It's a small bank, and its service area includes some of the nation's wealthiest neighborhoods. That should be two strikes against its CRA potential but New Jersey's Peapack-Gladstone Bank has an outstanding rating. What's it doing right?

[Expanded Picture]Inside the broad lobby of Peapack-Gladstone Bank, a wide mural above the teller stations immediately grabs your eye. Painted by a local artist, it shows a series of figures in the scarlet jackets, black caps and riding crops of people who ride to the hounds.

It's not just an anachronism; members of the Essex Hunt Club and other groups still put on the garb and gather to ride nearby, though they no longer chase foxes over hill and dale. Images of "the hunt" appear in most of the bank's printed materials and on brass-finish pins worn by officers at the $280-million-asset institution, whose brick headquarters represent the only bank in Gladstone, a town of just over 2,000 people.

Few customers in the bank's affluent rural and suburban territory some 35 miles southwest of New York City can relate directly to the hunt and its evocation of a genteel aristocracy. But Peapack-Gladstone's choice of images doesn't mean it won't lower its sights to the middle class. It has received an "outstanding" Community Reinvestment Act rating in the last two exams by the Federal Reserve Bank of New York, even though it has no distressed neighborhoods to lend to and only one part-time CRA officer.

What the 73-year-old, state-chartered institution has done is convince regulators that it is committed to CRA - that it understands what community investment means and is bent on carrying it through. Relatively few community banks have evinced such commitment; most outstanding ratings have been won by far larger banks with a battery of CRA personnel, sophisticated computerized mapping programs and established relationships with non-profits toiling in poorer communities.

"Management has a clear understanding of its community," wrote Fed examiners in the bank's most recent CRA evaluation. In particular, they cited management and directors' ongoing community outreach and involvement with local doings, plus quarterly reports from the bank's CRA officer that keep decision-makers current on issues and opportunities. In a community with few lower-income people, spreading the word about services and credit is critical.

Some will say Peapack is lucky, that it might be hard-pressed to deliver a high level of service in an area with real poverty. Perhaps, but that's a purely imaginary scenario. Regulators can only ask a bank to satisfy its service area (assuming it is logically drawn). The best CRA banks, like Peapack, seem to regard the law as a validation of a service philosophy - not as an unwarranted bureaucratic intrusion.

As the effective date of revisions to CRA regulations loom, banks of all sizes are trying to draw a bead on what regulators want. Time and again, they've heard that the new emphasis will be on results, not "paperwork," that banks under $250 million will have streamlined reviews, and that larger banks will be subject to three broad tests that judge lending, investment and service instead of the current dozen "assessment factors."

But with a new, more conservative Congress coming in, there's been talk of lobbying lawmakers to ease the CRA burden. As it stands, banking trade groups are endorsing the latest revision, but banks, the test kitchens of CRA, want to taste it first. The comment period closed only in late November, so it's too early to talk about the exact outline of the regulations. While highly rated banks like Peapack shouldn't encounter much trouble, uncertainty is unsettling.

Indeed, the first draft of the changes in December 1993 was a little alarming even for Peapack-Gladstone. "We were somewhat worried about the original proposal. We're somewhat limited from a lending perspective," says president and chief executive Frank A. Kissel. The bank has carried a rough 40% loan-to-deposit ratio since its founding (it was 36% last June 30), Kissel notes, and there just isn't enough loan demand to boost that to the 60% level regulators initially were targeting for community banks.

Kissel and chief operating officer Beverley Marsico talk a bit wistfully about being too big for the under-$250-million cutoff for streamlined exams. Too, the revised CRA could require the bank to expand its service area by including full census tracts, rather than defining it by the "natural barriers," like roads and hills, that Peapack now uses, says Marsico, a friendly, down-to-earth woman who has been in banking since 1950.

Rural and Residential

This service area extends from Gladstone in a rough circle covering some 200 square miles and spreading over parts of Morris, Somerset and Hunterdon Counties. Besides the main office, the bank has branches in Bernardsville, Califon, Far Hills, Long Valley, Mendham, Pluckemin and Pottersville. Kissel calls the market "rural/residential," and the bank once serviced chiefly agricultural interests, including a feed mill that operated next to the original bank building.

Even today, most local businesses are small trade and service establishments. The bulk of loans are residential - 82% of loans outstanding in 1993 were real estate-related. While the bank handles payroll and deposit services for some local businesses, "we do little ancillary business with them," Kissel says. "Hopefully, we do lots of mortgages and car loans with the people in those businesses."

Of course, many of Peapack's customers aren't bluebloods. Even tony Far Hills has a swatch of moderate-income neighborhoods where frame houses line small streets. And the northern tier of the bank's service area - towns like Flanders and Budd Lake - has a substantial population of trade and service employees who work locally; many of the bank's low- to moderate-income loans are made there, says Marsico.

As at smaller banks everywhere, the board is comprised chiefly of local businessmen, among them a paving contractor and funeral home owner. Kissel says they've been very active in outreach, and not just recently: Chairman T. Leonard Hill has been a director for 51 years.

