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, 2003
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 1, 2003:
6,713,656
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition June 30, 2003 and December 31, 2002 Page 3
Consolidated Statements of Income for the three and six months ended June Page 4
30, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity for the six Page 5
months ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 Page 6
and 2002
Notes to the Consolidated Financial Statements Page 7
Item 2 Management Discussion and Analysis of Financial Condition and Results of Page 8
Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 13
Item 4 Controls and Procedures Page 13
PART 2 OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders Page 14
Item 6 Exhibits and Reports on Form 8-K Page 14
2
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS
Cash and due from banks $ 20,409 $ 17,920
Federal funds sold 3,621 20,400
--------- ---------
Total cash and cash equivalents 24,030 38,320
Interest-earning deposits 523 549
Investment Securities:(approximate market value
$149,531 in 2003 and $171,290 in 2002) 146,355 168,066
Securities Available for Sale 344,968 212,259
Loans:
Loans secured by real estate 378,691 379,150
Other loans 30,558 30,610
--------- ---------
Total loans 409,249 409,760
Less: Allowance for loan losses 5,125 4,798
--------- ---------
Net loans 404,124 404,962
Premises and equipment, net 14,560 14,371
Accrued interest receivable 4,721 4,606
Cash surrender value of life insurance 16,153 15,747
Other assets 1,860 928
--------- ---------
TOTAL ASSETS $ 957,294 $ 859,808
========= =========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 151,214 $ 126,107
Interest-bearing deposits:
Checking 128,884 136,956
Savings 102,274 94,142
Money market accounts 181,424 173,973
Certificates of deposit over $100,000 62,102 59,607
Certificates of deposit less than $100,000 174,647 178,903
--------- ---------
Total deposits 800,545 769,688
Borrowed Funds 64,428 5,000
Accrued expenses and other liabilities 9,119 7,962
--------- ---------
TOTAL LIABILITIES 874,092 782,650
SHAREHOLDERS' EQUITY
Common stock (no par value; stated value $0.83 per share; authorized 20,000,000
shares; issued shares, 6,811,604 at June 30, 2003 and 6,800,041 at December 31,
2002; outstanding shares, 6,711,171 at
June 30, 2003 and 6,702,523 at December 31, 2002) 5,671 5,661
Surplus 38,659 38,385
Treasury Stock at cost, 100,433 shares in 2003
and 97,518 shares in 2002 (2,112) (2,020)
Retained Earnings 35,625 30,290
Accumulated other comprehensive income,
net of income tax 5,359 4,842
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 83,202 77,158
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 957,294 $ 859,808
========= =========
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,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 6,359 $ 7,430 $ 12,897 $ 14,750
Interest on investment securities:
Taxable 1,113 965 2,520 1,614
Tax-exempt 133 91 243 183
Interest on securities available for sale:
Taxable 2,703 2,554 5,133 4,943
Tax-exempt 90 90 180 170
Interest-earning deposits 2 2 3 134
Interest on federal funds sold 28 42 56 71
---------- ---------- ---------- ----------
Total interest income 10,428 11,174 21,032 21,865
INTEREST EXPENSE
Interest on savings account deposits 873 1,101 1,846 2,061
Interest on certificates of deposit over $100,000 393 530 823 1,086
Interest on other time deposits 1,198 1,344 2,423 2,753
Interest on borrowed funds 202 47 258 105
---------- ---------- ---------- ----------
Total interest expense 2,666 3,022 5,350 6,005
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 7,762 8,152 15,682 15,860
Provision for loan losses 150 201 300 400
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,612 7,951 15,382 15,460
---------- ---------- ---------- ----------
OTHER INCOME
Service charges and fees for other services 418 414 837 824
Trust department income 1,621 1,259 3,064 2,405
Securities gains 554 8 827 26
Bank owned life insurance 225 199 444 396
Other income 193 203 395 400
---------- ---------- ---------- ----------
Total other income 3,011 2,083 5,567 4,051
OTHER EXPENSES
Salaries and employee benefits 3,360 3,017 6,597 5,944
Premises and equipment 1,120 1,030 2,202 1,998
Other expense 1,268 1,288 2,432 2,523
---------- ---------- ---------- ----------
Total other expenses 5,748 5,335 11,231 10,465
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 4,875 4,699 9,718 9,046
Income tax expense 1,592 1,546 3,175 2,931
---------- ----------
---------- ---------- ---------- ----------
NET INCOME $ 3,283 $ 3,153 $ 6,543 $ 6,115
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.49 $ 0.47 $ 0.98 $ 0.91
