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 June 30, 2004
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-d). Yes [X] No [_]
Number of shares of Common stock outstanding as of August 2, 2004:
7,454,160
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition June 30, 2004 and December 31, 2003
Page 3
Consolidated Statements of Income for the three and six months ended June
30, 2004 and 2003 Page 4
Consolidated Statements of Changes in Shareholders' Equity for the six
months ended June 30, 2004 and 2003 Page 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2004
and 2003 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 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 15
Item 4 Controls and Procedures Page 16
PART 2 OTHER INFORMATION
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities Page 16
Item 4 Submission of Matters to a Vote of Security Holders Page 17
Item 6 Exhibits and Reports on Form 8-K Page 17
2
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2004 2003
----------- -----------
ASSETS
Cash and due from banks $ 22,387 $ 17,234
Federal funds sold 2,666 5,461
----------- -----------
Total cash and cash equivalents 25,053 22,695
Interest-earning deposits 847 30,949
Investment Securities (approximate market value
$96,514 in 2004 and $99,515 in 2003) 96,760 97,701
Securities Available for Sale 387,567 355,998
Loans:
Loans secured by real estate 435,633 397,068
Other loans 30,128 29,933
----------- -----------
Total loans 465,761 427,001
Less: Allowance for loan losses 5,706 5,467
----------- -----------
Net loans 460,055 421,534
Premises and equipment, net 17,958 15,132
Accrued interest receivable 4,560 4,295
Cash surrender value of life insurance 16,919 16,548
Other assets 3,744 3,274
----------- -----------
TOTAL ASSETS $ 1,013,463 $ 968,126
=========== ===========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 161,713 $ 155,189
Interest-bearing deposits:
Checking 168,268 140,393
Savings 108,562 101,451
Money market accounts 215,055 225,863
Certificates of deposit over $100,000 60,018 60,373
Certificates of deposit less than $100,000 162,007 162,502
----------- -----------
Total deposits 875,623 845,771
Borrowed Funds 48,219 30,032
Accrued expenses and other liabilities 4,174 7,269
----------- -----------
TOTAL LIABILITIES 928,016 883,072
----------- -----------
SHAREHOLDERS' EQUITY
Common stock (no par value; stated value $0.83 per share; authorized 20,000,000
shares; issued shares, 7,579,760 at June 30, 2004 and 7,535,160 at December 31,
2003; outstanding shares, 7,451,778 at
June 30, 2004 and 7,416,031 at December 31, 2003) 6,311 6,274
Surplus 62,647 61,959
Treasury Stock at cost, 127,982 shares in 2004
and 119,129 shares in 2003 (2,672) (2,391)
Retained Earnings 21,630 16,557
Accumulated other comprehensive (loss)/income,
net of income tax (2,469) 2,655
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 85,447 85,054
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,013,463 $ 968,126
=========== ===========
See accompanying notes to consolidated financial statements.
3
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 6,278 $ 6,359 $ 12,417 $ 12,897
Interest on investment securities:
Taxable 690 1,113 1,446 2,520
Tax-exempt 234 133 438 243
Interest on securities available for sale:
Taxable 3,423 2,703 6,727 5,133
Tax-exempt 91 90 182 180
Interest-earning deposits 2 2 13 3
Interest on federal funds sold 22 28 38 56
---------- ---------- ---------- ----------
Total interest income 10,740 10,428 21,261 21,032
INTEREST EXPENSE
Interest on savings and interest-bearing deposit
accounts 798 873 1,516 1,846
Interest on certificates of deposit over $100,000 315 393 630 823
Interest on other time deposits 859 1,198 1,717 2,423
Interest on borrowed funds 274 202 542 258
---------- ---------- ---------- ----------
Total interest expense 2,246 2,666 4,405 5,350
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 8,494 7,762 16,856 15,682
Provision for loan losses 150 150 300 300
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,344 7,612 16,556 15,382
---------- ---------- ---------- ----------
OTHER INCOME
Service charges and fees for other services 427 418 824 837
Trust department income 1,791 1,621 3,474 3,064
Securities gains 406 554 600 827
Bank owned life insurance 195 225 415 444
Other income 100 110 227 237
---------- ---------- ---------- ----------
Total other income 2,919 2,928 5,540 5,409
OTHER EXPENSES
Salaries and employee benefits 3,685 3,360 7,220 6,597
Premises and equipment 1,450 1,120 2,766 2,202
Other expense 1,368 1,185 2,556 2,274
---------- ---------- ---------- ----------
Total other expenses 6,503 5,665 12,542 11,073
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 4,760 4,875 9,554 9,718
Income tax expense 1,551 1,592 3,064 3,175
---------- ---------- ---------- ----------
NET INCOME $ 3,209 $ 3,283 $ 6,490 $ 6,543
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.43 $ 0.44 $ 0.87 $ 0.88
Diluted $ 0.42 $ 0.43 $ 0.85 $ 0.86
Average basic shares outstanding 7,446,078 7,378,182 7,435,281 7,376,695
Average diluted shares outstanding 7,647,272 7,604,993 7,643,074 7,594,313
See accompanying notes to consolidated financial statements.
