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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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PEAPACK-GLADSTONE FINANCIAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-3537895
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
158 ROUTE 206 NORTH, GLADSTONE, NEW JERSEY 07934
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER (908) 234-0700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_].
Number of shares of Common stock outstanding as of September 30, 1999:
2,564,102
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PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the December
31, 1998 Annual Report on Form 10-K for Peapack-Gladstone Financial Corporation
(the "Corporation").
The Corporation considers that all adjustments (all of which are normal
recurring accruals) necessary for a fair statement of the financial position and
results of operations for these periods have been made; however, results for
such interim periods are subject to year-end adjustments. Results for such
interim periods are not necessarily indicative of results for a full year.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1999 1998
-------------- -------------
ASSETS
Cash and due from banks $ 12,689 $ 13,079
Federal funds sold 33,363 29,600
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Total cash and cash equivalents 46,052 42,679
Investment Securities: (approximate market value
$45,069 in 1999 and $44,327 in 1998) 45,265 43,581
Securities Available for Sale: (amortized cost
$85,826 in 1999 and $90,781 in 1998) 83,913 92,255
Loans:
Loans secured by real estate 204,845 190,530
Other loans 23,827 23,326
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Total loans 228,672 213,856
Less: Allowance for loan losses 2,516 2,224
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Net loans 226,156 211,632
Premises and equipment 9,134 9,170
Accrued interest receivable 3,011 2,963
Other assets 1,517 516
========= =========
TOTAL ASSETS $ 415,048 $ 402,796
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 93,428 $ 85,881
Interest-bearing deposits:
Checking 70,326 79,778
Savings 72,365 70,962
Money market accounts 29,964 26,363
Certificates of deposit over $100,000 27,881 27,608
Certificates of deposit less than $100,000 78,982 72,241
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Total deposits 372,946 362,833
Accrued expenses and other liabilities 2,256 2,008
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TOTAL LIABILITIES 375,202 364,841
STOCKHOLDERS' EQUITY
Common stock (no par value; stated value $1 2/3
per share; authorized 10,000,000 shares; issued
2,575,718 shares.) 4,088 4,085
Surplus 12,454 12,483
Treasury Stock at cost, 11,616 shares in 1999
and 14,240 shares in 1998 (641) (791)
Retained Earnings 25,213 21,252
Accumulated other comprehensive income-
net unrealized (losses) gains on securities
available for sale (net of income taxes) (1,268) 926
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TOTAL STOCKHOLDERS' EQUITY 39,846 37,955
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 415,048 $ 402,796
========= =========
See accompanying notes to consolidated financial statements.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
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INTEREST INCOME
Interest and fees on loans $ 12,649 $ 11,339 $ 4,331 $ 3,995
Interest on investment securities:
Taxable 1,370 2,016 488 650
Tax-exempt 419 329 139 113
Interest on securities available for sale:
Taxable 4,371 4,115 1,442 1,346
Dividends 0 3 0 3
Interest on federal funds sold 903 648 340 266
---------- ---------- ---------- ----------
Total interest income 19,712 18,450 6,740 6,373
INTEREST EXPENSE
Interest on savings account deposits 2,277 2,434 769 821
Interest on certificates of deposit over $100,000 1,069 996 344 419
Interest on other time deposits 2,743 2,807 924 955
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Total interest expense 6,089 6,237 2,037 2,195
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 13,623 12,213 4,703 4,178
Provision for loan losses 294 273 96 91
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,329 11,940 4,607 4,087
---------- ---------- ---------- ----------
OTHER INCOME
Service charges and fees for other services 3,402 3,063 1,085 910
Securities gains 16 118 16 5
Other income 103 78 49 24
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Total other income 3,521 3,259 1,150 939
OTHER EXPENSES
Salaries and employee benefits 5,058 4,773 1,715 1,569
Premises and equipment 1,923 1,725 695 612
Other expense 2,464 2,201 986 731
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Total other expenses 9,445 8,699 3,396 2,912
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INCOME BEFORE INCOME TAX EXPENSE 7,405 6,500 2,361 2,114
