Peapack-Gladstone Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. The company is a New Jersey bank holding company operating Peapack-Gladstone Bank and wealth-management subsidiaries, focused on New Jersey and the New York City area. Figures are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $75.6 | $57.1 |
| Net interest income | $67.9 | $52.8 |
| Net interest margin | 3.01% | 3.26% |
| Provision for loan losses | $4.9 | $3.4 |
| Other income | $20.8 | $20.6 |
| Operating expenses | $59.5 | $55.2 |
| Net income | $14.9 | $9.3 |
| Diluted earnings per share | $1.22 | $1.01 |
| Return on average assets / equity | 0.63% / 7.96% | 0.54% / 7.37% |
- Growth and balance sheet: Total assets were $2.70 billion, up about $735 million (37%). Loans reached $2.25 billion, up $676 million (43%); deposits were $2.30 billion, up $651 million (39.5%). Customer deposits excluding brokered balances grew 21% to $1.98 billion.
- Loan mix and credit: Multifamily loans were $1.08 billion, or 48% of loans; commercial real estate loans were $405.8 million and commercial and industrial loans $81.4 million. Nonperforming assets declined to $8.2 million, or 0.30% of assets, from $8.6 million, or 0.44%. Nonperforming loans were 0.30% of loans. The allowance was $19.5 million, 0.87% of loans, versus 0.98% a year earlier; net charge-offs were $0.8 million.
- Noninterest business: Wealth-management assets under administration increased 11% to $2.99 billion; fee income rose 10% to $15.2 million.
- Cash flow: Operating activities provided $27.3 million, versus $32.7 million in 2013. Investing activities used $745.2 million, primarily reflecting $745.4 million of net loan growth. Financing activities provided $714.0 million, chiefly from deposit growth and equity issuance. Cash and cash equivalents ended at $31.2 million, down $3.9 million for the year.
- Debt and funding: Year-end FHLB advances were $83.7 million; overnight borrowings were $54.6 million; and capital-lease obligations were $10.7 million. Brokered demand deposits totaled $188.0 million and brokered CDs $131.7 million. Average loans to average deposits rose to 92.55% from 83.05%.
- Liquidity and capital: Available-for-sale securities totaled $332.7 million. Unused borrowing capacity was $672.4 million at the FHLB and $28.4 million with correspondent banks. The Bank was well capitalized; its total risk-based capital ratio was 14.96%, Tier 1 risk-based ratio 13.80%, and leverage ratio 8.74%. Company ratios were 15.55%, 14.38%, and 9.11%, respectively.
Material changes versus 2013
- Net income increased 61%, as loan growth lifted net interest income; growth was partly offset by a lower net interest margin, higher credit provision, and higher expenses.
- Interest income increased $18.5 million, while interest expense increased $3.4 million. The 25-basis-point margin contraction reflected low market yields, competitive pricing, and higher interest-bearing deposit and cash balances.
- Operating expenses rose 8%, principally due to strategic hiring and compensation costs. Management attributed higher expenses to execution of its “Expanding Our Reach” growth plan.
- Commercial and multifamily lending expanded substantially. Commercial mortgage and multifamily balances increased $556.8 million; commercial loans increased $176.9 million. Residential mortgages declined 12% following weaker originations and a shift away from loans originated for sale.
- Capital increased following a December at-the-market offering of 2.776 million shares, generating $50 million gross and about $48.4 million net proceeds. The company contributed $48.2 million to the Bank. The 2014 average share count was also materially higher.
- Other income excluding wealth-management fees declined 18% to $5.6 million, mainly due to lower securities and mortgage-loan sale gains. The company sold $67 million of longer-duration residential mortgages.
Outlook, commentary, risks and unusual items
- Management expected continued loan growth but said 2015 operating expenses would likely exceed prior periods; revenue and profitability from growth initiatives could lag expenses by several quarters. No earnings or revenue guidance range was provided.
- Interest-rate modeling estimated that an immediate, sustained 200-basis-point increase would reduce 2015 net interest income about 10.5%, while a 100-basis-point decrease would reduce it about 2.8%. Management cautioned that these models depend on assumptions and may differ from actual results. A $25 million receive-floating/pay-fixed swap was initiated in fourth-quarter 2014 to manage rate risk.
- Key risks include concentrated exposure to New Jersey and New York real estate and local economic conditions, rapid multifamily/commercial real estate and C&I growth, seasoning of newer loans, credit-loss and collateral-value uncertainty, interest-rate sensitivity, competition for deposits, and reliance in part on brokered funding. Cybersecurity, regulatory costs, liquidity, and the ability to manage growth are also identified risks.
- Troubled debt restructurings totaled $15.0 million, up from $14.0 million; impaired loans were $20.5 million, up from $17.7 million. Management reported no material litigation and no material impact from 2014 TDR modifications. No securities impairment charges were recognized in 2014.
- The filing reports effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether rapid multifamily, commercial real estate, and C&I loan growth is matched by sound underwriting, portfolio seasoning, and adequate reserves.
- Whether deposit growth can fund loan expansion without continued reliance on higher-cost brokered deposits or materially worsening the loan-to-deposit profile.
- Whether margin pressure and the expected lag between growth costs and revenue affect earnings beyond 2014.
- How the $25 million swap and subsequent funding and deposit changes affect actual interest-rate exposure versus modeled sensitivities.
- Whether 2014 earnings growth and capital strength remain sustainable after the substantial equity issuance and increase in shares outstanding.