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
-------- --------
Balance, Beginning of Period $ 85,054 $ 77,158
Comprehensive income:
Net Income 6,490 6,543
Unrealized holding (losses)/gains on securities
arising during the period, net of tax (4,734) 1,055
Less: Reclassification adjustment for gains
included in net income, net of tax 390 538
-------- --------
(5,124) 517
-------- --------
Total Comprehensive income 1,366 7,060
Common Stock Options Exercised 538 144
Purchase of Treasury Stock (282) (92)
Cash Dividends Declared (1,416) (1,207)
Tax Benefit on Disqualifying and Nonqualifying 187 139
Exercise of Stock Options
-------- --------
Balance, June 30, $ 85,447 $ 83,202
======== ========
See accompanying notes to consolidated financial statements.
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net Income: $ 6,490 $ 6,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 802 713
Amortization of premium and accretion of
discount on securities, net 790 1,191
Provision for loan losses 300 300
Gains on security sales (600) (827)
Tax benefit on stock option exercises 187 139
Increase in cash surrender value of life insurance, net (371) (406)
Increase in accrued interest receivable (265) (115)
Decrease/(increase) in other assets 1,275 (932)
(Decrease)/increase in other liabilities (1,480) 883
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,128 7,489
--------- ---------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 14,301 39,534
Proceeds from maturities of securities available
for sale 21,402 11,799
Proceeds from calls of investment securities 235 6,170
Proceeds from calls of securities available for sale 37,346 30,425
Proceeds from sales of securities available for sale 23,683 45,579
Purchase of investment securities (13,845) (24,780)
Purchase of securities available for sale (122,357) (219,298)
Net decrease in short-term investments 30,102 26
Net (increase)/decrease in loans (38,819) 538
Purchases of premises and equipment (3,628) (902)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (51,580) (110,909)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 29,852 30,857
Net increase in short-term borrowings 19,000 33,600
Net increase in long-term debt -0- 26,000
Repayments of long-term debt (813) (172)
Cash dividends paid (1,485) (1,207)
Exercise of stock options 538 144
Purchase of Treasury Stock (282) (92)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,810 89,130
--------- ---------
Net increase/(decrease) in cash and cash equivalents 2,358 (14,290)
Cash and cash equivalents at beginning of period 22,695 38,320
--------- ---------
Cash and cash equivalents at end of period $ 25,053 $ 24,030
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,421 $ 5,845
Income taxes 3,552 2,949
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 accounting
principles generally accepted in the United States of America 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 December 31, 2003 Annual Report on Form 10-K 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
accounting principles generally accepted in the United States 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 June 30, 2004, the Corporation had stock-based employee
and non-employee director compensation plans. The Corporation accounts for these
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income as all options
granted under those plans had an exercise price equal to or greater than the
market value of the underlying common stock on the date of the grant.