Income tax expense 2,425 2,398 643 798
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NET INCOME $ 4,980 $ 4,102 $ 1,718 $ 1,316
========== ========== ========== ==========
EARNINGS PER SHARE (Reflects a 5% stock
dividend effective November 1, 1999)
Basic $ 1.94 $ 1.60 $ 0.67 $ 0.51
Diluted $ 1.89 $ 1.55 $ 0.65 $ 0.50
Average basic shares outstanding 2,562,494 2,565,287 2,563,656 2,561,831
Average diluted shares outstanding 2,643,447 2,620,148 2,644,609 2,651,753
See accompanying notes to consolidated financial statements.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
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1999 1998
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Balance, Beginning of Period $ 37,955 $ 33,639
Comprehensive income:
Net Income 4,980 4,102
Change in net unrealized (losses) gains on securities
available for sale (2,194) 662
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Total Comprehensive income 2,786 4,764
Common Stock Options Exercised 24 (52)
Purchase of Treasury Stock 0 (389)
Cash Dividends Declared (919) (801)
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Balance, September 30, $ 39,846 $ 37,161
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See accompanying notes to consolidated financial statements.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1999 1998
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OPERATING ACTIVITIES:
Net Income: $ 4,980 $ 4,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 668 593
Amortization of premium and accretion of
discount on securities, net 184 48
Provision for loan losses 294 273
Provision for deferred taxes (25) (70)
Gains on securities (16) (118)
Increase in interest receivable (48) 45
Increase (decrease) in other assets 283 (113)
Increase in other liabilities 248 1,109
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NET CASH PROVIDED BY OPERATING ACTIVITIES 6,568 5,869
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INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 11,536 8,180
Proceeds from maturities of securities available
for sale 6,000 10,000
Proceeds from calls of investment securities 4,600 7,000
Proceeds from sales and calls of securities available
for sale 17,663 27,020
Purchase of investment securities (17,871) (10,174)
Purchase of securities available for sale (20,802) (32,269)
Net decrease (increase) in short term investments 1,911 (5,610)
Net increase in loans (14,818) (30,995)
Net decrease in other real estate 0 340
Purchase of premises and equipment (632) (972)
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NET CASH USED IN INVESTING ACTIVITIES (12,413) (27,480)
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FINANCING ACTIVITIES:
Net increase in deposits 10,113 9,345
Dividends paid (919) (801)
Exercise of stock options 24 (52)
Purchase of treasury stock 0 (389)
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NET CASH USED IN FINANCING ACTIVITIES 9,218 8,103
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Net increase (decrease) in cash and cash equivalents 3,373 (13,508)
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Cash and cash equivalents at beginning of period 42,679 33,240
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Cash and cash equivalents at end of period $ 46,052 $ 19,732
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Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits $ 6,267 $ 6,182
Income taxes 2,677 2,398
Noncash investing activities:
Transfer of loans to Other Real Estate 41 0
See accompanying notes to consolidated financial statements.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Peapack-Gladstone Financial Corporation
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly-owned subsidiary, the Peapack-Gladstone Bank. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements.
2. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management considers
adequate to reflect the risk of future losses inherent in the Corporation's loan
portfolio. In its evaluation of the adequacy of the allowance for loan losses,
management considers past loan loss experience, changes in the composition of
non-performing loans, the condition of borrowers facing financial pressure, the
relationship of the current level of the allowance to the credit portfolio and
to non-performing loans and existing economic conditions. The process of
determining the adequacy of the allowance is necessarily judgmental and subject
to changes in external conditions. The allowance is increased by provisions
charged to expense and reduced by net charge-offs.
3. EARNINGS PER COMMON SHARE - BASIC AND DILUTED
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share includes any additional common shares as if all
potentially dilutive common shares were issued (i.e., stock options).
