SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2005 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-16197 PEAPACK-GLADSTONE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-3537895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 158 Route 206 North, Gladstone, New Jersey 07934 (Address of principal executive offices, including zip code) (908) 234-0700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_|. Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act. Yes |_| No |X|. Number of shares of Common Stock outstanding as of November 1, 2005: 8,289,940 1
PEAPACK-GLADSTONE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited): Consolidated Statements of Condition September 30, 2005 and December 31, 2004 Page 3 Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004 Page 4 Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2005 and 2004 Page 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 Page 6 Notes to the Consolidated Financial Statements Page 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk Page 18 Item 4 Controls and Procedures Page 18 PART II OTHER INFORMATION Item 2 Unregistered Sales of Equity Securities and Use of Proceeds Page 19 Item 6 Exhibits Page 19 2
PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> September 30, December 31, 2005 2004 -------------- -------------- <S> <C> <C> ASSETS Cash and due from banks $ 24,410 $ 15,631 Federal funds sold 19,523 101 Interest-earning deposits 830 786 -------------- -------------- Total cash and cash equivalents 44,763 16,518 Investment Securities Held to Maturity (approximate market value $68,665 in 2005 and $87,544 in 2004) 69,060 87,128 Securities Available for Sale 316,287 354,186 Loans: Loans secured by real estate 718,738 541,460 Other loans 33,314 30,704 -------------- -------------- Total loans 752,052 572,164 Less: Allowance for loan losses 6,514 6,004 -------------- -------------- Loans, net 745,538 566,160 Premises and equipment, net 21,487 20,163 Accrued interest receivable 4,848 4,375 Cash surrender value of life insurance 17,780 17,253 Other assets 5,173 1,612 -------------- -------------- TOTAL ASSETS $ 1,224,936 $ 1,067,395 ============== ============== LIABILITIES Deposits: Noninterest-bearing demand deposits $ 173,917 $ 162,275 Interest-bearing deposits: Checking 189,577 194,669 Savings 95,859 106,576 Money market accounts 285,938 227,944 Certificates of deposit over $100,000 94,036 74,005 Certificates of deposit less than $100,000 204,750 170,197 -------------- -------------- Total deposits 1,044,077 935,666 Borrowed Funds 77,133 33,394 Accrued expenses and other liabilities 5,252 3,666 -------------- -------------- TOTAL LIABILITIES 1,126,462 972,726 -------------- -------------- SHAREHOLDERS' EQUITY Common stock (no par value; stated value $0.83 per share; authorized 20,000,000 shares; issued shares, 8,467,417 at September 30, 2005 and 8,393,625 at December 31, 2004; outstanding shares, 8,292,414 at September 30, 2005 and 8,246,042 at December 31, 2004) 7,056 6,994 Surplus 88,858 87,991 Treasury Stock at cost, 175,003 shares in 2005 and 147,583 shares in 2004 (3,630) (2,867) Retained Earnings 8,265 1,113 Accumulated other comprehensive (loss)/income, net of income tax (2,075) 1,438 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 98,474 94,669 -------------- -------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,224,936 $ 1,067,395 ============== ============== </TABLE> See accompanying notes to consolidated financial statements. 3
<TABLE> <CAPTION> PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited) Three months ended Nine months ended September 30, September 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 10,282 $ 7,126 $ 27,649 $ 19,544 Interest on investment securities: Taxable 350 623 1,278 2,069 Tax-exempt 296 262 880 700 Interest on securities available for sale: Taxable 3,217 3,438 10,183 10,165 Tax-exempt 90 91 271 273 Interest-earning deposits 8 2 17 15 Interest on federal funds sold 23 5 46 43 ---------- ---------- ---------- ---------- Total interest income 14,266 11,547 40,324 32,809 INTEREST EXPENSE Interest on savings and interest-bearing deposit accounts 2,333 932 5,842 2,446 Interest on certificates of deposit over $100,000 716 321 1,793 950 Interest on other time deposits 1,591 862 4,042 2,581 Interest on borrowed funds 864 410 1,912 953 ---------- ---------- ---------- ---------- Total interest expense 5,504 2,525 13,589 6,930 ---------- ---------- ---------- ---------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 8,762 9,022 26,735 25,879 Provision for loan losses 150 150 500 450 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,612 8,872 26,235 25,429 ---------- ---------- ---------- ---------- OTHER INCOME Trust division income 1,895 1,666 5,815 5,141 Service charges and fees 466 435 1,401 1,259 Securities gains, net 216 12 551 612 Bank owned life insurance 201 185 599 599 Other income 161 177 484 404 ---------- ---------- ---------- ---------- Total other income 2,939 2,475 8,850 8,015 OTHER EXPENSES Salaries and employee benefits 3,775 3,470 11,192 10,508 Premises and equipment 1,695 1,420 4,924 4,186 Other expense 1,391 1,252 4,318 3,991 ---------- ---------- ---------- ---------- Total other expenses 6,861 6,142 20,434 18,685 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAX EXPENSE 4,690 5,205 14,651 14,759 Income tax expense 1,475 1,670 4,515 4,734 ---------- ---------- ---------- ---------- NET INCOME $ 3,215 $ 3,535 $ 10,136 $ 10,025 ========== ========== ========== ========== EARNINGS PER SHARE Basic $ 0.39 $ 0.43 $ 1.22 $ 1.22 Diluted $ 0.38 $ 0.42 $ 1.21 $ 1.19 Average basic shares outstanding 8,300,574 8,206,321 8,286,714 8,188,047 Average diluted shares outstanding 8,417,581 8,406,096 8,405,195 8,390,680 </TABLE> See accompanying notes to consolidated financial statements. 4
PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands) (Unaudited) Nine Months Ended September 30, 2005 2004 ---------- ---------- Balance, Beginning of Period $ 94,669 $ 85,054 Comprehensive income: Net Income 10,136 10,025 Unrealized holding losses on securities arising during the period, net of tax (3,155) (339) Less: Reclassification adjustment for gains included in net income, net of tax 358 398 ---------- ---------- (3,513) (737) ---------- ---------- Total Comprehensive income 6,623 9,288 Common Stock Options Exercised 598 742 Purchase of Treasury Stock (763) (392) Cash Dividends Declared (2,984) (2,319) Tax Benefit on Disqualifying and Nonqualifying 331 313 Exercise of Stock Options ---------- ---------- Balance, September 30, $ 98,474 $ 92,686 ========== ========== See accompanying notes to consolidated financial statements. 5
PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months Ended September 30, 2005 2004 ---------- ---------- OPERATING ACTIVITIES: Net Income: $ 10,136 $ 10,025 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,474 1,220 Amortization of premium and accretion of discount on securities, net 817 1,132 Provision for loan losses 500 450 Gains on security sales (170) (612) Gain on loans sold (13) (2) Gain on disposal of fixed assets (28) -- Tax benefit on stock option exercises 331 313 Increase in cash surrender value of life insurance, net (527) (534) Increase in accrued interest receivable (473) (744) Decrease in other assets (2,182) (869) Decrease in accrued expenses and other liabilities 2,090 885 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 11,955 11,264 ---------- ---------- INVESTING ACTIVITIES: Proceeds from maturities of investment securities 31,277 21,507 Proceeds from maturities of securities available for sale 31,344 31,728 Proceeds from calls of investment securities 4,685 745 Proceeds from calls of securities available for sale 7,000 4,600 Proceeds from sales of securities available for sale 34,800 92,817 Purchase of investment securities (18,087) (16,849) Purchase of securities available for sale (41,349) (126,164) Proceeds from sales of loans 2,316 532 Purchase of loans (108,339) (60,016) Net increase in loans (73,842) (60,320) Purchases of premises and equipment (2,817) (4,698) Disposal of premises and equipment 47 -- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (132,965) (116,118) ---------- ---------- FINANCING ACTIVITIES: Net increase in deposits 108,411 34,101 Net increase in short-term borrowings 45,000 46,500 Repayments of borrowed funds (1,261) (1,224) Cash dividends paid (2,730) (2,230) Exercise of stock options 598 742 Purchase of Treasury Stock (763) (392) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 149,255 77,497 ---------- ---------- Net increase/(decrease) in cash and cash equivalents 28,245 (27,357) Cash and cash equivalents at beginning of period 16,518 53,644 ---------- ---------- Cash and cash equivalents at end of period $ 44,763 $ 26,287 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 12,676 $ 6,914 Income taxes 6,903 5,326 See accompanying notes to consolidated financial statements. 6
PEAPACK-GLADSTONE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Certain information and footnote disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the period ended December 31, 2004 for Peapack-Gladstone Financial Corporation (the "Corporation"). Principles of Consolidation: The Corporation considers that all adjustments (all of which are normal recurring accruals) necessary for a fair presentation of the statement of the financial position and results of operations in accordance with U.S. generally accepted accounting principles for these periods have been made. Results for such interim periods are not necessarily indicative of results for a full year. The consolidated financial statements of Peapack-Gladstone Financial Corporation are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Peapack-Gladstone Bank. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements. Allowance for Loan Losses: The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses inherent in the Corporation's loan portfolio. The allowance is based on management's evaluation of the loan portfolio considering, among other things, current economic conditions, the volume and nature of the loan portfolio, historical loan loss experience, and individual credit situations. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Stock Option Plans: At September 30, 2005, the Corporation had stock-based employee and non-employee director compensation plans. The Corporation accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share for the periods indicated if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, (In Thousands Except per Share Data) 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net Income: As Reported $ 3,215 $ 3,535 $ 10,136 $ 10,025 Less: Total Stock-Based Compensation Expense Determined under the Fair Value Based Method on all Stock Options, Net of Related Tax Effects 99 100 296 1,460 ---------- ---------- ---------- ---------- Pro Forma $ 3,116 $ 3,435 $ 9,840 $ 8,565 Earnings Per Share: As Reported Basic $ 0.39 $ 0.43 $ 1.22 $ 1.22 Diluted $ 0.38 $ 0.42 $ 1.21 $ 1.19 Pro Forma Basic $ 0.38 $ 0.42 $ 1.19 $ 1.05 Diluted $ 0.37 $ 0.41 $ 1.17 $ 1.02 </TABLE> 7