The following table illustrates the effect on net income and earnings per share
for the periods indicated if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands Except per Share Data) 2004 2003 2004 2003
----- ----- ----- -----
Net Income:
As Reported $3,209 $3,283 $6,490 $6,543
Less: Total Stock-Based Compensation Expense
Determined under the Fair Value Based Method
on all Stock Options, Net of Related Tax Effects 100 48 1,360 96
----- ----- ----- -----
Pro Forma $3,109 $3,235 $5,130 $6,447
Earnings Per Share:
As Reported
Basic $ 0.43 $ 0.44 $ 0.87 $ 0.88
Diluted $ 0.42 $ 0.43 $ 0.85 $ 0.86
Pro Forma
Basic $ 0.42 $ 0.44 $ 0.69 $ 0.87
Diluted $ 0.41 $ 0.43 $ 0.67 $ 0.85
7
Earnings per Common Share - Basic and Diluted: Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings per share includes
any additional common shares as if all potentially dilutive common shares were
issued (i.e., stock options) utilizing the treasury stock method. All share and
per share amounts have been restated to reflect all prior stock dividends and
stock splits.
Comprehensive Income: The difference between the Corporation's net income and
total comprehensive income for the three and six months ended June 30, 2004 and
2003 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.
2. BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of
its salaried employees.
The net periodic expense for the three and six months ended June 30 included the
following components:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2004 2003 2004 2003
----- ----- ----- -----
Service Cost $ 275 $ 245 $ 549 $ 489
Interest Cost 126 110 252 219
Expected Return on Plan Assets (117) (98) (234) (197)
Amortization of:
Net Loss 6 13 12 28
Unrecognized Prior Service Cost (1) (1) (1) (1)
Unrecognized Remaining Net Assets (1) (1) (3) (3)
----- ----- ----- -----
Net Periodic Benefit Cost $ 288 $ 268 $ 575 $ 535
===== ===== ===== =====
As previously disclosed in the financial statements for the year ended December
31, 2003, the Corporation expects to contribute $1.2 million to its pension plan
in 2004. As of June 30, 2004, contributions of $600 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 changes or no change in interest rates.
o Competitive pressure in the banking industry causes unanticipated
adverse changes.
o An unexpected decline in the economy of New Jersey causes customers to
default in the payment of their loans or causes loans to become
impaired.
o Enforcement of the Highlands Water Protection and Planning Act
o Loss of key managers or employees.
o Loss of major customers or failure to develop new customers.
o A decrease in loan quality and loan origination volume.
o An increase in non-performing loans.
o A decline in the volume of increase in trust assets or deposits.
The Corporation assumes no responsibility to update such forward-looking
statements in the future.
8
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 accounting principles generally accepted in the United States of
America. 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, 2003 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
the Central New Jersey area 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.
OVERVIEW: The Corporation realized earnings of $0.42 per diluted share for the
second quarter of 2004 as compared to $0.43 per diluted share for the second
quarter of 2003. Net income of $3.21 million for the quarter was marginally
lower when compared to net income of $3.28 million for the same quarter last
year. Annualized return on average assets for the quarter was 1.29 percent and
annualized return on average equity was 14.72 percent for the second quarter of
2004.
Year to date June 30, 2004 net income was $6.49 million as compared to $6.54
million for the same period last year. The diluted earnings per share were $0.85
for the first half of the year as compared to $0.86 for the first half of last
year. The year to date annualized return on average assets was 1.33 percent and
annualized return on average equity was 14.93 percent for the six months ended
June 30, 2004.
EARNINGS ANALYSIS
NET INTEREST INCOME: On a tax-equivalent basis, net interest income, before the
provision for loan losses, was $8.71 million for the second quarter of 2004,
while the same quarter of 2003 was $7.91 million, an increase of $798 thousand
or 10.1 percent. The increase in net interest income during the quarter was
primarily the result of lower deposit rates paid and an increase in average
earning assets offset in part by a decline in the rates paid on investments and
loans. The net interest margin on a fully tax equivalent basis was 3.71 percent
in the second quarter of 2004 as compared to 3.68 percent for the second quarter
of 2003, an increase of 3 basis points. When compared to the first quarter of
2004, net interest income increased $151 thousand, or 1.8 percent, from $8.56
million on a tax-equivalent basis. The net interest margin, on a fully tax
equivalent basis declined from 3.81 percent in the first quarter of 2004, to
3.71 percent in the second quarter of 2004.
