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Rating Action:

Moody's assigns first-time Baa3 issuer rating to Peapack-Gladstone Financial Corporation; outlook stable

09 Jul 2019

New York, July 09, 2019 -- Moody's Investors Service ("Moody's") has assigned first-time ratings to Peapack-Gladstone Financial Corporation and its operating bank subsidiary, Peapack-Gladstone Bank (collectively "Peapack-Gladstone"). Peapack-Gladstone Financial Corporation and Peapack-Gladstone Bank both have an issuer rating of Baa3. The bank was assigned long- and short-term deposit ratings of A3/Prime-2, together with a standalone baseline credit assessment (BCA) of baa2. Moody's has also assigned long- and short-term counterparty risk assessments of Baa1(cr) and Prime-2(cr) and long- and short-term counterparty risk ratings (local and foreign currency) of Baa2 and Prime-2 to the bank. The outlook for both entities is stable.

Assignments:

..Issuer: Peapack-Gladstone Bank

.... Adjusted Baseline Credit Assessment, Assigned baa2

.... Baseline Credit Assessment, Assigned baa2

.... LT Counterparty Risk Assessment, Assigned Baa1(cr)

.... ST Counterparty Risk Assessment, Assigned P-2(cr)

.... LT Counterparty Risk Rating, Assigned Baa2

.... ST Counterparty Risk Rating, Assigned P-2

.... LT Issuer Rating, Assigned Baa3, Stable

.... LT Deposit Rating, Assigned A3, Stable

.... ST Deposit Rating, Assigned P-2

..Issuer: Peapack-Gladstone Financial Corporation

.... LT Issuer Rating, Assigned Baa3 Stable

Outlook:

..Issuer: Peapack-Gladstone Financial Corporation

... Outlook, Stable

..Issuer: Peapack-Gladstone Bank

... Outlook, Stable

RATINGS RATIONALE

Peapack-Gladstone Bank's baa2 BCA reflects its strong balance sheet, characterized by good asset quality, low reliance on confidence-sensitive market funding, and high capitalization. The assessment also incorporates the risks stemming from a very large commercial real estate (CRE) lending concentration and the execution challenges associated with the bank's ongoing transition from a traditional community bank to a larger commercial bank. This transition, which centers on greater loan portfolio diversification and additional expansion of Peapack-Gladstone's wealth management franchise, should benefit the bank's creditors through lower asset risk and greater core earnings generation and stability over the long-term.

Moody's said that Peapack-Gladstone's profitability, as measured by net income relative to tangible banking assets of 0.96% for 2018, is slightly below the 1.04% median of baa BCA peers but has improved over the last few years. Moody's expects the bank's business transformation to support higher profitability levels. The rating agency anticipates that net interest margin (NIM), which, at 2.70% in the first quarter of 2019, was below same-rated peers (median at 3.35%), will increase as the loan mix continues to shift in favor of higher-yielding commercial loans, and as deposit costs decline as the bank enhances and expands its retail and commercial deposit strategy. Peapack-Gladstone's non-interest income, equaling about 28% of net revenue in 2018, is higher than most similarly-rated peers (median of 18%), driven primarily by its wealth management business. The firm's management expects to grow fee income to 35%-45% of net revenue over the next two to three years, which would provide greater earnings diversity and stability.

Moody's views Peapack-Gladstone's large CRE lending concentration and the risks associated with its ongoing strategic shift as the company's key credit challenges, though the business model transition is likely to have positive influence on the company's ultimate risk profile. Peapack-Gladstone's CRE concentration is among the highest of rated US banks, at 4.9 times Moody's measure of tangible common equity (TCE) as of year-end 2018, which could expose the bank to relatively high earnings volatility in a real estate downturn. However, the risk of this concentration is lessened by the composition, with around half of the CRE portfolio in multifamily mortgages, including a large portion of rent-regulated properties in the New York area; multifamily mortgages, notably in the New York region, historically have generated much lower losses relative to other CRE property types in times of stress. The bank's conservative underwriting, as evidenced by low loan-to-values and good debt-service coverage, should support performance through the credit cycle. Positively, the bank's CRE concentration has been declining rapidly, from 6.9 times TCE as recently as year-end 2016.

In citing the execution risk of Peapack-Gladstone's loan portfolio diversification, the rating agency noted that average commercial loans have grown 42% over the last year through Q1 2019, which is a high growth rate relative to both peers and nominal GDP, even allowing for its still-limited size in absolute amount. A large portion of the loan growth resulted from the expansion of the equipment finance portfolio and is offsetting the decline in the CRE loan portfolio. The bank and its lending businesses, in particular, are overseen by seasoned and experienced professionals, with a proven track record at other large financial institutions. However, this loan growth is occurring at a time when the market, particularly commercial & industrial lending, has become more competitive, with weakening underwriting and increased non-bank competition.

A key credit strength is Peapack-Gladstone's high capitalization, reflected in a Moody's TCE ratio of 11.8% as of December 31, 2018. The company's modest dividend payout, along with its moderate total loan growth, provide capital management flexibility to absorb unexpected losses in a downturn.

The company's overall liquidity profile is another credit strength, given the low reliance on market-sensitive funding and its sizeable core deposit base. Challenges to the liquidity profile are Peapack-Gladstone's significant amount of brokered deposits, which Moody's views as wholesale market funding, because these deposits tend to be less 'sticky' than traditional retail and corporate deposits. Additionally, its stock of liquid assets is moderate relative to similarly rated banks.

Peapack-Gladstone's issuer and deposit ratings also reflect Moody's application of its advanced Loss Given Failure (LGF) analysis. Moody's LGF analysis assesses Peapack-Gladstone Bank's deposits to have a very low loss given failure, hence, the long-term deposits are rated A3, two notches above its baa2 BCA.

What Could Change the Rating Up

Continued reduction in the CRE concentration that is prudently managed, for example without increasing credit risk in other loan portfolios, and successful wealth management expansion. These activities would both support higher and more stable profitability and could lead to an upgrade of the BCA and ratings. Higher capitalization or lower market-sensitive funding would also be positive for the BCA and the ratings.

What Could Change the Rating Down

Significant weakening of capitalization, profitability or liquidity could result in a lower BCA and ratings. The company's diversification and growth strategy appears conservatively managed, but indications of excessive risk-taking during this transition could adversely affect the ratings.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rita Sahu, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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