Diluted $ 0.47 $ 0.46 $ 0.95 $ 0.90
Average basic shares outstanding 6,707,438 6,678,146 6,706,087 6,668,528
Average diluted shares outstanding 6,913,629 6,869,526 6,903,921 6,817,748
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,
2003 2002
---- ----
Balance, Beginning of Period $ 77,158 $ 63,085
Comprehensive income:
Net Income 6,543 6,115
Unrealized holding gains on securities
arising during the period, net of tax 1,055 2,060
Less: Reclassification adjustment for gains
included in net income, net of tax (538) (17)
-------- --------
517 2,043
-------- --------
Total Comprehensive income 7,060 8,158
Common Stock Options Exercised 144 355
Purchase of Treasury Stock (92) (245)
Cash Dividends Declared (1,207) (1,001)
Tax Benefit on Disqualifying and Nonqualifying
Exercise of Stock Options 139 --
-------- --------
Balance, June 30, $ 83,202 $ 70,352
======== ========
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,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net Income: $ 6,543 $ 6,115
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 713 652
Amortization of premium and accretion of
discount on securities, net 1,191 311
Provision for loan losses 300 400
Gains on security sales (827) (26)
Increase in cash surrender value of life insurance (406) (365)
(Increase)/decrease in accrued interest receivable (115) 482
(Increase)/decrease in other assets (932) 2,724
Increase in other liabilities 1,398
1,022
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,489 11,691
--------- ---------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 39,534 3,942
Proceeds from maturities of securities available
for sale 11,799 3,944
Proceeds from calls of investment securities 6,170 1,670
Proceeds from calls of securities available for sale 30,425 26,730
Proceeds from sales of securities available for sale 45,579 17,034
Purchase of investment securities (24,780) (59,474)
Purchase of securities available for sale (219,298) (76,773)
Net decrease in short-term investments 26 15,108
Net decrease/(increase) in loans 538 (18,249)
Purchases of premises and equipment (902) (523)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (110,909) (86,591)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 30,857 79,929
Net increase in borrowed funds 59,428 3,000
Dividends paid (1,207) (1,001)
Exercise of stock options 144 355
Purchase of Treasury Stock (92) (245)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 89,130 82,038
--------- ---------
Net (decrease)/increase in cash and cash equivalents (14,290) 7,138
Cash and cash equivalents at beginning of period 38,320 19,983
--------- ---------
Cash and cash equivalents at end of period $ 24,030 $ 27,121
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,845 $ 5,978
Income taxes 2,949 2,829
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, 2002 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 principals 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, the 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 that management considers adequate to reflect the risk of losses inherent
in the Corporation's loan portfolio. In its evaluation of the adequacy of the
allowance for loan losses, management considers past loan loss experience,
changes in the composition of non-performing loans, the borrowers' current
financial condition, the relationship of the current level of the allowance to
the credit portfolio and to non-performing loans and existing economic
conditions. The allowance is increased by provisions charged to expense and
reduced by net charge-offs.
Stock Option Plans: At June 30, 2003, the Corporation had stock-based employee
and non-employee director compensation plans. The Corporation accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of the grant.
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) 2003 2002 2003 2002
---- ---- ---- ----
Net Income:
As Reported $ 3,283 $ 3,153 $ 6,543 $ 6,115
Less: Total Stock-Based Employee Compensation
Expense Determined under the Fair Value Based
Method on all Stock Options, Net of Related Tax Effects 48 62 96 124
--------- ----------- --------- ---------
Pro Forma $ 3,235 $ 3,091 $ 6,447 $ 5,991
Earnings Per Share:
As Reported
Basic $ 0.49 $ 0.47 $ 0.98 $ 0.91
Diluted $ 0.47 $ 0.46 $ 0.95 $ 0.90
Pro Forma
Basic $ 0.48 $ 0.46 $ 0.96 $ 0.90
Diluted $ 0.47 $ 0.45 $ 0.93 $ 0.88
7
Earnings per Common Share - Basic and Diluted: Basic earnings per share is
computed by dividing 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). 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 six months ended June 30, 2003 and 2002
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.
