10-Q 1 form10q-68715_pg.txt 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, 2005 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_|. Number of shares of Common Stock outstanding as of May 2, 2005: 8,299,000 1 PEAPACK-GLADSTONE FINANCIAL CORPORATION PART 1 FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited): Consolidated Statements of Condition March 31, 2005 and December 31, 2004 Page 3 Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 Page 4 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2005 and 2004 Page 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 Page 6 Notes to the Consolidated Financial Statements Page 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 9 Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 14 Item 4 Controls and Procedures Page 15 PART 2 OTHER INFORMATION Item 2 Unregistered Sales of Equity Securities and Use of Proceeds Page 15 Item 5 Other Information Page 15 Item 6 Exhibits Page 16
2 PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollars in thousands) (Unaudited)
March 31, December 31, 2005 2004 ----------- ------------ ASSETS Cash and due from banks $ 23,346 $ 15,631 Federal funds sold 915 101 ----------- ----------- Total cash and cash equivalents 24,261 15,732 Interest-earning deposits 674 786 Investment Securities (approximate market value $85,526 in 2005 and $87,544 in 2004) 85,824 87,128 Securities Available for Sale 370,986 354,186 Loans: Loans secured by real estate 583,377 541,460 Other loans 30,796 30,704 ----------- ----------- Total loans 614,173 572,164 Less: Allowance for loan losses 6,161 6,004 ----------- ----------- Net loans 608,012 566,160 Premises and equipment, net 20,031 20,163 Accrued interest receivable 5,372 4,375 Cash surrender value of life insurance 17,426 17,253 Other assets 3,629 1,612 ----------- ----------- TOTAL ASSETS $ 1,136,215 $ 1,067,395 =========== =========== LIABILITIES Deposits: Noninterest-bearing demand deposits $ 184,587 $ 162,275 Interest-bearing deposits: Checking 202,443 194,669 Savings 104,603 106,576 Money market accounts 238,624 227,944 Certificates of deposit over $100,000 76,613 74,005 Certificates of deposit less than $100,000 179,812 170,197 ----------- ----------- Total deposits 986,682 935,666 Borrowed Funds 49,727 33,394 Accrued expenses and other liabilities 5,535 3,666 ----------- ----------- TOTAL LIABILITIES 1,041,944 972,726 ----------- ----------- SHAREHOLDERS' EQUITY Common stock (no par value; stated value $0.83 per share; authorized 20,000,000 shares; issued shares, 8,424,783 at March 31, 2005 and 8,393,625 at December 31, 2004; outstanding shares, 8,270,224 at March 31, 2005 and 8,246,042 at December 31, 2004) 7,020 6,994 Surplus 88,358 87,991 Treasury Stock at cost, 154,559 shares in 2005 and 147,583 shares in 2004 (3,076) (2,867) Retained Earnings 3,907 1,113 Accumulated other comprehensive (loss)/income, net of income tax (1,938) 1,438 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 94,271 94,669 ----------- ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,136,215 $ 1,067,395 =========== ===========
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, 2005 2004 ----------- ----------- INTEREST INCOME Interest and fees on loans $ 8,274 $ 6,140 Interest on investment securities: Taxable 498 756 Tax-exempt 276 205 Interest on securities available for sale: Taxable 3,505 3,303 Tax-exempt 90 91 Interest-earning deposits 10 11 Interest on federal funds sold 3 16 ----------- ----------- Total interest income 12,656 10,522 INTEREST EXPENSE Interest on savings and interest-bearing deposit accounts 1,559 716 Interest on certificates of deposit over $100,000 498 315 Interest on other time deposits 1,135 859 Interest on borrowed funds 437 269 ----------- ----------- Total interest expense 3,629 2,159 ----------- ----------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 9,027 8,363 Provision for loan losses 150 150 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,877 8,213 ----------- ----------- OTHER INCOME Service charges and fees 465 398 Trust department income 2,013 1,683 Securities gains 298 193 Bank owned life insurance 197 219 Other income 177 127 ----------- ----------- Total other income 3,150 2,620 OTHER EXPENSES Salaries and employee benefits 3,652 3,463 Premises and equipment 1,566 1,315 Other expense 1,337 1,261 ----------- ----------- Total other expenses 6,555 6,039 ----------- ----------- INCOME BEFORE INCOME TAX EXPENSE 5,472 4,794 Income tax expense 1,769 1,513 ----------- ----------- NET INCOME $ 3,703 $ 3,281 =========== =========== EARNINGS PER SHARE Basic $ 0.45 $ 0.40 Diluted $ 0.44 $ 0.39 Average basic shares outstanding 8,261,692 8,167,137 Average diluted shares outstanding 8,405,073 8,391,563 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, 2005 2004 -------- -------- Balance, Beginning of Period $ 94,669 $ 85,054 Comprehensive income: Net Income 