PEAPACK-GLADSTONE FINANCIAL CORPORATION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management's confidence and strategies and Management's expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company's Form 10-K for the year endedDecember 31, 2020 , in addition to/which include the following:
• our inability to successfully grow our business and implement our strategic
plan, including an inability to generate revenues to offset the increased
personnel and other costs related to the strategic plan;
• the impact of anticipated higher operating expenses in 2021 and beyond;
• our inability to successfully integrate wealth management firm acquisitions;
• our inability to manage our growth; • our inability to successfully integrate our expanded employee base;
• an unexpected decline in the economy, in particular in our
• declines in our net interest margin caused by the interest rate environment
and/or our highly competitive market;
• declines in value in our investment portfolio;
• impact of our business from a pandemic event on our business, operations,
customers, allowance for loan losses and capital levels;
• higher than expected increases in our allowance for loan and lease losses;
• higher than expected increases in loan and lease losses or in the level of
nonperforming loans;
• changes in interest rates;
• decline in real estate values within our market areas;
• legislative and regulatory actions (including the impact of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Basel III and related
regulations) that may result in increased compliance costs;
• successful cyberattacks against our information technology ("IT")
infrastructure and that of our IT and third-party providers;
• higher than expected FDIC insurance premiums;
• adverse weather conditions;
• our inability to successfully generate business in new geographic markets;
• a reduction in our lower-cost funding sources; • our inability to adapt to technological changes;
• claims and litigation pertaining to fiduciary responsibility, environmental
laws and other matters;
• our inability to retain key employees;
• demands for loans and deposits in our market areas;
• adverse changes in securities markets;
• changes in accounting policies and practices; and
• other unexpected material adverse changes in our operations or earnings.
Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
• demand for our products and services may decline, making it difficult
to grow assets and income;
• if the economy is unable to substantially reopen, and higher levels of
unemployment continue for an extended period of time, loan
delinquencies, problem assets, and foreclosures may increase,
resulting in increased charges and reduced income;
• collateral for loans, especially real estate, may decline in value,
which could cause loan losses to increase;
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• our allowance for loan losses may increase if borrowers experience
financial difficulties, which will adversely affect our net income;
• the net worth and liquidity of loan guarantors may decline, impairing
their ability to honor commitments to us;
• a material decrease in net income or a net loss over several quarters
could result in an elimination or a decrease in the rate of our
quarterly cash dividend;
• our wealth management revenues may decline with continuing market turmoil;
• a worsening of business and economic conditions or in the financial
markets could result in an impairment of certain intangible assets,
such as goodwill;
• the unanticipated loss or unavailability of key employees due to the
outbreak, which could harm our ability to operate our business or
execute our business strategy, especially as we may not be successful
in finding and integrating suitable successors;
• we may face litigation, regulatory enforcement and reputation risk as
a result of our participation in the Paycheck Protection Program
("PPP") and the risk that the SBA may not fund some or all PPP loan
guaranties;
• our cyber security risks are increased as the result of an increase in
the number of employees working remotely; and
•
resolution costs.
Moreover, our operations depend on the management skills of our executive
officers and directors, many of whom have held officer and director positions
with us for many years. The unanticipated loss or unavailability of key
employees due to the pandemic could hinder our ability to operate our business
or execute our business strategy.
Except as may be required by applicable law or regulation, the Company
undertakes no duty to update any forward-looking statements to conform the
statement to actual results or change in the Company's expectations. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance, or achievements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis
of Financial Condition and Results of Operations is based upon the Company's
consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Note
1 to the Company's Audited Consolidated Financial Statements for the year ended
December 31, 2020 contains a summary of the Company's significant accounting
policies.
Management believes that the Company's policy with respect to the methodology
for the determination of the allowance for loan and lease losses involves a
higher degree of complexity and requires Management to make difficult and
subjective judgments, which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
materially impact results of operations. This critical policy and its
application are periodically reviewed with the Audit Committee and the Board of
Directors.
The provision for loan and lease losses is based upon Management's evaluation of
the adequacy of the allowance, including an assessment of known and inherent
risks in the portfolio, giving consideration to the size and composition of the
loan portfolio, actual loan loss experience, level of delinquencies, classified
loans and nonperforming loans, detailed analysis of individual loans for which
full collectability may not be assured, the existence and estimated fair value
of any underlying collateral and guarantees securing the loans, and current
economic and market conditions. Although Management uses the best information
available, the level of the allowance for loan and lease losses remains an
estimate, which is subject to significant judgment and short-term change.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to make additional provisions for loan and
lease losses based upon information available to them at the time of their
examination. Furthermore, the majority of the Company's loans are secured by
real estate in New Jersey and, to a lesser extent, New York City . Accordingly,
the collectability of a substantial portion of the carrying value of the
Company's loan portfolio is susceptible to changes in local market conditions
and any adverse economic conditions. Future adjustments to the provision for
loan and lease losses and allowance for loan and lease losses may be necessary
due to economic, operating, regulatory and other conditions beyond the Company's
control.
