================================================================================
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED YEAR-END DATA: 1998 1997 1996
- --------------------------------------------------------------------------------
NET INCOME $ 5,319 $ 4,492 $ 3,579
- --------------------------------------------------------------------------------
TOTAL ASSETS 402,796 363,665 327,404
- --------------------------------------------------------------------------------
TOTAL DEPOSITS 362,833 328,473 295,190
- --------------------------------------------------------------------------------
TOTAL SECURITIES 135,836 145,558 139,794
- --------------------------------------------------------------------------------
TOTAL LOANS 213,856 174,374 149,874
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 37,955 33,639 30,208
- --------------------------------------------------------------------------------
TRUST DEPARTMENT ASSETS (BOOK VALUE) 549,321 453,671 378,879
- --------------------------------------------------------------------------------
FINANCIAL RATIOS:
- --------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS 1.42% 1.30% 1.13%
- --------------------------------------------------------------------------------
RETURN ON AVERAGE EQUITY 14.79 14.22 12.41
- --------------------------------------------------------------------------------
CAPITAL LEVERAGE RATIO 9.60 9.40 9.43
- --------------------------------------------------------------------------------
RISK BASED CAPITAL
- --------------------------------------------------------------------------------
TIER 1 20.25 20.25 24.06
- --------------------------------------------------------------------------------
TOTAL 21.50 21.43 25.37
- --------------------------------------------------------------------------------
PER SHARE:
- --------------------------------------------------------------------------------
EARNINGS - BASIC $ 2.18 $ 1.84 $ 1.46
- --------------------------------------------------------------------------------
EARNING - DILUTED 2.11 1.81 1.45
- --------------------------------------------------------------------------------
BOOK VALUE 15.57 13.78 12.35
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A SERIES
OF BAR CHARTS IN THE PRINTED DOCUMENT.]
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
IN MILLIONS
NET INCOME $5.32 $4.49 $3.58 $3.91 $3.87
TOTAL ASSETS $403 $364 $327 $300 $279
TRUST ASSETS $549 $454 $379 $251 $247
EQUITY CAPITAL $37.9 $33.6 $30.2 $28.4 $23.6
TO OUR SHAREHOLDERS
AND FRIENDS
[LOGO]
1998 was not only the first full year of operation for Peapack-Gladstone
Financial Corporation, it was also the best year ever in the 78 year history of
Peapack-Gladstone Bank.
As we enter the last 1% of the century and prepare for the next millennium, we
are excited about the future and the prospects it presents. Y2K issues aside,
the calendar turning to 2000 is not going to be the catalyst for any miraculous
change in the way we live or do business. The evolution of the banking business
will continue. Seventy-eight years ago there were green eye shades, big ledger
books with beautiful penmanship and so called bankers' hours. Those are all gone
now, replaced by technologies that permit us to serve more customers more
efficiently and with greater accuracy than ever imagined. There is no question
in our minds that we will look back ten years from now and wonder how we ever
made do with what we think are wonderful technologies today.
Things are changing quickly in our business, and in fact, most of the
businesses in the world. Like our predecessors who managed the Bank off of
ledger books and onto typewriters, we are prepared to manage the Bank with
whatever the next wonderful technologies are.
Whether we are talking about 1921, the present or ten years from now there
are two great constants at Peapack-Gladstone Financial Corporation. The first is
that we are always guided by the desire to provide more services more
conveniently to our customers. The second is that we never lose sight that the
key to our success has always been our employees. We train and motivate them to
take the extra step to be sure we have a happy customer. Without these two
things, we are just another bank. We are always impressed by the hard work and
determination of our employees to reach their goals. We thank them for it.
Details of our financial results are reviewed in the Management Discussion
and Analysis section of this report. There are, however, a few highlights we
want to touch on.
Total assets of your corporation grew 10.8% from $363,665,000 to
$402,796,000. Crossing $400,000,000 for the first time pushed us past another
mile marker, but more importantly, we were very pleased with 10.8% growth in
this very competitive market.
2
For the second year in a row, we are reporting record earnings for
shareholders. Net income rose 18.4% to $5,319,000. Net interest income remained
very strong by industry standards, while our concerted efforts toward cost
controls have achieved some real efficiencies. We will continue to look for ways
to contain costs without compromising service to our customers.
Our return on average equity improved nicely from 14.22% in 1997 to 14.79%
in 1998. While just below our short term target of 15%, the trends in asset
growth, earnings and traditional ratios are all very positive.
The Trust and Investment Department also performed very well in 1998. Total
market value of assets held in the Department grew to over $840,000,000 during
the year. This is a reflection of outstanding market performance and the steady
flow of new customers. We have an outstanding staff of people ready to help you
with investment management, custody accounts, trust, wills, bequests, mutual
funds, retirement accounts and tax preparation. As your world of investing and
asset preservation becomes more complicated, we can be a great help to you and
your family.
On November 2, 1998 shareholders received a 5% stock dividend which
traditionally enhances shareholder value. For the year, share prices rose from
$40.50 to $55.00 representing a 35.8% increase. When added to the 43% reported
in the last Annual Report and 31% reported in the year prior, we have had
several years of strong performance. Stock prices don't always go in one
direction. We believe our recent stock performance is a reflection of our
growing business and wonderful shareholder support for the type of business we
are trying to run.
We introduced several new services during 1998. Among them is our new
Access 24 which gives our customers the ability to check on existing accounts,
transfer funds between accounts, learn about other services, loans, interest
rates and a wealth of other information seven days a week, 24 hours a day. This
has proven to be a great convenience for many customers.
We also introduced our new Chairman's Club for customers who are sixty or
better. Members enjoy discounted banking services, newsletters, seminars and
special activities. As an example, many of our members went to New York City to
see the tree at Rockefeller Center and the Christmas show at Radio City Music
Hall.
During 1998 we completed a scheduled major upgrade to our core computer
software systems. Combined with the hardware updates completed in 1997, we have
seen major improvements in the flexibility of our information systems. It puts
us in position to offer new technology based
3
customer services. We plan to install a new call center during 1999 which will
enable us to respond quickly and more thoroughly to customer needs.
Y2K is a very important issue that is on everyone's mind. Peapack-Gladstone
Financial Corporation has been working on Y2K preparation for almost three
years. We are pleased to report that we have upgraded all of our systems in
anticipation of the year 2000. All core systems have been tested and we are
confident that our Bank is ready. Our attorneys tell us that no business should
proclaim to the world that they are absolutely positively ready and that there
can be nothing that causes problems. The odds are each and everyone of us will
experience some minor effect from Y2K. I can assure you, however, that we
started early, have been very thorough, having done more than was probably
necessary to ensure a seamless new year for your Bank. We truly believe that
financial businesses in general and your Bank in particular are among the best
prepared industries in the country.
We are pleased to report that we have recently signed a contract to
purchase property for a new branch in Oldwick at the intersection of Main Street
and Lamington Road. The contract is contingent upon satisfactory approvals from
the required land use boards. We are excited about the prospects of providing
more convenient access to existing customers and the opportunity to serve the
residents of Tewksbury Township. We will continue to look for locations to
expand into new contiguous markets where our type of high service banking should
be most effective.
Finally, Mr. William Turnbull has decided not to stand for re-election to
our Board at the end of this current term. All shareholders should know how
valuable Mr. Turnbull has been to the Bank since he joined in 1959. At that time
total assets of the Bank were $5,540,000, approximately what we were able to
earn last year. He has provided great leadership throughout his 40 year term. He
has most recently led the change into new technologies. He is an extraordinary
man and we are delighted that he will continue to attend meetings as Director
Emeritus. Mr. Turnbull, we salute you and thank you for all you have done.
Our Directors and Staff also want to thank our Shareholders for their
continuing support. Our doors are always open for questions, ideas and new
banking opportunities. Please stop in.
/s/T. Leonard Hill /s/Frank A. Kissel
T. Leonard Hill Frank A. Kissel
CHAIRMAN PRESIDENT & CEO
4
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS: 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.
Peapack-Gladstone Financial Corporation's (the "Corporation") successful
results for 1998 reflect our commitment to maintaining and establishing strong
banking relationships with our customers. Strong growth in loans and deposits
highlighted 1998 which resulted in significantly higher net interest income.
This growth also extended to the Trust and Investment Department as total
fees increased 52% to $2,241,000. Noninterest income is a significant factor in
maintaining profitability in the fast changing financial services marketplace.
The Corporation's net income was $5,319,000 or diluted earnings per share
of $2.11 in 1998, compared to net income of $4,492,000 or diluted earnings per
share of $1.81 in 1997, and net income of $3,579,000 or diluted earnings per
share of $1.45 in 1996. The per share figures have been restated to reflect the
five percent stock dividends in 1998 and 1996 and the two-for-one stock split in
1997.
Return on average shareholders' equity increased to 14.79% in 1998 compared
to 14.22% in 1997 and 12.41% in 1996. Return on average assets increased to
1.42% in 1998 compared to 1.30% in 1997 and 1.13% in 1996.
The operating results of the Corporation depend primarily on net interest
income, which is the difference between interest income on interest-earning
assets, consisting primarily of loans and securities and interest expense on
interest-bearing deposits. The performance is also affected by the provision for
loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of noninterest income, including fees from
the Trust and Investment Department operations, noninterest expense and income
tax expense. Each of these principal categories of net income are discussed
below.
[THE FOLLOWING TABLE WAS REPRESENTED BY
BAR CHARTS IN THE PRINTED DOCUMENT.]
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
RETURN ON AVERAGE EQUITY 14.79% 14.22% 12.41% 15.05% 17.09%
RETURN ON AVERAGE ASSETS 1.42% 1.30% 1.13% 1.37% 1.38%
5
EARNING ASSETS: Total earning assets, consisting primarily of loans, securities,
and federal funds sold, increased approximately 13% from $335,432,000 at
December 31, 1997 to $379,292,000 at December 31, 1998.
Loans: The loan portfolio represents the Corporation's largest earning asset
balance and is a significant source of interest and fee income.
Total loans increased $39,482,000 or 23% from year-end 1997 levels. This
growth was focused primarily in the real estate sector, as loans secured by real
estate increased $40,846,000. The increase related primarily to the
Corporation's increased lending within its geographic market areas to customers
seeking residential first mortgages on their primary residence. Total loans at
year-end were $213,856,000 and $174,374,000 in 1998 and 1997, respectively.