Earnings per Common Share - Basic and Diluted: The following is a reconciliation of the calculation of basic and diluted earnings per share. Basic net income per common share is calculated by dividing net income to common shareholders by the weighted average common shares outstanding during the reporting period. Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, (In Thousands, except per share data) 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net Income to Common Shareholders $ 3,215 $ 3,535 $ 10,136 $ 10,025 Basic Weighted-Average Common Shares Outstanding 8,300,574 8,206,321 8,286,714 8,188,047 Plus: Common Stock Equivalents 117,007 199,775 118,481 202,633 ---------- ---------- ---------- ---------- Diluted Weighted-Average Common Shares Outstanding 8,417,581 8,406,096 8,405,195 8,390,680 Net Income Per Common Share Basic $ 0.39 $ 0.43 $ 1.22 $ 1.22 Diluted 0.38 0.42 1.21 1.19 </TABLE> Options to purchase 327,774 shares of common stock at a weighted average price of $28.93 per share were outstanding and were not included in the computation of diluted earnings per share in the third quarter of 2005 because the option price was greater than the average market price. Options to purchase 326,774 shares of common stock at a weighted average price of $28.94 per share were outstanding and were not included in the year-to-date 2005 computation of diluted earnings per share because the option price was greater than the average market price. Options to purchase 320,804 shares of common stock at a weighted average price of $29.03 per share were outstanding and were not included in the computation of diluted earnings per share in the third quarter of 2004 because the option price was greater than the average market price. Options to purchase 23,209 shares of common stock at a weighted average price of $30.87 per share were outstanding and were not included in the year-to-date 2004 computation of diluted earnings per share because the option price was greater than the average market price. Comprehensive Income: The difference between the Corporation's net income and total comprehensive income for the three and nine months ended September 30, 2005 and 2004 relates to the change in the net unrealized gains and losses on securities available for sale during the applicable period of time less adjustments for realized gains and losses. Total comprehensive income for the nine months ended September 30, 2005 and 2004 was $6.6 million and $9.3 million, respectively. 2. LOANS Loans outstanding as of September 30, consisted of the following: (In Thousands) 2005 2004 ---------- ---------- Loans Secured by 1-4 Family $ 500,875 $ 340,137 Commercial Real Estate 187,210 157,312 Construction Loans 30,653 16,463 Commercial Loans 24,660 22,112 Consumer Loans 6,134 7,417 Other Loans 2,520 3,301 ---------- ---------- Total Loans $ 752,052 $ 546,742 ========== ========== 3. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS At September 30, 2005 and 2004, advances from the Federal Home Loan Bank of New York (FHLB) totaled $77.1 million and $75.3 million, respectively, with a weighted average interest rate of 3.35 percent and 2.65 percent, respectively. These advances are secured by blanket pledges of certain 1-4 family residential mortgages totaling $212.6 million at September 30, 2005. At September 30, 2005, advances totaling $23.0 million have fixed maturity dates, advances totaling $9.1 million were amortizing advances with monthly payments of principal and interest and $45 million are floating rate advances with a 90-day original term. 8
The final maturity dates of the advances are scheduled as follows: (In Thousands) 2005 $45,000 2006 6,000 2007 4,000 2008 1,599 2009 2,000 Over 5 Years 18,534 ------- Total $77,133 ======= 4. BENEFIT PLANS The Corporation has a defined benefit pension plan covering substantially all of its salaried employees. The net periodic expense for the three and nine months ended September 30 included the following components: Three Months Ended Nine Months Ended September 30, September 30, (In Thousands) 2005 2004 2005 2004 ------- ------- ------- ------- Service Cost $ 351 $ 275 $ 1,053 $ 824 Interest Cost 146 126 439 378 Expected Return on Plan Assets (133) (117) (400) (351) Amortization of: Net Loss 16 6 50 18 Unrecognized Prior Service Cost 1 -- 1 (1) Unrecognized Remaining Net Assets (2) (2) (5) (5) ------- ------- ------- ------- Net Periodic Benefit Cost $ 379 $ 288 $ 1,138 $ 863 ======= ======= ======= ======= As previously disclosed in the financial statements for the year ended December 31, 2004, the Corporation expects to contribute $1.3 million to its pension plan in 2005. As of September 30, 2005, contributions of $954 thousand had been made in the current year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL: The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's view of future interest income and net loans, management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", "will", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: o Unanticipated costs in connection with the additional branch openings. o Competitive pressure in the banking industry causes unanticipated adverse changes. o An unexpected decline in the economy of New Jersey causes customers to default in the payment of their loans or causes loans to become impaired. o Enforcement of the Highlands Water Protection and Planning Act o Loss of key managers or employees. o Loss of major customers or failure to develop new customers. o A decrease in loan quality and loan origination volume. o An increase in non-performing loans. o A decline in the volume of increase in trust assets or deposits. o Disallowance of tax strategies. 9
