Peapack-Gladstone Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts are in U.S. dollars; financial statement amounts below are generally in millions unless stated otherwise.
Business context
The company operates banking and private wealth management businesses. It completed its acquisition of wealth adviser Lassus Wherley on September 1, 2018. The filing says the acquisition supports its strategy to expand wealth management organically and through acquisitions.
Financial performance and condition
- Q3 earnings: Net income was $10.7 million versus $10.2 million a year earlier; diluted EPS was $0.56 in both periods. Revenue, as defined by management as net interest income plus wealth fees and other income, was $39.1 million, up $0.3 million.
- Nine-month earnings: Net income rose to $33.4 million from $26.1 million; diluted EPS increased to $1.75 from $1.47. Management-defined revenue was $118.7 million, up $12.1 million.
- Interest income and margin: Q3 net interest income declined to $28.1 million from $30.0 million, while fully tax-equivalent net interest margin fell to 2.69% from 2.95%. For nine months, net interest income increased to $85.8 million from $82.6 million; margin was 2.75% versus 2.81%.
- Noninterest income and expenses: Q3 wealth management fees rose to $8.2 million from $5.8 million; nine-month fees increased to $24.7 million from $15.7 million. Operating expenses grew to $24.3 million in Q3 from $22.0 million and to $72.6 million for nine months from $61.4 million.
- Assets, loans and deposits: Total assets were $4.44 billion, up from $4.26 billion at year-end. Loans were $3.80 billion, up from $3.70 billion; deposits were $3.66 billion, down from $3.70 billion. Loans-to-deposits stood at 103.81% versus 100.16%.
- Credit quality: Allowance for loan and lease losses was $37.3 million, or 0.98% of loans, broadly unchanged as a percentage from year-end. Nonperforming loans were 0.28% of total loans versus 0.37%; impaired loans increased to $31.3 million from $23.1 million. Performing troubled debt restructurings were $19.3 million versus $9.5 million.
- Cash flow and liquidity: Nine-month operating cash flow was $57.4 million versus $44.6 million; cash and cash equivalents increased by $9.6 million to $123.0 million. The company reported $368.6 million of available-for-sale securities and unused borrowing commitments of $1.3 billion at the FHLB and $903.7 million at the Federal Reserve.
- Debt and capital: At September 30, borrowings included $95.2 million overnight, $84.0 million in FHLB advances, and $83.1 million net subordinated debt. The company’s total risk-based capital ratio was 15.15% and Tier 1 leverage ratio was 9.80%; the Bank’s corresponding ratios were 14.69% and 11.34%.
Material changes and unusual items
- Q3 net interest income was pressured by higher deposit costs and lower loan prepayment premiums and payoff fees; the effect of higher rates on adjustable-rate assets and a shift toward higher-yielding commercial and equipment-finance lending partly offset these pressures.
- Management identified Q3 severance costs of $319,000, Lassus Wherley-related professional fees of $340,000, and a $325,000 securities sale loss. It estimated these items reduced quarterly net income by $736,000 and EPS by $0.04. The filing says the securities portfolio restructuring is expected to offset the sale loss through higher earnings in less than 12 months.
- Q3 and nine-month results benefited from the lower federal corporate tax rate. A New Jersey corporate surtax, effective retroactively from January 1, 2018, increased the company’s tax burden; management said the effective tax rate could rise by 1% to 3% in 2019 depending on application of combined-reporting rules.
- Private Wealth Management assets under management and/or administration rose to $6.4 billion from $4.8 billion a year earlier, reflecting acquisitions and organic growth. Lassus Wherley contributed approximately $550 million at acquisition; final purchase accounting was still being evaluated.
- Net unrealized losses on available-for-sale securities increased, with gross unrealized losses of $8.0 million at September 30. Management attributed them to interest-rate and market movements and said it did not expect to sell the securities before recovery.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management said it expects higher operating expenses as strategic hiring and acquired businesses are integrated; revenue and profitability from new personnel may lag expenses by several quarters. It believes capital and liquidity are adequate for planned growth. Interest-rate modeling estimated that a sustained 200-basis-point increase could reduce year-one net interest income by 0.5% and increase year-two net interest income by 2.6%; a 100-basis-point decrease could reduce it by 3.9% in year one and 6.2% in year two. These are model estimates, not forecasts.
Risks highlighted include deposit and funding competition, margin pressure from interest rates, local economic and real-estate weakness, credit losses and commercial real-estate concentrations, acquisition integration and execution, cybersecurity, regulatory costs, and the ability to fund growth. Management expected the new lease standard to add approximately $10 million to $15 million of assets and liabilities at adoption in 2019. The eventual effect of the expected-credit-loss standard on loan-loss allowances was not yet determinable. The company reported no pending or threatened litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit-cost increases continue to outpace asset-yield repricing and weigh on net interest margin.
- Whether acquired wealth businesses deliver expected fee growth and integrate without further material expense increases.
- Trends in impaired loans, TDRs, commercial real-estate exposure, and allowance adequacy.
- Whether the securities restructuring produces the expected earnings benefit and how portfolio valuation losses evolve.
- The impact of New Jersey tax rules, lease accounting adoption, and the still-unquantified CECL transition adjustment.
- Funding mix and liquidity, including the use of overnight borrowings, reciprocal deposits, and wholesale funding as loans grow.