FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------
SELECTED YEAR-END DATA: 2003 2002 2001
- ---------------------------------------------------------------------------------------
NET INCOME $ 12,300 $ 11,925 $ 8,924
- ---------------------------------------------------------------------------------------
TOTAL ASSETS 968,126 859,808 704,773
- ---------------------------------------------------------------------------------------
TOTAL DEPOSITS 845,771 769,688 630,903
- ---------------------------------------------------------------------------------------
TOTAL SECURITIES 453,699 380,325 221,342
- ---------------------------------------------------------------------------------------
TOTAL LOANS 427,001 409,760 416,933
- ---------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 85,054 77,158 63,085
- ---------------------------------------------------------------------------------------
TRUST DEPARTMENT ASSETS (BOOK VALUE) 1,089,447 1,000,272 766,928
- ---------------------------------------------------------------------------------------
FINANCIAL RATIOS:
- ---------------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS 1.34% 1.53% 1.42%
- ---------------------------------------------------------------------------------------
RETURN ON AVERAGE EQUITY 15.14 17.06 15.03
- ---------------------------------------------------------------------------------------
CAPITAL LEVERAGE RATIO 8.91 9.19 9.84
- ---------------------------------------------------------------------------------------
RISK BASED CAPITAL:
TIER I 20.38 19.51 18.76
- ---------------------------------------------------------------------------------------
TOTAL 21.74 20.81 19.98
- ---------------------------------------------------------------------------------------
PER SHARE:
- ---------------------------------------------------------------------------------------
EARNINGS-BASIC $ 1.67 $ 1.62 $ 1.22
- ---------------------------------------------------------------------------------------
EARNINGS-DILUTED 1.62 1.59 1.20
- ---------------------------------------------------------------------------------------
BOOK VALUE 11.47 10.47 8.62
- ---------------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
NET INCOME
IN MILLIONS
$7.19 $7.71 $8.92 $11.93 $12.30
-----------------------------------------------------------
'99 '00 '01 '02 '03
TOTAL ASSETS
IN MILLIONS
$498 $567 $705 $860 $968
-----------------------------------------------------------
'99 '00 '01 '02 '03
DEPOSITS
IN MILLIONS
$444 $509 $631 $770 $846
-----------------------------------------------------------
'99 '00 '01 '02 '03
EQUITY CAPITAL
IN MILLIONS
$47.6 $55.2 $63.1 $77.2 $85.1
-----------------------------------------------------------
'99 '00 '01 '02 '03
1
DEAR SHAREHOLDERS AND FRIENDS
* PEAPACK GLADSTONE BANK *
[LOGO]
FOUNDED 1921
Confidence and optimism in our economy and way of life are growing. We are
seeing it in a very strong equity market, better earnings and a general
perception that it is time to come out of the bunker and look to the future for
the opportunities that will be there. The last piece to the puzzle will be with
the creation of new jobs which must come with an expanding economy. We should
never underestimate the resilience of Americans and their resolve to move ahead.
The historically low interest rate market in 2003 created an unusual and
challenging banking environment. We are very pleased to report that the Bank
posted record earnings for the seventh year in a row. Net income for the year
was up 3.1% to $12,300,000. These numbers translate into a 1.34% return on
average assets and a 15.14% return on average equity. Both are strong and
consistent returns for our shareholders.
Total assets grew over $108,000,000 to $968,000,000. Our branches
continued to grow bringing new customers and opportunities to the Bank. We view
the ongoing consolidation of our industry in our market area as a positive. We
believe we have a competitive advantage when customers have a choice between us
and a bank headquartered in Pittsburgh or Charlotte. Thanks to technology, we
are able to offer virtually any service available at large regional or national
banks. Our customers have the added advantage of a management team and Board of
Directors who live and work in the communities they serve. Outstanding service
is our one and only objective.
In order to continue our steady growth pattern, we are looking forward to
opening two new branches during 2004. The first is our long awaited Oldwick
Branch in Tewksbury Township, which is currently under construction and should
be ready to open in the late spring. The second is a fabulous building in
Morristown. Located at the intersection of Headley Road, Madison Avenue and
South Street, our new branch will offer customers easy access and convenience in
a very busy area. We will have New Business Officers and Trust & Investment
Officers on site to serve our customers. The Morristown Planning Board has just
approved our application and we hope to open by early summer.
You will find detailed financials in the Management's Discussion and
Analysis section of this report, however, there are a few highlights I would
like to emphasize.
We made the decision to add a little leverage to our balance sheet in
order to take advantage of the very low interest rate environment. We did this
with a simple borrowing program with the Federal Home Loan Bank. We borrowed
approximately $30,000,000 with an average life of six years at an average rate
of 3.36%. We feel confident that during the term of this program our net
interest income will benefit. In the meantime we were able to match fund some of
our new longer-term fixed rate assets, which attempts to remove interest rate
risk from that part of our balance sheet.
Readers will notice that balances in some of our loan portfolios actually
dropped during the course of the year. As our customers know, we portfolio most
of the loans that we originate. This is because we will be able to provide
better service to our customers than second or third or fourth party providers.
We made the decision, because of the historically low interest rate environment,
not to incur the interest rate
2
risk of booking and holding long-term fixed rate mortgages. As anticipated, our
balances did decline, however we believe we made the right decision in the long
term for our Bank in this business environment.
Another point we would like to emphasize is that our non-performing loans
were at an all time low of 0.05% of total loans as of December 31, 2003. A total
of $215,000 was considered non-performing out of total loan portfolios of over
$420,000,000. We believe that this coupled with a balance sheet structured to
benefit from gradually rising rates over the next few years, puts the Bank in a
very strong position for the future.
On November 3, 2003 your Board paid a 10% stock dividend and increased the
quarterly cash dividend to 10(cent) per share. Combined, the quarterly cash
dividend increased 22% with the November payout. This is on top of a 20%
increase in 2002 and an 18% increase in 2001. Investor returns are a primary
focus of the Board and Management. We continue to believe that the best way to
create shareholder value is to post strong earnings as we did in 2003. While our
stock price was flat during the year, we are pleased with the three-year average
increase in market capitalization of 24% and average return on equity for the
same period of 15.74%. We manage the Bank for the long term, not quarter to
quarter. We believe that our focus on steady growth in assets and earnings is
recognized in the market place and will ultimately continue to reward our
shareholders.
We remind our shareholders that our dividend reinvestment program is
available. Information is available at the branches or you may call Mr. Edwin
Carr directly at Registrar and Transfer Company at (800) 368-5948.
PGB Trust & Investments had another outstanding year. The market value of
assets held in the Department grew to over $1,400,000,000, an increase of 14.2%.
Fees generated by this area grew 23% to $5,800,000.
During 2003 we were very pleased to have formed an alliance with the
Rumson-Fair Haven Bank and Trust to provide trust and investment services to
their customers on a referral basis. We believe this is an exciting new business
model. It works not only for the benefit of both organizations but also for the
new customers who will find PGB Trust & Investments ready, willing and very able
to help them and their families plan and reach their financial goals.
It cannot be stressed often enough, that in order to reach a financial
goal, you have to take the time to make a plan. We can help you grow your assets
and minimize your tax expense during your lifetime. We can help you develop an
estate plan that addresses your specific needs and those of your family. We will
ensure that your plan is carried out generation to generation. Please call
either Craig Spengeman at (908) 719-3301 or John Bonk at (908) 719-3318 to find
out how our outstanding Trust & Investment Department can become part of your
team.
Finally, we would like to thank our Employees, Officers and Directors for
their outstanding efforts during 2003. We especially want to thank our customers
and shareholders for their confidence in us. Please refer your friends and
associates to your Bank. Your referral is our best source of new business.
/s/ Frank A. Kissel /s/ Robert M. Rogers
Frank A. Kissel Robert M. Rogers
Chairman & CEO President & COO
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW: The following discussion and analysis is intended to provide
information about the financial condition and results of operations of
Peapack-Gladstone Financial Corporation and its subsidiaries on a consolidated
basis and should be read in conjunction with the consolidated Financial
Statements and the related notes and supplemental financial information
appearing elsewhere in this report. All share and per share amounts have been
restated to reflect the 10 percent stock dividend issued in 2003 and all prior
stock dividends and splits.
Peapack-Gladstone Financial Corporation (the "Corporation"), formed in
1997, is the parent holding company for Peapack-Gladstone Bank, formed in 1921,
a commercial bank operating sixteen branches and one mini branch in Somerset,
Hunterdon, and Morris counties.
During 2003, the cash dividend rate was increased to $0.10 per share. This
new rate, coupled with the 10 percent stock dividend paid on November 1, 2003,
effectively raised the cash dividend rate by 22 percent over the previous rate
of $0.09 per share.
The year ended December 31, 2003 represented a year of moderate earnings
growth for the Corporation. The continuing low interest rate environment
negatively affected net interest income, yet deposit growth was strong. As
discussed in this Management's Discussion and Analysis section some of the
highlights are as follows:
o Assets increased 13 percent bringing the total assets of the Corporation
to $968 million.
o PGB Trust and Investments managed assets exceeded $1.4 billion in market
value for the first time.
o Deposits grew 10 percent and surpassed the $845 million level.
Peapack-Gladstone Financial Corporation's common stock trades on the
American Stock Exchange under the symbol "PGC".
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 Audited
Consolidated Financial Statements for the year ended December 31, 2003, contains
a summary of the Corporation's significant accounting policies. Management
believes the Corporation's policy with respect to the methodology for the
determination of the allowance for loan losses involves a higher degree of
complexity and requires management to make difficult and subjective judgments,
which often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could materially impact
results of operations. This critical policy and its application 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
4
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.
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
RETURN ON AVERAGE EQUITY
IN PERCENT
15.67 15.30 15.03 17.06 15.14
-----------------------------------------------------------
'99 '00 '01 '02 '03
RETURN ON AVERAGE ASSETS
IN PERCENT
1.48 1.47 1.42 1.53 1.34
-----------------------------------------------------------
'99 '00 '01 '02 '03
EARNINGS SUMMARY: The Corporation's net income increased 3 percent to $12.3
million for the year ended December 31, 2003 compared to $11.9 million earned in
2002. Earnings per diluted share were $1.62 as compared to $1.59 in 2002, an
increase of 2 percent.
These results produced a return on average assets of 1.34 percent as
compared to 1.53 percent in 2002 and a return on average shareholders' equity of
15.14 percent as compared to 17.06 percent in 2002.
The increase in net income for 2003 was primarily due to higher Trust
fees, other income and net security gains offset in part by lower net interest
income, higher salaries and benefits and premises and equipment expenses. In
2003, the Corporation experienced strong growth in assets and deposits; however,
the historically low interest rates mitigated the impact of the growth by
lowering interest income. Conversely, the low interest rate environment lowered
rates paid on deposits.
NET INTEREST INCOME: Net interest income, the primary source of the
Corporation's operating income, is the difference between interest and dividends
earned on earning assets and fees earned on loans, and interest paid on
interest-bearing liabilities. Earning assets include loans to individuals and
businesses, investment securities, interest-earning deposits and federal funds
sold. Interest-bearing liabilities include interest-bearing checking, savings
and time deposits, Federal Home Loan Bank advances and other borrowings. Net
interest income is determined by the difference between the yields earned on
earning assets and the rates paid on interest-bearing liabilities ("Net Interest
Spread") and the relative amounts of earning assets and interest-bearing
liabilities. The Corporation's net interest spread is affected
5
by regulatory, economic and competitive factors that influence interest rates,
loan demand and deposit flows and general levels of non-performing assets.
Net interest income (on a tax-equivalent basis) declined from $32.4
million in 2002 to $31.8 million in 2003. While average earning assets increased
$126.3 million or 17 percent from the average balances in 2002, the interest
earned on these assets declined. Interest expense declined $1.8 million or 15
percent over the levels recorded in 2002 on average balances of interest-bearing
liabilities that increased $103.2 million or 18 percent. Lower rates were earned
on earning assets in 2003, declining to 4.88 percent from 6.04 percent earned in
2002, Lower rates were paid on interest-bearing liabilities, which declined from
2.05 percent to 1.49 percent. In 2003, the net interest margin declined to 3.69
percent from 4.40 percent in 2002.
Interest income on earning assets (on a tax-equivalent basis) declined
$2.3 million or 5 percent to $42.1 million. This decrease was primarily due to
lower interest rates on investment securities and loans, which earned 122 basis
points less and 71 basis points less, respectively. Federal funds sold and
interest-earning deposits rates earned also declined by 119 basis points. During
2003, average investments increased 50 percent to $448.0 million, while average
loans declined $17.4 million or 4 percent to $407.3 million. The Corporation
reduced the balances of the lower yielding federal funds sold and
interest-earning deposits, by 41 percent to $7.0 million in order to invest in
higher yielding investment securities.
The decline in interest expense was primarily due to lower rates paid on
all categories of interest-bearing liabilities. The rate paid on
interest-bearing deposits declined 61 basis points to 1.43 percent in 2003 as
compared to 2.04 percent in 2002. Rates paid on borrowings declined 42 basis
points to 2.51 percent. The decline in interest rates paid in 2003 reflects the
overall decline in market interest rates, as rates continued to fall to
historically low levels.
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
NET INTEREST INCOME
IN MILLIONS
$21.2 $23.1 $25.0 $31.9 $31.2
-----------------------------------------------------------
'99 '00 '01 '02 '03
Partially offsetting lower rates paid was strong growth in most deposit
categories. Tiered money market accounts showed the strongest growth, increasing
$47.9 million on average. Savings accounts and interest bearing checking grew
$10.3 million and $8.3 million on average, respectively. Average
noninterest-bearing demand deposits increased $24.0 million or 21 percent during
2003 as compared to 2002. During 2003, the Corporation positioned 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. As a result, average
borrowings increased $27.4 million to $35.2 million.
6
LOANS: The loan portfolio represents a significant portion of the Corporation's
earning assets and is an important source of interest and fee income. Loan
originations are primarily originated in the Bank's market or surrounding areas.
Total loans increased $17.2 million, or 4 percent, to $427.0 million from
2002 levels. This increase was primarily in commercial mortgage loans, which
increased $21.0 million or 19 percent. This growth was primarily due to the
addition of new commercial business development officers to the professional
staff. Residential loans secured by first liens on 1-4 family homes declined
$2.8 million or 1 percent in 2003, while commercial loans declined $1.2 million
or 7 percent from 2002 levels.
Loans totaling $1.6 million were sold to the Federal Home Loan Bank (FHLB)
during the third and fourth quarters of 2003 at a gain of $13 thousand. The
loans sold represented lower yielding, longer-term mortgages. The sale of these
loans will mitigate interest rate risk if interest rates rise.
The yield on total loans averaged 6.18 percent for 2003, a 71 basis point
decline from the 6.89 percent average yield earned in 2002. The average yield on
the mortgage portfolio declined in 2003 to 6.26 percent from 6.98 percent in
2002. The average yield on the commercial loan portfolio declined 64 basis
points to 5.74 percent. The decline in yields earned in 2003 reflects the
overall decline in market interest rates as the Federal Reserve kept short-term
interest rates at a historical low during the year.
