Peapack-Gladstone Financial (PGC) 10-Q 2004 Q3 Quarterly report

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, 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 incorporation or organization)	(I.R.S. Employer 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 1, 2004:
8,238,698

1

PEAPACK-GLADSTONE FINANCIAL CORPORATION PART 1 FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited):
	Consolidated Statements of Condition September 30, 2004 and December 31, 2003	Page 3
	Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003	Page 4
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2004 and 2003	Page 5
	Consolidated Statements of Cash Flows for the nine months ended September 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 9
Item 3	Quantitative and Qualitative Disclosures about Market Risk	Page 16
Item 4	Controls and Procedures	Page 17
PART 2OTHER INFORMATION
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	Page 17
Item 6	Exhibits	Page 18

2

PEAPACK-GLADSTONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands)
(Unaudited)

			September 30, 2004			December 31, 2003
ASSETS
Cash and due from banks			$	23,734			$	17,234
Federal funds sold				1,897				5,461
	Total cash and cash equivalents			25,631				22,695
Interest-earning deposits				656				30,949
Investment Securities (approximate market value $92,943 in 2004 and $99,515 in 2003)				91,946				97,701
Securities Available for Sale				351,578				355,998
Loans:
Loans secured by real estate				514,079				397,068
Other loans				32,663				29,933
	Total loans			546,742				427,001
	Less:  Allowance for loan losses			5,852				5,467
	Net loans			540,890				421,534
Premises and equipment, net				18,610				15,132
Accrued interest receivable				5,039				4,295
Cash surrender value of life insurance				17,082				16,548
Other assets				4,143				3,274
		TOTAL ASSETS	$	1,055,575			$	968,126
LIABILITIES
Deposits:
	Noninterest-bearing demand deposits		$	163,734			$	155,189
	Interest-bearing deposits:
		Checking		164,665				140,393
		Savings		107,434				101,451
		Money market accounts		224,476				225,863
		Certificates of deposit over $100,000		64,240				60,373
		Certificates of deposit less than $100,000		155,323				162,502
Total deposits				879,872				845,771
Borrowed Funds				75,308				30,032
Accrued expenses and other liabilities				7,709				7,269
		TOTAL LIABILITIES		962,889				883,072
SHAREHOLDERS’ EQUITY
Common stock (no par value; stated value $0.83 per share; authorized 20,000,000 shares; issued shares, 8,365,181 at September 30, 2004 and 8,288,676 at December 31, 2003; outstanding shares, 8,220,363 at September 30, 2004 and 8,157,634 at December 31, 2003)				6,971				6,274
Surplus				86,580				61,959
Treasury Stock at cost, 144,818 shares in 2004 and 131,042 shares in 2003				(2,783	)			(2,391	)
Retained Earnings				—				16,557
Accumulated other comprehensive income, net of income tax				1,918				2,655
		TOTAL SHAREHOLDERS’ EQUITY		92,686				85,054
		TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY	$	1,055,575			$	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 September 30,				Nine months ended September 30,
		2004		2003		2004		2003
INTEREST INCOME
Interest and fees on loans		$	7,126	$	6,093	$	19,544	$	18,990
Interest on investment securities:
	Taxable		623		635		2,069		3,154
	Tax-exempt		262		162		700		405
Interest on securities available for sale:
	Taxable		3,438		2,960		10,165		8,094
	Tax-exempt		91		91		273		271
Interest-earning deposits			2		2		15		5
Interest on federal funds sold			5		4		43		60
Total interest income			11,547		9,947		32,809		30,979
INTEREST EXPENSE
Interest on savings and interest-bearing deposit accounts			932		794		2,446		2,639
Interest on certificates of deposit over $100,000			321		386		950		1,207
Interest on other time deposits			862		1,096		2,581		3,522
Interest on borrowed funds			410		322		953		580
Total interest expense			2,525		2,598		6,930		7,948
	NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		9,022		7,349		25,879		23,031
Provision for loan losses			150		150		450		450
	NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,872		7,199		25,429		22,581
OTHER INCOME
Service charges and fees for other services			435		415		1,259		1,251
Trust department income			1,666		1,358		5,141		4,422
Securities gains			12		400		612		1,227
Bank owned life insurance			185		217		599		661
Other income			177		124		404		362
	Total other income		2,475		2,514		8,015		7,923
OTHER EXPENSES
Salaries and employee benefits			3,638		3,306		10,858		9,902
Premises and equipment			1,420		1,213		4,186		3,416
Other expense			1,084		1,002		3,641		3,276
Total other expenses			6,142		5,521		18,685		16,594
INCOME BEFORE INCOME TAX EXPENSE			5,205		4,192		14,759		13,910
Income tax expense			1,670		1,308		4,734		4,483
	NET INCOME	$	3,535	$	2,884	$	10,025	$	9,427
EARNINGS PER SHARE
Basic		$	0.43	$	0.36	$	1.22	$	1.16
Diluted		$	0.42	$	0.34	$	1.19	$	1.12
Average basic shares outstanding			8,206,321		8,123,249		8,188,047		8,117,359
Average diluted shares outstanding			8,406,096		8,402,565		8,390,680		8,369,960

