OceanFirst Financial (OCFC) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents OceanFirst Financial Corp.'s unaudited consolidated financial statements and management's analysis of financial condition and operations Item 1. Consolidated Financial Statements (Unaudited) This section presents OceanFirst Financial Corp.'s unaudited consolidated financial statements, including condition, income, comprehensive income, equity changes, and cash flows, with detailed explanatory notes Consolidated Statements of Financial Condition This section presents the consolidated financial condition, detailing assets, liabilities, and equity at specific reporting dates Consolidated Statements of Financial Condition (September 30, 2022 vs. December 31, 2021) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Total assets | $12,683,453 | $11,739,616 | | Loans receivable, net | $9,672,488 | $8,583,352 | | Deposits | $9,959,469 | $9,732,816 | | Total liabilities | $11,143,237 | $10,223,063 | | Total stockholders' equity | $1,540,216 | $1,516,553 | Consolidated Statements of Income This section presents the consolidated statements of income, detailing revenues, expenses, and net income for the reporting periods Consolidated Statements of Income (Three Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Total interest income | $110,499 | $85,420 | | Total interest expense | $14,534 | $8,288 | | Net interest income | $95,965 | $77,132 | | Credit loss expense (benefit) | $1,016 | $(3,179) | | Total other income | $15,150 | $9,883 | | Total operating expenses | $58,997 | $58,673 | | Net income | $38,804 | $24,167 | | Net income available to common stockholders | $37,607 | $23,163 | | Diluted earnings per share | $0.64 | $0.39 | Consolidated Statements of Income (Nine Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Total interest income | $300,898 | $253,635 | | Total interest expense | $29,909 | $28,883 | | Net interest income | $270,989 | $224,752 | | Credit loss expense (benefit) | $4,121 | $(10,259) | | Total other income | $31,543 | $42,521 | | Total operating expenses | $175,153 | $162,026 | | Net income | $94,046 | $87,419 | | Net income available to common stockholders | $90,319 | $84,407 | | Diluted earnings per share | $1.53 | $1.41 | Consolidated Statements of Comprehensive Income This section presents the consolidated statements of comprehensive income, including net income and other comprehensive income/loss Consolidated Statements of Comprehensive Income (Three Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net income | $38,804 | $24,167 | | Total other comprehensive loss, net of tax | $(9,403) | $(760) | | Total comprehensive income | $29,401 | $23,407 | Consolidated Statements of Comprehensive Income (Nine Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net income | $94,046 | $87,419 | | Total other comprehensive loss, net of tax | $(35,675) | $(1,355) | | Total comprehensive income | $58,371 | $86,064 | Consolidated Statements of Changes in Stockholders' Equity This section details changes in stockholders' equity, including net income, dividends, and other comprehensive loss Changes in Stockholders' Equity (Nine Months Ended September 30, 2022) | Item | Amount (in thousands) | | :--------------------------------------- | :-------------------- | | Balance at December 31, 2021 | $1,516,553 | | Net income | $93,331 | | Other comprehensive loss, net of tax | $(35,675) | | Stock compensation | $5,019 | | Allocation of ESOP stock | $1,848 | | Cash dividend ($0.54 per share) | $(31,767) | | Exercise of stock options | $346 | | Repurchase 373,223 shares of common stock | $(7,396) | | Preferred stock dividend | $(3,012) | | Acquisition of Trident Abstract Title Agency, LLC | $836 | | Distributions to non-controlling interest | $(582) | | Balance at September 30, 2022 | $1,540,216 | Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $209,998 | $119,051 | | Net cash used in investing activities | $(909,178) | $(726,475) | | Net cash provided by financing activities | $645,104 | $296,435 | | Net decrease in cash and due from banks and restricted cash | $(54,076) | $(310,989) | | Cash and due from banks and restricted cash at end of period | $170,708 | $1,007,672 | Notes to Unaudited Consolidated Financial Statements These notes provide detailed explanations and disclosures for the unaudited consolidated financial statements, covering the basis of presentation, significant accounting policies, and specific financial line items Note 1. Basis of Presentation This note outlines the consolidation principles and the nature of interim financial reporting - The consolidated financial statements include OceanFirst Financial Corp., its wholly-owned subsidiaries, and a majority controlling interest in Trident Abstract Title Agency, LLC, with all significant intercompany accounts and transactions eliminated[98] - Interim consolidated