Peapack-Gladstone Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY2018. This is an annual report, not a standalone fourth-quarter filing. The company is a New Jersey-based bank holding company with commercial banking and wealth management businesses. Its 10-K was filed March 13, 2020.
Financial performance and position
| Metric | FY2019 / year-end | FY2018 / comparison |
|---|---|---|
| Net interest income | $120.3 million | $115.2 million |
| Wealth management fee income | $38.4 million | $33.2 million |
| Total other income | $54.7 million | $44.2 million |
| Operating expenses | $104.8 million | $98.1 million |
| Net income | $47.4 million | $44.2 million |
| Diluted EPS | $2.44 | $2.31 |
| Total assets | $5.18 billion | $4.62 billion |
| Total loans | $4.39 billion | $3.93 billion |
| Total deposits | $4.24 billion | $3.90 billion |
Net income rose 7% and diluted EPS rose 6%. Net interest income increased 5% on a fully tax-equivalent basis, while reported net interest margin declined 12 basis points to 2.63%. Return on average assets was 0.99% (1.02% in 2018); return on average common equity was 9.70% (10.13%).
Cash flow: Net cash from operating activities was $86.3 million, investing activities used $487.0 million, and financing activities provided $448.1 million. Cash and cash equivalents increased $47.4 million to $208.2 million. Loan growth was a major investing cash use; deposit growth and $128.1 million of short-term borrowings supported funding needs.
Debt and liquidity: Year-end short-term borrowings were $128.1 million, FHLB advances $105.0 million, and subordinated debt, net, $83.4 million. Cash and cash equivalents totaled $208.2 million and available-for-sale securities $390.8 million. The company reported unused borrowing commitments of $1.3 billion from the FHLB and $1.5 billion from the Federal Reserve Bank of New York. Management said liquidity was adequate. Company and Bank capital ratios remained above regulatory well-capitalized thresholds; the Bank’s total risk-based capital ratio was 13.76% and leverage ratio 10.63%.
Material changes versus FY2018
- Loans grew 12%, with commercial and industrial loans, including equipment finance, up 26% to $1.76 billion. Commercial lending expanded as multifamily and residential lending became a smaller share of the portfolio.
- Customer deposits, excluding brokered CDs and brokered overnight demand deposits, increased 10% to $4.03 billion. Total deposits increased 9%.
- Wealth assets under management and/or administration rose 29% to $7.5 billion, supported by market appreciation, organic growth, and the September 2019 Point View acquisition. Wealth fees increased 15%.
- Net interest margin compressed as funding costs rose; average interest-bearing liability cost increased to 1.62% from 1.32%.
- Operating expenses increased 7%, driven by acquisitions, strategic-plan hiring, and salary increases. Income tax expense rose to $18.7 million and the effective tax rate to 28.26%, primarily reflecting New Jersey tax changes.
- Nonperforming loans increased to $28.9 million from $25.7 million, and nonperforming assets were 0.56% of total assets in both years. The allowance for loan losses rose to $43.7 million; the company recorded $1.2 million of net recoveries in 2019 versus $1.5 million of net charge-offs in 2018.
Outlook, management commentary, risks, and unusual items
- Management’s strategy emphasizes commercial banking, wealth management growth, core deposit generation, and strategic acquisitions. It expects higher operating expenses in 2020 and beyond; management noted revenue from new personnel may lag expenses by several quarters. The filing gives no specific earnings or revenue guidance.
- Management attributed earnings growth to higher net interest income, wealth fees, and capital-markets-related income. Swap, SBA loan-sale, and mortgage-banking revenues depend on activity and may vary between periods.
- Point View was acquired in September 2019. The company repurchased 739,778 shares during 2019 for $21.0 million under a 960,000-share authorization; the program was completed in the first quarter of 2020.
- Credit exposures include commercial real estate and C&I lending, with loans concentrated in New Jersey and the New York area. Total CRE concentration was 404% of Bank regulatory capital. Management also highlighted local economic and real-estate conditions, loan seasoning, borrower repayment capacity, and allowance-estimation uncertainty.
- Other key risks include interest-rate and deposit competition, reliance in part on brokered deposits (about 5% of deposits at year-end), liquidity, cyber and operational risks, regulatory costs, and wealth-fee sensitivity to market values and client withdrawals. The filing specifically identifies the coronavirus outbreak as a potential risk as of its filing date.
- The company adopted the lease-accounting standard in 2019, recording right-of-use assets and lease liabilities. It adopted CECL on January 1, 2020; the final impact on loan-loss allowance and results was not clear in the filing text. The company described its securities portfolio impact as not expected to be material.
- A notable prior-year comparison is the 2018 $4.4 million loss on loans held for sale, partly offset by $3.0 million of life-insurance proceeds. FY2019 other income also included higher back-to-back swap and SBA loan-sale income.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls; it reported no pending or threatened litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether rapid C&I and equipment-finance growth can be maintained without deterioration in credit quality, and how the higher commercial real estate concentration performs.
- The composition and subsequent performance of the $28.9 million of nonperforming loans, including the commercial and healthcare-related exposures and specific reserves.
- The realized effect of CECL adoption on the allowance, capital, and earnings, and any subsequent changes to credit-loss assumptions.
- Whether deposit growth and pricing can support loan growth while containing funding costs and protecting net interest margin.
- 2020 expense trends after acquisitions and strategic hiring, and the recurring contribution of variable capital-markets, SBA, and wealth-management revenues.