PEAPACK GLADSTONE FINANCIAL CORP Q3 FY2026 earnings call

Strategy Execution and Growth

• The company is executing a long-term strategy initiated in 2023, resulting in 10 consecutive quarters of revenue growth and six of earnings growth.
• Annualized pre-tax, pre-provision revenue reached $129 million, roughly 2.7 times the trough seen in Q3 2024.
• Loan growth exceeded $403 million sequentially, and deposit growth exceeded $301 million sequentially, surpassing the internal '2-2-2' quarterly targets ($200M loan growth, $200M deposit growth, $2M core earnings growth).
• Return on average tangible equity improved to 11.4%, up 587 basis points since Q3 2024.

Operational Efficiency and Margins

• Expenses remained essentially flat at $55 million despite substantial business growth, driving strong operating leverage.
• The efficiency ratio improved significantly to 63%, down 1.7 percentage points sequentially and nearly 16 percentage points year-over-year.
• Net interest margin (NIM) expanded to 3.34%, an increase of two basis points from the previous quarter.
• New loan originations carried yields of approximately 6.4%, while new deposits came in at the mid-2% range.

Credit Quality and Portfolio Management

• Credit quality improved sequentially; non-performing assets declined 20% to $58 million (0.68% of total assets).
• Loans 30-89 days past due declined 18% to $39 million.
• Allowance coverage for non-performing loans increased to 126%.
• The New York rent-regulated multifamily portfolio continues to run off, now representing 11% of total loans (down from 18% in Q3 2024), with no new originations in this segment.
• Net charge-offs decreased to $4.7 million from $5.9 million in the prior quarter.

Wealth Management Franchise

• Assets under management and administration stood at $13.6 billion.
• Gross inflows remained solid, and wealth revenue grew 9% year-over-year to $17.3 million.
• The firm emphasizes its fiduciary expertise and integrated client relationship model as a cornerstone of its differentiated strategy.

Capital Position

• Moody’s affirmed the investment grade rating with a stable outlook.
• Capital buffers remain above regulatory thresholds, though growth has reduced some buffer levels.
• A voluntary dividend reinvestment program was launched to supplement organic capital generation.

Technology and Future Investments

• The company is heavily investing in AI across the enterprise, including standing up 100 AI agents for testing and implementation.
• Expense growth into 2027 is expected to be in the mid-to-upper single digits, driven by technology investments and natural merit increases, rather than headcount expansion.

The transcript does not break down financial performance by specific product segments (e.g., Commercial Banking vs. Wealth Management) in terms of absolute revenue contribution percentages for each distinct line item. However, it provides aggregate and key component data: Total Revenue was $88 million (up 24% YoY). Net Interest Income was $68 million (up 33% YoY), representing approximately 77% of total revenue. Non-Interest Income was $20 million (down ~10% sequentially), representing approximately 23% of total revenue. Wealth Management revenue specifically was $17.3 million (up 9% YoY). Core pre-tax pre-provision revenue was $32.3 million.

• Quarterly Operating Objectives: Management reaffirms the '2-2-2' target: $200 million in loan growth, $200 million in deposit growth, and $2 million in core earnings growth per quarter.
• Net Interest Margin (NIM): Expects NIM to improve by 2-3 basis points per quarter going into 2027, driven by back-book repricing and volume growth, despite funding cost pressures.
• Back-Book Repricing: Approximately $1.4 billion (20% of fixed-rate assets) is expected to reprice over the next two years, potentially adding 150-200 basisps to yield.
• Long-Term Returns: Targeting a return on assets (ROA) of 1.25%+ and return on equity (ROE) of 14%+, aiming to reach these benchmarks incrementally through end-of-year 2027.
• Expense Growth: Anticipates mid-to-single digit expense growth in 2027, transitioning from recent flat expense periods to normalized growth rates.
• Pipeline Visibility: Strong pipeline visibility extends into Q4 2026 and Q1 2027, suggesting sustained ability to meet or approach the 2-2-2 targets, though Q3's accelerated pace may normalize.