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,
			2004			2003
Balance, Beginning of Period			$	85,054		$	77,158
Comprehensive income:
		Net Income		10,025			9,427
		Unrealized holding (losses)/gains on securities arising during the period, net of tax		(339	)		(1,399	)
		Less: Reclassification adjustment for gains included in net income, net of tax		398			798
				(737	)		(2,197	)
	Total Comprehensive income			9,288			7,230
Common Stock Options Exercised				742			190
Purchase of Treasury Stock				(392	)		(100	)
Cash Dividends Declared				(2,319	)		(1,946	)
Tax Benefit on Disqualifying and Nonqualifying Exercise of Stock Options				313			159
Balance, September 30,			$	92,686		$	82,691

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,
		2004			2003
OPERATING ACTIVITIES:
Net Income:		$	10,025		$	9,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,220			1,055
Amortization of premium and accretion of discount on securities, net			1,132			2,271
Provision for loan losses			450			450
Gains on security sales			(612	)		(1,227	)
Tax benefit on stock option exercises			313			159
Increase in cash surrender value of life insurance, net			(534	)		(603	)
Increase in accrued interest receivable			(744	)		(530	)
Increase in other assets			(869	)		(2,203	)
Increase in other liabilities			885			1,449
	NET CASH PROVIDED BY OPERATING ACTIVITIES		11,266			10,248
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities			21,507			83,269
Proceeds from maturities of securities available for sale			31,728			24,279
Proceeds from calls of investment securities			745			9,170
Proceeds from calls of securities available for sale			4,600			46,825
Proceeds from sales of securities available for sale			92,817			51,401
Purchase of investment securities			(16,849	)		(32,755	)
Purchase of securities available for sale			(126,164	)		(295,339	)
Net decrease in short-term investments			30,293			46
Purchase of loans			(60,016	)		—
Net (increase)/decrease in loans			(59,790	)		3,365
Purchases of premises and equipment			(4,698	)		(1,696	)
	NET CASH USED IN INVESTING ACTIVITIES		(85,827	)		(111,435	)
FINANCING ACTIVITIES:
Net increase in deposits			34,101			45,742
Net increase in short-term borrowings			46,500			17,500
Proceeds from long-term debt			—			26,000
Repayments of long-term debt			(1,224	)		(566	)
Cash dividends paid			(2,230	)		(1,811	)
Exercise of stock options			742			190
Purchase of Treasury Stock			(392	)		(100	)
	NET CASH PROVIDED BY FINANCING ACTIVITIES		77,497			86,955
Net increase/(decrease) in cash and cash equivalents			2,936			(14,232	)
Cash and cash equivalents at beginning of period			22,695			38,320
Cash and cash equivalents at end of period		$	25,631		$	24,088
Supplemental disclosures of cash flow information:
Cash paid during the year for:
	Interest	$	6,914		$	8,530
	Income taxes		5,326			4,968

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 Annual Report on Form 10-K for the period ended December 31, 2003 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 September 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 September 30,				Nine Months Ended September 30,
(In Thousands Except per Share Data)					2004		2003		2004		2003
Net Income:
		As Reported			$	3,535	$	2,884	$	10,025	$	9,427
		Less:  Total Stock-Based Compensation Expense Determined under the Fair Value Based Method on all Stock Options, Net of Related Tax Effects				100		48		1,460		144
	Pro Forma				$	3,435	$	2,836	$	8,565	$	9,283
Earnings Per Share:
				As Reported
				Basic	$	0.43	$	0.36	$	1.22	$	1.16
				Diluted	$	0.42	$	0.34	$	1.19	$	1.12
				Pro Forma
			Basic		$	0.42	$	0.35	$	1.05	$	1.14
		Diluted			$	0.41	$	0.34	$	1.02	$	1.11

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 and a 10 percent stock dividend declared on September 9, 2004.  The Corporation recorded the dividend at the fair value of the stock issued.  The Corporation did not have sufficient retained earnings to fully record the fair value and charged $1.06 million to surplus.