Recent Accounting Pronouncements: Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," was issued in May 2003. Statement 150 requires
instruments within its scope to be classified as a liability (or, in some cases,
as an asset). Statement 150 is generally effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003 (i.e. July
1, 2003 for calendar year entities). For financial instruments created before
June 1, 2003 and still existing at the beginning of the interim period of
adoption, transition generally should be applied by reporting the cumulative
effect of a change in an accounting principle by initially measuring the
financial instruments at fair value or other measurement attributes of the
Statement. The adoption of Statement 150 did not have a significant effect on
the Corporation's consolidated financial statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued on April 30, 2003.
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement is not expected to have a significant effect on the Corporation's
consolidated financial statements.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL: The foregoing contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about management's 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", "believe", 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 in interest rates.
o Competitive pressure in the banking industry causes unanticipated
adverse changes.
o A downturn in the economy of New Jersey causes customers to default in
the payment of their loans or causes loans to become impaired.
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.
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 Operation" 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 Unaudited
Consolidated Financial Statements for the six months ended June 30, 2003,
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 is periodically
reviewed with the Audit Committee and the Board of Directors.
8
The allowance 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 allowance
for loan losses. Such agencies may require the Corporation to make additional
provisions for loan losses based upon information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Accordingly, the
collectibility of a substantial portion of the carrying value of the
Corporation's loan portfolio is susceptible to changes in 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 allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Corporation's control.
RESULTS OF OPERATIONS: The Corporation realized earnings of $0.47 per diluted
share for the second quarter of 2003 as compared to $0.46 per diluted share for
the same quarter in 2002, an increase of 2.2 percent. Net income for the quarter
rose 4.1 percent to $3.3 million compared with $3.2 million for the quarter
ended June 30, 2002. Annualized return on average assets for the quarter was
1.44 percent and annualized return on average equity was 16.24 percent.
Net income for the year to date June 30, 2003 was $6.5 million as compared to
$6.1 million for June 30, 2002 year to date. The per diluted share earnings were
$0.95 for the six months ended June 30, 2003 as compared to $0.90 for the year
to date June 30, 2002. Annualized return on average assets was 1.48 percent and
annualized return on average equity was 16.43 percent for the first six months
of 2003.
EARNINGS ANALYSIS
NET INTEREST INCOME: Net interest income before the provision for loan losses
for the second quarters of 2003 and 2002 was $7.8 million and $8.2 million,
respectively. This represents a decrease of $390 thousand or 4.8 percent. The
decline in net interest income during the second quarter of 2003 was primarily
the result of declining interest rates on loans and investments due to
refinancing and reinvestment activity. The Corporation has been careful to
attempt to limit our interest rate risk by not extending long-term fixed rate
assets during this low interest rate cycle. Deposit and borrowing rates also
declined, but at a slower pace than the rates on loans and investments. The net
interest margin on a fully tax equivalent basis was 3.67 percent in the second
quarter of 2003 as compared to 4.53 percent for the second quarter of 2002, a
decline of 86 basis points.
Average interest earning assets increased $131.2 million or 18.2 percent for the
quarter ended June 30, 2003 as compared to the same period in 2002. This was
primarily due to the increase in average investment security balances of $159.3
million, as average loan balances declined $27.6 million. During this time,
average federal funds sold and interest earning deposit balances remained
relatively flat, decreasing a total of $592 thousand.
Average interest-bearing liabilities for the second quarter of 2003 increased
$103.9 million or 18.0 percent from the second quarter of 2002. Average balances
of money market accounts rose $48.5 million while average balances of savings
accounts and certificates of deposits rose $13.1 million and $11.6 million,
respectively. Interest-bearing checking increased $5.8 million from the second
quarter of 2002 to the second quarter of 2003. Federal Home Loan Bank advances
averaged $30.4 million for the quarter ended June 30, 2003 as compared to $5.5
million for the quarter ended June 30, 2002. During the second quarter of 2003,
the Corporation began to position some of its borrowings to try to take
advantage of the low long-term interest rate environment that existed. This
strategy of extending the maturities of borrowings and matching with lower
yielding fixed rate loans is intended to reduce interest rate risk if interest
rates begin to rise. Average demand deposits increased $24.8 million or 21.7
percent as compared to the second quarter of 2002.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, declined 131 basis points to 4.97 percent in the second quarter 2003 from
6.28 percent earned in the same quarter of 2002. The average interest rates
earned on loans and investment securities declined 60 basis points and 161 basis
points, respectively, in the second quarter of 2003 as compared with the same
period in 2002. When compared to the quarter ended June 30, 2002, the average
interest rate paid on interest-bearing liabilities declined 53 basis points to
1.57 percent in 2003. The average rate paid on certificate of deposits declined
64 basis points and average rates paid on money market accounts declined 75
basis points in the second quarter of 2003 as compared with the same period in
2002.
