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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 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 November 3, 2003:
7,386,892
1
PEAPACK-GLADSTONE FINANCIAL CORPORATION
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Consolidated Statements of Condition September 30, 2003 and
December 31, 2002 Page 3
Consolidated Statements of Income for the three and nine months
ended September 30, 2003 and 2002 Page 4
Consolidated Statements of Changes in Shareholders' Equity for
the nine months ended September 30, 2003 and 2002 Page 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 Page 6
Notes to the Consolidated Financial Statements Page 7
Item 2 Management Discussion and Analysis of Financial Condition
and Results of Operations Page 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 13
Item 4 Controls and Procedures Page 13
PART 2 OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K Page 14
2
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Cash and due from banks $ 22,137 $ 17,920
Federal funds sold 1,951 20,400
---------- ----------
Total cash and cash equivalents 24,088 38,320
Interest-earning deposits 503 549
Investment Securities:(approximate market value
$108,843 in 2003 and $171,290 in 2002) 106,972 168,066
Securities Available for Sale 381,756 212,259
Loans:
Loans secured by real estate 378,262 379,150
Other loans 28,162 30,610
---------- ----------
Total loans 406,424 409,760
Less: Allowance for loan losses 5,277 4,798
---------- ----------
Net loans 401,147 404,962
Premises and equipment, net 15,012 14,371
Accrued interest receivable 5,136 4,606
Cash surrender value of life insurance 16,350 15,747
Other assets 2,972 928
---------- ----------
TOTAL ASSETS $ 953,936 $ 859,808
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 152,152 $ 126,107
Interest-bearing deposits:
Checking 128,226 136,956
Savings 102,552 94,142
Money market accounts 201,161 173,973
Certificates of deposit over $100,000 63,730 59,607
Certificates of deposit less than $100,000 167,609 178,903
---------- ----------
Total deposits 815,430 769,688
Borrowed Funds 47,934 5,000
Accrued expenses and other liabilities 7,881 7,962
---------- ----------
TOTAL LIABILITIES 871,245 782,650
---------- ----------
SHAREHOLDERS' EQUITY
Common stock (no par value; stated value $0.83
per share; authorized 20,000,000 shares; issued shares,
7,496,461 at September 30, 2003 and 7,480,045 at
December 31, 2002; outstanding shares, 7,385,706 at
September 30, 2003 and 7,372,776 at December 31, 2002) 6,242 5,661
Surplus 61,427 38,385
Treasury Stock at cost, 110,755 shares in 2003
and 107,269 shares in 2002 (2,120) (2,020)
Retained Earnings 14,497 30,290
Accumulated other comprehensive income,
net of income tax 2,645 4,842
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 82,691 77,158
---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 953,936 $ 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 Nine months ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 6,093 $ 7,457 $ 18,990 $ 22,207
Interest on investment securities:
Taxable 635 1,219 3,154 2,832
Tax-exempt 162 97 405 280
Interest on securities available for sale:
Taxable 2,960 2,365 8,094 7,308
Tax-exempt 91 90 271 260
Interest-earning deposits 2 2 5 136
Interest on federal funds sold 4 25 60 96
----------- ----------- ----------- -----------
Total interest income 9,947 11,255 30,979 33,119
INTEREST EXPENSE
Interest on savings account deposits 794 1,125 2,639 3,185
Interest on certificates of deposit over $100,000 386 513 1,207 1,599
Interest on other time deposits 1,096 1,345 3,522 4,098
Interest on borrowed funds 322 76 580 181
----------- ----------- ----------- -----------
Total interest expense 2,598 3,059 7,948 9,063
----------- ----------- ----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 7,349 8,196 23,031 24,056
Provision for loan losses 150 199 450 599
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,199 7,997 22,581 23,457
----------- ----------- ----------- -----------
OTHER INCOME
Service charges and fees for other services 415 424 1,251 1,249
Trust department income 1,358 1,172 4,422 3,577
Securities gains/(losses) 400 (7) 1,227 19
Bank owned life insurance 217 196 661 592
Other income 193 201 589 602
----------- ----------- ----------- -----------
Total other income 2,583 1,986 8,150 6,039
OTHER EXPENSES
Salaries and employee benefits 3,306 3,028 9,902 8,972
Premises and equipment 1,213 1,047 3,416 3,044
Other expense 1,071 1,315 3,503 3,841
----------- ----------- ----------- -----------
Total other expenses 5,590 5,390 16,821 15,857
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 4,192 4,593 13,910 13,639
Income tax expense 1,308 1,530 4,483 4,460
----------- ----------- ----------- -----------
NET INCOME $ 2,884 $ 3,063 $ 9,427 $ 9,179
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.39 $ 0.42 $ 1.28 $ 1.25
Diluted $ 0.38 $ 0.40 $ 1.24 $ 1.22
Average basic shares outstanding 7,384,772 7,358,204 7,379,418 7,343,072
Average diluted shares outstanding 7,638,696 7,603,173 7,609,055 7,548,394
See accompanying notes to consolidated financial statements.