THE FOLLOWING TABLE PRESENTS AN ANALYSIS OF OUTSTANDING LOANS AS OF DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
REAL ESTATE--CONSTRUCTION $ 1,946 $ 4,213 $ 4,703 $ 1,686 $ 1,865
- --------------------------------------------------------------------------------
REAL ESTATE--MORTGAGE
1-4 FAMILY RESIDENTIAL:
FIRST LIENS 141,782 99,168 77,365 59,410 47,993
- --------------------------------------------------------------------------------
JUNIOR LIENS 9,082 10,914 11,147 9,804 9,035
- --------------------------------------------------------------------------------
HOME EQUITY 4,820 6,238 4,817 4,757 4,110
- --------------------------------------------------------------------------------
REAL ESTATE--COMMERCIAL 32,900 29,151 26,726 22,882 19,484
- --------------------------------------------------------------------------------
COMMERCIAL LOANS 9,833 10,332 11,832 10,396 9,682
- --------------------------------------------------------------------------------
CONSUMER LOANS 12,830 13,462 11,219 10,882 11,374
- --------------------------------------------------------------------------------
OTHER LOANS 663 896 2,065 2,615 1,841
- --------------------------------------------------------------------------------
TOTAL LOANS $213,856 $174,374 $149,874 $122,432 $105,384
================================================================================
THE FOLLOWING TABLE SETS FORTH THE MATURITY DISTRIBUTION OF THE CORPORATION'S
LOAN PORTFOLIO AS OF DECEMBER 31, 1998. THE TABLE EXCLUDES REAL ESTATE LOANS
(OTHER THAN CONSTRUCTION LOANS) AND INSTALLMENT LOANS:
DUE AFTER
DUE IN ONE YEAR DUE AFTER
ONE YEAR THROUGH FIVE
(IN THOUSANDS) OR LESS FIVE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------
COMMERCIAL LOANS $ 7,181 $ 1,836 $ 816 $ 9,833
- --------------------------------------------------------------------------------
CONSTRUCTION LOANS 559 1,063 324 1,946
- --------------------------------------------------------------------------------
TOTAL $ 7,740 $ 2,899 $ 1,140 $11,779
================================================================================
THE FOLLOWING TABLE SETS FORTH, AS OF DECEMBER 31, 1998, THE SENSITIVITY OF THE
LOAN AMOUNTS DUE AFTER ONE YEAR TO CHANGES IN INTEREST RATES. THE TABLE EXCLUDES
REAL ESTATE LOANS (OTHER THAN CONSTRUCTION LOANS) AND INSTALLMENT LOANS:
DUE AFTER
ONE YEAR DUE AFTER
THROUGH FIVE
(IN THOUSANDS) FIVE YEARS YEARS
- --------------------------------------------------------------------------------
FIXED INTEREST RATES $ 448 $ 719
- --------------------------------------------------------------------------------
VARIABLE INTEREST RATES 2,451 421
- --------------------------------------------------------------------------------
TOTAL $2,899 $1,140
================================================================================
6
Investment Securities: Investment securities are those securities that the
Corporation has both the ability and intent to be held to maturity. These
securities are carried at amortized cost. The portfolio consists primarily of U.
S. Treasury and U. S. government agency and municipal obligations. The
Corporation's investment securities amounted to $43,581,000 at December 31,
1998, compared with $53,978,000 at December 31, 1997.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES
ATAMORTIZED COST, AS OF DECEMBER 31, 1998:
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------
U.S. TREASURY $13,003 $ 4,004 $ -- $ -- $17,007
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES -- 11,591 2,000 -- 13,591
- ----------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS 1,556 5,075 5,391 450 12,472
- ----------------------------------------------------------------------------------------
OTHER DEBT SECURITIES -- 511 -- -- 511
- ----------------------------------------------------------------------------------------
TOTAL $14,559 $21,181 $ 7,391 $ 450 $43,581
========================================================================================
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 stockholders'
equity, net of income taxes. Realized gains and losses are recognized in income
at the time the securities are sold.
At December 31, 1998, the Corporation had securities available for sale
with a market value of $92,255,000, compared with $91,580,000 at December 31,
1997. A $926,000 and $476,000 unrealized gain (net of income tax) was included
in stockholders' equity at December 31, 1998 and December 31, 1997,
respectively.
THE FOLLOWING TABLE PRESENTS THE CONTRACTUAL MATURITIES OF DEBT SECURITIES
AVAILABLE FORSALE, STATED AT MARKET VALUE, AS OF DECEMBER 31, 1998:
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------
U.S. TREASURY $ 6,069 $29,526 $ -- $ -- $35,595
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES -- 12,189 36,870 2,015 51,074
- ----------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS -- -- -- 254 254
- ----------------------------------------------------------------------------------------
OTHER DEBT SECURITIES
AVAILABLE FOR SALE -- 2,027 -- -- 2,027
- ----------------------------------------------------------------------------------------
TOTAL $ 6,069 $43,742 $36,870 $ 2,269 $88,950
========================================================================================
Federal funds sold are an integral part of the Corporation's investment and
liquidity strategies. The average balance of federal funds sold during 1998 and
1997 was $17.0 million and $15.7 million, respectively.
7
DEPOSITS: Total deposits increased $34,360,000 or 10% to $362,833,000 at
December 31, 1998, compared to $328,473,000 at December 31, 1997.
Noninterest-bearing demand deposits increased $11,169,000 or 15%, reflecting
marketing efforts and the strong economic conditions in existing market areas.
Certificates of deposits increased $11,876,000 or 14%. Competitively priced
certificates of deposit were an important factor in funding loan growth
throughout the year.
The Corporation does not participate in the brokered deposit market, and
certificates of deposit over $100,000 are generally purchased by local municipal
governments or individual depositors for periods of 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, 1998 (in thousands):
THREE MONTHS OR LESS $18,834
- --------------------------------------------------------------------------------
OVER THREE MONTHS THROUGH TWELVE MONTHS 6,403
- --------------------------------------------------------------------------------
OVER TWELVE MONTHS 2,371
- --------------------------------------------------------------------------------
TOTAL $27,608
================================================================================
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:
1998 1997 1996
(IN THOUSANDS) $ % $ % $ %
- --------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND
DEPOSITS $ 72,424 -- $ 61,508 -- $ 50,861 --
- --------------------------------------------------------------------------------
CHECKING DEPOSITS 71,973 1.12 67,097 1.29 59,950 1.74
- --------------------------------------------------------------------------------
SAVINGS DEPOSITS 69,641 2.45 71,624 2.46 72,799 2.89
- --------------------------------------------------------------------------------
MONEY MARKET DEPOSITS 23,882 3.19 27,919 2.89 26,512 2.99
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 97,808 5.28 82,358 5.17 75,322 5.24
- --------------------------------------------------------------------------------
TOTAL DEPOSITS $335,728 $310,506 $285,444
================================================================================
NET INTEREST INCOME: Net interest income, the Corporation's largest component of
operating income, is the difference between interest and fees earned on loans
and other interest-earning assets and interest paid on deposits. The dynamics of
the changes in interest rates, as well as the mix and volume of interest-earning
assets and interest-bearing liabilities, combine to affect net interest income.
Net interest income on a tax-equivalent basis totaled $16,466,000 for 1998,
an increase of 7.5% or $1,143,000 over the $15,323,000 reported in 1997. The
improvement was primarily due to an 11% increase in interest-earning assets and
an 18% increase in demand deposits, offset in part by higher interest-bearing
liabilities and a lower net interest spread, down 26 basis points from 1997
levels.
Interest income on interest-earning assets increased $1,883,000 or 8% to
$24,904,000. This increase was due to a significant increase in the loan
portfolio, primarily residential mortgage loans, offset in part by generally
lower interest rates earned.
The increase in interest expense was primarily attributable to increased
certificates of deposits, which increased $15,450,000 or 19% on average while
rates paid on certificates rose to 5.28% from 5.17% in the prior year, offset in
part by lower interest rates paid on checking and
8
savings. The net interest margin in 1998 was 4.70%, a decline of 13 basis points
from 4.83% in 1997.
Tax-equivalent net interest income equaled $15,323,000 for 1997, an
increase of $2,115,000 or 16% from the $13,208,000 earned in 1996. The net
interest margin in 1997 was 4.83%, an increase of 29 basis points from 4.54% for
1996.
[THE FOLLOWING TABLE WAS REPRESENTED BY A
BAR CHART IN THE PRINTED DOCUMENT.]
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN MILLIONS)
NET INTEREST INCOME $16.4 $15.2 $13.1 $12.2 $12.1
9
THE FOLLOWING TABLE COMPARES THE AVERAGE BALANCE SHEET, NET INTEREST SPREADS AND
NET INTEREST MARGINS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (FULLY
TAX-EQUIVALENT - FTE):
YEAR ENDED DECEMBER 31, 1998
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE $129,353 $ 7,999 6.18%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT 9,375 595 6.34%
- ---------------------------------------------------------------------------------------
LOANS 194,588 15,418 7.92%
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 16,972 892 5.26%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 350,288 24,904 7.11%
- ---------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 11,939
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (2,036)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 9,049
- ---------------------------------------------------------------------------------------
OTHER ASSETS 5,098
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 24,050
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $374,338
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
CHECKING $ 71,973 $ 805 1.12%
- ---------------------------------------------------------------------------------------
MONEY MARKET 23,882 763 3.19%
- ---------------------------------------------------------------------------------------
SAVINGS 69,641 1,709 2.45%
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 97,808 5,161 5.28%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 263,304 8,438 3.20%
- ---------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 72,424
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 2,647
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-BEARING LIABILITIES 75,071
- ---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 35,963
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $374,338
=======================================================================================
NET INTEREST INCOME $16,466
=======================================================================================
NET INTEREST SPREAD 3.91%
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.70%
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE $132,547 $ 8,497 6.41%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT 10,495 655 6.24%
- ---------------------------------------------------------------------------------------
LOANS 158,232 13,025 8.23%
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 15,681 844 5.38%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 316,955 23,021 7.26%
- ---------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 16,713
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (1,773)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 8,508
- ---------------------------------------------------------------------------------------
OTHER ASSETS 4,373
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 27,821
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $344,776
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
CHECKING $ 67,097 $ 867 1.29%
- ---------------------------------------------------------------------------------------
MONEY MARKET 27,919 807 2.89%
- ---------------------------------------------------------------------------------------
SAVINGS 71,624 1,765 2.46%
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 82,358 4,259 5.17%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 248,998 7,698 3.09%
- ---------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 61,508
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 2,686
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-BEARING LIABILITIES 64,194
- ---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 31,584
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $344,776
=======================================================================================
NET INTEREST INCOME $15,323
=======================================================================================
NET INTEREST SPREAD 4.17%
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.83%
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
ASSETS:
INTEREST-EARNING ASSETS:
INVESTMENTS:
TAXABLE $129,028 $ 8,363 6.48%
- ---------------------------------------------------------------------------------------
TAX-EXEMPT 10,682 715 6.69%
- ---------------------------------------------------------------------------------------
LOANS 134,825 11,150 8.27%
- ---------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 16,644 869 5.22%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 291,179 21,097 7.25%
- ---------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS:
CASH AND DUE FROM BANKS 14,404
- ---------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (1,446)
- ---------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 8,218
- ---------------------------------------------------------------------------------------
OTHER ASSETS 4,549
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-EARNING ASSETS 25,725
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $316,904
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING DEPOSITS:
CHECKING $ 59,950 $ 1,042 1.74%
- ---------------------------------------------------------------------------------------
MONEY MARKET 26,512 793 2.99%
- ---------------------------------------------------------------------------------------
SAVINGS 72,799 2,107 2.89%
- ---------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 75,322 3,947 5.24%
- ---------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 234,583 7,889 3.36%
- ---------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES:
DEMAND DEPOSITS 50,861
- ---------------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 2,617
- ---------------------------------------------------------------------------------------
TOTAL NONINTEREST-BEARING LIABILITIES 53,478
- ---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 28,843
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $316,904
=======================================================================================
NET INTEREST INCOME $13,208
=======================================================================================
NET INTEREST SPREAD 3.89%
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.54%
- ---------------------------------------------------------------------------------------
1. Average loan balances include non-accrual and restructured loans.
2. The tax-equivalent adjustment was computed based on a federal tax rate of
34%.
