Peapack-Gladstone Financial Corporation

Welcome to the PPAC-Gladstone Financial Corporation's second 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 be providing an overview of our second quarter results. John Babcock, our president of wealth management, and Lisa Chalkin, our chief credit officer, are also here to answer 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 tpacprivate.com. You may also access the investor presentation directly within the 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 and the appendices to each document. And with that, it is my pleasure to turn the call over to Doug.

Thanks, Matt, and good morning, everybody, and thank you for joining us today. On behalf of the entire team at PFAC Private, I'm really pleased to report that our strategy continues to deliver solid results. We believe that we're building a durable and valuable franchise that has significant barriers to entry, Our people, our product offering, grounded in wealth, is very rare and extremely difficult to replicate. Revenue and profitability have been positive for seven consecutive quarters, and we expect that trend to continue for the foreseeable future. We continue to be on track to deliver a 1% ROA and 10% ROE by the fourth quarter of this year, possibly slipping into the first quarter of next, which is what we communicated to all of you previously. We have entered the third quarter with a very strong new business pipeline, and we feel very positive about the future. For this past quarter, we reported that income of $15.8 million, consistent with where we had guided. This was an increase of 11% on a length quarter basis and was 99% year-over-year. Our wealth management business grew 6% year-to-date and 13% year-over-year with positive flows. Our deposits grew $231 million in the quarter, 35% of which was non-interest-bearing, and we continue to see relationships in that $2 to $2.5 million average size. Also notable is the fact that 56% of our deposit growth over the last 12 months have been in the form of non-interest-bearing accounts. Our loans are up $236 million, strong growth in CNI, equipment finance, and CRE. Multifamily was down an additional $21 million. in the quarter and $58 million year-to-date. So where are we in terms of our strategy and where we've been and where we're going? In 2023, as you know, we made some bold strategic moves. We invested heavily in building out our product offering. We lifted teams from First Republic and Signature. And to date, we've hired a total of 20 teams and nearly 200 professionals to cover the Metro New York market, which includes Westchester and Long Island. Of course, all of this hiring temporarily impacted earnings, which bottomed out in the third quarter of 2024, but we expected that. And as we modeled through where we are right now, we're a little ahead of where we thought it would be. Profits have rebounded quickly and given the level of investment. And what's really incredible is that we essentially have built a de novo bank in New York and made it profitable in under two years. So where are we headed and where are we going? The momentum that we built continues to grow. On page five of our investor deck, we share the level of non-interest-bearing DBAs that have been opened in the quarter. When you compare that to what happened a year ago earlier, that activity is up over 20% year over year. As stated, our current pipeline remains strong, and the number of positive conversations we're having in the market leads me to believe that the strength that we're seeing will continue. I should also note that the competition for deposits in the market has increased markedly, in the last quarter. And Frank will touch on that a little bit more, but we do see a little bit of headwinds in terms of pricing. We're reiterating that the net interest margin, you know, going back to the first quarter, will grow a total of six to nine basis points through the end of this year, which basically says it's going to sort of bounce around where it is. It'll have some volatility to it, but we're still committed to what we shared last quarter. From a strategic standpoint, we have everything that we need. It's really all now about dedicated, Focused Execution. So our brand, we've come a long way. We've abandoned the company. And I think about that a little bit, you know, as we go forward through the end of next year. I believe that, you know, by then we will have built a very credible private banking institution offering bespoke credit solutions that cater to affluent individuals and their families. At present, you know, we're offering life insurance premium finance. We have jumbo mortgages and HELOCs. We have investment lines of credit. We have professional lines of credit. We've done some fine arts and collectibles, and we recently began to launch aviation and yacht finance. All of this is geared towards meeting the needs of our clientele. So how we present our company externally will increasingly look and feel niche, private bank, with a focus on commercial and wealth management and the needs of high-net-worth individuals and their families. So with that, let me just summarize in saying that it's been a great strategic journey over the last couple of years and a strong quarter for us at PFAC Private. We've had lots of momentum and a clear vision and path to execute that we remain confident that we will deliver strong, durable results leading to superior shareholder value. With that, I'll hand the call over to Frank who will provide a detailed overview of the quarter's results.