The Corporation assumes no responsibility to update such forward-looking statements in the future. CRITICAL ACCOUNTING POLICIES AND ESTIMATES: "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based upon the Corporation's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements included in the December 31, 2004 Annual Report on Form 10-K, contains a summary of the Corporation's significant accounting policies. Management believes the Corporation's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors. The provision for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's provision for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or New Jersey experience an adverse economic shock. Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control. EXECUTIVE SUMMARY: Net income was $3.2 million for the third quarter ended September 30, 2005, compared to $3.5 million for the third quarter of 2004, representing a 9.1 percent decline. Diluted earnings per share declined to $0.38 for the third quarter of 2005 from $0.42 for the same period in 2004. Net income for the nine months ended September 30, 2005 was $10.1 million compared to $10.0 million for the same period in 2004. Diluted earnings per share increased to $1.21 for the nine months ended September 30, 2005, compared to $1.19 for the same period a year ago. For the quarter ended September 30, 2005, the Corporation achieved an annualized return on average shareholders equity of 13.00 percent and an annualized return on average assets of 1.08 percent. Net interest income for the current quarter declined $235 thousand on a tax equivalent basis to $9.0 million as compared to $9.3 million in the third quarter of 2004, and the net interest margin declined to 3.18 percent from 3.78 percent in the third quarter of 2004 and 3.37 percent in the second quarter of 2005. The net interest margin and the corresponding net interest income continues to be negatively impacted by a combination of an aberrant rate cycle, market pressure on loan spreads and the change in deposit funding mix towards higher cost certificates and money market accounts. While the net interest margin will likely remain under pressure in the short term, we believe the relatively short repricing term of our earning assets will yield margin expansion if the interest rate yield curve returns to more historically normal levels. Average loans grew by $225.0 million for the quarter ended September 30, 2005, or 44.8 percent as a result of new business development, higher originations and the purchase of adjustable-rate mortgage loans from a third-party entity. The yield on loans declined to 5.66 percent, representing a two basis point decrease from the third quarter of 2004. Credit quality has remained high and loan delinquencies have continued at very low levels. Average interest-bearing deposits increased $107.4 million, or 15.0 percent, for the third quarter of 2005, compared with the same period in 2004. Average demand deposits increased $14.9 million or 9.5 percent for the third quarter of 2005 as compared to the year ago period. Average borrowings increased by $27.9 million compared to the prior year. Higher average borrowings were used to fund growth in the loan portfolios. The cost of deposits and borrowings increased by 95 basis points over the prior year period to 2.02 percent. 10
EARNINGS ANALYSIS NET INTEREST INCOME: Net interest income, on a tax-equivalent basis, for the third quarter of 2005 decreased $235 thousand or 2.5 percent to $9.0 million over the same quarter of 2004 and $187 thousand or 2.0 percent over the second quarter of 2005. The net interest margin on a tax-equivalent basis was 3.18 percent, 19 basis points lower than the second quarter of 2005. The decline was mainly the result of the flattening of the yield curve with funding costs increasing faster than yields on new and repricing term loans and investments. The overall yield on interest-earning assets increased over the second quarter of 2005 by 12 basis points, while deposit and borrowing costs increased 33 basis points causing the narrowing of the margin. Deposit and borrowing costs have been increasing mainly due to competitive pricing pressure combined with rising short-term interest rates. For the third quarter of 2005, average loans increased $225.0 million or 44.8 percent while average investments declined $72.0 million or 15.2 percent over the same period in 2004. Compared to the linked second quarter of 2005, average loans grew $77.8 million or 12.0 percent, while the average balance of investments declined $39.1 million or 8.9 percent. Proceeds from sold or matured securities were used to fund higher yielding loans in both periods. Average interest-bearing liabilities for the quarter ended September 30, 2005 increased $135.3 million or 17.3 percent as compared to the quarter ended September 30, 2004 and increased $44.3 million or 5.1 percent as compared with the second quarter of 2005. Average total interest-bearing deposits increased $107.4 million or 15.0 percent for the quarter ended September 30, 2005 as compared with the same period in 2004 and increased $22.6 million or 2.8 percent compared with the second quarter of 2005. These increases were primarily attributed to the opening of the Morristown and Bridgewater branches and successful marketing of new certificate and money market products. Interest on loans increased $1.19 million for the third quarter of 2005 compared to the second quarter of 2005 due to the increased volume of loans and higher short-term interest rates. Interest from investments declined $341 thousand, on a tax-equivalent basis, for the three month period ended September 30, 2005 compared with the quarter ended June 30, 2005 mainly due to lower average balances offset in part by higher rates earned. The Federal Reserve increased short-term interest rates 11 times from June 2004 through September 2005, including two 25 basis point increases in the third quarter of 2005. The Corporation's prime rate moved in conjunction with each interest rate increase, which resulted in higher interest income during the quarters on commercial and home equity loans tied to the prime lending rate. Interest expense for the three months ended September 30, 2005 increased $1.05 million compared with the quarter ended June 30, 2005. This increase was primarily due to increased deposit interest rates due to pressures on deposit pricing from the market place and competitors, customers shifting deposits into higher yielding products and higher borrowing costs due to the rise in short-term rates. 11