3. Investments consist of investment securities and securities available for
sale.
10 11
RATE/VOLUME ANALYSIS (fully tax-equivalent basis):
THE EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 ARE SHOWN BELOW: (IN THOUSANDS)
YEAR ENDED 1998 COMPARED WITH 1997 YEAR ENDED 1997 COMPARED WITH 1996
- -----------------------------------------------------------------------------------------------
NET NET
DIFFERENCE DUE TO CHANGE IN DIFFERENCE DUE TO CHANGE IN
CHANGE IN: INCOME/ CHANGE IN: INCOME/
VOLUME RATE EXPENSE VOLUME RATE EXPENSE
- -----------------------------------------------------------------------------------------------
ASSETS
INVESTMENTS $ (276) $ (282) $ (558) $ 217 $ (143) $ 74
- -----------------------------------------------------------------------------------------------
LOANS 2,993 (600) 2,393 1,936 (61) 1,875
- -----------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 69 (21) 48 (50) 25 (25)
- -----------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 2,786 $ (903) $ 1,883 $ 2,103 $ (179) $ 1,924
===============================================================================================
LIABILITIES
CHECKING $ 63 $ (125) $ (62) $ 124 $ (299) $ (175)
- -----------------------------------------------------------------------------------------------
MONEY MARKET (117) 73 (44) 42 (28) 14
- -----------------------------------------------------------------------------------------------
SAVINGS (49) (7) (56) (34) (308) (342)
- -----------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 799 103 902 369 (57) 312
- -----------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 696 $ 44 $ 740 $ 501 $ (692) $ (191)
===============================================================================================
PROVISION FOR LOAN LOSSES: The provision for loan losses represents management's
determination of the amount necessary to bring the allowance for loan losses to
a level that management considers adequate to reflect the risk of losses
inherent in the Corporation's loan portfolio. In its evaluation of the adequacy
of the allowance for loan losses, management considers past loan loss
experience, changes in the composition of non-performing loans, the condition of
borrowers facing financial pressure, the relationship of the current level of
the allowance to the credit portfolio and to non-performing loans and existing
economic conditions. The process of determining the adequacy of the allowance is
necessarily judgmental and subject to changes in external conditions.
The total provision for loan losses for 1998 was $465,000 as compared to
$400,000 in 1997 and $642,000 in 1996. Net charge-offs for 1998, 1997 and 1996
were $134,000, $143,000 and $227,000, respectively. There was no other real
estate owned at December 31, 1998 as compared to $340,000 and $432,000 at
December 31, 1997 and 1996, respectively. Non-performing assets consist of
non-performing loans and other real estate owned. Non-performing loans are
composed of loans on nonaccrual status or loans which are contractually past due
90 days or more as to interest and principal payments but have not been
classified as nonaccrual. Non-performing assets were $807,000 in 1998,
$1,186,000 in 1997 and $1,737,000 in 1996. The allowance for loan losses was
$2,224,000 at December 31, 1998 as compared to $1,893,000 at December 31, 1997.
The allowance for loan losses currently provides 276% coverage of all
non-performing assets. At December 31, 1998, the allowance for loan losses as a
percentage of total loans outstanding was 1.04% compared to 1.09% at December
31, 1997 and 1.09% at December 31, 1996.
12
THE FOLLOWING TABLE PRESENTS THE LOAN LOSS EXPERIENCE DURING THE YEARS ENDED
DECEMBER 31:
(IN THOUSANDS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT
BEGINNING OF YEAR $1,893 $1,636 $1,221 $1,473 $1,538
- --------------------------------------------------------------------------------
LOANS CHARGED OFF DURING THE PERIOD:
REAL ESTATE -- 150 202 190 --
- --------------------------------------------------------------------------------
CONSUMER 152 97 49 34 286
- --------------------------------------------------------------------------------
COMMERCIAL AND OTHER 35 35 25 153 --
- --------------------------------------------------------------------------------
TOTAL LOANS CHARGED-OFF 187 282 276 377 286
- --------------------------------------------------------------------------------
RECOVERIES DURING THE PERIOD:
REAL ESTATE 5 105 19 -- 94
- --------------------------------------------------------------------------------
CONSUMER 12 25 8 8 7
- --------------------------------------------------------------------------------
COMMERCIAL AND OTHER 36 9 22 42 60
- --------------------------------------------------------------------------------
TOTAL RECOVERIES 53 139 49 50 161
- --------------------------------------------------------------------------------
NET CHARGE-OFFS 134 143 227 327 125
- --------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 465 400 642 75 60
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES AT
END OF YEAR $2,224 $1,893 $1,636 $1,221 $1,473
================================================================================
THE FOLLOWING TABLE SHOWS THE ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AS OF
DECEMBER 31:
(IN THOUSANDS) 1998 % 1997 % 1996 %
- --------------------------------------------------------------------------------
REAL ESTATE $1,223 55 $ 946 50 $ 818 50
- --------------------------------------------------------------------------------
CONSUMER 111 5 95 5 82 5
- --------------------------------------------------------------------------------
COMMERCIAL AND OTHER 890 40 852 45 736 45
- --------------------------------------------------------------------------------
TOTAL $2,224 100 $1,893 100 $1,636 100
================================================================================
13
NON-PERFORMING ASSETS:
THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF
NON-PERFORMING ASSETS:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
LOANS PAST DUE 90 DAYS OR MORE
AND STILL ACCRUING INTEREST $ 1 $ 104 $ 122 $ 636 $ 161
- ------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS 806 742 1,183 541 697
- ------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 807 846 1,305 1,177 858
- ------------------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- 340 432 999 1,592
- ------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS 807 1,186 1,737 2,176 2,450
==========================================================================================
LOAN CHARGE-OFFS 187 282 276 377 286
- ------------------------------------------------------------------------------------------
LOAN RECOVERIES 53 139 49 50 161
- ------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS 134 143 227 327 125
==========================================================================================
ALLOWANCE FOR LOAN LOSSES $2,224 $1,893 $1,636 $1,221 $1,473
==========================================================================================
RATIOS:
TOTAL NON-PERFORMING LOANS/
Total loans 0.38% 0.49% 0.87% 0.96% 0.81%
- ------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS/
Total assets 0.20% 0.23% 0.40% 0.39% 0.31%
- ------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS/
Total assets 0.20% 0.33% 0.53% 0.73% 0.88%
- ------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
Total loans 1.04% 1.09% 1.09% 1.00% 1.40%
- ------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES/
Total non-performing loans 275.59% 223.76% 125.36% 103.74% 171.68%
- ------------------------------------------------------------------------------------------
Interest income of $68,000, $47,000 and $82,000 would have been recognized
during 1998, 1997, and 1996, respectively, if non-accrual loans had been current
in accordance with their original terms.
OTHER INCOME: Other income before gains on securities was $4,095,000 in 1998,
representing a 27% increase from 1997 and a 43% increase from 1996. This
increase was primarily due to higher service charges and higher trust fees.
Service charges on deposit accounts increased to just over $1,351,000 in 1998,
representing a 3% gain over 1997 and a 12% gain over 1996. Trust and Investment
Department fees for 1998 were $2,241,000, 52% higher than 1997 and 76% higher
than 1996. For the year ended December 31, 1998, securities gains were $178,000
as compared to gains of $29,000 and $118,000 for 1997 and 1996, respectively.
14
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER INCOME:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS $1,351 $1,307 $1,202
- --------------------------------------------------------------------------------
TRUST DEPARTMENT FEES 2,241 1,474 1,270
- --------------------------------------------------------------------------------
SAFE DEPOSIT RENTAL FEES 173 164 157
- --------------------------------------------------------------------------------
OTHER FEE INCOME 226 180 145
- --------------------------------------------------------------------------------
CHECK PRINTING FEES 46 49 36
- --------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME 58 45 59
- --------------------------------------------------------------------------------
OTHER INCOME BEFORE GAIN ON SECURITIES 4,095 3,219 2,869
- --------------------------------------------------------------------------------
SECURITIES GAINS 178 29 118
- --------------------------------------------------------------------------------
TOTAL OTHER INCOME $4,273 $3,248 $2,987
================================================================================
OTHER EXPENSE: Other expense totaled $11,761,000 in 1998, an increase of
$1,035,000 or 9.6%, compared to $10,726,000 in 1997. Other expense in 1997
increased 6.5% from $10,072,000 in 1996. The increase in other expense in 1998
compared to 1997 was primarily the result of increases in employee salaries,
professional fees and data processing related expense.
Salaries and employee benefits, which represents the largest portion of
other expense, increased $475,000 in 1998 or 8% over 1997. This increase in 1998
resulted from staffing enhancements throughout the organization due to growth
and normal salary merit increases. Salaries and employee benefits as a
percentage of average assets were 1.7% in 1998, 1.8% in 1997 and 1.8% in 1996,
respectively.
Higher professional fees and data processing related expenses were, in
part, attributable to continued hardware and software upgrades related to Year
2000 issues. Management continues to proactively address these issues which will
serve the organization well into the next decade. In addition, increases
experienced in the postage, telephone and premises and equipment were directly
related to our growing customer base at both the Bank and Trust and Investment
Department.
The Corporation's efficiency/overhead ratio (other expense as a percentage
of the sum of net interest income on a tax-equivalent basis and other income)
improved to 56.71% in 1998 from 57.76% in 1997 and 62.19% in 1996.
15
THE FOLLOWING TABLE PRESENTS THE MAJOR COMPONENTS OF OTHER EXPENSE:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
SALARIES $ 5,169 $ 4,639 $ 4,327
- --------------------------------------------------------------------------------
RETIREMENT, HEALTH AND OTHER BENEFITS 1,399 1,454 1,261
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 2,363 2,231 2,124
- --------------------------------------------------------------------------------
STATIONERY AND SUPPLIES 240 279 245
- --------------------------------------------------------------------------------
POSTAGE 270 218 259
- --------------------------------------------------------------------------------
TELEPHONE 227 187 163
- --------------------------------------------------------------------------------
FDIC INSURANCE ASSESSMENT 38 37 1
- --------------------------------------------------------------------------------
OTHER EXPENSE 2,055 1,681 1,692
- --------------------------------------------------------------------------------
TOTAL OTHER EXPENSE $11,761 $10,726 $10,072
================================================================================
INCOME TAXES: Income tax expense for the year ended December 31, 1998 was
$3,092,000 as compared to $2,822,000 and $1,760,000 for the years 1997 and 1996,
respectively. The increased income tax expense in 1998 reflects higher levels of
taxable income offset, in part, by certain deferred tax adjustments recorded in
1997.
