Peapack-Gladstone Financial Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. The company operates Banking and Peapack Private wealth-management segments. The quarter reflects the initial economic disruption from COVID-19.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $46.3 million | $41.7 million in Q1 2019; up 11% |
| Net interest income | $31.7 million | $30.0 million in Q1 2019 |
| Net interest margin | 2.57% | 2.70% in Q1 2019 |
| Provision for loan and lease losses | $20.0 million | $0.1 million in Q1 2019 |
| Pretax income (loss) | $(2.0) million | $15.9 million in Q1 2019 |
| Income tax benefit (expense) | $3.3 million benefit | $4.5 million expense in Q1 2019 |
| Net income; diluted EPS | $1.4 million; $0.07 | $11.4 million; $0.58 in Q1 2019 |
| Operating cash flow | $7.4 million | $31.9 million in Q1 2019 |
| Total assets | $5.83 billion | $5.18 billion at December 31, 2019 |
| Gross loans; deposits | $4.41 billion; $4.44 billion | $4.39 billion; $4.24 billion at December 31, 2019 |
| Allowance for loan and lease losses | $63.8 million, or 1.45% of loans | $43.7 million, or 0.99%, at December 31, 2019 |
| Cash and cash equivalents | $774.0 million | $208.2 million at December 31, 2019 |
| Shareholders’ equity | $496.4 million | $503.7 million at December 31, 2019 |
Interest expense fell year over year, supporting higher net interest income, while average earning-asset yields declined. The company reported annualized return on average assets of 0.11% and return on average equity of 1.08%, versus 0.98% and 9.65%, respectively, in Q1 2019. The $3.2 million CARES Act-related tax benefit from carrying back tax net operating losses materially supported reported net income.
Cash provided by financing activities was $576.7 million, primarily reflecting $197.7 million of deposit growth and a $386.9 million net increase in short-term borrowings. Investing activities used $18.2 million. These cash-flow figures include the temporary liquidity borrowing described below.
Material changes and management commentary
- The $20.0 million credit-loss provision was driven principally by higher qualitative reserves for unemployment and borrower payment-deferral requests associated with COVID-19. The allowance rose to 1.45% of loans; nonperforming loans were 0.67% of loans, versus 0.66% at year-end.
- Noninterest income increased to $14.5 million from $11.7 million. Wealth-management fees rose to $10.0 million from $9.2 million, including a full quarter from Point View, acquired in September 2019. Other income benefited from capital-markets activity, including loan-level swap fees, SBA loan-sale gains, and mortgage banking.
- Operating expenses increased to $28.2 million from $25.7 million, principally due to compensation, staffing and costs associated with Point View and the company’s strategic growth plan.
- Assets under management and/or administration fell 14% to $6.4 billion from $7.5 billion at year-end, mainly from market-value declines rather than customer attrition. Management said wealth fees were negatively affected by market declines.
- Total capital to risk-weighted assets was 13.91% and the Tier 1 leverage ratio was 8.93% at March 31. The Bank’s leverage ratio was 10.28%; the filing states the Bank remained above well-capitalized regulatory thresholds. Capital ratios were lower than at year-end.
- Management reported $774.0 million of cash and cash equivalents and $400.6 million of available-for-sale securities. The company borrowed $500 million through a one-month FHLB advance in March as a liquidity precaution; it repaid that advance on April 24 after deposits continued to grow and borrower draws remained minimal. Available borrowing capacity was also reported, including FHLB and Federal Reserve facilities.
Outlook, risks and unusual items
- Management said COVID-19 was expected to have a significant operational impact but that its magnitude could not be estimated. Risks cited include further loan deterioration, increased credit-loss provisions, declining collateral values, pressure on net interest margin, lower wealth-management revenue, cyber and third-party service risks, and possible dividend reductions if earnings materially weaken.
- As of April 22, the company had approved payment deferrals relating to approximately $600 million, or 14% of its loan portfolio. By April 28, it had processed more than 2,000 Paycheck Protection Program applications, with approximately $600 million in approved loans. These are post-quarter figures.
- The company performed an interim goodwill-trigger assessment in light of the pandemic and concluded a goodwill impairment test was not required at March 31; it reported no impairment of intangible assets. AUM/AUA declines and future economic conditions remain relevant to that assessment.
- The company elected to delay adoption of the CECL credit-loss standard under the CARES Act provision. The filing says the eventual effect, including any opening retained-earnings adjustment, had not yet been determined.
- The board declared a regular $0.05-per-share dividend on April 28, payable May 27, 2020. The company completed its previously announced repurchase program during Q1, buying 220,222 shares for $6.5 million.
- No material pending or threatened litigation was reported. Management stated that disclosure controls and procedures were effective as of quarter-end.
Important facts for investors to verify
- Subsequent-quarter credit quality, reserve adequacy, payment deferrals, delinquencies and charge-offs, especially given the $20.0 million Q1 provision and commercial real-estate exposure.
- Deposit stability, funding needs and liquidity after repayment of the $500 million FHLB advance, including the timing and funding of approved PPP loans.
- Net interest margin and funding costs under near-zero rates; Q1 margin declined 13 basis points year over year.
- Wealth-management AUM/AUA, market-driven fee trends and whether customer retention remains stable.
- The durability of earnings excluding the $3.2 million tax benefit and variable capital-markets and loan-sale income.
- Future CECL adoption effects, goodwill impairment assessments, capital levels and the sustainability of the dividend.