The following table reflects the components of net interest income for the three months ended September 30, 2005 and 2004: <TABLE> <CAPTION> Average Balance Sheet Unaudited Quarters Ended (Tax-Equivalent Basis, Dollars in Thousands) September 30, 2005 September 30, 2004 ------------------ ------------------ Average Income/ Average Income/ Balance Expense Yield Balance Expense Yield ------- ------- ----- ------- ------- ----- <S> <C> <C> <C> <C> <C> <C> ASSETS: Interest-Earning Assets: Investments: Taxable (1) $ 350,342 $ 3,567 4.07% $ 427,945 $ 4,061 3.80% Tax-Exempt (1) (2) 52,334 638 4.88 46,753 582 4.98 Loans (2) (3) 727,517 10,291 5.66 502,552 7,133 5.68 Federal Funds Sold 2,670 23 3.40 1,475 5 1.36 Interest-Earning Deposits 1,014 8 3.18 715 2 1.12 ----------- ------------------- ----------- -------------------- Total Interest-Earning Assets 1,133,877 $ 14,527 5.12% 979,440 $ 11,783 4.81% ----------- ------------------- ----------- -------------------- Noninterest-Earning Assets: Cash and Due from Banks 21,171 19,969 Allowance for Loan Losses (6,367) (5,769) Premises and Equipment 21,606 18,242 Other Assets 24,697 23,407 ----------- ----------- Total Noninterest-Earning Assets 61,107 55,849 ----------- ----------- Total Assets $ 1,194,984 $ 1,035,289 =========== =========== LIABILITIES: Interest-Bearing Deposits Checking $ 196,156 $ 674 1.37% $ 165,293 $ 279 0.68% Money Markets 154,565 1,124 2.91 66,220 117 0.71 Tiered Money Markets 95,849 363 1.51 155,854 367 0.94 Savings 98,657 172 0.70 109,557 169 0.62 Certificates of Deposit 277,733 2,307 3.32 218,611 1,183 2.16 ----------- ------------------- ----------- -------------------- Total Interest-Bearing Deposits 822,960 4,640 2.26 715,535 2,115 1.18 Borrowings 96,398 864 3.59 68,474 410 2.40 ----------- ------------------- ----------- -------------------- Total Interest-Bearing Liabilities 919,358 5,504 2.39 784,009 2,525 1.29 ----------- ------------------- ----------- -------------------- Noninterest Bearing Liabilities Demand Deposits 172,421 157,508 Accrued Expenses and Other Liabilities 4,287 5,409 ----------- ----------- Total Noninterest-Bearing Liabilities 176,708 162,917 Shareholders' Equity 98,918 88,363 ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,194,984 $ 1,035,289 =========== =========== Net Interest Income (tax-equivalent basis) 9,023 9,258 Net Interest Spread 2.73% 3.52% ==== ==== Net Interest Margin (4) 3.18% 3.78% ==== ==== Tax equivalent adjustment (261) (236) ----------- ----------- Net Interest Income $ 8,762 $ 9,022 =========== =========== </TABLE> (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. 12
The following table reflects the components of net interest income for the three months ended September 30, 2005 and June 30, 2005: <TABLE> <CAPTION> Average Balance Sheet Unaudited Quarters Ended (Tax-Equivalent Basis, Dollars in Thousands) September 30, 2005 June 30, 2005 ------------------ ------------- Average Income/ Average Income/ Balance Expense Yield Balance Expense Yield ------- ------- ----- ------- ------- ----- <S> <C> <C> <C> <C> <C> <C> ASSETS: Interest-Earning Assets: Investments: Taxable (1) $ 350,342 $ 3,567 4.07% $ 385,908 $ 3,891 4.03% Tax-Exempt (1) (2) 52,334 638 4.88 55,881 655 4.69 Loans (2) (3) 727,517 10,291 5.66 649,733 9,101 5.60 Federal Funds Sold 2,670 23 3.40 1,719 12 2.90 Interest-Earning Deposits 1,014 8 3.18 776 6 3.02 ----------- -------------------- ----------- ------------------- Total Interest-Earning Assets 1,133,877 $ 14,527 5.12% 1,094,017 $ 13,665 5.00% ----------- -------------------- ----------- ------------------- Noninterest-Earning Assets: Cash and Due from Banks 21,171 21,641 Allowance for Loan Losses (6,367) (6,166) Premises and Equipment 21,606 21,155 Other Assets 24,697 23,703 ----------- ----------- Total Noninterest-Earning Assets 61,107 60,333 ----------- ----------- Total Assets $ 1,194,984 $ 1,154,350 =========== =========== LIABILITIES: Interest-Bearing Deposits Checking $ 196,156 $ 674 1.37% $ 205,237 $ 609 1.19% Money Markets 154,565 1,124 2.91 130,355 789 2.42 Tiered Money Markets 95,849 363 1.51 103,468 375 1.45 Savings 98,657 172 0.70 101,952 177 0.69 Certificates of Deposit 277,733 2,307 3.32 259,392 1,895 2.92 ----------- -------------------- ----------- ------------------- Total Interest-Bearing Deposits 822,960 4,640 2.26 800,404 3,845 1.92 Borrowings 96,398 864 3.59 74,668 610 3.27 ----------- -------------------- ----------- ------------------- Total Interest-Bearing Liabilities 919,358 5,504 2.39 875,072 4,455 2.04 ----------- -------------------- ----------- ------------------- Noninterest Bearing Liabilities Demand Deposits 172,421 177,270 Accrued Expenses and Other Liabilities 4,287 5,297 ----------- ----------- Total Noninterest-Bearing Liabilities 176,708 182,567 Shareholders' Equity 98,918 96,711 ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,194,984 $ 1,154,350 =========== =========== Net Interest Income (tax-equivalent basis) 9,023 9,210 Net Interest Spread 2.73% 2.96% ==== ==== Net Interest Margin (4) 3.18% 3.37% ==== ==== Tax equivalent adjustment (261) (265) ----------- ----------- Net Interest Income $ 8,762 $ 8,945 =========== =========== </TABLE> (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. 13