The last CRA evaluation, completed after an August 1993 examination, noted that Peapack offers low- to moderate-income borrowers reduced application and origination fees, as well as more liberal loan-to-value ratios. Yet it points out that examiners could find no "contributions to organizations in direct support of either community development or affordable housing programs."

To pull down an outstanding rating without showing such support - something generally de rigeur in more urban areas - testifies to the bank's affluent service area and lack of access to these intermediaries. But the evaluation noted that a bank director has been working with local community organizations, "providing technical expertise in obtaining funding." That director, retiree Jack D. Stine, "has been a guiding light" in development of two senior citizen extended-care facilities in Bridgewater, says Kissel.

The evaluation cites the value of a quarterly report prepared by the bank's CRA officer, assistant cashier Michael B. Garris, which "management uses to better identify the need for credit and deposit products and financial services." Garris, who is young, trim and brisk, doubles as the bank's training officer. Behind his desk stands a single good-sized filing cabinet where he collects CRA-related paperwork, as well as alphabetized files of bank advertisements and contributions.

Activities Summarized

Written reports, filled in by employees, document efforts made to meet local credit needs or show the bank's involvement in community development programs. Employees can check off a series of boxes and write in appropriate notes; summaries of these activities are compiled for examiners. Garris also prepares quarterly reports of credit activity for directors' review - an important issue for examiners.

The annual CRA sugary given to examiners has a narrative about the bank's approach to its market and community service philosophy; pie charts with data on mortgage and consumer loans (most are auto credits) by income level; business calls and branch-related calls by employees; community activities by directors and employees; and population data, including racial composition and income and poverty levels. Garris also performs an annual review of activity by zip code, including loans, checking accounts and CDs.

Marsico says the bank only has 1,100 loans, so it doesn't behoove Peapack-Gladstone to buy a mapping software program that would show different demographic areas in various shades of the rainbow. "We can break out loans by zip code and by town," Kissel says. Mapping might impress examiners, he says, but doesn't make economic sense for the bank.

Urbane and articulate, Kissel looks like he could be as comfortable in a Wall Street aerie as he is being a suburban banker. He insists the bank's approach to CRA is rooted in concern about quality service. "We feel that if a customer comes in and is qualified, we're going to make that loan. The regulators want banks to be color-blind, and we agree with that," he says.

That philosophy certainly hasn't hurt earnings. Peapack-Gladstone earned 1.47% on assets in fast half of '94, and 18.90% on equity; comparable numbers for all of 1993 were 1.42% and 19.25%. Just 1.2% of outstanding loans were classified at year-end 1993. Core earnings in the first half rose 31% from a year earlier.

The bank has doubled in size since 1989, and quadrupled since it opened a trust department in 1973 that has since swelled to well over $200 million in assets in custody. It did so with no acquisitions, apart from a branch closed by another institution in Mendham.

Compliance examiners have cited its generous operating hours - 8 to 6 for drive-in traffic, 7 p.m. on Fridays - and widespread 24-hour automated teller machine service. Marsico says the bank has had ATMs since 1978 and charges customers no fees for "on us" transactions and just 75 cents for foreign transactions.

Inevitably when CRA comes up, bankers home in on cost burdens and the competitive advantages enjoyed by non-bank rivals. Kissel talks about mounting competition from credit unions - some attached to major corporations nearby - that have none of the layers of regulation banks face. CRA clearly is one of the knottier layers. Kissel and company take it very seriously, but also talk of it as something sewn into the fabric of community service, and so something at which a committed bank can excel.

"We want to be good at the little things," he says. "That's really what CRA is all about."

RELATED ARTICLE: Long Driveways and Deep Roots

Included in the bank's service area are some of the country's wealthiest neighborhoods, estate towns that sprouted at the far reach of the rail lines leading to New York. In towns like Bernardsville and Far Hills, the blood flows very blue and tree-lined driveways stretch into the distance; houses are more visible from the air than from the street. The local postal directory is graced by Social Register names like Forbes, Dillon and Whitman (as in Governor Christie), and Jacqueline Onassis had a farm nearby. While boxer Mike Tyson did buy a hilltop mansion in Bernardsville before his fall - and singer Whitney Houston has a spread in Mendham - old money has put down deep roots.

This is horse country, and breeding farms abound; the U.S. Equestrian Team is headquartered a short canter from the bank's Gladstone offices. Historically, Democrats are about as welcome as horseflies, although a few cluster developments have brought in younger (though mostly quite affluent) people. But it's a area with little industry, one where the term "carriage trade" still carries meaning.

Hills swoop down into valleys - the town of Long Valley, bisected by the trout-stocked Raritan River, has one of the bank's branches - in a terrain far more reminiscent of Massachusetts' Berkshires than New Jersey's grimy industrial belt, cinched along the New York border. Smalltown values mix with sophistication, pickup tracks with Range Rovers.

In Gladstone itself - Peapack and Gladstone are separate boroughs, joined at the hip by a common mayor - the bank's brick building is the largest one on Main Street, which has both residential and commercial buildings. The branch in Pottersville, a town of white frame houses and fences, has a big glass front from decades ago, when it was Lindabery's General Store. The branch shares the building with a dentist's office, but it has a charm that modem technology doesn't bring; in fact, as a designated historic building, it is the bank's only branch without an ATM.

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