SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 000-23537
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2491488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
158 Route 206
Peapack-Gladstone, New Jersey 07934
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (908) 234-0700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, No par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K .
--
As of February 28, 1999, 2,439,966 shares of Common Stock were outstanding and
the aggregate market value of the shares held by unaffiliated stockholders was
approximately $118,621,514.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's 1998 Annual Report (the "1998 Annual Report") and
Definitive Proxy Statement for the Corporation's 1999 Annual Meeting of
Shareholders (the "1999 Proxy Statement") are incorporated by reference into
Parts II and III.
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FORM 10-K
PEAPACK-GLADSTONE FINANCIAL CORPORATION
For the Year Ended December 31, 1998
Table of Contents
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PART I
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Item 1 Description of Business................................................................................3
Item 2 Description of Property................................................................................6
Item 3 Legal Proceedings......................................................................................6
Item 4 Submission of Matters to a Vote of Security Holders....................................................6
PART II
Item 5 Market for the Registrant's Common Stock and Related Shareholders Matters..............................7
Item 6 Selected Financial Data................................................................................7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................7
Item 7A Quantitative and Qualitative Disclosure About Market Risk.............................................8
Item 8 Financial Statements and Supplementary Data............................................................8
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................8
PART III
Item 10 Directors and Executive Officers of the Registrant.....................................................8
Item 11 Executive Compensation.................................................................................9
Item 12 Security Ownership of Certain Beneficial Owners and Management.........................................9
Item 13 Certain Relationships and Related Transactions.........................................................9
PART IV
Item 14 Financial Statements and Exhibits......................................................................9
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This document contains certain forward looking statements with respect to the
financial condition, results of operations and business of the Corporation. Such
statements are not historical facts and include expressions about the
Corporation's confidence, strategies and expectations about earnings, new and
existing programs and products, relationships, opportunities, technology and
market conditions. These statements may be identified by forward-looking
terminology such as "expect", "believe", or "anticipate", or expressions of
confidence like "strong" or "on-going", or similar statements or variations of
such terms. Factors that may cause actual results to differ materially from
those contemplated by such forward looking statements include, among others, the
following possibilities:
o Competitive pressure in the banking and financial services industry
increases significantly.
o Changes in the interest rate environment may reduce interest rate margins.
o General economic conditions, either nationally or in the state of New
Jersey are less favorable than expected.
o Disruptions of the operations of the Corporation, the Bank, or any other
governmental or private entity may occur as a result of the "Year 2000
Problem."
The Corporation assumes no responsibility to update such forward looking
statements in the future.
PART I
Item 1. DESCRIPTION OF BUSINESS
The Corporation
The Peapack-Gladstone Financial Corporation (the "Corporation"), organized under
the laws of New Jersey in August, 1997, by the Board of Directors of
Peapack-Gladstone Bank (the "Bank") to become a holding company for the Bank.
The Corporation is a registered bank holding company. The Bank, including its
subsidiary, Peapack-Gladstone Investment Company, Inc., is now the wholly-owned
subsidiary of the Corporation, and holding the stock of the Bank represents the
only significant activity of the Corporation at this time. The Bank offers
financial services through ten full-service banking offices located in
Gladstone, Far Hills, Pluckemin, Pottersville, Bernardsville, Califon, Long
Valley, Mendham, Chester and Peapack and one mini-branch located in Fellowship
Village, a retirement community. The Bank maintains seven (7) branches and one
(1) auxiliary office in Somerset County, one (1) in Hunterdon County and three
(3) in Morris County. Peapack-Gladstone Investment Company, Inc. was established
in 1996 and incorporated under the laws of the State of New Jersey and is an
investment company whose portfolio consists primarily of U.S. Treasury
securities, U.S. Government Agency securities and investment-grade corporate
debt securities.
The Bank is primarily dedicated to providing quality, personalized financial,
trust and investment services to individuals and small businesses.
Commercial loan customers of the Bank are business people, including merchants,
landscapers, architects, doctors and dentists, attorneys, building contractors
and restaurateurs as well as various service firms and other local retailers.
Most forms of commercial lending are offered, including working capital lines of
credit, term loans for fixed asset acquisitions, commercial mortgages and other
forms of asset-based financing.
In addition to commercial lending activities, the Bank offers a wide range of
consumer banking services, including: Checking and Savings accounts, Money
Market and Interest-bearing Checking accounts, Certificates of Deposit,
Individual Retirement Accounts held in Certificates of Deposit or self-directed
investment accounts as well as accounts for employers' pension funds. The Bank
also offers residential, commercial and construction mortgages, Home Equity
lines of credit and other second mortgage loans. For children, the Bank offers a
special Pony Club Savings Account. New Jersey Consumer Checking Accounts are
offered to low income customers. In addition, the Bank provides foreign and
domestic Travelers' Checks, Personal Money Orders, Cashier's Checks and Wire
Transfers. Automated Teller Machines are available at nine (9) locations. The
machines serve the Bank customers as well as other area consumers who are
members of the MAC(TM), HONOR(TM) and PLUS(TM) networks. Via the Automatic
Teller Machine access card issued by the Bank, customers may pay for commodities
at Point-of-Sale merchant locations.
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The Trust and Investment Department is an important function of the Bank. Since
its inception in 1972, trust assets have increased to more than $549 million.
This Department is committed to sound, conservative management of assets for its
clients and strives to maintain high-quality, specialized services for this
important market segment.
Deposits of the Bank are insured for up to $100,000 per depositor by the Bank
Insurance Fund administered by the FDIC. The Bank is a member of the Federal
Reserve System.
As of December 31, 1998, the Corporation employs 117 full-time and 32 part-time
employees.
Principal Market Areas
The Bank's principal market for its deposit gathering activities include
northern Somerset, northwestern Morris and northeastern Hunterdon Counties. The
area is composed of large estates, upper-income single family homes, moderate
income properties, some low-income housing and a few prosperous farms. There are
numerous small retail businesses in each of the towns as well as offices for
various professionals, i.e. attorneys, architects, interior decorators,
photographers, etc. A portion of the market area is bisected by Interstate
Highways 287 and 78 where numerous corporate offices have relocated over the
past 25 years. The Bank does not have the resource capacity to satisfy the
financial needs of AT&T, Merck & Co., Chubb Insurance Company, or other large
corporations based in the area. However, the Bank has targeted the management
and staff of these companies as potential customers. The corporate decision to
move offices further out of the cities into western New Jersey caused the
relatively rural nature of the Bank's primary trade area to change dramatically.