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 $37,955,000, total stockholders'
equity grew 13% or $4,316,000 as compared with $33,639,000 at December 31, 1997.
At December 31, 1998, unrealized gains net of taxes were $926,000 as compared to
unrealized gains net of taxes of $476,000 at December 31, 1997. Federal
regulations require banks to meet target Tier 1 and total capital ratios of 4%
and 8%, respectively. At 20.25% and 21.50%, the Bank's Tier 1 and total capital
ratios are well in excess of regulatory minimums. The Bank's capital leverage
ratio was 9.60% at December 31, 1998.
LIQUIDITY: Liquidity refers to an institution's ability to meet short-term
requirements in the form of loan requests and deposit withdrawals. Principal
sources of liquidity include cash, temporary investments and investment
securities.
Management feels the Corporation's liquidity position is sufficient to meet
any future needs. Cash and cash equivalents, including federal funds sold,
averaged over $28 million in 1998. In addition, the Corporation has over $92
million in securities designated as available for sale. These securities can be
sold in response to liquidity concerns. As of December 31, 1998, investment
securities and securities available for sale maturing within one year amounted
to $23,628,000 and cash and cash equivalents totaled $42,679,000.
Another source of liquidity is borrowing capacity. The Corporation has a
variety of sources of short-term liquidity available, including federal funds
purchased from correspondent banks, sales of securities under repurchase
agreements, loan participation or sales of loans and sales of securities
available for sale. The Corporation also generates liquidity from the regular
principal payments made on its loan portfolio.
16
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 .31 on December 31, 1998 based on contractual
maturities 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, interest-earning demand
deposits, money market deposits and savings deposits are included in the 0-3
month category. The Corporation recognizes that certain of these deposits are
more stable with an effective maturity greater than their repricing frequency.
Assets with daily floating rates are included in the 0-3 month category. Assets
and liabilities are included based on their maturities or period to first
repricing, subject to the foregoing assumptions.
THE TABLE BELOW PRESENTS THE MATURITY AND REPRICING RELATIONSHIPS BETWEEN
INTEREST-EARNING ASSETS AND INTEREST-BEARING DEPOSITS AS OF DECEMBER31, 1998.
(IN THOUSANDS)
REPRICING OR 0 - 3 3 - 12 1 - 5 Over 5
MATURITY DATE Months Months Years Years Total
- ------------------------------------------------------------------------------------------
ASSETS
SECURITIES $ 7,667 $15,454 $ 64,923 $ 47,792 $135,836
- ------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 29,600 -- -- -- 29,600
- ------------------------------------------------------------------------------------------
LOANS (1) 21,461 6,021 60,276 125,292 213,050
- ------------------------------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
ASSETS $ 58,728 $21,475 $125,199 $173,084 $378,486
==========================================================================================
DEPOSITS
CERTIFICATES OF DEPOSIT $ 42,780 $37,161 $ 19,908 $ -- $ 99,849
- ------------------------------------------------------------------------------------------
SAVINGS 70,962 -- -- -- 70,962
- ------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNTS 26,363 -- -- -- 26,363
- ------------------------------------------------------------------------------------------
CHECKING 79,778 -- -- -- 79,778
NONINTEREST-BEARING
DEMAND DEPOSITS -- -- -- 85,881 85,881
- ------------------------------------------------------------------------------------------
TOTAL INTEREST-SENSITIVE
DEPOSITS $219,883 $37,161 $ 19,908 $ 85,881 $362,833
==========================================================================================
ASSETS/DEPOSITS 0.27 0.58 6.29 2.02 1.04
- ------------------------------------------------------------------------------------------
ASSETS/DEPOSITS (CUMULATIVE) 0.27 0.31 0.74 1.04
- ------------------------------------------------------------------------------------------
(1) Loan balances do not include non-accrual loans.
17
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.
18
THE FOLLOWING TABLE PRESENTS THE SCHEDULED MATURITY OF MARKET RISK SENSITIVE
INSTRUMENTS AS OF DECEMBER 31, 1998:
Average Within 1-5 Over Estimated
(IN THOUSANDS) Interest Rate 1 Year Years 5 Years Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
SECURITIES 6.33% $ 23,121 $ 64,923 $ 47,792 $135,836 $136,582
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS 7.24% 27,482 60,276 125,292 213,050 215,804
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 50,603 $125,199 $173,084 $348,886 $352,386
====================================================================================================================================
LIABILITIES
SAVINGS, CHECKING
AND MONEY MARKET 1.98% $177,103 $ -- $ -- $177,103 $177,103
- ------------------------------------------------------------------------------------------------------------------------------------
CD'S 5.28% 79,941 19,908 -- $ 99,849 $100,886
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $257,044 $ 19,908 $ -- $276,952 $277,989
====================================================================================================================================
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.
19
CHANGES IN ACCOUNTING PRINCIPLES: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 standardizes the accounting for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts. Under SFAS 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. SFAS 133 is effective for
fiscal years beginning after June 30, 1999, and is not expected to have a
material impact on the Corporation's financial condition or results of
operations.
YEAR 2000 CONSIDERATION: During fiscal 1998, the Corporation adopted a Year 2000
Compliance Plan (the "Plan") and established a Year 2000 Compliance Committee
(the "Committee"). The objectives of the Plan and the Committee are to prepare
the Corporation for the new millennium. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. These phases
will enable the Corporation to identify risks, develop an action plan, perform
adequate testing and complete certification that its processing systems will be
Year 2000 ready. Execution of the Plan is currently on target. The Corporation
is currently in Phase 4, Validation, for our core processing software. This
phase involvestesting of changes to hardware and software, accompanied by
monitoring and testing with vendors. Concurrently, the Corporation is also
addressing some issues related to subsequent phases. Prioritization of the most
critical applications has been addressed, along with contract and service
agreements. The primary operating software for the Corporation is obtained and
maintained by an external provider of software (the "External Provider"). The
readiness is a top priority and is expected to be accomplished. The Corporation
has contacted all other material vendors and suppliers regarding their Year 2000
state of readiness. Each of these third parties has delivered written assurance
to the Corporation that they expect to be Year 2000 compliant prior to the Year
2000. The Corporation is in the process of contacting all material customers and
non-information technology suppliers (i.e., utility systems, telephone systems
and security systems), regarding their Year 2000 state of readiness. The
Validation Phase is targeted for completion by June 30, 1999. The Implementation
Phase is to certify that systems are Year 2000 ready, and to assure that any new
systems are compliant on a going-forward basis. The Implementation Phase is
targeted for completion by September 30, 1999.
Costs will be incurred due to the replacement of non-compliant hardware and
software. The Corporation does not anticipate that the related overall costs
will be material in any single year. In total, the Corporation estimates that
its cost for compliance will amount to approximately $200,000 over the two-year
period from 1998-1999, of which approximately $100,000 was incurred as of
December 31, 1998. No assurance can be given that the Year 2000 Compliance Plan
will be completed successfully by the Year 2000, in which event the Corporation
could incur significant costs. If the External Provider is unable to resolve the
potential problem in time, the Corporation would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial statements of the
Corporation.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain,
20
including the progress and results of the Corporation's External Provider,
testing plans, and all vendors, suppliers and customer readiness.
TRUST AND INVESTMENT DEPARTMENT: The Trust and Investment Department continues
to be an extremely important part of Peapack-Gladstone Financial Corporation.
Since its inception in 1972, the Trust and Investment Department 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 the Trust and Investment
Department increased from $453,700,000 at December 31, 1997 to $549,300,000 at
December 31, 1998, an increase of 21%. The corresponding market value at
December 31, 1998 is now in excess of $840,800,000. Fee income generated by the
Trust and Investment Department was $2,241,000, $1,474,000 and $1,270,000 in
1998, 1997 and 1996, respectively.
THE FOLLOWING TABLE PRESENTS THE TOTAL BOOK VALUE OF ASSETS UNDER MANAGEMENT IN
THE TRUST AND INVESTMENT DEPARTMENT FOR THE YEARS ENDED DECEMBER 31:
(IN THOUSANDS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
TRUST ASSETS $549,321 $453,671 $378,879 $251,254 $246,526
- --------------------------------------------------------------------------------
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.
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY EARNINGS:
INTEREST INCOME $ 24,802 $ 22,890 $ 20,955 $ 19,420 $ 17,739
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 8,438 7,698 7,889 7,231 5,619
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 16,364 15,192 13,066 12,189 12,120
- -----------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 465 400 642 75 60
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSEs 15,899 14,792 12,424 12,114 12,060
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, EXCLUSIVE OF SECURITIES
GAINS (LOSSES) 4,095 3,219 2,869 2,357 2,174
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 11,761 10,726 10,072 9,108 8,506
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES GAINS (LOSSES) 178 29 118 62 (392)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 8,411 7,314 5,339 5,425 5,336
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 3,092 2,822 1,760 1,518 1,465
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,319 $ 4,492 $ 3,579 $ 3,907 $ 3,871
===================================================================================================================================
PER SHARE DATA: (REFLECTS 5% STOCK DIVIDEND PAID IN 1998; 2:1 STOCK SPLIT IN
DECEMBER, 1997; 5% STOCK DIVIDEND PAID IN 1996; AND 2:1 STOCK SPLIT IN APRIL,
1995.)