Average interest earning assets increased $78.5 million or 9.1 percent for the
second quarter of 2004 to $938.7 million as compared to $860.3 million for the
same quarter in 2003. This was due to the increase in average loan balances of
$42.9 million and average investment security balances of $35.4 million. The
balance sheet has been positioned to reduce interest rate risk and benefit in
the long term by not extending the maturities in our loan portfolio. In a rising
rate market, we continue to portfolio our shorter-term mortgage loans
maintaining close relationships with our customers.
9
Average interest-bearing liabilities increased $56.4 million or 8.3 percent to
$737.4 million for the quarter ended June 30, 2004 from $681.0 million in the
same period in 2003. Average balances of interest-bearing checking accounts rose
$35.3 million or 27.8 percent, money market accounts increased $19.8 million or
10.7 percent and average balances of savings accounts rose $5.9 million or 5.8
percent. For the second quarter of 2004, average certificates of deposits
declined $13.1 million, or 5.5 percent, when compared to the second quarter of
2003. Federal Home Loan Bank advances averaged $38.9 million for the quarter
ended June 30, 2004 as compared to $30.4 million for the quarter ended June 30,
2003. When comparing the second quarter of 2004 to the same quarter of 2003,
average demand deposits increased $24.5 million or 17.6 percent.
For the quarter ended June 30, 2004, average interest rates earned on
interest-earning assets, on a tax-equivalent basis, declined 25 basis points to
4.67 percent, from 4.92 percent earned in the same quarter of 2003. In the
second quarter of 2004, the average interest rates earned on loans declined 69
basis points while the average interest rates earned on investment securities
declined 6 basis points to 3.85 percent as compared with the same period in
2003. The average interest rate paid during the quarter on interest-bearing
liabilities declined 35 basis points to 1.22 percent when compared to the second
quarter of 2003. In the second quarter of 2004, the average rate paid on
certificate of deposits declined 59 basis points and average rates paid on money
market accounts declined 32 basis points to 0.77 percent when compared with the
same quarter in 2003. This contributed to a lower cost of funds for the second
quarter of 2004 of 1.00 percent as compared to the second quarter of 2003 of
1.30 percent.
Net interest income, on a tax-equivalent basis before the provision for loan
losses, increased $1.31 million or 8.2 percent to $17.27 million for the first
half of 2004 from $15.97 million for the same period of 2003. The increase in
net interest income was primarily the result of lower deposit rates paid and
higher average balances of interest-earning assets, partially offset by a
decline in the rates earned on investments and loans. The net interest margin,
on a fully tax equivalent basis, for the six months ended June 30, 2004 was 3.76
percent as compared to 3.81 percent for the same period in 2003, a decline of 5
basis points.
For the year to date 2004, average earning assets increased $81.4 million or 9.7
percent to $918.9 million. Investment securities averaged $473.1 million and
$426.3 million for the six months ended June 30, 2004 and 2003, respectively, a
$46.8 million or 11.0 percent increase. Average loans for this period in 2004
increased to $435.2 million, an increase of $33.9 million or 8.5 percent over
the six months ended June 30, 2003.
Average interest-bearing liabilities for the first six months in 2004 were
$723.0 million compared to $667.6 million for the same period in 2003, an
increase of $55.4 million or 8.3 percent. Over one-third of this increase is in
the interest-bearing checking accounts, which grew to $147.2 million, a $20.2
million or 15.9 percent increase. This is due to the introduction of our Master
Escrow Account, which is designed for those who act as agents in a fiduciary
capacity for client or other third-party funds. It is designed for entities that
require sub-accounting, such as municipalities, assisted living communities,
realtors, title companies and accountants. Average money market accounts
increased $24.0 million or 12.9 percent during the first half of 2004 to $210.1
million from $186.0 million during the same period of 2003. Partially offsetting
these increases is the decline in average certificate of deposit balances of
$13.3 million or 5.6 percent to $223.3 million. Federal Home Loan Bank advances
averaged $37.7 million for the six months ended June 30, 2004 as compared to
$19.4 million for the six months ended June 30, 2003. Average demand deposits
increased $24.4 million or 18.5 percent to $156.4 million year to date June 30,
2004 as compared to the same period in 2003.
