Peapack-Gladstone Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024, unless otherwise stated. The company operates banking and Peapack Private wealth-management businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
- Revenue and earnings: Total revenue was $53.1 million, down $9.0 million year over year. Net interest income was $34.4 million, down $9.6 million; noninterest income was $18.7 million, up $0.6 million. Net income was $8.6 million versus $18.4 million, and diluted EPS was $0.48 versus $1.01.
- Interest margin and returns: Net interest margin was 2.20%, down 68 basis points year over year; net interest spread was 1.29% versus 2.18%. Annualized return on average assets was 0.54% versus 1.16%, and return on average equity was 5.94% versus 13.50%.
- Costs and credit provision: Operating expenses rose 13% to $40.0 million, while provision for credit losses fell to $0.6 million from $1.5 million. The effective tax rate was 30.44%, compared with 26.43%.
- Cash flow: Operating activities provided $19.1 million, investing activities provided $78.7 million, and financing activities used $90.6 million. Cash and cash equivalents increased $7.2 million to $194.8 million. These quarterly cash-flow figures are not a measure of bank liquidity on their own.
- Balance sheet and lending: Total assets were $6.41 billion, down from $6.48 billion at year-end. Loans were $5.36 billion, down $72.9 million from year-end; deposits were $5.48 billion, up $202.6 million. The loans-to-deposits ratio was 97.80%, down from 102.94%.
- Funding and debt: Short-term borrowings were $119.5 million, down from $403.8 million at year-end; subordinated debt, net, was $133.3 million. Retail and brokered certificates of deposit totaled $639.3 million, with $497.2 million scheduled to mature in 2024. Average interest-bearing liability cost rose to 3.73% from 2.36% year over year.
- Liquidity and capital: Management reported approximately $2.9 billion of same-day external borrowing capacity and liquidity coverage equal to 303% of uninsured/unprotected deposits. Uninsured/unprotected deposits were approximately $1.2 billion, or 22% of deposits, after excluding collateralized public funds. The company’s total capital ratio was 15.34%, Tier 1 leverage ratio 9.36%, and shareholders’ equity $582.4 million.
- Credit quality: Nonperforming loans were 1.30% of total loans, versus 1.13% at year-end; nonperforming assets were 1.09% of total assets. Nonaccrual loans were $69.8 million, and loans 30–89 days past due and still accruing were $73.7 million. The allowance for credit losses was $66.3 million, or 1.24% of loans, versus $65.9 million, or 1.21%, at year-end.
- Wealth management: Peapack Private assets under management and/or administration were $11.5 billion, up 6% from year-end and 11% year over year. Wealth fees increased 5% to $14.4 million.
Material changes versus comparable periods
- Higher deposit and borrowing costs outpaced growth in asset yields, reducing net interest income and driving the decline in earnings. Average yield on interest-earning assets increased to 5.02% from 4.54%, but average cost of interest-bearing liabilities rose to 3.73% from 2.36%.
- Management said clients continued shifting from noninterest-bearing accounts into higher-cost deposit alternatives. Interest-bearing checking balances increased, while money-market and savings balances declined; brokered CDs increased to $145.5 million from $120.5 million at year-end.
- Expenses increased $4.5 million, principally from compensation and benefits, New York City expansion costs, health insurance and merit increases. The company also cited software and premises costs related to the expansion.
- Credit indicators weakened: nonperforming assets, past-due loans, classified loans and individually evaluated loans increased from year-end. Management attributed part of the increase to multifamily loans, including two loans totaling $8.0 million downgraded during the quarter. Commercial and industrial nonperforming loans also contributed to the year-over-year increase.
- Loans closed were $190.5 million, compared with $336.9 million in Q1 2023. Management also reported that loan originations and sale premiums for SBA loans remained pressured by higher rates and market conditions.
- Available-for-sale securities’ after-tax unrealized loss increased to $74.8 million from $69.2 million at year-end. Management attributed the losses principally to interest rates and credit spreads, not deterioration in credit quality; no securities credit-loss allowance was recorded.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical earnings or margin guidance. Management said it expects higher operating expenses in 2024 and beyond and described its strategy as expanding its reach, including its New York City presence. Management stated liquidity and capital were adequate and that it believed the bank remained well capitalized under its stress scenarios.
- Interest-rate exposure: The company described itself as liability sensitive. Its models estimate that an immediate, sustained 100-basis-point rate increase would reduce net interest income by approximately 1.8% in year one; a 100-basis-point decrease would increase it by approximately 1.7% in year one. These are model estimates, not forecasts, and depend on assumptions.
- Key risks identified: Deposit competition and funding costs; margin pressure and interest-rate changes; economic weakness and real-estate values in the company’s markets; multifamily, commercial real estate and C&I credit quality; liquidity and uninsured deposits; inflation and expenses; cybersecurity; regulation; and execution of growth and New York City expansion plans.
- Unusual or notable items: Corporate advisory fee income was $0.8 million, versus $0.1 million, and management attributed the increase to a major advisory/investment-banking transaction. The company recorded a $5.0 million cash distribution related to modified restricted stock units. It also adopted a cash-settled phantom stock plan, with $9.4 million of unrecognized compensation cost at quarter-end; future expense will vary with award fair value. The company repurchased 100,000 shares for $2.4 million and declared a $0.05-per-share dividend payable in May 2024.
- Contingencies and controls: Management reported no pending or threatened litigation believed likely to have a material adverse effect, no material change in risk factors from the 2023 Form 10-K, and effective disclosure controls as of quarter-end. It reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit pricing, deposit mix and borrowing needs stabilize enough to improve net interest margin and earnings.
- Subsequent-quarter trends in multifamily and C&I delinquencies, nonaccrual loans, classified credits, modifications and charge-offs.
- The composition, maturity and pricing of deposits—including brokered and reciprocal deposits—and the company’s uninsured-deposit and available-liquidity measures.
- Progress and ongoing costs of the New York City expansion, and whether revenue growth offsets increased compensation and occupancy expenses.
- Interest-rate sensitivity assumptions and the impact of market rates on margins, securities values and capital; note the substantial unrealized losses in the securities portfolio.
- Future compensation expense and cash payments under the phantom stock and modified restricted stock awards.