Peapack-Gladstone Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company operates Banking and Peapack Private wealth-management businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $57.5 | $61.4 | $119.5 | $115.7 |
| Net interest income | $38.9 | $42.9 | $82.9 | $82.5 |
| Net income | $13.1 | $20.1 | $31.5 | $33.5 |
| Diluted EPS | $0.73 | $1.08 | $1.74 | $1.79 |
| Net interest margin | 2.49% | 2.83% | 2.68% | 2.76% |
Q2 total revenue is net interest income plus wealth-management and other income. Q2 pretax income was $18.1 million, versus $27.3 million a year earlier. Q2 operating expenses rose 15% to $37.7 million; the six-month total rose 10% to $73.3 million. Six-month operating cash flow was $44.0 million, compared with $70.2 million; cash and cash equivalents fell $18.4 million to $171.6 million.
At June 30, total assets were $6.48 billion; loans were $5.44 billion, net loans $5.37 billion, and deposits $5.20 billion. Loans grew $149.8 million from year-end while deposits were nearly unchanged. The loan-to-deposit ratio was 104.55%. Short-term borrowings were $485.4 million, primarily overnight FHLB advances; subordinated debt, net, was $133.1 million. Shareholders’ equity was $565.1 million.
Available-for-sale securities had a fair value of $540.5 million and held-to-maturity securities a carrying value of $110.4 million (fair value $95.5 million). The securities portfolio had $119.6 million of gross unrealized losses at June 30; management attributed these mainly to interest rates and spreads, and recorded no credit-loss allowance on the securities.
Material changes versus comparable periods
- Q2 net income declined $7.0 million year over year as a sharp rise in deposit and borrowing costs more than offset higher asset yields. Q2 NIM fell 34 basis points; six-month NIM fell 8 basis points.
- Interest expense increased $30.3 million in Q2 and $52.3 million for the first half versus 2022. Management cited deposit repricing amid Federal Reserve tightening; cycle-to-date deposit betas were approximately 41% while the target federal funds rate had risen 500 basis points.
- Six-month total revenue increased despite lower net income, helped by the prior-year comparison: 2022 included a $6.6 million securities-sale loss. Wealth-management fees were $28.0 million for the first half, down 2%; Q2 fees rose 3% to $14.3 million.
- Noninterest income was affected by lower SBA loan-sale gains ($1.7 million for the first half, down $3.8 million) and lower corporate advisory and mortgage-banking income. AUM/AUA reached $10.7 billion, up 8% from year-end 2022.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or margin guidance. Management says results for the first half are not necessarily indicative of full-year or future results.
- Management described liquidity and capital as strong. On-balance-sheet liquidity was $761 million; available external borrowing capacity was approximately $2.8 billion. Together these represented 283% coverage of $1.3 billion in uninsured or unprotected deposits. The company reported capital ratios above regulatory requirements; management cited Company CET1 and total risk-based capital ratios of 11.47% and 15.20%, respectively.
- Credit quality weakened: nonaccrual loans rose to $34.5 million from $19.0 million at year-end, and nonperforming loans increased to 0.63% of loans from 0.36%. The allowance was $62.7 million, or 1.15% of loans. Three multifamily relationships totaling $18.9 million moved to nonaccrual in the first half.
- A subsequent event: an equipment-financing lease with a $9.2 million principal balance was downgraded after the lessee filed for bankruptcy after quarter-end. Management believed collateral would cover principal but said it would monitor the case; no additional June 30 allowance was recorded.
- Q2 included $1.7 million of expense related to employee retirements. First-half expenses also included $175,000 for three branch closures, $300,000 for accelerated restricted stock related to an executive retirement, and $409,000 of additional performance-based stock expense. The quarter included a $318,000 tax benefit from reversal of the New Jersey surtax.
- Interest-rate sensitivity analysis indicates the company was liability-sensitive: an immediate, sustained 100-basis-point increase was modeled to reduce year-one net interest income by 2.8%; a 200-basis-point increase by 4.6%. These are model estimates, not forecasts. Other stated risks include deposit competition and outflows, CRE and multifamily credit exposure, economic and real-estate weakness, margin pressure, market losses, cyber risk, and higher operating costs.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no pending or threatened litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Deposit mix, uninsured-deposit levels, and continued access to secured borrowing capacity; assess dependence on overnight FHLB funding.
- Developments in the $9.2 million bankrupt equipment-financing exposure and the multifamily loans moved to nonaccrual; review collateral coverage and reserve adequacy.
- Whether deposit costs stabilize relative to loan and securities yields, and how that affects NIM and earnings.
- Unrealized securities losses, their potential effect on capital and liquidity, and management’s assumptions about holding securities to recovery or maturity.
- Reconcile reported capital ratios by entity and confirm the company’s ability to sustain dividends, repurchases, and planned growth amid higher expenses.