The Bank has expanded its service areas from one office in 1968 to the present
ten (10) full-service banking locations and one (1) mini-branch location by
steadily opening new branches. All of the communities that the Bank serves are
demographically similar and contiguous to the main office, affording various
management economies.
Prior to 1996, the Corporation's operations facilities limited its ability to
continue to grow and provide superior customer service. In response to this
concern, the Corporation entered into an agreement to lease a 26,882 square foot
building on Route 206 in Peapack-Gladstone, New Jersey. In April of 1996, the
Corporation moved its administrative, loan and operations functions to this new
location.
Competition
Competition in the banking and financial services industry in the Bank's market
area is largely from branches of interstate banks including: First Union Bank;
Fleet Bank NY; PNC Bank, N.A.; and New Jersey regional banks including: United
National Bank, Summit Bank, Hudson United Bank and Valley National Bank; and
Thrift institutions such as Roselle Savings and Loan Association and Hudson City
Savings Bank. The Bank of Somerset Hills, a community bank, opened for business
in January, 1999 in Bernardsville, which is located in the Bank's market area.
Some of the major corporations in the trade area maintain credit unions that
offer competitive financial products.
The Bank attracts new business through direct mail campaigns, newspaper
advertising and personal contact with potential customers. Management encourages
community involvement, supports local charitable events, and reinvests in the
many various communities it serves. Management believes the Bank is
well-positioned to meet the deposit and credit requirements of local businesses
and customers within the trade area by responding to their various needs with
products tailored to their needs.
Governmental Policies and Legislation
The commercial banking business is affected not only by general economic
conditions, but also by the monetary and fiscal policies of the federal
government and the policies of the regulatory agencies, particularly the Federal
Reserve Board. The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) by its
open-market operations in United States government securities, by adjusting the
required level of reserves for financial institutions and by varying the
discount rates applicable to borrowings by
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financial institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits, and also affect
prime or reference lending rates and interest rates paid on deposits. The nature
and impact of any future changes in monetary policies implemented by the Federal
Reserve Board cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in state legislatures and before
various bank regulatory agencies. The likelihood of any major changes and the
impact such changes might have on the Bank are impossible to predict. Certain
potentially significant changes which have been enacted are discussed below.
Capital Requirements
The Federal Reserve Board has adopted risk-based capital guidelines for banks
and bank holding companies. The minimum guidelines for the ratio of total
capital to risk-weighted assets is 8%. At least half of the total capital is to
be comprised of common stock, retained earnings, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and certain other intangibles ("Tier 1 Capital"). The remainder
may consist of other preferred stock, certain other instruments and a portion of
the loan loss allowance. At December 31, 1998, the Corporation's Tier 1 Capital
and Total Capital ratios were 20.25% and 21.50%, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for banks and bank holding companies. These guidelines provide for a
minimum ratio of Tier 1 Capital to average total assets of 3% for banks that
meet certain specified criteria, including having the highest regulatory rating.
All other banks and bank holding companies generally are required to maintain a
leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis
points. The Corporation's leverage ratio at December 31, 1998 was 9.60%.
Restrictions on the Payment of Dividends
The holders of the Corporation's common stock are entitled to receive dividends,
when, as and if declared by the Board of Directors of the Corporation out of
funds legally available. The only statutory limitation is that such dividends
may not be paid when the Corporation is insolvent. Since the principal source of
income for the Corporation will be dividends on Bank common stock paid the
Corporation by the Bank, the Corporation's ability to pay dividends to its
shareholders will depend on whether the Bank pays dividends to it. As a
practical matter, restrictions on the ability of the Bank to pay dividends act
as restrictions on the amount of funds available for the payment of dividends by
the Corporation. As a New Jersey chartered commercial bank, the Bank is subject
to the restrictions on the payment of dividends contained in the New Jersey
Banking Act of 1948, as amended (the "Banking Act"). Under the Banking Act, the
Bank may pay dividends only out of retained earnings, and out of surplus to the
extent that surplus exceeds 50% of stated capital. Under the Financial
Institutions Supervisory Act, the FDIC has the authority to prohibit a
state-chartered bank from engaging in conduct which, in the FDIC's opinion,
constitutes an unsafe or unsound banking practice. Under certain circumstances,
the FDIC could claim that the payment of a dividend or other distribution by the
Bank to the Corporation constitutes an unsafe or unsound practice. The
Corporation is also subject to FRB policies which may, in certain circumstances,
limit its ability to pay dividends. The FRB policies require, among other
things, that a bank holding company maintain a minimum capital base. The FRB
would most likely seek to prohibit any dividend payment which would reduce a
holding company's capital below these minimum amounts.
FDICIA
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. FDICIA substantially revises the depository
institution regulatory and funding provisions of the FDIC and makes revisions to
several other federal banking statutes. Among other things, FDICIA requires the
federal banking regulators to take prompt corrective action in respect of
depository institutions that do not meet minimum capital
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requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." Under recently adopted regulations, a bank is
defined to be well capitalized if it maintains a leverage ratio of at least 5%,
a risk-adjusted Tier 1 capital ratio of at least 6% and a risk-adjusted total
capital ratio of at least 10% and is not otherwise in a "troubled condition" as
specified by its appropriate federal regulatory agency. A bank is defined to be
adequately capitalized if it is not deemed to be well capitalized and it meets
all of its minimum capital requirements. In addition, a depository institution
will be considered undercapitalized if it fails to meet any minimum required
measure, significantly undercapitalized if it is significantly below such
measure and critically undercapitalized if it fails to maintain a level of
tangible equity equal to not less than 2% of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
FDICIA further provides that a bank cannot accept brokered deposits unless (i)
it is well capitalized or (ii) it is adequately capitalized and receives a
waiver from the FDIC. A bank that cannot receive brokered deposits also cannot
offer "pass-through" insurance on certain employee benefit accounts. In
addition, a bank that is not well capitalized cannot offer rates of interest on
deposits which are more than 75 basis points above prevailing rates.
Insurance Funds Legislation
The Corporation's wholly-owned subsidiary, the Peapack-Gladstone Bank, is a
member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC also maintains
another insurance fund, the Savings Association Insurance Fund ("SAIF"), which
primarily covers savings and loan association deposits but also covers deposits
that are acquired by a BIF-insured institution from a savings and loan
association.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act") signed
into law on September 30, 1996 included The Deposit Insurance Funds Act of 1996
(the "Funds Act") under which the FDIC was required to impose a special
assessment on SAIF-assessable deposits to recapitalize the SAIF. Under the Funds
Act, the FDIC will also charge assessments for SAIF and BIF deposits in a 5 to 1
ratio to pay Financing Corp. ("FICO") bonds until January 1, 2000, at which time
the assessment will be equal. Beginning January 1, 1998, a FICO rate of
approximately 1.25 basis points is charged on BIF deposits, and approximately
6.28 basis points is charged on SAIF deposits. The 1996 Act instituted a number
of other regulatory relief provisions.