THE FOLLOWING TABLE PRESENTS AN ANALYSIS OF OUTSTANDING LOANS AS OF DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------
REAL ESTATE-MORTGAGE
1-4 FAMILY RESIDENTIAL
FIRST LIENS $ 226,887 $ 229,679 $ 246,197 $ 210,547 $ 168,979
- ----------------------------------------------------------------------------------------------
JUNIOR LIENS 11,163 15,211 22,903 25,017 21,263
- ----------------------------------------------------------------------------------------------
HOME EQUITY 18,251 22,265 18,120 15,633 14,488
- ----------------------------------------------------------------------------------------------
REAL ESTATE-COMMERCIAL 130,968 109,932 91,129 62,161 55,747
- ----------------------------------------------------------------------------------------------
REAL ESTATE-CONSTRUCTION 9,799 2,063 6,418 2,297 1,153
- ----------------------------------------------------------------------------------------------
COMMERCIAL LOANS 16,632 17,859 15,855 13,019 12,541
- ----------------------------------------------------------------------------------------------
CONSUMER LOANS 10,223 8,206 11,237 14,084 12,413
- ----------------------------------------------------------------------------------------------
OTHER LOANS 3,078 4,545 5,074 1,541 1,349
==============================================================================================
TOTAL LOANS $ 427,001 $ 409,760 $ 416,933 $ 344,299 $ 287,933
==============================================================================================
INVESTMENT SECURITIES: Investment securities are those securities that the
Corporation has both the ability and intent to hold to maturity. These
securities are carried at amortized cost. The portfolio consists primarily of
U.S. government agencies, mortgage-backed securities and municipal obligations.
The Corporation's investment securities at amortized cost amounted to $97.7
million at December 31, 2003, compared with $168.1 million at December 31, 2002.
7
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND INTEREST RATES OF
INVESTMENT SECURITIES AT AMORTIZED COST, AS OF DECEMBER 31, 2003:
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- -------------------------------------------------------------------------------------------------
U.S. TREASURY $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES 2,502 8,573 3,250 -- 14,325
6.460% 5.256% 5.767% -- 5.584%
- -------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (1) -- -- 8,308 40,769 49,077
-- -- 4.637% 4.338% 4.389%
- -------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 7,788 12,786 11,785 435 32,794
3.489% 3.983% 4.219% 8.602% 4.012%
- -------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES -- 1,505 -- -- 1,505
-- 7.301% -- -- 7.301%
- -------------------------------------------------------------------------------------------------
TOTAL $10,290 $22,864 $23,343 $41,204 $97,701
4.212% 4.679% 4.583% 4.383% 4.485%
=================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY.
SECURITIES AVAILABLE FOR SALE: Securities available for sale are used as a part
of the Corporation's interest rate risk management strategy, and they may be
sold in response to changes in interest rates, liquidity needs, and other
factors. These securities are carried at estimated fair value, and unrealized
changes in fair value are recognized as a separate component of shareholders'
equity, net of income taxes. Realized gains and losses are recognized in income
at the time the securities are sold.
At December 31, 2003, the Corporation had securities available for sale
with a market value of $356.0 million, compared with $212.3 million at December
31, 2002. A $2.7 million and $4.8 million unrealized gain (net of income tax)
was included in shareholders' equity at December 31, 2003 and December 31, 2002,
respectively.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES AND INTEREST RATES OF
DEBT SECURITIES AVAILABLE FOR SALE, STATED AT MARKET VALUE, AS OF DECEMBER 31,
2003:
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- -------------------------------------------------------------------------------------------------
U.S. TREASURY $ -- $ 1,074 $ -- $ -- $ 1,074
-- 4.328% -- -- 4.328%
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES 1,542 129,528 48,940 1,640 181,650
4.820% 3.848% 3.250% 2.600% 3.677%
- -------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (1) -- 526 37,437 98,360 136,323
-- 5.140% 3.920% 4.191% 4.120%
- -------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS -- 1,436 7,818 535 9,789
-- 5.284% 5.732% 6.069% 5.685%
- -------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 4,959 529 -- 21,674 27,162
4.598% 4.605% -- 3.894% 4.022%
- -------------------------------------------------------------------------------------------------
TOTAL $ 6,501 $133,093 $ 94,195 $122,209 $355,998
4.656% 3.875% 3.713% 4.121% 3.931%
=================================================================================================
(1) MORTGAGE-BACKED SECURITIES ARE SHOWN USING STATED FINAL MATURITY.
Federal funds sold and interest-earning deposits are an integral part of
the Corporation's investment and liquidity strategies. The combined average
balance of these vehicles during 2003 was $7.0 million as compared to $11.9
million in 2002.
8
DEPOSITS: Total deposits at December 31, 2003 were $845.8 million, an increase
of $76.1 million or 10 percent from $769.7 million at December 31, 2002. Our
strategy is to fund earning asset growth with core deposits, which is an
important factor in the generation of net interest income. Marketing, sales
efforts, and new branch locations all contributed to the strong growth in
deposits. Total average deposits increased $99.8 million or 14 percent over 2002
levels.
THE FOLLOWING TABLE SETS FORTH INFORMATION CONCERNING THE COMPOSITION OF THE
CORPORATION'S AVERAGE DEPOSIT BASE AND AVERAGE INTEREST RATES PAID FOR THE
FOLLOWING YEARS:
2003 2002 2001
- --------------------------------------------------------------------------------------------
(IN THOUSANDS) $ % $ % $ %
- --------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND $139,476 -- $115,487 -- $102,852 --
- --------------------------------------------------------------------------------------------
CHECKING 129,203 0.48 120,922 0.59 100,734 0.84
- --------------------------------------------------------------------------------------------
SAVINGS 100,451 0.76 90,142 1.27 77,207 1.95
- --------------------------------------------------------------------------------------------
MONEY MARKETS 62,607 0.88 61,058 1.49 49,869 3.04
- --------------------------------------------------------------------------------------------
TIERED MONEY MARKETS 129,485 1.12 81,553 1.83 44,785 3.60
- --------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSITS 233,687 2.57 225,965 3.34 188,187 5.29
- --------------------------------------------------------------------------------------------
TOTAL DEPOSITS $794,909 $695,127 $563,634
============================================================================================
Certificates of deposit over $100,000 are generally purchased by local
municipal governments or individuals for periods one year or less. These factors
translate into a stable customer oriented cost-effective funding source.
THE FOLLOWING TABLE SHOWS REMAINING MATURITY FOR CERTIFICATES OF DEPOSIT OVER
$100,000 AS OF DECEMBER 31, 2003 (IN THOUSANDS):
THREE MONTHS OR LESS $16,808
- --------------------------------------------------------------------------------
OVER THREE MONTHS THROUGH TWELVE MONTHS 29,078
- --------------------------------------------------------------------------------
OVER TWELVE MONTHS 14,487
- --------------------------------------------------------------------------------
TOTAL $60,373
================================================================================
FEDERAL HOME LOAN BANK ADVANCES: At December 31, 2003 and 2002, Federal Home
Loan Bank ("FHLB") advances totaled $30.0 million and $5.0 million,
respectively. The Corporation considers FHLB advances an added source of
funding, and accordingly, executes transactions from time to time to meet its
funding requirements. During 2003, the Corporation extended the maturities of
some of its borrowings and matched them with lower yielding fixed rate loans.
This strategy is intended to reduce interest rate risk if interest rates begin
to rise. The FHLB advances outstanding at December 31, 2003 have varying terms
and interest rates.
9
THE FOLLOWING TABLE COMPARES THE AVERAGE BALANCE SHEET, NET INTEREST SPREADS AND
NET INTEREST MARGINS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(FULLY TAX-EQUIVALENT - FTE):
YEAR ENDED DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- -----------------------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE $ 419,464 $ 15,261 3.64%
- -----------------------------------------------------------------------------------------------------
TAX-EXEMPT 28,572 1,571 5.50%
- -----------------------------------------------------------------------------------------------------
LOANS 407,261 25,175 6.18%
- -----------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 6,128 70 1.14%
- -----------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 917 8 0.87%
- -----------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 862,342 $ 42,085 4.88%
- -----------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 18,849
- -----------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (5,125)
- -----------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 14,788
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS 28,107
- -----------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 56,619
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 918,961
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
- -----------------------------------------------------------------------------------------------------
CHECKING $ 129,203 $ 616 0.48%
- -----------------------------------------------------------------------------------------------------
MONEY MARKETS 62,607 552 0.88%
- -----------------------------------------------------------------------------------------------------
TIERED MONEY MARKETS 129,485 1,444 1.12%
- -----------------------------------------------------------------------------------------------------
SAVINGS 100,451 767 0.76%
- -----------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 233,687 5,997 2.57%
- -----------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 655,433 9,376 1.43%
- -----------------------------------------------------------------------------------------------------
BORROWED FUNDS 35,248 886 2.51%
- -----------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 690,681 10,262 1.49%
- -----------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 139,476
- -----------------------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 7,578
- -----------------------------------------------------------------------------------------------------
TOTAL NONINTEREST-BEARING LIABILITIES 147,054
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 81,226
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 918,961
- -----------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 31,823
- -----------------------------------------------------------------------------------------------------
NET INTEREST SPREAD 3.39%
- -----------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.69%
=====================================================================================================
1. Average loan balances include non-accrual and restructured loans.
2. The tax-equivalent adjustment was computed based on a federal tax rate of 35
percent for 2003, 35 percent for 2002 and 34 percent for 2001.
3. Investments consist of investment securities and securities available for
sale at amortized cost.
10
YEAR ENDED DECEMBER 31, 2002 YEAR ENDED DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------
INCOME/ INCOME/
AVERAGE EXPENSE YIELD AVERAGE EXPENSE YIELD
BALANCE (FTE) (FTE) BALANCE (FTE) (FTE)
- ------------------------------------------------------------------------------------------------------
$ 281,329 $ 13,694 4.87% $ 160,191 $ 9,668 6.04%
- ------------------------------------------------------------------------------------------------------
18,207 1,208 6.63% 13,944 1,037 7.43%
- ------------------------------------------------------------------------------------------------------
424,661 29,248 6.89% 382,430 28,476 7.45%
- ------------------------------------------------------------------------------------------------------
8,564 135 1.58% 24,660 1,143 4.64%
- ------------------------------------------------------------------------------------------------------
3,319 138 4.16% 12,955 612 4.72%
- ------------------------------------------------------------------------------------------------------
736,080 $ 44,423 6.04% 594,180 $ 40,936 6.89%
- ------------------------------------------------------------------------------------------------------
17,245 15,655
- ------------------------------------------------------------------------------------------------------
(4,380) (3,682)
- ------------------------------------------------------------------------------------------------------
13,670 12,448
- ------------------------------------------------------------------------------------------------------
17,950 10,232
- ------------------------------------------------------------------------------------------------------
44,485 34,653
- ------------------------------------------------------------------------------------------------------
$ 780,565 $ 628,833
======================================================================================================
- ------------------------------------------------------------------------------------------------------
$ 120,922 $ 718 0.59% $ 100,734 $ 849 0.84%
- ------------------------------------------------------------------------------------------------------
61,058 908 1.49% 49,869 1,514 3.04%
- ------------------------------------------------------------------------------------------------------
81,553 1,493 1,83% 44,785 1,611 3.60%
- ------------------------------------------------------------------------------------------------------
90,142 1,149 1.27% 77,207 1,506 1.95%
- ------------------------------------------------------------------------------------------------------
225,965 7,558 3.34% 188,187 9,949 5.29%
- ------------------------------------------------------------------------------------------------------
579,640 11,826 2.04% 460,782 15,429 3.35%
- ------------------------------------------------------------------------------------------------------
7,814 229 2.93% 1,633 57 3.49%
- ------------------------------------------------------------------------------------------------------
587,454 12,055 2.05% 462,415 15,486 3.35%
- ------------------------------------------------------------------------------------------------------
115,487 102,852
- ------------------------------------------------------------------------------------------------------
7,730 4,193
- ------------------------------------------------------------------------------------------------------
123,217 107,045
- ------------------------------------------------------------------------------------------------------
69,894 59,373
- ------------------------------------------------------------------------------------------------------
$ 780,565 $ 628,833
======================================================================================================
$ 32,368 $ 25,450
======================================================================================================
3.99% 3.54%
- ------------------------------------------------------------------------------------------------------
4.40% 4.28%
- ------------------------------------------------------------------------------------------------------
11
RATE/VOLUME ANALYSIS:
THE EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME (ON A
TAX-EQUIVALENT BASIS) FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 ARE SHOWN
BELOW:
YEAR ENDED 2003 COMPARED WITH 2002 YEAR ENDED 2002 COMPARED WITH 2001
- ---------------------------------------------------------------------------------------------------------------------
NET NET
DIFFERENCE DUE TO CHANGE IN DIFFERENCE DUE TO CHANGE IN
CHANGE IN: INCOME/ CHANGE IN: INCOME/
(IN THOUSANDS): VOLUME RATE EXPENSE VOLUME RATE EXPENSE
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
INVESTMENTS $ 7,388 $(5,458) $ 1,930 $ 7,709 $(3,512) $ 4,197
- ---------------------------------------------------------------------------------------------------------------------
LOANS (1,198) (2,875) (4,073) 3,144 (2,372) 772
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD (38) (27) (65) (746) (262) (1,008)
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS (100) (30) (130) (455) (19) (474)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 6,052 $(8,390) $(2,338) $ 9,652 $(6,165) $ 3,487
=====================================================================================================================
LIABILITIES
CHECKING $ 49 $ (151) $ (102) $ 170 $ (301) $ (131)
- ---------------------------------------------------------------------------------------------------------------------
MONEY MARKET 23 (379) (356) 340 (946) (606)
- ---------------------------------------------------------------------------------------------------------------------
TIERED MONEY MARKET 877 (926) (49) 1,323 (1,441) (118)
- ---------------------------------------------------------------------------------------------------------------------
SAVINGS 131 (513) (382) 252 (609) (357)
- ---------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 258 (1,819) (1,561) 1,997 (4,388) (2,391)
- ---------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS 804 (147) 657 216 (44) 172
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 2,142 $(3,935) $(1,793) $ 4,298 $(7,729) $(3,431)
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 3,910 $(4,455) $ (545) $ 5,354 $ 1,564 $ 6,918
=====================================================================================================================
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION: The allowance for loan losses
was $5.5 million at December 31, 2003 as compared to $4.8 million at December
31, 2002. The allowance for loan losses currently provides 25.4 times the
coverage of all non-performing assets. At December 31, 2003, the allowance for
loan losses as a percentage of total loans outstanding was 1.28 percent compared
to 1.17 percent at December 31, 2002 and 0.96 percent at December 31, 2001.
The provision for loan losses declined $200 thousand, or 25 percent, to
$600 thousand for 2003, compared to $800 thousand for 2002. The decrease in
provision was due primarily to reduced levels on non-performing loans, net
recoveries on loans, partially offset by increases in loans outstanding and
changes in the composition of the loan portfolio. The provision was based upon
management's review and evaluation of the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, general market
and economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and the existence and net realizable value of
the collateral and guarantees securing the loans. Although management used 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 our market area in Central New Jersey experiences an
adverse economic downturn. Future adjustments to the allowance may be necessary
due to economic, operating, regulatory and other conditions beyond the
Corporation's control.