financial statements reflect normal and recurring adjustments, with results for the three and nine months ended September 30, 2022, not necessarily indicative of full-year results[99] Note 2. Business Combinations This note details the acquisition of Trident Abstract Title Agency, LLC and its accounting treatment - On April 1, 2022, the Company acquired a 60% majority controlling interest in Trident Abstract Title Agency, LLC for $7.1 million, resulting in $5.8 million in goodwill, complementary to the Company's lending business[103] - The acquisition was accounted for using the acquisition method, allocating the purchase price to acquired assets and assumed liabilities based on fair values, with goodwill calculation subject to change for up to one year[104][106] Note 3. Earnings per Share This note provides details on basic and diluted earnings per share calculations and outstanding shares Earnings Per Share (Three Months Ended September 30) | Metric | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Average basic shares outstanding (in thousands) | 58,681 | 59,311 | | Average diluted shares outstanding (in thousands) | 58,801 | 59,515 | Earnings Per Share (Nine Months Ended September 30) | Metric | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Average basic shares outstanding (in thousands) | 58,777 | 59,619 | | Average diluted shares outstanding (in thousands) | 58,918 | 59,862 | - Antidilutive stock options of 1,552,000 for the three and nine months ended September 30, 2022, and 1,573,000 and 1,566,000 for the corresponding 2021 periods, were excluded from EPS calculations[109] Note 4. Securities This note details the Company's debt and equity securities, including fair value and unrealized gains/losses Debt Securities Available-for-Sale (September 30, 2022) | Category | Amortized Cost (in thousands) | Estimated Fair Value (in thousands) | Gross Unrealized Losses (in thousands) | | :--------------------------------------- | :---------------------------- | :-------------------------------- | :----------------------------------- | | U.S. government and agency obligations | $107,198 | $99,099 | $(8,099) | | Corporate debt securities | $5,000 | $4,372 | $(628) | | Asset-backed securities | $296,228 | $274,873 | $(21,355) | | Agency commercial MBS | $110,871 | $91,956 | $(18,915) | | Total | $519,297 | $470,300 | $(48,997) | Debt Securities Held-to-Maturity (September 30, 2022) | Category | Amortized Cost (in thousands) | Estimated Fair Value (in thousands) | Gross Unrealized Losses (in thousands) | | :--------------------------------------- | :---------------------------- | :-------------------------------- | :----------------------------------- | | State, municipal and sovereign debt obligations | $263,614 | $232,562 | $(31,052) | | Corporate debt securities | $59,000 | $56,268 | $(3,135) | | Mortgage-backed securities | $708,769 | $616,596 | $(92,282) | | Total | $1,031,383 | $905,426 | $(126,469) | - The Company concluded that debt securities were not impaired at September 30, 2022, as issuers made all contractual payments, and unrealized losses were primarily due to interest rate movements and credit spread widening, not credit quality[122] Equity Investments (September 30, 2022 vs. December 31, 2021) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Equity investments | $81,722 | $101,155 | Net Gain (Loss) on Equity Investments (Three Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net gain (loss) on equity investments | $3,362 | $(466) | Net Gain (Loss) on Equity Investments (Nine Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net gain (loss) on equity investments | $(7,502) | $8,397 | Note 5. Loans Receivable, Net This note provides a breakdown of loans receivable, allowance for credit losses, and non-accrual loans Loans Receivable, Net (September 30, 2022 vs. December 31, 2021) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Commercial real estate – investor | $5,007,637 | $4,378,061 | | Commercial real estate – owner occupied | $983,784 | $1,055,065 | | Commercial and industrial | $652,620 | $449,224 | | Residential real estate | $2,813,209 | $2,479,701 | | Other consumer | $261,510 | $260,819 | | Total loans receivable | $9,718,760 | $8,622,870 | | Allowance for loan credit losses | $(53,521) | $(48,850) | | Total loans receivable, net | $9,672,488 | $8,583,352 | Allowance for Credit Losses on Loans (Nine Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Balance at beginning of period | $48,850 | $60,735 | | Credit loss (benefit) expense | $4,336 | $(11,024) | | Charge-offs | $(435) | $(939) | | Recoveries | $770 | $1,381 | | Balance at end of period | $53,521 | $50,153 | Non-Accrual Loans (September 30, 2022 vs. December 31, 2021) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Commercial real estate – investor | $9,866 | $3,614 | | Commercial real estate – owner occupied | $1,976 | $11,904 | | Commercial and industrial | $321 | $277 | | Residential real estate | $5,958 | $6,114 | | Other consumer | $3,377 | $3,585 | | Total | $21,498 | $25,494 | - Troubled Debt Restructuring (TDR) loans totaled $16.1 million at September 30, 2022, down from $23.6 million at December 31, 2021, with $10.0 million of TDRs being non-accrual at September 30, 2022[142] Note 6. Deposits This note details the composition of deposits by type, including non-interest-bearing and time deposits Deposits by Type (September 30, 2022 vs. December 31, 2021) | Type of Account | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Non-interest-bearing | $2,325,547 | $2,412,056 | | Interest-bearing checking | $3,909,864 | $4,201,736 | | Money market deposit | $749,229 | $736,090 | | Savings | $1,570,472 | $1,607,933 | | Time deposits | $1,404,357 | $775,001 | | Total deposits | $9,959,469 | $9,732,816 | - Brokered time deposits significantly increased to $828.7 million at September 30, 2022, from $25.0 million at December 31, 2021[145] Note 7. Borrowed Funds This note outlines the Company's borrowed funds, including FHLB advances and other borrowings Borrowed Funds (September 30, 2022 vs. December 31, 2021) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | FHLB advances | $514,200 | $0 | | Securities sold under agreements to repurchase with customers | $96,289 | $118,769 | | Other borrowings | $194,914 | $229,141 | | Total borrowed funds | $805,403 | $347,910 | - The Company redeemed $35.0 million of subordinated debt in March 2022[149] Note 8. Fair Value Measurements This note explains the fair value hierarchy and measurements for financial assets and liabilities - Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants, using valuation techniques consistent with market, income, and/or cost approaches[152] - The fair value hierarchy prioritizes inputs: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (significant unobservable inputs reflecting entity's own assumptions)[153][154][155] Financial Assets and Liabilities Measured at Fair Value (September 30, 2022, in thousands) | Item | Total Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | | :--------------------------------------- | :--------------- | :------------- | :------------- | :------------- | | Debt securities available-for-sale | $470,300 | $0 | $470,300 | $0 | | Equity investments (recurring) | $62,343 | $566 | $61,777 | $0 | | Interest rate derivative asset | $122,605 | $0 | $122,605 | $0 | | Interest rate derivative liability | $(122,618) | $0 | $(122,618) | $0 | | Equity investments (non-recurring) | $19,379 | $0 | $0 | $19,379 | | Loans measured for impairment | $7,268 | $0 | $0 | $7,268 | - During the nine months ended September 30, 2022, the Company converted $2.7 million of preferred stock into common stock, resulting in a transfer from Level 3 to Level 1[166] Note 9. Derivatives, Hedging Activities and Other Financial Instruments This note describes the Company's use of derivative instruments to manage interest rate risk - The Company uses derivative financial instruments (interest rate swaps and cap contracts) to manage interest rate risk for commercial loan customers, economically hedging its exposure with third-party agreements, which are not designated as hedges and are marked to market through earnings[184][185][186] Notional Amount of Derivatives Not Designated as Hedging Instruments | Date | Amount (in thousands) | | :--------------------------------------- | :-------------------- | | September 30, 2022 | $1,300,000 | | December 31, 2021 | $938,700 | - The Company has credit risk-related contingent features with third-party broker-dealers, requiring collateral transfers upon margin calls, with $112.1 million in collateral received from third parties at September 30, 2022, up from $0 at December 31, 2021[188] Note 10. Leases This note provides details on the Company's operating and finance lease right-of-use assets and liabilities Lease Right-of-Use (ROU) Assets and Liabilities (September 30, 2022 vs. December 31, 2021) | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Operating lease ROU assets | $19,474 | $17,442 | | Finance lease ROU asset | $1,347 | $1,495 | | Operating lease liabilities | $20,430 | $17,982 | | Finance lease liability | $1,750 | $1,904 | Weighted-Average Lease Terms and Discount Rates (September 30, 2022) | Metric | Operating Leases | Finance Lease | | :--------------------------------------- | :--------------- | :------------ | | Weighted-Average Remaining Lease Term | 7.04 years | 6.85 years | | Weighted-Average Discount Rate | 2.84% | 5.63% | Note 11. Variable Interest Entity This note explains the consolidation of Trident Abstract Title Agency, LLC as a Variable Interest Entity - The Company acquired a 60% ownership in Trident on April 1, 2022, which is classified as a Variable Interest Entity (VIE) under