Peapack-Gladstone Financial Corporation (PGC) Earnings Call Transcript

Welcome to the Peapack-Gladstone Financial Corporation Third Quarter 2026 Earnings Call. Please be advised that today's conference is being recorded. I will now hand the conference over to Matthew Remo, Treasurer and Head of Corporate Finance. Please go ahead.

Thank you and good morning, everyone. I'm joined today by our President and CEO, Doug Kennedy; and our CFO, Frank Cavallaro, who will provide an overview of our third quarter results. John Babcock, our President of Wealth Management; and Lisa Chalkan, our Chief Credit Officer, are also here if there are any questions. If you have not yet read the earnings release and investor presentation we issued yesterday afternoon, you may access them by going to the Investor Relations page on our company website at peapackprivate.com. You may also access the investor presentation directly within our webcast today. After the presentation, we will be happy to take questions. Our comments today may contain forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. Cautionary statements about reliance on this information are included in the earnings release and investor presentation as well as our SEC filings and other investor materials. The earnings release and presentation also include non-GAAP financial measures, so it is important to review the appropriate reconciliations in the appendices to each document. And with that, it is my pleasure to turn the call over to Doug.

Thanks, Matt. Good morning, everybody, and thank you for joining us on our third quarter call. On behalf of the entire team at Peapack Private, I'm pleased to report yet another strong quarter for our company. Before we get into the numbers, I want to frame the quarter, what you're seeing in Q3 is not a one quarter story as a result of a strategy that we've been executing on 2023 and is now showing up consistently in our results. The big takeaway for the quarter is continued growth and profitability. Revenue continued to grow significantly faster than expenses, and expenses actually declined from the second quarter. That combination drove core pretax pre-provision revenue to $32.3 million, up 76% year-over-year and net income available to common shareholders to $18.5 million. Diluted earnings per share were $0.99, up 15% on a linked quarter basis. This forward momentum marks 10 consecutive quarters of revenue and 6 consecutive quarters of earnings growth. And I'll add that during the quarter, Moody's affirmed our investment grade rating with a stable outlook. So how did we get here? Let me put that in context. In 2023, the banking industry went through a real stress Three large bank failures and a significant dislocation. We saw that dislocation as an opportunity and we acted. In May 2023, we hired our first experienced New York City team. By April 2024, we had 13 teams in the leadership in place. In January 2025, we rebranded to Peapack Private. That April, we opened our flagship branch on 300 Park Avenue. And over the past year, we expanded to Long Island and added wealth, commercial real estate and equipment finance talent. This past quarter, our annualized pretax pre-provision revenue reached $129 million, which was approximately 2.7x the trough that we saw in the third quarter of 2024. We made the investment. We built the teams and repositioned our brand, and now these investments are showing up in higher core earnings. So what do we see this quarter? Our net interest margin continued to improve despite funding cost pressure our efficiency ratio improved even further. That positive operating leverage is in its simplest form, revenues are up, our expenses are down and improved earnings following. During the quarter, loans grew $403 million. Deposits grew $301 million. Now as we've said before, growth is never going to be linear, and we don't expect that to ever be the fact. But our quarterly operating objectives remain $200 million of loan growth, $200 million of deposit growth and $2 million in core earnings growth. Q3 exceeded the loan and deposit objectives and delivered $2 million of core earnings growth. We began Q4 with a strong loan and deposit pipeline. And the quality of that growth has been meaningful. We continue to see growth in noninterest-bearing operating relationships, which have increased 18% year-over-year. On the loan side, commercial and industrial lending grew $409 million year-over-year, up 15%, and we're seeing growth across virtually every asset category. That healthy margin expansion, combined with strong balance sheet growth, as you would expect, are improving our returns, our return on average tangible equity was 11.4%, up 587 basis points since the third quarter of 2024. So despite the large growth and some isolated headwinds, our capital and credit have remained very solid. Our capital position continues to provide buffers that give us the capacity to support continued growth, and we're managing that capacity thoughtfully. Our focus is on balancing attractive growth opportunities with capital discipline as earnings improve. Frank is going to cover capital position and the current offering under our voluntary dividend reinvestment program which will supplement organic capital generation as we support anticipated growth. Credit quality also improved sequentially with lower nonperforming assets and early-stage delinquencies declining. As a result, our allowance coverage for nonperforming loans improved to 126% in the quarter. Our new rent-regulated multifamily portfolio is down 12% year-over-year and now represents 11% and of total loans versus 18% at September 30, 2024. We expect that this will continue into the future. Wealth management remains a foundational aspect of our company, who we are and how we act as a private bank. We ended the quarter with $13.6 billion in assets under management and administration, down slightly from the second quarter. Gross inflows remained solid Wealth revenue was $17.3 million, up 9% year-over-year and $51 million year-to-date. This is a scaled, long-established franchise. It deepens relationships across generations, it gives us real scarcity value through fiduciary expertise, specialist investment talent, sell-side advisory for business owners. It is the corner stop of what it is that we do. Client trust in this space is very hard to replicate. It takes decades of performance and the highest level of professionals to build. Wealth Management, as you would expect, Anchor is the entire strategy, customized banking spoke credit and treasury delivered through one coordinated team providing a high level of customer service, a single point of contact, solving the complex needs of affluent families and business owners one client at a time. So to summarize, our differentiated model is driving growth and improved profitability. Momentum is strong, and we're very constructive about our company's future. We have an established platform and are building an enviable differentiated franchise across Metro New York, experienced teams, specialist capabilities, scaled infrastructure and an integrated client relationship, wealth and fiduciary advice, private commercial banking, credit treasury solutions, all coordinated and made easy through a single point of contact. Our long-term objectives remain unchanged, a 125 plus return on assets and a 14% plus return on equity or better. We are not there yet but we're moving forward, achieving both benchmarks incrementally in a very thoughtful manner. So with that, I want to thank you again for your confidence and support. And at this point, I'm going to turn it over to Frank, who will give you a detailed overview of the quarter.