12
THE FOLLOWING TABLE PRESENTS THE LOAN LOSS EXPERIENCE DURING THE PERIODS ENDED
DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT
BEGINNING OF YEAR $ 4,798 $ 4,023 $ 3,435 $ 2,962 $ 2,428
- ---------------------------------------------------------------------------------------------------
LOANS CHARGED-OFF DURING
THE PERIOD
REAL ESTATE -- -- 42 27 --
- ---------------------------------------------------------------------------------------------------
CONSUMER 42 59 35 119 70
- ---------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER -- 9 15 28 52
- ---------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED-OFF 42 68 92 174 122
- ---------------------------------------------------------------------------------------------------
RECOVERIES DURING THE PERIOD
REAL ESTATE 37 -- 7 75 22
- ---------------------------------------------------------------------------------------------------
CONSUMER 40 36 65 53 63
- ---------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 34 7 8 19 16
- ---------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 111 43 80 147 101
- ---------------------------------------------------------------------------------------------------
NET (RECOVERIES)/CHARGE-OFFS (69) 25 12 27 21
- ---------------------------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 600 800 600 500 555
- ---------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
AT END OF YEAR $ 5,467 $ 4,798 $ 4,023 $ 3,435 $ 2,962
===================================================================================================
THE FOLLOWING TABLE SHOWS THE ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AND
THE PERCENTAGE OF EACH LOAN CATEGORY TO TOTAL LOANS AS OF DECEMBER 31,
% OF % OF % OF % OF % OF
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
(IN THOUSANDS) 2003 LOANS 2002 LOANS 2001 LOANS 2000 LOANS 1999 LOANS
- ----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE $3,007 93.0 $2,639 92.5 $2,213 92.3 $1,889 91.7 $1,629 90.9
- ----------------------------------------------------------------------------------------------------------------------------------
CONSUMER 273 2.4 240 2.0 201 2.7 172 4.1 148 4.3
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL AND OTHER 2,187 4.6 1,919 5.5 1,609 5.0 1,374 4.2 1,185 4.8
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $5,467 100.0 $4,798 100.0 $4,023 100.0 $3,435 100.0 $2,962 100.0
==================================================================================================================================
13
NON-PERFORMING ASSETS:
THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF
NON-PERFORMING ASSETS:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
LOANS PAST DUE 90 DAYS OR MORE
AND STILL ACCRUING INTEREST $ 56 $ 203 $ 53 $ 75 $ 205
- ---------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS 159 180 274 325 386
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 215 383 327 400 591
- ---------------------------------------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS 215 383 327 400 591
===============================================================================================================
LOAN CHARGE-OFFS 42 68 92 174 122
- ---------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES (111) (43) (80) (147) (101)
- ---------------------------------------------------------------------------------------------------------------
NET LOAN (RECOVERIES)/
CHARGE-OFFS (69) 25 12 27 21
===============================================================================================================
ALLOWANCE FOR LOAN LOSSES $ 5,467 $ 4,798 $ 4,023 $ 3,435 $ 2,962
===============================================================================================================
RATIOS:
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/
TOTAL LOANS 0.05% 0.09% 0.08% 0.12% 0.21%
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/
TOTAL ASSETS 0.02% 0.04% 0.05% 0.07% 0.12%
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS/
TOTAL ASSETS 0.02% 0.04% 0.05% 0.07% 0.12%
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
TOTAL LOANS 1.28% 1.17% 0.96% 1.00% 1.03%
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
TOTAL NON-PERFORMING LOANS 25.4x 12.5x 12.3x 8.6x 5.0x
- ---------------------------------------------------------------------------------------------------------------
Interest income of $11 thousand, $12 thousand and $20 thousand would have
been recognized during 2003, 2002, and 2001, respectively, if non-accrual loans
had been current in accordance with their original terms.
CONTRACTUAL OBLIGATIONS: The following table shows the significant contractual
obligations of the Corporation by expected payment period, as of December 31,
2003. Further discussion of these commitments is included in the Footnotes to
the Consolidated Financial Statements noted below:
LESS THAN MORE THAN
(IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT OBLIGATIONS
(NOTE 8) $ 6,580 $ 3,315 $ 3,533 $16,604 $30,032
OPERATING LEASE OBLIGATIONS
(NOTE 13) 1,750 3,598 3,716 14,685 23,749
PURCHASE OBLIGATIONS 789 703 528 -- 2,020
OTHER LONG-TERM LIABILITIES
REFLECTED ON THE BALANCE SHEET
UNDER GAAP (NOTE 11) (1) 1,194 -- -- -- 1,194
- ---------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS $10,313 $ 7,616 $ 7,777 $31,289 $56,995
===============================================================================================================
(1) The Corporation does not have an estimate of the actual pension contribution
for 2005 and beyond; however the Corporation anticipates that it will be at
least the same annual amount as 2004 of $1.2 million.
14
Long-term debt obligations include borrowings from the Federal Home Loan
Bank with defined terms. The chart is based on scheduled repayments of
principal.
Operating leases represent obligations entered into by the Corporation for
the use of land and premises. The leases generally have escalation terms based
upon certain defined indexes. Common area maintenance charges may also apply and
are adjusted annually based on the terms of the lease agreements.
Purchase obligations represent legally binding and enforceable agreements
to purchase goods and services from third parties and consist of contractual
obligations under data processing service agreements, as well as the contract
for the construction of a new branch in Oldwick. The Corporation also enters
into various routine rental and maintenance contracts for facilities and
equipment. These contracts are generally for one year and are not significant to
the consolidated financial statements of the Corporation.
Other long-term liabilities include the anticipated 2004 pension
contribution.
OFF-BALANCE SHEET ARRANGEMENTS: The following table shows the amounts and
expected maturities of significant commitments, as of December 31, 2003. Further
discussion of these commitments is included in Note 13 to the Consolidated
Financial Statements:
LESS THAN MORE THAN
(IN THOUSANDS) ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------
FINANCIAL LETTERS OF CREDIT $2,429 $ -- $-- $-- $2,429
PERFORMANCE LETTERS OF CREDIT 1,609 -- -- -- 1,609
COMMERCIAL LETTERS OF CREDIT 1,352 116 -- -- 1,468
- ------------------------------------------------------------------------------------------------
TOTAL LETTERS OF CREDIT $5,390 $116 $-- $-- $5,506
================================================================================================
Commitments under standby letters of credit, both financial and
performance do not necessarily represent future cash requirements, in that these
commitments often expire without being drawn upon.
OTHER INCOME: Other income before gains on securities was $9.0 million in 2003,
an increase of 14 percent over 2002 levels. This increase was primarily due to
higher trust fees and additions to cash surrender value of Bank Owned Life
Insurance. Trust fees rose $1.1 million or 23 percent over the levels recorded
in 2002. This increase is attributable to increased volume of business as the
book value of assets under management increased $89.2 million or 9 percent over
last year's levels. During the third quarter of 2001 and again in the fourth
quarter of 2002, the Corporation invested in Bank Owned Life Insurance (BOLI) to
assist in offsetting the rising costs of employee benefits. In 2003, other
income of $880 thousand was realized on increased cash surrender value on these
policies, as compared to $791 thousand in 2002. For 2003, other noninterest
income includes $13 thousand of income related to the sale of loans to the
Federal Home Loan Bank. For the year ended December 31, 2003, net securities
gains were $1.3 million as compared to $52 thousand recorded in 2002.
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER INCOME:
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------
TRUST DEPARTMENT FEES $ 5,759 $4,678 $4,013
- -----------------------------------------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,646 1,675 1,410
- -----------------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 880 791 264
- -----------------------------------------------------------------------------------------------
OTHER FEE INCOME 314 374 345
- -----------------------------------------------------------------------------------------------
SAFE DEPOSIT RENTAL FEES 225 219 202
- -----------------------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME 201 199 248
- -----------------------------------------------------------------------------------------------
SECURITIES GAINS 1,284 52 189
- -----------------------------------------------------------------------------------------------
TOTAL OTHER INCOME $10,309 $7,988 $6,671
===============================================================================================
15
OTHER EXPENSES: In 2003, other expense totaled $22.8 million, an increase of
$1.4 million or 7 percent compared to $21.4 million in 2002. This increase is
commensurate with the growth in the overall level of bank and trust business
activity.
Salaries and benefits expense, which accounts for the largest portion of
other expenses, increased $1.3 million or 11 percent in 2003 as compared to
2002. This increase was directly related to increased officer and staff levels,
normal merit increases, promotional raises and higher benefit costs. Within the
fringe benefit costs, pension plan expenses rose $360 thousand or 51 percent and
health insurance expenses increased $112 thousand or 20 percent above 2002
levels. The full time equivalent number of employees rose to 209 at December 31,
2003 from 205 a year ago.
Premises and equipment expense increased to $4.8 million from $4.2 million
in 2002. This increase was primarily due to the Corporation's continued
investment in technology, as the Bank converted to a new core processing system
in 2003. Higher occupancy expenses were attributable to costs associated with a
new branch location and a new operations center scheduled to open in 2004.
Professional and legal fees declined $155 thousand as compared to 2002. In
2002, the Corporation had higher legal and consulting fees to support the
expansion in business activity, as well as costs associated with internal
training programs and services to enhance audit and financial controls.
The Corporation strives to operate in an efficient manner and control
costs as a means of producing increased earnings and enhancing shareholder
value.
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER EXPENSES:
(IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------
SALARIES AND BENEFITS $13,262 $11,962 $ 9,975
- -------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 4,836 4,150 3,598
- -------------------------------------------------------------------------------
PROFESSIONAL AND LEGAL FEES 568 723 369
- -------------------------------------------------------------------------------
ADVERTISING 460 670 568
- -------------------------------------------------------------------------------
STATIONERY AND SUPPLIES 521 496 490
- -------------------------------------------------------------------------------
TRUST DEPARTMENT 487 451 368
- -------------------------------------------------------------------------------
TELEPHONE 376 390 339
- -------------------------------------------------------------------------------
POSTAGE 318 332 320
- -------------------------------------------------------------------------------
OTHER EXPENSE 1,958 2,181 1,796
- -------------------------------------------------------------------------------
TOTAL OTHER EXPENSE $22,786 $21,355 $17,823
===============================================================================
INCOME TAXES: Income tax expense for the years ended December 31, 2003 and 2002
was $5.8 million. The effective tax rate for the year ended December 31, 2003
was 32.00 percent compared to 32.72 percent for the year ended December 31,
2002. While taxable income rose from $17.7 million to $18.1 million, income tax
expense in 2003 remained stable due to a lower effective tax rate from increased
tax-exempt income.
RESULTS OF OPERATIONS 2002 COMPARED TO 2001: Net income for the year ended
December 31, 2002 increased 34 percent to $11.9 million compared to $8.9 million
earned in 2001. Diluted earnings per share increased 33 percent to $1.59 per
share from $1.20 per share earned in 2001. The increase in net income for 2002
was primarily due to higher net interest income, Trust fees and other income,
offset in part by higher salaries and benefits, other expenses and income taxes.
These results produced a return on average assets of 1.53 percent as compared to
1.42 percent in 2001 and a return on average shareholders' equity of 17.06
percent as compared to 15.03 percent in 2001.
16
Net interest income (on a tax-equivalent basis) totaled $32.4 million for
2002, an increase of $6.9 million or 27 percent over the $25.5 million recorded
in 2001. The increase was primarily due to a $141.9 million or 24 percent
increase in average earning assets and lower interest expense, which declined
$3.4 million or 22 percent over levels recorded in 2001. This increase was
offset in part by lower rates earned on earning assets, which declined to 6.04
percent from 6.89 percent earned in 2001, and higher interest-bearing
liabilities, which rose $125.0 million on average. The growth of net interest
income was also due to higher average noninterest-bearing demand deposits, which
increased $12.6 million or 12 percent during 2002 as compared to 2001. The net
interest margin in 2002 increased to 4.40 percent from 4.28 percent in 2001.
Other income before gains and losses on securities was $7.9 million in
2002, an increase of 22 percent over 2001 levels. This increase was primarily
due to higher trust fees, additions to cash surrender value of Bank Owned Life
Insurance, and service charges on deposit accounts. Trust fees rose $665
thousand or 17 percent over the levels recorded in 2001. This increase is
attributable to increased volume of business as the book value of assets under
management increased $233.3 million or 30 percent over 2001 levels.
During the third quarter of 2001, the Corporation invested $12 million in
Bank Owned Life Insurance (BOLI) to assist in offsetting the rising costs of
employee benefits, and realized other income of $791 thousand on increased cash
surrender value on these policies in 2002, as compared to $264 thousand in 2001.
Additional investments of $2.8 million were made in the fourth quarter of 2002.
For the year ended December 31, 2002, net securities gains were $52 thousand as
compared to $189 thousand recorded in 2001.
Other expense totaled $21.4 million in 2002, an increase of $3.5 million
or 20 percent compared to $17.8 million in 2001. This increase is commensurate
with the level of growth in the Bank and PGB Trust and Investments and the
addition of two branch locations.
Salaries and benefits expense, the largest component of other expense,
increased $2.0 million, or 20 percent, to $12.0 million from $10.0 million in
2001. This increase was related to increased officer and staff levels, normal
merit increases, promotional raises and higher benefit costs. The full-time
equivalent number of employees rose to 205 at December 31, 2002 from 180 at
December 31, 2001.
Premises and equipment expense increased to $4.2 million from $3.6 million
in 2001. This increase was primarily due to higher expenses related to the new
branches in Clinton and Warren and higher overall operating cost of facilities.
Professional fees also increased in 2002, to $723 thousand from $369
thousand, an increase of $354 thousand. This increase is attributable to higher
legal and consulting fees to support the expansion in business activity, as well
as costs associated with internal training programs and services to enhance
audit and financial controls.
CAPITAL RESOURCES: The solid capital base of the Corporation provides the
ability for future growth and financial strength. Maintaining a strong capital
position supports the Corporation's goal of providing shareholders an attractive
and stable long-term return on investment. At $85.1 million, total shareholders'
equity grew 10 percent or $7.9 million as compared with $77.2 million at
December 31, 2002. At December 31, 2003, unrealized gains on securities, net of
taxes, were $2.7 million as compared to unrealized gains on securities, net of
taxes, of $4.8 million at December 31, 2002. Federal regulations require banks
to meet target Tier 1 and total capital ratios of 4 percent and 8 percent,
respectively. At 20.38 percent and 21.74 percent, the Corporation's Tier 1 and
total capital ratios are well in excess of regulatory minimums. The
Corporation's capital leverage ratio was 8.91 percent at December 31, 2003.
17
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 feels the Corporation's liquidity position is sufficient to
meet future needs. Cash and cash equivalents, including federal funds sold,
averaged $25.9 million in 2003. In addition, the Corporation has $356.0 million
in securities designated as available for sale. These securities can be sold in
response to liquidity concerns. As of December 31, 2003, investment securities
and securities available for sale maturing within one year amounted to $16.8
million and cash and cash equivalents totaled $22.7 million.
Another source of liquidity is borrowing capacity. The Corporation has a variety
of sources of short-term liquidity available, including short and long-term
borrowings from the Federal Home Loan Bank of New York, short-term borrowings
from the Federal Reserve Bank Discount Window, and loan participation or sales
of loans. The Corporation also generates liquidity from the regular principal
payments made on its loan portfolio and on its mortgage-backed security
portfolio.
INTEREST RATE SENSITIVITY: Interest rate sensitivity is a measure of the
relationship between interest-earning assets and supporting funds, which are
susceptible to changes in interest rates during comparable time periods.
Interest rate movements on deposits have made managing the Corporation's
interest rate sensitivity increasingly more important as a means of managing net
interest income. The Corporation's Asset/Liability Committee is responsible for
managing the exposure to changes in market interest rates. The "sensitivity" gap
quantifies the repricing mismatch between assets and supporting funds over
various time intervals. The cumulative gap position as a percentage of total
rate-sensitive assets provides one relative measure of the Corporation's
interest rate exposure.