• Funding Cost Pressure: Increased competition for deposits and rapid loan growth have necessitated higher borrowings, putting upward pressure on deposit pricing and funding costs.
• Interest Rate Risk: 'Higher for longer' interest rates are viewed negatively as they give customers more time to seek higher yields, pressuring net interest margins.
• Multifamily Valuation Risks: While systemic issues are not pervasive, there is softening in values for some New York rent-regulated multifamily properties, requiring individual case-by-case modifications and potential write-downs.
• Fee Revenue Decline: Exit from SBA sales business leads to a structural decline in fee income, which is not being replaced.
• One-Time Losses: Recent quarters included one-time losses from ORE property sales and fair value marks on CRA equity securities, masking underlying operational trends.

Q: Analyst asked about deposit pricing trajectory and mix shifts, noting competitive pressure.

A: Management acknowledged upward pricing pressure on deposits, citing a 10 basis point increase in interest-bearing liabilities due to Fed moves and Federal Home Loan Bank borrowing. However, they maintain that overall beta to rates is manageable at 50-60%. They expect NIM to still improve by 2-3 basis points per quarter into 2027, supported by back-book repricing offsetting funding cost increases. They emphasized that while pricing is competitive, it has not gotten out of hand, and the strategic focus remains on acquiring high-quality, non-interest-bearing operating relationships.

Q: Analyst inquired about the cadence of paydowns and refinancing for the New York rent-regulated multifamily portfolio, asking if borrowers can post equity or if modifications are needed.

A: Chief Credit Officer Lisa Chalkin explained that normal amortization is $5-6 million per quarter, with additional small payoffs. With $500 million maturing over the next five quarters, many loans require modification because current document rates are above market. Modifications are highly customized—ranging from I.O. periods to rate resets—and involve concessions from the bank in exchange for collateral, guarantees, or other terms. Frank Cavallaro added that they are absorbing any necessary provisioning within their normal run rate and do not foresee a landslide of defaults.

Q: Analyst asked how the company plans to manage expense growth into 2027 given the efficiency ratio improvements, questioning if further hiring or tech investments would drive costs up.

A: CEO Doug Kennedy revealed a significant pivot toward technology, specifically AI. The company has deployed 100 AI agents across the institution to automate complex processes like closings, aiming to scale operations without proportional headcount growth. CFO Frank Cavallaro projected mid-to-single digit expense growth for 2027, attributing this to natural merit increases and lease resets rather than aggressive hiring. The strategy is to use technology to standardize processes and enable scaling, moving away from the heavy hiring phase of 2023-2025.

Q: Analyst sought quantification of the pipeline for Q4 2026 and beyond, asking if the accelerated '2-2-2' growth could continue and how NIM would benefit.

A: Management described the pipeline as 'very strong,' with absolute visibility into Q4 2026 and sufficient strength to see into Q1 2027. However, they cautioned that Q3's exceptional performance was abnormally strong, and growth is expected to normalize closer to the 2-2-2 targets in coming quarters. Regarding NIM, they confirmed that the combination of accretive loan/deposit volume and the repricing of the $1.4 billion back-book will help mitigate funding cost pressures, supporting the 2-3 basis point quarterly NIM improvement guidance.

Q: Analyst asked about the long-term ROA/ROE targets, noting the company is already near 90 bps ROA and asking if 1% ROA by end of 2026 is realistic given the 1.25% long-term goal.

A: Management clarified that while 1% ROA early next year is a stepping stone, the ultimate target is 1.25% ROA and 14% ROE by end of 2027. CEO Doug Kennedy explained that the path involves controlling expenses tightly while building revenue to annualize core earnings from $130 million to $180 million. He stated that modeling the 2-2-2 growth targets with the discussed margins lands them precisely in that target zone, calling the plan 'realistic' and 'enviable' based on their current execution trajectory.