Exhibit 13
FINANCIAL HIGHLIGHTS
(In Thousands, Except Per Share Data)
Selected Year-End Data: 2005 2004 2003
------------- ------------- -------------
Net Income $ 13,130 $ 13,109 $ 12,300
Total Assets 1,255,259 1,067,395 968,126
Total Deposits 1,041,996 935,666 845,771
Total Securities 419,668 441,314 453,699
Total Loans 768,473 572,164 427,001
Shareholders' Equity 99,155 94,669 85,054
Trust Department Assets
(Market Value) 1,761,846 1,691,860 1,414,591
Per Share:
Earnings-Basic $ 1.58 $ 1.60 $ 1.51
Earnings-Diluted 1.56 1.56 1.47
Book Value 11.97 11.48 10.43
Financial Ratios:
Return on Average Assets 1.12% 1.30% 1.34%
Return on Average Equity 13.49 14.72 15.14
Capital Leverage Ratio 8.66 9.18 8.91
Risk Based Capital:
Tier 1 16.71 19.02 20.38
Total 17.78 20.25 21.74
1
Dear Shareholders and Friends,
We are very pleased to report to our shareholders the 9th consecutive year
of record earnings. Net income for the year ended December 31, 2005 was
$13,130,000, beating 2004 by just $21,000.
We are pleased with the results because we were able to accomplish much in
an extremely competitive and unusual market. We say unusual because we are
moving from a protracted, historically low interest rate environment to a flat
and sometimes inverted interest rate yield curve. Fourteen interest rate
increases have been made by the Federal Reserve Board in the past 21 months. The
effect of the increases has been felt almost exclusively on the short end of the
curve (where we borrow or pay for deposits) with very little yield expansion on
the longer end where we lend (most loans and investments). The inevitable result
is that our interest margin is under pressure and will probably remain so until
a more normal yield curve returns. We believe it will return and have been
careful not to extend the average life of our various asset portfolios which
will enable us to react quickly as the market changes.
As we wait for these changes to occur, the business of banking has been
excellent. Many details are included in the Management Discussion & Analysis
section, however, we would like to highlight a few areas.
Loans
-----
Average loans increased 41% or $199,000,000 during the course of the year.
Much of the growth occurred in the first mortgage loan portfolio where the
majority of loans were of the adjustable rate variety.
Commercial loans grew 29% or about $26,000,000 reflecting our strong effort
toward more commercial lending. We have outstanding products and service levels
for these very important customers.
2
With this growth, we are very pleased to report that asset quality is
excellent with non-performing loans totaling $386,000 or .05% of total loans as
of the end of the year. We work hard to maintain our credit discipline in this
very competitive market.
Deposits
--------
During 2005 average deposits grew nearly $122,000,000. This represents a
14% increase and deposits now exceed $1.04 billion. There is no question that
customers, like the Bank, are looking to increase the yield on their deposits.
As a result, our adjustable rate money market and certificate of deposit
products have been very successful.
Branches
--------
We had an opportunity to open a new branch in the Finderne section of
Bridgewater Township this past summer. Early growth has far exceeded all
expectations. The new location enables us to win the business of customers in an
entirely new market.
We have approval from the Town of Summit to open a new branch at the corner
of Woodland and Deforest. For those who know Summit, they will agree that it is
a fabulous and energetic community. We are looking forward to bringing our style
of banking to Summit, and will be ready to open later in the year.
We are very pleased to have been chosen to provide banking services to the
employees of Chubb Insurance Group within their Headquarters in Warren. Chubb is
a world-class organization, emphasizing high levels of service to its clients.
We share that approach to business and look forward to providing Chubb's
employees with world-class banking services.
PGB Trust and Investments
-------------------------
Fees generated by PGB Trust and Investments grew 14% to $7,600,000 while
market value of assets under management grew to almost $1.8 billion by the end
of the year. This steady stream of non-interest income is an important asset to
our shareholders and sets us apart from almost all other community banking
organizations.
3
We feel privileged to be relied upon by so many families, individuals and
businesses. Financial goals can only be reached if you have planned for them and
then do the hard work to achieve them. We are prepared to help you achieve your
goals and to ensure your assets are moved from generation to generation. We
invite you to call Craig Spengeman, President of PGB Trust & Investments or John
Bonk, 1st Vice President for a consultation.
Cash Dividend
-------------
Shareholder value is always a priority of the Board and Management. Because
cash dividends are currently tax preferred, and with our strong capital base,
the Board increased the quarterly cash dividend to $0.14 per share in November.
This represents a 27% increase in the quarterly payout. We have now increased
the cash dividend by over 100% in the past five years.
Every year is exciting for the challenges and opportunities that always
present themselves. Our objective is to be the best banking organization
available to our customers and a constant and reliable partner to the
communities we serve.
We want to thank our employees, directors and shareholders for their hard
work and continuing support. Please take every opportunity to refer family,
friends and associates to your Bank.
Frank A. Kissel Robert M. Rogers
Chairman & CEO President & COO
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW: The following discussion and analysis is intended to provide
information about the financial condition and results of operations of
Peapack-Gladstone Financial Corporation and its subsidiaries on a consolidated
basis and should be read in conjunction with the consolidated financial
statements and the related notes and supplemental financial information
appearing elsewhere in this report.
Peapack-Gladstone Financial Corporation (the "Corporation"), formed in
1997, is the parent holding company for Peapack-Gladstone Bank, formed in 1921,
a commercial bank operating twenty branches in Somerset, Hunterdon and Morris
counties.
During 2005, the cash dividend rate was increased to $0.14 per share. This
new rate raised the cash dividend rate by 27 percent over the previous rate of
$0.11 per share. The cash dividend rate has increased 100 percent in the past
five years.
The year ended December 31, 2005 was a challenging year for the
Corporation. Although, loan and deposit growth was very strong, increasing on
average over $199 million and $121 million, respectively, net interest income on
a tax-equivalent basis increased only $399 thousand during the year as the
Federal Reserve increased the target fed funds rate on eight occasions during
the year yet the long-term interest rates remained relatively flat. Net interest
income was negatively affected by the very challenging operating environment.
Highly competitive loan and deposit pricing and the flat and occasionally
inverted yield curve combined to put pressure on the net interest margin. Yields
on interest-bearing liabilities increased 94 basis points, while yields on
interest-earning assets increased only 27 basis points. The net interest margin
declined 51 basis points or 13 percent over 2004 levels. As discussed in this
Management's Discussion and Analysis section some of the highlights are as
follows:
o Total assets of the Corporation exceeded $1.25 billion this year, over
a 17 percent increase.
o The loan portfolio experienced growth of 34 percent.
o PGB Trust and Investments assets reached nearly $1.8 billion in market
value, growing more than 4 percent.
o Deposits surpassed the $1 billion level, with greater than 11 percent
growth.
Peapack-Gladstone Financial Corporation's common stock trades on the
American Stock Exchange under the symbol "PGC".
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis
of Financial Condition and Results of Operation 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 for the
year ended December 31, 2005, contains a summary of the Corporation's
significant accounting
5
policies. Management believes that 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.
EARNINGS SUMMARY: The Corporation's net income for the year ended December 31,
2005 was $13.13 million compared to $13.11 million for the year ended December
31, 2004, an increase of $21 thousand. Earnings per diluted share were $1.56 for
both year end 2005 and 2004.
These results produced a return on average assets of 1.12 percent as
compared to 1.30 percent in 2004 and a return on average shareholders' equity of
13.49 percent as compared to 14.72 percent in 2004.
In 2005, the Corporation experienced strong growth in loans and deposits;
however, this was tempered by higher cost of funds and asset yields that
remained relatively flat to 2004.
NET INTEREST INCOME: The primary source of the Corporation's operating income is
net interest income, which is the difference between interest and dividends
earned on earning assets and fees earned on loans, and interest paid on
interest-bearing liabilities. Earning assets include loans to individuals and
businesses, investment securities, interest-earning deposits and federal funds
sold. Interest-bearing liabilities include interest-bearing checking, savings
and time deposits, Federal Home Loan Bank advances and other borrowings. Net
interest income is
6
determined by the difference between the yields earned on earning assets and the
rates paid on interest-bearing liabilities ("Net Interest Spread") and the
relative amounts of earning assets and interest-bearing liabilities. The
Corporation's net interest spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit flows
and general levels of non-performing assets. Credit quality remained excellent
in 2005 as loan delinquencies and non-performing assets were at historically low
levels.
Net interest income, on a fully tax-equivalent basis, increased from $35.9
million in 2004 to $36.3 million in 2005. Average earning assets increased
$160.4 million or 17 percent from the average balances in 2004 and rates earned
on earning assets increased 27 basis points in 2005. Interest expense doubled
over the levels recorded in 2004 on average balances of interest-bearing
liabilities that increased $141.3 million or 19 percent. Rates paid in 2005 on
interest-bearing liabilities rose 94 basis points over 2004 as competitive
pressure and the influence of rising federal funds target rates drove rates
higher. In 2005, the net interest margin declined to 3.27 percent from 3.78
percent in 2004.
On a fully tax-equivalent basis, interest income on earning assets rose
$10.7 million, or 23 percent, to $56.5 million. This increase was primarily due
to higher average loans, which rose $199.3 million, offset in part by a decline
of $35.1 million in average investments. Rates increased 24 basis points on
investments, while rates earned on loans declined 5 basis points, reflecting the
flat intermediate-term interest rate environment.
Interest expense rose $10.3 million during the year due to higher rates
paid on interest-bearing deposits. The overall rate paid on interest-bearing
deposits increased 89 basis points to 2.10 percent in 2005 as compared to 1.21
percent in 2004. Rates paid on borrowings rose 89 basis points to 3.57 percent.
The rise in deposit interest rates paid in 2005 reflects the market interest
rates during most of the year as rates began to rise in the latter part of 2004
and continued to rise in 2005 as the Federal Reserve Bank increased the Federal
funds rate a total of 13 consecutive times during this period.
Interest expense also increased due to higher average deposit balances. On
average, the Fed Tracker money market account, which was introduced in late
2004, and certificates of deposit grew $78.6 million and $50.9 million,
respectively. Shifting of balances occurred between the traditional money market
products, which declined $48.1 million on average, and the Fed Tracker money
market accounts, which yielded higher returns. Average interest-bearing checking
accounts increased $32.3 million or 20 percent over the comparable period in
2004, which includes the escrow checking products that grew $29.9 million on
average over year ago levels. Average noninterest-bearing demand deposits
increased $14.5 million or 9 percent during 2005 as compared to 2004. Average
overnight borrowings increased $6.5 million to $27.3 million during 2005 and the
Bank added short-term borrowings averaging $24.7 million for the year ended
December 31, 2005. Average Federal Home Loan Bank advances increased $2.8
million.
7
The following table compares the average balance sheets, net interest spreads
and net interest margins for the years ended December 31, 2005, 2004 and 2003
(fully tax-equivalent-FTE):
YEAR ENDED DECEMBER 31, 2005
Income/
Average Expense Yield
(Dollars In Thousands) Balance (FTE) (FTE)
----------- ----------- -----------
ASSETS:
Interest-Earning Assets:
Investments:
Taxable (1) $ 373,618 $ 15,210 4.07%
Tax-Exempt (1) (2) 52,732 2,550 4.84
Loans (2) (3) 682,648 38,593 5.65
Federal Funds Sold 2,253 73 3.26
Interest-Earning Deposits 807 26 3.17
----------- ----------- -----------
Total Interest-Earning Assets 1,112,058 $ 56,452 5.08%
----------- ----------- -----------
Noninterest-Earning Assets:
Cash and Due From Banks 21,411
Allowance for Loan Losses (6,271)
Premises and Equipment 21,124
Other Assets 24,154
-----------
Total Noninterest-Earning Assets 60,418
-----------
TOTAL ASSETS $ 1,172,476
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-Bearing Deposits:
Checking $ 191,305 $ 2,192 1.15%
Money Markets 147,235 4,107 2.79
Tiered Money Markets 101,861 1,506 1.48
Savings 99,594 691 0.69
Certificates of Deposit 273,140 8,609 3.15
----------- ----------- -----------
Total Interest-Bearing Deposits 813,135 17,105 2.10
Borrowed Funds 84,490 3,018 3.57
----------- ----------- -----------
Total Interest-Bearing Liabilities 897,625 20,123 2.24
----------- ----------- -----------
Noninterest-Bearing Liabilities:
Demand Deposits 172,692
Accrued Expenses and Other Liabilities 4,827
-----------
Total Noninterest-Bearing Liabilities 177,519
Shareholders' Equity 97,332
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,172,476
===========
NET INTEREST INCOME $ 36,329
===========
Net Interest Spread 2.84
===========
Net Interest Margin (4) 3.27%
===========
8
YEAR ENDED DECEMBER 31, 2004
Income/
Average Expense Yield
(Dollars In Thousands) Balance (FTE) (FTE)
----------- ----------- -----------
ASSETS:
Interest-Earning Assets:
Investments:
Taxable (1) $ 418,492 $ 15,992 3.82%
Tax-Exempt (1) (2) 42,959 2,155 5.02
Loans (2) (3) 483,397 27,566 5.70
Federal Funds Sold 5,122 58 1.13
Interest-Earning Deposits 1,640 19 1.16
----------- ----------- -----------
Total Interest-Earning Assets 951,610 $ 45,790 4.81%
----------- ----------- -----------
Noninterest-Earning Assets:
Cash and Due From Banks 19,832
Allowance for Loan Losses (5,710)
Premises and Equipment 17,785
Other Assets 26,317
-----------
Total Noninterest-Earning Assets 58,224
-----------
TOTAL ASSETS $ 1,009,834
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-Bearing Deposits:
Checking $ 159,043 $ 991 0.62%
Money Markets 68,582 572 0.83
Tiered Money Markets 149,559 1,450 0.97
Savings 106,518 664 0.62
Certificates of Deposit 222,241 4,834 2.18
----------- ----------- -----------
Total Interest-Bearing Deposits 705,943 8,511 1.21
Borrowed Funds 50,416 1,349 2.68
----------- ----------- -----------
Total Interest-Bearing Liabilities 756,359 9,860 1.30
----------- ----------- -----------
Noninterest-Bearing Liabilities:
Demand Deposits 158,151
Accrued Expenses and Other Liabilities 6,243
-----------
Total Noninterest-Bearing Liabilities 164,394
Shareholders' Equity 89,081
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,009,834
===========
NET INTEREST INCOME $ 35,930
===========
Net Interest Spread 3.51
===========
Net Interest Margin (4) 3.78%
===========
9
YEAR ENDED DECEMBER 31, 2003
Income/
Average Expense Yield
(Dollars In Thousands) Balance (FTE) (FTE)
--------- --------- ---------
ASSETS:
Interest-Earning Assets:
Investments:
Taxable (1) $ 419,464 $ 15,261 3.64%
Tax-Exempt (1) (2) 28,572 1,571 5.50
Loans (2) (3) 407,261 25,155 6.18
Federal Funds Sold 6,128 70 1.14
Interest-Earning Deposits 917 8 0.87
--------- --------- ---------
Total Interest-Earning Assets 862,342 $ 42,065 4.88%
--------- --------- ---------
Noninterest-Earning Assets:
Cash and Due From Banks 18,849
Allowance for Loan Losses (5,125)
Premises and Equipment 14,788
Other Assets 28,107
---------
Total Noninterest-Earning Assets 56,619
---------
TOTAL ASSETS $ 918,961
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-Bearing Deposits:
Checking $ 129,203 $ 616 0.48%
Money Markets 62,607 552 0.88
Tiered Money Markets 129,485 1,444 1.12
Savings 100,451 767 0.76
Certificates of Deposit 233,687 5,997 2.57
--------- --------- ---------
Total Interest-Bearing Deposits 655,433 9,376 1.43
Borrowed Funds 35,248 886 2.51
--------- --------- ---------
Total Interest-Bearing Liabilities 690,681 10,262 1.49
--------- --------- ---------
Noninterest-Bearing Liabilities:
Demand Deposits 139,476
Accrued Expenses and Other Liabilities 7,578
---------
Total Noninterest-Bearing Liabilities 147,054
Shareholders' Equity 81,226
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 918,961
=========
NET INTEREST INCOME $ 31,803
=========
Net Interest Spread 3.39
=========
Net Interest Margin (4) 3.69%
=========
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.