Frank? Thanks, Doug, and good morning, everyone. I will review the quarter in more detail, beginning with earnings, then moving through the balance sheet, credit, and capital. Net income available to common shareholders for the quarter was $15.8 million, or $0.85 per diluted share, compared to $14.2 million, or $0.80 a share, in the first quarter. Core earnings, which is pre-tax income before the provision, increased to $30.4 billion, up 12% sequentially and 70% from a year ago. Total revenue increased to $86.1 million, up 4% compared to the first quarter, and 23% year over year. Net interest income was $63.9 million, an increase of $4 million from the first quarter and $15.6 million from a year ago. This marked another quarter of consistent net interest income growth supported by balance sheet expansion, disciplined pricing, and improved earning asset yields. Net interest margin during Q2 increased by six basis points to 3.32%. The improvement this quarter was driven more by asset yields while we largely held our ground on funding costs. We're really pleased with this considering what's happened Defense Futures over the last three months and the increasingly competitive deposit environment we're seeing every day. Average earning asset yields increased for two primary reasons. First, we continue to hold our discipline on low pricing with average yields on new originations in the quarter just north of 6%. And second, we're also seeing some impact from back-bullet reprice. Our prior comments on average quarterly margin expansion of two to three basis points remains largely intact when reviewed over a longer period, but the progression will not necessarily be linear. Following the six basis points increase in this quarter, we may get some back over the coming quarters, as Doug mentioned, and report changes below the two to three basis point range in individual periods, but remaining consistent with the broader outlook. Non-interest income was $22.1 million, driven by wealth management fee income, which increased to $17.2 million, up 4% sequentially and 8% from a year ago. Operating expenses were $55.7 million, which is up less than 1% from the first quarter. Revenue growth outpaced expense growth 10 to 1, producing another strong quarter of positive operating leverage. The reported efficiency ratio declined to 65%, marking the seventh consecutive quarter of improvement. We expect expense growth will continue to normalize as the investments made over the past several years become more productive. Turning the balance sheet, growth remains strong across the company. Total loans increased $236 million during the quarter to $6.7 billion, up 15% year over year. growth remained concentrated in our core areas of strength, particularly C&I and commercial real estate. Deposits increased $231 million up to $7.1 billion, which is up 11% year-over-year, and non-interest-bearing deposits increased approximately $80 million in the quarter and have grown $386 million from a year ago. We opened and funded more than 650 non-interest-bearing DDA accounts in the quarter, which is consistent with our average volumes over recent quarters. As I've mentioned, this continued growth in operating accounts is an important indicator of relationship quality and supports a more durable funding profile over time. The loan and deposit ratio remain well managed at about 95%. We continue to maintain substantial on and off balance sheet liquidity, no broker deposits, and diversified funding base. Turning to credit, the provision for credit losses was $8.1 million. Net charge-offs were $5.9 million in the quarter and were concentrated in one multifamily loan and one commercial mortgage relationship. The allowance for credit losses remained stable at 1.04% of total loans. Non-performing assets increased to $72.2 million, or 91.91% of total assets, compared to 0.77% in the first quarter. The increase was primarily driven by the migration of a previously disclosed larger multifamily relationship. At the same time, special mention loans declined, reforming modifications decreased materially, and early-stage delinquencies were relatively stable. We continue to see no evidence of broad-based deterioration across the portfolio. Capital remains solid and can see the benefit from earnings generation. tangible book value. Her share increased 3% during the quarter to $36.26 and is up 9% from a year ago. Holding company common equity tier one capital was 10.38% and tier one capital was 10.83%. Based on this quarter's results and the continued momentum across the company, we elected to draw the remaining 20 million of available converted preferred equity in July. You may recall that in the first quarter of this year, we announced a $50 million commitment to issue convertible preferred equity with an initial draw of $30 million back in March. After assessing current results and projected growth rates going forward, we felt that this was the appropriate time to add the remaining $20 million in capital to our balance sheet. Overall, the quarter reflected continued progress across each of our key financial priorities, sustained revenue growth, positive operating leverage, margin expansion, disciplined balance sheet growth, and continued tangible book value creation. We remain upbeat on the earnings trajectory of the company and the durability of the underlying relationship activity. With that, we are happy to answer any questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. If you are muted, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Manuel Navas with Piper Sandler. Manuel, your line is now open. Please go ahead.

Hey, good morning. Can we have an update on the deposit growth pipeline? And you've had some commentary in the past about the mix and just more color there to start with.

Sure. So, Doug, good morning. How are you? I would say that, you know, the strength of the pipeline is very consistent with what we've seen so far to date. As you would imagine, money market accounts get funded right away. Non-interest-bearing actually take time to sort of make the transfer over to us. So, we sort of – the forward look for us is how many accounts are sitting there waiting to get funded – and I will tell you that that inventory of pipeline is as robust as it's ever been. I think that, you know, in terms of guidance, you know, we sort of talked to 200 million each quarter. We still believe that about a third of that would be a non-interest bearing. That could fluctuate from time to time or quarter to quarter, but I would say that as we look through the end of this year, I would say that we feel very comfortable that that's the trajectory that we're on. Thank you.