The Company accounts for its debt securities in accordance with ASC 320,
"Investments - Debt Securities " and its equity security in accordance with ASC
321, "Investments - Equity Securities ". All securities are classified as
available for sale and are carried at fair value, with unrealized holding gains
and losses reported in other comprehensive income/(loss), net of tax, with the
exception of the Company's investment in a CRA investment fund which is
classified as an equity security. In accordance with ASU 2016-01, "Financial
Instruments" unrealized holding gains and losses are marked to market through
the income statement.
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EXECUTIVE SUMMARY: The following table presents certain key aspects of our
performance for the three months ended
For the Three Months Ended June 30, Change
(Dollars in thousands, except per share data) 2021 2020 2021 vs 2020
Results of Operations:
Net interest income $ 33,845 $ 31,971 $ 1,874
Provision for loan and lease losses 900 4,900 (4,000 )
Net interest income after provision for loan
and lease losses 32,945 27,071 5,874
Wealth management fee income (1) 13,034 9,996 3,038
Other income (2) 4,644 2,630 2,014
Operating expense (3) 30,684 29,014 1,670
Income before income tax expense 19,939 10,683 9,256
Income tax expense 5,521 2,441 3,080
Net income $ 14,418 $ 8,242 $ 6,176
Total revenue (4) $ 51,523 $ 44,597 $ 6,926
Diluted average shares outstanding 19,439,439 19,059,822 379,617
Diluted earnings per share $ 0.74 $ 0.43 $ 0.31
Return on average assets annualized (ROAA) 0.97 % 0.56 % 0.41 %
Return on average equity annualized (ROAE) 10.86 6.56 4.30
(1) The
income and expense related to the December lift outs of teams from Lucas
Capital Management ("Lucas") and
approximately
(2) The quarter ended
termination of certain interest rate swaps; a
PPP loans;
third party; and
income related to receipt of life insurance proceeds.
(3) The June 2021 quarter included $648,000 of expense related to the
redemption of subordinated debt.
(4) Total revenue equals net interest income plus wealth management fee income
and other income.
The following table presents certain key aspects of our performance for the six
months ended
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For the Six Months Ended
June 30 , Change
(Dollars in thousands, except per share data) 2021 2020 2021 vs 2020 Results of Operations: Net interest income$ 65,638 $ 63,718 $ 1,920 Provision for loan and lease losses (1) 1,125 24,900 (23,775 ) Net interest income after provision for loan and lease losses 64,513 38,818 25,695 Wealth management fee income (2) 25,165 19,951 5,214 Other income (3) 10,333 7,192 3,141 Operating expense (4) 62,278 57,249 5,029 Income before income tax expense 37,733 8,712 29,021 Income tax expense/(benefit) (5) 10,137 (903 ) 11,040 Net income$ 27,596 $ 9,615 $ 17,981 Total revenue (6)$ 101,136 $ 90,861 $ 10,275 Diluted average shares outstanding 19,473,150 18,991,056 482,094 Diluted earnings per share$ 1.42 $ 0.51 $ 0.91 Return on average assets annualized (ROAA) 0.93 % 0.35 % 0.58 % Return on average equity annualized (ROAE) 10.45 3.80 6.65
(1) The
COVID-19 pandemic.
(2) The six months ended
and expense related to the December lift outs of teams from Lucas and Noyes
- approximately $1.2 million of wealth management fee income and
approximately $700,000 of operating expenses were recorded in 2021 for
these teams.
(3) The 2021 six months included a cost of
of certain interest rate swaps; a $1.4 million gain on loans held at lower
of cost or fair value; $722,000 of fee income related to referral of PPP
loans to a third party; and
receipt of life insurance proceeds.
(4) The six months ended
related to the redemption of subordinated debt and
severance expense related to certain corporate restructuring within several
areas of the Bank.
(5) The
carryback of tax net operating losses ("NOL")s to prior years when the
Federal tax rate was 14 percent higher.
(6) Total revenue equals net interest income plus wealth management fee income
and other income
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