Peapack-Gladstone Financial Corporation — Q1 2018 10-Q
Period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The company operates banking and private wealth management businesses. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
- Revenue and earnings: Total revenue, as defined by the company as net interest income plus wealth-management and other income, was $38.6 million, up $6.0 million (18%) year over year. Net income was $10.8 million versus $8.0 million; diluted EPS was $0.57 versus $0.46.
- Interest income and margins: Net interest income was $28.4 million, up $2.8 million. On a fully tax-equivalent basis, net interest income was $28.8 million versus $25.8 million; net interest margin rose to 2.76% from 2.71%, while the interest-rate spread edged down to 2.53% from 2.55%.
- Fees and expenses: Wealth-management fee income rose 74% to $8.4 million. Operating expenses increased 21% to $23.3 million, including higher personnel and occupancy costs and expenses associated with recent acquisitions and the equipment-finance business. The provision for loan and lease losses decreased to $1.25 million from $1.60 million.
- Returns and taxes: Annualized return on average assets was 1.01% versus 0.82%; annualized return on average equity was 10.54% versus 9.62%. The effective tax rate fell to 22.9% from 31.8%, primarily following the reduction in the federal corporate tax rate.
- Balance sheet: Total assets were $4.34 billion, up from $4.26 billion. Loans were $3.71 billion, little changed from year-end; total deposits fell to $3.55 billion from $3.70 billion. Shareholders’ equity increased to $422.4 million from $403.7 million.
- Cash flow and liquidity: Operating activities provided $14.1 million, compared with $23.5 million in Q1 2017; investing activities used $37.5 million, versus $124.6 million used; financing activities provided $63.5 million. Cash and cash equivalents ended the quarter at $153.5 million, up from $113.4 million at year-end. The company reported $1.1 billion of unused FHLB borrowing commitments and $839 million at the Federal Reserve Bank.
- Funding and capital: The company recorded $216 million of overnight FHLB borrowings at quarter-end, compared with none at year-end; FHLB advances were $22.9 million and subordinated debt, net, was $83.1 million. The Bank’s total risk-based capital ratio was 14.81%; the company reported a 15.32% total risk-based capital ratio. Management said capital was adequate to support planned near-term growth.
- Credit: The allowance for loan and lease losses was $37.7 million, or 1.02% of loans, versus $36.4 million, or 0.98%, at year-end. Nonperforming loans were 0.36% of loans. Classified loans increased to $55.9 million from $41.7 million at year-end; nonperforming assets were $15.4 million.
Material changes and management commentary
- Year-over-year earnings growth reflected higher loan interest income, increased wealth-management fees and a lower loss provision, partly offset by higher operating expenses. The MCM and Quadrant acquisitions, completed in 2017, contributed to the increase in wealth fees and costs.
- Wealth-management assets under management and/or administration were $5.6 billion, up from $3.8 billion a year earlier. Management cited acquisitions and organic growth, and cautioned that revenue and profitability from new personnel may lag their costs by several quarters.
- First-quarter net deposit outflows were $146 million. Management attributed $66 million to maturing listing-service deposits that it chose not to replace; most of the remaining outflow was concentrated among a small number of larger depositors who remained clients. The company also reported $180 million of brokered interest-bearing demand deposits.
- Management described the securities portfolio’s unrealized losses as temporary and linked them to interest-rate and market movements; it said it did not intend, and was not likely to be required, to sell the securities before recovery. Net unrealized losses in accumulated other comprehensive income increased to $2.8 million from $1.2 million at year-end.
Outlook, risks and unusual items
- No specific earnings or growth guidance was provided. Management said liquidity was sufficient for future needs and capital was adequate for planned near-term balance-sheet growth. Its interest-rate model indicated net interest income could rise 2.3% in year one and 6.7% in year two under an immediate, sustained 200-basis-point rate increase; a 100-basis-point decrease was modeled to reduce it 3.2% and 5.7%, respectively. Management cautioned that simulations depend on assumptions and are not precise forecasts.
- Key disclosed risks include deposit and liquidity pressures, rising deposit costs and margin sensitivity, real-estate and commercial-real-estate concentration, local economic and property-value deterioration, credit-loss uncertainty, acquisition integration and expense execution, cybersecurity, regulatory costs, and the ability to grow and fund the business.
- The company adopted accounting standards affecting revenue recognition and financial-instrument accounting in 2018. Under the latter, its CRA equity investment was marked through earnings, producing a $78,000 quarterly loss. Management was evaluating the future CECL expected-credit-loss standard and said its impact could not yet be determined.
- Management reported no material pending or threatened litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. The filing states that first-quarter results are not necessarily indicative of future results.
Important facts for investors to verify
- Whether deposit outflows persist and how reliance on overnight borrowings and brokered funding affects funding costs and liquidity.
- Whether wealth-management assets and fees are retained and grow enough to offset acquisition-related and hiring costs.
- Developments in classified and impaired loans, allowance adequacy, and the portfolio’s commercial-real-estate concentrations.
- How rising rates, deposit repricing and securities valuation changes affect net interest margin, earnings and equity.
- The eventual allowance and financial-statement impact of CECL implementation.