10
RATE/VOLUME ANALYSIS:
The effect of volume and rate changes on net interest income (on a
tax-equivalent basis) for the periods indicated are shown below:
Year Ended 2005 Compared with 2004 Year Ended 2004 Compared with 2003
Net Net
Difference Due To Change In Difference Due To Change In
Change In: Income/ Change In: Income/
(In Thousands): Volume Rate Expense Volume Rate Expense
--------- --------- --------- --------- --------- ---------
ASSETS:
Investments $ (1,122) $ 735 $ (387) $ 397 $ 918 $ 1,315
Loans 11,239 (212) 11,027 2,499 (88) 2,411
Federal Funds Sold (46) 61 15 (12) -- (12)
Interest-Earning Deposits (14) 21 7 7 4 11
--------- --------- --------- --------- --------- ---------
Total Interest Income $ 10,057 $ 605 $ 10,662 $ 2,891 $ 834 $ 3,725
--------- --------- --------- --------- --------- ---------
LIABILITIES:
Checking $ 899 $ 302 $ 1,201 $ 165 $ 210 $ 375
Money Market 2,765 770 3,535 68 (48) 20
Tiered Money Market (554) 610 56 55 (49) 6
Savings (43) 70 27 (9) (94) (103)
Certificates of Deposit 1,276 2,499 3,775 (282) (881) (1,163)
Borrowed Funds 1,182 487 1,669 371 92 463
--------- --------- --------- --------- --------- ---------
Total Interest Expense $ 5,525 $ 4,738 $ 10,263 $ 368 $ (770) $ (402)
--------- --------- --------- --------- --------- ---------
Net Interest Income $ 4,532 $ (4,133) $ 399 $ 2,523 $ 1,604 $ 4,127
========= ========= ========= ========= ========= =========
LOANS: The loan portfolio represents the largest portion of the Corporation's
earning assets and is an important source of interest and fee income. Loans are
primarily originated in the State of New Jersey.
At December 31, 2005, total loans were $768.5 million, an increase of
$196.3 million, or 34 percent from 2004 levels. The growth in our portfolios is
primarily the result of new business initiatives and our entry into new market
areas. Residential loans secured by first liens on 1-4 family homes rose $137.3
million or 42 percent in 2005, while commercial mortgage loans rose $34.3
million or 21 percent from 2004 levels. The majority of residential real estate
loan origination was primarily 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. Construction loans and
commercial loans also grew by $7.7 million and $12.5 million, respectively.
The yield on total loans averaged 5.65 percent for 2005, a 5 basis point
decline from the 5.70 percent average yield earned in 2004. The average yield on
the mortgage portfolio declined in 2005 to 5.45 percent from 5.77 percent in
2004. The average yield on the commercial loan portfolio increased 79 basis
points to 6.15 percent. Although short-term interest rates continued to rise
during the year, it did not have a significant impact on loan yields, as
long-term rates remained relatively flat.
11
The following table presents an analysis of outstanding loans as of December 31,
(In Thousands) 2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Real Estate-Mortgage
1-4 Family Residential
First Liens $465,228 $327,974 $226,887 $229,679 $246,197
Junior Liens 20,316 13,539 11,163 15,211 22,903
Home Equity 20,760 20,078 18,251 22,265 18,120
Real Estate-Commercial 196,431 162,166 130,968 109,932 91,129
Real Estate-Construction 25,387 17,703 9,799 2,063 6,418
Commercial Loans 33,322 20,821 16,632 17,859 15,855
Consumer Loans 5,014 7,181 10,223 8,206 11,237
Other Loans 2,015 2,702 3,078 4,545 5,074
-------- -------- -------- -------- --------
Total Loans $768,473 $572,164 $427,001 $409,760 $416,933
======== ======== ======== ======== ========
INVESTMENT SECURITIES HELD TO MATURITY: Investment securities are those
securities that the Corporation has both the ability and intent to hold to
maturity. These securities are carried at amortized cost. The portfolio consists
primarily of U.S. government agencies, mortgage-backed securities and municipal
obligations. The Corporation's investment securities held to maturity at
amortized cost amounted to $78.1 million at December 31, 2005, compared with
$87.1 million at December 31, 2004.
The following table presents the contractual maturities and rates of investment
securities held to maturity at amortized cost, as of December 31, 2005:
After 1 After 5
But But After
Within Within Within 10
(In Thousands) 1 Year 5 Years 10 Years Years Total
------------ ------------ ------------ ------------ ------------
U.S. Treasuries $ -- $ 499 $ -- $ -- 499
--% 3.248% --% --% 3.248%
U.S. Government Sponsored $ 1,497 $ -- $ -- $ -- 1,497
Agencies
6.653% -% -% --% 6.653%
Mortgage-Backed Securities (1) $ -- $ 3,571 $ 505 $ 17,359 21,435
4.717% --% 5.642% 4.735% 4.754%
State and Political Subdivisions (2)$ 25,738 $ 18,867 $ 10,048 $ -- 54,653
4.345% 4.017% 5.086% --% 4.366%
------------ ------------ ------------ ------------ ------------
Total $ 27,235 $ 22,937 $ 10,553 $ 17,359 78,084
4.472% 4.109% 5.113% 4.735% 4.510%
============ ============ ============ ============ ============
(1) Mortgage-backed securities are shown using stated final maturity.
(2) Yields presented on a fully tax-equivalent basis.
SECURITIES AVAILABLE FOR SALE: Securities available for sale are used as a part
of the Corporation's interest rate risk management strategy, and they may be
sold in response to changes in interest rates, liquidity needs, and other
factors. These securities are carried at estimated fair value, and unrealized
changes in fair value are recognized as a separate component of shareholders'
equity, net of income taxes. Realized gains and losses are recognized in income
at the time the securities are sold.
At December 31, 2005, the Corporation had securities available for sale
with a market value of $341.6 million, compared with $354.2 million at December
31, 2004. A $3.0 million net unrealized loss (net of
12
income tax) and a $1.4 million net unrealized gain (net of income tax) was
included in shareholders' equity at December 31, 2005 and December 31, 2004,
respectively.
The following table presents the contractual maturities and rates of securities
available for sale, stated at market value, as of December 31, 2005:
After 1 After 5
But But After
Within Within Within 10
(In Thousands) 1 Year 5 Years 10 Years Years Total
------------ ------------ ------------ ------------ ------------
U.S. Government Sponsored $ 11,392 $ 92,353 $ 8,876 $ -- $ 112,621
Agencies
3.116% 3.699% 3.632% --% 3.636%
Mortgage-Backed Securities (1) $ -- $ 8,692 $ 38,840 $ 133,908 $ 181,440
--% 4.081% 4.184% 4.664% 4.533%
State and Political Subdivisions (2) $ 292 $ 3,705 $ 5,065 $ -- $ 9,062
5.763% 5.758% 6.158% --% 5.980%
Other Securities $ 3,731 $ -- $ -- $ 34,730 $ 38,461
3.591% --% --% 5.590% 5.414%
------------ ------------ ------------ ------------ ------------
Total $ 15,415 $ 104,750 $ 52,781 $ 168,638 $ 341,584
3.272% 3.803% 4.273 4.851% 4.370%
============ ============ ============ ============ ============
(1) Mortgage-backed securities are shown using stated final maturity.
(2) Yields presented on a fully tax-equivalent basis.
Federal funds sold and interest-earning deposits are an additional part of
the Corporation's investment and liquidity strategies. The combined average
balance of these vehicles during 2005 was $3.1 million as compared to $6.8
million in 2004.
DEPOSITS: Total deposits at December 31, 2005 were $1.04 billion, an increase of
$106.3 million or 11 percent from $935.7 million at December 31, 2004. Our
strategy is to fund earning asset growth with core deposits, which is an
important factor in the generation of net interest income. Marketing, sales
efforts, and three new branch locations all contributed to the strong growth in
deposits. Total average deposits increased $121.7 million or 14 percent over
2004 levels.
The following table sets forth information concerning the composition of the
Corporation's average deposit base and average interest rates paid for the
following years:
(In Thousands) 2005 2004 2003
Noninterest-Bearing Demand $172,692 -% $158,151 -% $139,476 - %
Checking 191,305 1.15 159,043 0.62 129,203 0.48
Savings 99,594 0.69 106,518 0.62 100,451 0.76
Money Markets 147,235 2.79 68,582 0.83 62,607 0.88
Tiered Money Markets 101,861 1.48 149,559 0.97 129,485 1.12
Certificates of Deposits 273,140 3.15 222,241 2.18 233,687 2.57
--------------- --------------- ---------------
Total Deposits $985,827 $864,094 $794,909
=============== =============== ===============
Certificates of deposit over $100,000 are generally purchased by local
municipal governments or individuals for periods one year or less. These factors
translate into a stable customer oriented cost-effective funding source.
13
The following table shows remaining maturity for certificates of deposit over
$100,000 as of December 31, 2005 (In thousands):
Three Months or Less $ 50,718
Over Three Months Through Twelve Months 22,965
Over Twelve Months 20,220
---------
Total $ 93,903
=========
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: At December 31, 2005 and
2004, Federal Home Loan Bank (FHLB) advances totaled $31.7 million and $33.4
million, respectively, with a weighted average interest rate of 3.51 percent and
3.39 percent, respectively. The Corporation considers FHLB advances an added
source of funding, and accordingly, executes transactions from time to time to
meet its funding requirements. The FHLB advances outstanding at December 31,
2005 have varying terms and interest rates.
In addition, at December 31, 2005 short-term borrowings with an average
maturity of 90 days or less and overnight borrowings totaled $65.0 million and
$12.5 million, respectively. The Corporation had no short-term or overnight
borrowings at December 31, 2004.
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses
was $6.5 million at December 31, 2005 as compared to $6.0 million at December
31, 2004. At December 31, 2005, the allowance for loan losses as a percentage of
total loans outstanding was 0.85 percent compared to 1.05 percent at December
31, 2004 and 1.28 percent at December 31, 2003. The provision for loan losses
was $500 thousand for 2005 and $600 thousand for 2004. The allowance as a
percentage of total loans declined in 2005 as compared to 2004 and the provision
also declined with the prior year as loan growth and increases in
commercial-related loans was offset by relatively low levels of delinquencies,
non-performing loans and historical charge-off experience. In addition, the
composition of the Bank's loan portfolio was comprised of a higher percentage of
lower risk 1-4 family mortgages.
The provision was based upon management's review and evaluation of the size
and composition of the loan portfolio, actual loan loss experience, level of
delinquencies, general market and economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and the
existence and net realizable value of the collateral and guarantees securing the
loans. Although management used 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 allowance
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 market conditions in
the state and may be adversely affected should real estate values decline or New
Jersey experiences an adverse economic downturn. Future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Corporation's control.
14
The following table presents the loan loss experience during the periods ended
December 31,
(In Thousands) 2005 2004 2003 2002 2001
Allowance for Loan Losses At $ 6,004 $ 5,467 $ 4,798 $ 4,023 $ 3,435
Beginning of Year
Loans Charged-Off During the Period
Real Estate -- -- -- -- 42
Consumer 14 16 42 59 35
Commercial and Other 2 62 -- 9 15
------- ------- ------- ------- -------
Total Loans Charged-Off 16 78 42 68 92
------- ------- ------- ------- -------
Recoveries During the Period
Real Estate -- -- 37 -- 7
Consumer 2 6 40 36 65
Commercial and Other 12 9 34 7 8
------- ------- ------- ------- -------
Total Recoveries 14 15 111 43 80
------- ------- ------- ------- -------
Net Charge-Offs/(Recoveries) 2 63 (69) 25 12
------- ------- ------- ------- -------
Provision Charged to Expense 500 600 600 800 600
------- ------- ------- ------- -------
Allowance for Loan Losses at End of Year $ 6,502 $ 6,004 $ 5,467 $ 4,798 $ 4,023
======= ======= ======= ======= =======
The following table shows the allocation of the allowance for loan losses and
the percentage of each loan category to total loans as of December 31,
% of % of % of % of % of
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Total to Total to Total to Total to Total
(In Thousands) 2005 Loans 2004 Loans 2003 Loans 2002 Loans 2001 Loans
----------------- ---------------- ---------------- ---------------- ---------------
Residential $ 4,448 82.0 $3,942 81.1 $3,238 80.7 $2,860 80.4 $2,377 77.9
Commercial and Other 1,891 14.9 1,865 15.5 2,016 15.7 1,716 14.2 1,410 14.3
Consumer 163 3.1 197 3.4 213 3.6 222 5.4 236 7.8
----------------- ---------------- ---------------- ---------------- ---------------
Total $ 6,502 100.0 $6,004 100.0 $5,467 100.0 $4,798 100.0 $4,023 100.0
================= ================ ================ ================ ===============
NON-PERFORMING ASSETS:
The following table presents for the years indicated the components of
non-performing assets:
Years Ended December 31,
(In Thousands) 2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Loans Past Due 90 Days or More
And Still Accruing Interest $ 47 $ -- $ 56 $ 203 $ 53
Non-Accrual Loans 339 351 159 180 274
------- ------- ------- ------- -------
Total Non-Performing Loans 386 351 215 383 327
Other Real Estate Owned -- -- -- -- --
------- ------- ------- ------- -------
Total Non-Performing Assets $ 386 $ 351 $ 215 $ 383 $ 327
======= ======= ======= ======= =======
Loan Charge-Offs $ 16 $ 78 $ 42 $ 68 $ 92
Loan Recoveries (14) (15) (111) (43) (80)
------- ------- ------- ------- -------
Net Loan Charge-Offs/(Recoveries) $ 2 $ 63 $ (69) $ 25 $ 12
======= ======= ======= ======= =======
Allowance for Loan Losses $ 6,502 $ 6,004 $ 5,467 $ 4,798 $ 4,023
======= ======= ======= ======= =======
Ratios:
Total Non-Performing Loans/Total Loans 0.05% 0.06% 0.05% 0.09% 0.08%
Total Non-Performing Loans/Total Assets 0.03 0.03 0.02 0.04 0.05
Total Non-Performing Assets/Total Assets 0.03 0.03 0.02 0.04 0.05
Allowance for Loan Losses/Total Loans 0.85 1.05 1.28 1.17 0.96
Allowance for Loan Losses/Total Non-Performing Loans 16.8X 17.1X 25.4X 12.5X 12.3X
15
Interest income of $21 thousand, $11 thousand and $11 thousand would have
been recognized during 2005, 2004 and 2003, respectively, if non-accrual loans
had been current in accordance with their original terms.