Item 2. DESCRIPTION OF PROPERTY
The Corporation owns six branches located in Gladstone, Far Hills, Pottersville,
Bernardsville, Long Valley and Mendham and leases four branches located in
Pluckemin, Califon, Chester and Fellowship Village and leases the land on which
the Far Hills office is built. The Corporation also owns two properties adjacent
to the Main Office in Gladstone, and leases an administrative and operations
office building in Peapack-Gladstone.
Item 3. LEGAL PROCEEDINGS
There is no currently pending litigation against the Corporation which assert
claims, that if adversely decided, would have a material adverse effect on the
Corporation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Peapack-Gladstone Financial Corporation is traded on NASDAQ
as a "bulletin board item" under the symbol of PGFC. Trades on NASDAQ are
infrequent. The following table sets forth, for the periods indicated, the
reported high and low sale prices on known trades and cash dividends declared
per share by the Corporation.
Cash Dividend
High Low Per Share
---- --- ---------
1998
----
First Quarter $54.00 $46.25 $0.11
Second Quarter 60.00 54.00 0.11
Third Quarter 65.00 58.00 0.12
Fourth Quarter 56.75 54.75 0.12
1997
----
First Quarter $28.25 $28.25 $0.10
Second Quarter 28.75 28.75 0.10
Third Quarter 37.50 35.00 0.10
Fourth Quarter 40.50 37.50 0.11
The Corporation's Board approved a 2:1 stock split effective December 29, 1997.
In addition, the Board declared 5% stock dividends in November, 1998 and 1996.
All references to the average number of shares outstanding and related prices
per share amounts have been restated to reflect these actions. As a result, the
average number of shares outstanding was 2.441,358 for 1998 and 2,444,118 for
1997.
Future dividends payable by the Corporation will be determined by the Board of
Directors after consideration of earnings and financial condition of the
Corporation, need for capital and such other matters as the Board of Directors
deems appropriate. The payment of dividends is subject to certain restrictions,
see Part I, Item I, "Description of Business - Restrictions on the Payment of
Dividends."
On December 31, 1998, the last reported sale price of the Common Stock was
$55.00. Also, on February 28, 1999, there were approximately 699 shareholders of
record. Trading activity in the Corporation stock has generally been limited,
and frequently there are no reported daily trades. Ryan, Beck & Co., Inc. of
West Orange, New Jersey is the principal market maker for the common stock.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth in the 1998 Annual Report under the heading
"Management's Discussion and Analysis" is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in the 1998 Annual Report under the heading
"Management's Discussion and Analysis" is incorporated herein by reference.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth in the 1998 Annual Report under the heading "Market
Risk Sensitive Instruments" is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements set forth in the 1998 Annual Report,
together with the report thereon by KPMG LLP and the Notes to the Consolidated
Financial Statements are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the 1999 Proxy Statement with respect to the name
of each nominee or director, his age, his positions and offices with the
Registrant, his service on the Registrant's Board, his business experience and
his family relationships with other directors, nominees for director and
executive officers is incorporated herein by reference.
The following is a list of the Corporation's executive officers and their
positions at December 31, 1998. The age of each executive officer at December
31, 1998 is disclosed in parentheses.
T. Leonard Hill (87)
Chairman of the Board of the Corporation since 1997; Chairman of the Board of
the Bank since 1989; Director of the Bank since 1944.
Frank A. Kissel (48)
President and Chief Executive Officer since 1997; President and Chief Executive
Officer of the Bank since 1989; Senior Vice President of Somerset Trust Company
1973-1988; Engaged in the banking industry since 1973.
Robert M. Rogers (40)
Senior Vice President and Assistant Secretary since 1997; Senior Vice President
and Chief Operating Officer of the Bank since 1996; Senior Vice President and
Comptroller of the Bank from 1992; Engaged in the banking industry since 1981.
Arthur F. Birmingham (47)
Senior Vice President and Treasurer since 1997; Senior Vice President and
Comptroller of the Bank since 1996; Senior Vice President and Chief Financial
Officer of Shrewsbury State Bank 1989-1996; Engaged in the banking industry
since 1979.
Craig C. Spengeman (43)
Senior Vice President Since 1997; Senior Vice President and Senior Trust Officer
of the Bank since 1993; Trust Officer from 1985; Engaged in the banking industry
since 1977.
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Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation contained in the 1999 Proxy
Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person is known by the Corporation to be the beneficial owner of more than
five percent of any class of the Corporation's Common Stock.
Information with respect to the security ownership of management contained in
the 1999 Proxy Statement is incorporated herein by reference.
The Corporation knows of no contractual arrangements which may at a subsequent
date result in a change in control of the Corporation.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
contained in the 1999 Proxy Statement is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) Financial Statements
The 1998 Annual Report attached hereto contains all financial statements
incorporated herein by reference.
All financial statement schedules are omitted because they are either
inapplicable or not required, or because the required information is
included in the Consolidated Financial Statements or notes thereto
contained in the 1998 Annual Report.
(b) Exhibits (numbered in accordance with item 601 of Regulations S-K):
(3) Articles of Incorporation and By-Laws:
A. Certificate of Incorporation dated August 14, 1997 incorporated by
reference to the Registrant's Form 10-K Annual Report for the year
ended December 31, 1997 is incorporated herein by reference.
B. By-Laws of the Registrant adopted as of August 14, 1997 incorporated
by reference to the Registrant's Form 10-K Annual Report for the year
ended December 31, 1997 are incorporated herein by reference.
(10) Material Contracts:
A. "Change in Control Agreements" dated as of January 1, 1998 by and
among the Corporation, the Bank and Frank A. Kissel, Paul W. Bell,
Robert M. Rogers, Craig C. Spengeman, Arthur F. Birmingham and Barbara
Greco incorporated by reference to Registrant's Form 10-K Annual
Report for the year ended December 31, 1997 are incorporated herein by
reference.
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B. Peapack-Gladstone Financial Corporation 1998 Stock Option Plan and
1998 Stock Option Plan for Outside Directors incorporated by reference
to Registrant's Registration Statement on Form S-8 dated May 19, 1998
are incorporated herein by reference.
C. "Change in Control Agreement" dated April 3, 1998 by and among the
Corporation, the Bank and Garrett P. Bromley.
