Business context and reporting period
Peapack-Gladstone Financial Corporation is a New Jersey bank holding company whose principal subsidiary, Peapack-Gladstone Bank, provides commercial, consumer and private banking, lending, deposit and wealth management services. This Form 10-K covers the fiscal year ended December 31, 2016; the filing was signed March 14, 2017. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Net interest income | $96.4 million | $84.5 million | Up 14%; net interest margin declined to 2.74% from 2.80%. |
| Net income | $26.5 million | $20.0 million | Up 33%. |
| Diluted earnings per share | $1.60 | $1.29 | Up 24%. |
| Return on average assets / equity | 0.72% / 8.92% | 0.64% / 7.71% | Both improved. |
| Wealth management fees | $18.2 million | $17.0 million | Assets under administration reached $3.7 billion, up 11%. |
| Total assets | $3.88 billion | $3.36 billion | Up 15%. |
| Total loans | $3.31 billion | $2.91 billion | Up 14%; commercial loans rose 24% and commercial mortgages rose $138 million. |
| Total deposits | $3.41 billion | $2.94 billion | Up 16%; customer deposits, excluding specified brokered balances, rose 19% to $3.14 billion. |
| Operating expenses | $75.1 million | $68.9 million | Up 9%, largely due to strategic hiring, risk-management spending and higher FDIC assessments. |
| Provision for loan losses | $7.5 million | $7.1 million | Allowance was $32.2 million, or 0.97% of loans, versus $25.9 million, or 0.89%. |
Fourth-quarter 2016 net income was $7.3 million and diluted EPS was $0.43, compared with $4.3 million and $0.28 in fourth-quarter 2015. The 2015 quarter included $2.5 million of pretax charges for closing two branches.
Cash and cash equivalents were $162.7 million at year-end, and available-for-sale securities were $305.4 million. 2016 cash flow was $42.9 million provided by operations, $433.2 million used in investing and $482.8 million provided by financing; cash increased $92.5 million. Average loans to average deposits rose to 100.97% from 98.30%.
Year-end regulatory capital ratios were 13.25% total capital, 10.60% Tier 1 and CET1, and 8.35% leverage at the holding company. The Bank reported 12.87%, 11.82%, 11.82% and 9.31%, respectively, and was categorized as well capitalized. Shareholders’ equity was $324.2 million, or 8.36% of assets.
Debt included $61.8 million of FHLB advances, $9.7 million of capital lease obligations and $48.8 million of subordinated notes net of issuance costs. The $50 million notes issued in June 2016 carry a 6% fixed rate through June 2021, then reset to three-month LIBOR plus 485 basis points, and mature in 2026. The Company had no overnight borrowings at year-end.
Material changes versus the prior comparable period
- Growth in average loans drove higher interest income and net interest income, but the margin contracted six basis points as funding costs rose, including costs associated with subordinated debt, deposits and interest-rate swaps.
- Commercial lending expanded as management pursued a strategic shift toward C&I lending. Multifamily loans remained broadly flat; the Company sold or participated approximately $234 million of multifamily loans during 2016 and had none classified as held for sale at year-end, compared with $82.2 million in 2015.
- Noninterest income excluding wealth management fees rose 60% to $10.7 million, supported by loan-level swap fees, SBA loan sales and multifamily loan sales. Net securities gains declined to $119,000 from $527,000.
- Nonperforming assets increased to $11.8 million, or 0.30% of assets, from $7.3 million, or 0.22%. Nonperforming loans rose to $11.3 million from $6.7 million; 30–89-day past-due loans declined to $1.4 million from $2.1 million.
- Capital strengthened following the subordinated-note issuance and a $22.5 million contribution from the dividend reinvestment plan. Shares outstanding increased during the year.
- The Company corrected previously filed regulatory reports after identifying multifamily loans that had been risk-weighted at 50% rather than 100%. It reported that capital ratios were corrected and that the Bank remained above well-capitalized thresholds.
Outlook, management commentary, risks and unusual items
Management said the strategy would continue to emphasize organic growth, private banking and wealth management, and expansion of C&I lending. It expects higher operating expenses in 2017 and beyond; revenue and profitability from newly hired personnel may lag their costs by several quarters. No quantified earnings, revenue or loan-growth guidance is provided.
- Credit and concentration: Multifamily loans were 44% of total loans; multifamily lending was 372% of Bank regulatory capital and total commercial real estate concentration was 564% of capital. A large share of lending is secured by real estate in New Jersey and the New York area. Management cited the seasoning of a relatively new loan portfolio and potential sensitivity to local property markets.
- Funding and liquidity: Brokered deposits were reported at approximately $666.7 million, or 19.5% of deposits, including reciprocal deposits. Access and pricing could be affected by capital status or market conditions. Management considered liquidity adequate, citing cash, securities and unused secured borrowing capacity of $1.1 billion at the FHLB and $632 million at the Federal Reserve Bank of New York.
- Rates and margin: The Company was modeled as slightly asset-sensitive. A sustained +200-basis-point shock was estimated to increase net interest income 5.6% in year one and 8.3% in year two; a -100-basis-point shock was estimated to reduce it 5.2% and 6.7%, respectively. Management cautioned that simulations depend on assumptions and are not forecasts.
- Capital and accounting: The filing identifies the 2016 multifamily risk-weighting correction as a regulatory reporting issue. It also describes the future CECL expected-credit-loss standard as potentially materially increasing the allowance and creating greater volatility; the Company was evaluating its impact.
- Other items: Management recognized no securities impairment charges in 2014–2016, but disclosed an unrealized loss on a below-investment-grade trust preferred security and said it was monitoring the issuer. The filing reports no pending or threatened litigation believed likely to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether nonperforming loans, troubled debt restructurings and the allowance for loan losses remain controlled as the rapidly expanded loan book seasons.
- How multifamily and other commercial real estate concentrations, geographic exposure and property values affect credit quality and required capital.
- Whether core deposit growth can fund lending without increased reliance on brokered deposits, higher-cost funding or pressure on the net interest margin.
- Whether strategic hiring and risk-management investment produce revenue sufficient to offset the anticipated higher expenses.
- The details and regulatory implications of the multifamily risk-weighting correction, and the eventual balance-sheet and earnings effects of CECL adoption.
- The potential dilution and capital implications of ongoing share issuance through the dividend reinvestment plan and the Company’s $100 million shelf registration.