4
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------- --------
Balance, Beginning of Period $ 77,158 $ 63,085
Comprehensive income:
Net Income 9,427 9,179
Unrealized holding gains/(losses) on securities
arising during the period, net of tax (1,399) 4,054
Less: Reclassification adjustment for gains
included in net income, net of tax (798) (13)
-------- --------
(2,197) 4,041
-------- --------
Total Comprehensive income 7,230 13,220
Common Stock Options Exercised 190 515
Purchase of Treasury Stock (100) (403)
Cash Dividends Declared (1,946) (1,602)
Tax Benefit on Disqualifying and Nonqualifying
Exercise of Stock Options 159 --
-------- --------
Balance, September 30, $ 82,691 $ 74,815
======== ========
See accompanying notes to consolidated financial statements.
5
PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net Income: $ 9,427 $ 9,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,055 989
Amortization of premium and accretion of
discount on securities, net 2,271 674
Provision for loan losses 450 599
Gains on security sales (1,227) (19)
Increase in cash surrender value of life insurance (603) (546)
(Increase)/decrease in accrued interest receivable (530) 378
(Increase)/decrease in other assets (2,044) 2,703
Increase in other liabilities 1,449 2,455
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,248 16,412
--------- ---------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 83,269 12,881
Proceeds from maturities of securities available
for sale 24,279 10,508
Proceeds from calls of investment securities 9,170 3,170
Proceeds from calls of securities available for sale 46,825 30,730
Proceeds from sales of securities available for sale 51,401 19,042
Purchase of investment securities (32,755) (97,074)
Purchase of securities available for sale (295,339) (84,622)
Net decrease in short-term investments 46 15,111
Net decrease/(increase) in loans 3,365 (13,234)
Purchases of premises and equipment (1,696) (1,082)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (111,435) (104,570)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 45,742 76,526
Net increase in borrowed funds 42,934 18,500
Cash dividends paid (1,811) (1,501)
Exercise of stock options 190 515
Purchase of Treasury Stock (100) (403)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 86,955 93,637
--------- ---------
Net (decrease)/increase in cash and cash equivalents (14,232) 5,479
Cash and cash equivalents at beginning of period 38,320 19,983
--------- ---------
Cash and cash equivalents at end of period $ 24,088 $ 25,462
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 8,530 $ 8,703
Income taxes 4,968 3,996
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 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. In the opinion of management,
the information presented includes all adjustments and normal recurring accruals
considered necessary for a fair presentation, in all material respects, of the
interim period results.
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 September 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 Nine Months Ended
September 30, September 30,
(In Thousands Except per Share Data) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income:
As Reported $ 2,884 $ 3,063 $ 9,427 $ 9,179
Less: Total Stock-Based Employee Compensation
Expense Determined under the Fair Value Based
Method on all Stock Options, Net of Related Tax Effects 49 62 98 124
---------- ---------- ---------- ----------
Pro Forma $ 2,835 $ 3,001 $ 9,329 $ 9,055
Earnings Per Share:
As Reported
Basic $ 0.39 $ 0.42 $ 1.28 $ 1.25
Diluted $ 0.38 $ 0.40 $ 1.24 $ 1.22
Pro Forma
Basic $ 0.38 $ 0.41 $ 1.26 $ 1.23
Diluted $ 0.37 $ 0.39 $ 1.23 $ 1.20
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 the 10 percent stock dividend declared September 11, 2003 and all
prior stock dividends and stock splits.
Comprehensive Income: The difference between the Corporation's net income and
total comprehensive income for the nine months ended September 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 and losses.