CONTRACTUAL OBLIGATIONS:
The following table shows the significant contractual obligations of the
Corporation by expected payment period, as of December 31, 2005. Further
discussion of these commitments is included in the Footnotes to the Consolidated
Financial Statements noted below:
Less Than More Than
(In Thousands) One Year 1-3 Years 3-5 Years 5 Years Total
--------- --------- --------- --------- ---------
Overnight Borrowings $ 12,500 $ -- $ -- $ -- $ 12,500
Short-Term Borrowings 65,000 -- -- -- 65,000
Long-Term Debt Obligations (Note 8) 6,000 5,448 13,137 7,120 31,705
Operating Lease Obligations (Note 13) 2,257 4,474 4,402 12,753 23,886
Purchase Obligations 470 644 117 -- 1,231
Other Long-Term Liabilities (Note 11)(1) 1,100 -- -- -- 1,100
--------- --------- --------- --------- ---------
Total Contractual Obligations $ 87,327 $ 10,566 $ 17,656 $ 19,873 $ 135,422
========= ========= ========= ========= =========
(1) The Corporation does not have an estimate of the actual pension contribution
for 2007 and beyond; however it is anticipated to be approximately $1.1 million
in 2006.
Short-term and overnight borrowings are borrowings from the Federal Home
Loan Bank with defined terms. Long-term debt obligations include borrowings from
the Federal Home Loan Bank with defined terms. The chart is based on scheduled
repayments of principal.
Operating leases represent obligations entered into by the Corporation for
the use of land and premises. The leases generally have escalation terms based
upon certain defined indexes. Common area maintenance charges may also apply and
are adjusted annually based on the terms of the lease agreements.
Purchase obligations represent legally binding and enforceable agreements
to purchase goods and services from third parties and consist of contractual
obligations under data processing service agreements. The Corporation also
enters into various routine rental and maintenance contracts for facilities and
equipment. These contracts are generally for one year and are not significant to
the consolidated financial statements of the Corporation.
OFF-BALANCE SHEET ARRANGEMENTS:
The following table shows the amounts and expected maturities of significant
commitments, as of December 31, 2005. Further discussion of these commitments is
included in Note 13 to the Consolidated Financial Statements:
Less Than More Than
(In Thousands) One Year 1-3 Years 3-5 Years 5 Years Total
--------- --------- --------- --------- ---------
Financial Letters of Credit $ 863 $ -- $ -- $ -- $ 863
Performance Letters of Credit 1,908 48 -- -- 1,956
Commercial Letters of Credit 1,312 3,302 -- -- 4,614
--------- --------- --------- --------- ---------
Total Letters of Credit $ 4,083 $ 3,350 $ -- $ -- $ 7,433
========= ========= ========= ========= =========
Commitments under standby letters of credit, both financial and performance
do not necessarily represent future cash requirements, in that these commitments
often expire without being drawn upon.
16
OTHER INCOME: Other income was $11.5 million in 2005, an increase of 16 percent
over 2004 levels. This increase was attributable to increases in almost all
categories of other income, notably a $920 thousand increase, or 14 percent, in
trust fees. This increase is attributable to increased volume of business as the
market value of assets under management increased to $1.76 billion.
Net gains on sales of securities increased by $401 thousand. This increase
was primarily due to a $560 thousand other-than-temporary non-cash impairment
charge on adjustable rate investment-grade preferred stock in 2004 and a $253
thousand gain on the non-monetary exchange of equity securities in 2005.
Other income of $802 thousand was realized on increased cash surrender
value on Bank Owned Life Insurance (BOLI) policies, as compared to $793 thousand
in 2004. BOLI assists in offsetting the rising costs of employee benefits.
The following table presents the major components of other income:
(In Thousands) 2005 2004 2003
------- ------- -------
Trust Fees $ 7,640 $ 6,720 $ 5,759
Service Charges on Deposit Accounts 1,877 1,743 1,646
Bank Owned Life Insurance 802 793 880
Securities Gains, Net 551 150 1,284
Other Noninterest Income 282 205 201
Safe Deposit Rental Fees 233 233 225
Other Fee Income 110 83 77
------- ------- -------
Total Other Income $11,495 $ 9,927 $10,072
======= ======= =======
OTHER EXPENSES: In 2005, other expenses totaled $27.4 million, an increase of
$2.2 million or 9 percent compared to $25.2 million in 2004. This increase is
commensurate with the growth in the overall level of bank and trust business
activity. The Corporation strives to operate in an efficient manner and control
costs as a means of producing increased earnings and enhancing shareholder
value.
Salaries and benefits expense, which accounts for the largest portion of
other expenses, increased $784 thousand, or 6 percent, in 2005 as compared to
2004. Normal salary increases, as well as additions to staff, branch expansion
and higher group health insurance and pension plan costs accounted for the
increase. These increases were offset, in part, by lower profit sharing plan
contributions and a reduced bonus pool. At December 31, 2005, the Corporation's
full-time equivalent staff was 228 compared with 219 at December 31, 2004.
Premises and equipment expense increased to $6.7 million in 2005 from $5.7
million in 2004, an increase of $1.0 million, or 18 percent. Occupancy expenses
continue to grow as the Corporation invests in new branches and technological
capacity, both vital to the Corporation's future growth and profitability.
Advertising expenses increased $247 thousand, or 36 percent when compared
to 2004 due to additional advertising for the Bridgewater Branch and the
advertising of deposit products. Stationery and supplies expense and postage
expense declined $69 thousand, or 11 percent, and $46 thousand, or 14 percent,
respectively, as cost savings from the implementation of check imaging of
customer checks was realized. Telephone expense declined $51 thousand, or 12
percent, due to technological efficiencies created with the investment in the
new data center in 2004. Professional and legal fees remained relatively
constant from year to year.
17
The following table presents the major components of other expenses:
(In Thousands) 2005 2004 2003
------- ------- -------
Salaries and Benefits $14,682 $13,898 $12,638
Premises and Equipment 6,705 5,668 4,836
Advertising 936 689 460
Professional and Legal Fees 565 583 568
Stationery and Supplies 536 605 521
Trust Department 408 416 487
Telephone 390 441 376
Postage 286 332 318
Other Expenses 2,875 2,559 2,345
------- ------- -------
Total Other Expenses $27,383 $25,191 $22,549
======= ======= =======
INCOME TAXES: Income tax expense for the years ended December 31, 2005 and 2004
was $5.8 million and $6.1 million, respectively. The effective tax rate for the
year ended December 31, 2005 was 30.54 percent compared to 31.70 percent for the
year ended December 31, 2004. Taxable income declined from $19.2 million to
$18.9 million from December 31, 2004 to December 31, 2005. The effective tax
rate in 2005 decreased due to increased 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.
RESULTS OF OPERATIONS 2004 COMPARED TO 2003: Net income for the year ended
December 31, 2004 increased 7 percent to $13.1 million as compared to $12.3
million earned in the year ended December 31, 2003. Earnings per diluted share
were $1.56 in 2004 as compared to $1.47 in 2003, an increase of 6 percent. These
results produced a return on average assets of 1.30 percent as compared to 1.34
percent in 2003 and a return on average shareholders' equity of 14.72 percent as
compared to 15.14 percent in 2003. The increase in net income for 2004 was
primarily due to higher net interest income and trust fees, offset in part by
higher salaries and benefits and premises and equipment expenses. In 2004, the
Corporation experienced strong growth in loans and deposits, which, accompanied
by historically low cost of funds, resulted in strong growth in net interest
income. The results for 2004 also included substantial investments in two new
branch locations and a new data center.
Net interest income, on a fully tax-equivalent basis, increased from $31.8
million in 2003 to $35.9 million in 2004. Average earning assets increased $89.3
million, or 10 percent, from the average balances in 2003 and the interest
earned on these assets increased despite slightly lower yields. Average
interest-bearing liabilities increased $65.7 million, or 10 percent, while
interest expense declined $402 thousand, or 4 percent, over the levels recorded
in 2003. Deposit rates paid in 2004 reflect a decline in the market interest
rates during most of the year; however, rates began to rise later in 2004 as the
Federal Reserve Bank began to increase the Federal funds rate.
Other income was $9.9 million in 2004, a decline of 1 percent over 2003
levels. This decline was primarily due to lower net gains on sales of
securities, which totaled $150 thousand as compared to $1.3 million in 2003.
This decline was due, in part, to a $560 thousand other-than-temporary non-cash
impairment charge on adjustable rate investment-grade preferred stock. Trust
fees rose $961 thousand or 17 percent over the levels recorded in 2003 and was
attributable to increased volume of business as the market value of assets
18
increased $277.3 million or 20 percent over 2003 levels. Other income of $793
thousand was realized on increased cash surrender value on BOLI policies in
2004, as compared to $880 thousand in 2003.
Other expenses, in 2004, totaled $25.2 million, an increase of $2.6 million
or 12 percent compared to $22.5 million in 2003. Salaries and benefits expense
increased $1.3 million or 10 percent in 2004 as compared to 2003. This increase
was directly related to increased officer and staff levels, normal merit
increases, promotional raises and higher benefit costs. The full-time equivalent
number of employees was 219 at December 31, 2004 as compared to 209 at December
31, 2003.
Premises and equipment expense increased to $5.7 million from $4.8 million
in 2003, an increase of $832 thousand or 17 percent. Occupancy expenses grew due
to the investment in two new branches, Oldwick and Morristown, and a new data
center. During 2004, the Corporation invested in the equipment necessary to
image customer checks and create image statements of customer accounts and
enable the Corporation to comply with the Check 21 legislation.
Advertising expenses increased $229 thousand in 2004 due to additional
advertising for two branch grand openings and advertising of deposit products.
Also increasing due to the addition of two new branches was stationery and
supplies expense of $84 thousand and telephone expense of $65 thousand.
Professional and legal fees remained relatively constant from 2004 to 2003
despite additional costs related to the implementation of Section 404 of the
Sarbanes-Oxley Act.
CAPITAL RESOURCES: The solid capital base of the Corporation provides the
ability for future growth and financial strength. Maintaining a strong capital
position supports the Corporation's goal of providing shareholders an attractive
and stable long-term return on investment. Total shareholders' equity grew $4.5
million or 5 percent to $99.2 million at December 31, 2005 as compared with
$94.7 million at December 31, 2004. At December 31, 2005, net unrealized losses
on securities, net of taxes, were $3.0 million as compared to net unrealized
gains on securities, net of taxes, of $1.4 million at December 31, 2004. Federal
regulations require banks to meet target Tier 1 and total capital ratios of 4
percent and 8 percent, respectively. The Corporation's Tier 1 and total capital
ratios are well in excess of regulatory minimums at 16.71 percent and 17.78
percent, respectively. The Corporation's capital leverage ratio was 8.66 percent
at December 31, 2005.
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 feels the Corporation's liquidity position is sufficient to meet
future needs. Cash and cash equivalents, including federal funds sold and
interest-earning deposits, averaged $24.5 million in 2005. In addition, the
Corporation has $341.6 million in securities designated as available for sale.
These securities can be sold in response to liquidity concerns. As of December
31, 2005, investment securities and securities available for sale maturing
within one year amounted to $42.7 million and cash and cash equivalents totaled
$23.5 million.
Another source of liquidity is borrowing capacity. The Corporation has a
variety of sources of short-term liquidity available, including short and
long-term borrowings from the Federal Home Loan Bank of New York, short-term
borrowings from the Federal Reserve Bank Discount Window, federal funds
purchased from correspondent banks and loan participation or sales of loans. The
Corporation also generates liquidity from the regular principal payments
received on its loan portfolio and on its mortgage-backed security portfolio.
19
INTEREST RATE SENSITIVITY: Interest rate sensitivity is a measure of the
relationship between interest-earning assets and supporting funds, which are
susceptible to changes in interest rates during comparable time periods.
Interest rate movements on deposits have made managing the Corporation's
interest rate sensitivity increasingly more important as a means of managing net
interest income. The Corporation's Asset/Liability Committee is responsible for
managing the exposure to changes in market interest rates. The "sensitivity" gap
quantifies the repricing mismatch between assets and supporting funds over
various time intervals. The cumulative gap position as a percentage of total
rate-sensitive assets provides one relative measure of the Corporation's
interest rate exposure.
The Corporation's ratio of rate-sensitive assets to rate-sensitive
liabilities was approximately 0.64 on December 31, 2005 for the next twelve
months subject to certain assumptions explained in the following paragraph.
Since this ratio is less than 1.00, the Corporation has a "negative gap"
position, which may cause its assets to reprice more slowly than its deposit
liabilities. In a declining interest rate environment, interest costs may be
expected to fall faster than the interest received on earning assets, thus
increasing the net interest spread. If interest rates increase, a negative gap
means that the interest received on earning assets may be expected to increase
more slowly than the interest paid on the Corporation's liabilities, therefore
decreasing the net interest spread. Management does not view this amount as
presenting an unusually high risk potential, although no assurances can be given
that the Corporation is not at risk from interest rate increases or decreases.
Expected maturities are contractual maturities adjusted for all projected
payments of principal. For investment securities, loans and long-term debt,
expected maturities are based upon contractual maturity or call dates, projected
repayments and prepayments of principal. The prepayment experience reflected
herein is based on historical experience combined with market consensus
expectations derived from independent external sources. The actual maturities of
these instruments could vary substantially if future prepayments differ from
historical experience. For non-maturity deposit liabilities, in accordance with
standard industry practice and the Corporation's own historical experience,
"decay factors" were used to estimate deposit runoff.
The table below presents the maturity and repricing relationships between
interest-earning assets and interest-bearing deposits as of December 31, 2005
(In Thousands):
Repricing or 0-3 3-12 1-5 Over 5
Maturity Date Months Months Years Years Total
- --------------------------------------- ---------- ---------- ---------- ---------- ----------
Assets
Securities $ 38,528 $ 85,976 $ 225,925 $ 69,239 $ 419,668
Federal Funds Sold 2,631 -- -- -- 2,631
Interest-Earning Deposits 1,295 -- -- -- 1,295
Loans (1) 132,195 154,735 364,449 110,253 761,632
---------- ---------- ---------- ---------- ----------
Total Interest-Sensitive Assets $ 174,649 $ 240,711 $ 590,374 $ 179,492 $1,185,226
========== ========== ========== ========== ==========
Deposits
Certificates of Deposit $ 152,499 $ 84,384 $ 71,272 $ -- $ 308,155
Savings 24,272 7,139 36,297 23,036 90,744
Money Markets 145,536 22,642 112,123 767 281,068
Checking 47,124 13,860 70,471 44,720 176,175
Borrowed Funds 79,972 5,436 18,686 5,111 109,205
Noninterest-Bearing Demand Deposits 49,604 14,546 74,136 47,568 185,854
---------- ---------- ---------- ---------- ----------
Total Interest-Sensitive $ 499,007 $ 148,007 $ 382,985 $ 121,202 $1,151,201
Liabilities
========== ========== ========== ========== ==========
Assets/Liabilities 0.35 1.63 1.54 1.48 1.03
Assets/Liabilities (Cumulative) 0.35 0.64 0.98 1.03
(1) Loan balances do not include nonaccrual loans.
20
MARKET RISK SENSITIVE INSTRUMENTS: A derivative financial instrument includes
futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps or options. However, the Corporation is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of the customers of the Corporation.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
conditions established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Corporation until the instrument is exercised.
The Corporation's exposure to market risk is reviewed on a regular basis by
the Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the statement of condition to minimize the inherent risk while at the
same time maximize income. Management realizes certain risks are inherent and
that the goal is to identify and minimize the risks. Tools used by management
include the standard GAP report and interest rate shock simulation report. The
Corporation has no market risk sensitive instruments held for trading purposes.
Management believes the Corporation's market risk is reasonable at this time.