The following table reflects the components of net interest income for the nine months ended September 30, 2005 and 2004: <TABLE> <CAPTION> Average Balance Sheet Unaudited Year-to-Date (Tax-Equivalent Basis, Dollars in Thousands) September 30, 2005 September 30, 2004 ------------------ ------------------ Average Income/ Average Income/ Balance Expense Yield Balance Expense Yield ------- ------- ----- ------- ------- ----- <S> <C> <C> <C> <C> <C> <C> ASSETS: Interest-Earning Assets: Investments: Taxable (1) $ 379,263 $ 11,461 4.03% $ 429,385 $ 12,234 3.80% Tax-Exempt (1) (2) 53,321 1,898 4.75 42,018 1,606 5.09 Loans (2) (3) 657,264 27,673 5.61 457,791 19,561 5.70 Federal Funds Sold 2,057 46 2.97 5,841 43 0.98 Interest-Earning Deposits 806 17 2.87 1,905 15 1.05 ----------- -------------------- ----------- ------------------- Total Interest-Earning Assets 1,092,711 $ 41,095 5.01% 936,940 $ 33,459 4.76% ----------- -------------------- ----------- ------------------- Noninterest-Earning Assets: Cash and Due from Banks 21,260 19,483 Allowance for Loan Losses (6,188) (5,640) Premises and Equipment 20,984 17,255 Other Assets 24,534 25,825 ----------- ----------- Total Noninterest-Earning Assets 60,590 56,923 ----------- ----------- Total Assets $ 1,153,301 $ 993,863 =========== =========== LIABILITIES: Interest-Bearing Deposits Checking $ 200,727 $ 1,811 1.20% $ 153,285 $ 629 0.55% Money Markets 130,224 2,348 2.40 65,926 311 0.63 Tiered Money Markets 107,292 1,153 1.43 148,167 1,013 0.91 Savings 102,077 530 0.69 106,393 493 0.62 Certificates of Deposit 263,072 5,835 2.96 221,711 3,531 2.12 ----------- -------------------- ----------- ------------------- Total Interest-Bearing Deposits 803,392 11,677 1.94 695,482 5,977 1.15 Borrowings 76,013 1,912 3.35 48,017 953 2.64 ----------- -------------------- ----------- ------------------- Total Interest-Bearing Liabilities 879,405 13,589 2.06 743,499 6,930 1.24 ----------- -------------------- ----------- ------------------- Noninterest Bearing Liabilities Demand Deposits 172,033 156,740 Accrued Expenses and Other Liabilities 4,806 6,188 ----------- ----------- Total Noninterest-Bearing Liabilities 176,839 162,928 Shareholders' Equity 97,057 87,436 ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,153,301 $ 993,863 =========== =========== Net Interest Income (tax-equivalent basis) 27,506 26,529 Net Interest Spread 2.95% 3.52% ==== ==== Net Interest Margin (4) 3.36% 3.78% ==== ==== Tax equivalent adjustment (771) (650) ----------- ----------- Net Interest Income $ 26,735 $ 25,879 =========== =========== </TABLE> (1) Average balances for available-for-sale securities are based on amortized cost. (2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate. (3) Loans are stated net of unearned income and include non-accrual loans. (4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets. 14
OTHER INCOME: For the three and nine months ended September 30, 2005, other income increased $464 thousand or 18.7 percent and $835 thousand or 10.4 percent, respectively. The increases were due to higher trust division fees and service charges on deposit accounts. Income from PGB Trust and Investments, the Bank's trust division, was $1.9 million, an increase of $229 thousand or 13.7 percent for the third quarter of 2005 compared to the same period a year ago. For the first nine months of 2005, trust fees were $5.8 million as compared to $5.1 million for the same period in 2004, an increase of $674 thousand or 13.1 percent. The increased fee income is attributable to growth in client assets, which increased $154.4 million, or 9.9 percent, in market value over the third quarter of 2004. Service charges on deposit accounts increased $31 thousand or 7.1 percent for the third quarter of 2005 and increased $142 thousand or 11.3 percent for the nine months ended September 30, 2005, compared with the same period in 2004. These increases were primarily due to the introduction of a new overdraft protection product. Gains on securities transactions, net, increased $204 thousand in the third quarter of 2005 and declined $61 thousand for the nine months ended September 30, 2005 as compared to the same periods in 2004. The following table presents the components of other income for the three and nine months ended September 30, 2005 and 2004: Three Months Ended Nine Months Ended September 30, September 30, (In Thousands) 2005 2004 2005 2004 -------- -------- -------- -------- Trust division income $ 1,895 $ 1,666 $ 5,815 $ 5,141 Service charges and fees 466 435 1,401 1,259 Securities gains, net 216 12 551 612 Bank owned life insurance 201 185 599 599 Other non-interest income 73 84 224 168 Safe deposit rental fees 64 64 179 179 Fees for other services 24 29 81 57 -------- -------- -------- -------- Total other income $ 2,939 $ 2,475 $ 8,850 $ 8,015 ======== ======== ======== ======== OTHER EXPENSES: Other expenses increased by $719 thousand or 11.7 percent and $1.7 million or 9.4 percent for the three and nine months ended September 30, 2005 compared with the same periods in 2004, primarily due to increases in salaries and employee benefits and premises and equipment expenses. The Corporation incurred these additional expenses to support branch expansion and new business development initiatives. Salary and employee benefits increased $305 thousand or 8.8 percent and $684 thousand or 6.5 percent for the three and nine months ended September 30, 2005, compared with the same periods in the prior year. At September 30, 2005, the Corporation's full-time equivalent staff was 224 compared with 212 at September 30, 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. Premises and equipment expense for the three and nine months ended September 30, 2005 increased $275 thousand or 19.4 percent and $738 thousand or 17.6 percent compared with the same periods in 2004. These increases were largely due to business expansion such as new and refurbished branches, as well as, higher depreciation charges in connection with investments in technology and facilities. Other expense, excluding salaries and employee benefits and premises and equipment, increased $139 thousand or 11.1 percent and $327 thousand or 8.2 percent for the three and nine months ended September 30, 2005 as compared to the same periods in 2004. The significant components of other expense include advertising, stationery, professional fees and trust division expense. 15