Average interest rates, on a tax-equivalent basis, earned on interest earning
assets was 4.72 percent for the six-months ended June 30, 2004 as compared to
5.09 percent for the same period in 2003. Year to date 2004, average rates
earned on loans was 5.71 percent, a 72 basis point decline from the year to date
2003 average rates earned of 6.43 percent. The average interest rates earned on
investment securities in the six months ended June 30, 2004, declined slightly
to 3.92 percent from 3.99 percent in the same period in 2003. The average
interest rate paid on interest-bearing liabilities declined 38 basis points to
1.22 percent when compared to the first half of 2003. In the first half of 2004,
the average rate paid on certificate of deposits declined 64 basis points to
2.10 percent and average rates paid on money market accounts declined 35 basis
points to 0.80 percent when compared with the same period in 2003.
10
The following tables reflect the components of net interest income for each of
the three and six months ended June 30, 2004 and 2003:
Average Balance Sheet
Unaudited
Quarters Ended
(Tax-Equivalent Basis, Dollars in Thousands)
June 30, 2004 June 30, 2003
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
--------- --------- ------- --------- --------- -------
ASSETS:
Interest-Earning Assets:
Investments:
Taxable $ 442,672 $ 4,114 3.72% $ 423,801 $ 3,817 3.60%
Tax-Exempt (1) 42,095 536 5.09 25,524 368 5.76
Loans (1) (2) 443,905 6,283 5.66 401,030 6,364 6.35
Federal Funds Sold 9,302 22 0.95 9,277 28 1.19
Interest-Earning Deposits 774 2 0.88 643 2 1.12
--------- --------- ------- --------- --------- -------
Total Interest-Earning Assets 938,748 $ 10,957 4.67% 860,275 $ 10,579 4.92%
--------- --------- ------- --------- --------- -------
Noninterest-Earning Assets:
Cash and Due from Banks 19,629 18,545
Allowance for Loan Losses (5,625) (5,054)
Premises and Equipment 17,540 14,575
Other Assets 23,954 21,346
--------- ---------
Total Noninterest-Earning Assets 55,498 49,412
--------- ---------
Total Assets $ 994,246 $ 909,687
========= =========
LIABILITIES:
Interest-Bearing Deposits
Checking $ 162,593 $ 237 0.58% $ 127,259 $ 156 0.49%
Money Markets 66,143 93 0.56 64,370 155 0.96
Tiered Money Markets 139,102 303 0.87 121,030 352 1.16
Savings 107,310 165 0.61 101,446 210 0.83
Certificates of Deposit 223,387 1,174 2.10 236,502 1,591 2.69
--------- --------- ------- --------- --------- -------
Total Interest-Bearing Deposits 698,535 1,972 1.13 650,607 2,464 1.51
Borrowings 38,856 274 2.82 30,377 202 2.66
--------- --------- ------- --------- --------- -------
Total Interest-Bearing Liabilities 737,391 2,246 1.22 680,984 2,666 1.57
--------- --------- ------- --------- --------- -------
Noninterest Bearing
Liabilities
Demand Deposits 163,822 139,315
Accrued Expenses and
Other Liabilities 5,803 8,505
--------- ---------
Total Noninterest-Bearing
Liabilities 169,625 147,820
Shareholders' Equity 87,230 80,883
--------- ---------
Total Liabilities and
Shareholders' Equity $ 994,246 $ 909,687
========= =========
Net Interest Income
(tax-equivalent basis) 8,711 7,913
Net Interest Spread 3.45% 3.35%
======= =======
Net Interest Margin (3) 3.71% 3.68%
======= =======
Tax equivalent adjustment (217) (151)
--------- ---------
Net Interest Income $ 8,494 $ 7,762
========= =========
(1) Interest income is presented on a tax-equivalent basis using a 35 percent
federal tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) Net interest income on a tax-equivalent basis as a percentage of total
average interest-earning assets.