Thanks, Doug, and good morning, everyone. I'll begin with earnings and then take you through the balance sheet, credit quality and wrap up with a few comments on capital. Net income available to common shareholders increased 17% sequentially to $18.5 million or $0.99 per diluted share compared with $15.8 million or $0.86 in the second quarter. Total revenue was $88 million, up 2% sequentially and 24% year-over-year. That growth was primarily driven by net interest income, which increased to $68 million, up $3.6 million, which is 6% growth sequentially and 33% year-over-year. Net interest margin was 3.34%, an increase of 2 basis points from the second quarter. This change is consistent with our expectations and aligns with our prior guidance. Pricing on new business remained attractive. Loans originated during the quarter carried yields of approximately 6.4%, while new deposits came in, in the mid-2% range. However, rapid loan growth and increased competition for deposits required us to use more borrowings than in recent quarters, tempering the margin benefit of that growth. Noninterest income totaled $20 million, down $2.1 million or approximately 10% sequentially. A loss on the sale of an ORE property in addition to a fair value mark on a CRA equity security were responsible for approximately half of the linked quarter decline. As revenue continues to grow, expense growth is moderate. We supported substantial new business during the third quarter using the infrastructure we have built while holding expenses essentially flat. Operating expenses totaled $55 million, down 1% sequentially and up 5% year-over-year. Combined with the 24% year-over-year increase in revenue, this is producing strong positive operating leverage and contributing to earnings growth. Core earnings or pre-provision net revenue totaled $32.3 million, up approximately $2 million or 6% on a linked-quarter basis. Our efficiency ratio improved to 63%, which is down approximately 1.7 percentage points sequentially and nearly 16 full percentage points lower than the third quarter of 2024. The effective tax rate in the quarter was approximately 20.5% compared to 28.4% in the second quarter. The third quarter rate includes a discrete benefit of approximately $1.8 million related to the purchase of production tax credits, resulting in a lower tax provision. We consider this a onetime item and do not expect that benefit to recur next quarter. Turning to the balance sheet. Growth was strong across the company during the third quarter. Total loans increased $403 million sequentially to $7.1 billion, up 17% year-over-year. Growth was diversified across the franchise with C&I and commercial real estate showing particularly strong results. At the same time, our New York rent-regulated multifamily portfolio continued to run off and become a smaller portion of the overall balance sheet. Deposits increased $301 million or 4% quarter-to-quarter to $7.4 billion. Deposits increased approximately $800 million or 12% year-over-year. Deposit growth continues to come from across the franchise with a focus on delivering core relationships with significant operating account balances. Over the past 5 quarters, we have opened an average of more than 600 noninterest-bearing operating accounts per quarter. We also monitor how those accounts fund and develop over time to assess the depth and the economics of each relationship. Noninterest-bearing demand deposits ended the third quarter at approximately $1.6 billion, which reflects 18% growth year-over-year. We remain confident in our comprehensive relationship strategy as it continues to deliver fully banked relationships, supporting growth and managing our funding mix over time. Turning to credit. Nonperforming assets declined by $14 million or 20% sequentially to $58 million, representing 0.68% of total assets compared to 1.13% a year ago. Loans 30 to 89 days past due declined $9 million or 18% sequentially to $39 million, representing 0.56% of total loans. The provision for credit losses was $8.5 million compared to $8.1 million in the second quarter. Of that amount, $5 million of it was attributable to loan growth. Loan losses associated with loan workouts were lower than anticipated during the current quarter. Net charge-offs were $4.7 million compared with $5.9 million in the second quarter 2026. These improvements are encouraging, and we continue to actively manage individual problem credits. Within the New York rent-regulated multifamily portfolio, balances declined to $775 million as of September 30. That portfolio represented approximately 11% of total loans compared to 18% 2 years ago. The reduction of flexible portfolio runoff and growth elsewhere in the loan portfolio. Turning to capital. As Doug noted, we maintain buffers above regulatory capital thresholds. Our strong balance sheet growth has reduced some of those buffers even as earnings have improved. While we are managing capital proactive to support attractive relationship growth while observing an appropriate cushion. To support our growth, we issued the remaining $20 million of convertible preferred equity in July of this year. This supported capital at both the bank and the holding company levels. As profitability improves, we expect retained earnings to support a greater portion of our capital growth internally. In the meantime, we are actively managing the capital needed to support the business we are generating today. We launched our voluntary dividend reinvestment program in the fourth quarter, which is scheduled to close in mid-November. This program has successfully increased common equity in the past and provides a supplemental source of capital as earnings improve. Going forward, we continue to evaluate capital in the context of business opportunities risk and the interest of existing shareholders. We entered the fourth quarter with a stronger earnings base, continued relationship growth and expense discipline are supporting earnings and our priority is to translate that progress into higher returns while maintaining funding, credit and capital discipline. With that, we are happy to answer your questions.