EARNINGS PER SHARE-BASIC $ 2.18 $ 1.84 $ 1.46 $ 1.59 $ 1.58
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED 2.11 1.81 1.45 1.59 1.58
- -----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED 0.46 0.41 0.40 0.37 0.32
- -----------------------------------------------------------------------------------------------------------------------------------
BOOK VALUE END-OF-PERIOD $ 15.57 $ 13.78 $ 12.35 $ 11.57 $ 9.61
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 2,441,358 2,444,118 2,449,251 2,452,000 2,452,000
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUIVALENTS 82,543 44,306 29,242 6,631 --
===================================================================================================================================
22
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA: (AT PERIOD END)
TOTAL ASSETS $ 402,796 $ 363,665 $ 327,404 $ 300,076 $ 278,523
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES 43,581 53,978 55,198 45,540 81,804
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 92,255 91,580 84,596 90,890 55,024
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS 213,856 174,374 149,874 122,432 105,384
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES 2,224 1,893 1,636 1,221 1,473
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITs 362,833 328,473 295,190 269,504 253,375
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,955 33,639 30,208 28,376 23,560
- -----------------------------------------------------------------------------------------------------------------------------------
TRUST ASSETS (BOOK VALUE) 549,321 453,671 378,879 251,254 246,526
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PERFORMANCE RATIOS:
RETURN ON AVERAGE TOTAL ASSETS 1.42% 1.30% 1.13% 1.37% 1.38%
- -----------------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE TOTAL STOCKHOLDERS' EQUITY 14.79 14.22 12.41 15.05 17.09
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIO 20.62 21.77 25.45 21.06 18.10
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE TOTAL STOCKHOLDERS' EQUITY
TO AVERAGE ASSETS 9.61 9.16 9.10 9.08 8.09
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES TO AVERAGE ASSETS 3.14 3.11 3.18 3.19 3.04
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME TO AVERAGE ASSETS 1.09 0.93 0.91 0.82 0.78
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS: (AT PERIOD END)
NON-ACCRUAL LOANS TO TOTAL LOANS 0.38% 0.43% 0.79% 0.44% 0.66%
- -----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS TO TOTAL ASSETS 0.20 0.33 0.53 0.73 0.88
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO
NON-PERFORMING LOANS 275.59 223.76 125.36 103.74 171.68
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.04 1.09 1.09 1.00 1.40
- -----------------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS (RECOVERIES) TO AVERAGE
LOANS PLUS OTHER REAL ESTATE OWNED 0.07 0.09 0.17 0.29 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RATIOS:
AVERAGE LOANS TO AVERAGE DEPOSITS 57.96% 50.96% 47.23% 43.26% 39.72%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY TO TOTAL ASSETS 9.42 9.25 9.23 9.46 8.46
- -----------------------------------------------------------------------------------------------------------------------------------
TIER 1 Capital to Risk Weighted Assets 20.25 20.25 24.06 23.63 20.62
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL TO RISK WEIGHTED ASSETS 21.50 21.43 25.37 24.68 21.87
- -----------------------------------------------------------------------------------------------------------------------------------
TIER 1 Leverage Ratio 9.60 9.40 9.43 9.63 8.68
- -----------------------------------------------------------------------------------------------------------------------------------
23
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR
THE PERIODS INDICATED:
SELECTED 1998 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------
INTEREST INCOME $ 5,997 $ 6,080 $6,373 $6 ,352
- -----------------------------------------------------------------------------------------
INTEREST EXPENSE 1,998 2,044 2,195 2,201
- -----------------------------------------------------------------------------------------
NET INTEREST INCOME 3,999 4,036 4,178 4,151
- -----------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 91 91 91 192
- -----------------------------------------------------------------------------------------
OTHER INCOME, EXCLUDING
SECURITIES GAINS 1,279 928 934 954
- -----------------------------------------------------------------------------------------
SECURITIES GAINS 67 46 5 60
- -----------------------------------------------------------------------------------------
OTHER EXPENSE 2,861 2,926 2,912 3,062
- -----------------------------------------------------------------------------------------
INCOME TAX EXPENSE 903 697 798 694
- -----------------------------------------------------------------------------------------
NET INCOME $1,490 $1,296 $1,316 $1,217
=========================================================================================
EARNINGS PER SHARE-BASIC $ 0.61 $ 0.53 $ 0.53 $ 0.51
- -----------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED $ 0.59 $ 0.51 $ 0.52 $ 0.49
- -----------------------------------------------------------------------------------------
SELECTED 1997 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------
INTEREST INCOME $5,443 $5,707 $5,764 $5,976
- -----------------------------------------------------------------------------------------
INTEREST EXPENSE 1,887 1,881 1,905 2,025
- -----------------------------------------------------------------------------------------
NET INTEREST INCOME 3,556 3,826 3,859 3,951
- -----------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 100 100 100 100
- -----------------------------------------------------------------------------------------
OTHER INCOME, EXCLUDING
SECURITIES GAINS 963 804 735 717
- -----------------------------------------------------------------------------------------
SECURITIES GAINS -- 15 9 5
- -----------------------------------------------------------------------------------------
OTHER EXPENSE 2,700 2,754 2,589 2,683
- -----------------------------------------------------------------------------------------
INCOME TAX EXPENSE 616 631 718 857
- -----------------------------------------------------------------------------------------
NET INCOME $1,103 $1,160 $1,196 $1,033
=========================================================================================
EARNINGS PER SHARE-BASIC $ 0.44 $ 0.47 $ 0.48 $ 0.45
- -----------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED $ 0.44 $ 0.47 $ 0.47 $ 0.43
- -----------------------------------------------------------------------------------------
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Peapack-Gladstone Financial Corporation:
We have audited the accompanying consolidated statements of condition of
Peapack-Gladstone Financial Corporation and subsidiary as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation'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 generally accepted auditing
standards. 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, 1998
and 1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 2, 1999
25
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
CASH AND DUE FROM BANKS $ 13,079 $ 17,740
- --------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 29,600 15,500
- --------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 42,679 33,240
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES: (APPROXIMATE MARKET VALUE
$44,327 IN 1998 AND $54,452 IN 1997) 43,581 53,978
- --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE (AMORTIZED COST
$90,781 IN 1998 AND $90,817 IN 1997) 92,255 91,580
- --------------------------------------------------------------------------------
LOANS: 213,856 174,374
- --------------------------------------------------------------------------------
LESS: ALLOWANCE FOR LOAN LOSSES 2,224 1,893
- --------------------------------------------------------------------------------
NET LOANS 211,632 172,481
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 9,170 8,595
- --------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED -- 340
- --------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 2,963 3,006
- --------------------------------------------------------------------------------
OTHER ASSETS 516 445
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 402,796 $ 363,665
================================================================================
LIABILITIES
DEPOSITS:
NONINTEREST-BEARING DEMAND DEPOSITS $ 85,881 $ 74,712
- --------------------------------------------------------------------------------
INTEREST-BEARING DEPOSITS:
CHECKING 79,778 70,745
- --------------------------------------------------------------------------------
SAVINGS 70,962 70,419
- --------------------------------------------------------------------------------
MONEY MARKET ACCOUNTS 26,363 24,624
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT OVER $100,000 27,608 18,243
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT LESS THAN $100,000 72,241 69,730
- --------------------------------------------------------------------------------
TOTAL DEPOSITS 362,833 328,473
- --------------------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES 2,008 1,553
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 364,841 330,026
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
COMMON STOCK (NO PAR VALUE; Stated Value
$1 2/3 PER SHARE; AUTHORIZED 10,000,000
SHARES; ISSUED 2,451,244 SHARES;
REFLECTS 2:1 STOCK SPLIT OF
DECEMBER 1997) 4,085 3,892
- --------------------------------------------------------------------------------
SURPLUS 12,483 6,218
- --------------------------------------------------------------------------------
TREASURY STOCK AT COST, 13,562 SHARES IN 1998
AND 11,178 SHARES IN 1997 (791) (367)
- --------------------------------------------------------------------------------
RETAINED EARNINGS 21,252 23,420
- --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF INCOME TAX 926 476
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,955 33,639
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 402,796 $ 363,665
================================================================================
See accompanying notes to Consolidated Financial Statements
26
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- --------------------------------------------------------------------------------
INTEREST INCOME
INTEREST AND FEES ON LOANS $15,418 $13,025 $11,150
- --------------------------------------------------------------------------------
INTEREST ON INVESTMENT SECURITIES:
TAXABLE 2,540 2,800 2,465
- --------------------------------------------------------------------------------
TAX-EXEMPT 469 524 573
- --------------------------------------------------------------------------------
INTEREST AND DIVIDENDS ON SECURITIES
AVAILABLE FOR SALE:
TAXABLE 5,478 5,697 5,898
- --------------------------------------------------------------------------------
TAX-EXEMPT 5 -- --
- --------------------------------------------------------------------------------
INTEREST ON FEDERAL FUNDS SOLD 892 844 869
- --------------------------------------------------------------------------------
TOTAL INTEREST INCOME 24,802 22,890 20,955
- --------------------------------------------------------------------------------
INTEREST EXPENSE
INTEREST ON SAVINGS ACCOUNT DEPOSITS 3,277 3,439 3,942
- --------------------------------------------------------------------------------
INTEREST ON CERTIFICATES OF DEPOSIT OVER $100,000 1,411 965 802
- --------------------------------------------------------------------------------
INTEREST ON OTHER TIME DEPOSITS 3,750 3,294 3,145
- --------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 8,438 7,698 7,889
- --------------------------------------------------------------------------------
NET INTEREST INCOME 16,364 15,192 13,066
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 465 400 642
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,899 14,792 12,424
- --------------------------------------------------------------------------------
OTHER INCOME
SERVICE CHARGES AND FEES 1,750 1,651 1,504
- --------------------------------------------------------------------------------
TRUST FEES 2,241 1,474 1,270
- --------------------------------------------------------------------------------
SECURITIES GAINS 178 29 118
- --------------------------------------------------------------------------------
OTHER INCOME 104 94 95
- --------------------------------------------------------------------------------
TOTAL OTHER INCOME 4,273 3,248 2,987
- --------------------------------------------------------------------------------
OTHER EXPENSES
SALARIES AND EMPLOYEE BENEFITS 6,567 6,093 5,588
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT 2,291 2,231 2,124
- --------------------------------------------------------------------------------
OTHER EXPENSES 2,903 2,402 2,360
- --------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 11,761 10,726 10,072
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 8,411 7,314 5,339
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE 3,092 2,822 1,760
- --------------------------------------------------------------------------------
NET INCOME $ 5,319 $ 4,492 $ 3,579
================================================================================
EARNINGS PER SHARE (REFLECTS a 5% STOCK
DIVIDEND IN 1998; A 2:1 STOCK SPLIT IN DECEMBER,
1997; AND A 5% STOCK DIVIDEND IN 1996)
Basic $ 2.18 $ 1.84 $ 1.46
- --------------------------------------------------------------------------------
Diluted $ 2.11 $ 1.81 $ 1.45
================================================================================
See accompanying notes to Consolidated Financial Statements
27
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
(DOLLARS IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE AMOUNTS) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $3,707 $3,486 $ -- $20,196 $ 987 $28,376
- -------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 1996 3,579 3,579
UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF TAX OF ($284)) (579)
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $39) 79
-----
NET UNREALIZED HOLDING LOSSES ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF ($323)) (658) (658)
-------
TOTAL COMPREHENSIVE INCOME 2,921
DIVIDENDS DECLARED ($0.40 PER SHARE) (911) (911)
COMMON STOCK DIVIDEND
(FIVE PERCENT) 185 2,755 (2,940) --
COMMON STOCK OPTIONS EXERCISED (36) (36)
PURCHASE OF TREASURY STOCK
5,446 SHARES (142) (142)
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $3,892 $6,205 $(142) $19,924 $ 329 $30,208
- -------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 1997 4,492 4,492
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $103) 165
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $11) 18
-----
NET UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $92) 147 147
-------
TOTAL COMPREHENSIVE INCOME 4,639
DIVIDENDS DECLARED ($0.41 PER SHARE) (978) (978)
COMMON STOCK OPTIONS
EXERCISED AND RELATED TAX BENEFITS 13 56 (18) 51
PURCHASE OF TREASURY STOCK
7,892 SHARES (281) (281)
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $3,892 $6,218 $(367) $23,420 $ 476 $33,639
- -------------------------------------------------------------------------------------------------------
(Continued on following page)
28
ACCUMULATED
OTHER
(DOLLARS IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE AMOUNTS) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 1998 5,319 5,319
UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $327) 563
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME
(NET OF INCOME TAX OF $65) 113
-----
NET UNREALIZED HOLDING GAINS ON
SECURITIES ARISING DURING THE
PERIOD (NET OF INCOME TAX OF $262) 450 450
-------
TOTAL COMPREHENSIVE INCOME 5,769
DIVIDENDS DECLARED ($0.46 PER SHARE) (1,097) (1,097)
COMMON STOCK OPTIONS EXERCISED AND
RELATED TAX BENEFITS 68 459 527
COMMON STOCK DIVIDEND (FIVE PERCENT) 193 6,197 (6,390) --
PURCHASE OF TREASURY STOCK
15,339 SHARES (883) (883)
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $4,085 $12,483 $(791) $21,252 $ 926 $37,955
- -------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE REFLECT 2:1 STOCK SPLIT IN DECEMBER, 1997.