4. COMPREHENSIVE INCOME
The Corporation's total comprehensive income for the nine months ended September
30, 1999 and 1998 was $2,786,000 and $4,764,000 and for the three months ended
September 30, 1999 and 1998 was $1,459,000 and $1,978,000. The difference
between the Corporation's net income and total comprehensive income for the
three months ended and nine months ended September 30, 1999 and 1998 relates to
the change in the net unrealized gains (losses) on securities available for sale
during the applicable period of time.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL: This Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 which involve risks and
uncertainties. Such statements are not historical facts and include expressions
about management's confidence and strategies and management's expectations about
new and existing programs and products, relationships, opportunities, technology
and market conditions. You can identify forward looking statements by looking
for words such as "expect", "look", "believe", "anticipate", "may", "will", or
similar statements or variations of such terms. These forward-looking statements
involve certain risks and uncertainties. Actual results may differ materially
from the results the forward-looking statements contemplate because of, among
others, the following factors: the direction of interest rates is different than
anticipated, declines in the levels of loan quality and origination volume,
relationships with major customers including sources for loans, a decline in
trust business, unsuccessful completion of the implementation of Year 2000
technology changes, as well as the adverse effects of economic conditions and
legal and regulatory barriers and structure.
On August 26, 1999 the Corporation announced the signing of a definitive
agreement to acquire all of the outstanding shares of Chatham Savings, FSB in a
stock for stock exchange which is intended to be a tax-free exchange.
Under terms of the Agreement, each outstanding share of Chatham common stock
will be exchanged for 2.1837 shares of Corporation common stock. As a result, a
total of 305,730 shares of Corporation common stock will be exchanged for
Chatham common stock. The exchange ratio and total shares to be issued have been
adjusted for a 5% stock dividend effective November 1, 1999.
The Agreement, which has been approved by the Boards of Directors of both
organizations and by the sole shareholder of Chatham, is subject to approval by
the Federal Reserve Board and the New Jersey Department of Banking and
Insurance. The Corporation anticipates that the Merger will close later this
year or early in 2000.
During the third quarter of 1999, the Corporation formed a real estate
investment trust as a subsidiary of Peapack-Gladstone Bank to utilize income tax
advantages and enhance liquidity available under New Jersey tax law. Under the
name of Peapack-Gladstone Mortgage Group, Inc., this new corporation purchased
approximately $130 million of the residential mortgage loans of the Bank on July
9, 1999, and retained the Bank as servicer of those loans.
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and selected consolidated financial data
included within the report.
RESULTS OF OPERATIONS: Net income for the nine month period ended September 30,
1999 was $4,980,000, as compared to net income of $4,102,000 in 1998. On a
diluted per share basis, the Corporation earned $1.89 and $1.55 during the first
nine months of 1999 and 1998, respectively. Higher net interest income and
higher other income, offset in part by increased other expenses, were the
primary factors contributing to the increase in net income.
Net income for the quarter ended September 30, 1999 was $1,718,000, representing
a $402,000 increase from the third quarter net income in 1998. Higher net
interest income, higher other income and lower taxes, offset in part by higher
other expenses contributed to the increase in net income.
NET INTEREST INCOME: Net interest income after provision for loan losses for the
first nine months of 1999 increased 12% to $13,329,000 from $11,940,000 in 1998.
The increase in net interest income was primarily due to increased loan volume,
which was funded by increased low cost core deposits.
Average loans for the nine month period were $220,368,000, an increase of
$30,716,000 or 16% over the previous year. Average interest-earning assets
during the first nine months of 1999 were $396,734,000, representing an increase
of $52,019,000 or 15% over the previous year. Average interest-bearing
liabilities rose to $279,275,000 for the first nine months of 1999 as compared
with $260,698,000 during the same period in 1998.
