KBRA Affirms Ratings for Peapack-Gladstone Financial Corporation

KBRA affirms the ratings for Peapack-Gladstone Financial Corporation (NASDAQ: PGC) ("Peapack" or "the company"), including the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3. KBRA also affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the shot-term deposit and debt ratings of K2 for its subsidiary, Peapack-Gladstone Bank. The Outlook for all long- term ratings is Positive.

Key Credit Considerations

PGC’s ratings and Positive Outlook are supported by strong core capital levels, well-diversified revenue sources (with noninterest income generally comprising near or above 30% of revenues), and an experienced management team that has executed on strategic growth and diversification initiatives. A solid core deposit base (89% of total funding at 1Q23), along with sound credit quality metrics in recent years, are also supportive of the ratings. Peapack demonstrated strong core deposit growth in 1Q23 (+2% from YE22) despite industry headwinds following the events in March. PGC's uninsured deposit concentration ($1.6B or 30% of total as of 1Q23) is comparatively low, and the company maintains an adequate liquidity position, with on-balance sheet and contingency sources covering over 2x these balances. Strong earnings retention, supported by the company’s comparatively modest quarterly dividend, have contributed to the CET1 ratio increasing >100 bps YoY to 11.4% at 1Q23. With management noting its intention to maintain capital at current levels or higher over the intermediate term, we view Peapack’s capital position as a strength to its credit profile. Core operating performance has shown improvement relative to prior years, with ROA tracking between 1.15%-1.30% since 2Q22. Despite a comparatively weaker margin relative to peers - a function of lower-yielding loan classes - PGC’s NIM has expanded considerably over the past year due to its asset sensitive balance sheet that benefited from the precipitous rise in interest rates, as well as strong loan growth. Combined with meaningful and consistent fee income contributions, particularly from wealth management services, with over $10B of AUM/AUA, which has been relatively resilient despite the volatility in capital markets given the steady client inflows, the company’s earnings power has improved relative to historical levels. With that said, profitability is expected to trend lower (evidenced in 1Q23) as deposit costs have accelerated (1.46%) given the extremely competitive environment, which is projected to continue to outpace upward repricing on earning asset yields. We also recognize that PGC’s deposit costs are modestly higher than the KBRA rated universe of banks, though track in line with other NY/NJ peers. Conservative underwriting standards, combined with low historical loss rates for NY and NJ rent regulated multifamily lending, which remains a considerable portion of the overall loan portfolio, have contributed to minimal loss content over a long time horizon for PGC (average annual NCO ratio of <10 bps since 2014). The NPA ratio increased in 1Q23 from a low base at YE22, primarily due to one $9.7 million multifamily relationship that was transferred to non-accrual during the quarter. Nonetheless, NPAs continued to remain at manageable levels, and material loss content is not expected at this time. Altogether, KBRA maintains a positive view of the transformation of the loan portfolio over time, which has included a greater focus on C&I lending while significantly reducing the investor CRE concentration.

Rating Sensitivities

Given the Positive Outlook, a rating upgrade is possible over the medium term. Sustained improvement in profitability and capital measures, along with strong credit performance through a potential economic downturn, could result in positive rating momentum. An unexpected material degradation in asset quality or funding profile, or a significant reduction in core capital measures, could result in rating pressure.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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