Comprehensive Income:  The difference between the Corporation’s net income and total comprehensive income for the three and nine months ended September 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.  Total comprehensive income for the three months ended September 30, 2004 and 2003 was $7.2 million and $170 thousand, respectively.  For the nine months ended September 30, 2004 and 2003, total comprehensive income was $9.3 million and $7.2 million, respectively.

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 nine months ended September 30 included the following components:

		Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands)		2004				2003				2004				2003
Service Cost			$	275			$	244			$	824			$	733
Interest Cost				126				109				378				328
Expected Return on Plan Assets				(117	)			(98	)			(351	)			(295	)
Amortization of:
	Net Loss			6				14				18				42
	Unrecognized Prior Service Cost			—				—				(1	)			(1	)
	Unrecognized Remaining Net Assets			(2	)			(2	)			(5	)			(5	)
Net Periodic Benefit Cost			$	288			$	267			$	863			$	802

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 September 30, 2004, contributions of $900 thousand had been made in the current year.

8

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:

• Unanticipated changes or no change in interest rates.

• Competitive pressure in the banking industry causes unanticipated adverse changes.

• 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.

• Enforcement of the Highlands Water Protection and Planning Act

• Loss of key managers or employees.

• Loss of major customers or failure to develop new customers.

• A decrease in loan quality and loan origination volume.

• An increase in non-performing loans.

• 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.

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 New Jersey experience an adverse economic shock.  Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation’s control.

9

OVERVIEW:  For the third quarter of 2004, the Corporation realized earnings of $0.42 per diluted share as compared to $0.34 per diluted share for the third quarter of 2003.  Net income of $3.5 million for the quarter was $651 thousand, or 22.6 percent higher, than the net income of $2.9 million for the same quarter last year.  Annualized return on average assets for the quarter was 1.37 percent and annualized return on average equity was 16.00 percent for the third quarter of 2004.

Net income was $10.0 million for the year to date ended September 30, 2004 as compared to $9.4 million for the same nine months last year.  The diluted earnings per share were $1.19 for the first nine months of the year as compared to $1.12 for the same period last year.  The year to date annualized return on average assets was 1.34 percent and annualized return on average equity was 15.29 percent for the nine months ended September 30, 2004.

EARNINGS ANALYSIS

NET INTEREST INCOME:  Net interest income, on a tax-equivalent basis, before the provision for loan losses, was $9.3 million for the third quarter of 2004, compared to $7.5 million for the same quarter of 2003, an increase of $1.7 million or 23.08 percent.  The increase in net interest income during the quarter was primarily the result of higher loan volume, higher rates earned on investments and lower rates paid on deposits, offset in part by lower rates earned on loans.  The net interest margin on a fully tax equivalent basis was 3.78 percent in the third quarter of 2004 as compared to 3.35 percent for the third quarter of 2003, an increase of 43 basis points.  When compared to the second quarter of 2004, net interest income increased $547 thousand, or 6.3 percent, from $8.7 million on a tax-equivalent basis.  The net interest margin, on a fully tax equivalent basis increased from 3.71 percent in the second quarter of 2004, to 3.78 percent in the third quarter of 2004.

In the third quarter of 2004, average interest-earning assets increased $83.0 million or 9.3 percent to $979.4 million as compared to $896.4 million for the same quarter in 2003.  This was due to the increase in average loan balances of $92.6 million offset in part by a decline in average investment security balances of $9.1 million.    The increase in loan balances during the third quarter of 2004 was the result of growth in residential real estate, commercial mortgage and commercial loans.  The majority of residential real estate loan origination was primarily due to the purchase of adjustable rate loans from a third-party mortgage origination entity.  All of the loans purchased are secured by properties located within the Bank’s market area.

