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PGC > SEC Filings for PGC > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for PEAPACK GLADSTONE FINANCIAL CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PEAPACK GLADSTONE FINANCIAL CORP


15-Mar-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 subsidiary 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" or the "Company"), formed in 1997, is the parent holding company for Peapack-Gladstone Bank (the "Bank"), formed in 1921, a commercial bank operating 23 branches in Somerset, Hunterdon, Morris, Middlesex and Union counties.

For the year ended December 31, 2012, Peapack-Gladstone Financial Corporation recorded net income of $9.7 million, and diluted earnings per share of $1.05. Several strategic steps were taken during the fourth quarter of 2012 that we believe have positioned the Company well for the future. These strategic initiatives have strengthened the Corporation's core operating base as it embarks on a plan to grow its core lending, retail, and wealth advisory businesses, while maintaining and enhancing its high levels of customer service. The 2012 fourth quarter included the following strategic initiatives:

The position of Chairman and CEO was split when Doug Kennedy joined the Company as CEO in early October 2012. Frank Kissel remained as Chairman of the Board. Professional, legal, and other costs totaling approximately $336 thousand were recorded in connection with the CEO search.

Approximately $19 million of classified loans were transferred to loans held for sale and are being marketed for sale. The transfer of these loans to held for sale resulted in an additional provision for loan losses of $4.0 million and charge-offs of $5.4 million.

The Company's Pooled Trust Preferred Securities portfolio was sold, resulting in a $2.9 million gain. This transaction also resulted in a significant reduction in risk-weighted assets for regulatory capital purposes and the realization of a large portion of the Company's deferred tax assets, with the monetization of much of that to occur in 2013. As part of this, $260 thousand of additional tax expense needed to be recorded, which was related to the realization of the deferred tax assets to be carried-back to the prior two years at a slightly lower tax rate compared to the tax rate as recorded.

All of the Company's remaining Held to Maturity securities were transferred to Available for Sale.

The organization and set-up of PGB Trust & Investments of Delaware was completed just prior to year end, resulting in legal fees of approximately $74 thousand.

Staffing and organizational restructuring coupled with various resignations, retirements, and position eliminations, resulted in the recording of a $965 thousand severance accrual.

Additionally, the fourth quarter of 2012 included $175 thousand of costs and fee waivers as a result of Hurricane Sandy.

In January 2012, the Corporation repurchased the remaining $14.4 million of the preferred stock sold to the U.S. Treasury in the Capital Purchase Program ("CPP"), and in April 2012 paid $110,000 to the Treasury to repurchase the Warrant previously issued in January 2009 under the CPP. The Warrant allowed purchase of up to 150,296 shares of the Corporation's common stock.

Peapack-Gladstone Financial Corporation's common stock trades on the National Association of Securities Dealers Automated Quotations (NASDAQ) Global Select Market under the symbol "PGC."

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 for the year ended December 31, 2012, contains a summary of the Corporation's significant accounting policies.

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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, assumption 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 collectability may not be assured, the existence and estimated fair 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 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 collectability of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in local market conditions and may experience continuing adverse economic conditions. Future adjustments to the provision for loan losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control.

The Corporation accounts for its securities in accordance with "Accounting for Certain Investments in Debt and Equity Securities," which was codified into Accounting Standards Codification ("ASC") 320. Debt securities are classified as held to maturity and carried at amortized cost when Management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity due to changes in interest rates, prepayment risk, liquidity or other factors. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Securities are evaluated on at least a quarterly basis to determine whether a decline in value is other-than-temporary. To determine whether a decline in value is other-than-temporary, Management considers the reasons underlying the decline, the near-term prospects of the issuer, the extent and duration of the decline and whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. "Other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the amount of the impairment is split into two components - other-than-temporary impairment related to credit loss, which must be recognized through earnings. No impairment charges were recognized in 2012 or 2011. For equity securities, the entire amount of impairment is recognized through earnings.

EARNINGS SUMMARY: The Corporation recorded net income of $9.7 million for the year ended December 31, 2012, and diluted earnings per share, including the effect of the preferred dividend, of $1.05 compared to net income of $12.2 million and diluted earnings per share, including the effect of the preferred dividend, of $1.25 for the year ended December 31, 2011.

These results produced a return on average assets of 0.61 percent and 0.79 percent in 2012 and 2011, respectively, and a return on average common shareholders' equity of 8.03 percent in 2012 and 10.74 percent in 2011.