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 nine months ended September 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.
8
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 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: For the third quarter of 2003, the Corporation realized
earnings of $0.38 per diluted share as compared to $0.40 per diluted share for
the same quarter in 2002, a decline of 5.0 percent. Net income for the quarter
declined 5.8 percent to $2.9 million compared with $3.1 million for the quarter
ended September 30, 2002. Annualized return on average assets for the quarter
was 1.21 percent and annualized return on average equity was 14.08 percent.
Net income for the year to date September 30, 2003, increased 2.7 percent to
$9.4 million as compared to $9.2 million for the year to date September 30,
2002. The per diluted share earnings were $1.24 for the nine months ended
September 30, 2003, as compared to $1.22 for the year to date September 30,
2002. Annualized return on average assets was 1.38 percent and annualized return
on average equity was 15.63 percent for the first nine months of 2003.
EARNINGS ANALYSIS
NET INTEREST INCOME: Third quarter 2003 net interest income, before the
provision for loan losses, was $7.3 million while the same quarter of 2002 was
$8.2 million, a decrease of $847 thousand or 10.3 percent. The decline in net
interest income during the third quarter of 2003 was primarily the result of
declining interest rates on loans and investments due to refinancing and
reinvestment activity. Deposit and borrowing rates have declined as well. The
net interest margin on a fully tax equivalent basis was 3.32 percent in the
third quarter of 2003 as compared to 4.33 percent for the third quarter of 2002,
a decline of 101 basis points.
Average interest earning assets increased $147.5 million or 19.7 percent for the
third quarter 2003 as compared to the third quarter in 2002. This was primarily
due to the increase in average investment security balances of $173.8 million,
as average loan balances declined $22.4 million. The Corporation has been
careful to attempt to limit its interest rate risk by not extending long-term
fixed rate assets during this low interest rate cycle. During this time, average
federal funds sold and interest earning deposit balances also declined a total
of $3.9 million.
Average interest-bearing liabilities for the quarter ended September 30, 2003
increased $115.0 million or 19.1 percent to $718.1 million from $603.1 million
in the same period in 2002. Average balances of interest-bearing checking
accounts rose $10.7 million while average balances of savings accounts and
certificates of deposits rose $9.8 million and $9.1 million, respectively. Money
market accounts increased $44.0 million from the third quarter of 2002 to the
third quarter of 2003, an increase of 29.1 percent. Federal Home Loan Bank
advances averaged $53.3 million for the quarter ended September 30, 2003 as
compared to $11.8 million for the quarter ended September 30, 2002. During the
third quarter of 2003, the Corporation continued 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 $31.8 million or 27.9 percent as compared to the third
quarter of 2002.
Average interest rates earned on interest-earning assets, on a tax-equivalent
basis, declined to 4.52 percent in the third quarter of 2003, from 6.03 percent
earned in the same quarter of 2002. This is a decline of 151 basis points. The
average interest rates earned on loans declined 94 basis points while the
average interest rates earned on investment securities declined 166 basis points
in the third quarter of 2003 as compared with the same period in 2002. When
compared to the quarter ended September 30, 2002, the average interest rate paid
on interest-bearing liabilities declined 57 basis points to 1.44 percent in
2003. The average rate paid on certificate of deposits declined
9
76 basis points and average rates paid on money market accounts declined 72
basis points in the third quarter of 2003 as compared with the same quarter in
2002.
For the nine months ended September 30, 2003 and 2002, net interest income
before the provision for loan loss was $23.0 million and $24.1 million,
respectively, a decrease of $1.0 million or 4.3 percent. The decline in net
interest income during the first nine 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 nine months ended September 30, 2003 and
2002 was 3.65 percent and 4.49 percent, respectively, a decline of 84 basis
points.
For the nine months ended September 30, 2003, average interest-earning assets
increased $137.0 million from the same period in 2002 as the investment
portfolio experienced significant growth. Average balances of investments
increased $163.9 million or 59.2 percent. Interest-earning deposits declined
83.5 percent to $698 thousand on average. Average loan balances decreased $22.5
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 nine months ended September 30,
2003 increased $111.5 million or 19.5 percent from the nine months ended
September 30, 2002. Average balances of money market accounts rose $54.0 million
and certificates of deposit balances increased $14.7 million on average. Savings
accounts and interest-bearing checking accounts increased $11.0 million and $9.5
million, respectively, in the nine months ended September 30, 2003 when compared
to the same period of 2002. Federal Home Loan Bank advances averaged $30.8
million during the year to date September 30, 2003 as compared to $8.5 million
for the year to date ended September 30, 2002. Average demand deposits increased
$23.3 million or 20.6 percent as compared to the nine months ended September 30,
2002.