ASC 810, with the Company considered the primary beneficiary and having consolidated Trident's assets and liabilities[199] Summarized Financial Information for Consolidated VIE (Trident) as of September 30, 2022 | Metric | Amount (in thousands) | | :--------------------------------------- | :-------------------- | | Cash and cash equivalents | $33,234 | | Other assets | $1,079 | | Total assets | $34,313 | | Other liabilities | $31,906 | | Net assets | $2,407 | Note 12. Subsequent Events This note discloses significant events occurring after the reporting period, including the merger termination - On November 9, 2022, the Company and Partners Bancorp mutually agreed to terminate their Agreement and Plan of Merger, with each party bearing its own costs and no termination fee paid[201][202] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and operating results, covering key metrics, balance sheet and income statement changes, liquidity, capital, asset quality, and market risks - OceanFirst Financial Corp. is a regional bank holding company serving business and retail customers across New Jersey and major metropolitan areas, with operations primarily dependent on net interest income[16] - Key developments for the three months ended September 30, 2022, include strengthening net interest income and margin, loan and deposit growth, and the impact of the Durbin amendment on interchange fees[17][19] - The Company's Board of Directors declared a quarterly cash dividend of $0.20 per common share and $0.4375 per preferred depositary share[19] - The proposed merger with Partners Bancorp was mutually terminated on November 9, 2022, with no termination fees[19] Financial Summary This section provides a high-level overview of key financial condition and operating data, including ratios Selected Financial Condition Data (in thousands) | Metric | Sep 30, 2022 | Jun 30, 2022 | Sep 30, 2021 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Total assets | $12,683,453 | $12,438,653 | $11,829,688 | | Loans receivable, net | $9,672,488 | $9,380,688 | $8,139,961 | | Deposits | $9,959,469 | $9,831,484 | $9,774,097 | | Total stockholders' equity | $1,540,216 | $1,521,432 | $1,513,249 | Selected Operating Data (in thousands, except per share) | Metric | Sep 30, 2022 | Jun 30, 2022 | Sep 30, 2021 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Net interest income | $95,965 | $90,797 | $77,132 | | Net income | $38,804 | $29,483 | $24,167 | | Diluted earnings per share | $0.64 | $0.47 | $0.39 | Selected Financial Ratios | Metric | Sep 30, 2022 | Jun 30, 2022 | Sep 30, 2021 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Return on average assets | 1.19% | 0.92% | 0.78% | | Return on average stockholders' equity | 9.68% | 7.31% | 6.05% | | Net interest margin | 3.36% | 3.29% | 2.93% | | Efficiency ratio | 53.10% | 59.65% | 67.43% | | Non-performing loans as a percent of total loans receivable | 0.22% | 0.22% | 0.37% | Analysis of Net Interest Income This section analyzes the drivers of net interest income and margin, including interest-earning assets and interest-bearing liabilities Net Interest Income and Margin (Three Months Ended September 30) | Metric | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Net interest income (in thousands) | $95,965 | $77,132 | | Net interest rate spread | 3.19% | 2.80% | | Net interest margin | 3.36% | 2.93% | | Total cost of deposits | 0.36% | 0.22% | Net Interest Income and Margin (Nine Months Ended September 30) | Metric | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Net interest income (in thousands) | $270,989 | $224,752 | | Net interest rate spread | 3.15% | 2.77% | | Net interest margin | 3.28% | 2.91% | | Total cost of deposits | 0.24% | 0.28% | - The increase in net interest income and margin was largely driven by the rising rate environment's impact on interest-earning assets and an increase in loan balances, partly offset by higher cost of funds and lower prepayment fees[19][34] Comparison of Financial Condition at September 30, 2022 and December 31, 2021 This section compares the Company's balance sheet items, including assets, liabilities, and equity, between the two reporting dates Key Financial Condition Changes (September 30, 2022 vs. December 31, 2021) | Metric | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | Change (in millions) | | :--------------------------------------- | :------------------------- | :------------------------- | :------------------- | | Total assets | $12,680 | $11,740 | +$940 | | Total loans | $9,720 | $8,620 | +$1,100 | | Total debt securities | $1,550 | $1,760 | $(210) | | Total liabilities | $11,140 | $10,220 | +$920 | | Deposits | $9,960 | $9,730 | +$230 | | Time deposits | $1,400 | $775 | +$625 | | FHLB advances | $514 | $0 | +$514 | | Stockholders' equity | $1,540 | $1,520 | +$20 | | Accumulated other comprehensive loss | $(38.5) | $(2.8) | $(35.7) | | Loans-to-deposits ratio | 97.6% | 88.6% | +9.0% | | Stockholders' equity per common share | $26.04 | $25.63 | +$0.41 | - The increase in total assets was primarily driven by strong loan originations, while debt securities decreased due to principal repayments, maturities, and increased unrealized losses from rising interest rates[26] - Deposit growth was mainly in time deposits, particularly brokered time deposits, while other deposit categories saw a net runoff[27] Comparison of Operating Results for the Three and Nine Months Ended September 30, 2022 and September 30, 2021 This section compares the Company's income statement performance for the three and nine months, detailing changes in revenues and expenses General This subsection provides an overview of net income and diluted EPS, including the impact of non-recurring items Net Income Available to Common Stockholders (in millions, except per share) | Period | 2022 Net Income | 2021 Net Income | 2022 Diluted EPS | 2021 Diluted EPS | | :--------------------------------------- | :-------------- | :-------------- | :--------------- | :--------------- | | Three months ended Sep 30 | $37.6 | $23.2 | $0.64 | $0.39 | | Nine months ended Sep 30 | $90.3 | $84.4 | $1.53 | $1.41 | - Net income for the three months ended September 30, 2022, included a net benefit of $2.6 million (net of tax) from merger-related expenses, branch consolidation benefit, and gain on equity investments; for the nine months, it included a net decrease of $8.1 million (net of tax) from these items[30] Interest Income This subsection analyzes the changes in interest income and yield on average interest-earning assets Interest Income (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $110.5 | $85.4 | | Nine months ended Sep 30 | $300.9 | $253.6 | Yield on Average Interest-Earning Assets | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | 3.88% | 3.24% | | Nine months ended Sep 30 | 3.64% | 3.29% | - Interest income increased due to growth in average interest-earning assets (loans and securities) and a higher yield, driven by the redeployment of excess cash and the rising rate environment[31][32] Interest Expense This subsection analyzes the changes in interest expense and cost of average interest-bearing liabilities Interest Expense (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $14.5 | $8.3 | | Nine months ended Sep 30 | $29.9 | $28.9 | Cost of Average Interest-Bearing Liabilities | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | 0.69% | 0.44% | | Nine months ended Sep 30 | 0.49% | 0.52% | - Interest expense for the three months increased due to higher costs associated with FHLB advances and time deposits in an elevated rate environment; for the nine months, the cost decreased due to prior year deposit repricing, partly offset by recent rising rates and FHLB costs[33] Net Interest Income and Margin This subsection details the trends in net interest income and net interest margin, highlighting key drivers Net Interest Income (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $96.0 | $77.1 | | Nine months ended Sep 30 | $271.0 | $224.8 | Net Interest Margin | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | 3.36% | 2.93% | | Nine months ended Sep 30 | 3.28% | 2.91% | - Net interest margin expanded due to the redeployment of excess cash into loans and the positive impact of the rising rate environment on interest-earning assets, partially offset by increased cost of funds and growth in interest-bearing liabilities[34] Credit Loss Expense (Benefit) This subsection discusses the factors influencing credit loss expense, including loan growth and macroeconomic forecasts Credit Loss Expense (Benefit) (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $1.0 | $(3.2) | | Nine months ended Sep 30 | $4.1 | $(10.3) | - The credit loss expense for 2022 was influenced by loan growth, slowing prepayment rates, and uncertain macroeconomic forecasts (rising interest rates, inflation), partly offset by positive trends in criticized and classified assets[35] - Non-performing loans decreased to $21.5 million at September 30, 2022, from $30.3 million at September 30, 2021, primarily due to payoffs and loans returning to accrual status[35] Non-interest Income This subsection analyzes changes in non-interest income, including gains/losses on investments and fee income Other Income (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $15.2 | $9.9 | | Nine months ended Sep 30 | $31.5 | $42.5 | - For the three months, other income increased due to a $3.4 million gain on equity investments and $3.3 million in title-related fees from the Trident acquisition, partially offset by a $1.7 million decrease in bankcard services revenue due to the Durbin amendment[36] - For the nine months, other income decreased due to a $7.5 million net loss on equity investments (vs. $8.4 million gain