11
June 30, 2004 June 30, 2003
------------- -------------
Average Income/ Average Income/
Balance Expense Yield Balance Expense Yield
--------- --------- ------- --------- --------- -------
ASSETS:
Interest-Earning Assets:
Investments:
Taxable $ 433,517 $ 8,173 3.77% $ 402,722 $ 7,653 3.80%
Tax-Exempt (1) 39,625 1,024 5.17 23,600 697 5.91
Loans (1) (2) 435,164 12,428 5.71 401,247 12,907 6.43
Federal Funds Sold 8,048 38 0.95 9,263 56 1.21
Interest-Earning Deposits 2,507 13 1.04 605 3 1.07
--------- --------- ------- --------- --------- -------
Total Interest-Earning Assets 918,861 $ 21,676 4.72% 837,437 $ 21,316 5.09%
--------- --------- ------- --------- --------- -------
Noninterest-Earning Assets:
Cash and Due from Banks 19,237 18,774
Allowance for Loan Losses (5,575) (4,965)
Premises and Equipment 16,756 14,601
Other Assets 23,643 21,278
--------- ---------
Total Noninterest-Earning Assets 54,061 49,688
--------- ---------
Total Assets $ 972,922 $ 887,125
========= =========
LIABILITIES:
Interest-Bearing Deposits
Checking $ 147,216 $ 349 0.47% $ 127,062 $ 339 0.53%
Money Markets 65,777 194 0.59 66,073 330 1.00
Tiered Money Markets 144,281 648 0.90 119,964 737 1.23
Savings 104,793 325 0.62 98,511 440 0.89
Certificates of Deposit 223,279 2,347 2.10 236,543 3,246 2.74
--------- --------- ------- --------- --------- -------
Total Interest-Bearing Deposits 685,346 3,863 1.13 648,153 5,092 1.57
Borrowings 37,676 542 2.88 19,433 258 2.66
--------- --------- ------- --------- --------- -------
Total Interest-Bearing Liabilities 723,022 4,405 1.22 667,586 5,350 1.60
--------- --------- ------- --------- --------- -------
Noninterest Bearing
Liabilities
Demand Deposits 156,352 131,979
Accrued Expenses and
Other Liabilities 6,581 7,929
--------- ---------
Total Noninterest-Bearing
Liabilities 162,933 139,908
Shareholders' Equity 86,967 79,631
Total Liabilities and
Shareholders' Equity $ 972,922 $ 887,125
========= =========
Net Interest Income
(tax-equivalent basis) 17,271 15,966
Net Interest Spread 3.50% 3.49%
======= =======
Net Interest Margin (3) 3.76% 3.81%
======= =======
Tax equivalent adjustment (415) (284)
--------- ---------
Net Interest Income $ 16,856 $ 15,682
========= =========
(1) Interest income is presented on a tax-equivalent basis using a 35 percent
federal tax rate.
(2) Loans are stated net of unearned income and include non-accrual loans.
(3) Net interest income on a tax-equivalent basis as a percentage of total
average interest-earning assets.
12
OTHER INCOME: For the second quarter 2004, other income was $2.92 million as
compared to $2.93 million in the same period a year ago. Income from PGB Trust
and Investments, the Bank's trust division, was $1.79 million, an increase of
$170 thousand or 10.5 percent over last year's second quarter. This increase was
primarily due to an increase in trust assets under management. Security gains
were $406 thousand in the second quarter of 2004, a decline of $148 thousand as
compared to the same quarter of 2003. Service charges and fees increased from
$418 thousand in the second quarter of 2003 to $427 thousand for the same
quarter this year.
Other income for the first half of 2004 was $5.54 million as compared to $5.41
million for the first half of 2003. Trust income increased $410 thousand or 13.4
percent to $3.47 million during this period. Security gains declined $227
thousand to $600 thousand for the six months ended June 30, 2004 when compared
to the same period in 2003. Income from service charges and fees declined to
$824 thousand from $837 thousand.
