.81% 1.00%
PROVISION FOR LOAN LOSSES: The provision for loan losses was $39 thousand for
the first quarter of 2006 as compared to $131 thousand for the first quarter of
2005. The amount of the loan loss provision and the level of the allowance for
loan losses are based upon a number of factors including management's evaluation
of probable losses inherent in the portfolio, after consideration of appraised
collateral values, financial condition and past credit history of the borrowers
as well as prevailing economic conditions.
For the first quarter of 2006, net charge-offs were $3 thousand as compared to
net recoveries of $7 thousand during the first quarter of 2005.
A summary of the allowance for loan losses for the three-month period ended
March 31, follows:
(In thousands) 2006 2005
------- ------
Balance, January 1, $ 6,378 $5,989
Provision charged to expense 39 131
Charge-offs (4) --
Recoveries 1 7
------- ------
Balance, March 31, $ 6,414 $6,127
======= ======
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 29.5
percent and 32.3 percent for the three months ended March 31, 2006 and 2005,
respectively. Taxable income declined from $5.5 million for the first quarter of
2005 to $4.6 million for the first quarter of 2006. The effective tax rate in
2006 decreased due to increased
16
tax-exempt income, as well as a decline in state income tax due to higher
taxable income in the Real Estate Investment Trust subsidiary, which has a lower
effective state tax rate.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At March 31, 2006, total shareholders' equity, including net
unrealized losses on securities available for sale, was $99.1 million,
representing a decline in total shareholders' equity recorded at December 31,
2005, of $83 thousand or 0.08 percent. The Federal Reserve Board has adopted
risk-based capital guidelines for banks. The minimum guideline for the ratio of
total capital to risk-weighted assets is 8 percent. Tier 1 Capital consists of
common stock, retained earnings, minority interests in the equity accounts of
consolidated subsidiaries, non-cumulative preferred stock, less goodwill and
certain other intangibles. The remainder may consist of other preferred stock,
certain other instruments and a portion of the allowance for loan loss. At March
31, 2006, the Corporation's Tier 1 Capital and Total Capital ratios were 16.17
percent and 17.18 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines. These guidelines provide for a minimum ratio of Tier 1 Capital to
average total assets of 3 percent for banks that meet certain specified
criteria, including having the highest regulatory rating. All other banks are
generally required to maintain a leverage ratio of at least 3 percent plus an
additional 100 to 200 basis points. The Corporation's leverage ratio at March
31, 2006, was 8.13 percent.
LIQUIDITY: Liquidity refers to an institution's ability to meet short-term
requirements in the form of loan requests, deposit withdrawals and maturing
obligations. Principal sources of liquidity include cash, temporary investments
and securities available for sale.
Management's opinion is that the Corporation's liquidity position is sufficient
to meet future needs. Cash and cash equivalents, interest earning deposits and
federal funds sold totaled $27.0 million at March 31, 2006. In addition, the
Corporation has $351.7 million in securities designated as available for sale.
These securities can be sold in response to liquidity concerns or pledged as
collateral for borrowings as discussed below. Book value as of March 31, 2006,
of investment securities and securities available for sale maturing within one
year amounted to $23.6 million and $15.8 million, respectively.
The primary source of funds available to meet liquidity needs is the
Corporation's core deposit base, which excludes certificates of deposit greater
than $100 thousand. As of March 31, 2006, core deposits equaled $940.3 million.
Another source of liquidity is borrowing capacity. The Corporation has a variety
of sources of short-term liquidity available, including federal funds purchased
from correspondent banks, short-term and long-term borrowings from the Federal
Home Loan Bank of New York, access to the Federal Reserve Bank discount window
and loan participations or sales of loans. The Corporation also generates
liquidity from the regular principal payments made on its mortgage-backed
security and loan portfolios.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim financial
statements (March 31, 2006).
17
ITEM 4. Controls and Procedures
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that have materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
The Corporation's management, including the CEO and CFO, does not expect that
our disclosure controls and procedures or our internal controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, provides reasonable, not absolute, assurance that the objectives of
the control system are met. The design of a control system reflects resource
constraints; the benefits of controls must be considered relative to their
costs. Because there are inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Corporation have been or will be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns occur because of simple error
or mistake. Controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goals under all future conditions; over
time, control may become inadequate because of changes in conditions or
deterioration in the degree of compliance with the policies or procedures.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of
Shares Maximum Number
Total Purchased as of Shares that May
Number of Average Part of Publicly Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Purchased per Share or Programs Programs
Period
January 1-31, 2006 2,826 $ 27.83 -- 120,000
February 1-28, 2006 14,000 27.26 14,000 106,000
March 1-31, 2006 3,958 27.09 3,500 102,500
---------- ------- --------
Total 20,784 $ 27.31 17,500
========== ======= ========
On April 15, 2005, the Board of Directors of Peapack-Gladstone Financial
Corporation announced the authorization of a stock repurchase plan. The Board
authorized the purchase of up to 150,000 shares of outstanding common stock, to
be made from time to time, in the open market or in privately negotiated
transactions, at prices not exceeding prevailing market prices. On April 14,
2006, the Board of Directors authorized an extension of the stock buyback
program for an additional twelve months to April 15, 2007.
Note: All shares not purchased as part of the 2005 stock repurchase plan were
repurchased as a result of the cashless exercise of employee and director stock
options as provided in the Corporation's Stock Option Plans.
18
ITEM 6. Exhibits
a. Exhibits
3 Articles of Incorporation and By-Laws:
A. Restated Certificate of Incorporation as in effect on
the date of this filing is incorporated herein by
reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.
B. By-Laws of the Registrant as in effect on the date of
this filing are incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
10 H. 2006 Long-Term Stock Incentive Plan
31.1 Certification of Frank A. Kissel, Chief Executive Officer of
the Corporation, pursuant to Securities Exchange Act Rule
13a-14(a).
31.2 Certification of Arthur F. Birmingham, Chief Financial Officer
of the Corporation, pursuant to Securities Exchange Act Rule
13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002,
signed by Frank A. Kissel, Chief Executive Officer of the
Corporation, and Arthur F. Birmingham, Chief Financial Officer
of the Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Registrant)
DATE: May 10, 2006 By: /s/ Frank A. Kissel
--------------------------------------------------
Frank A. Kissel
Chairman of the Board and Chief Executive Officer
DATE: May 10, 2006 By: /s/ Arthur F. Birmingham
--------------------------------------------------
Arthur F. Birmingham
Executive Vice President and Chief Financial Officer
19
EXHIBIT INDEX
Number Description
------ -----------
3 Articles of Incorporation and By-Laws:
A. Restated Certificate of Incorporation as in effect on the date
of this filing is incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003.
B. By-Laws of the Registrant as in effect on the date of this
filing are incorporated herein by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003.
10 H. 2006 Long-Term Stock Incentive Plan
31.1 Certification of Frank A. Kissel, Chief Executive Officer of the
Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2 Certification of Arthur F. Birmingham, Chief Financial Officer of
the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by
Frank A. Kissel, Chief Executive Officer of the Corporation, and
Arthur F. Birmingham, Chief Financial Officer of the Corporation.
20