The Corporation's ratio of rate-sensitive assets to rate-sensitive
liabilities was approximately .71 on December 31, 2003 for the next twelve
months subject to certain assumptions explained in the following paragraph.
Since this ratio is less than 1.00, the Corporation has a "negative gap"
position, which may cause its assets to reprice more slowly than its deposit
liabilities. In a declining interest rate environment, interest costs may be
expected to fall faster than the interest received on earning assets, thus
increasing the net interest spread. If interest rates increase, a negative gap
means that the interest received on earning assets may be expected to increase
more slowly than the interest paid on the Corporation's liabilities, therefore
decreasing the net interest spread.
For purposes of calculating the gap position, 25 percent of
noninterest-earning demand deposits, interest-bearing checking accounts and
savings deposits are included in the 0-3 month category. The remainder is
decayed at 10 percent per year with the rest included in the greater than five
years category. Included in the 0-3 month category are 50 percent of the money
market accounts, which are then decayed at 10 percent per year with the
remainder included in the greater than five years category. The Corporation
recognizes that certain of these deposits are more stable with an effective
maturity greater than their repricing frequency. Assets and liabilities are
included based on their maturities and prepayment assumptions or period to first
repricing, subject to the foregoing assumptions.
18
THE TABLE BELOW PRESENTS THE MATURITY AND REPRICING RELATIONSHIPS BETWEEN
INTEREST-EARNING ASSETS AND INTEREST-BEARING DEPOSITS AS OF DECEMBER 31, 2003
(IN THOUSANDS):
REPRICING OR 0-3 3-12 1-5 OVER 5
MATURITY DATE MONTHS MONTHS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------
ASSETS
SECURITIES $ 35,906 $ 79,377 $269,474 $ 68,942 $453,699
- -------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 5,461 -- -- -- 5,461
- -------------------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 30,949 -- -- -- 30,949
- -------------------------------------------------------------------------------------------------------------
LOANS (1) 40,653 76,458 209,889 99,842 426,842
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
ASSETS $112,969 $155,835 $479,363 $168,784 $916,951
=============================================================================================================
DEPOSITS
CERTIFICATES OF DEPOSIT $ 43,482 $113,889 $ 65,503 $ -- $222,875
- -------------------------------------------------------------------------------------------------------------
SAVINGS 25,363 -- 62,010 14,078 101,451
- -------------------------------------------------------------------------------------------------------------
MONEY MARKETS 112,903 -- 90,605 22,355 225,863
- -------------------------------------------------------------------------------------------------------------
CHECKING 35,099 -- 45,909 59,385 140,393
- -------------------------------------------------------------------------------------------------------------
BORROWED FUNDS 2,391 4,189 6,848 16,604 30,032
- -------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING
DEMAND DEPOSITS 38,780 -- 50,856 65,554 155,189
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
LIABILITIES $258,018 $118,078 $321,731 $177,976 $875,803
=============================================================================================================
ASSETS/LIABILITIES 0.44 1.32 1.49 0.95 1.05
- -------------------------------------------------------------------------------------------------------------
ASSETS/LIABILITIES (CUMULATIVE) 0.44 0.71 1.07 1.05
- -------------------------------------------------------------------------------------------------------------
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS.
MARKET RISK SENSITIVE INSTRUMENTS: A derivative financial instrument includes
futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps or options. However, the Corporation is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of the customers of the Corporation.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised.
The Corporation's exposure to market risk is reviewed on a regular basis
by the Asset/Liability Committee. Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic losses can
be reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect on net interest
income and to adjust the statement of condition to minimize the inherent risk
while at the same time maximize income. Management realizes certain risks are
inherent and that the goal is to identify and minimize the risks. Tools used by
management include the standard GAP report and interest rate shock simulation
report. The Corporation has no market risk sensitive instruments held for
trading purposes. Management believes the Corporation's market risk is
reasonable at this time.
19
THE FOLLOWING TABLE PRESENTS THE SCHEDULED MATURITY OF MARKET RISK SENSITIVE
INSTRUMENTS AS OF DECEMBER 31, 2003 (IN THOUSANDS):
AVERAGE ESTIMATED
INTEREST WITHIN 1-5 OVER FAIR
MATURING IN: RATE 1 YEAR YEARS 5 YEARS TOTAL VALUE
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
SECURITIES 4.05% $ 16,791 $155,958 $280,950 $453,699 $455,513
- -----------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 1.13% 5,461 -- -- 5,461 5,461
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 0.86% 30,949 -- -- 30,949 30,949
- -----------------------------------------------------------------------------------------------------------------------
LOANS (1) 6.09% 73,188 108,771 244,883 426,842 428,152
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $126,389 $264,729 $525,833 $916,951 $920,075
=======================================================================================================================
LIABILITIES
SAVINGS, CHECKING
AND MONEY MARKETS 0.80% $467,707 $ -- $ -- $467,707 $467,707
- -----------------------------------------------------------------------------------------------------------------------
CD'S 2.57% 157,372 65,503 -- 222,875 223,632
- -----------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS 2.51% 3,000 4,622 22,410 30,032 29,335
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $628,079 $ 70,125 $ 22,410 $720,614 $720,674
=======================================================================================================================
(1) LOAN BALANCES DO NOT INCLUDE NONACCRUAL LOANS.
EFFECTS OF INFLATION AND CHANGING PRICES: The financial statements and related
financial data presented herein have been prepared in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same magnitude as the prices of goods and services.
The Corporation believes residential real estate values have stabilized,
however, if real estate prices in the Corporation's trade area decrease, the
values of real estate collateralizing the Corporation's loans and real estate
held by the Corporation as other real estate owned could also be adversely
affected.
RECENT ACCOUNTING PRONOUNCEMENTS: In December 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities," which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
The Corporation will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The initial adoption of FIN 46 and FIN 46R
is not expected to have a significant impact on the consolidated financial
statements of the Corporation.
FASB Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued in May 2003. This Statement establishes
standards for the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The Statement
20
also includes required disclosures for financial instruments within its scope.
For the Corporation, the Statement was effective for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatorily redeemable financial instruments. For certain
mandatorily redeemable financial instruments, the Statement will be effective
for the Corporation on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Corporation currently does not have any financial instruments
that are within the scope of this Statement.
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
TRUST ASSETS BOOK VALUE
IN MILLIONS
$615 $710 $767 $1,000 $1,089
-----------------------------------------------------------
'99 '00 '01 '02 '03
SFAS 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 SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was effective for contracts entered into or modified after June 30,
2003. The provisions of SFAS No. 149 which relate to the commitments to
originate or purchase mortgages that the Corporation intends to hold for sale or
forward purchases or sales of when-issued securities or other securities that do
not yet exist, should be applied to both existing contracts and new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 did not have an
impact on the Corporation's consolidated financial statements.
PGB TRUST AND INVESTMENTS: PGB Trust and Investments, a division of the Bank,
continues to be an extremely important part of Peapack-Gladstone Financial
Corporation. Since its inception in 1972, it has served in the roles of executor
and trustee while providing investment management, custodial, tax, retirement,
and financial services to its growing client base.
The book value of assets under management in PGB Trust and Investments
increased from $1.0 billion at December 31, 2002, to $1.1 billion at December
31, 2003, an increase of 9 percent. The corresponding market value at December
31, 2003 was in excess of $1.4 billion. Fee income generated by PGB Trust and
Investments was $5.8 million, $4.7 million and $4.0 million in 2003, 2002 and
2001, respectively.
FORWARD LOOKING STATEMENTS: 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
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 results to differ materially from such
forward-looking statements include, but are not limited to, an unexpected
decline in the direction of the economy in New Jersey, an unexpected decline or
no increase in interest rates, continued unexpected loan prepayment volume, a
decline in levels of loan quality and origination volume and a decline in the
volume of increase in trust assets or deposits. Peapack-Gladstone Financial
Corporation assumes no obligation for updating any such forward-looking
statements at any time.
21
SELECTED CONSOLIDATED FINANCIAL DATA:
THE FOLLOWING IS SELECTED CONSOLIDATED FINANCIAL DATA FOR THE CORPORATION AND
ITS SUBSIDIARIES FOR THE YEARS INDICATED. THIS INFORMATION IS DERIVED FROM THE
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
SUMMARY EARNINGS:
INTEREST INCOME $ 41,426 $ 43,947 $ 40,523 $ 35,567 $ 31,587
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 10,262 12,055 15,486 12,509 10,341
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 31,164 31,892 25,037 23,058 21,246
- --------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 600 800 600 500 555
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 30,564 31,092 24,437 22,558 20,691
- --------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, EXCLUSIVE
OF SECURITIES GAINS/(LOSSES) 9,025 7,936 6,482 5,813 5,279
- --------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 22,786 21,355 17,823 16,520 15,215
- --------------------------------------------------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES) 1,284 52 189 (200) 16
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 18,087 17,725 13,285 11,651 10,771
- --------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 5,787 5,800 4,361 3,943 3,582
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,300 $ 11,925 $ 8,924 $ 7,708 $ 7,189
================================================================================================================================
PER SHARE DATA: (REFLECTS A 10% STOCK DIVIDEND IN 2003 EXCEPT FOR CASH DIVIDENDS PER SHARE.)
EARNINGS PER SHARE-BASIC $ 1.67 $ 1.62 $ 1.22 $ 1.05 $ 0.98
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 1.62 1.59 1.20 1.03 0.95
- --------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 0.38 0.33 0.29 0.27 0.25
- --------------------------------------------------------------------------------------------------------------------------------
BOOK VALUE END-OF-PERIOD 11.47 10.47 8.62 7.55 6.53
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES OUTSTANDING 7,384,030 7,348,262 7,321,239 7,304,457 7,289,724
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUIVALENTS (DILUTIVE) 210,057 150,412 123,098 172,856 209,204
- --------------------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR CHART IN THE PRINTED MATERIAL.]
DIVIDENDS PER SHARE
IN DOLLARS
$0.25 $0.27 $0.29 $0.33 $0.38
-----------------------------------------------------------
'99 '00 '01 '02 '03
BOOK VALUE PER SHARE
IN DOLLARS
$6.53 $7.55 $8.62 $10.47 $11.47
-----------------------------------------------------------
'99 '00 '01 '02 '03
22
BALANCE SHEET DATA (AT PERIOD END): 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 968,126 $ 859,808 $ 704,773 $ 567,032 $ 497,535
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES 97,701 168,066 48,722 69,575 61,672
- ----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 355,998 212,259 172,620 83,950 101,324
- ----------------------------------------------------------------------------------------------------------------------------------
LOANS 427,001 409,760 416,933 344,299 287,933
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES 5,467 4,798 4,023 3,435 2,962
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 845,771 769,688 630,903 508,879 444,088
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 85,054 77,158 63,085 55,156 47,575
- ----------------------------------------------------------------------------------------------------------------------------------
TRUST ASSETS (BOOK VALUE) 1,089,447 1,000,272 766,928 709,732 651,469
- ----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 2,760 2,207 1,846 1,592 1,292
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED PERFORMANCE RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL ASSETS 1.34% 1.53% 1.42% 1.47% 1.48%
- ----------------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL
SHAREHOLDERS' EQUITY 15.14 17.06 15.03 15.30 15.67
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIO 22.44 18.51 20.69 20.65 17.97
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE TOTAL SHAREHOLDERS'
EQUITY TO AVERAGE ASSETS 8.84 8.95 9.44 9.63 8.86
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES TO
AVERAGE ASSETS 2.48 2.74 2.83 3.16 3.13
- ----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME TO
AVERAGE ASSETS 1.12 1.02 1.06 1.07 1.09
- ----------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS (AT PERIOD END):
- ----------------------------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS TO TOTAL LOANS 0.04% 0.04% 0.07% 0.09% 0.13%
- ----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS TO
TOTAL ASSETS 0.02 0.04 0.05 0.07 0.12
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO
NON-PERFORMING LOANS 25.4x 12.5x 12.3x 8.6x 5.0x
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO
TOTAL LOANS 1.28% 1.17% 0.96% 1.00% 1.03%
- ----------------------------------------------------------------------------------------------------------------------------------
NET (RECOVERIES)/CHARGE-OFFS
TO AVERAGE LOANS PLUS
OTHER REAL ESTATE OWNED (0.02) 0.01 0.01 0.01 0.01
- ----------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE LOANS TO AVERAGE DEPOSITS 51.23% 61.09% 67.85% 67.99% 59.44%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY TO
TOTAL ASSETS 8.79 8.97 8.95 9.73 9.56
- ----------------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL TO RISK WEIGHTED
ASSETS 20.38 19.51 18.76 20.80 26.55
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK WEIGHTED
ASSETS 21.74 20.81 19.98 22.10 28.16
- ----------------------------------------------------------------------------------------------------------------------------------
TIER 1 LEVERAGE RATIO 8.91 9.19 9.84 10.49 10.02
- ----------------------------------------------------------------------------------------------------------------------------------
23
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR
THE PERIODS INDICATED (PER SHARE DATA HAVE BEEN RESTATED FOR THE EFFECT OF THE
10 PERCENT STOCK DIVIDEND ISSUED IN 2003.):
SELECTED 2003 QUARTERLY DATA:
(IN THOUSANDS
EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME $ 10,602 $ 10,428 $ 9,947 $ 10,447
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE 2,684 2,666 2,598 2,314
- ---------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,918 7,762 7,349 8,133
- ---------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 150 150 150 150
- ---------------------------------------------------------------------------------------------------
OTHER INCOME, EXCLUDING
SECURITIES GAINS 2,284 2,457 2,183 2,101
- ---------------------------------------------------------------------------------------------------
SECURITIES GAINS 273 554 400 57
- ---------------------------------------------------------------------------------------------------
OTHER EXPENSE 5,483 5,748 5,590 5,964
- ---------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAX EXPENSE 4,842 4,875 4,192 4,177
- ---------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,582 1,592 1,308 1,304
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 3,260 $ 3,283 $ 2,884 $ 2,873
===================================================================================================
EARNINGS PER SHARE-BASIC $ 0.44 $ 0.44 $ 0.39 $ 0.39
- ---------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 0.43 0.43 0.38 0.38
- ---------------------------------------------------------------------------------------------------
SELECTED 2002 QUARTERLY DATA:
(IN THOUSANDS
EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME $ 10,690 $ 11,174 $ 11,255 $ 10,828
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE 2,981 3,022 3,059 2,993
- ---------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,709 8,152 8,196 7,835
- ---------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 199 201 199 201
- ---------------------------------------------------------------------------------------------------
OTHER INCOME, EXCLUDING
SECURITIES GAINS/(LOSSES) 1,950 2,075 1,993 1,918
- ---------------------------------------------------------------------------------------------------
SECURITIES GAINS/(LOSSES) 17 8 (7) 34
- ---------------------------------------------------------------------------------------------------
OTHER EXPENSE 5,132 5,335 5,390 5,498
- ---------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAX EXPENSE 4,345 4,699 4,593 4,088
- ---------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,384 1,546 1,530 1,340
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 2,961 $ 3,153 $ 3,063 $ 2,748
===================================================================================================
EARNINGS PER SHARE-BASIC $ 0.40 $ 0.43 $ 0.42 $ 0.37
- ---------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 0.40 0.42 0.40 0.36
- ---------------------------------------------------------------------------------------------------
24
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PEAPACK-GLADSTONE FINANCIAL CORPORATION
We have audited the accompanying consolidated statements of condition of
Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Short Hills, New Jersey
February 6, 2004
25
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS) 2003 2002
- ------------------------------------------------------------------------------------------------
ASSETS
CASH AND DUE FROM BANKS $ 17,234 $ 17,920
- ------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 5,461 20,400
- ------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 22,695 38,320
- ------------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 30,949 549
