Peapack-Gladstone Financial Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative figures are primarily for FY 2016. The filing also reports fourth-quarter results. The company is a New Jersey bank holding company operating a commercial bank and wealth management business, mainly in New Jersey and the New York metropolitan area.
Financial results and position
| Metric | FY 2017 / Dec. 31, 2017 | Prior comparable period |
|---|---|---|
| Total income (net interest income plus noninterest income) | $145.8 million | $125.4 million in FY 2016 |
| Net interest income | $111.1 million; fully tax-equivalent (FTE) $112.2 million | $96.4 million; FTE $97.4 million in FY 2016 |
| Net interest margin | 2.80% | 2.74% in FY 2016 |
| Wealth management fees | $23.2 million | $18.2 million in FY 2016 |
| Provision for loan losses | $5.9 million | $7.5 million in FY 2016 |
| Operating expenses | $85.6 million | $75.1 million in FY 2016 |
| Net income; diluted EPS | $36.5 million; $2.03 | $26.5 million; $1.60 in FY 2016 |
| Return on average assets; return on average equity | 0.89%; 10.12% | 0.72%; 8.92% in FY 2016 |
| Total assets; loans; deposits | $4.26 billion; $3.70 billion; $3.70 billion | $3.88 billion; $3.31 billion; $3.41 billion at Dec. 31, 2016 |
| Cash and cash equivalents | $113.4 million | $162.7 million at Dec. 31, 2016 |
| Cash flow from operations; investing; financing | $55.9 million; $(435.5) million; $330.3 million | Net cash decreased $49.2 million in FY 2017 |
FY 2017 total income is presented here as net interest income plus reported noninterest income; it is not a separately labeled GAAP revenue line. Cash-flow figures are consolidated cash flows and should not be read as a standalone measure of bank liquidity.
Changes and operating developments
- Net income rose 38% and diluted EPS rose 27% year over year. Net interest income increased 15% FTE, supported by asset and loan growth, including higher-yielding C&I lending; the margin improved 6 basis points.
- Loans grew 12%; C&I loans grew approximately 50% to $958 million. Multifamily loans declined 5% to $1.39 billion as the company reduced their share of the portfolio.
- Wealth assets under management and/or administration reached $5.5 billion, up 49%. Acquisitions of Murphy Capital Management and Quadrant Capital Management contributed about $1.31 billion of AUM at acquisition; management also cited approximately $500 million of organic growth, including market appreciation.
- Expenses increased 14%, principally from strategic hiring, acquisition-related costs, equipment-finance expansion and other growth initiatives. The company also recorded $1.3 million of separation expense for two senior officers. Compensation and benefits rose 20% to $54.0 million.
- Asset quality remained generally strong, but nonperforming loans increased to $13.5 million from $11.3 million, and nonperforming assets rose to $15.6 million from $11.8 million. Nonperforming assets were 0.37% of total assets versus 0.30%. Allowance coverage was 269% of nonperforming loans, down from 286%.
Debt, liquidity, outlook and risks
- At year-end, FHLB advances were $37.9 million and subordinated debt, net of issuance costs, was $83.0 million. The company issued $35 million of subordinated notes in December 2017 at a 4.75% fixed rate for five years, then floating; about $29.1 million of net proceeds was contributed to the Bank. The Bank was reported well capitalized.
- Total deposits included $612.5 million of brokered deposits, approximately 16.6% of deposits. The company reported $327.6 million of available-for-sale securities and unused secured borrowing capacity of $1.2 billion from the FHLB and $785.6 million from the Federal Reserve Bank of New York. Management judged liquidity adequate.
- Capital ratios improved year over year: company total risk-based capital was 14.84% and CET1 was 11.31%; Bank total risk-based capital was 14.34% and CET1 was 13.27%. The quarterly common dividend remained $0.05 per share.
- No numeric earnings guidance was provided. Management said 2018 and beyond would emphasize C&I growth and cautioned that operating expenses would be higher as strategic investments continue; wealth-business revenue from new personnel may lag costs by several quarters.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% beginning in 2018. FY 2017 included a $1.6 million tax benefit from remeasuring deferred taxes; the filing also says adoption of stock-compensation accounting guidance generated a $1.0 million tax benefit. The exact contribution of each item to normalized earnings should be assessed.
- Key risks include concentrated New Jersey/New York lending and real estate collateral exposure; multifamily and commercial-real-estate concentrations; rapid C&I and lease-finance growth; interest-rate and deposit-cost pressure; reliance on brokered funding; integration and execution risks; and the future impact of CECL, which management had not yet quantified.
- The auditor expressed unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective. The company reported no litigation it believed would have a material adverse effect.
Important facts for investors to verify
- Underlying earnings excluding the $1.6 million tax-reform benefit, the $1.0 million stock-compensation tax benefit, and $1.3 million of officer-separation expense.
- Credit performance and reserve adequacy as the newer C&I and equipment-finance exposures season, including the rise in nonperforming loans and the reduced allowance-to-NPL coverage.
- Funding mix, deposit pricing and brokered-deposit retention as rates change, alongside the cost and terms of the subordinated debt.
- Whether acquisition-driven AUM and fee growth translates into sustained wealth-segment profitability, given higher costs and delayed revenue from new hires.
- Loan concentration, CRE exposure and the eventual CECL allowance impact; the filing does not provide a clear quantified CECL estimate.