(13) Annual Report to Shareholders
(21) List of Subsidiaries:
(a) Subsidiaries of the Corporation:
Percentage of Voting
Jurisdiction Securities Owned by the
Name of Incorporation Parent
Peapack-Gladstone Bank New Jersey 100%
(b) Subsidiaries of the Bank:
Percentage of Voting
Jurisdiction Securities Owned by the
Name of Incorporation Parent
Peapack-Gladstone Investment
Company, Inc. New Jersey 100%
Peapack-Gladstone Financial
Services, Inc. (Inactive) New Jersey 100%
(23) Consents of Experts and Counsel:
Consent of KPMG LLP.
(27) Financial Data Schedule
(99) Proxy Statement for the Corporation's 1999 Annual Meeting of Shareholders,
to be filed within 120 days of the end of the fiscal year to which this
Annual Report applies.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEAPACK-GLADSTONE FINANCIAL CORPORATION
(Registrant)
By /s/ T. LEONARD HILL
--------------------------------------
T. Leonard Hill, Chairman of the Board
Dated March 11, 1999
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Date
--------- ----
/s/ T. LEONARD HILL March 11, 1999
- ----------------------------------------------------------------
T. Leonard Hill, Chairman of the Board
/s/ FRANK A. KISSEL March 11, 1999
- ----------------------------------------------------------------
Frank A. Kissel, President and CEO (Principal Executive Officer)
/s/ ARTHUR F. BIRMINGHAM March 11, 1999
- ----------------------------------------------------------------
Arthur F. Birmingham, Senior Vice President and Treasurer
(Chief Financial Officer and Comptroller)
/s/ PAMELA HILL March 11, 1999
- ----------------------------------------------------------------
Pamela Hill, Director
/s/ JOHN D. KISSEL March 11, 1999
- ----------------------------------------------------------------
John D. Kissel, Director
/s/ JAMES R. LAMB March 11, 1999
- ----------------------------------------------------------------
James R. Lamb, Director
/s/ GEORGE R. LAYTON March 11, 1999
- ----------------------------------------------------------------
George R. Layton, Director
/s/ EDWARD A. MERTON March 11, 1999
- ----------------------------------------------------------------
Edward A. Merton, Director
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/s/ F. DUFFIELD MEYERCORD March 11, 1999
- ----------------------------------------------------------------
F. Duffield Meyercord, Director
/s/ JOHN R. MULCAHY March 11, 1999
- ----------------------------------------------------------------
John R. Mulcahy, Director
/s/ PHILIP W. SMITH March 11, 1999
- ----------------------------------------------------------------
Philip W. Smith III Director
/s/ JACK D. STINE March 11, 1999
- ----------------------------------------------------------------
Jack D. Stine, Director
/s/ WILLIAM TURNBULL March 11, 1999
- ----------------------------------------------------------------
William Turnbull, Director
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CHANGE-IN-CONTROL AGREEMENT
(Garrett P. Bromley)
THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of this 3rd day of
April, 1998, among PEAPACK-GLADSTONE BANK ("Bank"), a New Jersey state banking
association with its principal office at 190 Main Street, Gladstone, New Jersey
07934, PEAPACK-GLADSTONE FINANCIAL CORPORATION ("Peapack"), a New Jersey
Corporation which maintains its principal office at 158 Route 206 North,
Gladstone, New Jersey 07934 (Peapack and the Bank collectively are the
"Company") and GARRETT P. BROMLEY (the "Executive").
BACKGROUND
WHEREAS, the Executive has been continuously employed by the Bank for many
years;
WHEREAS, the Executive throughout his tenure has worked diligently in his
position in the business of the Bank and Peapack;
WHEREAS, the Board of Directors of the Bank and Peapack believe that the
future services of the Executive are of great value to the Bank and Peapack and
that it is important for the growth and development of the Bank that the
Executive continue in his position;
WHEREAS, if the Company receives any proposal from a third person
concerning a possible business combination with, or acquisition of equities
securities of, the Company, the Board of Directors of the Company (the "Board")
believes it is imperative that the Company and the Board be able to rely upon
the Executive to continue in his position, and that they be able to receive and
rely upon his advice, if they request it, as to the best interests of the
Company and its shareholders, without concern that the Executive might be
distracted by the personal uncertainties and risks created by such a proposal;
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WHEREAS, to achieve that goal, and to retain the Executive's services prior
to any such activity, the Board of Directors and the Executive have agreed to
enter into this Agreement to govern the Executive's termination benefits in the
event of a Change in Control of the Company, as hereinafter defined.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of the Executive and the availability of his advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company, and to induce the Executive to remain in the employ of
the Company, and for other good and valuable consideration, the Company and the
Executive, each intending to be legally bound hereby agree as follows:
Definitions
a) Cause. For purposes of this Agreement "Cause" with respect to the
termination by the Company of Executive's employment shall mean (i) willful and
continued failure by the Executive to perform his duties for the Company under
this Agreement after at least one warning in writing from the Company's Board of
Directors identifying specifically any such failure; (ii) the willful engaging
by the Executive in misconduct which causes material injury to the Company as
specified in a written notice to the Executive from the Board of Directors; or
(iii) conviction of a crime, other than a traffic violation, habitual
drunkenness, drug abuse, or excessive absenteeism other than for illness, after
a warning (with respect to drunkenness or absenteeism only) in writing from the
Board of Directors to refrain from such behavior. No act or failure to act on
the part of the Executive shall be considered willful unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
the action or omission was in the best interest of the Company.