9
For the six months ended June 30, 2003 and 2002, net interest income before the
provision for loan loss was $15.7 million and $15.9 million, respectively, a
decrease of $178 thousand or 1.1 percent. The decline in net interest income
during the first six months of 2003 was primarily the result of declining
interest rates on loans and investments due to refinancing and reinvestment
activity. Deposit and borrowing rates also declined, but at a slower pace than
the rates on loans and investments. The net interest margin on a fully
tax-equivalent basis for the six months ended June 30, 2003 and 2002 was 3.83
percent and 4.58 percent, respectively, a decline of 75 basis points.
For the six months ended, average interest-earning assets increased $131.3
million from June 30, 2002 to 2003 as the investment portfolio experienced
significant growth. Average balances of investments increased $158.8 million or
61.2 percent. Interest-earning deposits decreased 90.1 percent to $605 thousand
on average. Average loan balances decreased $22.9 million, primarily due to
residential mortgage pay-offs as consumers refinanced their mortgages to their
benefit from the historically low interest rate environment.
Average interest-bearing liabilities for the six months ended June 30, 2003
increased $109.7 million or 19.7 percent from the same period in 2002. Average
balances of money market accounts rose $59.1 million and certificates of deposit
balances increased $17.5 million on average. Savings accounts and
interest-bearing checking accounts increased $11.6 million and $8.9 million,
respectively, in the six months ended June 30, 2003 when compared to the same
period of 2002. Federal Home Loan Bank advances averaged $19.4 million during
the year to date June 30, 2003 as compared to $6.8 million for the year to date
ended June 30, 2002. Average demand deposits increased $18.7 million or 16.6
percent as compared to the six months ended June 30, 2002.
For the year to date ended June 30, 2003, average interest rates earned on
investments and loans declined 150 basis points and 53 basis points,
respectively. Interest rates paid on interest-bearing deposits declined 58 basis
points with the largest decreases in the interest rates paid on certificates of
deposit, 76 basis points and money market accounts, 65 basis points. Average
interest rates on FHLB borrowings declined 44 basis points from the six months
ended June 30, 2002 to the same period in 2003.
OTHER INCOME: Other income amounted to $3.0 million for the quarter ended June
30, 2003 as compared to $2.1 million for the quarter ended June 30, 2002. This
is an increase of $928 thousand or 44.6 percent. PGB Trust and Investments, the
Bank's trust division, generated gross fees of $1.6 million for the second
quarter of 2003 as compared to $1.3 million in the second quarter of 2002, an
increase of 28.8 percent. This increase was primarily due to an increase in
trust assets under management. Service charges and fees remained constant at
$418 thousand for the quarter ended June 30, 2003 as compared to $414 thousand
for the prior year quarter. Due to the Corporation's additional investment of
$2.8 million in Bank Owned Life Insurance (BOLI) in the fourth quarter of 2002,
income rose 13.1 percent over the same period in 2002 to $225 thousand. BOLI
assists in offsetting the rising cost of employee benefits.
For the six-month period ended June 30, 2003, total other income increased $1.5
million or 37.4 percent as compared to the same six-month period in 2002. For
the six months ended June 30, 2003 other income, exclusive of gains on
securities sold reflects an increase of $715 thousand or 17.8 percent compared
with the six months ended June 30, 2002. This increased revenue was primarily
driven by the increase in fees from PGB Trust and Investments, which rose $659
thousand, or 27.4 percent, to $3.1 million for the year to date ended June 30,
2003 as compared to $2.4 million for the same period in 2002. Income from BOLI
totaled $444 thousand for the six months ended June 30, 2003, rising $48
thousand or 12.1 percent, from $396 thousand for the same six months in 2002.
For the three and six month periods ended June 30, 2003 the Corporation recorded
net gains of $554 thousand and $827 thousand on securities sold from the
available for sale investment portfolio compared to net gains of $8 thousand and
$26 thousand realized in the 2002 comparable periods.
