PEAPACK GLADSTONE FINANCIAL CORP annual report, FY2020

Peapack-Gladstone Financial Corporation — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. The company is a New Jersey bank holding company operating commercial banking and private wealth management businesses, principally in New Jersey and the New York metropolitan area.

Financial performance and position

Metric20202019
Net interest income$127.6 million$120.3 million
Provision for loan losses$32.4 million$4.0 million
Net income$26.2 million$47.4 million
Diluted EPS$1.37$2.44
Net interest margin2.31%2.63%
Total assets at year-end$5.89 billion$5.18 billion
Total loans at year-end$4.37 billion$4.39 billion
Total deposits at year-end$4.82 billion$4.24 billion
Shareholders’ equity at year-end$527.1 million$503.7 million
Cash and cash equivalents at year-end$653.3 million$208.2 million
Operating cash flow$36.7 million$86.3 million

Wealth management fees were $40.9 million, up 7%; assets under management and/or administration rose 17% to $8.8 billion. The company reported return on average assets of 0.45% and return on average equity of 5.11%. It declared $0.20 per common share in dividends for the year.

The allowance for loan losses was $67.3 million, or about 1.54% of loans, versus $43.7 million, or 0.99%, a year earlier. Nonperforming assets were $11.5 million, or 0.19% of assets; nonperforming loans were 0.26% of loans. Regulatory capital remained above well-capitalized thresholds: the Bank’s total risk-based capital ratio was 14.81% and its common equity Tier 1 ratio was 13.55%.

At December 31, 2020, borrowings included $177.1 million under the Paycheck Protection Program Liquidity Facility, $15.0 million of short-term borrowings, and $181.8 million of subordinated debt, net. The company issued $100 million of subordinated notes in December. Management reported approximately $1.3 billion of balance-sheet liquidity and substantial additional unused secured borrowing capacity.

Material changes versus 2019

  • Net income declined 45% and diluted EPS declined 44%, primarily reflecting a substantially higher credit-loss provision and increased operating expenses.
  • The $32.4 million 2020 provision reflected COVID-19-related economic uncertainty and higher qualitative reserve factors. Net charge-offs were $8.8 million, including a $4.7 million charge-off on an assisted-living facility loan.
  • Net interest income rose 6%, but net interest margin fell 32 basis points to 2.31% as asset yields fell faster than funding costs. Interest income declined $14.9 million while interest expense fell $22.2 million.
  • Operating expenses increased 19% to $125.0 million. Notable items included a $4.8 million FHLB advance prepayment penalty, a $4.4 million valuation allowance on a loan held for sale, higher personnel costs and branch-related costs.
  • Deposits grew 14%; customer deposits excluding brokered deposits grew 16%. Loans were roughly flat, partly reflecting loan paydowns and lower commercial mortgage and multifamily balances.
  • Other income included a $7.4 million gain on the sale of $355 million of PPP loans. The company originated approximately $600 million of PPP loans and held $195.6 million at year-end.
  • The company’s reported cash dividend per share remained $0.20. It repurchased $6.5 million of shares during 2020, completing a previously authorized program.

Fourth-quarter results

For the quarter ended December 31, 2020, net income was $3.0 million and diluted EPS was $0.16, compared with net income of $12.2 million and diluted EPS of $0.64 in fourth-quarter 2019. Fourth-quarter 2020 included a $2.4 million loan-loss provision and $39.2 million of operating expenses.

Outlook, risks and unusual items

  • Management gave no specific earnings or revenue guidance. It planned to reduce excess interest-earning cash in 2021 through loan originations and securities purchases, and expected higher operating expenses as strategic-plan investments continue.
  • Management described the bank as asset-sensitive: its models estimated net interest income would increase 8.5% in year one under an immediate, sustained 100-basis-point rate increase, but fall in a declining-rate environment. These are model estimates, not forecasts.
  • COVID-19 remains a principal uncertainty. The company modified 536 loans totaling $946.3 million during 2020; $74.0 million remained under deferral at year-end. Management cautioned that post-deferral borrower performance was uncertain.
  • Credit risks include exposure to commercial real estate, commercial and industrial borrowers, and concentrated regional markets. The company also cited pandemic-related risks to hospitality, food service and non-grocery retail borrowers, collateral values, loan losses and wealth fees.
  • The company adopted the CECL expected-credit-loss standard on January 1, 2021. At filing, management was finalizing implementation and model validation and estimated the one-time adoption adjustment would not materially affect consolidated financial condition.
  • Other risks include sustained low rates and margin pressure, deposit competition and funding concentration, cyber and third-party service risks, regulatory requirements, and the transition away from LIBOR. The filing contains an apparent date inconsistency in its LIBOR transition discussion; investors should consult the full disclosure.
  • The company stated that no pending or threatened legal proceeding was expected to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.

Most important facts to verify

  • Whether COVID-era loan deferrals, criticized credits and the $67.3 million allowance adequately reflect subsequent borrower performance and expected losses.
  • The composition and credit quality of commercial real estate and C&I exposures, including the assisted-living facility loan and remaining PPP loans.
  • The sustainability of net interest income and the 2.31% margin under prolonged low rates, and the assumptions underlying management’s rate-sensitivity models.
  • The CECL adoption impact and whether the estimated immaterial adjustment was confirmed after implementation.
  • How the $100 million subordinated-note proceeds are deployed, including any share repurchases, debt redemption or wealth-management acquisitions; the filing notes a board-approved repurchase plan of up to 948,735 shares through March 31, 2022.