The yield on interest-earning assets, including loans, securities and federal
funds sold declined during the first nine months of 1999 to 6.88% from 7.08%
during the same period of 1998. This decline is attributable to the overall
decline in interest rates as the Federal Reserve Bank lowered the federal funds
rate 25 basis points on three separate occasions during the later part of 1998.
The rate paid on interest-bearing liabilities declined to 2.92% during the first
nine months of 1999 from 3.20% the previous year. Lower rates paid on savings
accounts, down 48 basis points, and certificates of deposits, down 42 basis
points, were the major factors contributing to the lower cost of funds. Average
noninterest-bearing demand deposits increased to $87,807,000, representing a 23%
increase over the previous year.
During the third quarter of 1999, net interest income was $4,607,000 as compared
to $4,087,000 in 1998. The increase in net interest income for the quarter was
primarily due to an increase in residential mortgage loan volume, funded by
growth of low cost core deposits.
OTHER INCOME: Other income before gains on securities was $3,505,000 and
$3,141,000 for the first nine months of 1999 and 1998, respectively. This
increase was primarily due to higher trust fees, up $429,000 from 1998 levels.
During the third quarter of 1999, other income before securities gains was
$1,134,000 compared to $934,000 a year earlier. Trust fees accounted for this
increase, up $215,000 for the period.
During the first nine months of 1999, gains on sale of securities amounted to
$16,000 as compared to $118,000 a year earlier.
OTHER EXPENSES: Other expenses for the first nine months of 1999 increased from
$8,699,000 in 1998 to $9,445,000 in 1999 an increase of 8.6%. Salary expense for
the first nine months of 1999 increased $437,000 as compared with the same
period in 1998. Merit and promotional raises plus several additions to the
professional staff contributed to this increase. Partially offsetting the
increase in salary expense was lower benefit expense, which declined $152,000
from the prior year period. The decline was primarily due to reduced pension
contribution costs.
Premises and equipment expense increased $198,000 or 11% during the first nine
months of 1999. This increase was primarily due to higher depreciation expenses
on computer equipment purchased during 1998 as the Corporation upgraded various
computer hardware and software.
During the third quarter of 1999, other expenses increased $484,000 from the
same period in 1998, representing an increase of 17%. Higher salary expense,
depreciation, Trust Department and professional fees accounted for the increase.
The increase in professional fees was attributable to consulting costs of
$185,000 in connection with the formation of a real estate investment trust
subsidiary.
PROVISION FOR LOAN LOSSES: At September 30, 1999, the allowance for loan losses
amounted to $2,516,000 as compared with $2,097,000 a year earlier.
Non-performing loans (consisting of all non-accrual loans and loans over 90 days
past due and still accruing interest) were $611,000 and $1,182,000 at September
30, 1999 and 1998, respectively. A provision of $294,000 and $273,000 for loan
losses was recorded for the nine months ended September 30, 1999 and 1998,
respectively. Net charge-offs were $2,000 during the first nine months of 1999
as compared with net charge-offs of $69,000 during the same period in 1998.
A provision for loan losses of $96,000 was recorded in the third quarter of
1999, as compared to $91,000 in the third quarter of 1998. Net recoveries were
$13,000 during the third quarter of 1999 as compared to net charge-offs of
$48,000 during the third quarter of 1998.
A summary of the allowance for loan losses for the nine month period ended
September 30, follows:
(In thousands) 1999 1998
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Balance, January 1, $ 2,224 $ 1,893
Provision charged to expense 294 273
Loans charged off (70) (108)
Recoveries 68 39
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Balance, September 30, $ 2,516 $ 2,097
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CAPITAL RESOURCES: Maintaining a strong capital position is an important goal of
the Corporation. At September 30, 1999, total shareholders' equity (including
net unrealized (losses) gains) was $39,846,000, representing a 7% increase over
the same period in 1998. The Federal Reserve Board has adopted risk-based
capital guidelines for banks. The minimum guidelines for the ratio of total
capital to risk-weighted assets is 8%. At least half of the total capital is to
be comprised of common stock, retained earnings, minority interests in the
equity accounts of consolidated subsidiaries, non-cumulative preferred stock,
less goodwill and certain other intangibles ("Tier 1 Capital"). The remainder
may consist of other preferred stock, certain other instruments and a portion of
the loan loss allowance. At September 30, 1999, the Bank's Tier 1 Capital and
Total Capital ratios were 21.21% and 22.62%, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for banks. These guidelines provide for a minimum ratio of Tier 1
Capital to average total assets of 3% for banks that meet certain specified
criteria, including having the highest regulatory rating. All other banks are
generally required to maintain a leverage ratio of at least 3% plus an
additional cushion of 100 to 200 basis points. The Bank's leverage ratio at
September 30, 1999 was 9.34%.