b) Change in Control. "Change in Control" means any of the following
events: (i) when Peapack or a Subsidiary acquires actual knowledge that any
person (as such term is used in
14
<PAGE>
Sections 13(d) and 14(d)(2) of the Exchange Act), other than an affiliate of
Peapack or a Subsidiary or an employee benefit plan established or maintained by
Peapack, a Subsidiary or any of their respective affiliates, is or becomes the
beneficial owner (as defined in Rule 13d-3 of the Exchange Act) directly or
indirectly, of securities of Peapack representing more than twenty-five percent
(25%) of the combined voting power of Peapack's then outstanding securities (a
"Control Person"), (ii) upon the first purchase of Peapack's common stock
pursuant to a tender or exchange offer (other than a tender or exchange offer
made by Peapack, a Subsidiary or an employee benefit plan established or
maintained by Peapack, a Subsidiary or any of their respective affiliates),
(iii) upon the approval by Peapack's stockholders of (A) a merger or
consolidation of Peapack with or into another corporation (other than a merger
or consolidation which is approved by at least two-thirds of the Continuing
Directors (as hereinafter defined) and the definitive agreement for which
provides that at least two-thirds of the directors of the surviving or resulting
corporation immediately after the transaction are Continuing Directors (a
"Non-Control Transaction")), (B) a sale or disposition of all or substantially
all of Peapack's assets or (C) a plan of liquidation or dissolution of Peapack,
(iv) if during any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the Board (the "Continuing Directors") cease
for any reason to constitute at least two-thirds thereof or, following a
Non-Control Transaction, two-thirds of the board of directors of the surviving
or resulting corporation; provided that any individual whose election or
nomination for election as a member of the Board (or, following a Non-Control
Transaction, the board of directors of the surviving or resulting corporation)
was approved by a vote of at least two-thirds of the Continuing Directors then
in office shall be considered a Continuing Director, or (v) upon a sale of (A)
common stock of the Bank if after such sale any person (as such term is used in
Section 13(d) and 14(d)(2) of the Exchange Act) other than Peapack, an employee
benefit plan established or maintained by Peapack or a Subsidiary, or an
affiliate of Peapack or a Subsidiary,
15
<PAGE>
owns a majority of the Bank's common stock or (B) all or substantially all of
the Bank's assets (other than in the ordinary course of business). No person
shall be considered a Control Person for purposes of clause (i) above if (A)
such person is or becomes the beneficial owner, directly or indirectly, of more
than ten percent (10%) but less than twenty-five percent (25%) of the combined
voting power of Peapack's then outstanding securities if the acquisition of all
voting securities in excess of ten percent (10%) was approved in advance by a
majority of the Continuing Directors then in office or (B) such person acquires
in excess of ten percent (10%) of the combined voting power of Peapack's then
outstanding voting securities in violation of law and by order of a court of
competent jurisdiction, settlement or otherwise, disposes or is required to
dispose of all securities acquired in violation of law.
c) Contract Period. "Contract Period" shall mean the period commencing the
day immediately preceding a Change in Control and ending on the earlier of (i)
the third anniversary of the Change in Control or (ii) the date the Executive
would attain age 65 or (iii) the death of the Executive. For the purpose of this
Agreement, a Change in Control shall be deemed to have occurred at the date
specified in the definition of Change-in-Control.
d) Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
e) Good Reason. When used with reference to a voluntary termination by
Executive of his employment with the Company, "Good Reason" shall mean any of
the following, if taken without Executive's express written consent:
(1) The assignment to Executive of any duties inconsistent with, or
the reduction of powers or functions associated with, Executive's position,
title, duties, responsibilities and status with the Company immediately
prior to a Change in Control; any removal of Executive from, or any
16
<PAGE>
failure to re-elect Executive to, any position(s) or office(s) Executive
held immediately prior to such Change in Control. A change in title or
positions resulting merely from a merger of the Company into or with
another bank or company which does not downgrade in any way the Executive's
powers, duties and responsibilities shall not meet the requirements of this
paragraph;
(2) A reduction by the Company in Executive's annual base compensation
as in effect immediately prior to a Change in Control or the failure to
award Executive annual increases in accordance herewith;
(3) A failure by the Company to continue any bonus plan in which
Executive participated immediately prior to the Change in control or a
failure by the Company to continue Executive as a participant in such plan
on at least the same basis as Executive participated in such plan prior to
the Change in Control;
(4) The Company's transfer of Executive to another geographic location
outside of New Jersey or more than 25 miles from his present office
location, except for required travel on the Company's business to an extent
substantially consistent with Executive's business travel obligations
immediately prior to such Change in Control;
(5) The failure by the Company to continue in effect any employee
benefit plan, program or arrangement (including, without limitation the
Company's retirement plan, benefit equalization plan, life insurance plan,
health and accident plan, disability plan, deferred compensation plan or
long term stock incentive plan) in which Executive is participating
immediately prior to a Change in Control (except that the Company may
institute or continue plans, programs or arrangements providing Executive
with substantially similar benefits); the taking of any action by the
Company which would adversely affect Executive's participation in or
materially reduce Executive's benefits under, any of such plans, programs
17
<PAGE>
or arrangements; the failure to continue, or the taking of any action which
would deprive Executive, of any material fringe benefit enjoyed by
Executive immediately prior to such Change in Control; or the failure by
the Company to provide Executive with the number of paid vacation days to
which Executive was entitled immediately prior to such Change in Control;
(6) The failure by the Company to obtain an assumption in writing of
the obligations of the Company to perform this Agreement by any successor
to the Company and to provide such assumption to the Executive prior to any
Change in Control; or
(7) Any purported termination of Executive's employment by the Company
during the term of this Agreement which is not effected pursuant to all of
the requirements of this Agreement; and, for purposes of this Agreement, no
such purported termination shall be effective.
f) Subsidiary. "Subsidiary" means any corporation in an unbroken chain of
corporations, beginning with Peapack, if each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
2. Employment. The Company hereby agrees to employ the Executive, and the
Executive hereby accepts employment, during the Contract Period upon the terms
and conditions set forth herein.
3. Position. During the Contract Period the Executive shall be employed as
Senior Vice President of the Bank, or such other corporate or divisional profit
center as shall then be the principal successor to the business, assets and
properties of the Company, with substantially the same title and the same duties
and responsibilities as before the Change in Control. The Executive shall devote
his full time and attention to the business of the Company, and shall not during
the Contract Period be engaged in any
18
<PAGE>
other business activity. This paragraph shall not be construed as preventing the
Executive from managing any investments of his which do not require any service
on his part in the operation of such investments.
4. Cash Compensation. The Company shall pay to the Executive compensation
for his services during the Contract Period as follows:
a) Base Salary. A base annual salary equal to the annual salary in
effect as of the Change in Control. The annual salary shall be payable in
installments in accordance with the Company's usual payroll method.
b) Annual Bonus. An annual cash bonus equal to at least the average of
the bonuses paid to the Executive in the three years prior to the Change in
Control. The bonus shall be payable at the time and in the manner which the
Company paid such bonuses prior to the Change in Control.
c) Annual Review. The Board of Directors of the Company during the
Contract Period shall review annually, or at more frequent intervals which
the Board determines is appropriate, the Executive's compensation and shall
award him additional compensation to reflect the Executive's performance,
the performance of the Company and competitive compensation levels, all as
determined in the discretion of the Board of Directors.