[Operator Instructions] Our first question from Christopher Marinac with Brean Capital, LLC.

Frank and Doug and team, can you talk a little bit about where you see deposit pricing going from here? And do you see any further mix shift beyond what we've seen in the last few quarters?

Chris, this is Doug. I would say, listen, we absolutely have seen a little bit of pressure. We've been sort of trying to gate at sort of that $200 million, $200 million range. And if you look at sort of the $200 million that we gotten core during the quarter. The pricing and the spread between that and what we're lending out at was north of that 4% target that we set for each other. So I think that the pricing will it's been more competitive, I think it's not -- certainly, it's not gotten out of hand. Maybe Frank...

Yes, I was just looking at the quarter-to-quarter the interest-bearing liabilities went up 10 basis points. So we expected that because of the 25 basis point move by the Fed during the quarter. In addition, we were borrowing a little bit of money from the Federal Loan Bank. So putting some pressure there. But I think to answer your question, we do expect to see upward pricing pressure on the cost of deposits. But it's -- if we've managed the overall beta to 50% to 60%, we think that's a comfortable level for us to manage the overall interest rate risk.

In terms of NIM, we invest in Q1, we've guided sort of 6 to 9 basis points for the year. We're kind of right in that range now. We expect that will play out this year between the back book repricing even with the added pressure on funding costs, we think that we can still sort of get 2 to 3 basis point improvement in NIM in each of the quarters going into '27.

Great. And then just a follow-up for -- on the credit side. Do you see any further shift on multifamily values for you in terms of how you've calibrated it at this point?

Lisa Chalkan is here, so we'll have Lisa respond to that.

Values on the underlying collateral or value of the actual loans in a trade?

Well, it's actually just the collateral. And would you have to make additional reserve additions and/or write-downs from here?

Yes. As we're getting updated appraisals, and again, we only have to get an updated appraisal if something is nonperforming and the first time ago substandard we do. And then if it's nonperforming, we get them annually. And I would say that we're seeing a mix. We are seeing some properties where there seems to be some softening of value. But at the same time, we are seeing some properties that are either holding up or actually have an improvement in value over the appraisal that was obtained a year ago. So I don't think that there's anything pervasive. Could there be one-offs? Absolutely. But it doesn't seem to be that we're seeing it across the board or systemically.

Additional provisioning to your question, we're absorbing it in our normal provision run rate. So like Lisa said, there's going to be one-offs we're dealing with them as they come up and -- but we don't see a landslide of deals coming our way. So we're pretty comfortable with how it's been performing to date.

Your next question from the line of Steve Moss with Raymond James.

Maybe just following up here on the multifamily. Just kind of curious how to think about the cadence of potential paydowns over the next 4 to 5 quarters. I'm just curious like what percentage of those loans may be repriced over that time period as well.

Do you want to take the repricing?

Yes. So the repricing, I think we looked at -- we've got over the next 5 quarters, so let's say, through the end of next year, we think there's $0.5 million in rent-regulated multifamily that reprices. I think the $1 billion is the -- yes. But on the -- I think he's asking specifically rent regulated. Yes. So $500 million we're comfortable with that. And as far as -- you can answer the second...

