Peapack-Gladstone Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates banking and private wealth management businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $35.2 | $32.1 | $100.8 | $95.9 |
| Provision for loan and lease losses | $1.6 | $5.2 | $2.7 | $30.1 |
| Other income | $17.8 | $20.2 | $53.3 | $47.4 |
| Operating expenses | $32.2 | $28.5 | $94.5 | $85.7 |
| Net income | $14.2 | $13.5 | $41.8 | $23.2 |
| Diluted EPS | $0.74 | $0.71 | $2.15 | $1.22 |
| Net interest margin | 2.42% | 2.20% | 2.35% | 2.33% |
Management-defined total revenue was $53.0 million for Q3, up 1.2%, and $154.1 million for the nine months, up 7.6%. Q3 pretax income was $19.2 million versus $18.7 million; nine-month pretax income was $56.9 million versus $27.5 million. Returns on average assets/equity were 0.95%/10.40% for Q3 and 0.94%/10.43% for the nine-month period.
Wealth management fees rose 37% in Q3 to $13.9 million and 30% for the nine months to $39.0 million. Assets under management/administration were $10.3 billion, up 17% from year-end 2020, reflecting market performance, new business, and acquisitions.
Balance sheet, cash flow, debt, and capital
- Total assets were $6.24 billion at September 30, up 5.9% from December 31, 2020. Loans were $4.58 billion, up 4.6%; deposits were $5.38 billion, up 11.6%. The loans-to-deposits ratio declined to 85.10% from 90.74%.
- Cash and cash equivalents were $616.2 million; available-for-sale securities were $843.8 million. Securities included $12.7 million of gross unrealized losses; accumulated other comprehensive loss was $9.0 million, compared with $1.4 million at year-end 2020.
- For the first nine months, operating cash flow was $68.5 million (prior year $18.7 million), investing cash outflow was $446.0 million, and financing cash inflow was $340.5 million. Cash and equivalents decreased $37.1 million to $616.2 million.
- There were no short-term borrowings at quarter-end. PPPLF borrowings were $48.5 million, down from $177.1 million at year-end; subordinated debt, net, was $132.6 million, down from $181.8 million after redemption of $50 million of notes. The company reported $1.9 billion of unused FHLB borrowing capacity and $1.1 billion of Federal Reserve Discount Window capacity.
- Company total risk-based capital was 15.12% versus 17.67% at year-end; Tier 1 leverage was 8.56%. The Bank’s total risk-based capital ratio was 14.26% and leverage ratio 10.15%. Management said capital remained above regulatory requirements and sufficient for planned near-term growth.
- The company repurchased 619,815 shares for $19.4 million during the first nine months. A $0.05-per-share dividend was declared for payment in November 2021.
Material changes and drivers
- Q3 net income increased 4.6% year over year despite higher expenses; lower credit-loss provision and higher net interest and wealth management income helped offset reduced other income and a new swap valuation charge.
- Nine-month net income rose 80.3%, principally reflecting the $27.3 million lower provision compared with 2020. The prior-year period included a $7.4 million gain on sale of PPP loans and a $3.2 million tax benefit from an NOL carryback, which also affect comparisons.
- Q3 2021 operating expenses included a $1.35 million swap valuation allowance tied to a commercial real estate loan placed on nonaccrual. Nine-month expenses also included $1.5 million of severance, $648,000 of subordinated-debt issuance-cost write-off, and acquisition- and hiring-related costs.
- Multifamily loans grew to $1.50 billion from $1.13 billion at year-end; commercial and industrial loans declined to $916 million from $1.06 billion. The loan portfolio remained concentrated in commercial real estate: regulatory CRE concentration was 384% of Bank capital, including multifamily at 230% and non-owner-occupied CRE at 154%.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expects benefit from repricing: nearly $400 million of certificates of deposit, averaging approximately 0.52%, mature in the 12 months through September 30, 2022.
- Interest-rate models show the company as asset-sensitive. An immediate, sustained 100-basis-point increase was estimated to raise net interest income 5.9% in year one and 8.9% in year two; a 200-basis-point increase was estimated to raise it 10.4% and 16.3%, respectively. These are model estimates, not forecasts, and depend on assumptions.
- Credit quality requires attention: nonaccrual loans increased to $25.9 million from $11.4 million at year-end, including a $19.9 million commercial real estate loan with a $7.1 million specific reserve. Nonperforming loans were 0.57% of total loans versus 0.26% at year-end. The allowance was $65.1 million, or 1.42% of loans.
- COVID-related modifications totaling $947 million had $33.1 million outstanding at September 30; the filing’s MD&A separately refers to approximately $13 million of remaining deferrals. The filing does not clearly reconcile these figures. PPP loans remaining in the portfolio were approximately $48.7 million, and management expected most to be forgiven.
- Management cited risks from COVID-19, economic and real estate conditions, CRE concentration, interest-rate and securities-market changes, credit losses, competition, acquisition integration, technology and cybersecurity, and regulatory costs. It also warned that loan-loss estimates and goodwill could be adversely affected by pandemic-related conditions. No material litigation was reported; no material change to previously disclosed risk factors was noted.
- The company expected to adopt CECL on January 1, 2022 and anticipated a one-time cumulative allowance adjustment, but said its size and total effect could not yet be determined.
Most important facts to verify
- Reconcile the $33.1 million outstanding COVID modification balance in the notes with the approximately $13 million cited in MD&A.
- Review performance, collateral, and reserve adequacy for the $19.9 million nonaccrual commercial real estate exposure and broader CRE concentrations.
- Assess sensitivity of net interest income and securities values to changing rates, including the assumptions underlying management’s rate-shock estimates.
- Track expense growth and earnings contribution from the Lucas/Noyes teams and PPSG acquisition, and distinguish recurring revenue from PPP, SBA, swap, and other transaction-based income.
- Monitor CECL adoption, the resulting opening allowance adjustment, and capital and liquidity after share repurchases and dividend payments.