5. Expenses and Fringe Benefits.
a) Expenses. During the Contract Period, the Executive shall be
entitled to reimbursement for all business expenses incurred by him with
respect to the business of the Company in the same manner and to the same
extent as such expenses were previously reimbursed to him immediately prior
to the Change in Control.
b) Supplemental Retirement Plan. During the Contract Period, if the
Executive was entitled to benefits under any supplemental retirement plan
prior to the Change in Control, the
19
<PAGE>
Executive shall be entitled to continued benefits under such plan after the
Change in Control and such plan may not be modified to reduce or eliminate such
benefits during the Contract Period.
c) Club Membership and Automobile. If prior to the Change in Control, the
Executive was entitled to membership in a country club and/or the use of an
automobile, he shall be entitled to the same membership and/or use of an
automobile at least comparable to the automobile provided to him prior to the
Change in Control.
d) Other Benefits. The Executive also shall be entitled to vacations and
sick days, in accordance with the practices and procedures of the Company, as
such existed immediately prior to the Change in Control. During the Contract
Period, the Executive also shall be entitled to hospital, health, medical and
life insurance, and any other benefits enjoyed, from time to time, by senior
officers of the Company, all upon terms as favorable as those enjoyed by other
senior officers of the Company. Notwithstanding anything in this paragraph 5(d)
to the contrary, if the Company adopts any change in the benefits provided for
senior officers of the Company, and such policy is uniformly applied to all
officers of the Company (and any successor or acquirer of the Company, if any),
including the chief executive officer of such entities, then no such change
shall be deemed to be contrary to this paragraph.
6. Termination for Cause. The Company shall have the right to terminate the
Executive for Cause, upon written notice to him of the termination which notice
shall specify the reasons for the termination. In the event of termination for
Cause the Executive shall not be entitled to any further benefits under this
Agreement.
7. Disability. During the Contract Period if the Executive becomes
permanently disabled, or is unable to perform his duties hereunder for 4
consecutive months in any 12 month period, the
20
<PAGE>
Company may terminate the employment of the Executive. In such event, the
Executive shall not be entitled to any further benefits under this Agreement.
8. Death Benefits. Upon the Executive's death during the Contract Period,
his estate shall not be entitled to any further benefits under this Agreement.
9. Termination Without Cause or Resignation for Good Reason. The Company
may terminate the Executive without Cause during the Contract Period by written
notice to the Executive providing four weeks notice. The Executive may resign
for Good Reason during the Contract Period upon four weeks' written notice to
the Company specifying facts and circumstances claimed to support the Good
Reason. The Executive shall be entitled to give a Notice of Termination that his
or her employment is being terminated for Good Reason at any time during the
Contract Period, not later than twelve months after any occurrence of an event
stated to constitute Good Reason. If the Company terminates the Executive's
employment during the Contract Period without Cause or if the Executive Resigns
for Good Reason, the Company shall, subject to Section 12 hereof:
(a) Within 20 business days of the termination of employment pay the
Executive a lump sum severance payment in an amount equal to three (3.0)
times the highest annual cash compensation, consisting solely of salary and
bonus, as well as any 401(k) deferral, paid to the Executive during any
calendar year in each of the three calendar years immediately prior to the
Change in Control; and
(b) Continue to provide the Executive during the remainder of the
Contract Period with health, hospitalization and medical insurance, as were
provided at the time of the termination of his employment with the Company,
at the Company's cost (subject to standard deductibles and co-pays, and the
Executive's continuing payment of his part of the premium for family
coverage, if applicable).
21
<PAGE>
The Executive shall not have a duty to mitigate the damages suffered by him
in connection with the termination by the Company of his employment without
Cause or a resignation for Good Reason during the Contract Period. If the
Company fails to pay the Executive the lump sum amount due him hereunder or to
provide him with the health, hospitalization and medical insurance benefits due
under this section, the Executive, after giving 10 days' written notice to the
Company identifying the Company's failure, shall be entitled to recover from the
Company all of his reasonable legal fees and expenses incurred in connection
with his enforcement against the Company of the terms of this Agreement. The
Executive shall be denied payment of his legal fees and expenses only if a court
finds that the Executive sought payment of such fees without reasonable cause
and not in good faith.
10. Resignation Without Good Reason. The Executive shall be entitled to
resign from the employment of the Company at any time during the Contract Period
without Good Reason, but upon such resignation the Executive shall not be
entitled to any additional compensation for the time after which he ceases to be
employed by the Company, and shall not be entitled to any of the other benefits
provided hereunder. No such resignation shall be effective unless in writing
with four weeks' notice thereof.
11. Non-Disclosure of Confidential Information.
a) Non-Disclosure of Confidential Information. Except in the course of his
employment with the Company and in the pursuit of the business of the Company or
any of its subsidiaries or affiliates, the Executive shall not, at any time
during or following the Contract Period, disclose or use, any confidential
information or proprietary data of the Company or any of its subsidiaries or
affiliates. The Executive agrees that, among other things, all information
concerning the identity of and the Company's relations with its customers is
confidential information.
22
<PAGE>
b) Specific Performance. Executive agrees that the Company does not have an
adequate remedy at law for the breach of this section and agrees that he shall
be subject to injunctive relief and equitable remedies as a result of the breach
of this section. The invalidity or unenforceability of any provision of this
Agreement shall not affect the force and effect of the remaining valid portions.
c) Survival. This section shall survive the termination of the Executive's
employment hereunder and the expiration of this Agreement.
12. Certain Reduction of Payments by the Company.
a) Anything in this Agreement to the contrary notwithstanding, prior to the
payment of any lump sum amount payable hereunder, the certified public
accountants of the Company immediately prior to a Change of Control (the
"Certified Public Accountants) shall determine as promptly as practical and in
any event within 20 business days following the termination of employment of
Executive whether any payment or distribution by the Company to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would more likely than not be nondeductible by the Company for
Federal income purposes because of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and if it is then the aggregate present value of
amounts payable or distributable to or for the benefit of Executive pursuant to
this Agreement (such payments or distributions pursuant to this Agreement are
thereinafter referred to as "Agreement Payments") shall be reduced (but not
below zero) to the reduced Amount. For purposes of this paragraph, the "Reduced
Amount" shall be an amount expressed in present value which maximizes the
aggregate present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of said Section 280G of the Code.