The following table presents the components of other income for the three and
six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2004 2003 2004 2003
------ ------ ------ ------
Trust department income $1,791 $1,621 $3,474 $3,064
Service charges 427 418 824 837
Bank owned life insurance 195 225 415 444
Safe deposit rental fees 54 52 115 111
Other non-interest income 37 38 85 90
Fee for other services 9 20 27 36
Securities gains 406 554 600 827
------ ------ ------ ------
Total other income $2,919 $2,928 $5,540 $5,409
====== ====== ====== ======
OTHER EXPENSES: Other expenses for the second quarter of 2004 were $6.50 million
compared to $5.67 million for the second quarter of 2003, an increase of $838
thousand or 14.8 percent. Salaries and benefits expense grew $325 thousand or
9.7 percent during the second quarter of 2004 as compared to the second quarter
of 2003. Additions to the professional and clerical staff, required to service
higher levels of business activity, along with the related benefits costs
account for the increase. Occupancy expenses increased $330 thousand to $1.45
million for the second quarter of 2004 as compared to $1.12 million for the same
quarter of 2003. In the past year, occupancy expenses have grown due to the
investment in two new branches and a new operations center. Our newest branch,
in Oldwick, New Jersey opened in late June and we anticipate opening a new
branch in Morristown, New Jersey, later in the year. The new operations center
expands the Corporation's technological capacity for future growth.
For the six months ended June 30, 2004, other expenses increased $1.47 million
or 13.3 percent to $12.54 million. Salary and benefit expense and occupancy
costs were the primary reasons for the higher level of other expenses. Salaries
and benefits rose $623 thousand or 9.4 percent while occupancy costs rose to
$2.77 million, as compared to $2.20 million for the first half of 2003. As
discussed in the previous paragraph, additions to staff, merit increases and the
related benefits costs account for the increase in salaries and benefits
expense. Premises and equipment increases are due to investments in future
growth in the form of new branches and a new operations center.
13
The following table presents the components of other expense for the three and
six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2004 2003 2004 2003
-------- -------- -------- --------
Salaries and employee benefits $ 3,685 $ 3,360 $ 7,220 $ 6,597
Premises and equipment 1,450 1,120 2,766 2,202
Advertising 228 141 329 234
Stationery and supplies 164 139 267 263
Professional fees 114 173 250 323
Telephone 141 89 243 177
Trust department expense 91 124 193 260
Postage 96 72 180 177
Insurance 79 36 160 69
Deferred Loan Origination Costs (111) (159) (182) (298)
Other expense 566 570 1,116 1,069
-------- -------- -------- --------
Total other expense $ 6,503 $ 5,665 $ 12,542 $ 11,073
======== ======== ======== ========
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 $918 thousand and $168 thousand at
June 30, 2004 and 2003, respectively. The increase was primarily due to the
addition to non-performing loans of a commercial mortgage in the amount of $747
thousand. The underlying property is currently under contract for sale for an
amount in excess of the loan and interest receivable balances. 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:
June 30,
(In thousands) 2004 2003
------------------
Other real estate owned $ - $ -
Loans past due in excess of 90 days and still accruing 817 1
Non-accrual loans 101 167
---- ----
Total non-performing assets $ 918 $ 168
==== ====
Non-performing loans as a % of total loans 0.20% 0.04%
Non-performing assets as a % of total
Loans plus other real estate owned 0.20% 0.04%
Allowance as a % of loans 1.23% 1.25%
PROVISION FOR LOAN LOSSES: The provision for loan losses was $150 thousand for
both the second quarters of 2004 and 2003. For the six months ended June 30,
2004 and 2003, the provision for loan losses was $300 thousand. 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 second quarter of 2004, net charge-offs were $6 thousand as compared to
net charge-offs of $8 thousand during the second quarter of 2003. Net
charge-offs for the first half of 2004 were $61 thousand as compared to net
recoveries for the first half of 2003 of $27 thousand.
