Peapack-Gladstone Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. The company operates a banking business and a Private Wealth Management division. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2017 / June 30, 2017 | Comparison |
|---|---|---|
| Total revenue (net interest income plus other income) | $35.1 | $31.6 in Q2 2016; up 11% |
| Net interest income | $27.0 | $24.2 in Q2 2016; up 12% |
| Net income | $7.9; diluted EPS $0.45 | $6.6 and $0.40 in Q2 2016 |
| Six-month net income / diluted EPS | $15.9 / $0.91 | $12.1 / $0.74 in first half 2016 |
| Annualized returns | Q2 ROAA 0.79%; ROAE 9.06% | Q2 2016: 0.73% / 9.06%. First-half 2017 ROAA 0.80%, ROAE 9.33%, versus 0.68% / 8.45% |
| Net interest margin, tax-equivalent | Q2 2.76%; first half 2.73% | Q2 2016 2.79%; first half 2016 2.80% |
| Total assets | $4,165.7 | $3,878.6 at Dec. 31, 2016 |
| Loans / deposits | Loans $3,664.0; deposits $3,581.3; loan-to-deposit ratio 102.31% | Loans $3,312.1; deposits $3,411.8; ratio 97.08% at Dec. 31, 2016 |
| Allowance for loan losses | $35.8, or 0.98% of loans | $32.2, or 0.97%, at Dec. 31, 2016 |
| Cash and cash equivalents | $93.8 | $162.7 at Dec. 31, 2016 |
| Shareholders’ equity | $356.8 | $324.2 at Dec. 31, 2016 |
- Q2 provision for loan losses was $2.2 million, unchanged year over year; first-half provision was $3.8 million versus $3.9 million.
- Operating expenses rose 7% to $20.1 million in Q2. Compensation and benefits increased 15% to $12.8 million, reflecting strategic hiring and the addition of an equipment-finance team. FDIC expense fell to $0.6 million from $1.6 million following a change in assessment methodology.
- Six-month operating cash flow was $31.3 million versus $16.5 million in 2016. Investing activities used $367.6 million, chiefly reflecting $352.3 million of net loan growth; financing activities provided $267.5 million, including deposit growth and $87.0 million of new overnight FHLB borrowings. Cash and equivalents declined $68.9 million over the half-year.
- At June 30, borrowings included $87.0 million overnight FHLB borrowings, $58.8 million in FHLB advances, $48.8 million subordinated debt, and a $9.4 million capital lease obligation. The subordinated notes carry a 6% fixed rate through June 2021, then reset to three-month LIBOR plus 485 basis points; stated maturity is June 2026.
- Company regulatory capital ratios were 13.24% total capital to risk-weighted assets, 10.69% Tier 1 and common equity Tier 1, and 8.82% Tier 1 leverage. The filing says the Bank remained above “well capitalized” thresholds.
Material changes and operating trends
- Loan growth drove higher interest income: loans increased $351.9 million from year-end. Commercial loans were $799.3 million versus $636.7 million; multifamily loans were $1,504.6 million versus $1,459.6 million. Management said it seeks to reduce multifamily lending as a share of the portfolio while expanding commercial and C&I lending.
- Net interest income increased, but tax-equivalent net interest margin narrowed year over year. Management attributed pressure to low market yields, competitive pricing, higher funding costs associated in part with subordinated debt, and maintaining higher liquidity.
- Wealth management fee income was $5.1 million in Q2, up 4%; first-half income was $9.9 million, up 8%. Assets under administration rose 15% year over year to $3.9 billion.
- Q2 included $1.3 million in loan-level back-to-back swap fee income, compared with none in Q2 2016; first-half income was $1.7 million versus $94,000. This was a notable contributor to other income growth.
- Nonperforming loans increased to $15.6 million from $11.3 million at year-end; nonperforming loans were 0.43% of loans versus 0.34%. Nonperforming assets totaled $16.0 million. Performing troubled debt restructurings declined to $9.7 million from $17.8 million.
- Commercial real estate concentration remained substantial: multifamily and non-owner-occupied CRE together equaled 552% of Bank regulatory capital at June 30, down from 564% at year-end and 610% a year earlier.
Outlook, risks and notable items
- Management expects continued loan growth but did not provide numerical earnings or margin guidance. It cautioned that revenue and profitability from new wealth-management and equipment-finance hires may lag associated expenses by several quarters.
- Management described liquidity as adequate. Available liquidity included $93.8 million cash and equivalents, $315.2 million of available-for-sale securities, and unused borrowing commitments of $1.1 billion from FHLB, $695.6 million from the Federal Reserve, and $22.0 million from correspondent banks.
- Interest-rate models estimate that an immediate, sustained 200-basis-point increase would raise year-one net interest income 7.1% and year-two income 10.2%; a 100-basis-point decrease would reduce it 6.8% and 8.1%, respectively. The filing cautions that model assumptions limit forecast precision.
- Key stated risks include local economic and real-estate deterioration, CRE and loan-loss exposure, net interest margin pressure, funding and liquidity conditions, growth and acquisition integration, rising operating costs, regulatory and compliance costs, and cybersecurity threats. Most loans are secured by real estate in New Jersey and, to a lesser extent, New York.
- The company announced a definitive agreement to acquire Murphy Capital Management in May; the acquisition closed July 31, 2017, after quarter-end. Consideration included cash and $2.0 million of company common stock.
- Management reported no material pending or threatened litigation and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- Management considered available-for-sale securities’ unrealized losses temporary and reported no impairment charge. One trust preferred security was rated below investment grade (Moody’s Ba1); management said it was monitoring the issuer.
- ASU 2016-09 adoption reduced the effective tax rate, but the filing gives differing amounts for the resulting tax benefit: $785,000 in the accounting note and $662,000 in MD&A. The company was evaluating the future CECL allowance impact and said its magnitude could not yet be determined.
Most important facts for investors to verify
- Reconcile the reported $785,000 versus $662,000 tax benefit from ASU 2016-09 and assess the sustainability of the lower effective tax rate.
- Track whether loan growth, especially commercial lending, can sustain earnings while preserving underwriting quality; monitor the rise in nonaccrual loans and the allowance’s adequacy.
- Evaluate CRE concentration and the effect of changing multifamily and C&I mix, including sensitivity to local property values and economic conditions.
- Assess whether margin pressure and deposit repricing offset balance-sheet growth, and monitor reliance on brokered deposits and overnight borrowings.
- Separate recurring earnings from back-to-back swap fees and assess acquisition integration, new-hire costs, and the post-quarter Murphy Capital Management transaction.