Peapack-Gladstone Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company operates banking and Peapack Private wealth-management businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $52.36 | $44.50 | $143.22 | $128.53 |
| Net interest income | $32.15 | $30.09 | $95.87 | $89.36 |
| Provision for loan and lease losses | $5.15 | $0.80 | $30.05 | $2.05 |
| Pre-tax income | $18.75 | $17.44 | $27.46 | $48.33 |
| Net income | $13.55 | $12.23 | $23.16 | $35.20 |
| Diluted EPS | $0.71 | $0.63 | $1.22 | $1.81 |
| Net interest margin | 2.20% | 2.60% | 2.33% | 2.65% |
Q3 revenue increased 18% year over year, while net income rose about 11%. The nine-month decline in earnings principally reflects the substantially higher credit-loss provision. Reported net interest margin fell 40 basis points in Q3 and 32 basis points year to date. Management attributed margin pressure to lower market rates and excess cash and securities earning lower yields; PPP income partly supported net interest income.
Q3 other income included a $7.4 million gain from selling approximately $355 million of PPP loans. Wealth-management fees were $10.1 million for the quarter, up from $9.5 million, primarily reflecting the Point View acquisition. Nine-month income tax expense included a $3.2 million benefit from carrying tax losses back under the CARES Act; nine-month effective tax rate was 15.65%, versus 27.17% in 2019.
Financial position, credit, and liquidity
- At September 30, total assets were $5.96 billion, up from $5.18 billion at year-end 2019. Loans were $4.43 billion, net loans $4.36 billion, and available-for-sale securities $596.9 million.
- Deposits were $4.86 billion, up $615.6 million from year-end. Cash and cash equivalents were $679.4 million. Cash from operations was $18.7 million for the first nine months, compared with $67.1 million in 2019; investing activities used $225.0 million and financing activities provided $677.4 million.
- Borrowings included $183.8 million from the Federal Reserve’s PPP Liquidity Facility, $105.0 million of FHLB advances, $15.0 million of short-term borrowings, and $83.6 million of subordinated debt, net. The PPP facility is collateralized by PPP loans. Management reported approximately $1.3 billion of balance-sheet liquidity and substantial additional secured borrowing availability.
- The allowance for loan and lease losses was $66.1 million, versus $43.7 million at year-end; management reported coverage of 1.56% of loans excluding PPP loans. The nine-month provision was $30.1 million, mainly reflecting COVID-related qualitative factors.
- Nonperforming loans were $8.6 million, or 0.19% of loans, compared with $28.9 million and 0.66% at year-end. The comparison is affected by a $10.0 million commercial loan transferred to held-for-sale status. Special-mention loans increased to $129.7 million, principally due to downgrades in hospitality/food services and non-grocery-anchored retail exposures.
- COVID-related loan modifications totaled $940.2 million; $827.8 million remained under deferral at quarter-end. The company had originated approximately $600 million of PPP loans, sold approximately $355 million, and retained $202 million.
- Regulatory capital remained above required levels: company total risk-based capital was 15.04%, and the Bank’s was 14.58%. The Bank’s leverage ratio was 9.68%. Loans-to-deposits were 91.18%, compared with 103.55% at year-end.
Changes, outlook, and risks
Loan balances increased modestly from year-end, with commercial and industrial lending a larger share of the portfolio; the company reported $202 million of PPP loans remaining. Deposit growth and PPP-related funding increased liquidity, while the company also expanded its securities portfolio. Wealth-management assets under management or administration were $7.6 billion, compared with $7.5 billion at year-end, recovering from $6.4 billion at March 31.
Management provided no formal earnings or revenue guidance. It said the full effect of COVID-19 cannot be estimated and may materially affect credit losses, operations, liquidity, and earnings. Management cited unemployment, loan deferrals, real-estate collateral values, interest rates, deposit funding, cybersecurity, and PPP-related litigation or guarantee risks among the concerns. It reported approximately $95 million of loans with residual COVID-related sector risk and said those exposures would be monitored.
Management said it believed liquidity and capital were adequate. Its interest-rate models estimated net interest income would increase 10.0% in year one under an immediate, sustained 100-basis-point rate increase and 17.7% under a 200-basis-point increase; these are model estimates, not guidance. The company delayed CECL adoption under temporary CARES Act relief; the eventual allowance and earnings impact had not been determined. Management found disclosure controls effective and reported no material change in internal control over financial reporting. No material pending litigation was identified.
Key facts for investors to verify
- Whether borrowers resume contractual payments as the $827.8 million of remaining deferrals expire, and whether COVID-sensitive sectors produce further downgrades or losses.
- How PPP forgiveness, loan sales, deferred fees, and the $7.4 million sale gain affect future earnings and reported loan growth.
- Whether the $66.1 million allowance remains adequate as economic forecasts and criticized credits evolve, and the impact of CECL adoption.
- Whether deposit growth and available contingent funding persist, and how cash balances and funding costs affect net interest margin.
- Whether wealth-management fee growth and expense trends continue after the Point View acquisition, and whether management’s interest-rate sensitivity assumptions prove reliable.