3,703 3,281 Unrealized holding (losses)/gains on securities arising during the period, net of tax (3,182) 1,576 Less: Reclassification adjustment for gains included in net income, net of tax 194 125 -------- -------- (3,376) 1,451 -------- -------- Total Comprehensive income 327 4,732 Common Stock Options Exercised 243 279 Purchase of Treasury Stock (209) (186) Cash Dividends Declared (909) (671) Tax Benefit on Disqualifying and Nonqualifying Exercise of Stock Options 150 94 -------- -------- Balance, March 31, $ 94,271 $ 89,302 ======== ======== 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, 2005 2004 -------- -------- OPERATING ACTIVITIES: Net Income: $ 3,703 $ 3,281 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 474 391 Amortization of premium and accretion of discount on securities, net 310 371 Provision for loan losses 150 150 Gains on security sales (298) (193) Gain on loans sold (7) -- Gain on disposal of fixed assets (10) -- Tax benefit on stock option exercises 150 94 Increase in cash surrender value of life insurance, net (173) (198) Increase in accrued interest receivable (997) (558) Increase in other assets (755) (2,000) Increase in accrued expenses and other liabilities 2,682 811 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,229 2,149 -------- -------- INVESTING ACTIVITIES: Proceeds from maturities of investment securities 7,109 5,079 Proceeds from maturities of securities available for sale 8,173 7,974 Proceeds from calls of investment securities 3,185 235 Proceeds from calls of securities available for sale 2,000 22,101 Proceeds from sales of securities available for sale 1,489 10,131 Purchase of investment securities (9,073) (2,617) Purchase of securities available for sale (33,845) (48,033) Net decrease in short-term investments 112 30,228 Proceeds from sales of loans 607 -- Purchase of loans (28,972) -- Net increase in loans (13,630) (2,690) Purchases of premises and equipment (353) (2,079) Disposal of premises and equipment 21 -- -------- -------- NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (63,177) 20,329 -------- -------- FINANCING ACTIVITIES: Net increase in deposits 51,016 1,034 Net increase in short-term borrowings 16,750 -- Repayments of long-term debt (417) (405) Cash dividends paid (906) (742) Exercise of stock options 243 279 Purchase of Treasury Stock (209) (186) -------- -------- NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 66,477 (20) -------- -------- Net increase in cash and cash equivalents 8,529 22,458 Cash and cash equivalents at beginning of period 15,732 22,695 -------- -------- Cash and cash equivalents at end of period $ 24,261 $ 45,153 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 3,469 $ 2,202 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, 2004 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 net charge-offs. Stock Option Plans: At March 31, 2005, the Corporation had stock-based employee and non-employee director compensation plans. The Corporation accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share for the periods indicated if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation: Three Months Ended March 31, (In Thousands Except per Share Data) 2005 2004 -------- -------- Net Income: As Reported $ 3,703 $ 3,281 Less: Total Stock-Based Compensation Expense Determined under the Fair Value Based Method on all Stock Options, Net of Related Tax Effects 98 1,261 -------- -------- Pro Forma $ 3,605 $ 2,020 Earnings Per Share: As Reported Basic $ 0.45 $ 0.40 Diluted $ 0.44 $ 0.39 Pro Forma Basic $ 0.44 $ 0.25 Diluted $ 0.43 $ 0.24 7 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 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. All share and per share amounts have been restated to reflect all prior stock dividends and stock splits and a 10 percent stock dividend declared on September 9, 2004. Comprehensive Income: The difference between the Corporation's net income and total comprehensive income for the three months ended March 31, 2005 and 2004 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, 2005 and 2004 was $327 thousand and $4.7 million, respectively. 2. 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) 2005 2004 -------- -------- Service Cost $ 351 $ 274 Interest Cost 146 126 Expected Return on Plan Assets (133) (117) Amortization of: Net Loss 17 6 Unrecognized Prior Service Cost -- 1 Unrecognized Remaining Net Assets (2) (2) -------- -------- Net Periodic Benefit Cost $ 379 $ 288 ======== ======== As previously disclosed in the financial statements for the year ended December 31, 2004, the Corporation expects to contribute $1.3 million to its pension plan in 2005. As of March 31, 2005, contributions of $318 thousand had been made in the current year. 8 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. 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, 2004 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 New Jersey experience an adverse economic shock. Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. 9 OVERVIEW: The Corporation realized earnings of $0.44 per diluted share in the first quarter of 2005 as compared to $0.39 per diluted share for the same quarter of 2004. Net income of $3.7 million for the quarter was $422 thousand, or 12.9 percent higher, than the net income of $3.3 million for the first quarter last year. Annualized return on average assets for the quarter was 1.33 percent and annualized return on average equity was 15.51 percent for the first quarter of 2005. EARNINGS ANALYSIS NET INTEREST INCOME: On a tax-equivalent basis, net interest income, before the provision for loan losses, was $9.3 million for the first quarter of 2005, compared to $8.6 million for the same quarter of 2004, an increase of $711 thousand or 8.3 percent. The increase in net interest income during the quarter was primarily the result of higher loan volume offset in part by lower rates earned on loans, higher deposit balances and higher rates paid on deposits. The net interest margin on a fully tax equivalent basis was 3.53 percent in the first quarter of 2005 as compared to 3.83 percent for the same quarter of 2004, a decrease of 30 basis points. Net interest income for the first quarter of 2005, when compared to the fourth quarter of 2004, declined $130 thousand, or 1.4 percent, from $9.4 million on a tax-equivalent basis. The net interest margin, on a fully tax equivalent basis declined from 3.78 percent in the fourth quarter of 2004, to 3.53 percent in the first quarter of 2005, a 25 basis point decrease. Average interest-earning assets increased $155.6 million or 17.4 percent to $1.05 billion for the first quarter of 2005 as compared to $893.7 million for the same quarter in 2004. This was due to the increase in average loan balances of $166.6 million, or 39.1 percent, offset in part by a decline in average investment securities, federal funds sold and interest-earning deposits balances of $11.0 million, or 2.4 percent. The increase in loan balances during the first quarter of 2005 was the result of growth in residential real estate, commercial mortgage and commercial 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. For the quarter ended March 31, 2005, average interest-bearing liabilities increased $134.3 million or 19.0 percent to $842.9 million from $708.7 million in the same period in 2004. Average balances of interest-bearing checking accounts rose $69.0 million or 52.3 percent, certificate of deposits rose $28.6 million or 12.8 percent and money market accounts increased $13.2 million or 6.1 percent. Average savings accounts rose $3.4 million, or 3.3 percent for the first quarter of 2005 when compared to the first quarter of 2004. In addition to opening two new branches since first quarter 2004, several new deposit products have been introduced in the past year, which have been well received by customers, including Master Escrow Account, Fed Flyer CD and the Fed Tracker Money Market Account. Federal Home Loan Bank advances averaged $56.5 million for the first quarter of 2005 as compared to $36.5 million for the same quarter of 2004. Average non-interest-bearing demand deposits increased $17.5 million or 11.7 percent for the first quarter of 2005 as compared to the first quarter of 2004. On a tax-equivalent basis, average interest rates earned on interest-earning assets rose 12 basis points to 4.92 percent for the first quarter of 2005, from 4.80 percent for the first quarter of 2004. In the first quarter of 2005, the average interest rates earned on loans declined 18 basis points to 5.58 percent, due to the flattening yield curve and competitive pressures. For the quarter ended March 31, 2005, the average interest rates earned on investment securities rose 14 basis points to 4.06 percent from 3.92 percent in the same period in 2004. The average interest rate paid on interest-bearing liabilities in the first quarter of 2005 and 2004 was 1.72 percent and 1.22 percent, respectively, a 50 basis point increase. The average rate paid on certificate of deposits in the first quarter of 2005 rose 49 basis points to 2.59 percent and average rates paid on money market accounts increased 66 basis points to 1.49 percent when compared with the same quarter in 2004. Higher retail deposit rates were the result of the Federal Reserve increasing the Federal Funds rate five times during the year. The cost of funds for the quarter increased to 1.44 percent as compared to the first quarter of 2004 of 1.01 percent. 10 The following tables reflect the components of net interest income for the three months ended March 31, 2005 and 2004: Average Balance Sheet Unaudited Year-to-Date (Tax-Equivalent Basis, Dollars in Thousands)