See accompanying notes to Consolidated Financial Statements
[THE FOLLOWING TABLE WAS REPRESENTED BY BAR CHARTS IN THE PRINTED DOCUMENT.]
1998 1997 1996 1995 1994
IN DOLLARS
- --------------------------------------------------------------------------------
DIVIDENDS PER SHARE $ 0.46 $ 0.41 $ 0.40 $ 0.37 $0.32
- --------------------------------------------------------------------------------
BOOK VALUE PER SHARE $15.57 $13.78 $12.35 $11.57 $9.61
- --------------------------------------------------------------------------------
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
NET INCOME $ 5,319 $ 4,492 $ 3,579
- --------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 817 694 670
- --------------------------------------------------------------------------------
AMORTIZATION OF PREMIUM AND ACCRETION
OF DISCOUNT ON SECURITIES, NET 117 43 75
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 465 400 642
- --------------------------------------------------------------------------------
(Benefit) PROVISION FOR DEFERRED TAXES (138) 399 (96)
- --------------------------------------------------------------------------------
GAIN ON SECURITIES (178) (29) (118)
- --------------------------------------------------------------------------------
DECREASE (INCREASE) IN INTEREST RECEIVABLE 43 (91) (48)
- --------------------------------------------------------------------------------
(INCREASE) DECREASE IN OTHER ASSETS (195) (270) 46
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN ACCRUED EXPENSES
AND OTHER LIABILITIES 455 (453) (190)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,705 5,185 4,560
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF INVESTMENT SECURITIES 8,280 14,671 12,852
- --------------------------------------------------------------------------------
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE
FOR SALE 10,000 11,000 25,000
- --------------------------------------------------------------------------------
PROCEEDS FROM CALLS OF INVESTMENT SECURITIES 17,220 2,000 10,207
- --------------------------------------------------------------------------------
PROCEEDS FROM SALES AND CALLS OF SECURITIES
AVAILABLE FOR SALE 42,335 6,840 10,025
- --------------------------------------------------------------------------------
PURCHASE OF INVESTMENT SECURITIES (15,132) (15,466) (32,664)
- --------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE
FOR SALE (52,192) (24,625) (33,814)
- --------------------------------------------------------------------------------
NET DECREASE (INCREASE) IN SHORT-TERM INVESTMENTS (16) 38 4,018
- --------------------------------------------------------------------------------
NET INCREASE IN LOANS (39,616) (24,903) (27,957)
- --------------------------------------------------------------------------------
NET DECREASE IN OTHER REAL ESTATE Owned 340 352 855
- --------------------------------------------------------------------------------
PURCHASES OF PREMISES AND EQUIPMENT (1,392) (689) (2,376)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,173) (30,782) (33,854)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
NET INCREASE IN DEPOSITS 34,360 33,283 25,686
- --------------------------------------------------------------------------------
DIVIDENDS PAID (1,097) (978) (911)
- --------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 9 51 (36)
- --------------------------------------------------------------------------------
PURCHASE OF TREASURY STOCK (365) (281) (142)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,907 32,075 24,597
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 9,439 6,478 (4,697)
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,240 26,762 31,459
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,679 $ 33,240 $ 26,762
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
CASH PAID DURING THE YEAR FOR:
INTEREST ON DEPOSITS $ 8,288 $ 8,836 $ 8,163
- --------------------------------------------------------------------------------
INCOME TAXES 3,146 2,487 1,885
- --------------------------------------------------------------------------------
NONCASH INVESTING ACTIVITIES:
TRANSFER OF LOANS TO OTHER REAL ESTATE -- 260 288
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF Consolidation and Organization: Effective December 12, 1997 all of
the then outstanding common shares of the Peapack-Gladstone Bank (the Bank) were
exchanged on a one-for-one basis for shares of Peapack-Gladstone Financial
Corporation (the Corporation), which was organized as a New Jersey Bank Holding
Company on August 19, 1997. This exchange of shares has been accounted for as a
"pooling-of-interests," and as a result, the Corporation reports on a combined
basis the values of the assets, liabilities and stockholders' equity of the Bank
and the Holding Company.
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 and its wholly-owned subsidiary,
Peapack-Gladstone Investment Company. While the following footnotes include the
collective results of Peapack-Gladstone Financial Corporation and
Peapack-Gladstone Bank, these footnotes primarily reflect the Bank's activities.
All significant intercompany balances and transactions have been eliminated from
the accompanying consolidated financial statements.
BUSINESS: The 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 northwestern 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 generally accepted accounting principles.
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 composed 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
31
securities are excluded from earnings, but are included in stockholders' 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 is discontinued if certain factors indicate reasonable doubt as to the
timely collectibility of such 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
Northwestern New Jersey.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level considered adequate to provide for potential 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.
32
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: Prior to January 1, 1996, the Corporation accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense was recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Corporation adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Corporation has elected to continue to apply the
provisions of APB Opinion No. 25 and to provide the pro forma disclosure
provisions of SFAS No. 123.
EARNINGS PER SHARE: Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding including common stock equivalents utilizing the treasury
stock method.
The Board of Directors approved a 2 for 1 stock split effective December
29, 1997. In addition, per share data reflects 5 percent stock dividends paid in
November 1998 and 1996. As a result, the average number of shares outstanding
was 2,523,901, 2,488,424 and 2,478,493 for 1998, 1997 and 1996, respectively,
and included common stock equivalents of 82,543, 44,306 and 29,242 for 1998,
1997 and 1996, respectively.
COMPREHENSIVE INCOME: On January 1, 1998, the Corporation adopted the provisions
of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Prior period
amounts have been restated.
RECLASSIFICATION: Certain reclassifications have been made in the 1996 and 1997
financial statements in order to conform to the 1998 presentation.
33
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, 1998 and 1997 follows:
1998
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $30,598 $344 $ (13) $30,929
- ------------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS 12,472 417 (2) 12,887
- ------------------------------------------------------------------------------------------
OTHER DEBT SECURITIES 511 -- -- 511
- ------------------------------------------------------------------------------------------
$43,581 $761 $ (15) $44,327
==========================================================================================
1997
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $44,557 $174 $ (48) $44,683
- ------------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS 9,421 348 -- 9,769
- ------------------------------------------------------------------------------------------
$53,978 $522 $ (48) $54,452
==========================================================================================
The amortized cost and approximate market value of investment securities as
of December 31, 1998, 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 $14,559 $14,650
- ----------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 21,181 21,498
- ----------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 7,391 7,610
- ----------------------------------------------------------------------------
AFTER TEN YEARS 450 569
- ----------------------------------------------------------------------------
$43,581 $44,327
============================================================================
Securities having an approximate carrying value of $5,169,000 and
$5,000,000 as of December 31, 1998 and 1997, respectively, were pledged to
secure public funds and for other purposes required or permitted by law. Gross
gains of $8,000, $5,000 and $95,000 were realized in 1998, 1997 and 1996,
respectively. There were no gross realized losses in 1998, 1997 and 1996. There
were no sales of investment securities in 1998, 1997 or 1996 except for
securities called by issuers.
34
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, 1998 and 1997 follows:
1998
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $85,232 $1,567 $(130) $86,669
- ------------------------------------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS 240 14 -- 254
- ------------------------------------------------------------------------------------------
OTHER SECURITIES AVAILABLE FOR SALE 5,309 23 -- 5,332
- ------------------------------------------------------------------------------------------
$90,781 $1,604 $(130) $92,255
==========================================================================================
1997
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
U.S. TREASURY & GOVERNMENT AGENCIES $86,035 $ 838 $ (74) $86,799
- ------------------------------------------------------------------------------------------
OTHER SECURITIES AVAILABLE FOR SALE 4,782 2 (3) 4,781
- ------------------------------------------------------------------------------------------
$90,817 $ 840 $ (77) $91,580
==========================================================================================
The amortized cost and approximate market value of debt securities
available for sale as of December31, 1998, 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 $ 6,000 $ 6,069
- ------------------------------------------------------------------------
AFTER ONE YEAR THROUGH FIVE YEARS 42,624 43,742
- ------------------------------------------------------------------------
AFTER FIVE YEARS THROUGH TEN YEARS 36,612 36,870
- ------------------------------------------------------------------------
AFTER TEN YEARS 2,258 2,269
- ------------------------------------------------------------------------
$87,494 $88,950
========================================================================
Gross gains of $170,000, $24,000 and $23,000 were realized in 1998, 1997
and 1996, respectively. There were no gross realized losses in 1998, 1997 and
1996.
4. LOANS
Loans outstanding as of December 31, 1998 and 1997 consisted of the
following:
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------
LOANS SECURED BY REAL ESTATE $188,584 $145,471
- ------------------------------------------------------------------------
CONSTRUCTION LOANS 1,946 4,213
- ------------------------------------------------------------------------
COMMERCIAL LOANS 9,833 10,332
- ------------------------------------------------------------------------
CONSUMER LOANS 12,830 13,462
- ------------------------------------------------------------------------
OTHER LOANS 663 896
- ------------------------------------------------------------------------
TOTAL LOANS $213,856 $174,374
========================================================================
Non-accrual loans totaled $806,000 and $742,000 at December 31, 1998 and
1997, respectively. Loans past due 90 days or more and still accruing interest
totaled $1,000 and
35
$104,000 at December 31, 1998 and 1997, 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 $17,000, $25,000 and $18,000 in
1998, 1997 and 1996, respectively. Interest income of $68,000, $47,000 and
$82,000 would have been recognized during 1998, 1997 and 1996, respectively,
under contractual terms for such non-accrual loans.
Loans that met the criteria of troubled debt restructuring totaled $457,000
and $261,000 at December 31, 1998 and 1997, respectively. The amount of interest
income recognized on troubled debt restructurings in 1998, 1997 and 1996 totaled
$23,000, $18,000 and $16,000, respectively. Interest income of approximately
$43,000, $26,000 and $27,000 would have been recognized during 1998, 1997 and
1996, based on original terms. There are no commitments to lend additional
amounts on troubled debt restructurings.
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
$100,000. Residential mortgage loans, a group of homogeneous loans that are
collectively evaluated for impairment, are excluded. There was no recorded
investment in impaired loans as of December 31, 1998 and 1997 and no investments
in impaired loans during 1998 and 1997.