- ------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES (APPROXIMATE MARKET VALUE
$99,515 IN 2003 AND $171,290 IN 2002) 97,701 168,066
- ------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 355,998 212,259
- ------------------------------------------------------------------------------------------------
LOANS 427,001 409,760
- ------------------------------------------------------------------------------------------------
LESS: ALLOWANCE FOR LOAN LOSSES 5,467 4,798
- ------------------------------------------------------------------------------------------------
NET LOANS 421,534 404,962
- ------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 15,132 14,371
- ------------------------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 4,295 4,606
- ------------------------------------------------------------------------------------------------
CASH SURRENDER VALUE OF LIFE INSURANCE 16,548 15,747
- ------------------------------------------------------------------------------------------------
OTHER ASSETS 3,274 928
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 968,126 $ 859,808
================================================================================================
LIABILITIES
DEPOSITS:
NONINTEREST-BEARING DEMAND DEPOSITS $ 155,189 $ 126,107
- ------------------------------------------------------------------------------------------------
INTEREST-BEARING DEPOSITS:
CHECKING 140,393 136,956
- ------------------------------------------------------------------------------------------------
SAVINGS 101,451 94,142
- ------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNTS 225,863 173,973
- ------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT OVER $100,000 60,373 59,607
- ------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT LESS THAN $100,000 162,502 178,903
- ------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 845,771 769,688
- ------------------------------------------------------------------------------------------------
LONG-TERM DEBT 30,032 5,000
- ------------------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 7,269 7,962
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 883,072 782,650
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
COMMON STOCK (NO PAR VALUE; STATED VALUE $0.83
PER SHARE; AUTHORIZED 20,000,000 SHARES;
ISSUED SHARES, 7,535,160 AT DECEMBER 31, 2003 AND 7,480,045
AT DECEMBER 31, 2002; OUTSTANDING SHARES, 7,416,031 AT
DECEMBER 31, 2003 AND 7,372,775 AT DECEMBER 31, 2002) 6,274 5,661
- ------------------------------------------------------------------------------------------------
SURPLUS 61,959 38,385
- ------------------------------------------------------------------------------------------------
TREASURY STOCK AT COST, 119,129 SHARES IN 2003
AND 107,270 SHARES IN 2002 (2,391) (2,020)
- ------------------------------------------------------------------------------------------------
RETAINED EARNINGS 16,557 30,290
- ------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF INCOME TAX 2,655 4,842
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 85,054 77,158
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 968,126 $ 859,808
================================================================================================
See Accompanying Notes To Consolidated Financial Statements
26
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2003 2002 2001
- --------------------------------------------------------------------------------------------
INTEREST INCOME
INTEREST AND FEES ON LOANS $25,135 $29,248 $28,476
- --------------------------------------------------------------------------------------------
INTEREST ON INVESTMENT SECURITIES:
TAXABLE 3,889 4,165 3,190
- --------------------------------------------------------------------------------------------
TAX-EXEMPT 590 383 523
- --------------------------------------------------------------------------------------------
INTEREST AND DIVIDENDS ON SECURITIES
AVAILABLE FOR SALE:
TAXABLE 11,372 9,529 6,498
- --------------------------------------------------------------------------------------------
TAX-EXEMPT 362 349 81
- --------------------------------------------------------------------------------------------
INTEREST ON FEDERAL FUNDS SOLD 70 135 1,143
- --------------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 8 138 612
- --------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 41,426 43,947 40,523
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
INTEREST ON CHECKING ACCOUNTS 616 718 849
- --------------------------------------------------------------------------------------------
INTEREST ON SAVINGS AND MONEY MARKET ACCOUNTS 2,763 3,550 4,631
- --------------------------------------------------------------------------------------------
INTEREST ON CERTIFICATES OF DEPOSIT OVER $100,000 1,539 2,101 2,518
- --------------------------------------------------------------------------------------------
INTEREST ON OTHER TIME DEPOSITS 4,458 5,457 7,431
- --------------------------------------------------------------------------------------------
INTEREST ON BORROWINGS 156 52 17
- --------------------------------------------------------------------------------------------
INTEREST ON LONG-TERM DEBT 730 177 40
- --------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 10,262 12,055 15,486
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME 31,164 31,892 25,037
- --------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 600 800 600
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 30,564 31,092 24,437
- --------------------------------------------------------------------------------------------
OTHER INCOME
TRUST FEES 5,759 4,678 4,013
- --------------------------------------------------------------------------------------------
SERVICE CHARGES AND FEES 2,185 2,268 1,957
- --------------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE 880 791 264
- --------------------------------------------------------------------------------------------
OTHER INCOME 201 199 248
- --------------------------------------------------------------------------------------------
SECURITIES GAINS 1,284 52 189
- --------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 10,309 7,988 6,671
- --------------------------------------------------------------------------------------------
OTHER EXPENSES
SALARIES AND EMPLOYEE BENEFITS 13,262 11,962 9,975
- --------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 4,836 4,150 3,598
- --------------------------------------------------------------------------------------------
OTHER EXPENSES 4,688 5,243 4,250
- --------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 22,786 21,355 17,823
- --------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 18,087 17,725 13,285
INCOME TAX EXPENSE 5,787 5,800 4,361
- --------------------------------------------------------------------------------------------
NET INCOME $12,300 $11,925 $ 8,924
============================================================================================
EARNINGS PER SHARE
BASIC $ 1.67 $ 1.62 $ 1.22
- --------------------------------------------------------------------------------------------
DILUTED 1.62 1.59 1.20
============================================================================================
See Accompanying Notes To Consolidated Financial Statements
27
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
(IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 5,064 $ 25,104 $ (956) $26,420 $ (476) $ 55,156
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
NET INCOME 2001 8,924 8,924
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $762) 1,256
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $64) 125
--------
NET UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $698) 1,131 1,131
--------
TOTAL COMPREHENSIVE INCOME 10,055
DIVIDENDS DECLARED ($0.29 PER SHARE) (1,846) (1,846)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS 34 318 352
COMMON STOCK DIVIDEND
(TEN PERCENT) 510 12,416 (12,926) --
TREASURY STOCK TRANSACTIONS (632) (632)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 5,608 $ 37,838 $(1,588) $20,572 $ 655 $ 63,085
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
NET INCOME 2002 11,925 11,925
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX
OF $2,775) 4,221
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $18) 34
--------
NET UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $2,757) 4,187 4,187
--------
TOTAL COMPREHENSIVE INCOME 16,112
DIVIDENDS DECLARED ($0.33 PER SHARE) (2,207) (2,207)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS 53 547 600
TREASURY STOCK TRANSACTIONS (432) (432)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 5,661 $ 38,385 $(2,020) $30,290 $ 4,842 $ 77,158
- ------------------------------------------------------------------------------------------------------------------------------------
28
ACCUMULATED
OTHER
(IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE DATA) STOCK SURPLUS STOCK EARNINGS INCOME/(LOSS) TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
NET INCOME 2003 12,300 12,300
UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX
BENEFIT OF $1,081) (1,352)
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $449) 835
------
NET UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX
BENEFIT OF $1,530) (2,187) (2,187)
--------
TOTAL COMPREHENSIVE INCOME 10,113
DIVIDENDS DECLARED ($0.38 PER SHARE) (2,760) (2,760)
COMMON STOCK OPTIONS
EXERCISED AND RELATED
TAX BENEFITS 45 869 914
COMMON STOCK DIVIDEND
(TEN PERCENT) 568 22,705 (23,273) --
TREASURY STOCK TRANSACTIONS (371) (371)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $ 6,274 $ 61,959 $ (2,391) $16,557 $2,655 $ 85,054
================================================================================================================================
See Accompanying Notes To Consolidated Financial Statements
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
NET INCOME $ 12,300 $ 11,925 $ 8,924
- -----------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 1,448 1,348 1,204
- -----------------------------------------------------------------------------------------------------
AMORTIZATION OF PREMIUM AND ACCRETION
OF DISCOUNT ON SECURITIES, NET 2,761 1,346 247
- -----------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 600 800 600
- -----------------------------------------------------------------------------------------------------
DEFERRED TAXES (1,221) 3,560 (313)
- -----------------------------------------------------------------------------------------------------
GAIN ON SALE OF SECURITIES (1,284) (52) (189)
- -----------------------------------------------------------------------------------------------------
GAIN ON LOANS SOLD (13) -- --
- -----------------------------------------------------------------------------------------------------
TAX BENEFIT ON STOCK OPTION EXERCISE 379 -- --
- -----------------------------------------------------------------------------------------------------
INCREASE IN CASH SURRENDER VALUE OF LIFE INSURANCE (801) (728) (244)
- -----------------------------------------------------------------------------------------------------
DECREASE/(INCREASE) IN ACCRUED INTEREST RECEIVABLE 311 591 (1,033)
- -----------------------------------------------------------------------------------------------------
INCREASE IN OTHER ASSETS (1,125) (499) (1,813)
- -----------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN ACCRUED EXPENSES AND OTHER
- -----------------------------------------------------------------------------------------------------
LIABILITIES 626 (684) 2,727
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,981 17,607 10,110
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES 95,655 29,111 8,487
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 32,110 19,614 11,943
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM CALLS OF INVESTMENT SECURITIES 9,170 4,170 12,831
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES AND CALLS OF SECURITIES
AVAILABLE FOR SALE 177,391 60,838 68,796
- -----------------------------------------------------------------------------------------------------
PURCHASE OF INVESTMENT SECURITIES (36,073) (153,382) (1,494)
- -----------------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (356,821) (113,684) (166,609)
- -----------------------------------------------------------------------------------------------------
NET (INCREASE)/DECREASE IN SHORT-TERM
INVESTMENTS (30,400) 15,085 (14,724)
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM SALES OF LOANS 1,648 -- --
- -----------------------------------------------------------------------------------------------------
NET (INCREASE)/DECREASE IN LOANS (18,807) 7,148 (72,646)
- -----------------------------------------------------------------------------------------------------
PURCHASES OF PREMISES AND EQUIPMENT` (2,209) (2,245) (3,017)
- -----------------------------------------------------------------------------------------------------
PURCHASE OF LIFE INSURANCE -- (2,775) (12,000)
- -----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (128,336) (136,120) (168,433)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
NET INCREASE IN DEPOSITS 76,083 138,785 122,024
- -----------------------------------------------------------------------------------------------------
PROCEEDS FROM LONG-TERM DEBT 26,000 -- 5,000
- -----------------------------------------------------------------------------------------------------
REPAYMENTS OF LONG-TERM DEBT (968) -- --
- -----------------------------------------------------------------------------------------------------
DIVIDENDS PAID (2,549) (2,103) (1,785)
- -----------------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 535 600 352
- -----------------------------------------------------------------------------------------------------
PURCHASE OF TREASURY STOCK (371) (432) (632)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 98,730 136,850 124,959
- -----------------------------------------------------------------------------------------------------
NET (DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (15,625) 18,337 (33,364)
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38,320 19,983 53,347
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,695 $ 38,320 $ 19,983
=====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
CASH PAID DURING THE YEAR FOR:
INTEREST $ 10,902 $ 12,611 $ 15,725
- -----------------------------------------------------------------------------------------------------
INCOME TAXES 5,918 6,378 2,197
- -----------------------------------------------------------------------------------------------------
TRANSFER OF SECURITIES FROM HELD TO
MATURITY AVAILABLE FOR SALE -- -- 1,004
- -----------------------------------------------------------------------------------------------------
See Accompanying Notes To Consolidated Financial Statements
30
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION: The consolidated financial
statements of the Corporation are prepared on the accrual basis and include the
accounts of the Corporation and its wholly owned subsidiary, Peapack-Gladstone
Bank. The consolidated statements also include the Bank's wholly owned
subsidiaries, Peapack-Gladstone Investment Company and it's wholly owned
subsidiary, Peapack-Gladstone Mortgage Group, Inc. While the following footnotes
include the collective results of Peapack-Gladstone Financial Corporation and
Peapack-Gladstone Bank, these footnotes primarily reflect the Bank's and its
subsidiaries' activities. All significant intercompany balances and transactions
have been eliminated from the accompanying consolidated financial statements.
BUSINESS: Peapack-Gladstone Bank, the subsidiary of the Corporation, provides a
full range of banking services to individual and corporate customers through its
branch operations in central New Jersey. The Bank is subject to competition from
other financial institutions, is regulated by certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the statement of condition and revenues and
expenses for that period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, cash
and cash equivalents include cash and due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES: Investment securities are comprised of debt securities
that the Corporation has the positive intent and ability to hold to maturity.
Such securities are stated at cost, adjusted for amortization of premium and
accretion of discount over the term of the investments.
SECURITIES AVAILABLE FOR SALE: Debt securities that cannot be categorized as
investment securities are classified as securities available for sale. Such
securities include debt securities to be held for indefinite periods of time and
not intended to be held to maturity, as well as marketable equity securities.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available for sale are carried at fair value and unrealized
holding gains and losses (net of related tax effects) on such securities are
excluded from earnings, but are included in Shareholders' Equity as Accumulated
Other Comprehensive Income. Upon realization, such gains or losses are included
in earnings using the specific identification method.
LOANS: Loans are stated at the principal amount outstanding. Loan origination
fees and certain direct loan origination costs are deferred and recognized over
the life of the loan as an adjustment to the loan's yield. The accrual of income
on loans, including impaired loans, is discontinued if certain factors indicate
reasonable doubt as to the timely collectibility of such
31
interest, generally when the loan becomes over 90 days delinquent. A non-accrual
loan is not returned to an accrual status until factors indicating doubtful
collection no longer exist. The majority of the loans are secured by real estate
located within the Corporation's market area in central New Jersey.
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
portfolio. The allowance is based on management's evaluation of the loan
portfolio considering 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require the Corporation to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
fair value of the collateral. Impairment losses are included in the allowance
for loan losses through provisions charged to operations.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation charges are computed using the
straight-line method. Premises and equipment are depreciated over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
expensed as incurred. The cost of major renewals and improvements are
capitalized. Gains or losses realized on routine dispositions are recorded as
other income or other expense.
OTHER REAL ESTATE OWNED: Other real estate owned is carried at fair value minus
estimated costs to sell, based on an independent appraisal. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Any subsequent write-downs that may be
required to the carrying value of the properties or losses on the sale of
properties are charged to the valuation allowance on other real estate owned or
to other expense.
INCOME TAXES: The Corporation files a consolidated Federal income tax return.
Separate State income tax returns are filed for each subsidiary based on current
laws and regulations.
The Corporation recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in its
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on the enacted tax rates applicable to taxable income for
the years in which these temporary differences are expected to be recovered or
settled. Such tax assets and liabilities are adjusted for the effect of a change
in tax rates in the period of enactment.
STOCK OPTION PLANS: At December 31, 2003, the Corporation had stock-based
employee and non-employee director compensation plans, which are described more
fully in Note 12. 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.