Yes. I mean the normal amortization on the portfolio, the New York rent regulated is, I would say, $5 million or $6 million a quarter. We have seen some small payoffs. I'm anticipating more than not. Many of the loans will either reprice or be looking for some that repricing in the document is over market. so they may be looking for some level of modification to make it a little bit more in line with what a current market rate might be.

Yes. It's declining. Not as quickly as we would hope it. But the important thing is it's not increasing. We're doing -- we're not originating anything new in that space. And then we continue to let pay downs happen obviously on monthly P&I payments. But anytime we see a relationship that's just transactional, we kind of encourage them to seek other funding when their maturity date comes up, correct?

Okay. So just kind of curious in terms of like the potential modification like would it be a new 5-year loan at maybe 6% kind of you're got to be thinking about it? Or just as a $500 million comes through in the next 5 quarters, what does that kind of refi process like our borrowers able to put up equity?

Yes. It runs a gamut. I wish there was -- I wish there was a menu of here's the 2 or 3 scenarios. Every single one is something different. Sometimes, we look for a pay down. We have had clients who have actually posted collateral accounts with us. We've had clients who have given us guarantees. We have done something that's maturing on a 1-year IO to give them time to be able to refinance it or sort out how they want to move forward. We have reset the interest rate and reset the amortization for a 2-year period, a 3-year period, nothing more than a 5-year period. But it really -- every single loan is looked at individually discussed and negotiated.

But the important thing is, we're agreeing to a modification. We're conceding something to the borrower, but we're getting something in return. And that's -- we're open to discussion on what that something is in every case.

Okay. Great. Now I appreciate that color there. And then just in terms of the margin here, I guess a couple of things, and I apologize, Frank, I had a hard time hearing you on your margin comments. But just curious in terms of where were new loan originations this quarter? And just in terms of just thinking about what percentage of loans are variable rate as well?

So the origination question I think we announced that the originations were at about 6.4%. So mid-6s on the new loans. The mix I mean overall, the mix of the variable rate is about 2/3 fixed, 1/3 -- 25% -- I'm sorry, 75% fixed, 25% variable is probably the answer to the question on the mix.

Okay. Great. And then in terms of just the pipeline here, rates have moved up. Just kind of curious like have -- as we head to the fourth quarter, you have origination yield stepped up from there? Or are they holding steady?

So the tenure as you know, Steve, is just bouncing around. So right now, in every business, including real estate, which is recent, everything we're quoting is a spread to like [indiscernible]. We don't like the right until we get to a closing. And those spreads are pretty much constant. It's 2% to 2.5%, depending on the bat business. So the spreads to the 5-year or it's typically the 5-year -- 3 or 5 years, somewhere in there. That has been very consistent with the spread.

Okay. I appreciate that. And then in terms of just kind of thinking -- the other thing I was curious on here, in terms of loan growth, good loan growth overall, the consumer book definitely shot up this quarter. I'm just kind of curious on the drivers there.

Yes. Some of it was growth in the residential loan origination. We -- I think we've raised before that we have this professional line of credit that we are offering to count attorneys and accountants. We've seen more volume there. We also have had a pool of loans that we purchased from a third party. We had been doing that. And so that was all the case of it. And so those are the 3 drivers. We also are seeing a lot more volume in the investment credit lines tied to the growth in John's business. We offer a product that margin allows people to borrow against their margin collateral. And we are definitely seeing a lot more volume there, although I would say many of those lines remain unused, their liquidity lines, but there's a lot more volume.

And we've also closed out a couple of yacht loans as well.

Correct. I think that we -- probably in these results, there were probably 3 yacht loans that we closed.

Okay. Great. Appreciate that. Maybe just in terms of expenses here, efficiency ratio has steadily improved. And Doug, I hear you on operational improvement. Just kind of curious here, and I definitely can first one from your net income color. But how you guys are thinking about the cadence of expense growth into '27 and any investments you may have to make?

So we've really leaned into AI across the enterprise. I've got a meeting actually this afternoon. It's literally -- we've got AI champions in every area of the bank. We've actually stood up 100 agents across the institution. They're right now in final testing, for example, loan closings, which was a very complicated sort of do. So I would say that the inclination is probably going to be more towards technology, the investment going into '27 that it will be people. And the idea is to take a lot of what we do that's I'll call it like an arts and crafts business, getting our processes very consistent and then being able to scale and set ourselves up to scale going forward, leveraging technology. So -- we also -- we've got ordinary raises, health care, we're expecting to have an increase. So Frank, I think it's coming mid to upper single digit is probably where we'll land for next year.