PEAPACK GLADSTONE FINANCIAL CORP quarterly report, Q3 FY2014

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Peapack-Gladstone Financial Corporation — Q3 2014 Form 10-Q

Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2014. The company operates through Banking and Private Wealth Management. Its strategy, “Expanding Our Reach,” emphasizes loan and deposit growth, hiring revenue-producing staff, and investment in infrastructure; most lending is secured by real estate in New Jersey and New York.

Financial performance and position

  • Q3 results: Net interest income was $17.0 million, up 27.5% from $13.4 million; provision for loan losses was $1.15 million, versus $0.75 million. Net income rose to $3.86 million from $1.96 million. Diluted EPS was $0.32, versus $0.22. Annualized return on average assets was 0.63% and return on average equity 8.35%.
  • Nine-month results: Net interest income was $49.5 million, up 29.5%; provision was $3.63 million, versus $2.10 million. Net income increased to $10.68 million from $6.87 million; diluted EPS was $0.90, versus $0.76. Annualized ROA was 0.63% and ROE 7.95%.
  • Margins and other income: Tax-equivalent net interest margin was 2.89% for Q3, down from 3.28%, and 3.06% for the nine months, down from 3.26%. Nine-month other income was $15.52 million, nearly flat versus $15.62 million; lower mortgage-banking and securities gains were partly offset by higher wealth-management fees and other income.
  • Expenses: Operating expenses increased 3.7% to $14.69 million in Q3 and 8.4% to $43.96 million for the nine months. Management attributed much of the increase to strategic hiring, growth, and new or expanded offices.
  • Balance sheet at September 30: Total assets were $2.515 billion, versus $1.967 billion at year-end 2013. Gross loans were $2.041 billion, up from $1.574 billion; deposits were $2.203 billion, up from $1.647 billion. Shareholders’ equity was $188.1 million, versus $170.7 million.
  • Funding and liquidity: Cash and cash equivalents were $120.8 million, compared with $35.1 million at year-end. Deposits included $270.5 million of brokered demand deposits and brokered CDs. FHLB advances totaled $83.7 million; there were no overnight FHLB borrowings at quarter-end. Management reported $670.6 million of unused FHLB capacity and $28.6 million of correspondent-bank capacity. Available-for-sale securities were $269.6 million, including $221.8 million unencumbered.
  • Cash flow, nine months: Operating activities provided $22.6 million, down from $29.5 million. Investing activities used $451.6 million, mainly reflecting $535.5 million of net loan growth. Financing activities provided $514.6 million, including a $556.2 million net increase in deposits. Cash and cash equivalents increased $85.7 million.
  • Credit and capital: The allowance for loan losses was $18.3 million, or 0.90% of loans, versus $15.4 million and 0.98% at year-end. Nonperforming assets were $9.7 million, including $8.8 million of nonaccrual loans; nonperforming loans were 0.43% of loans and allowance coverage was 208.18%. Impaired loans rose to $21.8 million from $17.7 million. The Bank reported Tier 1 and total risk-based capital ratios of 11.59% and 12.79%, and a leverage ratio of 7.22%; each exceeded the then-applicable well-capitalized thresholds.

Material changes versus comparable periods

  • Rapid growth in commercial lending drove higher earning assets and net interest income. Commercial mortgage loans were $1.261 billion, or 61.8% of gross loans, compared with $832.0 million and 52.9% at year-end. Multifamily loans were $928.1 million, up from $541.5 million.
  • Growth in loan volume outweighed lower asset yields, but net interest margin contracted amid low rates, competitive pricing, and larger liquidity balances. Average interest-earning deposits in Q3 were $197.7 million, versus $35.2 million a year earlier.
  • Private Wealth Management fees increased 11.1% in Q3 and 11.0% for the nine months. Assets under administration rose 10.7% year over year to $2.86 billion.
  • Mortgage banking income declined as mortgage originations and sales slowed and the company shifted toward shorter-duration, relationship-focused residential lending. In June, it sold $67 million of longer-duration, lower-coupon residential mortgages; the nine-month period included a $169,000 gain on loans held at lower of cost or fair value.

Outlook, management commentary, and risks

  • Management said expense growth was tracking strategic-plan projections and expected higher expenses to continue through the end of 2014 and into 2015. It cautioned that revenue and profitability from new hires may lag their costs by several quarters, while noting recent quarterly revenue improvement.
  • On October 23, 2014, the company announced an at-the-market offering of up to $50 million of common stock for general corporate purposes, including growth and strategic opportunities. This creates potential dilution; the amount and timing of any sales were not specified.
  • Management cited economic and real-estate weakness in its markets, loan-loss and nonperforming-loan increases, margin pressure, interest-rate changes, liquidity and funding risks, execution and integration of growth, regulatory costs, cyber risk, and technology and litigation risks. It also noted the portfolio’s significant real-estate concentration.
  • Interest-rate simulations estimated that an immediate, sustained 200-basis-point increase would reduce net interest income approximately 9% in year one and 2% in year two; a 100-basis-point decrease would reduce it approximately 3% and 5%, respectively. The model estimated economic value of portfolio equity would fall 18.77% under +200 basis points and 7.84% under +100, and rise 4.95% under -100. Management cautioned that model assumptions limit predictive accuracy.
  • Management considered liquidity and capital adequate. It expected the Bank to meet or exceed well-capitalized levels under phased-in Basel III rules. The board declared a $0.05-per-share dividend payable November 14, 2014.
  • A $1.5 million commercial nonaccrual loan reported at quarter-end was paid in full on October 8, 2014. The company reported no other-than-temporary impairment charges on securities during the periods presented; however, a trust preferred security with a $389,000 unrealized loss was rated below investment grade and monitored for credit events.

Most important facts for investors to verify

  • Whether rapid commercial and multifamily loan growth can be sustained without weakening underwriting, asset quality, or reserve adequacy; review the rise in impaired loans and nonperforming assets.
  • How the company’s real-estate concentration and local New Jersey/New York conditions affect credit performance, collateral values, and the allowance for loan losses.
  • Whether loan growth and wealth-management gains can offset margin compression, higher funding costs, and strategic-plan expenses.
  • The composition, cost, and stability of brokered deposits, and the company’s reliance on wholesale funding and available borrowing capacity.
  • Whether any shares are sold under the $50 million at-the-market program and the resulting effect on share count and per-share earnings.
  • The subsequent status of the below-investment-grade trust preferred security and the company’s interest-rate exposure as actual rates and balance-sheet mix change.