The following table presents the scheduled maturity of market risk sensitive
instruments as of December 31, 2005 (In Thousands):
Average Estimated
Interest Within 1-5 Over Fair
Maturing In: Rate 1 Year Years 5 Years Total Value
------ ---------- ---------- ---------- ---------- ----------
Assets
Securities 4.17% $ 42,650 $ 127,687 $ 249,331 $ 419,668 $ 418,870
Federal Funds Sold 3.26 2,631 -- -- 2,631 2,631
Interest-Earning Deposits 3.17 1,295 -- -- 1,295 1,295
Loans (1) 5.65 115,615 291,225 361,294 768,134 760,085
------ ---------- ---------- ---------- ---------- ----------
Total $ 162,191 $ 418,912 $ 610,625 $1,191,728 $1,182,881
========== ========== ========== ========== ==========
Liabilities
Savings, Checking
And Money Markets 1.57% $ 547,987 $ -- $ -- $ 547,987 $ 547,987
CDs 3.15 236,875 71,280 -- 308,155 305,818
Borrowed Funds 3.57 83,500 18,585 7,120 109,205 107,932
------ ---------- ---------- ---------- ---------- ----------
Total $ 868,362 $ 89,865 $ 7,120 $ 965,347 $ 961,737
========== ========== ========== ========== ==========
(1) Loan balances do not include nonaccrual loans
EFFECTS OF INFLATION AND CHANGING PRICES: The financial statements and related
financial data presented herein have been prepared in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same magnitude as the prices of goods and services.
21
The Corporation believes residential real estate values have stabilized,
however, if real estate prices in the Corporation's trade area decrease, the
values of real estate collateralizing the Corporation's loans and real estate
held by the Corporation as other real estate owned could also be adversely
affected.
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. 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
anticipates expensing approximately $114 thousand in 2006 based on options
outstanding at December 31, 2005.
FASB Statement No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3, changes the
requirements for the accounting for and reporting of a change in accounting
principle. The Statement applies to all voluntary changes in accounting
principle and to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. The Corporation does not expect FAS No. 154 to impact on the
consolidated financial statements at this time.
The American Institute of Certified Public Accountants (AICPA) Accounting
Standards Executive Committee (AcSEC) Statements of Position (SOP) 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer, issued
in December 2003, effective for loans acquired in fiscal years beginning after
December 15, 2004, with early adoption encouraged. SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investors initial investments in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes loans acquired in business combinations
and applies to all nongovernmental entities, including not-for-profit
organizations, but does not apply to loans originated by the entity. A
transition provision applies for certain aspects of loans currently within the
scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired
Loans. The Corporation does not expect SOP 03-3 to have an impact on the
consolidated financial statements at this time.
FASB Staff Position No. FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments" (the
"FSP"), was issued on November 3, 2005 and addresses the determination of when
an investment is considered impaired; whether the impairment is other than
temporary; and how to measure an impairment loss. The FSP also addresses
accounting considerations subsequent to the recognition of an
other-than-temporary impairment on a debt security, and requires certain
disclosures about unrealized
22
losses that have not been recognized as other-than-temporary impairments. The
FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to
existing authoritative literature concerning other-than-temporary determinations
(principally Statement of Financial Accounting Standards No. 115 and SEC Staff
Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in
earnings equal to the entire difference between the security's cost and its fair
value at the financial statement date, without considering partial recoveries
subsequent to that date. The FSP also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. The FSP is effective for reporting
periods beginning after December 15, 2005. The Corporation does not expect that
the application of the FSP will have a material impact on its financial
condition, results of operations or financial statement disclosures.
In November 2005, the FASB Emerging Issues Task Force (EITF) stated that it
would review employer accounting for deferred compensation or postretirement
benefit aspects of split-dollar life insurance arrangements at its March 2006
meeting. The Corporation's accounting for the Bank owned life insurance and the
existing terms of the split-dollar insurance arrangements with executives and
senior officers could change as a result of actions taken by the EITF. At this
time the Corporation is unable to determine the impact, if any, of any changes
in the accounting in this area.
PGB TRUST AND INVESTMENTS: PGB Trust and Investments, a division of the Bank,
since its inception in 1972 has served in the roles of executor and trustee
while providing investment management, custodial, tax, retirement and financial
services to its growing client base. Officers from PGB Trust and Investments are
available to provide investment services at the Bank's Morristown and Gladstone
Branches.
The book value of assets under management in PGB Trust and Investments
increased from $1.2 billion at December 31, 2004 to $1.3 billion at December 31,
2005, an increase of 9 percent. The corresponding market value at December 31,
2005 reached almost $1.8 billion. Fee income generated by PGB Trust and
Investments was $7.6 million, $6.7 million and $5.8 million in 2005, 2004 and
2003, respectively.
FORWARD LOOKING STATEMENTS: The foregoing 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", or similar statements or variations of such
terms. Actual results may differ materially from such forward-looking
statements. Factors that may cause results to differ materially from such
forward-looking statements include, but are not limited to, an unexpected
decline in the direction of the economy in New Jersey, unexpected changes in
interest rates, unexpected loan prepayment volume, a decline in levels of loan
quality and origination volume and a decline in the volume of increase in trust
assets or deposits. Peapack-Gladstone assumes no obligation for updating any
such forward-looking statements at any time.
SELECTED CONSOLIDATED FINANCIAL DATA:
The following is selected consolidated financial data for the Corporation and
its subsidiaries for the years indicated. This information is derived from the
historical consolidated financial statements and should be read in conjunction
with the Consolidated Financial Statements and Notes.
23
Years Ended December 31,
(In Thousands, Except Per Share Data) 2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
Summary Earnings:
Interest Income $ 55,414 $ 44,917 $ 41,426 $ 43,947 $ 40,523
Interest Expense 20,123 9,860 10,262 12,055 15,486
----------- ----------- ----------- ----------- -----------
Net Interest Income 35,291 35,057 31,164 31,892 25,037
----------- ----------- ----------- ----------- -----------
Provision for Loan Losses 500 600 600 800 600
Net Interest Income After
Provision
For Loan Losses 34,791 34,457 30,564 31,092 24,437
----------- ----------- ----------- ----------- -----------
Other Income, Exclusive of
Securities
Gains, net 10,944 9,777 8,788 7,642 6,220
Other Expenses 27,383 25,191 22,549 21,061 17,561
Securities Gains, net 551 150 1,284 52 189
----------- ----------- ----------- ----------- -----------
Income Before Income Tax Expense 18,903 19,193 18,087 17,725 13,285
----------- ----------- ----------- ----------- -----------
Income Tax Expense 5,773 6,084 5,787 5,800 4,361
----------- ----------- ----------- ----------- -----------
Net Income $ 13,130 $ 13,109 $ 12,300 $ 11,925 $ 8,924
=========== =========== =========== =========== ===========
Per Share Data:
Earnings Per Share-Basic $ 1.58 $ 1.60 $ 1.51 $ 1.48 $ 1.11
Earnings Per Share-Diluted 1.56 1.56 1.47 1.45 1.09
Cash Dividends Declared 0.50 0.42 0.38 0.33 0.29
Book Value End-Of-Period 11.97 11.48 10.43 9.52 7.84
Weighted Average Shares Outstanding 8,286,926 8,200,681 8,122,433 8,083,088 8,053,362
Common Stock Equivalents (Dilutive) 116,348 177,412 231,062 165,453 135,407
Balance Sheet Data (At Period End): 2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
Total Assets $ 1,255,259 $ 1,067,395 $ 968,126 $ 859,808 $ 704,773
Investment Securities 78,084 87,128 97,701 168,066 48,722
Securities Available for Sale 341,584 354,186 355,998 212,259 172,620
Loans 768,473 572,164 427,001 409,760 416,933
Allowance for Loan Losses 6,502 6,004 5,467 4,798 4,023
Total Deposits 1,041,996 935,666 845,771 769,688 630,903
Total Shareholders' Equity 99,155 94,669 85,054 77,158 63,085
Trust Assets (Market Value) 1,761,846 1,691,860 1,414,591 1,238,754 1,024,795
Cash Dividends Declared 4,143 3,226 2,760 2,207 1,846
Selected Performance Ratios:
Return on Average Total Assets 1.12% 1.30% 1.34% 1.53% 1.42%
Return on Average Total Shareholders' 13.49 14.72 15.14 17.06 15.03
Equity
Dividend Payout Ratio 31.56 24.61 22.44 18.51 20.69
Average Total Shareholders' Equity to
Average Assets 8.30 8.82 8.84 8.95 9.44
Non-Interest Expenses to Average Assets 2.34 2.49 2.45 2.70 2.79
Non-Interest Income to Average Assets 0.98 0.98 1.10 0.99 1.02
Asset Quality Ratios (At Period End):
Non-Accrual Loans to Total Loans 0.04% 0.06% 0.04% 0.04% 0.07%
Non-Performing Assets to Total Assets 0.03 0.03 0.02 0.04 0.05
Allowance For Loans Losses to
Non-Performing Loans 16.8X 17.1X 25.4X 12.5X 12.3X
Allowance For Loans Losses to
Total Loans 0.85% 1.05% 1.28% 1.17% 0.96%
Net (Recoveries)/Charge-Offs to Average
Loans Plus Other Real Estate Owned 0.00 0.01 (0.02) 0.01 0.01
Liquidity and Capital Ratios:
Average Loans to Average Deposits 69.25% 55.94% 51.23% 61.09% 67.85%
Total Shareholders' Equity to Total 7.90 8.87 8.79 8.97 8.95
Assets
Tier 1 Capital to Risk Weighted Assets 16.71 19.02 20.38 19.51 18.76
Total Capital to Risk Weighted Assets 17.78 20.25 21.74 20.81 19.98
Tier 1 Leverage Ratio 8.66 9.18 8.91 9.19 9.84
24
The following table sets forth certain unaudited quarterly financial data for
the periods indicated:
Selected 2005 Quarterly Data: March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(In Thousands Except Per Share Data)
Interest Income $ 12,656 $ 13,400 $ 14,266 $ 15,092
Interest Expense 3,629 4,455 5,504 6,535
------------ ------------ ------------ ------------
Net Interest Income 9,027 8,945 8,762 8,557
------------ ------------ ------------ ------------
Provision for Loans Losses 150 200 150 --
Trust Fees 2,013 1,906 1,895 1,826
Securities Gains, Net 298 37 216 --
Other Income 839 818 828 819
Other Expenses 6,555 7,017 6,861 6,950
------------ ------------ ------------ ------------
Net Income Before Income Tax Expense 5,472 4,489 4,690 4,252
Income Tax Expense 1,769 1,271 1,475 1,258
------------ ------------ ------------ ------------
Net Income $ 3,703 $ 3,218 $ 3,215 $ 2,994
============ ============ ============ ============
Earnings Per Share-Basic $ 0.45 $ 0.39 $ 0.39 $ 0.36
Earnings Per Share-Diluted 0.44 0.38 0.38 0.36
Selected 2004 Quarterly Data: March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(In Thousands Except Per Share Data)
Interest Income $ 10,522 $ 10,740 $ 11,547 $ 12,108
Interest Expense 2,159 2,246 2,525 2,930
------------ ------------ ------------ ------------
Net Interest Income 8,363 8,494 9,022 9,178
------------ ------------ ------------ ------------
Provision for Loans Losses 150 150 150 150
Trust Fees 1,683 1,791 1,666 1,580
Securities Gains/(Losses), Net 193 406 12 (461)
Other Income 744 722 797 794
Other Expenses 6,039 6,503 6,142 6,507
------------ ------------ ------------ ------------
Net Income Before Income Tax Expense 4,794 4,760 5,205 4,434
Income Tax Expense 1,513 1,551 1,670 1,350
------------ ------------ ------------ ------------
Net Income $ 3,281 $ 3,209 $ 3,535 $ 3,084
============ ============ ============ ============
Earnings Per Share-Basic $ 0.40 $ 0.39 $ 0.43 $ 0.37
Earnings Per Share-Diluted 0.39 0.38 0.42 0.37
25
Management Report on Internal Control over Financial Reporting
--------------------------------------------------------------
Management of the Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. The Corporation's internal
control system was designed to provide reasonable assurance to the Corporation's
management and board of directors regarding the preparation and fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2005. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon
our assessment we believe that, as of December 31, 2005, the Corporation's
internal control over financial reporting is effective based upon those
criteria. The Corporation's independent auditors have issued an audit report on
our assessment of, and the effective operation of, the Corporation's internal
control over financial reporting. This report begins on the next page.