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) 1998 1997 1996
- --------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 1,893 $ 1,636 $ 1,221
- --------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 465 400 642
- --------------------------------------------------------------------------------
LOANS CHARGED-OFF (187) (282) (276)
- --------------------------------------------------------------------------------
RECOVERIES 53 139 49
- --------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 2,224 $ 1,893 $ 1,636
================================================================================
6. PREMISES AND EQUIPMENT
Premises and equipment for the years indicated follows:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------
LAND $ 2,440 $ 2,259
- -----------------------------------------------------------------------------
BUILDINGS 4,714 4,703
- -----------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 4,938 3,818
- -----------------------------------------------------------------------------
LEASEHOLD IMPROVEMENTS 2,657 2,577
- -----------------------------------------------------------------------------
14,749 13,357
- -----------------------------------------------------------------------------
LESS: ACCUMULATED DEPRECIATION 5,579 4,762
- -----------------------------------------------------------------------------
TOTAL $ 9,170 $ 8,595
=============================================================================
Depreciation expense amounted to $817,000, $694,000 and $670,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
7. 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
36
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 or
dealer quotes.
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.
The following table summarizes carrying amounts and fair values for
financial instruments at December 31, 1998 and 1997:
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCIAL ASSETS:
CASH AND CASH EQUIVALENTS $ 42,679 $ 42,679 $ 33,240 $ 33,240
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES 43,581 44,327 53,978 54,452
- --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 92,255 92,255 91,580 91,580
- --------------------------------------------------------------------------------
LOANS, NET OF ALLOWANCE
FOR LOAN LOSSES 211,632 215,804 172,481 172,437
- --------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
DEPOSITS 362,833 364,299 328,473 328,543
- --------------------------------------------------------------------------------
8. INCOME TAXES
The income tax expense included in the consolidated financial statements
for the years ended December31, 1998, 1997 and 1996, is allocated as follows:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE FROM OPERATIONS:
FEDERAL:
CURRENT EXPENSE $ 2,850 $ 2,178 $ 1,655
- --------------------------------------------------------------------------------
DEFERRED (BENEFIT) EXPENSE (107) 309 (83)
- --------------------------------------------------------------------------------
STATE:
CURRENT EXPENSE 380 245 201
- --------------------------------------------------------------------------------
DEFERRED (BENEFIT) EXPENSE (31) 90 (13)
- --------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE
FROM OPERATIONS $ 3,092 $ 2,822 $ 1,760
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
DEFERRED EXPENSE:
UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE $ 261 $ 153 $ 383
================================================================================
37
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% in 1998, 1997 and 1996 to income before
taxes as a result of the following:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
COMPUTED "EXPECTED" TAX EXPENSE $ 2,860 $ 2,487 $ 1,815
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN TAXES RESULTING FROM:
TAX-EXEMPT INCOME (170) (161) (176)
- --------------------------------------------------------------------------------
STATE INCOME TAXES 230 221 124
- --------------------------------------------------------------------------------
DEFERRED TAX ADJUSTMENT-TAX BAD DEBT -- 210 --
- --------------------------------------------------------------------------------
OTHER 172 65 (3)
- --------------------------------------------------------------------------------
$ 3,092 $ 2,822 $ 1,760
================================================================================
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, 1998 and 1997 are as follows:
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
LOANS, PRINCIPALLY DUE TO ALLOWANCE FOR
LOAN LOSSES AND DEFERRED FEE INCOME $ 674 $ 462
- --------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED, PRINCIPALLY DUE TO
RESERVES FOR WRITEDOWNS 5 28
- --------------------------------------------------------------------------------
POST RETIREMENT BENEFITS OTHER THAN PENSIONS 46 50
- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER -- 25
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED ASSETS $ 725 $ 565
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE $ 548 $ 43
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES, PRINCIPALLY DUE TO
THE ACCRETION OF BOND DISCOUNT 37 45
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
PRINCIPALLY DUE TO DIFFERENCES IN DEPRECIATION 396 365
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED LIABILITIES $ 981 $ 453
- --------------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITY) ASSET $(256) $ 112
================================================================================
9. BENEFIT PLANS
The Corporation sponsors a non-contributory defined benefit pension plan
that covers substantially all salaried employees. The benefits are based on an
employee's compensation, age at retirement and years of service. It is the
policy of the Corporation to fund not less than the minimum funding amount
required by the Employee Retirement Income Security Act (ERISA).
38
The following table shows the change in benefit obligation, the change in
plan assets andthe funded status for the plan at December 31,
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
BENEFIT OBLIGATION AT Beginning of Year $ 3,178 $ 2,645
- --------------------------------------------------------------------------------
SERVICE COST 484 430
- --------------------------------------------------------------------------------
INTEREST COST 189 157
- --------------------------------------------------------------------------------
ACTUARIAL LOSS 7 7
- --------------------------------------------------------------------------------
BENEFITS PAID (144) (61)
- --------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 3,714 $ 3,178
================================================================================
CHANGE IN PLAN ASSETS:
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 3,635 $ 2,721
- --------------------------------------------------------------------------------
ACTUAL RETURN ON PLAN ASSETS 718 545
- --------------------------------------------------------------------------------
EMPLOYER CONTRIBUTION 345 430
- --------------------------------------------------------------------------------
BENEFITS PAID (144) (61)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 4,554 $ 3,635
================================================================================
FUNDED STATUS $ 840 $ 457
- --------------------------------------------------------------------------------
UNRECOGNIZED TRANSITION ASSET (71) (78)
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST (4) (5)
- --------------------------------------------------------------------------------
UNRECOGNIZED NET ACTUARIAL (Gain) (713) (296)
- --------------------------------------------------------------------------------
PREPAID BENEFIT COST $ 52 $ 78
================================================================================
Net periodic expense for the years ended December 31 included the following
components:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
SERVICE COST $ 484 $ 430 $ 405
- --------------------------------------------------------------------------------
INTEREST COST 189 157 148
- --------------------------------------------------------------------------------
EXPECTED RETURN ON PLAN ASSETS (718) (545) (292)
- --------------------------------------------------------------------------------
AMORTIZATION OF:
NET GAIN 424 313 83
- --------------------------------------------------------------------------------
UNRECOGNIZED PRIOR SERVICE COST 1 1 1
- --------------------------------------------------------------------------------
UNRECOGNIZED REMAINING NET ASSETS (8) (8) (8)
- --------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 372 $ 348 $ 337
================================================================================
For December 31, 1998 and 1997 the weighted average discount rate and rate
of increase in future compensation used in determining the actuarial present
value of the projected benefit obligation were 6.0 percent and 3.0 percent,
respectively. The related expected long-term rate of return on plan assets was
7.5 percent.
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
39
for the savings plan was approximately $24,000, $23,000 and $21,000 in 1998,
1997 and 1996, 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
$200,000 in 1998, $175,000 in 1997 and $125,000 in 1996.
POST RETIREMENT BENEFITS OTHER THAN PENSIONS:
The Corporation provides certain health care and life insurance benefits to
eligible retired employees. Accordingly, the cost of retiree health care and
other benefits is accrued during the employees active service. Expense for the
years ended December31, 1998, 1997 and 1996 is not material.
10. STOCK OPTION PLAN
The Corporation's incentive stock option plans allows the granting of up to
189,525 shares of the Corporation's common stock to certain key employees. The
options granted under this plan 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, 1995 69,678 $16.32-$17.95
- --------------------------------------------------------------------------------
GRANTED DURING 1996 3,308 22.68
- --------------------------------------------------------------------------------
EXERCISED DURING 1996 3,881 16.32
- --------------------------------------------------------------------------------
FORFEITED DURING 1996 2,822 16.32
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 66,283 16.32-22.68
- --------------------------------------------------------------------------------
GRANTED DURING 1997 45,360 27.38-37.73
- --------------------------------------------------------------------------------
EXERCISED DURING 1997 2,268 16.32
- --------------------------------------------------------------------------------
FORFEITED DURING 1997 420 16.32
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 108,955 16.32-37.73
- --------------------------------------------------------------------------------
GRANTED DURING 1998 1,730 51.43-56.25
- --------------------------------------------------------------------------------
EXERCISED DURING 1998 3,793 34.76
- --------------------------------------------------------------------------------
FORFEITED DURING 1998 1,285 16.32-34.76
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 105,607 $16.32-$56.25
================================================================================
At December 31, 1998, the number of options exercisable was 41,903 and the
weighted-average price of those options was $20.52 per share. At December 31,
1997, the number of options exercisable was 24,056 and the weighted-average
price of those options was $17.89 per share.
40
The Corporation has non-qualified stock option plans for non-employee
directors. The plans allow the granting of up to 102,900 shares of the
Corporation's common stock. The options granted under this plan 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, 1995 54,027 $16.32-$19.84
- -------------------------------------------------------------------------------
EXERCISED DURING 1996 1,103 16.32
- -------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 52,924 16.32-19.84
- -------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 52,924 16.32-19.84
- -------------------------------------------------------------------------------
GRANTED DURING 1998 26,250 51.43
- -------------------------------------------------------------------------------
EXERCISED DURING 1998 1,050 51.43
- -------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 78,124 $16.32-$51.43
================================================================================
At December 31, 1998, the number of options exercisable was 30,256 and the
weighted-average price of those options was $16.63. At December 31, 1997, the
number of options exercisable was 20,506 and the weighted-average price of those
options was $17.14.
At December 31, 1998, there were 96,599 additional shares available for
grant under the Plans. The per share weighted-average fair value of stock
options granted during 1998 and 1997 was $10.98 and $8.64 on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1998--expected dividend yield 0.82%, expected volatility of 9%,
risk-free interest rate of 5.65%, and an expected life of 5 years;
1997--expected dividend yield of 0.88%, expected volatility of 11%, risk-free
interest rate of 6.13%, and an expected life of 5 years.
The Corporation applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Corporation determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Corporation's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997
- --------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $ 5,319 $ 4,492
- --------------------------------------------------------------------------------
PRO FORMA $ 5,174 $ 4,389
- --------------------------------------------------------------------------------
EARNINGS PER SHARE:
AS REPORTED
BASIC $ 2.18 $ 1.84
- --------------------------------------------------------------------------------
DILUTED $ 2.11 $ 1.81
- --------------------------------------------------------------------------------
PRO FORMA
BASIC $ 2.12 $ 1.80
- --------------------------------------------------------------------------------
DILUTED $ 2.05 $ 1.76
- --------------------------------------------------------------------------------
41
11. COMMITMENTS AND REGULATORY MATTERS
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 its actions depart from routine legal proceedings and 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
$37,131,000 and $29,077,000 and letters of credit of $1,232,000 and $1,261,000
at December 31, 1998 and 1997, respectively, which are not included in the
accompanying consolidated financial statements.
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 year-end 1998 and 1997, the Bank was required to maintain balances of
$365,000 and $7,291,000, respectively, at the Federal Reserve Bank of New York
in satisfaction of statutory reserve requirements.