The following table presents the components of other expense for the three and nine months ended September 30, 2005 and 2004: Three Months Ended Nine Months Ended September 30, September 30, (In Thousands) 2005 2004 2005 2004 -------- -------- -------- -------- Salaries and employee benefits $ 3,775 $ 3,470 $ 11,192 $ 10,508 Premises and equipment 1,695 1,420 4,924 4,186 Advertising 178 110 670 439 Stationery and supplies 128 141 426 408 Professional fees 116 120 359 371 Trust division expense 99 103 308 296 Telephone 88 113 280 356 Postage 74 70 212 250 Other expense 708 595 2,063 1,871 -------- -------- -------- -------- Total other expense $ 6,861 $ 6,142 $ 20,434 $ 18,685 ======== ======== ======== ======== NON-PERFORMING ASSETS: Other real estate owned (OREO), loans past due in excess of 90 days and still accruing, and non-accrual loans are considered non-performing assets. These assets totaled $532 thousand and $289 thousand at September 30, 2005 and 2004, respectively. Loans past due in excess of 90 days and still accruing are in the process of collection and are considered well secured. The following table sets forth non-performing assets on the dates indicated, in conjunction with asset quality ratios: September 30, (In thousands) 2005 2004 -------- -------- Other real estate owned $ -- $ -- Loans past due in excess of 90 days and still accruing 192 188 Non-accrual loans 340 101 -------- -------- Total non-performing assets $ 532 $ 289 ======== ======== Non-performing loans as a % of total loans 0.07% 0.05% Non-performing assets as a % of total loans plus other real estate owned 0.07% 0.05% Allowance as a % of total loans 0.87% 1.07% PROVISION FOR LOAN LOSSES: The provision for loan losses was $150 thousand for the third quarters of 2005 and 2004. The amount of the loan loss provision and the level of the allowance for loan losses are based upon a number of factors including management's evaluation of probable losses inherent in the portfolio, after consideration of appraised collateral values, financial condition and past credit history of the borrowers as well as prevailing economic conditions. For the nine months ended September 30, 2005, the provision for loan losses was $500 thousand as compared to $450 thousand for the same nine-month period last year. For the third quarter of 2005, net recoveries were $2 thousand as compared to net recoveries of $4 thousand during the third quarter of 2004. Net recoveries for the nine months ended September 30, 2005 were $10 thousand as compared to net charge-offs of $65 thousand for the nine months ended September 30, 2004. A summary of the allowance for loan losses for the nine-month periods ended September 30, follows: (In Thousands) 2005 2004 ---- ---- Balance, January 1, $ 6,004 $ 5,467 Provision charged to expense 500 450 Loans charged off (3) (77) Recoveries 13 12 ------- ------- Balance, September 30, $ 6,514 $ 5,852 ======= ======= 16
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 31.4 percent and 32.1 percent for the three months ended September 30, 2005 and 2004, respectively. On a year to date basis, income tax expense as a percentage of pre-tax income was 30.8 percent in 2005 and 32.1 percent in 2004. The rate of income tax expense declined due to higher levels of tax-exempt income as well as a decline in the state income tax due to higher taxable income in the Real Estate Investment Trust subsidiary, which has a lower effective tax rate. CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital position. At September 30, 2005, total shareholders' equity, including net unrealized losses on securities available for sale, was $98.5 million, representing an increase in total shareholders' equity recorded at December 31, 2004, of $3.8 million or 4.0 percent. The Federal Reserve Board has adopted risk-based capital guidelines for banks. The minimum guideline for the ratio of total capital to risk-weighted assets is 8 percent. Tier 1 Capital consists of common stock, retained earnings, minority interests in the equity accounts of consolidated subsidiaries, non-cumulative preferred stock, less goodwill and certain other intangibles. The remainder may consist of other preferred stock, certain other instruments and a portion of the allowance for loan loss. At September 30, 2005, the Corporation's Tier 1 Capital and Total Capital ratios were 17.05 percent and 18.16 percent, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines. These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets of 3 percent for banks that meet certain specified criteria, including having the highest regulatory rating. All other banks are generally required to maintain a leverage ratio of at least 3 percent plus an additional 100 to 200 basis points. The Corporation's leverage ratio at September 30, 2005, was 8.67 percent. LIQUIDITY: Liquidity refers to an institution's ability to meet short-term requirements in the form of loan requests, deposit withdrawals and maturing obligations. Principal sources of liquidity include cash, temporary investments and securities available for sale. Management's opinion is that the Corporation's liquidity position is sufficient to meet future needs. Cash and cash equivalents, interest earning deposits and federal funds sold totaled $44.8 million at September 30, 2005. In addition, the Corporation had $316.3 million