Average interest rates earned on investments and loans declined 156 basis points
and 74 basis points, respectively, for the year to date ended September 30,
2003. Interest rates paid on interest-bearing deposits declined 59 basis points
with the largest decreases in the interest rates paid on certificates of
deposit, 77 basis points and money market accounts, 67 basis points. For the
nine months ended September 30, 2003, average interest rates on FHLB borrowings
declined 34 basis points as compared to the same period a year ago.
OTHER INCOME: For the quarter ended September 30, 2003, other income totaled
$2.6 million as compared to $2.0 million for the quarter ended September 30,
2002. This is an increase of $597 thousand or 30.1 percent. PGB Trust and
Investments, the Bank's trust division, generated gross fees of $1.4 million for
the third quarter of 2003 as compared to $1.2 million in the third quarter of
2002, an increase of 15.9 percent. This increase was primarily due to an
increase in trust assets under management. Service charges and fees declined
slightly from $424 thousand in the third quarter of 2002 to $415 thousand for
the quarter ended September 30, 2002. 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 10.7 percent over the same period in 2002 to $217
thousand. BOLI assists in offsetting the rising cost of employee benefits.
For the nine-month period ended September 30, 2003, total other income increased
$2.1 million or 35.0 percent as compared to the same nine-month period in 2002.
For the nine months ended September 30, 2003 other income, exclusive of gains
and losses on securities sold, reflects an increase of $903 thousand, or 15.0
percent, when compared with the nine months ended September 30, 2002. This
increased revenue was primarily driven by the increase in fees from PGB Trust
and Investments, which rose $845 thousand, or 23.6 percent, to $4.4 million for
the year to date ended September 30, 2003 as compared to $3.6 million for the
same period in 2002. Income from BOLI totaled $661 thousand for the nine months
ended September 30, 2003, rising $69 thousand or 11.7 percent, from $592
thousand for the same nine months in 2002.
For the quarter ended September 30, 2003, the Corporation recorded net gains on
securities sold from the available for sale investment portfolio of $400
thousand as compared to net losses of $7 thousand for the same quarter in 2002.
For the nine-month periods ended September 30, 2003 and 2002, the Corporation's
net gains on securities were $1.2 million and $19 thousand, respectively.
10
The following table presents the components of other income for the three and
nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands) 2003 2002 2003 2002
------- ------- ------- -------
Trust department income $ 1,358 $ 1,172 $ 4,422 $ 3,577
Service charges 415 424 1,251 1,249
Fee for other services 90 89 284 272
Bank owned life insurance 217 196 661 592
Other non-interest income 41 55 132 160
Safe deposit rental fees 62 57 173 170
Securities gains/(losses) 400 (7) 1,227 19
------- ------- ------- -------
Total other income $ 2,583 $ 1,986 $ 8,150 $ 6,039
======= ======= ======= =======
OTHER EXPENSES: For the three months ended September 30, 2003 total other
expenses increased $200 thousand or 3.7 percent over the comparable three months
of 2002, with increased salary and benefit expense and premises and equipment
expense accounting for most of the increase.
Salaries and employee benefits expense for the quarter ended September 30, 2003
increased 9.2 percent to $3.3 million from $3.0 million for the quarter ended
September 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 $166 thousand or 15.9 percent, $1.2 million and
$1.0 million for the quarters ended September 30, 2003 and 2002, respectively.
These higher costs are attributable to additional rent for new branch and data
center 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 $571 thousand and $719 thousand for the three months
ended September 30, 2003 and 2002, respectively.
For the nine-month period ended September 30, 2003, other expenses increased to
$16.8 million from $15.9 million for the same period in 2002, a increase of $964
thousand or 6.1 percent. The largest component of other expense, salaries and
employee benefits, increased from $9.0 million to $9.9 million or 10.4 percent.