I appreciate that. It also sounds like loan pipelines are pretty strong. Can you just comment on what you're seeing out there in the market? Is it going to be at a continued similar mix to this quarter's really impressive growth? Just any further comment there.

So, there was some volume actually kicked into this quarter. So, we actually came out of the gate pretty strong. and the pipelines, Lisa Chalkin is here. Lisa, I think they're still very strong.

Yeah, I think we think that the growth number will be about $300 million, which means that we'll be closing $450 to $500 million in order to be able to do that.

So stronger than the quarter we just had.

Is that maybe driving... potential variability in the NIM that you're just having such strong opportunities on the growth side?

The answer to that is yes, because we'll never get the timing right on poor deposits hitting our balance sheet at the same time that we're funding the loan type. So that's part of it. The other part of it is that just in general, there's been elevated competition, and we're seeing rates with a four-handle on it as being very common. So the longer we sit in this sort of even at its transitory higher elevated rate environment, the more pressure we're seeing. And also, you know, the economy is on fire. Other banks are growing their balance sheets. So there is elevated competition for deposits. So I don't know exactly where it lands. As Frank said, you know, we still hold on to the original guidance that we gave in the first quarter, you know, in terms of where we'll land by the end of the year. We had a stronger performance this quarter, but we may give some of that back. this quarter that we're in, but we'll land what we said that we were. So we still see some improvement in them, but we're definitely seeing some headwinds, and the timing of the loan closings ahead of the deposits could potentially elevate costs as well.

I appreciate that. I'll jump back into the queue.

Your next question comes from the line of Steve Moss with Raymond James. Steve, your line is now open. Please go ahead.

Hey, guys. Good morning. This is Chase on for Steve.

Hey, Chase. Hey, Chase.

So I hear you on the elevated deposit competition in the market. I was curious, like, what costs were deposits coming on at in the quarter?

Give us a coupon. Do you have a coupon on deposit? Yeah, during the quarter, what we added was about 2.5%.

Got it. Appreciate that. And on the multifamily MTA inflow, do you have any indication on, like, resolution timing there?

This is Lisa Chalkin, Chief Credit Officer. Now, it's hard to predict. I mean, the loans that just moved over, we're still negotiating with the client. We have started the foreclosure process. We are awaiting for a receiver to be appointed. In New York City, the foreclosure process is incredibly protracted post-COVID, and it's not gotten any better. So in the event that we can come to some sort of an agreement that works for both the borrower and us, then maybe we'll be able to restructure and get them back paying but otherwise we're just going to continue to go through the foreclosure process, and that can take some time. We could choose to sell the note at some point if that makes sense, but I think the plan at the present time is to just move through the foreclosure process to get title.

I appreciate all that, Keller. And just one last one for me. Can you size up the back book repricing opportunity in, like, the roll-off yields there?

Yeah, it's about a billion and a half dollars over the next six quarters. that's not all multi. It's sort of a mix. And so we've the coupon there is just a little bit north of four. Is that right? Four and change? Four and change. The current rate today is six and change. And, you know, there'll be some of the multi, the rent stabilized stuff. I'm certain that we, you know, some of those have got sort of contractual rates that are in the sevens, which will negotiate on a client-by-client basis. So I think we've modeled, we have modeled in, you know, some assumptions. I think I-5s is what we sort of conservatively took a look at.

Do you expect to get north of 1%, maybe 125 pickup on the repricing? For the billion dollars, it's going to reprice over the next, you know, the next six quarters.

Got it. Thank you for all the color, guys.

Your next question comes from the line of Christopher Maranac with Breen Capital, LLC. Christopher, your line is now open. Please go ahead.

Hey, thanks. Good morning. Can you talk about the criticized loans in terms of what is tax-rated within some of the past dues? And just wanted to kind of get back to kind of I think it's slide 18 and the details you gave us there on the New York multifamily.

So just for multifamily, you want to know what is pass-rated within pass-do versus criticized or classified?

Right, just to get to kind of a bottom number. Yeah, just to get Lisa to a bottom number in terms of what is criticized and what is passed.

Yes. I'm doing the math in my head. There is... about $20 million is in special mention, and the balance of the multifamily is in pass. And the pass rate alone in the 30-day bucket versus the ones that are special mention are 61 days at the end of the quarter.

Okay, great. Thank you for that. And are you at a point now where the downgrades can slow down maybe even possibly switch, or what would be the timeline for that?