32
The following table illustrates the effect on net income and earnings per
share 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:
(IN THOUSANDS EXCEPT PER SHARE DATA) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $ 12,300 $ 11,925 $ 8,924
- ------------------------------------------------------------------------------------------------------
LESS: TOTAL STOCK-BASED EMPLOYEE COMPENSATION
EXPENSE DETERMINED UNDER THE FAIR VALUE BASED
METHOD ON ALL STOCK OPTIONS, NET OF RELATED
TAX EFFECTS 193 248 294
- ------------------------------------------------------------------------------------------------------
PRO FORMA $ 12,107 $ 11,677 $ 8,630
======================================================================================================
EARNINGS PER SHARE:
AS REPORTED
BASIC $ 1.67 $ 1.62 $ 1.22
- ------------------------------------------------------------------------------------------------------
DILUTED 1.62 1.59 1.20
- ------------------------------------------------------------------------------------------------------
PRO FORMA
BASIC $ 1.64 $ 1.59 $ 1.18
- ------------------------------------------------------------------------------------------------------
DILUTED 1.59 1.56 1.16
- ------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE: The numerator of both the Basic and Diluted EPS is
equivalent to net income. The weighted average number of shares outstanding used
in the denominator for Diluted EPS is increased over the denominator used for
Basic EPS by the effect of potentially dilutive common stock equivalents
utilizing the treasury stock method. Common stock equivalents are common stock
options outstanding.
All share and per share amounts have been restated to reflect the 10
percent stock dividend in 2003.
The following table shows the calculation of both Basic and Diluted
earnings per share for the years ended December 31, 2003, 2002 and 2001:
(IN THOUSANDS EXCEPT PER SHARE DATA) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 12,300 $ 11,925 $ 8,924
======================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 7,384,030 7,348,262 7,321,239
- ------------------------------------------------------------------------------------------------------
PLUS: COMMON STOCK EQUIVALENTS 210,057 150,412 123,098
- ------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 7,594,087 7,498,674 7,444,337
======================================================================================================
EARNINGS PER SHARE:
BASIC $ 1.67 $ 1.62 $ 1.22
- ------------------------------------------------------------------------------------------------------
DILUTED 1.62 1.59 1.20
- ------------------------------------------------------------------------------------------------------
33
TREASURY STOCK: Treasury stock is recorded using the cost method and accordingly
is presented as an unallocated reduction of shareholders' equity.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and net
unrealized gains (losses) on securities available for sale and is presented in
the consolidated statements of changes in shareholders' equity.
RECLASSIFICATION: Certain reclassifications have been made in the prior periods'
financial statements in order to conform to the 2003 presentation.
RECENTLY ADOPTED ACCOUNTING STANDARDS: In November 2003, the Emerging Issues
Task Force (EITF) issued EITF Issue No. 03-1 "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments."
Issue 03-1 requires new tabular and narrative disclosure items effective for
fiscal years ending after December 15, 2003. Companies are required to provide
expanded information about their debt and marketable equity securities with
market values below carrying values. The narrative information must include
positive and negative information management considered in concluding the
unrealized loss was not other-than-temporary and therefore was not recognized.
The Corporation's disclosures in notes 2 and 3 incorporate the requirements of
Issue No. 03-1.
In December 2003, FASB Statement No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," was issued.
Statement 132 (revised) prescribes employers' disclosures about pension plans
and other postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the disclosure
requirements contained in the original Statement 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. The Corporation's disclosures in note 11 incorporate
the requirements of Statement 132 (revised).
2. INVESTMENT SECURITIES
A summary of amortized cost and approximate market value of investment
securities included in the consolidated statements of condition as of December
31, 2003 and 2002 follows:
2003
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $ 14,325 $ 673 $ -- $ 14,998
- ------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 49,077 595 (45) 49,627
- ------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 32,794 578 (105) 33,267
- ------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 1,505 118 -- 1,623
- ------------------------------------------------------------------------------------------------------------
TOTAL $ 97,701 $ 1,964 $ (150) $ 99,515
============================================================================================================
2002
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $ 24,226 $ 1,102 $ -- $ 25,328
- ------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 124,076 1,538 (152) 125,462
- ------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 16,313 599 (7) 16,905
- ------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 3,451 144 -- 3,595
- ------------------------------------------------------------------------------------------------------------
TOTAL $168,066 $ 3,383 $ (159) $171,290
============================================================================================================
34
The amortized cost and approximate market value of investment securities
as of December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
MATURING IN:
APPROXIMATE
(IN THOUSANDS) AMORTIZED COST MARKET VALUE
- --------------------------------------------------------------------------------
ONE YEAR OR LESS $10,290 $10,407
- --------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 22,864 23,717
- --------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 15,035 15,205
- --------------------------------------------------------------------------------
AFTER TEN YEARS 435 559
- --------------------------------------------------------------------------------
48,624 49,888
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 49,077 49,627
- --------------------------------------------------------------------------------
TOTAL $97,701 $99,515
================================================================================
There were no investment securities pledged as of December 31, 2003.
During 2001, the Corporation transferred one security in the amount of
$1.0 million from Held to Maturity to Available for Sale. The security had a
market value of $1.0 million. The transfer was made due to a significant
deterioration in the issuer's credit worthiness. The security was subsequently
sold at a gain of $27 thousand.
The following table presents the Corporation's investment securities with
continuous unrealized losses and the approximate market value of these
investments.
DURATION OF LOSS
- ------------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- ------------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY &
GOVERNMENT AGENCIES $ -- $ -- $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 11,240 (45) -- -- 11,240 (45)
- ------------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS 11,153 (105) -- -- 11,153 (105)
- ------------------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
$ 22,393 $ (150) $ -- $ -- $ 22,393 $ (150)
========================================================================================================================
Management has determined that these unrealized losses are temporary and
due to interest rate fluctuations rather than the credit ratings of the issuers.
The Corporation has a policy to purchase only from issuers with an investment
grade credit rating and monitors credit ratings periodically.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government agencies. It is expected that the
securities would not be settled at a price less than the amortized cost of the
investment. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Corporation has the
intent to hold these investments until maturity, these investments are not
considered other-than-temporarily impaired.
Most of the securities issued by state and political subdivisions in the
table above are issued by municipalities located in New Jersey and have had
unrealized losses for six months or less. These investments represent purchases
in municipal bonds, which generally have lower coupons; however many are not
taxable by the Federal government and their effective yield is higher. Because
the Corporation intends to hold these securities to mature at par, no loss is
anticipated.
35
3. SECURITIES AVAILABLE FOR SALE
A summary of amortized cost and approximate market value of securities available
for sale included in the consolidated statements of condition as of December 31,
2003 and 2002 follows:
2003
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $180,064 $ 3,763 $ (1,103) $182,724
- -------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 135,998 772 (447) 136,323
- -------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 9,364 425 -- 9,789
- -------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 26,254 948 (40) 27,162
- -------------------------------------------------------------------------------------------------------------
TOTAL $351,680 $ 5,908 $ (1,590) $355,998
=============================================================================================================
2002
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $130,360 $ 6,241 $ (170) $136,431
- -------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 42,197 1,243 (17) 43,423
- -------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL SUBDIVISIONS 9,055 304 -- 9,359
- -------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 22,612 540 (106) 23,046
- -------------------------------------------------------------------------------------------------------------
TOTAL $204,224 $ 8,328 $ (293) $212,259
=============================================================================================================
The amortized cost and approximate market value of debt securities
available for sale as of December 31, 2003, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties.
MATURING IN:
APPROXIMATE
(IN THOUSANDS) AMORTIZED COST MARKET VALUE
- -------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS $ 5,771 $ 6,501
- -------------------------------------------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 129,074 132,567
- -------------------------------------------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 56,824 56,758
- -------------------------------------------------------------------------------------------------------------
AFTER TEN YEARS 24,013 23,849
- -------------------------------------------------------------------------------------------------------------
215,682 219,675
- -------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 135,998 136,323
- -------------------------------------------------------------------------------------------------------------
TOTAL $351,680 $355,998
=============================================================================================================
Securities having an approximate carrying value of $11.8 million and $11.9
million as of December 31, 2003 and December 31, 2002, respectively, were
pledged to secure public funds and for other purposes required or permitted by
law. Net security gains of $1.3 million, $52 thousand and $189 thousand were
realized in 2003, 2002 and 2001.
36
The following table presents the Corporation's available for sale
securities with continuous unrealized losses and the approximate market value of
these investments.
DURATION OF LOSS
- --------------------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE APPROXIMATE
MARKET UNREALIZED MARKET UNREALIZED MARKET UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- --------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY &
GOVERNMENT AGENCIES $ 47,299 $ (743) $ 1,640 $ (360) $ 48,939 $ (1,103)
- --------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED
SECURITIES 52,078 (447) -- -- 52,078 (447)
- --------------------------------------------------------------------------------------------------------------------------------
STATE AND POLITICAL
SUBDIVISIONS -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 1,953 (35) 65 (5) 2,018 (40)
- --------------------------------------------------------------------------------------------------------------------------------
$ 101,330 $ (1,225) $ 1,705 $ (365) $ 103,035 $ (1,590)
================================================================================================================================
Management has determined that these unrealized losses are temporary and
due to interest rate fluctuations and volatility rather than the credit ratings
of the issuers. The Corporation has a policy to purchase only from issuers with
an investment grade credit rating and monitors credit ratings periodically.
The unrealized losses on investments in U.S. government agency bonds were
caused by interest rate increases. The contractual terms of these investments do
not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. Because the Corporation has the ability and
intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired.
The unrealized losses on investments in mortgage-backed securities were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. government agencies. It is expected that the
securities would not be settled at a price less than the amortized cost of the
investment. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Corporation has the
ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.
The other debt securities with unrealized losses caused by interest rate
increases are adjustable and will price to par at the time of the rate reset.
The Corporation has the ability and intent to hold these investments until a
market price recovery or maturity; therefore these investments are not
considered other-than-temporarily impaired.
4. LOANS
Loans outstanding as of December 31, 2003 and 2002 consisted of the
following:
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
LOANS SECURED BY 1-4 FAMILY $256,301 $267,155
- --------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE 130,968 109,932
- --------------------------------------------------------------------------------
CONSTRUCTION LOANS 9,799 2,063
- --------------------------------------------------------------------------------
COMMERCIAL LOANS 16,632 17,859
- --------------------------------------------------------------------------------
CONSUMER LOANS 10,223 8,206
- --------------------------------------------------------------------------------
OTHER LOANS 3,078 4,545
- --------------------------------------------------------------------------------
TOTAL LOANS $427,001 $409,760
================================================================================
37
Non-accrual loans totaled $159 thousand and $180 thousand at December 31,
2003 and 2002, respectively. Loans past due 90 days or more and still accruing
interest totaled $56 thousand and $203 thousand at December 31, 2003 and 2002,
respectively. There are no commitments to lend additional amounts on non-accrual
loans. The amount of interest income recognized on year-end non-accrual loans
totaled $3 thousand, $5 thousand and $10 thousand in 2003, 2002 and 2001,
respectively. Interest income of $11 thousand, $12 thousand and $20 thousand
would have been recognized during 2003, 2002 and 2001, respectively, under
contractual terms for such non-accrual loans.
The Corporation defines an impaired loan as an investment in a loan that
is on non-accrual status with a principal outstanding balance in excess of $100
thousand. Residential mortgage loans, a group of homogeneous loans that are
collectively evaluated for impairment, and consumer loans are excluded. There
were no impaired loans as of or for the years ended December 31, 2003 and 2002.
5. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses for the years
indicated follows:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 4,798 $ 4,023 $ 3,435
- --------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 600 800 600
- --------------------------------------------------------------------------------
LOANS CHARGED-OFF (42) (68) (92)
- --------------------------------------------------------------------------------
RECOVERIES 111 43 80
- --------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 5,467 $ 4,798 $ 4,023
================================================================================
6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, follows:
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
LAND $ 3,471 $ 2,554
- --------------------------------------------------------------------------------
BUILDINGS 7,400 7,298
- --------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 10,617 8,857
- --------------------------------------------------------------------------------
LEASEHOLD IMPROVEMENTS 4,335 4,369
- --------------------------------------------------------------------------------
PROJECTS IN PROGRESS 695 1,294
- --------------------------------------------------------------------------------
26,518 24,372
- --------------------------------------------------------------------------------
LESS: ACCUMULATED DEPRECIATION 11,386 10,001
- --------------------------------------------------------------------------------
TOTAL $15,132 $14,371
================================================================================
Depreciation expense amounted to $1.4 million, $1.3 million and $1.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
7. DEPOSITS
Interest expense on time deposits of $100,000 or more totaled $1.5
million, $2.1 million and $2.5 million in 2003, 2002 and 2001, respectively.
The scheduled maturities of time deposits are as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 $ 157,372
- --------------------------------------------------------------------------------
2005 38,532
- --------------------------------------------------------------------------------
2006 2,416
- --------------------------------------------------------------------------------
2007 8,931
- --------------------------------------------------------------------------------
2008 15,624
- --------------------------------------------------------------------------------
TOTAL $ 222,875
================================================================================
38
8. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At December 31, 2003 and 2002, advances from the Federal Home Loan Bank of
New York (FHLB) totaled $30.0 million and $5.0 million, respectively, with a
weighted average interest rate of 3.36 percent and 3.53 percent, respectively.
These advances are secured by blanket pledges of 1-4 family residential
mortgages totaling $121.6 million at December 31, 2003 and $110.9 million at
December 31, 2002. Advances totaling $18.0 million at December 31, 2003, have
fixed maturity dates, while advances totaling $12.0 million were amortizing
advances with monthly payments of principal and interest.
THE FINAL MATURITY DATES OF THE ADVANCES ARE SCHEDULED AS FOLLOWS:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 $ 3,000
- --------------------------------------------------------------------------------
2005 --
- --------------------------------------------------------------------------------
2006 2,000
- --------------------------------------------------------------------------------
2007 --
- --------------------------------------------------------------------------------
2008 2,622
- --------------------------------------------------------------------------------
OVER 5 YEARS 22,410
- --------------------------------------------------------------------------------
TOTAL $ 30,032
================================================================================
In addition, other borrowings consisting of overnight borrowings at FHLB
had an average balance of $13.4 million with a weighted average interest rate of
1.17 percent and $2.8 million with a weighted average interest rate of 1.85
percent for the years ended December 31, 2003 and 2002, respectively. No amounts
were outstanding as of December 31, 2003 or 2002. The maximum amount outstanding
at any month end during 2003 and 2002 was $33.6 million and $18.5 million,
respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation discloses estimated fair values for its significant
financial instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value
of each class of significant financial instruments:
CASH AND SHORT-TERM INVESTMENTS - The carrying amount of cash and
short-term investments is considered to be fair value.
SECURITIES - The fair value of securities is based upon quoted market
prices.
LOANS - The fair value of loans is estimated by discounting the future
cash flows using the build-up approach consisting of four components: the
risk-free rate, credit quality, operating expense and prepayment option price.
DEPOSITS - The fair value of deposits with no stated maturity, such as
demand deposits, checking accounts, savings and money market accounts, is equal
to the carrying amount. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows.
LONG-TERM DEBT - The fair value of FHLB advances is based on the
discounted value of estimated cash flows. The discount rate is estimated using
the rates currently offered for similar advances.
