Peapack-Gladstone Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company operates through Banking and Peapack Private wealth management. Financial amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue, as defined by the company | $61.9 million | $53.0 million | $177.6 million | $154.1 million |
| Net interest income | $45.5 million | $35.2 million | $128.0 million | $100.8 million |
| Net income | $20.1 million | $14.2 million | $53.7 million | $41.8 million |
| Diluted earnings per share | $1.09 | $0.74 | $2.88 | $2.15 |
| Net interest margin | 2.98% | 2.42% | 2.83% | 2.35% |
| Return on average assets / equity, annualized | 1.30% / 15.21% | 0.95% / 10.40% | 1.16% / 13.46% | 0.94% / 10.43% |
Revenue is net interest income plus wealth management fees and other income. Q3 provision for credit losses was $0.6 million, versus $1.6 million a year earlier; the nine-month provision was $4.4 million, versus $2.7 million. Operating expenses were $33.6 million in Q3 and $100.4 million for the nine-month period, up 4% and 6%, respectively, year over year.
- Balance sheet at September 30: Total assets were $6.09 billion; loans were $5.18 billion, up about $370 million from year-end 2021; deposits were $5.30 billion, up $33 million. Loans to deposits were 97.70%, compared with 91.28% at year-end.
- Credit quality: Allowance for credit losses was $59.7 million, or 1.15% of loans, versus $61.7 million and 1.28% at year-end. Nonperforming loans were $15.7 million, or 0.30% of loans; there were no loans 90 days past due and still accruing.
- Liquidity and funding: Cash and cash equivalents were $108.3 million. The company reported $1.8 billion of available FHLB funding and $1.7 billion of Federal Reserve discount-window capacity; it had $32.4 million of overnight FHLB borrowings outstanding. Cash declined $38.5 million during the first nine months.
- Debt and capital: Subordinated debt, net, was $132.9 million. Bank total capital to risk-weighted assets was 14.69%, and the company’s ratio was 14.74%; the Bank’s Tier 1 leverage ratio was 10.79%. Management said capital remained above applicable well-capitalized requirements.
- Cash flows, nine months: Operating activities provided $105.6 million; investing activities used $177.4 million; financing activities provided $33.3 million.
Material changes versus comparable periods
- Q3 net income rose 42% and diluted EPS increased from $0.74 to $1.09. Higher loan yields, loan growth and net interest margin expansion drove much of the improvement; deposit interest expense also increased as rates rose.
- Nine-month net income increased 28%. Net interest income rose $27.2 million, while other income fell $3.7 million overall. The period included a $6.6 million securities-sale loss from a first-quarter balance-sheet repositioning.
- The repositioning involved selling lower-yielding securities and adding $250 million of multifamily loans. Management said it improved future net interest margin by four basis points, with no impact to tangible capital or tangible book value per share.
- Available-for-sale securities fell to $497.9 million from $796.8 million at year-end, reflecting sales and lower fair values. Accumulated other comprehensive loss widened to $75.0 million from $12.4 million, principally from unrealized securities losses. Management attributed the losses mainly to higher interest rates and credit spreads, not deterioration in credit quality, and recorded no securities credit-loss allowance.
- Wealth management assets under management/administration declined 16% from year-end to $9.3 billion amid market declines. Q3 wealth fees fell 7% year over year, while nine-month fees rose 7%, including the effect of the 2021 PPSG acquisition.
- Shareholders’ equity decreased to $515.5 million from $546.4 million at year-end. Net income was offset by share repurchases and the increase in accumulated other comprehensive loss. The company repurchased 790,277 shares for $27.5 million during the nine months.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management described the company as asset-sensitive: its model estimated that an immediate, sustained 100-basis-point rate increase would raise net interest income about 1.3% in year one and 3.8% in year two; a 200-basis-point increase was estimated to raise year-one NII about 3.2% and year-two NII about 7.8%. These are model scenarios, not forecasts, and management cautioned that actual results may differ.
- Key stated risks include inflation and rising rates, recession or weaker local economies, pressure on margins and loan originations, increased deposit costs, falling securities and real-estate values, higher credit losses, CRE concentration, competition, operating costs, cyberattacks, and execution/integration risks related to growth and acquisitions.
- Commercial real estate concentration was 396% of Bank regulatory capital, including multifamily at 254%. Management said it believes its CRE risk-management framework addresses key regulatory elements.
- The company adopted CECL on January 1, 2022, recording a $3.9 million net increase to retained earnings. The filing notes that expected-loss estimates rely on management judgment and economic forecasts and may change.
- Disclosure controls were concluded effective at September 30, 2022. Separately, management disclosed that a material weakness in internal control over financial reporting related to CECL controls had been identified as of March 31, 2022; remediation was ongoing and had not yet operated long enough for management to conclude the weakness was remediated.
- No material pending or threatened litigation was reported. The Board declared a $0.05-per-share dividend payable November 28, 2022. The company’s 2017 subordinated notes were due to move from a 4.75% fixed rate to a floating rate in December 2022.
Most important facts for investors to verify
- Whether net interest margin and earnings growth persist as deposit costs reprice and interest rates or the economy change.
- Whether the securities portfolio’s substantial unrealized losses, including the $75.0 million accumulated other comprehensive loss, affect capital, liquidity or future earnings.
- Credit performance and allowance adequacy as the loan book grows, especially in multifamily and other commercial real estate; monitor criticized loans, nonaccruals and charge-offs.
- Deposit stability, funding mix and liquidity capacity, given loans-to-deposits of 97.70% and rising funding costs.
- Progress in remediating the CECL-related internal-control material weakness and any subsequent disclosures about control effectiveness.
- How market declines affect wealth-management assets and fees, and how variable SBA, mortgage-banking and advisory income contributes to results.