March 31, 2005 March 31, 2004 -------------- -------------- Average Income/ Average Income/ Balance Expense Yield Balance Expense Yield ----------- --------- ------- --------- --------- ------- ASSETS: Interest-Earning Assets: Investments: Taxable (1) $ 402,107 $ 4,003 3.98% $ 419,082 $ 4,059 3.87% Tax-Exempt (1) (2) 51,741 603 4.66 37,155 488 5.25% Loans (2) (3) 593,063 8,280 5.58 426,423 6,145 5.76% Federal Funds Sold 1,772 11 2.48 6,794 16 0.95% Interest-Earning Deposits 622 3 1.93 4,240 11 1.07% ----------- -------------------- --------- -------------------- Total Interest-Earning Assets 1,049,305 $ 12,900 4.92% 893,694 $ 10,719 4.80% ----------- -------------------- --------- -------------------- Noninterest-Earning Assets: Cash and Due from Banks 20,968 18,845 Allowance for Loan Losses (6,027) (5,526) Premises and Equipment 20,176 15,972 Other Assets 25,203 28,612 ----------- --------- Total Noninterest-Earning Assets 60,320 57,903 ----------- --------- Total Assets $ 1,109,625 $ 951,597 =========== ========= LIABILITIES: Interest-Bearing Deposits Checking $ 200,839 $ 528 1.05% $ 131,837 $ 110 0.34% Money Markets 105,210 434 1.65 65,412 101 0.62% Tiered Money Markets 122,855 415 1.35 149,460 344 0.92% Savings 105,701 182 0.69 102,276 161 0.63% Certificates of Deposit 251,807 1,633 2.59 223,170 1,174 2.10% ----------- -------------------- --------- -------------------- Total Interest-Bearing Deposits 786,412 3,192 1.62 672,155 1,890 1.12% Borrowings 56,536 437 3.09 36,495 269 2.94% ----------- -------------------- --------- -------------------- Total Interest-Bearing Liabilities 842,948 3,629 1.72 708,650 2,159 1.22% ----------- -------------------- --------- -------------------- Noninterest Bearing Liabilities Demand Deposits 166,339 148,884 Accrued Expenses and Other Liabilities 4,833 7,358 ----------- --------- Total Noninterest-Bearing Liabilities 171,172 156,242 Shareholders' Equity 95,505 86,705 ----------- --------- Total Liabilities and Shareholders' Equity $ 1,109,625 $ 951,597 =========== ========= Net Interest Income (tax-equivalent basis) 9,271 8,560 Net Interest Spread 3.20% 3.58% ======= ======= Net Interest Margin (4) 3.53% 3.83% ======= ======= Tax equivalent adjustment (244) (197) --------- --------- Net Interest Income $ 9,027 $ 8,363 ========= =========
(1) Average balances for available-for-sale securities are based on amortized cost. (2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate. (3) Loans are stated net of unearned income and include non-accrual loans. (4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets. 11 OTHER INCOME: Other income was $3.15 million for the first quarter 2005, as compared to $2.62 million in the first quarter 2004, an increase of $530 thousand or 20.2 percent. Income from PGB Trust and Investments, the Bank's trust division, was $2.01 million, an increase of $330 thousand or 19.6 percent over last year's first quarter. The market value of trust assets increased $179.3 million or 12.1 percent from the first quarter of 2004 to 2005. In the first quarter of 2005 and 2004, service charges and fees were $465 thousand and $398 thousand, respectively, an increase of $67 thousand or 16.8 percent. Security gains of $298 thousand were recorded in the first quarter of 2005 as compared to $193 thousand for the same quarter of 2004. This quarter's gain 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, 2005 and 2004: Three Months Ended March 31, (In Thousands) 2005 2004 -------- -------- Trust department income $ 2,013 $ 1,683 Service charges and fees 465 398 Bank owned life insurance 197 219 Safe deposit rental fees 61 61 Other non-interest income 86 48 Fees for other services 30 18 Securities gains 298 193 -------- -------- Total other income $ 3,150 $ 2,620 ======== ======== OTHER EXPENSES: For the first quarter of 2005, other expenses increased $516 thousand or 8.5 percent to $6.56 million compared to $6.04 million for the first quarter of 2004. Salaries and benefits expense during the first quarter of 2005 were $3.65 million as compared to $3.46 million for the first quarter of 2004, an increase of $189 thousand or 5.5 percent. Normal salary increases as well as additions to business development officer ranks and the related benefits costs account for the increase. For the first quarter of 2005, premises and equipment expenses recorded were $1.57 million, an increase of $251 thousand or 19.1 percent, when compared to $1.32 million for the same quarter of 2004. In the past year, premises and equipment expenses have increased due to the investment in two new branches and a new operations center. In addition, the Corporation invested in its technological capacity for this future growth and the expectation of increased business activity. The following table presents the components of other expense for the three months ended March 31, 2005 and 2004: Three Months Ended March 31, (In Thousands) 2005 2004 -------- -------- Salaries and employee benefits $ 3,652 $ 3,463 