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 Private Bank & Trust. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Peapack’s ratings are supported by a more conservatively positioned balance sheet, particularly from a liquidity standpoint. The company is now operating with a loan-to-deposit ratio near 90%, down from over 100% in prior years. This improvement has been driven by the success of newly added deposit-focused teams in New York City, which have brought in $1.2 billion in core deposits over the past five quarters. Combined with organic growth in its legacy New Jersey markets, this has resulted in a robust 34% increase in core deposits during that period. As a result, PGC is now operating with an entirely core deposit-funded balance sheet, with virtually no reliance on brokered deposits or FHLB borrowings. Additionally, while wholesale funding has been fully paid off, on-balance sheet liquidity has improved, with cash and AFS securities increasing to 15% of total assets as of 1Q25, up from 12% at year-end 2023. The deposit mix has also strengthened, supported by a 30% NIB component in the accounts sourced by the new deposit teams. Although deposit costs remain modestly above peers (2.57% in 1Q25), the gap has been narrowing due to the improved deposit mix and reduction in wholesale funding. Management expects this positive trend to continue, projecting an additional $2 billion–$3 billion in lower-cost deposit growth over the next few years, while maintaining a 25%–35% NIB deposit mix from the newly added teams. Given these developments, and the expectation of more measured loan growth over that time horizon, despite the recent addition of experienced commercial bankers in the NYC and Long Island markets, KBRA believes that the company’s liquidity and funding profile will continue to improve over the medium term, reinforcing key credit strengths.

Despite improvements on the liability side, asset-side risks remain for PGC, particularly in investor CRE, which accounted for 48% of total loans, or 359% of total risk-based capital, as of 1Q25. This exposure is primarily concentrated in multifamily lending (31% of total loans), with a notable portion tied to rent-regulated properties in New York City, which represent 16% of the loan portfolio. Additionally, isolated credit issues persist within the equipment finance portfolio, which comprises 15% of total loans. That said, Peapack continues to focus on growing C&I lending and diversifying the loan portfolio over time. Credit quality metrics reflect the challenges in those aforementioned sectors, and although we note that the NPA levels remain considerably above peers (1.69% as of 1Q25), these have not directly translated into materially higher NCO activity. Additionally, based on recent appraisals, the composition of NPAs suggests that the resolution of these credits is unlikely to result in significant losses, mitigating the risk of meaningfully higher provisioning. We also take comfort in the strong performance of the broader portfolio, particularly the rest of the investor CRE segment, which has remained largely pristine. This reflects conservative underwriting standards, including low LTV ratios and strong debt service coverage, contributing to consistently low loss rates and helping to mitigate the concentration risk. Exposure to the troubled office sector is minimal at just 2% of total loans, and the portfolio is well-diversified, with granular exposure, including average loan sizes range from $2 to $3 million, and primarily concentrated in more resilient suburban markets.

KBRA views Peapack’s revenue diversification favorably, with noninterest income consistently representing 30% or more of total revenue, primarily driven by its durable and dependable wealth management business (nearly $12 billion of AUM/AUA as of 1Q25). While these stable fee revenues have not translated into stronger bottom line performance in recent years, the weaker profitability is attributed to NIM compression driven by higher deposit costs and limited asset repricing, elevated provisioning due to headwinds in the multifamily and equipment finance portfolios, and strategic investments in infrastructure and talent related to the build out of deposit-focused teams and C&I capabilities. That said, recent improvements in the funding mix, including the addition of lower-cost core deposits and a shift toward higher-yielding C&I loans, are expected to support meaningful NIM recovery, which has already been observed over the past year. While near-term earnings may be affected by the resolution of select problem credits, KBRA believes that Peapack is positioned for a structurally improved earnings profile over the intermediate term.

Capital ratios remain solid for the rating category, with a CET1 ratio of 11.2% as of 1Q25, and are expected to remain at similar levels going forward despite steady balance sheet growth. Peapack’s capital deployment strategy is expected to prioritize loan growth opportunities. Its minimal dividend, typically reflecting a payout ratio below 10%, limited appetite for share buybacks, and improving earnings profile over the next few years further support management’s capital targets.

Rating Sensitivities

An upgrade is not anticipated at this time; however, continued successful execution of lending and deposit growth strategies, which could lead to improved earnings via continued enhancements in the funding position and stronger loan yields, along with resolution of problem credits and capital stability could support positive rating momentum over the longer term. Conversely, while a downgrade is also not expected, negative rating action could occur if current NPA levels translate into material credit losses or if capital becomes pressured by outsized balance sheet growth.

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