23
<PAGE>
b) If under paragraph (a) of this section the Certified Public Accountants
determine that any Payment would more likely than not be nondeductible by the
Company because of Section 280G of the Code, the Company shall promptly give the
Executive notice to that effect and a copy of the detailed calculation thereof
and of the Reduced Amount, and the Executive may then elect, in his sole
discretion, which and how much of the Agreement Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Agreement Payments equals the Reduced Amount), and shall advise the Company in
writing of his election within 20 business days of his receipt of notice. If no
such election is made by the Executive within such 20-day period, the Company
may elect which and how much of the Agreement Payments shall be eliminated or
reduced (as long as after such election the Aggregate present Value of the
Agreement Payments equals the Reduced Amount) and shall notify the Executive
promptly of such election. For purposes of this paragraph, present Value shall
be determined in accordance with Section 280G(d)(4) of the Code. All
determinations made by the Certified Public Accountants shall be binding upon
the Company and Executive shall be made within 20 business days of a termination
of employment of Executive. With the consent of the Executive, the Company may
suspend part or all of the lump sum payment due under Section 9 hereof and any
other payments due to the Executive hereunder until the Certified Public
Accountants finish the determination and the Executive (or the Company, as the
case may be) elect how to reduce the Agreement Payments, if necessary. As
promptly as practicable following such determination and the elections
hereunder, the Company shall pay to or distribute to or for the benefit of
Executive such amounts as are then due to Executive under this Agreement and
shall promptly pay to or distribute for the benefit of Executive in the future
such amounts as become due to Executive under this Agreement.
24
<PAGE>
c) As a result of the uncertainty in the application of Section 280G of the
Code, it is possible that Agreement Payments may have been made by the Company
which should not have been made ("Overpayment") or that additional Agreement
Payments which will have not been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculation of the Reduced
Amount hereunder. In the event that the Certified Public Accountants, based upon
the assertion of a deficiency by the Internal Revenue Service against the
Company or Executive which said Certified Public Accountants believe has a high
probability of success, determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to Executive which
Executive shall repay to the Company together with interest at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided,
however, that no amount shall be payable by Executive to the Company in and for
the extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that the Certified Public
Accountants, based upon controlling precedent, determine that an Underpayment
has occurred, any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
25
<PAGE>
13. Term and Effect Prior to Change in Control.
a) Term. Except as otherwise provided for hereunder, this Agreement shall
commence on the date hereof and shall remain in effect for a period of 3 years
from the date hereof (the "Initial Term") or until the end of the Contract
Period, whichever is later. The Initial Term shall be automatically extended for
an additional one year period on the anniversary date hereof (so that the
Initial Term is always 3 years) unless, prior to a Change in Control, the
Chairman of the Board of Directors of Peapack notifies the Executive in writing
at any time that the Contract is not so extended, in which case the Initial Term
shall end upon the later of (i) 3 years after the date hereof, or (ii) 2 years
after the date of such written notice. Notwithstanding anything to the contrary
contained herein, the Initial Term shall cease when the Executive attains age
65.
b) No Effect Prior to Change in Control. This Agreement shall not effect
any rights of the Company to terminate the Executive prior to a Change in
Control or any rights of the Executive granted in any other agreement or
contract or plan with the Company. The rights, duties and benefits provided
hereunder shall only become effective upon and after a Change in Control. If the
full-time employment of the Executive by the Company is ended for any reason
prior to a Change in Control, this Agreement shall thereafter be of no further
force and effect.
14. Severance Compensation and Benefits Not in Derogation of Other
Benefits. Anything to the contrary herein contained notwithstanding, the payment
or obligation to pay any monies, or granting of any benefits, rights or
privileges to Executive as provided in this Agreement shall not be in lieu or
derogation of the rights and privileges that the Executive now has or will have
under any plans or programs of or agreements with the Company, except that if
the Executive received any payment hereunder, he shall not be entitled to any
payment under the Company's severance policies for officers and employees.
26
<PAGE>
15. Miscellaneous. This Agreement is the joint and several obligation of
the Bank and Peapack. The terms of this Agreement shall be governed by, and
interpreted and construed in accordance with the provisions of, the laws of New
Jersey. This Agreement supersedes all prior agreements and understandings with
respect to the matters covered hereby, including expressly any prior agreement
with the Company concerning change-in-control benefits. The amendment or
termination of this Agreement may be made only in a writing executed by the
Company and the Executive, and no amendment or termination of this Agreement
shall be effective unless and until made in such a writing. This Agreement shall
be binding upon any successor (whether direct or indirect, by purchase, merge,
consolidation, liquidation or otherwise) to all or substantially all of the
assets of the Company. This Agreement is personal to the Executive and the
Executive may not assign any of his rights or duties hereunder but this
Agreement shall be enforceable by the Executive's legal representatives,
executors or administrators. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
IN WITNESS WHEREOF, Peapack-Gladstone Bank and Peapack-Gladstone Financial
Corporation each have caused this Agreement to be signed by their duly
authorized representatives pursuant to the authority of their Boards of
Directors, and the Executive has personally executed this Agreement, all as of
the day and year first written above.
ATTEST: PEAPACK-GLADSTONE
FINANCIAL CORPORATION
_________________________________ By: __________________________________
Catherine A. McCatharn, Secretary T. Leonard Hill, Chairman
ATTEST: PEAPACK-GLADSTONE BANK
27
<PAGE>
_________________________________ By: __________________________________
Catherine A. McCatharn, Secretary T. Leonard Hill, Chairman
WITNESS:
GARRETT P. BROMLEY, EXECUTIVE
________________________________ __________________________________
Garrett P. Bromley, Executive
28
================================================================================
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
<PAGE>
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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
========================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
AFTER 1 AFTER 5
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) 1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
========================================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
INCOME/
AVERAGE EXPENSE YIELD
(IN THOUSANDS, EXCEPT YIELD INFORMATION) BALANCE (FTE) (FTE)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
===============================================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
NON-PERFORMING ASSETS:
THE FOLLOWING TABLE PRESENTS FOR THE YEARS INDICATED THE COMPONENTS OF
NON-PERFORMING ASSETS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
==========================================================================================
<CAPTION>
<S> <C> <C> <C> <C> <C>
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%
- ------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
REPRICING OR 0 - 3 3 - 12 1 - 5 Over 5
MATURITY DATE Months Months Years Years Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Loan balances do not include non-accrual loans.
17
<PAGE>
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
<PAGE>
THE FOLLOWING TABLE PRESENTS THE SCHEDULED MATURITY OF MARKET RISK SENSITIVE
INSTRUMENTS AS OF DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Average Within 1-5 Over Estimated
(IN THOUSANDS) Interest Rate 1 Year Years 5 Years Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
====================================================================================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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.)
