Peapack-Gladstone Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Dollar amounts are in millions unless otherwise stated. Comparisons are with Q1 2021 for income and cash flow, and December 31, 2021 for balance-sheet measures.
Business context and key financial metrics
The company operates Banking and Peapack Private wealth-management businesses. At March 31, 2022, total assets were $6.26 billion, including $5.12 billion in loans; deposits were $5.39 billion.
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Total revenue | $54.3 million | Up $4.7 million from Q1 2021 |
| Net interest income | $39.6 million; net interest margin 2.69% | NII up $7.8 million; NIM up 41 basis points from Q1 2021 |
| Provision for credit losses | $2.4 million | $0.2 million in Q1 2021 |
| Net income / diluted EPS | $13.4 million / $0.71 | $13.2 million / $0.67 in Q1 2021 |
| Operating cash flow | $30.9 million | $30.3 million in Q1 2021 |
| Cash and cash equivalents | $114.0 million | Down from $146.8 million at year-end |
| Allowance for credit losses | $58.4 million; 1.14% of loans | $61.7 million; 1.28% at year-end |
| Capital and liquidity | Company total capital ratio 13.94%; Tier 1 leverage 8.37%. Unused secured borrowing capacity included $1.8 billion from FHLB and $1.6 billion from the Federal Reserve. | Company total capital ratio was 14.64% at year-end |
Net cash used in investing activities was $292.9 million, primarily reflecting $316.2 million of net loan growth. Financing activities provided $229.1 million, including $121.3 million of deposit growth and $122.1 million of overnight borrowings. Cash decreased by $32.8 million during the quarter. Subordinated debt, net, was $132.8 million; short-term borrowings were $122.1 million.
Material changes versus comparable periods
- Loans rose $315.5 million from year-end, with multifamily loans increasing approximately $254.2 million. Deposits grew $121.3 million.
- Net interest income benefited from loan growth and lower funding costs. The average cost of interest-bearing liabilities fell to 0.40% from 0.59% in Q1 2021.
- Other income included a $6.6 million securities-sale loss from a balance-sheet repositioning. Excluding that loss, other income excluding wealth fees increased $0.8 million year over year.
- Wealth-management fees rose 22% to $14.8 million; assets under management and/or administration were $10.7 billion, down 4% from year-end but up 13% year over year.
- Operating expenses increased 8% to $34.2 million, including a $0.7 million swap valuation allowance, acquisition-related costs, and $0.4 million of private-banking office consolidation costs. Q1 2022 and Q1 2021 each included $1.5 million of severance expense.
- Available-for-sale securities fell to $601.2 million from $796.8 million at year-end. The after-tax accumulated unrealized loss on securities increased to $40.4 million from $9.9 million, contributing to a $28.6 million comprehensive loss despite positive net income.
Outlook, management commentary, risks, and unusual items
- The securities sale and replacement with higher-yielding multifamily loans was intended to improve future net interest margin by four basis points, with management stating no impact to tangible capital or tangible book value per share. Management described the company as asset-sensitive; its models estimate that a sustained 100-basis-point rate increase would raise net interest income about 1.2% in year one and 4.6% in year two. These are model estimates, not earnings guidance, and management cautions that actual results may differ.
- The filing provides no formal earnings or revenue guidance. It identifies anticipated higher operating expenses in 2022 and beyond as a risk, alongside margin pressure, inflation and interest-rate changes, loan and real-estate credit risk, market declines, cyber risk, and uncertainty from COVID-19 and geopolitical events.
- The company adopted CECL on January 1, 2022. Adoption reduced retained earnings by $3.9 million after tax; the transition included a $5.5 million reduction in the loan-loss allowance. Management cited historically low charge-offs and the loan portfolio’s shorter duration as contributing factors. The allowance remains an estimate subject to judgment and economic forecasts.
- Credit indicators included $15.9 million of nonaccrual loans, no loans 90 days past due and still accruing, and $110.3 million of special-mention loans. Multifamily and non-owner-occupied commercial real estate concentrations were significant: total CRE concentration was 424% of Bank regulatory capital.
- Management reported a material weakness in internal control over financial reporting related to the design and timing of controls for CECL. Remediation was ongoing, and disclosure controls were deemed ineffective as of March 31, 2022. The company stated that the financial statements fairly present its results. The 10-Q was filed two business days after the extended deadline under Rule 12b-25.
- Management reported no pending or threatened litigation believed likely to have a material adverse effect and no material changes to the risk factors disclosed in the 2021 Form 10-K.
Important facts for investors to verify
- Whether the claimed four-basis-point margin benefit from the securities repositioning materializes, and how rising rates affect funding costs and loan yields.
- How CECL assumptions, remediation of the reported material weakness, and subsequent allowance levels develop.
- Credit performance in multifamily and commercial real estate portfolios, including special-mention and nonaccrual exposures and the 424% CRE concentration measure.
- Whether deposit growth and available borrowing capacity remain sufficient as loans grow and cash balances decline.
- Whether elevated operating costs and variable capital-markets income affect earnings, and how securities valuation changes affect equity and capital.