39
The following table summarizes carrying amounts and fair values for
financial instruments at December 31, 2003 and 2002:
(IN THOUSANDS) 2003 2002
- ------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS $ 22,695 $ 22,695 $ 38,320 $ 38,320
- -------------------------------------------------------------------------------------
INTEREST-EARNING DEPOSITS 30,949 30,949 549 549
- -------------------------------------------------------------------------------------
INVESTMENT SECURITIES 97,701 99,515 168,066 171,290
- -------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 355,998 355,998 212,259 212,259
- -------------------------------------------------------------------------------------
LOANS, NET OF ALLOWANCE FOR
LOAN LOSSES 421,534 422,844 404,962 423,090
- -------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
DEPOSITS 845,771 846,528 769,688 772,822
- -------------------------------------------------------------------------------------
LONG-TERM DEBT 30,032 29,335 5,000 5,114
- -------------------------------------------------------------------------------------
10. INCOME TAXES
The income tax expense included in the consolidated financial statements
for the years ended December 31, 2003, 2002 and 2001, is allocated as follows:
(IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------------
FEDERAL:
CURRENT EXPENSE $ 6,939 $ 2,010 $ 4,493
- -------------------------------------------------------------------------------------
DEFERRED (BENEFIT)/EXPENSE (1,304) 3,615 (252)
- -------------------------------------------------------------------------------------
STATE:
CURRENT EXPENSE 69 230 181
- -------------------------------------------------------------------------------------
DEFERRED EXPENSE/(BENEFIT) 83 (55) (61)
- -------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,787 $ 5,800 $ 4,361
- -------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
DEFERRED EXPENSE ON UNREALIZED
GAIN ON SECURITIES AVAILABLE FOR SALE $ 1,530 $ 2,757 $ 698
=====================================================================================
Total income tax expense differed from the amounts computed by applying
the U.S. Federal income tax rate of 35 percent in 2003 and 2002 and 34 percent
in 2001 to income before taxes as a result of the following:
(IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------------
COMPUTED "EXPECTED" TAX EXPENSE $ 6,330 $ 6,204 $ 4,517
- -------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN TAXES RESULTING FROM:
TAX-EXEMPT INCOME (384) (323) (234)
- -------------------------------------------------------------------------------------
STATE INCOME TAXES 99 114 79
- -------------------------------------------------------------------------------------
BANK OWNED LIFE INSURANCE INCOME (279) (251) (82)
- -------------------------------------------------------------------------------------
OTHER 21 56 81
- -------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,787 $ 5,800 $ 4,361
=====================================================================================
40
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 2003 and 2002 are as follows:
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
LOANS, PRINCIPALLY DUE TO ALLOWANCE FOR
LOAN LOSSES AND DEFERRED FEE INCOME $ 2,178 $ 1,814
- --------------------------------------------------------------------------------
POST RETIREMENT BENEFITS OTHER THAN PENSIONS 61 107
- --------------------------------------------------------------------------------
START-UP & ORGANIZATION COSTS 10 33
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER 3 20
- --------------------------------------------------------------------------------
CONTRIBUTION LIMITATION 5 --
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED ASSETS $ 2,257 $ 1,974
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
INVESTMENT SECURITIES, PRINCIPALLY DUE TO
THE ACCRETION OF BOND DISCOUNT 53 41
- --------------------------------------------------------------------------------
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE 1,663 3,193
- --------------------------------------------------------------------------------
DEFERRED LOAN ORIGINATION COSTS AND FEES 348 311
- --------------------------------------------------------------------------------
DEFERRED REIT DIVIDEND 2,435 3,652
- --------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT,
PRINCIPALLY DUE TO DIFFERENCES IN DEPRECIATION 799 569
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED LIABILITIES 5,298 7,766
- --------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $(3,041) $(5,792)
================================================================================
Based upon taxes paid and projected future taxable income, management
believes that it is more likely than not that the gross deferred tax assets will
be realized.
11. BENEFIT PLANS
PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially
all of its salaried employees. The benefits are based on an employee's
compensation during the five years before retirement, age at retirement and
years of service. The Corporation makes annual contributions to the plan equal
to the maximum amount that can be deducted for income tax purposes.
41
The following table shows the change in benefit obligation, the change in
plan assets and the funded status for the plan at December 31,
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT BEGINNING OF YEAR $ 6,782 $ 5,642
- --------------------------------------------------------------------------------
SERVICE COST 978 744
- --------------------------------------------------------------------------------
INTEREST COST 437 388
- --------------------------------------------------------------------------------
ACTUARIAL LOSS 726 610
- --------------------------------------------------------------------------------
BENEFITS PAID (475) (602)
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 8,448 $ 6,782
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 4,944 $ 5,185
- --------------------------------------------------------------------------------
ACTUAL RETURN ON PLAN ASSETS 980 (485)
- --------------------------------------------------------------------------------
EMPLOYER CONTRIBUTION 1,223 846
- --------------------------------------------------------------------------------
BENEFITS PAID (475) (602)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 6,672 $ 4,944
================================================================================
FUNDED STATUS $(1,776) $(1,838)
- --------------------------------------------------------------------------------
UNRECOGNIZED TRANSITION ASSET (38) (45)
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST (3) (3)
- --------------------------------------------------------------------------------
UNRECOGNIZED NET ACTUARIAL GAIN 1,895 1,809
- --------------------------------------------------------------------------------
ACCRUED BENEFIT COST $ 78 $ (77)
================================================================================
The accumulated benefit obligation for the pension plan was $5.7 million
and $5.0 million at December 31, 2003 and 2002, respectively.
Net periodic expense for the years ended December 31 included the
following components:
(IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
SERVICE COST $ 978 $ 744 $ 590
- --------------------------------------------------------------------------------
INTEREST COST 437 388 360
- --------------------------------------------------------------------------------
EXPECTED RETURN ON PLAN ASSETS (395) (392) (459)
- --------------------------------------------------------------------------------
AMORTIZATION OF:
NET LOSS/(GAIN) 55 -- (19)
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST 1 1 1
- --------------------------------------------------------------------------------
UNRECOGNIZED REMAINING NET ASSETS (7) (7) (7)
- --------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $ 1,069 $ 734 $ 466
================================================================================
The following table shows the actuarial assumptions applied for the
valuation of plan obligations at December 31,
2003 2002 2001
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE DISCOUNT RATE 6% 6.5% 7%
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE RATE OF INCREASE
ON FUTURE COMPENSATION 3% 3% 3%
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE EXPECTED LONG-TERM RATE
OF RETURN ON PLAN ASSETS 6.5% 7% 8%
- --------------------------------------------------------------------------------
The Corporation's overall expected long-term rate of return on assets is
6.5 percent. The expected long-term rate of return is based on the portfolio as
a whole and not on the sum of the returns on individual asset categories.
42
The weighted-average asset allocation of the Corporation's pension
benefits at December 31, 2003 and 2002 were as follows:
PENSION BENEFITS PLAN ASSETS
AT DECEMBER 31
- --------------------------------------------------------------------------------
ASSET CATEGORY 2003 2002
- --------------------------------------------------------------------------------
EQUITY SECURITIES 59.8% 54.7%
- --------------------------------------------------------------------------------
DEBT SECURITIES 29.0 36.3
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 11.2 9.0
- --------------------------------------------------------------------------------
TOTAL 100.0% 100.0%
================================================================================
The Corporation's investment policies and strategies for the pension
benefits plan do not use target allocations for the individual asset categories.
The Corporation's investment goals are to maximize returns subject to specific
risk management policies. Its risk management policies permit investments in
mutual funds, and prohibit direct investments in debt and equity securities and
derivative financial instruments. The Corporations addresses diversification by
the use of mutual fund investments whose underlying investments are in domestic
and international fixed income securities and domestic and international equity
securities. These mutual funds are readily marketable and can be sold to fund
benefit payment obligations as they become payable.
The Corporation expects to contribute $1.2 million to its pension plan in
2004.
SAVINGS AND PROFIT SHARING PLANS:
In addition to the retirement plan, the Corporation sponsors a profit
sharing plan and a savings plan under Section 401(k) of the Internal Revenue
Code, covering substantially all salaried employees over the age of 21 with at
least 12 months service. Under the savings portion of the plan, employee
contributions are partially matched by the Corporation. Expense for the savings
plan was approximately $36 thousand, $33 thousand and $30 thousand in 2003, 2002
and 2001, respectively. Contributions to the profit sharing portion are made at
the discretion of the Board of Directors and all funds are invested solely in
Corporation stock. The contribution to the profit sharing plan was $375 thousand
in 2003, $350 thousand in 2002 and $300 thousand in 2001.
12. STOCK OPTION PLANS
The Corporation's incentive stock option plans allow the granting of up to
725,663 shares of the Corporation's common stock to certain key employees. The
options granted under these plans are, in general, exercisable not earlier than
one year after the date of grant, at a price equal to the fair market value of
the common stock on the date of grant, and expire not more than ten years after
the date of grant. The stock options will vest during a period of up to five
years after the date of grant. Options granted to officers at or above the
senior vice president level are immediately exercisable at the date of grant.
43
Changes in options outstanding during the past three years were as
follows:
OPTION PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2000 327,588 $6.12 - $22.57
- --------------------------------------------------------------------------------
GRANTED DURING 2001 91,146 14.98 - 20.40
- --------------------------------------------------------------------------------
EXERCISED DURING 2001 (54,472) 6.12 - 13.03
- --------------------------------------------------------------------------------
FORFEITED DURING 2001 (7,198) 13.03 - 18.55
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 357,064 $6.12 - $22.57
- --------------------------------------------------------------------------------
GRANTED DURING 2002 6,380 16.59 - 29.32
- --------------------------------------------------------------------------------
EXERCISED DURING 2002 (51,874) 6.12 - 19.28
- --------------------------------------------------------------------------------
FORFEITED DURING 2002 (10,263) 6.12 - 18.55
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 301,307 $6.12 - $29.32
- --------------------------------------------------------------------------------
GRANTED DURING 2003 2,300 27.32 - 31.74
- --------------------------------------------------------------------------------
EXERCISED DURING 2003 (55,338) 6.12 - 22.57
- --------------------------------------------------------------------------------
FORFEITED DURING 2003 (2,183) 16.71 - 31.82
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 246,086 $6.12 - $31.74
================================================================================
At December 31, 2003, the number of options exercisable was 237,191 and
the weighted-average price of those options was $15.40 per share. At December
31, 2002, the number of options exercisable was 186,140 and the weighted-average
price of those options was $13.46 per share.
The Corporation has non-qualified stock option plans for non-employee
directors. The plans allow the granting of up to 362,542 shares of the
Corporation's common stock. The options granted under these plans are, in
general, exercisable not earlier than one year after the date of grant, at a
price equal to the fair market value of the common stock on the date of grant,
and expire not more than ten years after the date of grant. The stock options
will vest during a period of up to five years after the date of grant. Changes
in options outstanding during the past three years were as follows:
OPTION PRICE
SHARES PER SHARE
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 191,947 $6.12 - $17.91
- --------------------------------------------------------------------------------
GRANTED DURING 2001 35,285 17.25
- --------------------------------------------------------------------------------
EXERCISED DURING 2001 (1,698) 6.12
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 225,534 $6.12 - $19.28
- --------------------------------------------------------------------------------
EXERCISED DURING 2002 (18,290) 6.12
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 207,244 $6.12 - $19.28
- --------------------------------------------------------------------------------
EXERCISED DURING 2003 (29,051) 6.12 - 17.25
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 178,193 $6.12 - $19.28
================================================================================
At December 31, 2003, the number of options exercisable was 157,444 and
the weighted-average price of those options was $12.54. At December 31, 2002,
the number of options exercisable was 163,872 and the weighted-average price of
those options was $10.86.
At December 31, 2003, there were 372,812 additional shares available for
grant under the Plans. The per share weighted-average fair value of stock
options granted during 2003, 2002 and 2001 was $10.16, $7.51, and $4.34 on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2003 - expected dividend yield of 1.29%, expected
volatility of 40%, risk free interest rate of 3.27%, and an expected life of 5
years; 2002 - expected dividend yield of 1.79%, expected volatility of 34%,
risk-free interest rate of 4.12%, and an expected life of 5 years; 2001 -
expected dividend yield of 1.70%, expected volatility of 20%, risk-free interest
rate of 4.77%, and an expected life of 5 years.
44
13. COMMITMENTS
The Corporation, in the ordinary course of business, is a party to
litigation arising from the conduct of its business. Management does not
consider that these actions depart from routine legal proceedings and believes
that such actions will not affect its financial position or results of its
operations in any material manner. There are various outstanding commitments and
contingencies, such as guarantees and credit extensions, including loan
commitments of $69.4 million and $95.0 million at December 31, 2003 and 2002,
respectively, which are not included in the accompanying consolidated financial
statements.
The Corporation issues financial standby letters of credit that are within
the scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." These are irrevocable undertakings by the Corporation to guarantee
payment of a specified financial obligation. Most of the Corporation's financial
standby letters of credit arise in connection with lending relationships and
have terms of one year or less. The maximum potential future payments the
Corporation could be required to make equals the contract amount of the standby
letters of credit and amounted to $5.5 million and $4.0 million at December 31,
2003 and 2002, respectively. The Corporation's recognized liability for
financial standby letters of credit was insignificant at December 31, 2003.
For commitments to originate loans, the Corporation's maximum exposure to
credit risk is represented by the contractual amount of those instruments. Those
commitments represent ultimate exposure to credit risk only to the extent that
they are subsequently drawn upon by customers. The Corporation uses the same
credit policies and underwriting standards in making loan commitments as it does
for on-balance-sheet instruments. For loan commitments, the Corporation would
generally be exposed to interest rate risk from the time a commitment is issued
with a defined contractual interest rate.
At December 31, 2003, the Corporation was obligated under non-cancelable
operating leases for certain premises. Rental expense aggregated $1.5 million,
$1.1 million and $869 thousand for the years ended December 31, 2003, 2002 and
2001, respectively, which is included in premises and equipment expense in the
consolidated statements of income.
The minimum annual lease payments under the terms of the lease agreements,
as of December 31, 2003, were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 $ 1,750
- --------------------------------------------------------------------------------
2005 1,738
- --------------------------------------------------------------------------------
2006 1,860
- --------------------------------------------------------------------------------
2007 1,851
- --------------------------------------------------------------------------------
2008 1,865
- --------------------------------------------------------------------------------
THEREAFTER 14,685
- --------------------------------------------------------------------------------
TOTAL $ 23,749
================================================================================
14. REGULATORY CAPITAL
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The
45
Corporation's and the Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2003, that the Corporation and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 2003, the Corporation and the Bank met all requirements
to be considered well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Corporation and
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table.
The Corporation's actual capital amounts and ratios are presented in the
table.
TO BE WELL
CAPITALIZED UNDER FOR CAPITAL
PROMPT CORRECTIVE ADEQUACY
(IN THOUSANDS) ACTUAL ACTION PROVISIONS PURPOSES
- ------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2003:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $87,303 21.7% $40,150 10.0% $32,120 8.0%
- ------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS) 81,836 20.4 24,090 6.0 16,060 4.0
- ------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
(TO AVERAGE ASSETS) 81,836 8.9 45,948 5.0 27,569 3.0
- ------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2002:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $76,551 20.8% $36,777 10.0% $29,422 8.0%
- ------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS) 71,753 19.5 22,066 6.0 14,711 4.0
- ------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL
(TO AVERAGE ASSETS) 71,753 9.2 39,028 5.0 23,417 3.0
- ------------------------------------------------------------------------------------------------------------------
46
15. CONDENSED FINANCIAL STATEMENTS OF PEAPACK-GLADSTONE FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
The following information of the parent company only financial statements
as of and for the years ended December 31, 2003 and 2002 should be read in
conjunction with the notes to the consolidated financial statements.
STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
ASSETS:
CASH $ 162 $ 146
- --------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY -- 1,999
- --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 14,323 8,832
- --------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARY 71,632 66,913
- --------------------------------------------------------------------------------
OTHER ASSETS 83 50
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 86,200 $ 77,940
================================================================================
LIABILITIES:
OTHER LIABILITIES $ 1,146 $ 782
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 1,146 782
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
COMMON STOCK 6,274 5,661
- --------------------------------------------------------------------------------
SURPLUS 61,959 38,385
- --------------------------------------------------------------------------------
TREASURY STOCK (2,391) (2,020)
- --------------------------------------------------------------------------------
RETAINED EARNINGS 16,557 30,290
- --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF INCOME TAX 2,655 4,842
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 85,054 77,158
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 86,200 $ 77,940
================================================================================
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
INCOME:
DIVIDEND FROM BANK $ 5,250 $ 5,000 $ 4,000
- --------------------------------------------------------------------------------
OTHER INCOME 372 375 300
- --------------------------------------------------------------------------------
SECURITIES GAINS 90 32 --
- --------------------------------------------------------------------------------
TOTAL INCOME 5,712 5,407 4,300
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------
OTHER EXPENSES 104 307 280
- --------------------------------------------------------------------------------
TOTAL EXPENSES 104 307 280
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT/
EXPENSE AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANK 5,608 5,100 4,020
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE/(BENEFIT) 110 15 (8)
- --------------------------------------------------------------------------------
NET INCOME BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF BANK 5,498 5,085 4,028
- --------------------------------------------------------------------------------
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 6,802 6,840 4,896
- --------------------------------------------------------------------------------
Net Income $12,300 $11,925 $ 8,924
================================================================================
47
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 12,300 $ 11,925 $ 8,924
- ----------------------------------------------------------------------------------------------
LESS EQUITY IN UNDISTRIBUTED EARNINGS (6,802) (6,840) (4,896)
- ----------------------------------------------------------------------------------------------
AMORTIZATION AND ACCRETION IN SECURITIES 13 (3) (5)
- ----------------------------------------------------------------------------------------------
GAIN ON SECURITIES AVAILABLE FOR SALE (90) (32) --
- ----------------------------------------------------------------------------------------------
(INCREASE)/DECREASE IN OTHER ASSETS (33) 30 148
- ----------------------------------------------------------------------------------------------
(DECREASE)/INCREASE IN OTHER LIABILITIES (10) 74 55
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,378 5,154 4,226
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 1,670 75 --
- ----------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES
HELD TO MATURITY 2,000 -- --
- ----------------------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES
AVAILABLE FOR SALE 9,692 8,700 3,576
- ----------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES HELD TO MATURITY -- (1,989) --
- ----------------------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (16,339) (9,912) (7,261)
- ----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,977) (3,126) (3,685)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
DIVIDENDS PAID (2,549) (2,103) (1,785)
- ----------------------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 535 600 352
- ----------------------------------------------------------------------------------------------
TREASURY STOCK TRANSACTIONS (371) (432) (632)
- ----------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,385) (1,935) (2,065)
- ----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16 93 (1,524)
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 146 53 1,577
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 162 $ 146 $ 53
==============================================================================================
COMMON STOCK PRICES (UNAUDITED)
The following table shows the 2003 and 2002 range of prices paid on known
trades of Peapack-Gladstone Financial Corporation common stock.
DIVIDEND
2003 HIGH LOW PER SHARE
- ----------------------------------------------------------------------------------------------
1ST QUARTER $ 31.14 $ 22.77 $ 0.090
- ----------------------------------------------------------------------------------------------
2ND QUARTER 32.99 18.18 0.090
- ----------------------------------------------------------------------------------------------
3RD QUARTER 32.73 28.89 0.100
- ----------------------------------------------------------------------------------------------
4TH QUARTER 33.10 30.10 0.100
- ----------------------------------------------------------------------------------------------
DIVIDEND
2002 HIGH LOW PER SHARE
- ----------------------------------------------------------------------------------------------
1ST QUARTER $ 22.73 $ 16.48 $ 0.075
- ----------------------------------------------------------------------------------------------
2ND QUARTER 28.64 22.50 0.075
- ----------------------------------------------------------------------------------------------
3RD QUARTER 29.55 26.21 0.090
- ----------------------------------------------------------------------------------------------
4TH QUARTER 34.05 27.05 0.090
- ----------------------------------------------------------------------------------------------
48
OFFICER
- -------------------------------------------------------------------------------------------------------------
GLADSTONE T. LEONARD HILL Chairman Emeritus *
LOAN AND ----------------------------------------------------------------------------------------
ADMINISTRATION FRANK A. KISSEL Chairman of the Board & CEO*
BUILDING ----------------------------------------------------------------------------------------
ROBERT M. ROGERS President & COO *
----------------------------------------------------------------------------------------
ARTHUR F. BIRMINGHAM Executive Vice President & CFO *
----------------------------------------------------------------------------------------
GARRETT P. BROMLEY Executive Vice President & Chief Credit Officer
----------------------------------------------------------------------------------------
PAUL W. BELL Senior Vice President & Security Officer
----------------------------------------------------------------------------------------
HUBERT P. CLARKE Senior Vice President Information Systems
----------------------------------------------------------------------------------------
MICHAEL J. GIACOBELLO Senior Vice President & Senior Commercial Loan Officer
----------------------------------------------------------------------------------------
BARBARA A. GRECO Senior Vice President & Personnel Officer
----------------------------------------------------------------------------------------
TODD T. BRUNGARD Vice President
----------------------------------------------------------------------------------------
ROBERT A. BUCKLEY Vice President
----------------------------------------------------------------------------------------
KAREN M. CHIARELLO Vice President & Auditor
----------------------------------------------------------------------------------------
MICHELE DELLAVALLE Vice President
----------------------------------------------------------------------------------------
KAREN M. FERRARO Vice President
----------------------------------------------------------------------------------------
VALERIE L. KODAN Vice President
----------------------------------------------------------------------------------------
V. SHERRI LICATA Vice President & Bank Secrecy Act Compliance Officer
----------------------------------------------------------------------------------------
DOUGLAS J. MOORE Vice President
----------------------------------------------------------------------------------------
TERESA A. PETERS Vice President
----------------------------------------------------------------------------------------
MARY M. RUSSELL Vice President & Comptroller
----------------------------------------------------------------------------------------
JOHN A. SCERBO Vice President
----------------------------------------------------------------------------------------
PATRICIA J. SCHWARTZ Vice President
----------------------------------------------------------------------------------------
JAMES S. STADTMUELLER Vice President
----------------------------------------------------------------------------------------
MARGARET VOLK Vice President & Mortgage Officer
----------------------------------------------------------------------------------------
FRANK C. WALDRON Vice President
----------------------------------------------------------------------------------------
EILEEN C. WOLFE Vice President
----------------------------------------------------------------------------------------
NANCY L. WYNANT Vice President
----------------------------------------------------------------------------------------
SANDRA BORNGESSER Assistant Vice President
----------------------------------------------------------------------------------------
JOHN G. HARITON Assistant Vice President & Corporate Trainer
----------------------------------------------------------------------------------------
KAREN R. HORVATH Assistant Vice President & Assistant Comptroller
----------------------------------------------------------------------------------------
KATHRYN M. NEIGH Assistant Vice President
----------------------------------------------------------------------------------------
CHRISTOPHER P. POCQUAT Assistant Vice President
----------------------------------------------------------------------------------------
DIANE M. RIDOLFI Assistant Vice President
----------------------------------------------------------------------------------------
S. SHAY SCHOENBAUM Assistant Vice President & Marketing Officer
----------------------------------------------------------------------------------------
EDWARD J. SWEENEY Assistant Vice President
----------------------------------------------------------------------------------------
SHANIN BACHSTEIN Assistant Cashier
----------------------------------------------------------------------------------------
CAROL L. BEHLER Assistant Cashier
----------------------------------------------------------------------------------------
ELAINE CARDOSO Assistant Cashier
----------------------------------------------------------------------------------------
LYNDA CROSS Assistant Cashier
----------------------------------------------------------------------------------------
MARJORIE A. DZWONCZYK Assistant Cashier & CRA and Compliance Officer
----------------------------------------------------------------------------------------
LAURA GARMS Assistant Cashier
----------------------------------------------------------------------------------------
E. SUSAN GIANETTI Assistant Cashier
----------------------------------------------------------------------------------------
VITA M. PARISI Assistant Cashier
----------------------------------------------------------------------------------------
DAVID L. PETRY Assistant Cashier
----------------------------------------------------------------------------------------
KRISTIN A. ROMEO Assistant Cashier
----------------------------------------------------------------------------------------
JOSEPH J. SARDINI Assistant Cashier
----------------------------------------------------------------------------------------
SCOTT T. SEARLE Assistant Cashier
----------------------------------------------------------------------------------------
ANTOINETTE ROSELL Corporate Secretary *
----------------------------------------------------------------------------------------
49
----------------------------------------------------------------------------------------
PGB TRUST & CRAIG C. SPENGEMAN President & Chief Investment Officer *
INVESTMENTS ----------------------------------------------------------------------------------------
GLADSTONE BRYANT K. ALFORD First Vice President & Senior Trust Officer
----------------------------------------------------------------------------------------
JOHN M. BONK First Vice President & Director of Business
Development
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JOHN C. KAUTZ First Vice President & Senior
Investment Officer
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ROY C. MILLER First Vice President & Trust Officer
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ROBERT M. FIGURELLI Vice President & Trust Officer
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MICHAEL E. HERRMANN Vice President & Trust Officer
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KATHERINE S. QUAY Vice President & Trust Officer
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ANNE M. SMITH Vice President & Trust Officer
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KURT G. TALKE Vice President & Trust Officer
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MICHAEL T. TORMEY Vice President & Trust Officer
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LAWRENCE J. VERNY Vice President & Trust Officer
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JENNIFER CUCE Assistant Vice President & Trust Officer
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EDWARD P. NICOLICCHIA Assistant Vice President & Trust Officer
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DAVID C. O'MEARA Trust Officer
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CATHERINE A. MCCATHARN Assistant Trust Officer & Assistant
Corporate Secretary *
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R. GARY O'CONNOR Assistant Trust Officer
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PATRICIA K. SAWKA Assistant Trust Officer
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BERNARDSVILLE CHARLES A. STUDDIFORD, III Vice President
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CAROL E. RITZER Assistant Cashier
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CALIFON ANN W. KALLAM Assistant Vice President
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CHATHAM
MAIN STREET VALERIE A. OLPP Assistant Vice President
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CHATHAM
SHUNPIKE DONNA I. GISONE Vice President
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CHESTER DONNA M. WHRITENOUR Assistant Vice President
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CLINTON CAROLYN I. SEPKOWSKI Assistant Vice President
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FAR HILLS TONYA FLOWERS Assistant Cashier
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FELLOWSHIP JANET E. BATTAGLIA Assistant Cashier
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GLADSTONE THOMAS N. KASPER Vice President
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HILLSBOROUGH AMY E. GLASER Assistant Vice President
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LONG VALLEY KATHERINE M. KREMINS Vice President
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JAMES A. CICCONE Assistant Cashier
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MENDHAM LINDA S. ZIROPOULOS Assistant Vice President
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PENNY M. BURNS Assistant Cashier
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NEW VERNON DONNA I. GISONE Vice President
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PLUCKEMIN MARY ANNE MALONEY Assistant Vice President
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TERESA M. LAWLER Assistant Cashier
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WARREN LEE ANN HUNT Vice President
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* Denotes a Holding Company Officer
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DIRECTORS OFFICES
ANTHONY J. CONSI, II LOAN & ADMINISTRATION PGB TRUST &
Senior Vice President BUILDING INVESTMENTS
Weichert Realtors 158 Route 206 North 190 Main Street
Morris Plains, NJ Gladstone, NJ 07934 Gladstone, NJ 07934
(908) 234-0700 (908) 719-4360
PAMELA HILL www.pgbank.com
President
Ferris Corp. GLADSTONE (Main Office) BERNARDSVILLE
Gladstone, NJ 190 Main Street 36 Morristown Road
Gladstone, NJ 07934 Bernardsville, NJ 07924
T. LEONARD HILL (908) 719-4360 (908) 766-1711
Chairman Emeritus
CALIFON CHESTER
FRANK A. KISSEL 438 Route 513 350 Main Street
Chairman of the Board & CEO Califon, NJ 07830 Chester, NJ 07930
(908) 832-5131 (908) 879-8115
JOHN D. KISSEL
Turpin Realty, Inc FAR HILLS FELLOWSHIP VILLAGE
Far Hills, NJ 26 Dumont Road 8000 Fellowship Road
Far Hills, NJ 07931 Basking Ridge, NJ 07920
JAMES R. LAMB, ESQ. (908) 781-1018 (908) 719-4332
James R. Lamb, P.C.
Morristown, NJ LONG VALLEY MENDHAM
59 East Mill Road (Route 24) 17 East Main Street
EDWARD A. MERTON Long Valley, NJ 07853 Mendham, NJ 07945
President (908) 876-3300 (973) 543-6499
Merton Excavating & Paving Co.
Chester, NJ PLUCKEMIN POTTERSVILLE
468 Route 206 North 11 Pottersville Road
F. DUFFIELD MEYERCORD Bedminster, NJ 07921 Pottersville, NJ 07979
Managing Director (908) 658-4500 (908) 439-2265
Meyercord Advisors, Inc.
Bedminster, NJ NEW VERNON CHATHAM MAIN STREET
Village Road 311 Main Street
JOHN R. MULCAHY New Vernon, NJ 07976 Chatham, NJ 07928
Far Hills, NJ (973) 540-0444 (973) 635-8500
ROBERT M. ROGERS CHATHAM SHUNPIKE HILLSBOROUGH
President & COO 650 Shunpike Road 417 Route 206 North
Chatham Township, NJ 07928 Hillsborough, NJ 08844
PHILIP W. SMITH, III (973) 377-0081 (908) 281-1031
President
Phillary Management, Inc. CLINTON WARREN
Far Hills, NJ 189 Center Street 58 Mountain Boulevard
Clinton, NJ 08809 Warren, NJ 07059
CRAIG C. SPENGEMAN (908) 238-1935 (908) 757-2805
President, PGB Trust and
Investments
JACK D. STINE
Trustee
Proprietary House Association
Perth Amboy, NJ
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SHAREHOLDER INFORMATION
CORPORATE ADDRESS STOCK LISTING INDEPENDENT AUDITORS
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158 Route 206, North Peapack-Gladstone Financial KPMG LLP
Gladstone, New Jersey 07934 Corporation common stock is 150 John F. Kennedy Parkway
(908) 234-0700 traded on the American Stock Short Hills, New Jersey 07078
www.pgbank.com Exchange under the symbol PGC
and reported in the Wall Street
Journal and most major newspapers.
ANNUAL MEETING TRANSFER AGENT SHAREHOLDER RELATIONS
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The annual meeting of shareholders Registrar and Transfer Company Arthur F. Birmingham
of Peapack-Gladstone Financial 10 Commerce Drive Executive Vice President and
Corporation will be held on Cranford, New Jersey 07016-3572 Chief Financial Officer
April 27, 2004 at 2:00 p.m. (908) 719-4308
birmingham@pgbank.com
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