/s/ Frank A. Kissel /s/ Arthur F. Birmingham
- -------------------------- ----------------------------
Frank A. Kissel Arthur F. Birmingham
Chairman of the Board and Executive Vice President,
Chief Executive Officer Chief Financial Officer and
Chief Accounting Officer
February 28, 2006
26
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Peapack-Gladstone Financial Corporation:
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Peapack-Gladstone
Financial Corporation and subsidiary (the "Corporation") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control -Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of the Corporation is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Corporation's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Peapack-Gladstone Financial
Corporation and subsidiary maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all material respects,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Also,
in our opinion, Peapack-Gladstone Financial Corporation and subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of
27
December 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
condition of Peapack-Gladstone Financial Corporation and subsidiary as of
December 31, 2005 and 2004, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2005, and our report dated February 28,
2006 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Short Hills, New Jersey
February 28, 2006
28
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Peapack-Gladstone Financial Corporation:
We have audited the accompanying consolidated statements of condition of
Peapack-Gladstone Financial Corporation and subsidiary (the "Corporation") as of
December 31, 2005 and 2004, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peapack-Gladstone
Financial Corporation and subsidiary as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of
Peapack-Gladstone Financial Corporation and subsidiary's internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
28, 2006 expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
February 28, 2006
29
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
(In Thousands) 2005 2004
----------- -----------
Assets
Cash and Due From Banks $ 19,573 $ 15,631
Federal Funds Sold 2,631 101
Interest-Earning Deposits 1,295 786
----------- -----------
Total Cash and Cash Equivalents 23,499 16,518
Investment Securities Held to Maturity (Approximate
Market Value $77,286 in 2005 and $87,544 in 2004) 78,084 87,128
Securities Available for Sale 341,584 354,186
Loans 768,473 572,164
Less: Allowance for Loan Losses 6,502 6,004
----------- -----------
Net Loans 761,971 566,160
Premises and Equipment 21,412 20,163
Accrued Interest Receivable 4,828 4,375
Cash Surrender Value of Life Insurance 17,957 17,253
Other Assets 5,924 1,612
----------- -----------
Total Assets $ 1,255,259 $ 1,067,395
=========== ===========
Liabilities
Deposits:
Noninterest-Bearing Demand Deposits $ 185,854 $ 162,275
Interest-Bearing Deposits:
Checking 176,175 194,669
Savings 90,744 106,576
Money Market Accounts 281,068 227,944
Certificates of Deposit over $100,000 93,903 74,005
Certificates of Deposit less than $100,000 214,252 170,197
----------- -----------
Total Deposits 1,041,996 935,666
Short-Term Borrowings 77,500 --
Long-Term Debt 31,705 33,394
Accrued Expenses and Other Liabilities 4,903 3,666
----------- -----------
Total Liabilities 1,156,104 972,726
Shareholders' Equity
Common Stock (No Par Value; Stated Value $0.83
Per Share; Authorized 20,000,000 shares;
Issued Shares, 8,473,718 at December 31, 2005 and 8,393,625
At December 31, 2004; Outstanding shares, 8,284,715 at
December 31, 2005 and 8,246,042 at December 31, 2004) 7,061 6,994
Surplus 88,973 87,991
Treasury Stock at Cost, 189,003 shares in 2005
And 147,583 shares in 2004 (4,022) (2,867)
Retained Earnings 10,100 1,113
Accumulated Other Comprehensive (Loss)/Income,
Net of Income Tax (Benefit)/Expense (2,957) 1,438
----------- -----------
Total Shareholders' Equity 99,155 94,669
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,255,259 $ 1,067,395
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
30
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(In Thousands, Except Per Share Data) 2005 2004 2003
------- ------- -------
Interest Income
Interest and Fees on Loans $38,559 $27,542 $25,135
Interest on Investment Securities
Held to Maturity:
Taxable 1,591 2,650 3,889
Tax-Exempt 1,188 943 590
Interest and Dividends on Securities
Available for Sale:
Taxable 13,619 13,342 11,372
Tax-Exempt 358 363 362
Interest on Federal Funds Sold 73 58 70
Interest-Earning Deposits 26 19 8
------- ------- -------
Total Interest Income 55,414 44,917 41,426
Interest Expense
Interest on Checking Accounts 2,192 991 616
Interest on Savings and Money Market Accounts 6,304 2,686 2,763
Interest on Certificates of Deposit Over $100,000 2,678 1,320 1,539
Interest on Other Certificates of Deposit 5,931 3,514 4,458
Interest on Short-Term Borrowings 1,879 345 156
Interest on Long-Term Debt 1,139 1,004 730
------- ------- -------
Total Interest Expense 20,123 9,860 10,262
------- ------- -------
Net Interest Income Before Provision
For Loan Losses 35,291 35,057 31,164
------- ------- -------
Provision for Loan Losses 500 600 600
------- ------- -------
Net Interest Income After Provision
For Loan Losses 34,791 34,457 30,564
Other Income
Trust Fees 7,640 6,720 5,759
Service Charges and Fees 2,220 2,059 1,948
Bank Owned Life Insurance 802 793 880
Other Income 282 205 201
Securities Gains, Net 551 150 1,284
------- ------- -------
Total Other Income 11,495 9,927 10,072
Other Expenses
Salaries and Employee Benefits 14,682 13,898 12,638
Premises and Equipment 6,705 5,668 4,836
Other Expenses 5,996 5,625 5,075
------- ------- -------
Total Other Expenses 27,383 25,191 22,549
Income Before Income Tax Expense 18,903 19,193 18,087
Income Tax Expense 5,773 6,084 5,787
------- ------- -------
Net Income $13,130 $13,109 $12,300
======= ======= =======
Earnings Per Share
Basic $ 1.58 $ 1.60 $ 1.51
Diluted 1.56 1.56 1.47
See Accompanying Notes to Consolidated Financial Statements
31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
(In Thousands, Except Common Treasury Retained Comprehensive
Per Share Data) Stock Surplus Stock Earnings Income/(Loss) Total
- ---------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
2002, 6,702,523 Shares Outstanding $ 5,661 $ 38,385 $ (2,020) $ 30,290 $ 4,842 $ 77,158
Comprehensive Income
Net Income 2003 12,300 12,300
Unrealized Holding Losses on
Securities Arising During the
Period (Net of Income
Tax Benefit of $1,017) (1,416)
Less: Reclassification
Adjustment for Gains
Included in Net Income
(Net of Income Tax of $513) 771
----------
Net Unrealized Holding
Losses on Securities
Arising
During the Period (Net of
Income Tax Benefit of $1,530) (2,187) (2,187)
----------
Total Comprehensive Income 10,113
Dividends Declared
($0.38 Per Share) (2,760) (2,760)
Common Stock Options
Exercised and Related
Tax Benefits, 42,304 shares 45 869 914
Common Stock Dividend
(Ten Percent), 671,204 568 22,705 (23,273) --
shares
Treasury Stock Transactions (371) (371)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003
7,416,031 Shares Outstanding $ 6,274 61,959 $ (2,391) $ 16,557 $ 2,655 $ 85,054
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive Income
Net Income 2004 13,109 13,109
Unrealized Holding Losses on
Securities Arising During
the
Period (Net of Income
Tax Benefit of $796) (1,119)
Less: Reclassification
Adjustment for Gains
Included in Net Income
(Net of Income Tax of $52) 98
----------
Net Unrealized Holding
Losses on Securities
Arising
During the Period (Net of
Income Tax Benefit of $848) (1,217) (1,217)
----------
Total Comprehensive Income 11,892
Dividends Declared
($0.42 Per Share) (3,226) (3,226)
Common Stock Options
Exercised and Related
Tax Benefits, 83,002 85 1,340 1,425
shares
Common Stock Dividend
(Ten Percent), 747,009 shares 635 24,692 (25,327) --
Treasury Stock Transactions (476) (476)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004
8,246,042 Shares Outstanding $ 6,994 87,991 $ (2,867) $ 1,113 $ 1,438 $ 94,669
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive Income
Net Income 2005 13,130 13,130
Unrealized Holding Losses on
Securities Arising During
the
Period (Net of Income
Tax Benefit of $2,504) (4,037)
Less: Reclassification
Adjustment for Gains
Included in Net Income
(Net of Income Tax of $193) 358
32
Net Unrealized Holding
Losses on Securities Arising
During the Period (Net of --
Income Tax Benefit of $2,697) (4,395) (4,395)
----------
Total Comprehensive Income 8,735
Dividends Declared
($0.50 Per Share) (4,143) (4,143)
Common Stock Options
Exercised and Related
Tax Benefits, 38,673 67 982 1,049
shares
Treasury Stock Transactions (1,155) (1,155)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2005
8,284,715 Shares Outstanding $ 7,061 88,973 $ (4,022) $ 10,100 $ (2,957) $ 99,155
========== ========== ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In Thousands, Except Per Share Data) 2005 2004 2003
--------- --------- ---------
Operating Activities:
Net Income $ 13,130 $ 13,109 12,300
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation 1,991 1,658 1,448
Amortization of Premium and Accretion of Discount on
Securities, Net 1,009 1,450 2,761
Provision for Loan Losses 500 600 600
Deferred Taxes (2,008) (291) (1,221)
Gain on Sale of Securities, Net (298) (150) (1,284)
Gain on Loans Sold (13) (4) (13)
Gain on Disposal of Fixed Assets (28) -- --
Tax Benefit on Stock Option Exercises 347 477 379
Increase in Cash Surrender Value of Life Insurance (704) (705) (801)
(Increase)/Decrease in Accrued Interest Receivable (453) (80) 311
(Increase)/Decrease in Other Assets (2,305) 1,662 (1,125)
Increase/(Decrease) in Accrued Expenses and Other Liabilities 3,683 (2,556) 626
--------- --------- ---------
Net Cash Provided by Operating Activities 14,851 15,170 13,981
--------- --------- ---------
Investing Activities:
Proceeds From Maturities of Investment Securities
Held to Maturity 35,119 25,669 95,655
Proceeds From Maturities of Securities Available for Sale 51,383 42,859 32,110
Proceeds From Calls of Investment Securities Held to Maturity 5,685 2,495 9,170
Proceeds From Sales and Calls of Securities Available for Sale 42,225 102,706 177,391
Purchase of Investment Securities Held to Maturity (32,000) (18,036) (36,073)
Purchase of Securities Available for Sale (88,569) (146,673) (356,821)
Proceeds From Sales of Loans 2,316 769 1,648
Purchase of Loans (191,842) (74,452) --
Net Increase in Loans (6,772) (71,539) (18,807)
Purchases of Premises and Equipment (3,259) (6,689) (2,209)
Proceeds from Disposal of Premises and Equipment 47 -- --
--------- --------- ---------
Net Cash Used in Investing Activities (185,667) (142,891) (97,936)
--------- --------- ---------
Financing Activities:
Net Increase in Deposits 106,330 89,895 76,083
Net Increase in Short-Term Borrowings 77,500 -- --
Proceeds From Long-Term Debt -- 8,000 26,000
Repayments of Long-Term Debt (1,689) (4,638) (968)
Dividends Paid (3,891) (3,134) (2,549)
Exercise of Stock Options 702 948 535
Purchase of Treasury Stock (1,155) (476) (371)
--------- --------- ---------
Net Cash Provided by Financing Activities 177,797 90,595 98,730
--------- --------- ---------
Net Increase/(Decrease) in Cash and Cash Equivalents 6,981 (37,126) 14,775
--------- --------- ---------
Cash and Cash Equivalents at Beginning of Year 16,518 53,644 38,869
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 23,499 $ 16,518 53,644
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 18,399 $ 9,578 $ 10,902
Income Taxes 8,307 6,437 5,918
See Accompanying Notes to Consolidated Financial Statements
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Organization: The consolidated financial
statements of the Corporation are prepared on the accrual basis and include the
accounts of the Corporation and its wholly-owned subsidiary, Peapack-Gladstone
Bank. The consolidated statements also include the Bank's wholly-owned
subsidiary, Peapack-Gladstone Investment Company and its wholly-owned
subsidiary, Peapack-Gladstone Mortgage Group, Inc. While the following footnotes
include the collective results of Peapack-Gladstone Financial Corporation and
Peapack-Gladstone Bank, these footnotes primarily reflect the Bank's and its
subsidiaries' activities. All significant intercompany balances and transactions
have been eliminated from the accompanying consolidated financial statements.
Business: Peapack-Gladstone Bank, the subsidiary of the Corporation, provides a
full range of banking services to individual and corporate customers through its
branch operations in central New Jersey. The Bank is subject to competition from
other financial institutions, is regulated by certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation: The consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the statement of condition and revenues and expenses for that period. Actual
results could differ from those estimates.
Segment Information: Substantially all of the Corporation's business is
conducted through its banking subsidiary and involves the delivery of loan and
deposit products to customers. The Corporation makes operating decisions and
assesses performance based on an ongoing review of these banking operations,
which constitute the only operating segment for financial reporting.
Cash and Cash Equivalents: For purposes of the statements of cash flows, cash
and cash equivalents include cash and due from banks, interest-earning deposits
and federal funds sold. Generally, federal funds are sold for one-day periods.
Securities: Investment securities are comprised of debt securities that the
Corporation has the positive intent and ability to hold to maturity. Such
securities are stated at cost, adjusted for amortization of premium and
accretion of discount on the level-yield method, over the term of the
investments.
Securities that cannot be categorized as investment securities are
classified as securities available for sale. Such securities include debt
securities to be held for indefinite periods of time and not intended to be held
to maturity, as well as marketable equity securities. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes. Securities
available for sale are carried at estimated market value and unrealized holding
gains and losses (net of related tax effects) on such securities are excluded
from earnings, but are included in Shareholders' Equity as Accumulated Other
Comprehensive Income/(Loss). Upon
35
realization, such gains or losses are included in earnings on a trade-date basis
using the specific identification method.
A decline in the estimated market value of any security below cost that is
deemed other-than-temporary results in a reduction in the carrying amount to
estimated market value. The impairment loss is charged to earnings and a new
cost basis of the security is established. In determining whether an impairment
is other-than temporary, the Corporation considers, among other things, the
duration of the impairment, changes in value subsequent to year end, forecasted
performance of the issuer and the Corporation's intent and ability to hold the
security until a market price recovery.
Debt securities that are purchased and held primarily for the purpose of
being sold in the near term are classified as trading. Trading securities are
carried at market value with realized and unrealized gains and losses reported
in non-interest income. There were no trading securities at December 31, 2005 or
2004. Loans: Loans are stated at the principal amount outstanding. Interest on
loans is recognized based upon the principal amount outstanding. Loans are
stated at face value, less unearned income and net deferred fees. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment, on a level-yield method,
to the loan's yield.
Loans are considered past due when they are not paid in accordance with
contractual terms. The accrual of income on loans, including impaired loans, is
discontinued if certain factors indicate reasonable doubt as to the timely
collectibility of such interest, generally when the loan becomes over 90 days
delinquent. A non-accrual loan is not returned to an accrual status until
factors indicating doubtful collection no longer exist. Commercial loans are
generally charged off after an analysis is completed which indicates that
collectibility of the full principal balance is in doubt. Consumer loans are
generally charged off after they become 120 days past due. Mortgage loans are
not generally placed on a nonaccrual status unless the value of the real estate
has deteriorated to the point that a potential loss of principal or interest
exists. Subsequent payments are credited to income only if collection of
principal is not in doubt. If principal and interest payments are brought
contractually current and future collectibility is reasonably assured, loans are
returned to accrual status. Mortgage loans are generally charged off when the
value of the underlying collateral does not cover the outstanding principal
balance. The majority of the Corporation's loans are secured by real estate in
the State of New Jersey.
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
portfolio. The allowance is based on management's evaluation of the loan
portfolio considering 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require the Corporation to
36
recognize additions to the allowance based on their judgments about information
available to them at the time of their examinations.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
fair value of the collateral. Impairment losses are included in the allowance
for loan losses through provisions charged to operations. Premises and
Equipment: Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation charges are computed using the straight-line method.
Equipment and other fixed assets are depreciated over the estimated useful
lives, which range from three to ten years. Premises are depreciated over the
estimated useful life of 40 years, while leasehold improvements are amortized on
a straight-line basis over the shorter of their estimated useful lives or the
term of the lease. Expenditures for maintenance and repairs are expensed as
incurred. The cost of major renewals and improvements are capitalized. Gains or
losses realized on routine dispositions are recorded as other income or other
expense.
Other Real Estate Owned: Other real estate owned is carried at fair value minus
estimated costs to sell, based on an independent appraisal. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Any subsequent write-downs that may be
required to the carrying value of the properties or losses on the sale of
properties are charged to the valuation allowance on other real estate owned or
to other expense. The Corporation had no other real estate owned as of December
31, 2005 and 2004.
Income Taxes: The Corporation files a consolidated Federal income tax return.
Separate State income tax returns are filed for each subsidiary based on current
laws and regulations.
The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in its
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on the enacted tax rates applicable to taxable income for
the years in which these temporary differences are expected to be recovered or
settled. Such tax assets and liabilities are adjusted for the effect of a change
in tax rates in the period of enactment.
In February 2006, the State of New Jersey Division of Taxation adopted new
regulations relating to the dividends paid by Real Estate Investment Trusts
(REIT). Dividends received from a REIT are now ineligible for inclusion in the
dividends received deduction for corporations. This regulation applies to
dividends paid on or after February 6, 2006. The Corporation believes that this
new regulation will not have a material impact on its financial condition or
results of operations during 2006.
Stock Option Plans: At December 31, 2005, the Corporation had stock-based
employee and non-employee director compensation plans, which are described more
fully in Note 12. The Corporation accounts for those plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations.
37
No stock-based employee compensation cost is reflected in net income as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant.
On December 8, 2005, the Board of Directors accelerated the vesting of
116,928 of unvested stock options awarded to outside directors and senior
officers under the Corporation's 1998 and 2002 Stock Option Plans and 1998 and
2002 Stock Option Plans for Outside Directors. All but 1,000 of the total
accelerated options had an exercise price greater than $28.25, the closing price
of the Corporation's common stock on the American Stock Exchange on December 8,
2005. As a result of the acceleration, options to acquire the shares, with
exercise prices ranging from $26.73 per share to $30.00 per share, which
otherwise would have vested from time to time over the next four and one-half
years, became immediately exercisable.
The Board's decision to accelerate the vesting of these options was in
response to a review of the Corporation's long-term incentive compensation
programs in light of changes in market practices and recently issued changes in
accounting rules resulting from the issuance by the FASB of Statement of
Financial Accounting Standard No. 123 (revised 2004), Statement 123(R), Share
Based Payment, which the Corporation has adopted effective January 1, 2006.