Earnings for the year ended December 31, 2012 were reduced by the effects of the strategic initiatives detailed in the "Overview" section above.

Earnings for the 2011 year were benefitted by a state income tax benefit of $2.99 million related to the reversal of a valuation allowance previously recorded in 2008. Circumstances and projections indicated that the deferred tax asset would be realized in future periods and it was, in fact, realized upon the sale of the Pooled Trust Preferred Securities portfolio in the fourth quarter of 2012, as noted previously in the "Overview" section.

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 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 nonperforming assets.

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Net interest income, on a fully tax-equivalent basis, was $52.0 million in 2012, an increase of $2.5 million, or 5 percent, from 2011's levels. The Corporation's net interest margin for 2012 and 2011 was 3.50 percent and 3.47 percent, respectively, reflecting an increase of three basis points. Net interest income and net interest margin reflected increases for 2012 when compared to 2011, as the positive effect of increased loans, funded by reduced lower yielding investment securities and increased lower cost core deposits, was partially offset by the effect of lower market yields, which compressed asset yields more than deposit costs.

In 2012, interest income on earning assets, on a fully tax-equivalent basis, increased $23 thousand at $56.7 million compared to 2011. Interest income remained relatively constant due to the increase in loan volumes which counteracted the decreases in rates earned on loans and investments and the decrease in investment volumes. Average earning assets for 2012 totaled $1.49 billion compared to $1.43 billion for 2011, an increase of $58.4 million or 4 percent. The average rate earned on earning assets was 3.81 percent in 2012, compared to 3.96 percent in 2011, a decline of 15 basis points. The decline in the average rates on earning assets was due to continued decreases to already very low market rates for all loan types in 2012. In 2012, average investment securities totaled $350.4 million, a decrease of $58.9 million compared to 2011. The average yield was 2.40 percent for 2012. Average loan balances increased $129.0 million, or 13 percent, during 2012 to $1.09 billion from $965.7 million in 2011. The average yield on total loans was 4.40 percent and 4.84 percent in 2012 and 2011, respectively, a decrease of 44 basis points. During 2012, the average yield on the residential mortgage portfolio declined 49 basis points to 3.85 percent from 4.34 percent in 2011. The average yield on the commercial mortgage loan portfolio was 5.08 percent in 2012, declined 46 basis points from 2011, while the average yield on commercial loans was 4.97 percent, declining 38 basis points in 2012. The average yield on home equity lines remained relatively constant when compared to 2011 at 3.20 percent for 2012 and 3.23 percent for 2011. Average rates declined during the year due to lower market rates and competitive pressure experienced during 2012.

For the years ended December 31, 2012 and 2011, average interest-bearing liabilities totaled $1.17 billion and $1.16 billion, respectively, reflecting an increase of $9.3 million or 1 percent from the average balance in 2011, while the average rate paid declined to 0.40 percent for 2012 from 0.61 percent for 2011. The decline in the average rate on interest-bearing liabilities was due to the sustained low in-market rates in 2012 coupled with targeted growth of lower-costing core deposits and continued run-off of higher-paying certificates of deposit.

The Corporation's interest-bearing checking accounts continued to grow during 2012, and averaged $336.2 million for the year, an increase of $17.8 million, or 6 percent, from 2011. During 2012, the average rate paid on interest-bearing checking accounts was 0.11 percent, a decrease of 22 basis points from the average rates paid in 2011 of 0.33 percent. For the years ended December 31, 2012 and 2011, noninterest-bearing checking accounts averaged $296.3 million and $243.9 million, respectively, increasing $52.4 million or 21 percent from 2011's levels. Checking account growth is due to the Corporation's relationship orientation as the Corporation has successfully focused on business and personal core deposit generation, particularly checking; establishing municipal relationships within its market territory; and growth in deposits associated with its commercial mortgage and commercial loan growth. In 2012, average money market accounts totaled $510.6 million, compared to $519.7 million in 2011, decreasing $9.1 million or 2 percent, from 2011. The decline in the Corporation's money market deposits can be attributed to the lower rates on these products, which averaged 0.20 percent and 0.39 percent for the years ended December 31, 2012 and 2011, respectively. Average certificates of deposit declined $19.0 million, or 9 percent, as the Corporation has opted not to pay higher rates on maturing certificates of deposit and average rates declined 17 basis points from the 2011 year to the 2012 year.

