Peapack-Gladstone Financial Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing also reports fourth-quarter results. The company is a New Jersey bank holding company operating commercial banking and private wealth management businesses, principally in New Jersey and the New York metropolitan area.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $127.6 million | $120.3 million |
| Provision for loan losses | $32.4 million | $4.0 million |
| Net income | $26.2 million | $47.4 million |
| Diluted EPS | $1.37 | $2.44 |
| Net interest margin | 2.31% | 2.63% |
| Total assets at year-end | $5.89 billion | $5.18 billion |
| Total loans at year-end | $4.37 billion | $4.39 billion |
| Total deposits at year-end | $4.82 billion | $4.24 billion |
| Shareholders’ equity at year-end | $527.1 million | $503.7 million |
| Cash and cash equivalents at year-end | $653.3 million | $208.2 million |
| Operating cash flow | $36.7 million | $86.3 million |
Wealth management fees were $40.9 million, up 7%; assets under management and/or administration rose 17% to $8.8 billion. The company reported return on average assets of 0.45% and return on average equity of 5.11%. It declared $0.20 per common share in dividends for the year.
The allowance for loan losses was $67.3 million, or about 1.54% of loans, versus $43.7 million, or 0.99%, a year earlier. Nonperforming assets were $11.5 million, or 0.19% of assets; nonperforming loans were 0.26% of loans. Regulatory capital remained above well-capitalized thresholds: the Bank’s total risk-based capital ratio was 14.81% and its common equity Tier 1 ratio was 13.55%.
At December 31, 2020, borrowings included $177.1 million under the Paycheck Protection Program Liquidity Facility, $15.0 million of short-term borrowings, and $181.8 million of subordinated debt, net. The company issued $100 million of subordinated notes in December. Management reported approximately $1.3 billion of balance-sheet liquidity and substantial additional unused secured borrowing capacity.
Material changes versus 2019
- Net income declined 45% and diluted EPS declined 44%, primarily reflecting a substantially higher credit-loss provision and increased operating expenses.
- The $32.4 million 2020 provision reflected COVID-19-related economic uncertainty and higher qualitative reserve factors. Net charge-offs were $8.8 million, including a $4.7 million charge-off on an assisted-living facility loan.
- Net interest income rose 6%, but net interest margin fell 32 basis points to 2.31% as asset yields fell faster than funding costs. Interest income declined $14.9 million while interest expense fell $22.2 million.
- Operating expenses increased 19% to $125.0 million. Notable items included a $4.8 million FHLB advance prepayment penalty, a $4.4 million valuation allowance on a loan held for sale, higher personnel costs and branch-related costs.
- Deposits grew 14%; customer deposits excluding brokered deposits grew 16%. Loans were roughly flat, partly reflecting loan paydowns and lower commercial mortgage and multifamily balances.
- Other income included a $7.4 million gain on the sale of $355 million of PPP loans. The company originated approximately $600 million of PPP loans and held $195.6 million at year-end.
- The company’s reported cash dividend per share remained $0.20. It repurchased $6.5 million of shares during 2020, completing a previously authorized program.
Fourth-quarter results
For the quarter ended December 31, 2020, net income was $3.0 million and diluted EPS was $0.16, compared with net income of $12.2 million and diluted EPS of $0.64 in fourth-quarter 2019. Fourth-quarter 2020 included a $2.4 million loan-loss provision and $39.2 million of operating expenses.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It planned to reduce excess interest-earning cash in 2021 through loan originations and securities purchases, and expected higher operating expenses as strategic-plan investments continue.
- Management described the bank as asset-sensitive: its models estimated net interest income would increase 8.5% in year one under an immediate, sustained 100-basis-point rate increase, but fall in a declining-rate environment. These are model estimates, not forecasts.
- COVID-19 remains a principal uncertainty. The company modified 536 loans totaling $946.3 million during 2020; $74.0 million remained under deferral at year-end. Management cautioned that post-deferral borrower performance was uncertain.
- Credit risks include exposure to commercial real estate, commercial and industrial borrowers, and concentrated regional markets. The company also cited pandemic-related risks to hospitality, food service and non-grocery retail borrowers, collateral values, loan losses and wealth fees.
- The company adopted the CECL expected-credit-loss standard on January 1, 2021. At filing, management was finalizing implementation and model validation and estimated the one-time adoption adjustment would not materially affect consolidated financial condition.
- Other risks include sustained low rates and margin pressure, deposit competition and funding concentration, cyber and third-party service risks, regulatory requirements, and the transition away from LIBOR. The filing contains an apparent date inconsistency in its LIBOR transition discussion; investors should consult the full disclosure.
- The company stated that no pending or threatened legal proceeding was expected to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts to verify
- Whether COVID-era loan deferrals, criticized credits and the $67.3 million allowance adequately reflect subsequent borrower performance and expected losses.
- The composition and credit quality of commercial real estate and C&I exposures, including the assisted-living facility loan and remaining PPP loans.
- The sustainability of net interest income and the 2.31% margin under prolonged low rates, and the assumptions underlying management’s rate-sensitivity models.
- The CECL adoption impact and whether the estimated immaterial adjustment was confirmed after implementation.
- How the $100 million subordinated-note proceeds are deployed, including any share repurchases, debt redemption or wealth-management acquisitions; the filing notes a board-approved repurchase plan of up to 948,735 shares through March 31, 2022.