Peapack-Gladstone Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company operates banking and private wealth management businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $44.5 | $39.1 | $128.5 | $118.7 |
| Net interest income | $30.1 | $28.1 | $89.4 | $85.8 |
| Provision for loan losses | $0.8 | $0.5 | $2.1 | $2.1 |
| Net income | $12.2 | $10.7 | $35.2 | $33.4 |
| Diluted EPS | $0.63 | $0.56 | $1.81 | $1.75 |
| Net interest margin | 2.60% | 2.69% | 2.65% | 2.75% |
- Q3 revenue rose 14%, pretax income rose 22%, and net income rose 14% year over year. Nine-month revenue rose 8%, pretax income 10%, and net income 5%. Management attributed slower net-income growth versus pretax growth to higher taxes.
- Wealth management fees increased 16% in Q3 to $9.5 million and 14% for the nine-month period to $28.2 million. Other income also grew, notably from loan-level swap fees; these and SBA-sale revenues can vary with transaction volume.
- Operating expenses were $26.3 million in Q3, up $2.0 million year over year, and $78.1 million for nine months, up $5.6 million. Compensation, acquisitions, strategic-plan hiring and ongoing operating costs contributed to increases.
- Annualized return on average assets/equity was 1.00%/9.87% in Q3 and 0.99%/9.67% for nine months. The nine-month comparisons were 1.04%/10.43% in 2018.
Financial position, cash flow and credit
- At September 30, total assets were $4.93 billion, up from $4.62 billion at year-end 2018. Gross loans were $4.16 billion, up $232 million; deposits were $4.06 billion, up $166 million. The loans-to-deposits ratio was 102.43%, versus 100.84% at year-end.
- Cash and cash equivalents were $227.1 million, compared with $160.8 million at year-end. Nine-month operating cash flow was $67.1 million; investing activities used $210.8 million and financing activities provided $210.0 million.
- Available-for-sale securities were $350.0 million. Shareholders’ equity was $495.4 million. FHLB advances were $105.0 million, short-term borrowings were $67.0 million, and subordinated debt, net, was $83.4 million.
- The allowance for loan and lease losses was $41.6 million, or 1.00% of loans, versus $38.5 million and 0.98% at year-end. Nonperforming loans were $29.4 million, or 0.71% of loans, compared with $25.7 million and 0.65% at year-end; there were no loans over 90 days past due and still accruing. Management cited specific reserves on two nonperforming credits and loan growth as factors in Q3’s higher provision.
- Commercial real estate exposure is significant: multifamily and non-owner-occupied CRE concentrations were 208% and 182% of Bank regulatory capital, respectively. The filing describes local real estate conditions, borrower performance and industry conditions as credit risks.
- Bank capital ratios remained above regulatory well-capitalized thresholds: total risk-based capital 14.23%, Tier 1 risk-based capital 13.20%, CET1 13.20%, and Tier 1 leverage 11.08%. The company also reported a 9.43% Tier 1 leverage ratio.
- Management cited $227.1 million of cash, $350.0 million of available-for-sale securities and unused borrowing capacity of approximately $1.3 billion at the FHLB and $1.5 billion at the Federal Reserve Bank of New York as liquidity sources. Some securities were pledged as collateral.
Material changes, outlook and risks
- The company acquired Point View Wealth Management on September 1, 2019. It issued $5.6 million of equity and paid additional cash; the cash amount is not clearly stated in the supplied filing text. Point View contributed about $350 million of AUM. Total wealth-management AUM was $7.0 billion, up 21% from year-end, including acquisition, organic growth and market appreciation.
- In Q3, the company repurchased 595,853 shares for $16.7 million under a newly authorized 960,000-share repurchase program. The board declared a regular $0.05-per-share dividend payable in November 2019.
- Management said loan growth and a shift toward higher-yielding C&I and equipment-finance lending supported interest income, while deposit costs and competition pressured margins. It reported that balance-sheet liquidity was being maintained to fund future loan growth.
- No numerical earnings or revenue guidance was provided. Management identified higher operating costs, integration of wealth-management acquisitions, growth execution and a lag between hiring and related revenue as relevant considerations.
- New Jersey tax-law changes increased the effective tax rate: 29.9% in Q3 versus 25.2% a year earlier, and 27.17% for nine months versus 24.18%. The filing identifies interest-rate changes, margin pressure, local economic and real-estate conditions, credit losses, funding competition, cybersecurity and acquisition integration among key risks.
- The company expected to complete CECL model implementation and validation by Q4 2019, ahead of the standard’s 2020 effective date. It had not yet determined the expected allowance adjustment or overall financial impact. Management viewed the securities-portfolio impact as not material but could not yet assess the loan-portfolio impact.
- Management reported no pending or threatened litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were considered effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether margin pressure continues as deposit pricing adjusts and interest rates change.
- Credit trends in commercial real estate and C&I, including nonperforming loans, criticized credits and specific reserves.
- The final Point View purchase accounting, integration costs and contribution to wealth-management growth.
- The CECL adoption adjustment and resulting effect on the allowance, earnings and capital.
- Liquidity and funding mix, particularly the loans-to-deposits ratio, brokered deposits and short-term borrowing use.
- The sustainability of earnings growth after higher operating expenses, tax-law effects and variable swap/SBA-related income.