in prior year), lower net gain on sale of loans, and reduced bankcard services revenue, partly offset by $7.8 million from Trident and increased commercial loan swap income[37] Non-interest Expense This subsection details the components of non-interest expense, including compensation, data processing, and acquisition-related costs Operating Expenses (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $59.0 | $58.7 | | Nine months ended Sep 30 | $175.2 | $162.0 | - For the three months, operating expenses increased by $4.6 million (excluding merger/consolidation items), driven by $2.8 million from the Trident acquisition, $1.8 million in compensation and benefits (medical claims), and $1.2 million in data processing (new core banking system)[38][39] - For the nine months, operating expenses increased by $16.2 million (excluding merger/consolidation items), primarily due to $6.0 million from Trident, $5.3 million in compensation and benefits (commercial banking strategy/hires), and $4.6 million in data processing[40] Income Tax Expense This subsection presents the provision for income taxes and the effective tax rate for the reporting periods Provision for Income Taxes (in millions) | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | $12.3 | $7.4 | | Nine months ended Sep 30 | $29.2 | $28.1 | Effective Tax Rate | Period | 2022 | 2021 | | :--------------------------------------- | :--- | :--- | | Three months ended Sep 30 | 24.1% | 23.3% | | Nine months ended Sep 30 | 23.7% | 24.3% | Liquidity and Capital Resources This section discusses the Company's liquidity management, funding sources, and regulatory capital adequacy - Primary liquidity sources for the holding company are Bank dividends, investment sales, and stock/debt issuance; the Bank's primary sources are deposits, loan/investment payments, FHLB advances, and other borrowings[43][44] - FHLB advances increased to $514.2 million at September 30, 2022, from $0 at December 31, 2021, to fund liquidity needs, including loan originations and residential loan pool purchases[28][45][46] - The Company has $439.5 million in outstanding commitments to originate loans and $1.72 billion in undrawn lines of credit at September 30, 2022[47] Regulatory Capital Ratios (September 30, 2022) | Metric | Actual Ratio | Required for Capital Adequacy | Required to be Well-Capitalized | | :--------------------------------------- | :----------- | :---------------------------- | :------------------------------ | | Bank Tier 1 capital (to average assets) | 9.23% | 4.00% | 5.00% | | Bank Common equity Tier 1 (to risk-weighted assets) | 10.98% | 7.00% | 6.50% | | Bank Total capital (to risk-weighted assets) | 11.55% | 10.50% | 10.00% | | Company Tier 1 capital (to average assets) | 9.30% | 4.00% | N/A | | Company Common equity Tier 1 (to risk-weighted assets) | 9.69% | 7.00% | N/A | | Company Total capital (to risk-weighted assets) | 12.78% | 10.50% | N/A | - The Company and the Bank satisfied the criteria to be 'well-capitalized' under Prompt Corrective Action Regulations[56] Non-Performing Assets This section analyzes trends in non-performing loans and assets, and the adequacy of the allowance for credit losses Non-Performing Assets (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Total non-performing loans | $21,498 | $25,494 | | Total non-performing assets | $21,498 | $25,600 | | Allowance for loan credit losses as a percent of total loans | 0.55% | 0.57% | | Allowance for loan credit losses as a percent of total non-performing loans | 248.96% | 191.61% | | Non-performing loans as a percent of total loans receivable | 0.22% | 0.30% | | Non-performing assets as a percent of total assets | 0.17% | 0.22% | - Non-performing loans decreased primarily due to loans being paid off and returning to accrual status; special mention and substandard loans also decreased due to improved borrower profitability and ability to service loans[58][59] Critical Accounting Policies This section highlights accounting policies requiring significant estimates and judgments, particularly for credit losses - The methodology used to determine the allowance for credit losses is a critical accounting policy due to its importance and reliance on estimation techniques, valuation assumptions, and subjective assessments[61] - The critical accounting policy and its application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors[61] Impact of New Accounting Pronouncements This section discusses the adoption of new accounting standards and their expected or actual impact on financial statements Accounting Pronouncements Adopted in 2022 This subsection details accounting pronouncements adopted in 2022 and their impact - The adoption of ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes," effective for periods beginning after December 15, 2021, did not have a material impact on the consolidated financial