Peapack-Gladstone Financial Corporation — Q3 2017 Form 10-Q
Business context and period. The company is a New Jersey-based bank holding company operating through banking and private wealth management businesses. This unaudited filing covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $30.0 | $24.3 | $82.6 | $71.9 |
| Provision for loan losses | $0.4 | $2.1 | $4.2 | $6.0 |
| Other income, including wealth fees | $8.8 | $7.5 | $24.0 | $21.2 |
| Operating expenses | $22.0 | $18.2 | $61.4 | $56.1 |
| Net income | $10.2 | $7.1 | $26.1 | $19.2 |
| Diluted EPS | $0.56 | $0.43 | $1.47 | $1.17 |
| Tax-equivalent net interest margin | 2.95% | 2.74% | 2.81% | 2.78% |
- Q3 annualized return on average assets was 0.97% and return on average equity was 11.09%; nine-month figures were 0.86% and 9.94%, respectively.
- At September 30, assets were $4.18 billion, up from $3.88 billion at year-end; loans were $3.67 billion versus $3.31 billion, and deposits were $3.66 billion versus $3.41 billion.
- Shareholders’ equity was $379.9 million, compared with $324.2 million at year-end. Total capital to risk-weighted assets was 13.28% at the company and 12.92% at the Bank; the Bank’s Tier 1 leverage ratio was 8.75%. The filing states the Bank remained above “well-capitalized” regulatory thresholds.
- Cash and cash equivalents were $93.3 million, down from $162.7 million at year-end. Nine-month cash flows were $44.6 million provided by operations, $376.8 million used in investing, and $262.8 million provided by financing.
- Debt included $49.9 million of FHLB advances, $48.9 million of subordinated debt (net), and a $9.2 million capital lease obligation. FHLB advances declined from $61.8 million at year-end. Loans-to-deposits were 100.12%.
- The allowance for loan and lease losses was $35.9 million, or 0.98% of loans. Nonperforming loans were 0.42% of loans; nonperforming assets were $15.5 million. No loans were over 90 days past due and still accruing.
Material changes and management commentary
- Q3 net income increased to $10.2 million from $7.1 million; nine-month net income rose to $26.1 million from $19.2 million. Growth reflected higher net interest income and wealth-management fees, as well as lower loan-loss provision, partly offset by higher operating expenses.
- Q3 tax-equivalent net interest income rose 24% year over year. Management attributed growth to larger loan and securities balances, higher loan yields, and some benefit from Federal Reserve rate increases. Q3 included $1.2 million of deferred-fee recognition and prepayment income on two commercial loans, including approximately $1.2 million of multifamily prepayment premiums.
- Q3 operating expenses increased 21% year over year. Management cited strategic hiring, incentive costs, the new equipment-finance business, the MCM acquisition, and acquisition-related professional fees. Management cautioned that revenue and profitability from new personnel may lag expenses by several quarters.
- Private wealth management fees were $5.8 million for Q3, up from $4.4 million; assets under administration reached $4.8 billion, up from $3.5 billion a year earlier. Growth reflected MCM, new business, and market appreciation.
- The loan portfolio grew, with commercial loans a larger share and multifamily loans a smaller share. Multifamily remained a significant concentration: 39.3% of loans and 329% of Bank regulatory capital. Total CRE concentration was 529% of Bank regulatory capital, down from 610% a year earlier.
- The company acquired Murphy Capital Management (MCM) effective August 1, 2017, for $10.0 million cash plus $2.0 million of equity, with final purchase accounting still under review. It completed the Quadrant Capital Management acquisition on October 31, 2017, after quarter-end; consideration included $3.1 million of equity plus cash.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management said it expects revenue and profitability from the equipment-finance team and new wealth-management personnel to lag related expenses by several quarters.
- Management described liquidity as adequate. Available sources included $315.1 million of securities, of which $177.3 million were pledged, and unused borrowing commitments of approximately $1.2 billion from FHLB and $732 million from FRB.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 200-basis-point rate increase would lift year-one net interest income about 4.4%; a 100-basis-point decrease would reduce it about 5.9%. Management cautioned that model assumptions limit predictive precision.
- Key disclosed risks include credit losses and local real-estate conditions, CRE concentration, deposit pricing and funding, interest-rate changes, integration and growth execution, operating-cost increases, cybersecurity, regulation, and liquidity. Management noted the allowance estimate involves significant judgment. A single-issuer trust preferred security was rated below investment grade (Ba1); management considered its unrealized loss temporary and reported no other-than-temporary impairment.
- The company adopted share-based compensation guidance that reduced its effective tax rate; the filing reports a $792,000 tax benefit in the financial-statement note and a $662,000 first-quarter benefit in MD&A. Management states nine-month effective tax rate improvement was primarily due to adoption.
- Management reported no pending or threatened litigation expected to have a material adverse effect, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth and the Q3 net interest margin can be sustained as deposit costs rise and the benefit of one-time loan fees and prepayment premiums recedes.
- Credit quality trends: nonaccrual loans increased to $15.4 million from $11.3 million at year-end, while the allowance-to-nonperforming-loans ratio declined to 233.72% from 285.94%.
- Exposure and underwriting performance in multifamily and other commercial real estate, including the effect of loan sales and growth in commercial and industrial lending.
- Whether expense growth, acquisition integration, and the delayed revenue contribution from new teams affect future profitability; assess MCM and Quadrant purchase accounting and subsequent results.
- Liquidity and funding mix, including the 100.12% loans-to-deposits ratio, brokered deposits, and the decline in cash balances; confirm borrowing capacity and collateral availability.
- Share issuance and dilution: average diluted shares increased year over year, and the dividend reinvestment plan raised $26.1 million during the first nine months.