New Accounting Pronouncement: In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet, either as an asset, or as a
liability, measured at its fair value. The Statement requires that changes in
the derivative's fair value shall be recognized in current earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. In June 1999, the FASB issued SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which changed the effective date of SFAS 133 from
fiscal quarters of fiscal years beginning after June 15, 1999 to fiscal quarters
of fiscal years beginning after June 15, 2000. A company may implement the
Statement as of the beginning of any fiscal quarter but it cannot be applied
retroactively. The Corporation does not currently have derivative or hedged
instruments and management does not anticipate the Statement to have a material
impact on its financial position or results of operations.
Year 2000 Compliance: During fiscal 1998, the Corporation adopted a Year 2000
Compliance Plan (the "Plan") and established a Year 2000 Compliance Committee
(the "Committee"). The objectives of the Plan and the Committee are to prepare
the Corporation for the new millennium. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. These phases
will enable the Corporation to identify risks, develop an action plan, perform
adequate testing and complete certification that its processing systems will be
Year 2000 ready. Execution of the five (5) phases of the plan have been
completed as of September 30, 1999, including testing and complete certification
of the primary operating software, maintained by an external provider of
software, for the Corporation. The Corporation is currently in the process of
preparing and testing contingency plans in the event of a failure of hardware or
software, including non-information technology suppliers (i.e., utility systems,
telephone systems and security systems), regarding their Year 2000 state of
readiness. The Corporation has also contacted all material loan customers
concerning their state of readiness.
Costs will be incurred due to the replacement of non-compliant hardware and
software. The Corporation does not anticipate that the related overall costs
will be material in any single year. In total, the Corporation estimates that
its cost for compliance will amount to approximately $200,000 over the two-year
period from 1998-1999, of which approximately $125,000 was incurred as of
September 30, 1999. No assurance can be given that the Year 2000 Compliance Plan
will be completed successfully by the Year 2000, in which event the Corporation
could incur significant costs.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
Corporation's testing plans, and all vendors, suppliers and customer readiness.
Market Risk: The Corporation continues to monitor its exposure to various market
risk sensitive instruments. These instruments and procedures employed to monitor
market risks are listed in the Corporation's 1998 Annual Report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No information is reported under this item.
ITEM 2. CHANGES IN SECURITIES
No changes have been made to the rights of holders of any class of securities
during the third quarter of 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No default has occurred with respect to any of the Corporation's securities
during 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
No information is reported under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
One Form 8-K was filed during the period from July 1, 1999 to the date of
the filing of this report. Current report on Form 8-K dated September 7,
1999 announcing that Peapack-Gladstone Financial Corporation and Chatham
Savings, FSB have entered into an Agreement and Plan of Merger. The Merger
Agreement provides for the merger of Chatham Savings, FSB with and into
Peapack-Gladstone Bank.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 8th day of November 1999.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Registrant)
BY /s/ FRANK A. KISSEL
--------------------------------
(FRANK A. KISSEL, PRESIDENT
AND CHIEF EXECUTIVE OFFICER)
/s/ ARTHUR F. BIRMINGHAM
--------------------------------
(ARTHUR F. BIRMINGHAM, SENIOR
VICE PRESIDENT AND TREASURER)