Average interest-bearing liabilities increased $65.9 million or 9.2 percent to $784.0 million for the quarter ended September 30, 2004 from $718.1 million in the same period in 2003.  Average balances of interest-bearing checking accounts rose $32.1 million or 24.1 percent, money market accounts increased $26.6 million or 13.6 percent and average balances of savings accounts rose $6.8 million or 6.6 percent.  Average certificates of deposits declined $14.9 million, or 6.4 percent for the third quarter of 2004 when compared to the third quarter of 2003.  Federal Home Loan Bank advances averaged $68.5 million for the quarter ended September 30, 2004 as compared to $53.3 million for the quarter ended September 30, 2003.  Average demand deposits increased $12.1 million or 8.3 percent for the third quarter of 2004 as compared to the same quarter of 2003.

For the third quarter, average interest rates earned on interest-earning assets, on a tax-equivalent basis, rose 29 basis points to 4.81 percent, from the 4.52 percent earned in the same quarter of 2003.  In the third quarter of 2004, the average interest rates earned on loans declined 27 basis points to 5.68 percent, while the average interest rates earned on investment securities rose 59 basis points to 3.91 percent when compared with the same period in 2003. The average interest rate paid during the quarter on interest-bearing liabilities declined 16 basis points to 1.29 percent when compared to the third quarter of 2003.  The average rate paid on certificate of deposits in the third quarter of 2004 declined 38 basis points and average rates paid on money market accounts declined 10 basis points to 0.87 percent when compared with the same quarter in 2003.  This contributed to a lower cost of funds for the quarter of 1.07 percent as compared to the third quarter of 2003 of 1.20 percent.

For the nine months ended September 30, 2004, net interest income, on a tax-equivalent basis before the provision for loan losses, increased $3.0 million or 13.0 percent to $26.5 from $23.5 million for the same period of 2003.  The increase in net interest income was primarily the result of higher average balances of interest-earning assets and lower deposit rates paid, partially offset by an increase in the average balances of interest-bearing liabilities.  The net interest margin, on a fully tax equivalent basis, for the nine months ended September 30, 2004 was 3.78 percent as compared to 3.67 percent for the same period in 2003, an increase of 11 basis points.

Average earning assets increased $84.8 million or 9.9 percent for the year to date 2004, to $936.9 million.  Average loans for this period in 2004 increased to $457.8 million, an increase of $53.6 million or 13.3 percent over the nine months ended September 30, 2003.  Investment securities averaged $471.4 million and $440.6 million for the nine months ended September 30, 2004 and 2003, respectively, a $30.8 million or 7.0 percent increase. 

10

Average interest-bearing liabilities for the first nine months in 2004 were $743.5 million compared to $684.6 million for the same period in 2003, an increase of $58.9 million or 8.6 percent.  Average money market balances accounted for over one-third of the increase, rising $24.9 million or 13.2 percent during the first nine months of 2004 to $214.1 million from $189.2 million during the same period of 2003.  Interest-bearing checking accounts averaged $153.3 million, growing $24.2 million, a 18.7 percent increase, 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.  Federal Home Loan Bank advances averaged $48.0 million for the nine months ended September 30, 2004 as compared to $30.8 million for the nine months ended September 30, 2003, a $17.2 million or 55.7 percent increase.  Partially offsetting these increases is the decline in average certificate of deposit balances of $13.8 million or 5.9 percent to $221.7 million.  Average demand deposits increased $20.2 million or 14.8 percent to $156.7 million year to date September 30, 2004 as compared to the same period in 2003.

Average interest rates, on a tax-equivalent basis, earned on interest earning assets was 4.76 percent for the nine-months ended September 30, 2004 as compared to 4.92 percent for the same period in 2003.  Year to date 2004, average rates earned on loans was 5.70 percent, a 57 basis point decline from the nine month 2003 average rates earned of 6.27 percent.  The average interest rates earned on investment securities in the nine months ended September 30, 2004, declined 17 basis points to 3.91 percent from 3.74 percent in the same period in 2003. The average interest rate paid on interest-bearing liabilities declined 31 basis points to 1.24 percent when compared to the same nine months of 2003.  The average rate paid on certificate of deposits declined 56 basis points to 2.12 percent year to date September 30, 2004, and average rates paid on money market accounts declined 26 basis points to 0.83 percent when compared with the same period in 2003.