<CAPTION>
<S> <C> <C> <C> <C> <C>
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 --
===================================================================================================================================
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED QUARTERLY FINANCIAL DATA FOR
THE PERIODS INDICATED:
<TABLE>
<CAPTION>
SELECTED 1998 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------
<CAPTION>
SELECTED 1997 QUARTERLY DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
(DOLLARS IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE AMOUNTS) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on following page)
28
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
(DOLLARS IN THOUSANDS, EXCEPT COMMON TREASURY RETAINED COMPREHENSIVE
PER SHARE AMOUNTS) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
<CAPTION>
1997
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
<CAPTION>
1997
- ------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
</TABLE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER FOR CAPITAL
PROMPT CORRECTIVE ADEQUACY
(IN THOUSANDS) ACTUAL ACTION PROVISIONS PURPOSES
- -----------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
- -----------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
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
<PAGE>
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
<PAGE>
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
-------------------------------------------------------------
PAULA A. PHILHOWER Assistant Vice President
-------------------------------------------------------------
CHRISTOPHER POCQUAT Assistant Vice President
-------------------------------------------------------------
PATRICIA A. STUMP Assistant Vice President
-------------------------------------------------------------
EDWARD J. SWEENEY Assistant Vice President
-------------------------------------------------------------
FRANK C. WALDRON Assistant Vice President
-------------------------------------------------------------
MARY M. WOOD Assistant Vice President
-------------------------------------------------------------
CATHERINE A. McCATHARN Secretary*
-------------------------------------------------------------
MARJORIE DZWONCZYK Assistant Cashier
-------------------------------------------------------------
JOHN G. HARITON Assistant Cashier
-------------------------------------------------------------
KATHRYN M. NEIGH Assistant Cashier/Assistant Secretary
-------------------------------------------------------------
DIANE M. RIDOLFI Assistant Cashier/Assistant Secretary
- --------------------------------------------------------------------------------
TRUST DEPARTMENT CRAIG C. SPENGEMAN Senior Vice President &
GLADSTONE Senior Trust Officer*
-------------------------------------------------------------
BRYANT K. ALFORD Vice President & Trust Officer
-------------------------------------------------------------
JOHN M. BONK Vice President & Trust Officer
-------------------------------------------------------------
GRETA N. DAWSON Vice President & Trust Officer
-------------------------------------------------------------
RICHARD K. DONNELLY Vice President & Trust Officer
-------------------------------------------------------------
JOHN C. KAUTZ Vice President & Trust Officer
-------------------------------------------------------------
KURT G. TALKE Assistant Vice President &
Trust Officer
-------------------------------------------------------------
RICHARD E. PURTELL Assistant Vice President
-------------------------------------------------------------
CATHERINE A. McCATHARN Assistant Trust Officer
-------------------------------------------------------------
WENDY KONTIR Assistant Trust Officer
-------------------------------------------------------------
EDWARD NICOLICCHIA Assistant Trust Officer
- --------------------------------------------------------------------------------
BERNARDSVILLE DONNA IORIO-GISONE Vice President
- --------------------------------------------------------------------------------
CALIFON CAROL L. BEHLER Assistant Cashier/Assistant Secretary
- --------------------------------------------------------------------------------
CHESTER DONNA M. WHRITENOUR Assistant Vice President
- --------------------------------------------------------------------------------
GLADSTONE THOMAS N. KASPER Assistant Vice President
- --------------------------------------------------------------------------------
FAR HILLS JAMES CICCONE Assistant Cashier
- --------------------------------------------------------------------------------
LONG VALLEY DONALD R. GOLDENBAUM Vice President
SHERRI HALLETT Assitant Cashier
- --------------------------------------------------------------------------------
MENDHAM ELIZABETH RAHN Vice President
- --------------------------------------------------------------------------------
FELLOWSHIP JANET E. BATTAGLIA Assistant Cashier
- --------------------------------------------------------------------------------
PLUCKEMIN PAMELA W. STONE Vice President
MARILYN M. MORROW Assistant Cashier
- --------------------------------------------------------------------------------
POTTERSVILLE PHYLLIS HERZOG Assistant Cashier
-------------------------------------------------------------
* Denotes a Holding Company Officer
<PAGE>
DIRECTORS
- -------------------------
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
- -------------------------------
LOAN & ADMINISTRATION BUILDING
158 Route 206 North
Gladstone, NJ 07934
(908) 234-0700
- -------------------------------
GLADSTONE (Main Office)
190 Main Street
Gladstone, NJ 07934
(908) 234-0700
- -------------------------------
CALIFON
438 Route 513
Califon, NJ 07830
(908) 832-5131
- -------------------------------
FAR HILLS
26 Dumont Road
Far Hills, NJ 07931
(908) 781-1018
- -------------------------------
LONG VALLEY
59 East Mill Road (Route 24)
Long Valley, NJ 07853
(908) 876-3300
- -------------------------------
PLUCKEMIN
468 Route 206 North
Bedminster, NJ 07921
(908) 658-4500
- -------------------------------
TRUST & INVESTMENT DEPARTMENT
190 Main Street
Gladstone, NJ 07934
(908) 719-4360
- -------------------------------
BERNARDSVILLE
36 Morristown Road
Bernardsville, NJ 07924
(908) 766-1711
- -------------------------------
CHESTER
350 Main Street
Chester, NJ 07930
(908) 879-8115
- -------------------------------
FELLOWSHIP VILLAGE
8000 Fellowship Road
Basking Ridge, NJ 07920
(908) 719-4332
- -------------------------------
MENDHAM
17 East Main Street
Mendham, NJ 07945
(973) 543-9630
- -------------------------------
POTTERSVILLE
11 Pottersville Rd.
Pottersville, NJ 07979
(908) 439-2265
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Peapack-Gladstone Financial Corporation:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Peapack-Gladstone Financial corporation of our report dated February 2,
1999, relating to the consolidated statements of conditions 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, which report is incorporated by reference in the December 31, 1998 Annual
Report on Form 10-K of Peapack-Gladstone Financial Corporation.
KPMG LLP
Short Hills, New Jersey
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 42,679 33,240
<SECURITIES> 135,836 145,558
<RECEIVABLES> 216,819 177,380
<ALLOWANCES> 2,224 1,893
<INVENTORY> 0 0
<CURRENT-ASSETS> 516 785
<PP&E> 9,170 8,595
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 402,796 363,665
<CURRENT-LIABILITIES> 364,841 330,026
<BONDS> 0 0
0 0
0 0
<COMMON> 4,085 3,892
<OTHER-SE> 33,870 29,747
<TOTAL-LIABILITY-AND-EQUITY> 402,796 363,665
<SALES> 0 0
<TOTAL-REVENUES> 29,075 26,138
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,761 10,726
<LOSS-PROVISION> 465 400
<INTEREST-EXPENSE> 8,438 7,698
<INCOME-PRETAX> 8,411 7,314
<INCOME-TAX> 3,092 2,822
<INCOME-CONTINUING> 5,319 4,492
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,319 4,492
<EPS-PRIMARY> 2.18 1.84
<EPS-DILUTED> 2.11 1.81
</TABLE>
