PEAPACK GLADSTONE FINANCIAL CORP quarterly report, Q2 FY2014

Peapack-Gladstone Financial Corporation — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. The company operates a bank and a Private Wealth Management division, primarily serving New Jersey and nearby markets. Amounts are in U.S. dollars; financial statement figures are generally in thousands unless noted.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net interest income	$16.9 million	$12.4 million	$32.5 million	$24.9 million
Provision for loan losses	$1.15 million	$0.50 million	$2.48 million	$1.35 million
Other income	$5.47 million	$5.24 million	$10.47 million	$10.84 million
Operating expenses	$14.93 million	$14.08 million	$29.27 million	$26.37 million
Net income	$3.78 million	$2.01 million	$6.81 million	$4.90 million
Diluted EPS	$0.32	$0.22	$0.58	$0.55

Q2 annualized return on average assets was 0.67% and return on average equity was 8.44%; first-half figures were 0.63% and 7.74%, respectively.
Net interest margin declined to 3.14% in Q2 from 3.22% a year earlier, and to 3.16% for the first half from 3.25%. Loan growth increased net interest income, while low yields and competitive pricing weighed on margins.
Wealth-management fees rose 10.4% in Q2 to $4.0 million and 10.9% in the first half to $7.8 million. Assets under administration were $2.84 billion, up 12.8% from June 2013.

Financial position, liquidity and capital

At June 30, 2014, total assets were $2.401 billion, up from $1.967 billion at December 31, 2013. Loans were $1.875 billion, versus $1.574 billion at year-end; commercial mortgage growth, particularly multifamily lending, was a major driver.
Total deposits were $2.115 billion, compared with $1.647 billion at year-end. This included $283 million of brokered deposits, versus $15 million at year-end. Cash and cash equivalents were $215.6 million; available-for-sale securities were $225.3 million, of which $171.2 million was unencumbered.
FHLB advances were $83.7 million, up from $74.7 million; there were no overnight FHLB borrowings at quarter-end, compared with $54.9 million at year-end. Unused borrowing capacity was reported at $636.4 million from FHLB and $28.8 million from correspondent banks.
Shareholders’ equity was $182.3 million, up from $170.7 million. The Bank reported Tier 1 and total capital ratios of 12.53% and 13.78%, and a leverage ratio of 7.69%; each exceeded the stated well-capitalized thresholds. Management expected the Bank to meet or exceed well-capitalized levels under phased-in Basel III rules.
For the first six months, operating activities provided $13.7 million of cash, investing activities used $257.9 million, and financing activities provided $424.6 million. Cash and cash equivalents increased $180.5 million to $215.6 million, largely reflecting deposit growth and funding of loan expansion.

Changes, credit quality and notable items

Q2 net income increased $1.8 million year over year; first-half net income increased $1.9 million. Management attributed the improvement mainly to loan-driven net interest income and higher wealth fees, partly offset by higher credit costs, strategic-plan expenses and lower mortgage banking gains.
Nonperforming assets were $7.6 million, down from $8.6 million at year-end; nonperforming loans were 0.35% of loans. The allowance for loan losses was $17.2 million, or 0.92% of loans, versus $15.4 million, or 0.98%, at year-end. The allowance covered nonperforming loans by 263%.
Impaired loans increased to $19.8 million from $17.7 million at year-end. Accruing troubled debt restructurings were $12.7 million; the filing states that accruing TDRs were paying according to modified terms at June 30. The filing reports one TDR payment default within 12 months of modification during the first half, involving a $55,000 residential mortgage.
Multifamily loans rose to $845.3 million from $541.5 million at year-end and represented 45.2% of the risk-classified loan portfolio. Commercial and investment real estate exposures also increased. Management noted that most loans are secured by real estate in New Jersey and New York.
During Q2, the company sold approximately $67 million of longer-duration, lower-coupon residential mortgages and executed $61 million of multifamily loan participations, retaining majority ownership, servicing and client relationships. Management said the transactions supported liquidity, interest-rate-risk management and credit diversification.
Strategic hiring and related investment raised first-half operating expenses 11.0%; salaries and benefits rose 19.5%. Management expected expenses to remain elevated through 2014 and noted that revenue and profitability from new personnel may lag costs by several quarters.
Mortgage banking gains declined to $112,000 in Q2 from $391,000. Securities gains were $79,000 versus $238,000. Q2 included a $176,000 gain on residential loan sales. A $300,000 Q2 OREO valuation provision compared with $930,000 in Q2 2013; the filing cites a prior write-down of a property and a further write-down in 2014.

Outlook, risks and other disclosures

No earnings or revenue guidance was provided. Management said the strategic plan was gaining momentum and revenue had improved, but projected continued higher operating expenses as the company invests in personnel and infrastructure.
Liquidity modeling indicated that an immediate, sustained 200-basis-point rate increase would reduce year-one net interest income about 6%, while a 100-basis-point decrease would reduce it about 3% in year one and 6% in year two. Management cautioned that model assumptions limit precision.
Risks highlighted include local economic and real-estate weakness, credit losses and allowance needs, low-rate and competitive pressure on net interest margin, growth-management and strategic-plan execution, reliance on brokered funding, liquidity, regulation and compliance costs, and cybersecurity. Management identified allowance estimation as a significant judgment area.
Management stated that securities unrealized losses were considered temporary and reported no other-than-temporary impairment charges. One trust-preferred security was rated Ba1; management said it monitored the issuer and did not expect to sell the security before recovery.
The Board declared a regular $0.05-per-share dividend payable August 14, 2014. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter. No material changes to the previously disclosed risk factors were reported.

Important facts for investors to verify

Whether rapid commercial and multifamily loan growth can be sustained without weakening underwriting or increasing credit losses, given the portfolio’s real-estate concentration.
Trends in impaired loans, TDRs, classified credits, charge-offs and provision expense, and the adequacy of the allowance as the loan book expands.
The durability and cost of deposit growth, including brokered deposits, and the company’s capacity to maintain liquidity if funding conditions change.
Whether revenue growth from strategic hiring and wealth management offsets elevated compensation and infrastructure costs, and whether margin pressure persists.
The sensitivity of earnings and economic value to interest-rate changes, including the assumptions underlying management’s models.