The following table presents the components of other income for the three and
six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(In Thousands) ---- ---- ---- ----
Trust Department Fees $1,621 $1,259 $3,064 $2,405
Service Charges on Deposit Accounts 418 414 837 824
Other Fee Income 103 91 194 183
Bank Owned Life Insurance 225 199 444 396
Other Non-Interest Income 38 57 90 104
Safe Deposit Rental Fees 52 55 111 113
Securities Gains 554 8 827 26
------ ------ ------ ------
Total Other Income $3,011 $2,083 $5,567 $4,051
====== ====== ====== ======
10
OTHER EXPENSES: For the three months ended June 30, 2003 total other expenses
increased $413 thousand or 7.7 percent over the comparable three months ended
June 30, 2002, with increased salary and benefit expense and Bank premises and
equipment expense accounting for most of the increase.
Salaries and employee benefits expense for the quarter ended June 30, 2003
increased 11.3 percent to $3.4 million from $3.0 million for the quarter ended
June 30, 2002. This increase can be attributed to additions to the professional
staff, higher health insurance and pension costs and overtime costs associated
with the conversion of the Bank's core processing system. Premises and equipment
expense increased $90 thousand or 8.7 percent, $1.1 million and $1.0 million for
the quarters ended June 30, 2003 and 2002, respectively. These higher costs are
attributable to additional rent for branch space, depreciation expense and
computer expense.
The significant components of other expense include professional fees, trust
department expense, advertising, telephone, postage and stationery expense.
These expenses totaled $690 thousand and $734 thousand for the quarters ended
June 30, 2003 and 2002, respectively. These expenses also declined year over
year, totaling $1.3 million and $1.5 million at June 30, 2003 and 2002
respectively.
For the six-month period ended June 30, 2003, other expenses increased 7.3
percent to $11.2 million from $10.5 million for the same period in 2002. The
largest component of other expense, salaries and employee benefits, increased
from $5.9 million to $6.6 million or 11.0 percent. Premises and equipment
expense rose $204 thousand or 10.2 percent year over year to $2.2 million.
The level of operating expenses during both the six and three-month periods of
2003 were effected by an increase in several expense categories. The year to
year increase in expenses are primarily attributable to the continued investment
in technology, as the Bank converted to a new core processing system this
quarter, the need to attract, develop and retain high caliber employees and
higher health insurance and pension costs. The Corporation's year-to date
efficiency ratio at June 30, 2003 was 54.99 percent as compared to 52.63 percent
at June 30, 2002. The Corporation believes the efficiency ratio effectively
measures a company's ability to control its expenses in relation to increases
and decreases in income components. The formula used is a common formula for
banks, which allows for comparison to other banks. The formula may not be the
same as that used by other companies.
The following table presents the components of other expense for the three and
six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands)
Salaries and Benefits $ 3,360 $ 3,017 $ 6,597 $ 5,944
Premises and Equipment 1,120 1,030 2,202 1,998
Advertising 141 166 234 339
Stationery and Supplies 139 125 263 244
Professional Fees 125 138 233 376
Trust Department 124 109 260 216
Telephone 89 114 177 173
Postage 72 82 177 160
Other Expense 578 554 1,088 1,015
------- ------- ------- -------
Total Other Expense $ 5,748 $ 5,335 $11,231 $10,465
======= ======= ======= =======
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 $168 thousand and $394 thousand at
June 30, 2003 and 2002, respectively. Loans past due in excess of 90 days and
still accruing are in the process of collection and are well secured.
11
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
June 30,
(In thousands) 2003 2002
Loans past due in excess of 90
days and still accruing $ 1 $ 308
Non-accrual loans 167 86
------ -------
Total non-performing assets $ 168 $ 394
====== =======
Non-performing loans as a % of total loans 0.04% 0.09%
Non-performing assets as a % of total
Loans plus other real estate owned 0.04% 0.09%
Allowance as a % of loans 1.25% 1.02%
PROVISION FOR LOAN LOSSES: For the three months ended June 30, 2003 and 2002,
the provision for loan losses was $150 thousand and $201 thousand, respectively.