Premises and equipment expense rose $372 thousand or 12.2 percent year over year
to $3.4 million. The significant components of other expense, professional fees,
trust department expense, advertising, telephone, postage and stationery
expense, declined year over year, totaling $1.9 million and $2.2 million at
September 30, 2003 and 2002 respectively.
The level of operating expenses during both the nine and three-month periods of
2003 were affected 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, 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
September 30, 2003 was 56.16 percent as compared to 52.72 percent at September
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 Corporation calculates the efficiency ratio by
dividing total other expense by the total of net interest income and total other
income excluding security gains and losses. 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
nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands) 2003 2002 2003 2002
------- ------- ------- -------
Salaries and employee benefits $ 3,306 $ 3,028 $ 9,902 $ 8,972
Premises and equipment 1,213 1,047 3,416 3,044
Advertising 109 147 343 486
Stationery and supplies 102 115 365 359
Professional fees 95 167 418 543
Trust department expense 107 93 367 309
Telephone 101 110 278 283
Postage 70 87 247 247
Other expense 487 596 1,485 1,614
------- ------- ------- -------
Total other expense $ 5,590 $ 5,390 $16,821 $15,857
======= ======= ======= =======
11
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 $228 thousand and $279 thousand at
September 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.
The following table sets forth non-performing assets on the dates indicated, in
conjunction with asset quality ratios:
September 30,
(In thousands) 2003 2002
----------------------
Loans past due in excess of 90
days and still accruing $ 65 $ 94
Non-accrual loans 163 185
------- -------
Total non-performing assets $ 228 $ 279
======= =======
Non-performing loans as a % of total loans 0.06% 0.06%
Non-performing assets as a % of total
Loans plus other real estate owned 0.06% 0.06%
Allowance as a % of loans 1.30% 1.07%
PROVISION FOR LOAN LOSSES: For the three months ended September 30, 2003 and
2002, the provision for loan losses was $150 thousand and $199 thousand,
respectively. For the nine months ended September 30, 2003 and 2002, the
provision for loan losses was $450 thousand and $599 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 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. Net recoveries were $2 thousand for the third
quarter of 2003 as compared to net charge-offs of $25 thousand during the third
quarter of 2002. Net recoveries were $29 thousand for the nine months ended
September 30, 2003, as compared to $28 thousand in net charge-offs for the same
period in 2002.
A summary of the allowance for loan losses for the nine-month period ended
September 30, follows:
(In thousands) 2003 2002
---- -----
Balance, January 1, $ 4,798 $ 4,023
Provision charged to expense 450 599
Loans charged off (24) (64)
Recoveries 53 36
------- -------
Balance, September 30, $ 5,277 $ 4,594
======= =======
INCOME TAXES: Income tax expense as a percentage of pre-tax income was 31
percent for the three months ended September 30, 2003 compared to 33 percent for
the same period in 2002 due to higher levels of tax-exempt income. For the nine
months ended September 30, 2003 and 2002, the income tax expense as a percentage
of pre-tax income was 32 percent and 33 percent, respectively. Income tax
expense remained flat for the nine months ended September 30, 2003 and 2002.
CAPITAL RESOURCES: The Corporation is committed to maintaining a strong capital
position. At September 30, 2003, total shareholders' equity, including net
unrealized gains on securities available for sale, was $82.7 million,
representing a 10.5 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 September 30, 2003, the Corporation's Tier 1 Capital and Total
Capital ratios were 20.62 percent and 21.99 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
12
least 3 percent plus an additional 100 to 200 basis points. The Corporation's
leverage ratio at September 30, 2003, was 8.74 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 $24.6 million at September 30, 2003. In addition, the
Corporation has $381.8 million in securities designated as available for sale.
These securities can be sold in response to liquidity concerns. Book value as of
September 30, 2003, of investment securities and securities available for sale
maturing within one year amounted to $9.4 million and $9.8 million,
respectively.
The primary source of funds available to meet liquidity needs is the
Corporation's core deposit base, which excludes certificates of deposit greater
than $100 thousand. As of September 30, 2003, core deposits equaled $751.7
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 (September 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 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 (filed herewith) (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 August 4, 2003 (furnishing second
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: November 12, 2003 By:
----------------------------------------------------
FRANK A. KISSEL
Chairman of the Board and Chief Executive Officer
DATE: November 12, 2003 By:
----------------------------------------------------
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 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 (filed herewith) (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