Statement 123(R) requires that all share-based payments to employees, including
grants of employee stock options, be recognized in the financial statements
based on their fair values beginning with the first interim or annual period
after December 15, 2005. Management believes that accelerating the vesting of
these options prior to the adoption of Statement 123(R) will result in the
Corporation not being required to recognize aggregate compensation expense of
$1.21 million for the five years ending December 31, 2010.
The following table illustrates the effect on net income and earnings per
share 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:
(In Thousands Except Per Share Data) 2005 2004 2003
---------- ---------- ----------
Net Income:
As Reported $ 13,130 $ 13,109 $ 12,300
Less: Total Stock-Based Compensation
Expense Determined Under the Fair Value Based
Method on All Stock Options, Net of Related
Tax Effects 1,603 1,559 193
---------- ---------- ----------
Pro Forma $ 11,527 $ 11,550 $ 12,107
Earnings Per Share:
As Reported
Basic $ 1.58 $ 1.60 $ 1.51
Diluted 1.56 1.56 1.47
Pro Forma
Basic $ 1.39 $ 1.41 $ 1.49
Diluted 1.37 1.38 1.45
38
Earnings Per Share: In calculating earnings per share, there are no adjustments
to net income, which is the numerator of both the Basic and Diluted EPS. The
weighted average number of shares outstanding used in the denominator for
Diluted EPS is increased over the denominator used for Basic EPS by the effect
of potentially dilutive common stock equivalents utilizing the treasury stock
method. Common stock equivalents are common stock options outstanding.
The following table shows the calculation of both Basic and Diluted
earnings per share for the years ended December 31, 2005, 2004 and 2003:
(In Thousands Except Per Share Data) 2005 2004 2003
---------- ---------- ----------
Net Income $ 13,130 $ 13,109 $ 12,300
========== ========== ==========
Basic Weighted Average Shares Outstanding 8,286,926 8,200,681 8,122,433
Plus: Common Stock Equivalents 116,348 177,412 231,062
---------- ---------- ----------
Diluted Weighted Average Shares Outstanding 8,403,274 8,378,093 8,353,495
========== ========== ==========
Earnings Per Share:
Basic $ 1.58 $ 1.60 $ 1.51
Diluted 1.56 1.56 1.47
Treasury Stock: Treasury stock is recorded using the cost method and is
presented as an unallocated reduction of shareholders' equity.
Comprehensive Income: Comprehensive income consists of net income and the change
during the period in net unrealized gains (losses) on securities available for
sale, net of tax, and is presented in the consolidated statements of changes in
shareholders' equity.
Reclassification: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2005 presentation.
2. INVESTMENT SECURITIES HELD TO MATURITY
A summary of amortized cost and approximate market value of investment
securities held to maturity included in the consolidated statements of condition
as of December 31, 2005 and 2004 follows:
2005
------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Treasury $ 499 $ -- $ (6) $ 493
U.S. Government-Sponsored Agencies 1,497 12 -- 1,509
Mortgage-Backed Securities 21,435 96 (271) 21,260
State and Political Subdivisions 54,653 39 (668) 54,024
------------ ------------ ------------ ------------
Total $ 78,084 $ 147 $ (945) $ 77,286
============ ============ ============ ============
2004
------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government-Sponsored Agencies $ 10,006 $ 153 $ (1) $ 10,158
Mortgage-Backed Securities 33,399 350 (75) 33,675
State and Political Subdivisions 42,221 192 (235) 42,177
39
Other Debt Securities 1,502 32 -- 1,534
------------ ------------ ------------ ------------
Total $ 87,128 $ 727 $ (311) $ 87,544
============ ============ ============ ============
The amortized cost and approximate market value of investment securities
held to maturity as of December 31, 2005, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
Maturing In: Approximate
(In Thousands) Amortized Cost Market Value
-------------- --------------
One Year or Less $ 27,235 $ 27,140
After One Year Through Five Years 19,366 18,990
After Five Years Through Ten Years 10,048 9,896
-------------- --------------
56,649 56,026
Mortgage-Backed Securities 21,435 21,260
-------------- --------------
Total $ 78,084 $ 77,286
============== ==============
Securities having an approximate carrying value of $300 thousand as of
December 31, 2005 were pledged to secure public funds and for other purposes
required or permitted by law.
The following table presents the Corporation's investment securities held
to maturity with continuous unrealized losses and the approximate market value
of these investments as of December 31, 2005 and 2004.
2005
Duration of Unrealized Loss
Less Than 12 Months 12 Months or Longer Total
Approximate Approximate Approximate
Market Unrealized Market Unrealized Market Unrealized
(In Thousands) Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S Treasury $ 493 $ (6) $ -- $ -- $ 493 $ (6)
Mortgage-Backed Securities 7,331 (95) 6,757 (176) 14,088 (271)
State and Political
Subdivisions 34,879 (278) 14,316 (390) 49,195 (668)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 42,703 $ (379) $ 21,073 $ (566) $ 63,776 $ (945)
============ ============ ============ ============ ============ ============
2004
Duration of Unrealized Loss
Less Than 12 Months 12 Months or Longer Total
Approximate Approximate Approximate
Market Unrealized Market Unrealized Market Unrealized
(In Thousands) Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. Government-Sponsored
Agencies $ 3,015 $ (1) $ -- $ -- $ 3,015 $ (1)
Mortgage-Backed Securities 13,984 (75) -- -- 13,984 (75)
State and Political
Subdivisions 19,214 (191) 927 (44) 20,141 (235)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 36,213 $ (267) $ 927 $ (44) $ 37,140 $ (311)
============ ============ ============ ============ ============ ============
Management has determined that these unrealized losses are temporary and
due to interest rate fluctuations rather than the credit ratings of the issuers.
The Corporation has a policy to purchase only from issuers with an investment
grade credit rating and monitors credit ratings periodically.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government-sponsored agencies. It is expected
that the securities would not be
40
settled at a price substantially less than the amortized cost of the investment.
Because the decline in fair value is attributable to changes in interest rates
and not credit quality, and because the Corporation has the intent to hold these
investments until maturity, these investments are not considered
other-than-temporarily impaired.
Most of the securities issued by state and political subdivisions in the
table above are issued by municipalities located in New Jersey. These
investments represent purchases in municipal bonds, which generally have lower
coupons; however many are not taxable by the Federal government and their
effective yield is higher. Because the Corporation intends to hold these
securities to mature at par, no loss is anticipated.
3. SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate market value of securities
available for sale included in the consolidated statements of condition as of
December 31, 2005 and 2004 follows:
2005
-----------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
----------- ----------- ------------ ------------
U.S. Government-Sponsored Agencies $ 114,442 $ 162 $ (1,983) $ 112,621
Mortgage-Backed Securities 185,226 34 (3,820) 181,440
State and Political Subdivisions 8,909 163 (10) 9,062
Other Securities 37,846 801 (186) 38,461
----------- ----------- ------------ ------------
Total $ 346,423 $ 1,160 $ (5,999) $ 341,584
=========== =========== ============ ============
2004
-----------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
----------- ----------- ------------ ------------
U.S. Treasury $ 1,012 $ 14 $ - $ 1,026
U.S. Government-Sponsored Agencies 146,635 1,399 (837) 147,197
Mortgage-Backed Securities 163,563 831 (674) 163,720
State and Political Subdivisions 9,312 360 (3) 9,669
Other Securities 31,411 1,243 (80) 32,574
----------- ----------- ------------ ------------
Total $ 351,933 $ 3,847 $ (1,594) $ 354,186
=========== =========== ============ ============
The amortized cost and approximate market value of debt securities
available for sale as of December 31, 2005, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
Maturing In: Approximate
(In Thousands) Amortized Cost Market Value
-------------- ------------
One Year or Less $ 15,117 $ 15,415
After One Year Through Five Years 97,582 96,058
After Five Years Through Ten Years 13,996 13,941
After Ten Years 34,502 34,730
-------------- ------------
161,197 160,144
41
Mortgage-Backed Securities 185,226 181,440
-------------- ------------
Total $ 346,423 $ 341,584
============== ============
Securities having an approximate carrying value of $19.2 million and $14.8
million as of December 31, 2005 and December 31, 2004, respectively, were
pledged to secure public funds and for other purposes required or permitted by
law. Gross gains on sales of securities of $443 thousand, $747 thousand and $1.6
million and gross losses on sales of securities of $145 thousand, $37 thousand
and $363 thousand were realized in 2005, 2004 and 2003, respectively. In 2005,
the Corporation recognized $253 thousand in gains on the non-monetary exchange
of equity securities. In the fourth quarter of 2004, the Corporation recognized
a non-cash charge of $560 thousand related to an other-than-temporary impairment
charge for Fannie Mae (FNMA) and Freddie Mac (FHLMC) preferred stock with a cost
of $2.0 million.
The following table presents the Corporation's available for sale
securities with continuous unrealized losses and the approximate market value of
these investments.
2005
Duration of Unrealized
Loss
Less Than 12 Months 12 Months or Longer Total
Approximate Approximate Approximate
Market Unrealized Market Unrealized Market Unrealized
(In Thousands) Value Losses Value Losses Value Losses
-------------- ----------- ----------- ---------- ------------ ----------
U.S. Government-Sponsored
Agencies $ 29,333 $ (316) $ 70,081 $ (1,667) $ 99,414 $ (1,983)
Mortgage-Backed Securities 122,849 (2,189) 49,319 (1,631) 172,168 (3,820)
State and Political -- -- 332 (10) 332 (10)
Subdivisions
Other Securities 4,935 (65) 1,473 (27) 6,408 (92)
Marketable Equity 772 (62) 328 (32) 1,100 (94)
Securities
-------------- ----------- ----------- ---------- ------------ ----------
Total $ 157,889 $ (2,632) $ 121,533 $ (3,367) $ 279,422 $ (5,999)
============== =========== =========== ========== ============ ==========
2004
Duration of Unrealized
Loss
Less Than 12 Months 12 Months or Longer Total
Approximate Approximate Approximate
Market Unrealized Market Unrealized Market Unrealized
(In Thousands) Value Losses Value Losses Value Losses
-------------- ----------- ----------- ---------- ------------ ----------
U.S. Government-Sponsored
Agencies $ 64,143 $ (604) $ 14,807 $ (233) $ 78,950 $ (837)
Mortgage-Backed Securities 57,964 (450) 13,430 (224) 71,394 (674)
State and Political 344 (3) -- -- 344 (3)
Subdivisions
Other Securities 4,942 (59) -- -- 4,942 (59)
Marketable Equity 315 (21) -- -- 315 (21)
Securities
-------------- ----------- ----------- ---------- ------------ ----------
Total $ 127,708 $ (1,137) $ 28,237 $ (457) $ 155,945 $ (1,594)
============== =========== =========== ========== ============ ==========
Management has determined that these unrealized losses are temporary and
due to interest rate fluctuations and volatility rather than the credit ratings
of the issuers. The Corporation has a policy to purchase only from issuers with
an investment grade credit rating and monitors credit ratings periodically.
The unrealized losses on investments in U.S. government-sponsored agency
bonds were caused by interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because the Corporation has the
ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government-sponsored agencies. It is expected
that the securities would not be
42
settled at a price substantially less than the amortized cost of the investment.
Because the decline in fair value is attributable to changes in interest rates
and not credit quality, and because the Corporation has the ability and intent
to hold these investments until a market price recovery or maturity, these
investments are not considered other-than-temporarily impaired.
The other securities with unrealized losses caused by interest rate
increases are adjustable and will price to par at the time of the rate reset.
The Corporation has the ability and intent to hold these investments until a
market price recovery or maturity; therefore these investments are not
considered other-than-temporarily impaired.
The marketable equity securities with unrealized losses are evaluated on an
individual issuer basis. The Corporation evaluated the near-term prospects of
the issuer in relation to the severity and duration of the impairment. Based on
that evaluation and the Corporation's ability and intent to hold these
securities for a reasonable period of time sufficient for a price recovery, the
Corporation does not consider these securities to be other-than-temporarily
impaired.
4. LOANS
Loans outstanding as of December 31, consisted of the following:
(In Thousands) 2005 2004
------------ ------------
Loans Secured by 1-4 Family $ 506,304 $ 361,591
Commercial Real Estate 196,431 162,166
Commercial Loans 33,322 20,821
Construction Loans 25,387 17,703
Consumer Loans 5,014 7,181
Other Loans 2,015 2,702
------------ ------------
Total Loans $ 768,473 $ 572,164
============ ============
Included in the totals above for December 31, 2005 is $3.9 million of
unamortized discount and $3.1 million of deferred origination costs net of
deferred origination fees as compared to $3.8 million of unamortized discount
and $1.6 million of deferred origination costs net of deferred origination fees
for December 31, 2004.
Non-accrual loans totaled $339 thousand and $351 thousand at December 31,
2005 and 2004, respectively. At December 31, 2005 there were $47 thousand of
loans past due 90 days or more and still accruing interest. There were no loans
past due 90 days or more and still accruing interest at December 31, 2004. There
are no commitments to lend additional amounts on non-accrual loans. The amount
of interest income recognized on year-end non-accrual loans totaled $6 thousand,
$14 thousand and $3 thousand in 2005, 2004 and 2003, respectively. Interest
income of $21 thousand, $11 thousand and $11 thousand would have been recognized
during 2005, 2004 and 2003, respectively, under contractual terms for such
non-accrual loans.
The Corporation defines an impaired loan as an investment in a loan that is
on non-accrual status with a principal outstanding balance in excess of $100
thousand. Residential mortgage loans, a group of homogeneous loans that are
collectively evaluated
43
for impairment, and consumer loans are excluded. There were no impaired loans
during the years ended December 31, 2005, 2004 and 2003.
In the ordinary course of business, the Corporation, through the Bank, may
extend credit to officers, directors or their associates. These loans are
subject to the Corporation's normal lending policy. All loans are performing.
The following table shows the changes in loans to officers, directors or
their associates.
(In thousands)
Balance, December 31, 2004 $ 2,383
New loans 357
Repayments (791)
-------
Balance, December 31, 2005 $ 1,949
=======
5. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses for the years
indicated follows:
Years Ended December 31,
(In Thousands) 2005 2004 2003
------- ------- -------
Balance, Beginning of Year $ 6,004 $ 5,467 $ 4,798
Provision Charged to Expense 500 600 600
Loans Charged-Off (16) (78) (42)
Recoveries 14 15 111
------- ------- -------
Balance, End of Year $ 6,502 $ 6,004 $ 5,467
======= ======= =======
6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, follows:
(In Thousands) 2005 2004
------- -------
Land $ 3,518 $ 3,518
Buildings 8,554 8,554
Furniture and Equipment 14,717 13,421
Leasehold Improvements 7,905 7,251
Projects in Progress 1,545 382
------- -------
36,239 33,126
------- -------
Less: Accumulated Depreciation 14,827 12,963
------- -------
Total $21,412 $20,163
======= =======
Depreciation expense amounted to $2.0 million, $1.7 million and $1.4
million for the years ended December 31, 2005, 2004 and 2003, respectively.
7. DEPOSITS
44
Interest expense on time deposits of $100,000 or more totaled $2.7
million, $1.3 million and $1.5 million in 2005, 2004 and 2003, respectively.
The scheduled maturities of time deposits are as follows:
(In Thousands)
2006 $236,875
2007 40,832
2008 14,727
2009 6,713
2010 9,008
--------
Total $308,155
========
8. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from the Federal Home Loan Bank of New York (FHLB) totaled $31.7
million and $33.4 million at December 31, 2005 and 2004, respectively, with a
weighted average interest rate of 3.51 percent and 3.39 percent, respectively.
