Peapack-Gladstone Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context
The company operates a banking business and a Private Wealth Management Division. Its loan portfolio is concentrated in New Jersey and New York real estate, alongside commercial and industrial lending and equipment finance. Wealth management results include the 2017 acquisitions of Murphy Capital Management and Quadrant Capital Management.
Financial results and key metrics
- Q2 revenue and earnings: Net interest income was $29.2 million, up 8% from $27.0 million a year earlier. Total other income was $11.7 million, up from $8.2 million. Net income rose to $11.9 million from $7.9 million; diluted EPS was $0.62 versus $0.45.
- First-half results: Net interest income was $57.6 million, versus $52.6 million; total other income was $22.0 million, versus $15.2 million. Net income increased to $22.7 million from $15.9 million, and diluted EPS to $1.20 from $0.91.
- Interest margins: On a fully tax-equivalent basis, Q2 net interest margin was 2.82%, compared with 2.76%; first-half margin was 2.79%, compared with 2.73%. Interest rate spread was slightly lower year over year in both periods.
- Fees and expenses: Q2 wealth management fees were $8.1 million, up 60%; first-half fees were $16.5 million, up 67%. Operating expenses rose 24% in Q2 to $24.9 million and 23% in the first half to $48.3 million, partly reflecting acquisitions, strategic hiring, and equipment finance operations.
- Returns: Annualized Q2 ROAA was 1.11% and ROAE 11.11%, versus 0.79% and 9.06%. First-half ROAA was 1.06% and ROAE 10.83%, versus 0.80% and 9.33%.
- Balance sheet at June 30: Total assets were $4.27 billion, loans $3.72 billion, deposits $3.52 billion, and shareholders’ equity $437.0 million. Total assets were nearly unchanged from year-end 2017; deposits declined from $3.70 billion.
- Funding and liquidity: Cash and cash equivalents were $66.8 million, down from $113.4 million at year-end. First-half operating cash flow was $31.4 million; investing cash use was $55.1 million and financing cash use was $22.9 million. Unused borrowing commitments were $1.1 billion from the FHLB and $913.7 million from the Federal Reserve Bank.
- Borrowings: At quarter-end, overnight borrowings were $127.4 million, FHLB advances $52.9 million, and subordinated debt, net, $83.1 million. There were no overnight borrowings at December 31, 2017.
- Capital: The Bank’s total risk-based capital ratio was 15.23% and Tier 1 leverage ratio 11.27%; management reported regulatory capital ratios above well-capitalized requirements.
Material changes versus comparable periods
- Earnings growth reflected higher net interest income, substantially higher wealth management fees, lower loan-loss provision, and a lower effective tax rate. Acquisitions and organic growth helped lift wealth management assets under management and administration to $5.7 billion from $3.9 billion a year earlier.
- Higher loan yields and a shift toward commercial and industrial lending supported interest income. Average commercial loan balances grew, while average commercial mortgage balances declined. Deposit costs also increased as competition and the mix of higher-cost certificates and money market accounts raised funding expense.
- Total deposits fell $175.4 million in the first half, including the runoff of listing-service deposits the company chose not to replace. The company used overnight borrowings and FHLB funding; loans-to-deposits rose to 105.68% from 100.16% at year-end.
- Credit indicators were mixed: nonperforming loans declined to 0.32% of loans from 0.37% at year-end, while impaired loans rose to $30.7 million from $23.1 million. Performing troubled debt restructurings increased to $18.7 million from $9.5 million.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said higher operating expenses were anticipated as part of its strategic plan, and revenue and profitability from newly hired personnel may lag expenses by several quarters.
- Management said liquidity and capital were adequate for planned growth. It also reported a regular $0.05-per-share dividend declared July 26, 2018, payable August 23, 2018.
- The filing identifies risks including deposit-generation and funding costs, net interest margin pressure, interest-rate and securities-market changes, credit losses and real estate values, economic weakness in the New Jersey and New York markets, acquisition integration, cybersecurity, regulation, and execution of growth plans.
- New Jersey legislation enacted July 1, 2018 imposes a temporary business surtax effective retroactively from January 1, 2018. The company expected a third-quarter tax adjustment and said its effective tax rate could rise by as much as 1 percentage point in 2018 and by 1–3 points in 2019, depending on application of combined-reporting rules.
- Available-for-sale securities had $6.9 million of gross unrealized losses at June 30, versus $3.7 million at year-end. Management attributed the losses to interest rates and market conditions, and said it did not expect to sell the securities before recovery. A new accounting rule also resulted in a $114,000 first-half mark-to-market loss on the CRA equity investment.
- The filing reports no pending or threatened litigation believed likely to have a material adverse effect, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit outflows and the use of overnight and wholesale funding persist, and how these affect funding costs and the loans-to-deposits ratio.
- Whether expense growth moderates and acquired wealth-management businesses deliver expected revenue and profitability.
- Whether increases in impaired loans and performing TDRs lead to higher provisions or credit losses.
- The realized effects of the New Jersey surtax and combined-reporting requirements on future tax expense.
- How interest-rate movements affect net interest margin, securities values, and the company’s modeled rate sensitivity; management cautions that model outcomes may differ from actual results.