At December 31, 1998, the Corporation was obligated under non-cancelable
operating leases for certain premises. Rental expense aggregated $478,000,
$579,000 and $607,000 for the years ended December 31, 1998, 1997 and 1996,
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, 1998, were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 $ 560
- --------------------------------------------------------------------------------
2000 524
- --------------------------------------------------------------------------------
2001 637
- --------------------------------------------------------------------------------
2002 633
- --------------------------------------------------------------------------------
2003 633
- --------------------------------------------------------------------------------
Thereafter 3,144
- --------------------------------------------------------------------------------
TOTAL $6,131
================================================================================
42
12. REGULATORY CAPITAL
The Bank is 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
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) 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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also 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, 1998:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $38,070 21.5% $17,705 10.0% $14,164 8.0%
- -----------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 35,846 20.3% 10,623 6.0% 7,082 4.0%
- -----------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 35,846 9.6% 18,670 5.0% 11,202 3.0%
- -----------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $34,313 21.4% $16,010 10.0% $12,808 8.0%
- -----------------------------------------------------------------------------------------
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) 32,420 20.3% 9,606 6.0% 6,404 4.0%
- -----------------------------------------------------------------------------------------
TIER I CAPITAL
(TO AVERAGE ASSETS) 32,420 9.4% 17,239 5.0% 10,343 3.0%
- -----------------------------------------------------------------------------------------
43
13. CONDENSED FINANCIAL STATEMENTS OF PEAPACK-GLADSTONE FINANCIAL CORPORATION
(PARENT COMPANY ONLY):
The following information of the parent company only financial statements
as of December 31, 1998 and 1997 should be read in conjunction with the notes to
the consolidated financial statements.
STATEMENTS OF CONDITION
DECEMBER 31,
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
CASH $ 429 $ 947
- --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE 1,014 --
- --------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARY 36,757 32,897
- --------------------------------------------------------------------------------
OTHER ASSETS 116 52
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 38,316 $ 33,896
================================================================================
LIABILITIES
OTHER LIABILITIES $ 361 $ 257
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 361 257
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
COMMON STOCK 4,085 3,892
- --------------------------------------------------------------------------------
SURPLUS 12,483 6,218
- --------------------------------------------------------------------------------
TREASURY STOCK (791) (367)
- --------------------------------------------------------------------------------
RETAINED EARNINGS 21,252 23,420
- --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (NET OF
INCOME TAX) 926 476
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,955 33,639
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,316 $ 33,896
================================================================================
STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31,
(IN THOUSANDS) 1998 1997*
- --------------------------------------------------------------------------------
INCOME
DIVIDEND FROM BANK $ 2,000 $ 1,000
- --------------------------------------------------------------------------------
OTHER INCOME 24 --
- --------------------------------------------------------------------------------
TOTAL INCOME 2,024 1,000
- --------------------------------------------------------------------------------
EXPENSES
OTHER EXPENSES 184 1
- --------------------------------------------------------------------------------
TOTAL EXPENSES 184 1
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 1,840 999
- --------------------------------------------------------------------------------
INCOME TAX BENEFIT (54) --
- --------------------------------------------------------------------------------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK 1,894 999
- --------------------------------------------------------------------------------
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK 3,425 140
- --------------------------------------------------------------------------------
NET INCOME $ 5,319 $ 1,139
================================================================================
44
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
(IN THOUSANDS) 1998 1997*
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,319 $ 1,139
- --------------------------------------------------------------------------------
LESS EQUITY IN UNDISTRIBUTED EARNINGS OF BANK (3,425) (140)
- --------------------------------------------------------------------------------
INCREASE IN OTHER ASSETS (74) (52)
- --------------------------------------------------------------------------------
INCREASE IN OTHER LIABILITIES 104 257
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,924 1,204
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 201 --
- --------------------------------------------------------------------------------
PURCHASE OF SECURITIES AVAILABLE FOR SALE (1,190) --
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (989) --
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
DIVIDENDS PAID (1,097) (257)
- --------------------------------------------------------------------------------
EXERCISE OF STOCK OPTIONS 9 --
- --------------------------------------------------------------------------------
TREASURY STOCK TRANSACTIONS (365) --
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,453) (257)
- --------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (518) 947
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 947 --
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 429 $ 947
================================================================================
* 1997 amounts are for the period from December 12, 1997 to December 31,
1997.
- --------------------------------------------------------------------------------
STOCK PRICES:
The following table shows the 1998 and 1997 range of prices paid on known
trades of Corporation stock.
DIVIDEND
1998 HIGH LOW PER SHARE
- --------------------------------------------------------------------------------
1st QUARTER $54.00 $46.25 $0.11
- --------------------------------------------------------------------------------
2nd QUARTER 60.00 54.00 0.11
- --------------------------------------------------------------------------------
3rd QUARTER 65.00 58.00 0.12
- --------------------------------------------------------------------------------
4th QUARTER 56.75 54.75 0.12
- --------------------------------------------------------------------------------
DIVIDEND
1997 HIGH LOW PER SHARE
- --------------------------------------------------------------------------------
1st QUARTER $28.25 $28.25 $0.10
- --------------------------------------------------------------------------------
2nd QUARTER 28.75 28.75 0.10
- --------------------------------------------------------------------------------
3rd QUARTER 37.50 35.00 0.10
- --------------------------------------------------------------------------------
4th QUARTER 40.50 37.50 0.11
- --------------------------------------------------------------------------------
45
OFFICERS
- --------------------------------------------------------------------------------
GLADSTONE T. LEONARD HILL Chairman of the Board*
LOAN AND -------------------------------------------------------------
ADMINISTRATION FRANK A. KISSEL President & CEO*
BUILDING -------------------------------------------------------------
ROBERT M. ROGERS Senior Vice President & COO*
-------------------------------------------------------------
PAUL W. BELL Senior Vice President
-------------------------------------------------------------
ARTHUR F. BIRMINGHAM Senior Vice President &
Comptroller*
-------------------------------------------------------------
GARRETT P. BROMLEY Senior Vice President &
Chief Credit Officer
-------------------------------------------------------------
BARBARA A. GRECO Senior Vice President
-------------------------------------------------------------
ELIZABETH B. BOOCOCK Vice President
-------------------------------------------------------------
TODD T. BRUNGARD Vice President
-------------------------------------------------------------
RICHARD CIMO Vice President
-------------------------------------------------------------
KAREN M. CHIARELLO Vice President & Auditor
-------------------------------------------------------------
TERESA A. PETERS Vice President
-------------------------------------------------------------
V. SHERRI LiCATA Vice President
-------------------------------------------------------------
DENNIS A. LONGO Vice President
-------------------------------------------------------------
PAUL A. SMITH Vice President
-------------------------------------------------------------
JAMES STADTMUELLER Vice President
-------------------------------------------------------------
MARIA FORNARO Assistant Vice President
-------------------------------------------------------------
PATRICIA J. MORSCH Assistant Vice President
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PAULA A. PHILHOWER Assistant Vice President
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CHRISTOPHER POCQUAT Assistant Vice President
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PATRICIA A. STUMP Assistant Vice President
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EDWARD J. SWEENEY Assistant Vice President
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FRANK C. WALDRON Assistant Vice President
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MARY M. WOOD Assistant Vice President
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CATHERINE A. McCATHARN Secretary*
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MARJORIE DZWONCZYK Assistant Cashier
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JOHN G. HARITON Assistant Cashier
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KATHRYN M. NEIGH Assistant Cashier/Assistant Secretary
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DIANE M. RIDOLFI Assistant Cashier/Assistant Secretary
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TRUST DEPARTMENT CRAIG C. SPENGEMAN Senior Vice President &
GLADSTONE Senior Trust Officer*
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BRYANT K. ALFORD Vice President & Trust Officer
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JOHN M. BONK Vice President & Trust Officer
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GRETA N. DAWSON Vice President & Trust Officer
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RICHARD K. DONNELLY Vice President & Trust Officer
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JOHN C. KAUTZ Vice President & Trust Officer
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KURT G. TALKE Assistant Vice President &
Trust Officer
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RICHARD E. PURTELL Assistant Vice President
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CATHERINE A. McCATHARN Assistant Trust Officer
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WENDY KONTIR Assistant Trust Officer
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EDWARD NICOLICCHIA Assistant Trust Officer
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BERNARDSVILLE DONNA IORIO-GISONE Vice President
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CALIFON CAROL L. BEHLER Assistant Cashier/Assistant Secretary
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CHESTER DONNA M. WHRITENOUR Assistant Vice President
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GLADSTONE THOMAS N. KASPER Assistant Vice President
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FAR HILLS JAMES CICCONE Assistant Cashier
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LONG VALLEY DONALD R. GOLDENBAUM Vice President
SHERRI HALLETT Assitant Cashier
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MENDHAM ELIZABETH RAHN Vice President
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FELLOWSHIP JANET E. BATTAGLIA Assistant Cashier
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PLUCKEMIN PAMELA W. STONE Vice President
MARILYN M. MORROW Assistant Cashier
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POTTERSVILLE PHYLLIS HERZOG Assistant Cashier
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* Denotes a Holding Company Officer
DIRECTORS
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PAMELA HILL
President
Ferris Corp.
Gladstone, NJ
T. LEONARD HILL
Chairman of the Board
Gladstone, NJ
FRANK A. KISSEL
President & CEO
JOHN D. KISSEL
Turpin Realty, Inc.
Far Hills, NJ
JAMES R. LAMB, ESQ.
James R. Lamb, P.C.
Morristown, NJ
GEORGE R. LAYTON
Director
Layton Funeral Home
Bedminster, NJ
EDWARD A. MERTON
President
Merton Excavating & Paving Co.
Chester, NJ
F. DUFFIELD MEYERCORD
Managing Director
Meyercord Advisors, Inc.
Bedminster, NJ
JOHN R. MULCAHY
Basking Ridge, NJ
PHILIP W. SMITH III
President
Phillary Management, Inc.
Far Hills, NJ
JACK D. STINE
Chairman
Bridgewater Community Services
Bridgewater, NJ
WILLIAM TURNBULL
Gladstone, NJ
OFFICES
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LOAN & ADMINISTRATION BUILDING
158 Route 206 North
Gladstone, NJ 07934
(908) 234-0700
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GLADSTONE (Main Office)
190 Main Street
Gladstone, NJ 07934
(908) 234-0700
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CALIFON
438 Route 513
Califon, NJ 07830
(908) 832-5131
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FAR HILLS
26 Dumont Road
Far Hills, NJ 07931
(908) 781-1018
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LONG VALLEY
59 East Mill Road (Route 24)
Long Valley, NJ 07853
(908) 876-3300
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PLUCKEMIN
468 Route 206 North
Bedminster, NJ 07921
(908) 658-4500
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TRUST & INVESTMENT DEPARTMENT
190 Main Street
Gladstone, NJ 07934
(908) 719-4360
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BERNARDSVILLE
36 Morristown Road
Bernardsville, NJ 07924
(908) 766-1711
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CHESTER
350 Main Street
Chester, NJ 07930
(908) 879-8115
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FELLOWSHIP VILLAGE
8000 Fellowship Road
Basking Ridge, NJ 07920
(908) 719-4332
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MENDHAM
17 East Main Street
Mendham, NJ 07945
(973) 543-9630
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POTTERSVILLE
11 Pottersville Rd.
Pottersville, NJ 07979
(908) 439-2265