During 2012, the average balance of borrowings was $25.3 million compared to $22.6 million during 2011, an increase of $2.7 million or 12 percent, due to the increase in overnight borrowings in 2012 to $10.2 million. As the result of regular principal repayments and maturities on Federal Home Loan Bank advances during 2012, the average of these borrowings declined to $15.1 million from $21.7 million in 2011. The average rates paid on total borrowings was 2.17 percent during 2012 compared to 3.28 percent during 2011, a decrease of 111 basis points. The average rates paid on the Corporation's overnight borrowings during 2012 was 0.38 percent compared to 0.35 percent during 2011, while the average rates paid on Federal Home Loan Bank advances was 3.37 percent and 3.41 percent in 2012 and 2011, respectively.

The average balance on capital lease obligations rose $2.7 million from 2011, as the Corporation added a capital lease obligation on its Gladstone property at the end of 2011. The average rate on capital lease obligations during 2012 was 4.75 percent compared to 4.99 percent in 2011, declining 24 basis points from 2011.

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The following table compares the average balance sheets, net interest spreads and net interest margins for the years ended December 31, 2012, 2011 and 2010 (on a fully tax-equivalent basis-"FTE"):

                          Year Ended December 31, 2012



                                                                Income/
                                                  Average       Expense      Yield
(In thousands except yield information)           Balance        (FTE )      (FTE)
Assets:
Interest-earnings assets:
 Investments:
   Taxable (1)                                  $   303,599     $  7,033       2.32 %
Tax-exempt(1)(2)                                     46,780        1,363       2.91
 Loans held for sale                                  2,487          123       4.94
 Loans (2)(3)                                     1,094,696       48,112       4.40
 Federal funds sold                                     100            -       0.10
 Interest-earning deposits                           41,303           98       0.24
   Total interest-earning assets                  1,488,965     $ 56,729       3.81 %
Noninterest-earning assets:
 Cash and due from banks                              6,506
 Allowance for loan losses                          (13,942 )
 Premises and equipment                              31,049
 Other assets                                        77,048
   Total noninterest-earning assets                 100,661
   Total assets                                 $ 1,589,626
Liabilities and shareholders' equity:
Interest-bearing deposits:
 Checking                                       $   336,228     $    379       0.11 %
 Money markets                                      510,633        1,022       0.20
 Savings                                            101,068           70       0.07
 Certificates of deposit                            188,918        2,237       1.18
   Total interest-bearing deposits                1,136,847        3,708       0.33
 Borrowed funds                                      25,277          548       2.17
 Capital lease obligation                             9,067          431       4.75
   Total interest-bearing liabilities             1,171,191        4,687       0.40 %
Noninterest-bearing liabilities:
 Demand deposits                                    296,250
 Accrued expenses and other liabilities               6,977
   Total noninterest-bearing liabilities            303,227
Shareholders' equity                                115,208
   Total liabilities and shareholders' equity   $ 1,589,626
    Net interest income                                         $ 52,042
    Net interest spread                                                        3.41 %
    Net interest margin (4)                                                    3.50 %

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 nonaccrual loans.

4. Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

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                          Year Ended December 31, 2011



                                                                Income/
                                                  Average       Expense      Yield
(In thousands except yield information)           Balance        (FTE )      (FTE)
Assets:
Interest-earnings assets:
 Investments:
   Taxable (1)                                  $   369,905     $  8,351       2.26 %
Tax-exempt(1)(2)                                     39,338        1,439       3.66
 Loans held for sale                                    880           56       6.41
 Loans (2)(3)                                       965,716       46,716       4.84
 Federal funds sold                                     100            -       0.23
 Interest-earning deposits                           54,664          144       0.26
   Total interest-earning assets                  1,430,603     $ 56,706       3.96 %
Noninterest-earning assets:
 Cash and due from banks                              8,260
 Allowance for loan losses                          (14,561 )
 Premises and equipment                              33,015
 Other assets                                        73,263
   Total noninterest-earning assets                  99,977
   Total assets                                 $ 1,530,580
Liabilities and shareholders' equity:
Interest-bearing deposits:
 Checking                                       $   318,446     $  1,045       0.33 %
 Money markets                                      519,702        2,010       0.39
 Savings                                             86,818          205       0.24
 Certificates of deposit                            207,892        2,815       1.35
   Total interest-bearing deposits                1,132,858        6,075       0.54
 Borrowed funds                                      22,622          742       3.28
 Capital lease obligation                             6,397          319       4.99
   Total interest-bearing liabilities             1,161,877        7,136       0.61 %
Noninterest-bearing liabilities:
 Demand deposits                                    243,850
 Accrued expenses and other liabilities               7,954
   Total noninterest-bearing liabilities            251,804
Shareholders' equity                                116,899
   Total liabilities and shareholders' equity   $ 1,530,580
    Net interest income                                         $ 49,570
    Net interest spread                                                        3.35 %
    Net interest margin (4)                                                    3.47 %

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 nonaccrual loans.

4. Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

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                          Year Ended December 31, 2010



                                                                Income/
                                                  Average       Expense      Yield
(In thousands except yield information)           Balance        (FTE )      (FTE)
Assets:
Interest-earnings assets:
 Investments:
   Taxable (1)                                  $   329,605     $  9,315       2.83 %
Tax-exempt(1)(2)                                     34,985        1,607       4.59
 Loans held for sale                                      -            -          -
 Loans (2)(3)                                       958,472       50,529       5.27
 Federal funds sold                                     174            1       0.23
 Interest-earning deposits                           64,182          149       0.23
   Total interest-earning assets                  1,387,418     $ 61,601       4.44 %
Noninterest-earning assets:
 Cash and due from banks                              8,567
 Allowance for loan losses                          (14,070 )
 Premises and equipment                              31,826
 Other assets                                        69,309
   Total noninterest-earning assets                  95,632
   Total assets                                 $ 1,483,050
Liabilities and shareholders' equity:
Interest-bearing deposits:
 Checking                                       $   258,995     $  1,586       0.61 %
 Money markets                                      510,331        3,619       0.71
 Savings                                             77,023          289       0.38
 Certificates of deposit                            266,134        4,286       1.61
   Total interest-bearing deposits                1,112,483        9,780       0.88
 Borrowed funds                                      29,552        1,046       3.54
 Capital lease obligation                             3,637          206       5.64
   Total interest-bearing liabilities             1,145,672       11,032       0.96 %
Noninterest-bearing liabilities:
 Demand deposits                                    214,753
 Accrued expenses and other liabilities               6,490
   Total noninterest-bearing liabilities            221,243
Shareholders' equity                                116,135
   Total liabilities and shareholders' equity   $ 1,483,050
    Net interest income                                         $ 50,569
    Net interest spread                                                        3.48 %
    Net interest margin (4)                                                    3.64 %

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 nonaccrual loans.

4. Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

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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 2012 Compared with 2011                  Year Ended 2011 Compared with 2010
                                                                    Net                                                Net
                                   Difference due to             Change In                Change In                 Change In
                                      Change In:                  Income/                  Income/                   Income/
(In Thousands):                Volume              Rate           Expense         Volume              Rate           Expense
ASSETS:
Investments                 $     (1,050 )     $       (344 )   $    (1,394 )   $     2,161       $     (3,293 )   $    (1,132 )
Loans                              5,801             (4,405 )         1,396             539             (4,352 )        (3,813 )
Loans held for sale                   80                (13 )            67              56                  -              56
Federal funds sold                     -                  -               -              (1 )                -              (1 )
Interest-earning deposits            (35 )              (11 )           (46 )           (23 )               18              (5 )
Total interest income       $      4,796       $     (4,773 )   $        23     $     2,732       $     (7,627 )   $    (4,895 )
LIABILITIES:
Checking                    $          5       $       (671 )   $      (666 )   $       251       $       (791 )   $      (540 )
Money market                         (35 )             (953 )          (988 )            43             (1,652 )        (1,609 )
Savings                               30               (165 )          (135 )            30               (115 )           (85 )
Certificates of deposit             (244 )             (334 )          (578 )          (848 )             (623 )        (1,471 )
Borrowed funds                      (185 )               (9 )          (194 )          (267 )              (37 )          (304 )
Capital lease obligation             127                (15 )           112             139                (26 )           113
Total interest expense      $       (302 )     $     (2,147 )   $    (2,449 )   $      (652 )     $     (3,244 )   $    (3,896 )
Net interest income         $      5,098       $     (2,626 )   $     2,472     $     3,384       $     (4,383 )   $      (999 )

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. As noted in the "Overview" section above, in December 2012, the Corporation transferred its . . .

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