Peapack-Gladstone Financial Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The company operates Banking and Peapack Private wealth-management segments. Balance-sheet comparisons are against December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue (net interest income plus other income) | $61.4 | $51.5 | $115.7 | $101.1 |
| Net interest income | $42.9 | $33.8 | $82.5 | $65.6 |
| Provision for credit losses | $1.4 | $0.9 | $3.8 | $1.1 |
| Net income | $20.1 | $14.4 | $33.5 | $27.6 |
| Diluted EPS | $1.08 | $0.74 | $1.79 | $1.42 |
| Net interest margin | 2.83% | 2.38% | 2.76% | 2.32% |
| Annualized return on average assets | 1.30% | 0.97% | 1.09% | 0.93% |
| Annualized return on average equity | 15.43% | 10.86% | 12.59% | 10.45% |
- Balance sheet and lending: Total assets were $6.15 billion, versus $6.08 billion at year-end. Loans were $5.15 billion, up from $4.81 billion; deposits were $5.40 billion, up from $5.27 billion. Loans equaled 95.37% of deposits, compared with 91.28% at year-end.
- Funding, debt and capital: Cash and cash equivalents were $153.4 million. There were no short-term borrowings outstanding; subordinated debt, net, was $132.8 million. Bank total risk-based capital was 14.31%, Tier 1 leverage was 10.42%, and the company reported a 14.60% total capital ratio. Management said capital remained above regulatory requirements.
- Asset quality and reserves: Nonperforming loans were $15.1 million, or 0.29% of loans; nonperforming assets were $15.2 million, or 0.25% of assets. The allowance for credit losses was $59.0 million, 1.15% of loans, versus $61.7 million and 1.28% at year-end. No loans were 90 days past due and still accruing.
- Cash flow, six months: Operating activities provided $70.2 million; investing activities used $179.7 million, principally reflecting loan growth; financing activities provided $116.2 million. Cash and cash equivalents increased $6.6 million to $153.4 million.
- Wealth management: Fees were $13.9 million in Q2 and $28.7 million year to date, increases of 7% and 14%, respectively. Assets under management and/or administration were $9.5 billion, down 14% from year-end, reflecting market declines.
Material changes and notable items
- Net income and diluted EPS increased in both comparison periods. Management attributed stronger net interest income to loan growth, higher asset yields and a lower cost of interest-bearing liabilities; the reported margin rose 45 basis points in Q2 and 44 basis points year to date.
- Operating expenses rose 6% in Q2 to $32.7 million and 7% year to date to $66.8 million. Drivers included acquisition-related costs, hiring and compensation, corporate and health insurance costs, and, year to date, a $673,000 swap valuation allowance and $372,000 of private-office consolidation costs.
- First-quarter balance-sheet repositioning included selling securities and adding higher-yielding multifamily loans. The six-month results include a $6.6 million securities-sale loss. Management said the repositioning is expected to improve future margin by four basis points, with no impact to tangible capital or tangible book value per share.
- Available-for-sale securities fell to $556.8 million from $796.8 million at year-end. Their net-of-tax unrealized loss in accumulated other comprehensive income widened to $59.1 million from $9.9 million, contributing to the decline in shareholders’ equity to $520.3 million from $546.4 million. Management attributed security-value declines primarily to higher market rates and spreads, not credit deterioration, and recorded no securities credit-loss allowance.
- The company adopted CECL on January 1, 2022. Adoption reduced retained earnings by $3.9 million and reduced the loan allowance by $5.5 million; the filing cautions that prior-period credit-loss figures use the former incurred-loss method and are not directly comparable.
- The company repurchased 499,878 shares for $17.6 million during the first half. The board declared a $0.05-per-share dividend payable in August 2022.
Outlook, risks and controls
- No specific earnings, revenue or margin guidance was provided. Management described the company as asset-sensitive: its models estimated that an immediate, sustained 100-basis-point rate increase would raise net interest income 1.4% in year one and 4.1% in year two versus a flat-rate scenario; a 200-basis-point increase was estimated to raise it 3.3% and 8.1%, respectively. Management cautioned that model assumptions limit precision.
- Management cited risks including inflation and changing interest rates, recession or weaker local economies, real-estate values, credit losses, deposit competition and funding costs, market declines, execution of growth and acquisition strategies, cyberattacks, and COVID-19-related uncertainty. Multifamily and non-owner-occupied commercial real estate concentrations were significant: combined CRE concentration was 416% of Bank regulatory capital.
- Liquidity sources included $153.4 million of cash, $556.8 million of available-for-sale securities, and reported unused borrowing capacity of $1.9 billion at the FHLB and $1.6 billion at the Federal Reserve. Management considered liquidity adequate.
- Management reported disclosure controls effective at June 30. It also disclosed that controls had been deemed ineffective at March 31 due to a material weakness in the design and timing of controls over CECL accounting, and said remediation steps had been taken. The filing states no material change in internal control over financial reporting during the quarter other than the described matter.
- Management reported no pending or threatened legal matters believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether loan growth, especially multifamily and commercial real estate, remains consistent with underwriting standards and whether CRE concentration and criticized/classified exposures change.
- Whether the securities repositioning delivers the stated margin benefit, and how rising rates affect deposit costs, net interest margin and accumulated other comprehensive loss.
- Whether CECL assumptions, the allowance and the $12.5 million nonaccrual investment CRE loan remain appropriate as economic conditions evolve.
- Whether wealth-management assets and fee growth withstand market volatility, and whether strategic hiring and acquisition costs produce expected revenue.
- Progress and evidence supporting remediation of the CECL controls material weakness, along with capital and liquidity levels after repurchases and continued loan growth.