Peapack-Gladstone Financial Corporation — Q2 2020 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. The company operates through its banking business and Peapack Private wealth management division. Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts are presented in millions.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $31.97 | $29.27 | $63.72 | $59.28 |
| Provision for loan and lease losses | $4.90 | $1.15 | $24.90 | $1.25 |
| Total revenue, as defined by the company | $44.60 | $42.29 | $90.86 | $84.03 |
| Income before taxes | $10.68 | $14.97 | $8.71 | $30.89 |
| Net income | $8.24 | $11.55 | $9.62 | $22.98 |
| Diluted earnings per share | $0.43 | $0.59 | $0.51 | $1.18 |
| Reported net interest margin | 2.27% | 2.64% | 2.41% | 2.67% |
- Q2 revenue increased 5% year over year, but net income fell 29%; the higher loan-loss provision and operating expenses more than offset revenue growth. Six-month net income declined 58%, reflecting the $24.9 million provision and higher costs. A $3.2 million tax benefit from a CARES Act NOL carryback partly offset the six-month decline.
- Q2 wealth management fees were $10.0 million, up 4%; six-month fees were $20.0 million, up 6%. Growth included Point View, acquired in September 2019. Assets under management/administration were $7.2 billion at June 30, down 4% from year-end but up from $6.4 billion at March 31.
- At June 30, total assets were $6.28 billion, loans were $4.86 billion, deposits were $4.85 billion, and shareholders’ equity was $508.0 million. Loans grew from $4.39 billion and deposits from $4.24 billion at December 31, 2019.
- The allowance for loan and lease losses was $66.1 million, or 1.36% of loans, versus $43.7 million, or 0.99%, at year-end. The June ratio includes $521.6 million of SBA-guaranteed PPP loans.
- For the six months, operating cash flow was $21.1 million (versus $44.0 million in 2019); investing cash flow was negative $629.5 million; and financing cash flow was positive $1.02 billion. Cash and cash equivalents increased to $622.8 million from $208.2 million, largely reflecting deposit growth and $535.8 million of PPPLF funding.
- Borrowings at June 30 included $535.8 million under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF), $105.0 million of FHLB advances, $15.0 million of short-term borrowings, and $83.5 million of subordinated debt, net.
- Regulatory capital ratios were above stated minimums. The company reported a 14.62% total risk-based capital ratio and 8.57% Tier 1 leverage ratio; the Bank’s corresponding ratios were 14.21% and 9.79%.
Material changes versus comparable periods
- COVID-19-related credit provisioning rose sharply: the first-half provision was $24.9 million versus $1.25 million a year earlier. Management attributed the increase principally to higher unemployment, payment deferrals, and other pandemic-related qualitative factors.
- Reported NIM declined 37 basis points year over year in Q2 and 26 basis points for the first half. Management cited falling asset yields, including the rapid decline in LIBOR, while lower deposit costs and higher average earning assets supported net interest income.
- Operating expenses increased 11% in Q2 and 10% for the first half, including Point View-related costs, staffing and strategic-plan costs, and a $278,000 branch-closure expense. Compensation and benefits were the largest expense category.
- Commercial and industrial loans included $521.6 million of PPP loans at quarter-end. Total loan modifications under pandemic relief provisions were $913.7 million across 504 loans, with principal and/or interest deferrals generally lasting 90–180 days.
Outlook, risks, contingencies, and unusual items
- Management said it could not determine or estimate the full effect of COVID-19. It identified potential further credit losses, higher allowances, falling collateral values, weaker demand, margin pressure, wealth-fee volatility, goodwill impairment, liquidity needs, and PPP-related legal, regulatory, and reputation risks.
- The company expects PPP fees to benefit future net interest income; $11.1 million of net deferred PPP fees were to be amortized over the loans’ lives, potentially accelerated if loans are forgiven. About $300 million of CDs averaging approximately 1.50% were scheduled to mature during July–December 2020, which management expected to benefit funding costs as they reprice.
- Management’s interest-rate simulations estimated net interest income increases versus a flat-rate scenario of 9.5% in year one and 12.7% in year two for an immediate, sustained 100-basis-point increase; a 200-basis-point increase was estimated to raise year-one and year-two NII by 17.3% and 23.1%, respectively. These are model estimates, not guidance, and the filing cautions that actual results may differ.
- The Bank’s commercial real estate concentration was 388% of regulatory capital at June 30, 2020. Management said it monitors this concentration and identified manufacturing, transportation, accommodation and food services, retail, retail real estate, and arts and recreation as pandemic-sensitive sectors.
- Management concluded a quantitative goodwill impairment test was not required at June 30 after an interim assessment. It also reported no material pending or threatened litigation and no material changes to previously disclosed risk factors.
- The company declared a regular $0.05-per-share dividend on July 28, 2020, payable August 25, 2020. No specific earnings or revenue guidance was provided.
Most important facts for investors to verify
- Subsequent performance and repayment status of the $913.7 million of modified loans, especially after deferral periods end.
- Credit quality, criticized/classified exposures, and adequacy of the allowance as pandemic effects emerge; distinguish PPP-guaranteed loans from other portfolio loans when assessing coverage.
- PPP loan forgiveness, SBA reimbursement, deferred-fee recognition, and the associated PPPLF repayment timing.
- Deposit stability, liquidity usage, funding costs, and the effect of maturing CDs and very low interest rates on NIM and earnings.
- Commercial real estate concentration and exposures to pandemic-sensitive industries, alongside wealth AUM/AUA recovery and related fee income.
- Actual results against management’s interest-rate model assumptions and the potential impact of CECL adoption, which the filing said had not yet been quantified.