Peapack-Gladstone Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless stated otherwise, dollar amounts below are in millions. Comparisons are with the corresponding 2020 period or December 31, 2020, as applicable.
Business context
The company operates banking and Peapack Private wealth management businesses. Its lending is concentrated in commercial and real estate loans, primarily in New Jersey and nearby markets. The filing reports unaudited interim results; management cautions that they are not necessarily indicative of full-year results.
Financial and operating highlights
| Metric | Q2 2021 / June 30, 2021 | Comparable period / change |
|---|---|---|
| Total revenue | $51.5 | $44.6 in Q2 2020; up $6.9 |
| Net interest income | $33.8 | $32.0 in Q2 2020 |
| Net interest margin | 2.38% | 2.27% in Q2 2020; six-month margin was 2.32% versus 2.41% |
| Provision for loan and lease losses | $0.9 | $4.9 in Q2 2020 |
| Net income | $14.4 | $8.2 in Q2 2020 |
| Diluted EPS | $0.74 | $0.43 in Q2 2020 |
| Total assets | $5,791.7 | $5,890.4 at December 31, 2020 |
| Loans, before allowance | $4,568.8 | $4,372.4 at December 31, 2020 |
| Deposits | $4,895.8 | $4,818.5 at December 31, 2020 |
| Shareholders’ equity | $538.5 | $527.1 at December 31, 2020 |
For the six months, revenue was $101.1 versus $90.9; net income was $27.6 versus $9.6; and diluted EPS was $1.42 versus $0.51. Six-month net interest income was $65.6 versus $63.7. The prior-year six-month comparison included a $24.9 million loan-loss provision and a $3.2 million federal tax benefit from an NOL carryback, making reported earnings growth unusually sensitive to those items.
Cash flow and liquidity: Operating cash flow was $53.9 for the first six months, compared with $21.1 in 2020. Investing activities used $406.9, chiefly reflecting securities purchases and loan growth; financing activities used $96.9, including $50.0 of subordinated-debt repayment, $12.0 of share repurchases and $1.9 of dividends. Cash and cash equivalents ended at $203.5, down from $653.3 at year-end. The company reported $823.8 of available-for-sale securities, of which $788.5 was pledged, and available secured borrowing capacity of about $1.7 billion from the FHLB and $1.0 billion at the Federal Reserve Discount Window.
Credit and capital: Allowance for loan and lease losses was $63.5, or 1.39% of loans, versus $67.3, or 1.54%, at year-end. Nonperforming loans were $6.0, or 0.13% of loans, versus $11.4, or 0.26%; no loans were 90 days past due and still accruing. Special-mention loans were $148.6. Company total risk-based capital ratio was 15.74%, down from 17.67%; Tier 1 leverage was 8.67%, up from 8.53%. Management said the Bank remained above regulatory well-capitalized thresholds.
Material changes and unusual items
- Q2 earnings improved with lower loan-loss provision and higher wealth-management and other income, partly offset by lower loan interest income and higher operating costs.
- Wealth-management fees rose 30% in Q2 to $13.0 million and 26% for six months to $25.2 million. Assets under management and administration reached $9.8 billion, up 11% from year-end; December 2020 team lift-outs contributed to growth and expenses.
- Multifamily loans increased to $1.42 billion from $1.13 billion at year-end; multifamily originations were $255.8 million in Q2. Commercial real estate concentration was 381% of Bank regulatory capital, versus 356% at year-end.
- Noninterest income included a $1.1 million gain on sale of $57 million of PPP loans, $0.7 million of PPP referral fees, and $0.5 million of additional bank-owned life insurance income for the first half. A $0.8 million loss on termination of interest-rate swaps and $0.6 million of subordinated-debt issuance-cost write-off were also recorded in Q2.
- The company redeemed $50 million of 2016 subordinated notes, funded in part with proceeds from its 2020 notes. Subordinated debt, net, was $132.6 million at quarter-end versus $181.8 million at year-end. PPPLF borrowings declined to $83.6 million from $177.1 million.
- The company repurchased 392,755 shares for $12.0 million in the first half. The quarterly dividend was $0.05 per share; a further $0.05 dividend was declared July 27, 2021, payable August 24.
Outlook, commentary and risks
No quantified earnings or revenue guidance is provided. Management said roughly $400 million of certificates of deposit, averaging about 0.62%, would mature over the 12 months ending June 30, 2022, and expected repricing to benefit net interest income. Interest-rate models indicate asset sensitivity: a sustained 100-basis-point increase was estimated to raise net interest income 4.7% in year one and 7.8% in year two; a 200-basis-point increase was estimated to raise it 7.9% and 13.9%, respectively. Management cautions that these simulations depend on assumptions and are not precise forecasts.
Management expects COVID-19 to continue affecting operations but says the ultimate impact is uncertain. Of $946.8 million in pandemic-related loan modifications approved, $36.7 million remained outstanding at June 30; future performance beyond deferral terms is uncertain. The company had funded about $650 million of PPP loans and retained about $83.8 million, which management believed would largely be forgiven. Management also cited anticipated higher operating expenses in 2021 and beyond. Key risks include local economic weakness, real-estate values and credit losses, interest-rate and margin changes, reduced low-cost funding, wealth-management market declines and acquisition integration, cyber threats, regulatory costs, and uncertainty around pandemic effects.
The company expects to adopt CECL on January 1, 2022; it could not yet estimate the size of the one-time allowance adjustment or the overall financial impact. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material pending litigation was reported.
Important facts for investors to verify
- Whether credit quality, pandemic-modified loan performance, special-mention exposures and the allowance remain consistent with management’s estimates.
- How loan growth and a 381% CRE concentration relative to Bank capital affect risk, funding needs and future credit costs.
- Whether wealth-management growth and deposit-cost savings can offset loan-yield pressure, operating-expense growth and market volatility.
- The cash, pledged-securities and secured-borrowing position, and the trajectory of deposits, PPP balances and PPPLF funding.
- The actual effect of CECL adoption, rate changes and the forthcoming certificate-of-deposit maturities on earnings and capital.