These advances are secured by blanket pledges of certain 1-4 family residential
mortgages totaling $239.3 million at December 31, 2005 and $160.3 million at
December 31, 2004. Advances totaling $23.0 million at December 31, 2005, have
fixed maturity dates, while advances totaling $8.7 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 1,448
2009 2,000
2010 11,137
Over 5 Years 7,120
--------
Total $ 31,705
========
At December 31, 2005, short-term borrowings at FHLB with an average
maturity of 90 days or less, were $65.0 million, while the Corporation had no
short-term borrowings at December 31, 2004. The weighted average interest rate
for short-term borrowings at December 31, 2005 was 3.84 percent.
Overnight borrowings totaled $12.5 million at December 31, 2005 as compared
to no overnight borrowings at December 31, 2004. For the years ended, December
31, 2005 and 2004, overnight borrowings at FHLB averaged $27.3 million with a
weighted average interest rate of 3.40 percent and $20.8 million with a weighted
average interest rate of 1.66 percent, respectively. The maximum amount
outstanding at any month end during 2005 and 2004 was $59.0 million and $48.3
million, respectively. At December
45
31, 2005, unused short-term or overnight borrowings commitments totaled $122.5
million from FHLB and $50.0 million from correspondent banks.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation discloses estimated fair values for its significant
financial instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of significant financial instruments:
CASH AND SHORT-TERM INVESTMENTS-The carrying amount of cash and short-term
investments is considered to be fair value.
SECURITIES-The fair value of securities is based upon quoted market prices.
LOANS-The fair value of loans is estimated by discounting the future cash flows
using the buildup approach consisting of four components: the risk-free rate,
credit quality, operating expense and prepayment option price. DEPOSITS-The fair
value of deposits with no stated maturity, such as demand deposits, checking
accounts, savings and money market accounts, is equal to the carrying amount.
The fair value of certificates of deposit is based on the discounted value of
contractual cash flows.
OVERNIGHT AND SHORT-TERM BORROWINGS-The carrying amount of overnight and
short-term borrowings is considered to be fair value.
LONG-TERM DEBT-The fair value of FHLB advances is based on the discounted value
of estimated cash flows. The discount rate is estimated using the rates
currently offered for similar remaining advance terms.
The following table summarizes carrying amounts and fair values for financial
instruments at December 31:
2005 2004
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and Cash Equivalents $ 23,499 $ 23,499 $ 16,518 $ 16,518
Investment Securities 78,084 77,286 87,128 87,544
Securities Available for Sale 341,584 341,584 354,186 354,186
Loans, Net of Allowance for
Loans Losses 761,971 753,922 566,160 566,655
Financial Liabilities:
Deposits 1,041,996 1,039,659 935,666 934,929
Overnight and Short-Term
Borrowings 77,500 77,500 -- --
Long-Term Debt 31,705 30,431 33,394 32,709
46
10. INCOME TAXES
The income tax expense included in the consolidated financial statements
for the years ended December 31, is allocated as follows:
(In Thousands) 2005 2004 2003
------- ------- -------
Federal:
Current Expense $ 7,570 $ 6,079 $ 6,939
Deferred Benefit (1,637) (102) (1,304)
State:
Current Expense 211 296 69
Deferred (Benefit)/Expense (371) (189) 83
------- ------- -------
Total Income Tax Expense $ 5,773 $ 6,084 $ 5,787
======= ======= =======
Shareholders' Equity
Deferred (Benefit)/Expense on
Unrealized (Loss)/Gain on
Available for Sale $(2,697) $ (848) $ 1,530
======= ======= =======
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35 percent to income before taxes as a result of
the following:
(In Thousands) 2005 2004 2003
------- ------- -------
Computed "Expected" Tax Expense $ 6,616 $ 6,717 $ 6,330
Increase/(Decrease) in Taxes Resulting From:
Tax-Exempt Income (492) (516) (384)
State Income Taxes (104) 70 99
Bank Owned Life Insurance Income (244) (244) (279)
Other (3) 57 21
------- ------- -------
Total Income Tax Expense $ 5,773 $ 6,084 $ 5,787
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are as follows:
(In Thousands) 2005 2004
------- -------
Deferred Tax Assets:
Allowance for Loans Losses $ 2,598 $ 2,397
Unrealized Loss on Securities Available for Sale 1,882 --
Post Retirement Benefits Other Than Pensions 166 32
Securities Impairment -- 224
Prepaid Alternative Minimum Assessment 164 58
Capital Loss Carryover 24 3
Contribution Limitation 37 13
Other 45 --
------- -------
47
Total Gross Deferred Tax Assets $ 4,916 $ 2,727
======= =======
Deferred Tax Liabilities:
Investment Securities, Principally Due to
The Accretion of Bond Discount $ 78 $ 70
Unrealized Gain on Securities Available for Sale -- 815
Deferred Loan Origination Costs and Fees 605 947
Deferred REIT Dividend -- 972
Bank Premises and Equipment,
Principally Due to Difference in Depreciation 1,430 1,825
------- -------
Total Gross Deferred Tax Liabilities 2,113 4,629
------- -------
Net Deferred Tax Asset/(Liability) $ 2,803 $(1,902)
======= =======
Based upon taxes paid and projected future taxable income, management
believes that it is more likely than not that the gross deferred tax assets will
be realized.
11. BENEFIT PLANS
PENSION PLAN:
The Corporation has a defined benefit pension plan covering substantially
all of its salaried employees. The benefits are based on an employee's
compensation during the five years before retirement, age at retirement and
years of service. The Corporation makes annual contributions to the plan equal
to the maximum amount that can be deducted for income tax purposes.
The following table shows the change in benefit obligation, the change in
plan assets and the funded status for the plan at December 31:
(In Thousands) 2005 2004
-------- --------
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $ 10,228 $ 8,448
Service Cost 1,404 1,098
Interest Cost 586 504
Actuarial Loss 602 677
Benefits Paid (437) (499)
-------- --------
Benefit Obligation at End of Year $ 12,383 $ 10,228
======== ========
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $ 8,092 $ 6,672
Actual Return on Plan Assets 483 675
Employer Contribution 1,312 1,244
Benefits Paid (437) (499)
-------- --------
Fair Value of Plan Assets at End of Year $ 9,450 $ 8,092
======== ========
Funded Status
Unfunded Projected Benefit Obligation $ (2,933) $ (2,136)
Unrecognized Transition Asset (25) (32)
Unrecognized Prior Service Cost (2) (2)
48
Unrecognized Net Actuarial Loss 2,926 2,341
-------- --------
(Accrued)/Prepaid Benefit Cost $ (34) $ 171
======== ========
The accumulated benefit obligation for the pension plan was $9.0 million
and $7.4 million at December 31, 2005 and 2004, respectively.
Net periodic expense for the years ended December 31, included the
following components:
(In Thousands) 2005 2004 2003
------- ------- -------
Service Cost $ 1,404 $ 1,098 $ 978
Interest Cost 586 504 437
Expected Return on Plan Assets (534) (468) (395)
Amortization of:
Net Loss 68 23 55
Unrecognized Prior Service Cost -- 1 1
Transition Asset (7) (7) (7)
------- ------- -------
Net Periodic Benefit Cost $ 1,517 $ 1,151 $ 1,069
======= ======= =======
The following table shows the actuarial assumptions applied for the
valuation of plan obligations at December 31:
2005 2004 2003
------- ------- -------
Discount Rate 5.50% 5.75% 6.00%
Rate of Increase on Future Compensation 3.00 3.00 3.00
The Discount Rate was obtained using a high-quality (AA rated), corporate
bond rate at year end.
The following table shows the actuarial assumptions applied for the net
periodic expense at December 31:
2005 2004 2003
------- ------- -------
Discount Rate 5.75% 6.00% 6.50%
Rate of Increase on Future Compensation 3.00 3.00 3.00
Expected Long-Term Rate of Return on Plan Assets 5.75 6.00 6.50
The Corporation's overall expected long-term rate of return on assets is
5.50 percent. The expected long-term rate of return is based on the portfolio as
a whole and not on the sum of the returns on individual assets categories.
The weighted-average asset allocation of the Corporation's pension benefits
plan assets at December 31, were as follows:
2005 2004
------ ------
Equity Securities 63.4% 60.7%
Debt Securities 32.2 31.0
Cash and Cash Equivalents 4.4 8.3
------ ------
49
Total 100.0% 100.0%
====== ======
The Plan's Trustees are granted full discretion to buy, sell, invest and
reinvest in accordance with the pension plan's investment policy. The Trustees
establish target asset allocations for equity and debt securities at their
regular committee meetings. Cash equivalents are invested in money market funds
or in other high quality investments approved by the Trustees of the Plan.
The Corporation expects to contribute $1.1 million to its pension plan in
2006.
The following table shows the estimated future pension benefit payments.
(In Thousands)
2006 $ 146
2007 233
2008 293
2009 316
2010 477
2011-2015 3,772
SAVINGS AND PROFIT SHARING PLANS
In addition to the retirement plan, the Corporation sponsors a profit
sharing plan and a savings plan under Section 401(k) of the Internal Revenue
Code, covering substantially all salaried employees over the age of 21 with at
least 12 months service. Under the savings portion of the plan, employee
contributions are partially matched by the Corporation. Expense for the savings
plan was approximately $42 thousand, $37 thousand and $36 thousand in 2005, 2004
and 2003, respectively. Contributions to the profit sharing portion are made at
the discretion of the Board of Directors and all funds are invested solely in
Peapack-Gladstone Corporation common stock. The contribution to the profit
sharing plan was $225 thousand in 2005, $425 thousand in 2004 and $375 thousand
in 2003.
12. STOCK OPTION PLANS
The Corporation's incentive stock option plans allow the granting of up to
798,229 shares of the Corporation's common stock to certain key employees. The
options granted under these plans are, in general, exercisable not earlier than
one year after the date of grant, at a price equal to the fair market value of
the 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. Options granted to officers at or above the senior vice
president level are immediately exercisable at the date of grant. As noted in
Footnote 1, the Board of Directors accelerated the vesting of 37,728 unvested
stock options awarded to senior officers under the Corporation's 1998 and 2002
Stock Option Plans on December 8, 2005.
Changes in options outstanding during the past three years were as follows:
50
Number of Exercise Price Weighted Average
Shares Per Share Exercise Price
------------------------------------------------
Balance, December 31, 2002 331,203 $5.56-$26.65 $14.13
Granted During 2003 2,893 24.84-28.93 26.39
Exercised During 2003 (28,470) 5.56-20.52 11.16
Forfeited During 2003 (2,401) 15.19-28.93 18.45
------------------------------------------------
Balance, December 31, 2003 303,225 $5.56-$28.85 $14.49
------------------------------------------------
Granted During 2004 224,965 27.36-32.14 28.95
Exercised During 2004 (53,115) 5.56-24.17 12.00
Forfeited During 2004 (4,885) 13.68-28.89 21.74
------------------------------------------------
Balance, December 31, 2004 470,190 $5.56-$32.14 $21.61
------------------------------------------------
Granted During 2005 8,950 26.73-29.50 28.54
Exercised During 2005 (35,399) 5.56-18.66 10.71
Forfeited During 2005 (2,578) 13.68-30.59 24.67
------------------------------------------------
Balance, December 31, 2005 441,163 $11.85-$32.14 $22.61
================================================
The following table summarizes information about stock options outstanding
at December 31, 2005.
Shares Remaining Shares
Exercise Price Outstanding Contractual Life Exercisable
- --------------------------------------------------------------------------------
< $12.00 68,062 1.6 years 68,062
12.01 - 16.05 17,380 4.9 years 16,282
16.06 - 19.20 120,449 4.0 years 112,690
19.21 - 26.00 2,589 6.8 years 1,301
26.01 - 28.90 216,703 7.7 years 195,996
28.91 - 32.14 15,980 8.5 years 12,236
- --------------------------------------------------------------------------------
$22.61 * 441,163 5.7 years 406,567
================================================================================
* Weighted average exercise price
The Corporation has non-qualified stock option plans for non-employee
directors. The plans allow the granting of up to 398,796 shares of the
Corporation's common stock. The options granted under these plans are, in
general, exercisable not earlier than one year after the date of grant, at a
price equal to the fair market value of the 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 noted in
Footnote 1, the Board of Directors accelerated the vesting of 79,200 of the
unvested stock options awarded to outside directors under the Corporation's 1998
and 2002 Stock Option Plans for Outside Directors on December 8, 2005.
Changes in options outstanding during the past three years were as follows:
Number of Exercise Price Weighted Average
Shares Per Share Exercise Price
-----------------------------------------------
Balance, December 31, 2002 227,951 $5.56-$17.53 $10.86
-----------------------------------------------
51
Exercised During 2003 (31,971) 5.56-15.68 6.95
-----------------------------------------------
Balance, December 31, 2003 195,980 $5.56-$17.53 $12.54
-----------------------------------------------
Granted During 2004 98,999 28.89 28.89
Exercised During 2004 (52,555) 5.56-17.53 6.40
-----------------------------------------------
Balance, December 31, 2004 242,424 $5.56-$28.89 $20.04
-----------------------------------------------
Exercised During 2005 (44,694) 5.56-17.53 7.33
-----------------------------------------------
Balance, December 31, 2005 197,730 $15.68-$28.89 $22.91
===============================================
The following table summarizes information about stock options outstanding
at December 31, 2005.
Exercise Shares Remaining Shares
Price Outstanding Contractual Life Exercisable
- --------------------------------------------------------------------------------
< $16.00 30,567 5.2 years 23,583
16.01 - 20.00 68,164 2.4 years 68,164
20.01 - 28.89 98,999 8.0 years 98,999
- --------------------------------------------------------------------------------
$22.91 * 197,730 5.6 years 190,746
================================================================================
* Weighted average exercise price
At December 31, 2005, there were 84,666 additional shares available for
grant under the Plans. The per share weighted-average fair value of stock
options granted during 2005, 2004 and 2003 was $9.51, $10.32 and $9.24 on the
date of grant using the Black Scholes option-pricing model with the following
weighted -average assumptions: 2005 - expected dividend yield of 1.69%, expected
volatility of 40%, risk free interest rate of 3.79%, and an expected life of 5
years; 2004 - expected dividend yield of 1.18%, expected volatility of 40%, risk
free interest rate of 3.26%, and an expected life of 5 years; 2003 - expected
dividend yield of 1.29%, expected volatility of 40%, risk free interest rate of
3.27%, and an expected life of 5 years.
13. COMMITMENTS
The Corporation, in the ordinary course of business, is a party to
litigation arising from the conduct of its business. Management does not
consider that these actions depart from routine legal proceedings and believes
that such actions will not affect its financial position or results of its
operations in any material manner. There are various outstanding commitments and
contingencies, such as guarantees and credit extensions, including loan
commitments of $110.0 million and $71.7 million at December 31, 2005 and 2004,
respectively, which are not included in the accompanying consolidated financial
statements. These commitments include unused commercial and home equity lines of
credit.
The Corporation issues financial standby letters of credit that are within
the scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." These are irrevocable undertakings by the Corporation to guarantee
payment of a specified financial obligation. Most of the Corporation's financial
standby letters of credit arise in
52
connection with lending relationships and have terms of one year of less. The
maximum potential future payments the Corporation could be required to make
equals the contract amount of the standby letters of credit and amounted to $7.4
million and $3.1 million at December 31, 2005 and 2004, respectively. The
Corporation's recognized liability for financial standby letters of credit was
insignificant at December 31, 2005.