Premises and equipment 1,566 1,315 Advertising 154 101 Stationery and supplies 158 103 Professional fees 96 136 Telephone 103 101 Trust department expense 107 102 Postage 68 85 Other expense 651 633 -------- -------- Total other expense $ 6,555 $ 6,039 ======== ======== 12 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 $255 thousand and $153 thousand at March 31, 2005 and 2004, 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) 2005 2004 ------------------- Other real estate owned $ -- $ -- Loans past due in excess of 90 days and still accruing 12 52 Non-accrual loans 243 101 ------- ------- Total non-performing assets $ 255 $ 153 ======= ======= Non-performing loans as a % of total loans 0.04% 0.04% Non-performing assets as a % of total loans plus other real estate owned 0.04% 0.04% Allowance as a % of total loans 1.00% 1.29% PROVISION FOR LOAN LOSSES: The provision for loan losses was $150 thousand for both the first quarters of 2005 and 2004. 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 2005, net recoveries were $7 thousand as compared to net charge-offs of $55 thousand during the first quarter of 2004. A summary of the allowance for loan losses for the three-month period ended March 31, follows: (In thousands) 2005 2004 ---- ---- Balance, January 1, $ 6,004 $ 5,467 Provision charged to expense 150 150 Loans charged off -- (65) Recoveries 7 10 ------- ------- Balance, March 31, $ 6,161 $ 5,562 ======= ======= INCOME TAXES: Income tax expense as a percentage of pre-tax income was 32.3 percent and 31.6 percent for the three months ended March 31, 2005 and 2004, respectively. CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital position. At March 31, 2005, total shareholders' equity, including net unrealized losses on securities available for sale, was $94.3 million, representing a decline in total shareholders' equity recorded at December 31, 2004, of $398 thousand or 0.4 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, 2005, the Corporation's Tier 1 Capital and Total Capital ratios were 18.46 percent and 19.65 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, 2005, was 8.62 percent. 13 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 $24.9 million at March 31, 2005. In addition, the Corporation has $371.0 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, 2005, of investment securities and securities available for sale maturing within one year amounted to $21.9 million and $18.1 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, 2005, core deposits equaled $910.1 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. RECENT ACCOUNTING PRONOUNCEMENTS: Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment, addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. Statement 123(R) generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity's ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Corporation beginning January 1, 2006. The Corporation must use either the modified prospective or the modified retrospective transition method. Early adoption of Statement 123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The Corporation is currently evaluating the transition provisions of Statement 123(R), the adoption of which will lower reported net income and earnings per share. The Corporation does not know the full impact on the consolidated financial statements at this time. 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, 2005). 14 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 Weighted Purchased as of Shares that May Number of Average Part of Publicly Yet Be Purchased Shares Price Paid Announced Plans Under the Plans Period Purchased per Share or Programs or Programs January 1-31, 2005 4,309 $ 31.13 -- -- February 1-28, 2005 1,320 28.14 -- -- March 1-31, 2005 1,073 27.03 -- -- ------- ------- ------- ------- Total 6,702 $ 29.88 -- -- ======= ======= ======= =======
Note: All shares listed above are added to treasury stock through the cashless exercise of employee and director stock options as allowed in the Stock Option Plans. ITEM 5. Other Information On January 13, 2005, the Board of Directors, with the Compensation Committee members abstaining, approved an additional annual retainer of $10,000 for the Compensation Committee Chair and an additional annual retainer of $1,000 for each of the Compensation Committee members. 15 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. 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 9, 2005 By: /s/ Frank A. Kissel ------------------------------------------------- FRANK A. KISSEL Chairman of the Board and Chief Executive Officer DATE: May 9, 2005 By: /s/ Arthur F. Birmingham ------------------------------------------------- ARTHUR F. BIRMINGHAM Executive Vice President and Chief Financial Officer 16 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. 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. 17