in securities designated as available for sale. These securities can be sold in response to liquidity concerns or pledged as collateral for borrowings as discussed below. Book value as of September 30, 2005, of investment securities and securities available for sale maturing within one year amounted to $15.4 million and $25.7 million, respectively. The primary source of funds available to meet liquidity needs is the Corporation's core deposit base, which excludes certificates of deposit greater than $100 thousand. As of September 30, 2005, core deposits equaled $950.0 million. Another source of liquidity is borrowing capacity. The Corporation has a variety of sources of short-term liquidity available, including federal funds purchased from correspondent banks, short-term and long-term borrowings from the Federal Home Loan Bank of New York, access to the Federal Reserve Bank discount window and loan participations or sales of loans. The Corporation also generates liquidity from the regular principal payments made on its mortgage-backed security and loan portfolios. RECENT ACCOUNTING PRONOUNCEMENTS: Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment, addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. Statement 123(R) generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity's ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Corporation beginning January 1, 2006. The Corporation must use either the modified prospective or the modified retrospective transition method. Early adoption of Statement 123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The Corporation is currently evaluating the transition provisions of Statement 123(R), the adoption of which will lower reported net income and earnings per share. The Corporation does not know the full impact on the consolidated financial statements at this time. 17
Financial Accounting Standards Board (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 impact on the consolidated financial statements at this time. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to information required regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to the date of the most recent interim financial statements (September 30, 2005). ITEM 4. Controls and Procedures The Corporation's Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Corporation's management, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. The Corporation's Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Corporation's internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. The Corporation's management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, control may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 18
PART II. OTHER INFORMATION ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds <TABLE> <CAPTION> Issuer Purchases of Equity Securities Total Number of Shares Maximum Number Purchased as of Shares that May Total Number Average Part of Publicly Yet Be Purchased of Shares Price Paid Announced Plans Under the Plans or Period Purchased per Share or Programs Programs - -------------------- -------------- --------------- ---------------- -------------------- <S> <C> <C> <C> <C> July 1-31, 2005 -- $ -- -- 150,000 August 1-31, 2005 7,300 26.95 7,300 142,700 September 1-30, 2005 8,700 27.51 8,700 134,000 --------------- --------------- ---------------- Total 16,000 27.25 16,000 =============== =============== ================ </TABLE> On April 15, 2005, the Board of Directors of Peapack-Gladstone Financial Corporation announced the authorization of a stock repurchase plan. The Board authorized the purchase of up to 150,000 shares of outstanding common stock, to be made from time to time, in the open market or in privately negotiated transactions, at prices not exceeding prevailing market prices. The plan expires on April 15, 2006. ITEM 6. Exhibits a. Exhibits 3 Articles of Incorporation and By-Laws: A. Restated Certificate of Incorporation as in effect on the date of this filing is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. B. By-Laws of the Registrant as in effect on the date of this filing are incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 31.1 Certification of Frank A. Kissel, Chief Executive Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a). 31.2 Certification of Arthur F. Birmingham, Chief Financial Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a). 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by Frank A. Kissel, Chief Executive Officer of the Corporation, and Arthur F. Birmingham, Chief Financial Officer of the Corporation. 19
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEAPACK-GLADSTONE FINANCIAL CORPORATION (Registrant) DATE: November 7, 2005 By: /s/ Frank A. Kissel ------------------------------------------------- FRANK A. KISSEL Chairman of the Board and Chief Executive Officer DATE: November 7, 2005 By: /s/ Arthur F. Birmingham -------------------------------------------------- ARTHUR F. BIRMINGHAM Executive Vice President and Chief Financial Officer 20
EXHIBIT INDEX Number Description 3 Articles of Incorporation and By-Laws: A. Restated Certificate of Incorporation as in effect on the date of this filing is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. B. By-Laws of the Registrant as in effect on the date of this filing are incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 31.1 Certification of Frank A. Kissel, Chief Executive Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a). 31.2 Certification of Arthur F. Birmingham, Chief Financial Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a). 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by Frank A. Kissel, Chief Executive Officer of the Corporation, and Arthur F. Birmingham, Chief Financial Officer of the Corporation. 21