11

The following tables reflect the components of net interest income for each of the three and nine months ended September 30, 2004 and 2003:

Average Balance Sheet
Unaudited
Quarters Ended
(Tax-Equivalent Basis, Dollars in Thousands)

					September 30, 2004									September 30, 2003
					Average Balance			Income/ Expense			Yield			Average Balance			Income/ Expense			Yield
ASSETS:
Interest-Earning Assets:
		Investments:
			Taxable (1)		$	427,945		$	4,061			3.80	%	$	451,987		$	3,595			3.18	%
			Tax-Exempt (1) (2)			46,753			582			4.98			31,840			418			5.26
		Loans (2) (3)				502,552			7,133			5.68			409,935			6,098			5.95
		Federal Funds Sold				1,475			5			1.36			1,784			4			0.90
		Interest-Earning Deposits				715			2			1.12			879			2			0.91
		Total Interest-Earning Assets				979,440		$	11,783			4.81	%		896,425		$	10,117			4.52	%
Noninterest-Earning Assets:
		Cash and Due from Banks				19,969									19,147
		Allowance for Loan Losses				(5,769	)								(5,200	)
		Premises and Equipment				18,242									14,890
		Other Assets				23,407									27,660
		Total Noninterest-Earning Assets				55,849									56,497
Total Assets					$	1,035,289								$	952,922
LIABILITIES:
Interest-Bearing Deposits
		Checking			$	165,293		$	279			0.68	%	$	133,189		$	154			0.46	%
		Money Markets				66,220			117			0.71			59,153			123			0.83
		Tiered Money Markets				155,854			367			0.94			136,284			353			1.04
		Savings				109,557			169			0.62			102,738			164			0.64
		Certificates of Deposit				218,611			1,183			2.16			233,525			1,482			2.54
			Total Interest-Bearing Deposits			715,535			2,115			1.18			664,889			2,276			1.37
		Borrowings				68,474			410			2.40			53,255			322			2.42
		Total Interest-Bearing Liabilities				784,009			2,525			1.29			718,144			2,598			1.45
Noninterest Bearing Liabilities
		Demand Deposits				157,508									145,377
		Accrued Expenses and Other Liabilities				5,409									7,446
		Total Noninterest-Bearing Liabilities				162,917									152,823
Shareholders’ Equity						88,363									81,955
	Total Liabilities and Shareholders’ Equity				$	1,035,289								$	952,922
		Net Interest Income (tax-equivalent basis)							9,258									7,519
				Net Interest Spread								3.52	%								3.07	%
				Net Interest Margin (4)								3.78	%								3.35	%
Tax equivalent adjustment									(236	)								(170	)
Net Interest Income								$	9,022								$	7,349

(1) Average balances for available-for-sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

(3) Loans are stated net of unearned income and include non-accrual loans.

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

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Average Balance Sheet
Unaudited
Year-to-Date
(Tax-Equivalent Basis, Dollars in Thousands)

			September 30, 2004									September 30, 2003
			Average Balance			Income/ Expense			Yield			Average Balance			Income/ Expense			Yield
ASSETS:
Interest-Earning Assets:
	Investments:
		Taxable (1)	$	429,385		$	12,234			3.80	%	$	414,189		$	11,248			3.62	%
		Tax-Exempt (1) (2)		42,018			1,606			5.09			26,376			1,116			5.64
	Loans (2) (3)			457,791			19,561			5.70			404,175			19,005			6.27
	Federal Funds Sold			5,841			43			0.98			6,742			60			1.19
	Interest-Earning Deposits			1,905	��		15			1.05			698			5			0.99
	Total Interest-Earning Assets			936,940		$	33,459			4.76	%		852,180		$	31,434			4.92	%
Noninterest-Earning Assets:
	Cash and Due from Banks			19,483									18,900
	Allowance for Loan Losses			(5,640	)								(5,044	)
	Premises and Equipment			17,255									14,698
	Other Assets			25,825									28,564
	Total Noninterest-Earning Assets			56,923									57,118
Total Assets			$	993,863								$	909,298
LIABILITIES:
Interest-Bearing Deposits
	Checking		$	153,285		$	629			0.55	%	$	129,128		$	493			0.51	%
	Money Markets			65,926			311			0.63			63,742			453			0.95
	Tiered Money Markets			148,167			1,013			0.91			125,463			1,089			1.16
	Savings			106,393			493			0.62			99,935			604			0.81
	Certificates of Deposit			221,711			3,531			2.12			235,526			4,729			2.68
		Total Interest-Bearing Deposits		695,482			5,977			1.15			653,794			7,368			1.50
	Borrowings			48,017			953			2.64			30,831			580			2.51
	Total Interest-Bearing Liabilities			743,499			6,930			1.24			684,625			7,948			1.55
Noninterest Bearing Liabilities
	Demand Deposits			156,740									136,494
	Accrued Expenses and Other Liabilities			6,188									7,765
	Total Noninterest-Bearing Liabilities			162,928									144,259
Shareholders’ Equity				87,436									80,414
	Total Liabilities and Shareholders’ Equity		$	993,863								$	909,298
	Net Interest Income (tax-equivalent basis)						26,529									23,486
		Net Interest Spread								3.52	%								3.37	%
		Net Interest Margin (4)								3.78	%								3.67	%
Tax equivalent adjustment						��	(650	)								(455	)
Net Interest Income						$	25,879								$	23,031

