Peapack-Gladstone Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020. The company operates banking and Peapack Private wealth-management businesses. Dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 or prior quarter-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $49.6 million | $46.3 million |
| Net interest income | $31.8 million | $31.7 million |
| Net interest margin | 2.28% | 2.57% |
| Provision for loan and lease losses | $0.2 million | $20.0 million |
| Operating expenses | $31.6 million | $28.2 million |
| Net income | $13.2 million | $1.4 million |
| Diluted earnings per share | $0.67 | $0.07 |
| Net cash provided by operating activities | $30.3 million | $7.4 million |
Wealth-management fees rose 22% to $12.1 million. Other income excluding wealth-management fees was $5.7 million, up 25%, with higher mortgage banking, SBA-sale and corporate advisory income partly offset by no loan-level swap fee income in the quarter. Annualized return on average assets was 0.89% and return on average equity was 10.03%.
Financial position, liquidity and credit
- Total assets were $5.97 billion, up from $5.89 billion at year-end. Loans were $4.38 billion, nearly unchanged; deposits rose to $4.94 billion from $4.82 billion. The loans-to-deposits ratio was 88.53%, down from 90.74%.
- Cash and cash equivalents were $476.5 million, down from $653.3 million. Available-for-sale securities increased to $875.3 million from $622.7 million; $841.9 million of these securities were pledged. Operating cash flow was positive, while investing activities used $317.5 million, primarily reflecting securities purchases and loan growth. Cash decreased $176.8 million during the quarter.
- Reported debt and borrowings included $181.8 million of subordinated debt, $168.2 million under the PPP Liquidity Facility and $15.0 million of short-term borrowings. The company reported $1.8 billion of unused FHLB borrowing capacity and $990 million available at the Federal Reserve Discount Window; neither source was drawn at quarter-end.
- The allowance for loan and lease losses was $67.5 million, or 1.54% of loans, versus $67.3 million and 1.54% at year-end. Nonaccrual loans were $11.8 million; nonperforming loans were 0.27% of total loans. Special-mention loans increased to $166.0 million from $162.1 million, while classified loans declined to $25.7 million from $37.8 million.
- Commercial real estate exposure remains significant: multifamily and non-owner-occupied CRE concentrations together were 351% of Bank regulatory capital. Company total capital to risk-weighted assets was 17.70%; the Bank’s ratio was 15.04%. The Bank’s leverage ratio was 9.95%.
- Shareholders’ equity was $522.4 million, down from $527.1 million at year-end, largely reflecting a $12.4 million other comprehensive loss, partly offset by earnings. The company repurchased 158,033 shares for $4.4 million and paid $0.05 per share in dividends.
Material changes and unusual items
- Net income improved substantially year over year, chiefly because the loan-loss provision fell from $20.0 million to $0.2 million. Management attributed the prior-year provision to pandemic-related economic uncertainty and increased qualitative credit-loss factors.
- Q1 2021 included $1.5 million of severance expense related to staff reorganization. Q1 2020 included a $3.2 million federal tax benefit from carrying back net operating losses under the CARES Act; Q1 2021 income tax expense was $4.6 million.
- Net interest margin contracted 29 basis points year over year as lower market rates reduced asset yields; average yields on interest-earning assets fell to 2.70% from 3.65%. Lower deposit costs partly offset that pressure.
- Available-for-sale securities’ unrealized position shifted from a $5.5 million net gain at year-end to a $7.9 million net loss at March 31, 2021. Management attributed losses to rate and market movements and stated it did not intend, and was not likely required, to sell affected securities before recovery.
- Wealth-management assets under management or administration were $9.4 billion, up 7% from year-end and 47% year over year. Management cited acquisitions of teams from Lucas and Noyes, organic growth and market appreciation.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management expects benefit from the repricing of approximately $415 million of certificates of deposit maturing over the 12 months ending March 31, 2022, at an average rate of about 0.76%.
- Management describes the company as asset-sensitive: its models estimate net interest income would rise 6.3% in year one and 10.2% in year two under an immediate, sustained 100-basis-point rate increase; a 200-basis-point increase is estimated to lift it 11.6% and 18.9%, respectively. These are model estimates, not forecasts, and actual results may differ.
- COVID-related uncertainty remains. Of $946.7 million in CARES Act loan modifications approved, $42.8 million remained outstanding at quarter-end. The company had funded approximately $650 million of PPP loans overall, with $232.7 million remaining in its portfolio; management believed most would be forgiven. Management cautioned that borrowers’ performance after deferrals remains uncertain.
- Key risks include deterioration in pandemic-affected borrowers, real-estate values and CRE concentrations; credit-loss estimates; interest-rate and securities-market changes; liquidity or funding pressures; competition and margin compression; execution and integration of growth initiatives; and cybersecurity, regulatory and litigation risks. Management stated it could not estimate COVID-19’s full impact.
- The company expects to adopt CECL on January 1, 2022; the size of the transition adjustment and overall impact had not yet been determined. Management said liquidity and capital were adequate for planned near-term growth. The Board declared a $0.05-per-share dividend payable May 25, 2021.
Important facts for investors to verify
- Whether the lower provision reflects durable credit improvement, and how loan deferrals, special-mention exposures and CRE concentrations perform.
- Whether deposit growth and CD repricing support net interest income while margin remains below the prior-year level.
- How much of reported earnings depends on variable or transaction-driven items, including mortgage banking, SBA sales and corporate advisory fees.
- The effect of securities valuation changes, liquidity deployment and the planned CECL adoption on future capital and earnings.
- Whether growth-related costs, severance and share repurchases align with the company’s stated strategic and capital priorities.