14
A summary of the allowance for loan losses for the six-month period ended June
30, follows:
(In thousands) 2004 2003
---- ----
Balance, January 1, $ 5,467 $ 4,798
Provision charged to expense 300 300
Loans charged off (72) (15)
Recoveries 11 42
------- -------
Balance, June 30, $ 5,706 $ 5,125
======= =======
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 32.6
percent for the three months ended June 30, 2004 compared to 32.7 percent for
the same period in 2003. On a year to date basis, income tax expense as a
percentage of pre-tax income was 32.1 percent in 2004 and 32.7 percent in 2003.
The rate of income tax expense decline was due to higher levels of tax-exempt
income.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At June 30, 2004, total shareholders' equity, including net unrealized
losses on securities available for sale, was $85.4 million, representing a
slight increase over total shareholders' equity recorded at December 31, 2003.
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 June 30, 2004, the Corporation's Tier 1 Capital and
Total Capital ratios were 20.17 percent and 21.52 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 June 30,
2004, was 8.72 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 $25.9 million at June 30, 2004. In addition, the
Corporation has $387.6 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 June 30, 2004, of
investment securities and securities available for sale maturing within one year
amounted to $16.0 million and $6.4 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 June 30, 2004, core deposits equaled $815.6 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.
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 (June 30, 2004).
15
ITEM 4. Controls and Procedures
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that have materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
The Corporation's management, including the CEO and CFO, does not expect that
our disclosure controls and procedures or our internal controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, provides reasonable, not absolute, assurance that the objectives of
the control system are met. The design of a control system reflects resource
constraints; the benefits of controls must be considered relative to their
costs. Because there are inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Corporation have been or will be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns occur because of simple error
or mistake. Controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goals under all future conditions; over
time, control may become inadequate because of changes in conditions or
deterioration in the degree of compliance with the policies or procedures.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Issuer Purchases of Equity Securities
Total Number of Shares
Purchased as Part of Maximum Number of
Total Number Weighted Publicly Announced Shares that May Yet Be
of Shares Average Price Plans or Programs Purchased Under the
-
Purchased Paid per Share Plans or Programs
Period
April 1-30, 2004 286 34.83 - -
May 1-31, 2004 2,783 30.40 - -
June 1-30, 2004 15 32.55 - -
---------------- ----------------- ------------------------ -------------------------
Total 3,084 $ 30.82 - -
================ ================= ======================== =========================
Note: The Corporation has no repurchase plan or program. All shares listed above
are added to treasury stock through the cashless exercise of employee and
director stock options as allowed in the Stock Option Plans.
16
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of shareholders held on April 27, 2004, in
Peapack-Gladstone, New Jersey, the following persons were elected as directors
of Peapack-Gladstone Financial Corporation for a term of one year:
DIRECTORS FOR WITHHELD
--------- --- --------
Anthony J. Consi II 4,961,560 25,607
Pamela Hill 4,959,673 27,494
T. Leonard Hill 4,958,360 28,807
Frank A. Kissel 4,960,309 26,858
John D. Kissel 4,959,833 27,334
James R. Lamb 4,864,831 122,336
Edward A. Merton 4,951,198 35,969
F. Duffield Meyercord 4,963,495 23,672
John R. Mulcahy 4,946,051 41,116
Robert M. Rogers 4,964,748 22,419
Philip W. Smith III 4,959,027 28,140
Craig C. Spengeman 4,963,999 23,168
Jack D. Stine 4,956,459 30,708
ITEM 6. Exhibits and Reports on Form 8-K
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.
b. Reports on Form 8-K
1 Current Report on Form 8-K dated April 29, 2004 (furnishing first
quarter earnings release for Peapack-Gladstone Financial
Corporation).
17
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: August 5, 2004 By: /s/ FRANK A. KISSEL
----------------------------------------------
FRANK A. KISSEL
Chairman of the Board and Chief Executive Officer
DATE: August 5, 2004 By: /s/ ARTHUR F. BIRMINGHAM
-------------------------------------------------
ARTHUR F. BIRMINGHAM
Executive Vice President and Chief Financial Officer
18
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.
19