(1) Average balances for available-for-sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

(3) Loans are stated net of unearned income and include non-accrual loans.

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

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OTHER INCOME: For the third quarter 2004, other income was $2.48 million as compared to $2.51 million in the same period a year ago.  Income from PGB Trust and Investments, the Bank’s trust division, was $1.67 million, an increase of $308 thousand or 22.7 percent over last year’s third quarter.  This increase was primarily due to an increase in trust assets under management.  Service charges and fees increased from $415 thousand in the third quarter of 2003 to $435 thousand for the same quarter this year.

Other income for the first nine months of 2004 was $8.02 million as compared to $7.92 million for the same nine months of 2003.  Trust income increased to $5.14 million from $4.42 million, year to date September 30, 2004 to 2003, respectively, a $719 thousand or 16.3 percent increase.  The market value of trust assets under management was $1.56 billion at September 30, 2004, an increase of $214 million, or 15.9% over the previous year.  Income from service charges and fees remained constant at $1.26 million.

Security gains were $12 thousand in the third quarter of 2004 as compared to $400 thousand for the same quarter of 2003.  Security gains declined $615 thousand to $612 thousand for the nine months ended September 30, 2004 when compared to the same period in 2003.  In 2003, the Corporation took advantage of the historically low interest rate environment and sold securities and recognized gains.

The following table presents the components of other income for the three and nine months ended September 30, 2004 and 2003:

		Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)		2004		2003		2004		2003
Trust department income		$	1,666	$	1,358	$	5,141	$	4,422
Service charges			435		415		1,259		1,251
Bank owned life insurance			185		217		599		661
Safe deposit rental fees			64		62		179		173
Other non-interest income			84		41		168		132
Fees for other services			29		21		57		57
Securities gains			12		400		612		1,227
	Total other income	$	2,475	$	2,514	$	8,015	$	7,923

OTHER EXPENSES: For the third quarter of 2004, other expenses increased $621 thousand or 11.2 percent to $6.14 million compared to $5.52 million for the third quarter of 2003.  Salaries and benefits expense during the third quarter of 2004 were $3.64 million as compared to $3.31 million for the third quarter of 2003, an increase of $332 thousand or 10.0 percent.  Normal salary increases as well as additions to staff due to branch expansion and the related benefits costs account for the increase.  For the third quarter, occupancy expenses increased $207 thousand to $1.42 million as compared to $1.21 million for the same quarter of 2003.  In the past year, occupancy expenses have increased due to the investment in two new branches and a new operations center.  New branches are our primary source of future growth and profitability.

For the nine months ended September 30, 2004, other expenses increased $2.09 million or 12.6 percent to $18.69 million.  Salary and benefit expense and occupancy costs were the primary reasons for the higher level of other expenses.  Salaries and benefits rose $956 thousand or 9.7 percent while occupancy costs rose $770 thousand or 22.5 percent when compared to the nine months ended September 30, 2003.  Salaries and benefits expense rose due to additions to staff, merit increases and the related benefits costs while the increases in premises and equipment expense are due to investments in future growth in the form of new branches and a new operations center.

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The following table presents the components of other expense for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2004			2003			2004			2003
Salaries and employee benefits	$	3,638		$	3,306		$	10,858		$	9,902
Premises and equipment		1,420			1,213			4,186			3,416
Advertising		110			109			439			343
Stationery and supplies		141			102			408			365
Professional fees		120			95			371			418
Telephone		113			101			356			278
Trust department expense		103			107			296			367
Postage		70			70			250			247
Deferred Loan Origination Costs		(168	)		(155	)		(351	)		(452	)
Other expense		595			573			1,872			1,710
Total other expense	$	6,142		$	5,521		$	18,685		$	16,594

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 $289 thousand and $228 thousand at September 30, 2004 and 2003, respectively.  Loans past due in excess of 90 days and still accruing are in the process of collection and are considered well secured.