I guess if I had a crystal ball, but it's hard to say. I do think that they have slowed. I mean, I do think that the downward migration in risk grading has slowed. I think this quarter we saw five of the loans that were in the relationship that we've been talking about for a while move to non-performing. But there was nothing else that moved to non-performing. So I think from a risk-grading perspective, I think that we've seen improvement. And even on the past dues, if I look at the past dues, once I net out the three loans that are part of that relationship, the balance of the $10-ish million in multifamily that is past due, that's seven different relationships.

With the wave of repricings and maturities that are coming up, There could be down rates. There could be.

I can't predict it.

It's relationship by relationship, and that's kind of how the conversations are going. Correct.

I mean, every single loan, you know, we're dealing with individually, but I'm not seeing a pervasive every quarter. The past dues in multifamily are down this quarter compared to last.

I guess we're not seeing anything systemic. There's nothing that is, you know, that's bothersome. There's this one relationship that skewed the numbers. We sort of disclosed to bake that out. I mean, it's very, very sanguine. Having said that, as we go through repricing, part of the negotiation may be that a client that has been servicing, never been delinquent, could stop paying us in order to negotiate. So there's going to be things that we think that we're going to have a rocky road as we go client by client, loan by loan through this repricing cycle over the next six quarters that ultimately could create some noise inside delinquencies, inside of non-reformers, et cetera. But in the end, there's nothing that's systemic. If it does show up, it's a negotiation, is really what's going on. Which is, by the way, is what's going on. Thank you for that. That's exactly what I was talking about. The craziest thing that's ever happened in my career, and I've only been doing this for a few decades, I've never had a loan that actually has the capacity to pay, has more than one-to-one debt coverage, has an appraisal that shows that there's equity in it, and the borrower says, I'm not making any payments. And we've commenced foreclosure. And we started foreclosure. I've never seen that in my entire career. It's negotiating. It's what they're doing.

Understood. Thank you for sharing all that. And then just a last related question. Does the reserve already anticipate some downgrades? Some of those happen on a case-by-case basis that the reserve may have already covered a portion of it?

I missed the beginning. has the increase in the reserve already covered some of the potential downgrades? It's a mix.

There's some yes and some no.

It's a mix. I mean, we would get an updated appraisal and sort out the specific reserve when something hits substandard. And so of the ones that we just downgraded to non-performing, four of them, the appraisals are pending at this point. But one of the appraisals that we did get in, The reserve that we had to put against, it was only like $80,000 or something. It was minimal. But every quarter, anything that's in non-performing, every single quarter, we're looking at the value of the collateral in order to make a determination, and the specific reserve is adjusted at that point in time.

We had sort of communicated at the end of last year, the third quarter, fourth quarter of last year, that we thought we would have an elevated provision in the first half of this year. We've aggressively attacked a lot of the stuff that's there. having said that, we believe that, you know, at least through the end of this year, that it's going to remain sort of at that $7.5 million level. And it's a consequence of not something that we're seeing right now, but it's something that would arise because of what I just started in a negotiation. So there's some hard conversations that are going to take place that has the potential of keeping it sort of at that $7.5 million order. would be sort of our best guess.

I was going to say, loan growth and the economic conditions have had an impact. About half-ish of the reserve that we've put up this quarter is due either to the loan growth or because of weakening economic conditions, which the model factors in.

Great. Thanks again very much for all the detail on this topic.

At this time, we would like to reprompt. So, if you would like to ask the question, please press star 1. Again, that is star 1. We shall hold for any additional questions. There are no further questions at this time. I will now turn the call back to Doug for closing remarks.

Thank you all for joining us today. Q2 was clearly a validation of the strategy that we laid out during the disruption in our industry in 2023. We've invested where a lot of the other institutions that we compete against in this market have pulled back. But I want to really, the message that delivers this quarter is that that investment is clearly behind us. And what you're seeing now is a platform that's producing the ninth consecutive quarter of revenue growth, our seventh consecutive quarter of efficiency improvement, and we've also got an accelerated earnings and profitability path. And so in some ways, you know, a lot of the risk of us going into New York is behind us, and we do see a lot of momentum turning into the third quarter and continuing outright to the end of the year. So with that, I want to thank you all, and we look forward to sharing our progress, continuing as we pull up in October. And, of course, our door is open for anyone that wants to give us a shout. We're an open door here, and we'd love to be able to address any questions that you may have regarding our company. Thanks for your investment, and thank you for your loyalty and a lot of great stuff happening at Feedback Private.

This concludes today's call. Thank you for attending. you may now disconnect