For the six months ended June 30, 2003 and 2002, the provision for loan losses
was $300 thousand and $400 thousand, respectively. 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 potential losses in the
portfolio, after consideration of appraised collateral values, financial
condition and past credit history of the borrowers as well as prevailing and
anticipated economic conditions. Net charge-offs were $8 thousand for the second
quarter of 2003 as compared to net recoveries of $20 thousand during the same
period of 2002. For the six months ended June 30, 2003, net recoveries were $27
thousand compared to $2 thousand in net charge-offs for the same period in 2002.
A summary of the allowance for loan losses for the six-month period ended June
30, follows:
(In thousands) 2003 2002
---- ----
Balance, January 1, $4,798 $ 4,023
Provision charged to expense 300 400
Loans charged off (15) (35)
Recoveries 42 33
------- -------
Balance, June 30, $5,125 $4,421
======= =======
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 33
percent for the three months ended June 30, 2003 and 2002. For the six months
ended June 30, 2003 and 2002, the income tax expense as a percentage of pre-tax
income was 33 percent and 32 percent, respectively. Income taxes increased 8.3
percent from $2.9 million for the six months ended June 30, 2002 to $3.2 million
for the same period in 2003, reflecting higher taxable income.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At June 30, 2003, total shareholders' equity, including net unrealized
gains on securities available for sale, was $83.2 million, representing an 18.3
percent increase over the same period in 2002. 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 loan loss
allowance. At June 30, 2003, the Corporation's Tier 1 Capital and Total Capital
ratios were 19.87 percent and 21.19 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,
2003, was 8.71 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.
12
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 $24.6 million at June 30, 2003. In addition, the
Corporation has $345.0 million in securities designated as available for sale.
These securities can be sold in response to liquidity concerns. Book value as of
June 30, 2003, of investment securities and securities available for sale
maturing within one year amounted to $7.3 million and $2.6 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, 2003, core deposits equaled $738.4 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, 2003).
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 has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
13
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of shareholders held on April 22, 2003, in
Peapack-Gladstone, New Jersey, the following matters were discussed and voted
upon:
(1) 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 4,679,026 78,269
Pamela Hill 4,677,226 80,069
T. Leonard Hill 4,678,426 78,869
Frank A. Kissel 4,615,198 142,097
John D. Kissel 4,648,888 108,407
James R. Lamb 4,611,461 145,834
George R. Layton 4,664,892 92,403
Edward A. Merton 4,667,549 89,746
F. Duffield Meyercord 4,666,937 90,358
John R. Mulcahy 4,665,949 91,346
Robert M. Rogers 4,612,798 144,497
Philip W. Smith III 4,676,702 80,593
Craig C. Spengeman 4,640,536 116,759
Jack D. Stine 4,678,426 78,869
(2) The approval of an amendment to Peapack-Gladstone Financial Corporation's
Certificate of Incorporation to increase the authorized common stock of
Peapack-Gladstone Financial Corporation to 20 million shares from the
presently authorized 10 million shares. FOR: 4,353,912 AGAINST: 383,252
ABSTAIN: 20,131
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
3 (i) Articles of Incorporation
A. Restated Certificate of Incorporation of the Corporation, as in
effect on the date of this filing (incorporated by reference to
the Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 filed with the Securities and Exchange
Commission on May 13, 2003 (Exhibit 3)).
(ii) By-Laws
A. By-Laws of the Corporation, as in effect on the date of this
filing (incorporated by reference to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission on March 31, 1998
(Exhibit 3.2)).
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 22, 2003 (furnishing first
quarter earnings release for Peapack-Gladstone Financial Corporation).
14
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 8, 2003 By: /s/ Frank A. Kissel
---------------------------------
FRANK A. KISSEL
Chairman of the Board and
Chief Executive Officer
DATE: August 8, 2003 By: /s/ Arthur F. Birmingham
---------------------------------
ARTHUR F. BIRMINGHAM
Executive Vice President and
Chief Financial Officer
15
EXHIBIT INDEX
Number Description
- ------ -----------
3 (i) Articles of Incorporation
A. Restated Certificate of Incorporation of the Corporation, as
in effect on the date of this filing (incorporated by
reference to the Corporation's Quarterly R eport on Form 10-Q
for the quarter ended March 31, 2003 filed with the
Securities and Exchange Commission on May 13, 2003 (Exhibit
3)).
(ii) By-Laws
A. By-Laws of the Corporation, as in effect on the date of this
filing (incorporated by reference to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission on March
31, 1998 (Exhibit 3.2)).
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.
16