For commitments to originate loans, the Corporation's maximum exposure to
credit risk is represented by the contractual amount of those instruments. Those
commitments represent ultimate exposure to credit risk only to the extent that
they are subsequently drawn upon by customers. The Corporation uses the same
credit policies and underwriting standards in making loan commitments as it does
for on-balance-sheet instruments. For loan commitments, the Corporation would
generally be exposed to interest rate risk from the time a commitment is issued
with a defined contractual interest rate.
At December 31, 2005, the Corporation was obligated under non-cancelable
operating leases for certain premises. Rental expense aggregated $2.1 million,
$2.0 million and $1.5 million for the years ended December 31, 2005, 2004 and
2003, respectively, which is included in premises and equipment expense in the
consolidated statements of income.
The minimum annual lease payments under the terms of the lease agreements,
as of December 31, 2005, were as follows:
(In Thousands)
2006 $ 2,257
2007 2,235
2008 2,239
2009 2,209
2010 2,193
Thereafter 12,753
--------
Total $23,886
========
14. REGULATORY CAPITAL
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and
53
of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2005, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2005, the Corporation and the Bank met all requirements
to be considered well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Corporation and
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table.
The Corporation's actual capital amounts and ratios are presented in the
table.
To Be Well
Capitalized Under For Capital
Prompt Corrective Adequacy
(In Thousands) Actual Action Provisions Purposes
Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- ------ --------- ------
As of December 31, 2005:
Total Capital
(To Risk-Weighted Assets) $108,011 17.78% $ 60,744 10.00% $ 48,595 8.00%
Tier I Capital
(To Risk-Weighted Assets) 101,509 16.71 36,446 6.00 24,298 4.00
Tier I Capital
(To Average Assets) 101,509 8.66 58,596 5.00 35,157 3.00
As of December 31, 2004:
Total Capital
(To Risk-Weighted Assets) $ 98,626 20.25% $ 48,707 10.00% $ 38,966 8.00%
Tier I Capital
(To Risk-Weighted Assets) 92,622 19.02 29,224 6.00 19,483 4.00
Tier I Capital
(To Average Assets) 92,622 9.18 50,464 5.00 30,278 3.00
15. CONDENSED FINANCIAL STATEMENTS OF PEAPACK-GLADSTONE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
The following information of the parent company only financial statements
should be read in conjunction with the notes to the consolidated financial
statements.
Statements of Condition
December 31,
(In Thousands) 2005 2004
--------- ---------
Assets:
Cash $ 91 $ 101
Interest-Earning Deposits 6,985 4,355
Securities Available for Sale 13,175 13,930
Investment in Subsidiary 79,861 77,308
Other Assets 321 228
--------- ---------
Total Assets $ 100,433 $ 95,922
========= =========
Liabilities:
Other Liabilities $ 1,278 $ 1,253
--------- ---------
Total Liabilities 1,278 1,253
54
Shareholders' Equity
Common Stock 7,061 6,994
Surplus 88,973 87,991
Treasury Stock (4,022) (2,867)
Retained Earnings 10,100 1,113
Accumulated Other Comprehensive
(Loss)/Income, Net of Income Tax (2,957) 1,438
--------- ---------
Total Shareholders' Equity 99,155 94,669
--------- ---------
Total Liabilities and Shareholders' Equity $ 100,433 $ 95,922
========= =========
Statements of Income
Years Ended December 31,
(In Thousands) 2005 2004 2003
------- ------- -------
Income
Dividend From Bank $ 6,000 $ 5,750 $ 5,250
Other Income 627 452 372
Securities Gains, Net 395 236 90
------- ------- -------
Total Income 7,022 6,438 5,712
------- ------- -------
Expenses
Other Expenses 109 105 104
------- ------- -------
Total Expenses 109 105 104
------- ------- -------
Income Before Income Tax Expense and
Equity in Undistributed Earnings of
Bank 6,913 6,333 5,608
Income Tax Expense 318 196 110
------- ------- -------
Net Income Before Equity in
Undistributed Earnings of Bank 6,595 6,137 5,498
Equity in Undistributed Earnings of Bank 6,535 6,972 6,802
------- ------- -------
Net Income $13,130 $13,109 $12,300
======= ======= =======
Statements of Cash Flows
Years Ended December 31,
(In Thousands) 2005 2004 2003
-------- -------- --------
Cash Flows From Operating Activities:
Net Income $ 13,130 $ 13,109 $ 12,300
Less Equity in Undistributed Earnings (6,535) (6,972) (6,802)
Amortization and Accretion on Securities 11 13 13
Gain on Securities Available for Sale (142) (236) (90)
Increase in Other Assets (93) (145) (33)
Increase/(Decrease) In Other Liabilities 368 295 (10)
-------- -------- --------
Net Cash Provided by Operating Activities 6,739 6,064 5,378
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds From Sales of Securities
Available for Sale 4,855 5,476 1,670
Proceeds From Maturities of Securities
Held to Maturity -- -- 2,000
Proceeds From Maturities of Securities
55
Available for Sale 1,500 1,950 635
Purchase of Securities Available for Sale (6,130) (9,356) (6,371)
-------- -------- --------
Net Cash Used in Investing Activities 225 (1,930) (2,066)
-------- -------- --------
Cash Flows From Financing Activities:
Dividends Paid (3,891) (3,134) (2,549)
Exercise of Stock Options 702 948 535
Treasury Stock Transactions (1,155) (476) (371)
-------- -------- --------
Net Cash Used in Financing Activities (4,344) (2,662) (2,385)
-------- -------- --------
Net Increase in Cash 2,620 1,472 927
Cash at Beginning of Period 4,456 2,984 2,057
-------- -------- --------
Cash at End of Period $ 7,076 $ 4,456 $ 2,984
======== ======== ========
COMMON STOCK PRICES (UNAUDITED)
The following table shows the 2005 and 2004 range of prices paid on known
trades of Peapack-Gladstone Financial Corporation common stock.
Dividend
2005 High Low Per Share
-------- -------- ---------
1st Quarter $ 31.77 $ 25.94 $ 0.110
2nd Quarter 30.50 25.50 0.110
3rd Quarter 30.38 25.81 0.140
4th Quarter 29.28 25.95 0.140
Dividend
2004 High Low Per Share
-------- -------- ---------
1st Quarter $ 31.55 $ 27.73 $ 0.100
2nd Quarter 32.27 25.35 0.100
3rd Quarter 31.09 26.09 0.110
4th Quarter 33.00 28.75 0.110
56
OFFICERS
Loan and Administration T. Leonard Hill Chairman Emeritus *
Gladstone Frank A. Kissel Chairman of the Board & CEO*
Robert M. Rogers President & COO *
Arthur F. Birmingham Executive Vice President & CFO *
Garrett P. Bromley Executive Vice President & Chief Lending Officer
Paul W. Bell Senior Vice President & Facilities Manager
Robert A. Buckley Senior Vice President & Branch Administrator
Finn M.W. Caspersen, Jr Senior Vice President & Chief Corporate Risk Manager
Michael J. Giacobello Senior Vice President & Senior Commercial Loan Officer
Bridget J. Walsh Senior Vice President & Human Resource Director
Stephanie Adkins Vice President
Todd T. Brungard Vice President & Bank Secrecy Act Compliance Officer
Karen M. Ferraro Vice President
Dirk Graham Vice President
John G. Hariton Vice President & Corporate Trainer
Charles T. Kirk Vice President
Valerie L. Kodan Vice President
Katherine M. Kremins Vice President
Douglas J. Moore Vice President
Christopher P. Pocquat Vice President
Mary M. Russell Vice President & Comptroller
S. Shay Schoenbaum Vice President & Marketing Officer
Scott T. Searle Vice President
James S. Stadtmueller Vice President
Margaret Volk Vice President & Mortgage Officer
Elaine Cardoso Assistant Vice President
Betty J. Cariello Assistant Vice President
E. Sue Gianetti Assistant Vice President
Susan Smith Assistant Vice President
Sheryl L. Cappa Assistant Cashier
Lynda Cross Assistant Cashier & Security Officer
Marjorie A. Dzwonczyk Assistant Cashier & CRA and Compliance Officer
Lisa Lough Assistant Cashier
Eram F. Mirza Assistant Cashier
David L. Petry Assistant Cashier
Michele Ravo Assistant Cashier
Laura Watt Assistant Cashier
Antoinette Rosell Corporate Secretary *
Operations Hubert P. Clarke Senior Vice President Information Systems
Bedminster V. Sherri LiCata Vice President
Diane M. Ridolfi Vice President
Frank C. Waldron Vice President
Sandra Borngesser Assistant Vice President
Carol L. Behler Assistant Cashier
Vita M. Parisi Assistant Cashier
Kristin A. Romeo Assistant Cashier
Margaret A. Trimmer Assistant Cashier
Audit Karen M. Chiarello Vice President & Auditor
Chester Shanin Bachstein Assistant Vice President
Loan John A. Scerbo Vice President
Morristown Nancy L. Wynant Vice President
PGB Trust & Investments Craig C. Spengeman President & Chief Investment Officer *
Gladstone Bryant K. Alford First Vice President & Senior Trust Officer
John M. Bonk First Vice President & Director of Business Development
John C. Kautz First Vice President & Senior Investment Officer
Roy C. Miller First Vice President & Trust Officer
John E. Creamer Vice President & Trust Officer
Glenn C. Guerin Vice President & Trust Officer
Michael E. Herrmann Vice President & Trust Officer
Katherine S. Quay Vice President & Trust Officer
Anne M. Smith Vice President & Trust Officer
Kurt G. Talke Vice President & Trust Officer
Scott Marshman Assistant Vice President & Trust Officer
Edward P. Nicolicchia Assistant Vice President & Trust Officer
Catherine A. McCatharn Trust Officer & Assistant Corporate Secretary *
57
David C. O'Meara Trust Officer
Patricia K. Sawka Trust Officer
Maribeth Brown Assistant Trust Officer
Helen F. Plummer Assistant Trust Officer
Morristown Robert M. Figurelli Vice President & Trust Officer
John J. Lee Vice President & Trust Officer
Michael T. Tormey Vice President & Trust Officer
Thomas S. Diemar Assistant Trust Officer
Branches
Bernardsville Charles A. Studdiford, III Vice President
Carol E. Ritzer Assistant Cashier
Bridgewater Denise Parella Vice President
Todd Young Assistant Vice President
Califon Ann W. Kallam Assistant Vice President
Chatham Main Street Valerie A. Olpp Vice President
Lisa Treich Assistant Cashier
Chatham Shunpike Donna I. Gisone Vice President
Chester Joan S. Wychules Assistant Vice President
Clinton Carolyn I. Sepkowski Vice President
Far Hills Mary Anne Maloney Assistant Vice President
Fellowship Janet E. Battaglia Assistant Cashier
Gladstone Thomas N. Kasper Vice President
Annette Malanga Assistant Cashier
Hillsborough Teresa M. Lawler Assistant Cashier
Long Valley Amy E. Glaser Vice President
James A. Ciccone Assistant Cashier
Mendham Linda S. Ziropoulos Assistant Vice President
Anna Mentes Assistant Cashier
Morristown Kathleen T. Becker Assistant Vice President
New Vernon Donna I. Gisone Vice President
Oldwick Tonya M. Flowers Assistant Cashier
Deborah J. Krehely Assistant Cashier
Pluckemin Lee Ann Hunt Vice President
Rohinton E. Madon Assistant Cashier
Pottersville Tracey Todd Assistant Cashier
Warren Ronald F. Field Assistant Cashier
58
DIRECTORS
ANTHONY J. CONSI, II
Senior Vice President, Weichert Realtors
Morris Plains, NJ
PAMELA HILL
President, Ferris Corp
Gladstone, NJ
T. LEONARD HILL Chairman Emeritus
FRANK A. KISSEL
Chairman of the Board & Chief Executive Officer
JOHN D. KISSEL
Turpin Realty, Inc.
Far Hills, NJ
JAMES R. LAMB, ESQ.
James R. Lamb, P.C.
Morristown, NJ
EDWARD A. MERTON
President, Merton Excavating & Paving Co.
Chester, NJ
F. DUFFIELD MEYERCORD
Managing Director and Partner, Carl Marks Consulting Group, LLC
Bedminster, NJ
JOHN R. MULCAHY
Far Hills, NJ
ROBERT M. ROGERS
President & Chief Operating Officer
PHILIP W. SMITH, III
President, Phillary Management, Inc.
Far Hills, NJ
CRAIG C. SPENGEMAN
President & Chief Investment Officer
JACK D. STINE
Trustee, Proprietary House Association
Perth Amboy, NJ
59
OFFICES
LOAN & ADMINISTRATION BUILDING
158 Route 206 North, Gladstone, NJ 07934 (908) 234-0700
www.pgbank.com
--------------
PGB TRUST & INVESTMENTS
190 Main Street, Gladstone, NJ 07934 (908) 719-4360
BERNARDSVILLE
36 Morristown Road, Bernardsville, NJ 07924 (908) 766-1711
BRIDGEWATER
619 East Main Street, Bridgewater, NJ 08807 (908) 429-9988
CALIFON
438 Route 513, Califon, NJ 07830 (908) 832-5131
CHATHAM MAIN STREET
311 Main Street, Chatham, NJ 07928 (973) 635-8500
CHATHAM SHUNPIKE
650 Shunpike Road, Chatham Township, NJ 07928 (973) 377-0081
CHESTER
350 Main Street, Chester, NJ 07930 (908) 879-8115
CLINTON
189 Center Street, Clinton, NJ 08809 (908) 238-1935
FAR HILLS
26 Dumont Road, Far Hills, NJ 07931 (908) 781-1018
FELLOWSHIP VILLAGE
8000 Fellowship Road, Basking Ridge, NJ 07920 (908) 719-4332
GLADSTONE (Main Office)
190 Main Street, Gladstone, NJ 07934 (908) 719-4360
HILLSBOROUGH
417 Route 206 North, Hillsborough, NJ 08844 (908) 281-1031
LONG VALLEY
59 East Mill Road (Route 24), Long Valley, NJ (908) 876-3300
07853
MENDHAM
17 East Main Street, Mendham, NJ 07945 (973) 543-6499
MORRISTOWN
233 South Street, Morristown, NJ 07960 (973) 455-1118
NEW VERNON
Village Road, New Vernon, NJ 07976 (973) 540-0444
OLDWICK
169 Lamington Road, Oldwick, NJ 08858 (908) 439-2320
PLUCKEMIN
468 Route 206 North, Bedminster, NJ 07921 (908) 658-4500
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POTTERSVILLE
11 Pottersville Road, Pottersville, NJ 07979 (908) 439-2265
WARREN
58 Mountain Boulevard, Warren, NJ 07059 (908) 757-2805
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SHAREHOLDER INFORMATION
Corporate Address
158 Route 206, North
Gladstone, New Jersey 07934
(908) 234-0700
www.pgbank.com
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Stock Listing
Peapack-Gladstone Financial Corporation common stock is traded on the American
Stock Exchange under the symbol PGC and reported in the Wall Street Journal and
most major newspapers.
Independent Registered Public Accounting Firm
KPMG LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Shareholder Relations
Arthur F. Birmingham, Executive Vice President and Chief Financial Officer
(908) 719-4308
birmingham@pgbank.com
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Annual Meeting
The annual meeting of shareholders of Peapack-Gladstone Financial Corporation
will be held on April 25, 2006 at 2:00 p.m. at Fiddler's Elbow Country Club in
Bedminster Township.
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