KBRA Affirms Ratings for Peapack-Gladstone Financial Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Bedminster, New Jeresey-based Peapack-Gladstone Financial Corporation (NASDAQ: PGC) ("Peapack" or "the company"). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Peapack-Gladstone Bank. The Outlook for all long-term ratings is revised to Stable from Positive.

Key Credit Considerations

The revision of PGC’s Outlook to Stable from Positive stems largely from subdued returns amidst a difficult earnings environment and credit quality issues that could potentially continue in future periods. Despite reflecting an asset sensitive balance sheet entering this period of rising rates, which provided NIM benefits throughout 2022, the company’s funding costs have quickly accelerated post-bank failures and remain under pressure in this higher for longer environment. While PGC’s deposit base has reflected a slightly higher through-the-cycle deposit beta of 52% at 1Q24, the maintenance of a below peer NIM is due to its concentration in multifamily loans that are naturally lower-yielding (34% of total loans as of 1Q24). As such, given the recent NIM headwinds and rising credit costs, performance has been meaningfully impacted (1Q24 ROA of 0.54%). Moving forward, management is hopeful for NIM relief from the recent de-levering of noncore funding, though profitability will likely remain challenged due to lingering pressure on funding costs and the potential for higher credit costs. Historically, KBRA viewed the loan portfolio as relatively low risk, driven by an above average exposure to multifamily, notably rent-regulated, which had been an asset class that had outperformed from a credit quality perspective over a long period of time, and, in turn, produced sound credit quality metrics in recent years. However, PGC has experienced some deterioration in recent quarters, with an NPA ratio increasing to 1.30% as of 1Q24 and a slight uptick in NCOs (0.57% during 4Q23). This has been largely associated with its equipment finance portfolio, specifically, the trucking industry, which has encountered supply and demand imbalances post-pandemic that have pushed smaller operators out of the market and led to bankruptcies. Peapack had exposure to two companies that declared bankruptcy, with one relationship causing the higher NCOs. Management is in the workout process with the other trucking operator, which is attempting to restructure the company in bankruptcy court. The recent rise in NPAs was also associated with multifamily loans totaling $25 million, which is due to the headwinds facing the rent-regulated sector in NYC stemming from the change in legislation in 2019 and rising interest rates. Given this, there is the potential for elevated NCOs prospectively, though fortunately, the remainder of the trucking portfolio is minimal, and while the NYC rent-regulated book is sizable (17% of loans) there are a minimal amount of upcoming maturities and rate resets (8% of portfolio prior to YE25). Therefore, credit issues could remain elevated, though relatively contained overall, in our view. The trucking and multifamily issues are somewhat counterbalanced by a minimal exposure to other higher-risk areas, including investor office (less than 2% of loans) and C&D lending (3% of total risk-based capital as of 1Q24). The ratings continue to recognize the strong core capital levels (CET1 ratio of 11.8%) and favorable funding profile (91% core deposit funded). With regard to the former, the company’s modest growth over the past year and minimal dividend payout has resulted in solid growth despite declining earnings. Moreover, capital is anticipated to be deployed on the expected growth from the team lift outs in NYC, though likely should not be a material drag on risk-based measures as the growth will be primarily deposit oriented. As such, we expect the CET1 ratio to remain above peers and a strength to its credit profile. PGC’s core deposit balances remain above peer and surprisingly grew over the past year while most banks reported declining balances. Moreover, the addition of 10+ deposit teams in 2Q24 should present considerable core deposit growth opportunities over the next two years and further enhance the company’s liquidity profile. We also acknowledge that the company is being led by a strong and experienced management team that has diversified the bank from being more spread reliant and multifamily focused into an institution that reflects peer leading noninterest income levels and a growing C&I portfolio. The strengthening fee income, which is largely supported by its robust wealth management business ($11.5 billion of AUM/AUA as of 1Q24), has averaged above 30% of total revenues the past five years and continues to be a key rating differentiator.

Rating Sensitivities

An upgrade is not expected over the medium term, though over the longer-term, improved profitability, maintenance of a solid capital position, and execution of its NYC deposit-focused strategy could facilitate positive rating momentum. Conversely, a downgrade is unlikely, though further deterioration in credit quality metrics, continued NIM compression, or negative trends with capital/liquidity management, could potentially pressure the ratings.

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