The following table sets forth non-performing assets on the dates indicated, in conjunction with asset quality ratios:

		September 30,
(In thousands)		2004			2003
Other real estate owned		$	—		$	—
Loans past due in excess of 90 days and still accruing			188			65
Non-accrual loans			101			163
Total non-performing assets		$	289		$	228
Non-performing loans as a% of total loans			0.05	%		0.06	%
Non-performing assets as a% of total
	Loans plus other real estate owned		0.05	%		0.06	%
Allowance as a% of loans			1.07	%		1.30	%

PROVISION FOR LOAN LOSSES: The provision for loan losses was $150 thousand for both the third quarters of 2004 and 2003. For the nine months ended September 30, 2004 and 2003, the provision for loan losses was $450 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 third quarter of 2004, net charge-offs were $4 thousand as compared to net recoveries of $2 thousand during the third quarter of 2003.  Net charge-offs for the first nine months of 2004 were $65 thousand as compared to net recoveries for the same period of 2003 of $29 thousand.

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A summary of the allowance for loan losses for the nine-month period ended September 30, follows:

(In thousands)	2004			2003
Balance, January 1,	$	5,467		$	4,798
Provision charged to expense		450			450
Loans charged off		(77	)		(24	)
Recoveries		12			53
Balance, September 30,	$	5,852		$	5,277

INCOME TAXES:Income tax expense as a percentage of pre-tax income was 32.1 percent and 31.2 percent for the three months ended September 30, 2004 and 2003, respectively.  On a year to date basis, income tax expense as a percentage of pre-tax income was 32.1 percent in 2004 and 32.2 percent in 2003.

CAPITAL RESOURCES:The Corporation is committed to maintaining a strong capital position.  At September 30, 2004, total shareholders’ equity, including net unrealized losses on securities available for sale, was $92.7 million, representing an increase over total shareholders’ equity recorded at December 31, 2003, of $7.6 million or 9.0 percent.  The Federal Reserve Board has adopted risk-based capital guidelines for banks.  The minimum guideline for the ratio of total capital to risk-weighted assets is 8 percent.  Tier 1 Capital consists of common stock, retained earnings, minority interests in the equity accounts of consolidated subsidiaries, non-cumulative preferred stock, less goodwill and certain other intangibles.  The remainder may consist of other preferred stock, certain other instruments and a portion of the allowance for loan loss.  At September 30, 2004, the Corporation’s Tier 1 Capital and Total Capital ratios were 19.59 percent and 20.86 percent, respectively.

In addition, the Federal Reserve Board has established minimum leverage ratio guidelines.  These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets of 3 percent for banks that meet certain specified criteria, including having the highest regulatory rating.  All other banks are generally required to maintain a leverage ratio of at least 3 percent plus an additional 100 to 200 basis points.  The Corporation’s leverage ratio at September 30, 2004, was 9.08 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 $26.3 million at September 30, 2004.  In addition, the Corporation has $351.6 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 September 30, 2004, of investment securities and securities available for sale maturing within one year amounted to $16.8 million and $3.9 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, 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 (September 30, 2004).

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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. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

�� Period	Total Number of Shares Purchased		Weighted Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2004		—		$	—		—		—
August 1-31, 2004		2,926			26.36		—		—
September 1-30, 2004		1,110			30.29		—		—
Total		4,036		$	27.44		—		—

All share and per share amounts have been restated to reflect the 10 percent stock dividend declared September 9, 2004.

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.

17

ITEM 6.  Exhibits
	a. Exhibits
		3	Articles of Incorporation and By-Laws:
			A.	Restated Certificate of Incorporation as in effect on the date of this filing is incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
			B.	By-Laws of the Registrant as in effect on the date of this filing are incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
		31.1	Certification of Frank A. Kissel, Chief Executive Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
		31.2	Certification of Arthur F. Birmingham, Chief Financial Officer of the Corporation, pursuant to Securities Exchange Act Rule 13a-14(a).
		32	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, signed by Frank A. Kissel, Chief Executive Officer of the Corporation, and Arthur F. Birmingham, Chief Financial Officer of the Corporation.

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 5, 2004	By:
	FRANK A. KISSEL
	Chairman of the Board and Chief Executive Officer
DATE: November 5, 2004	By:
	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