statements[62] Recent Accounting Pronouncements Not Yet Adopted This subsection outlines recent accounting pronouncements not yet adopted and their anticipated impact - ASU 2022-03, "Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions," effective for periods beginning after December 15, 2023, is not expected to have a material impact[63] - ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures," effective for periods beginning after December 15, 2022, will be adopted on January 1, 2023, and its impact is currently being evaluated[64] - ASU 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method," effective for periods beginning after December 15, 2022, is not expected to have a material impact[65] Private Securities Litigation Reform Act Safe Harbor Statement This section provides a safe harbor statement for forward-looking information, outlining potential risk factors - Forward-looking statements are based on assumptions and describe future plans, strategies, and expectations, identified by words like "believe," "expect," "intend," etc[66] - Factors that could materially adversely affect operations include the termination of the Partners Bancorp merger, changes in interest rates, inflation, general economic conditions, real estate values, legislative/regulatory changes, and cybersecurity risks[67] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company monitors interest rate sensitivity using gap analysis and EVE/NII modeling, with exposure impacted by asset deployment and market rate shifts - The Company's interest rate sensitivity is monitored using interest rate risk (IRR) modeling, including gap analysis[70] Interest Sensitivity Gap (September 30, 2022) | Period | Interest Sensitivity Gap (in thousands) | Cumulative Gap as % of Total Interest-Earning Assets | | :--------------------------------------- | :------------------------------------ | :--------------------------------------------------- | | 3 Months or Less | $798,392 | 6.97% | | 3 Months to 1 Year | $107,332 | 7.90% | | 1 Year to 3 Years | $794,288 | 14.83% | | 3 Years to 5 Years | $1,005,171 | 23.60% | | More than 5 Years | $316,891 | 26.37% | | Total | $3,022,074 | 26.37% | - The Company's one-year gap was positive 7.90% at September 30, 2022, down from positive 14.15% at December 31, 2021[70] - Interest rate sensitivity was impacted by the deployment of cash into loans, a shift from overnight to short-term borrowings, slower loan and securities prepayment speeds, and a significant increase in market interest rates[76] Item 4. Controls and Procedures Management concluded that disclosure controls were effective, with no material changes in internal control over financial reporting during the quarter (a) Disclosure Controls and Procedures This subsection confirms the effectiveness of the Company's disclosure controls and procedures - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022, ensuring timely and accurate reporting of required information[78] (b) Changes in Internal Control Over Financial Reporting This subsection reports on any material changes in internal control over financial reporting during the quarter - There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[79] PART II. OTHER INFORMATION This section provides other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The Company and the Bank are not involved in any material legal proceedings beyond routine matters occurring in the ordinary course of business - The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which are considered immaterial to financial condition or results of operations[203] Item 1A. Risk Factors There have been no material changes to the Company's risk factors since December 31, 2021, as detailed in the 2021 Form 10-K - There have been no material changes to risk factors relevant to the Company's operations since December 31, 2021, as summarized in the 2021 Form 10-K[204] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any common stock during the quarter ended September 30, 2022, but has 2,934,438 shares remaining available under its authorized stock repurchase program - The Company did not repurchase any shares of its common stock during the three months ended September 30, 2022[205] - As of September 30, 2022, 2,934,438 shares were available for repurchase under the Company's stock repurchase program[205] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reporting period Item 5. Other Information This item is not applicable to the Company for the reporting period Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, XBRL financial data, and the interactive data file - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.0), XBRL formatted financial statements (101.0), and the Cover Page Interactive Data File (104.0)[210] Signatures The report is duly signed on behalf of the registrant by Christopher D. Maher, Chairman and Chief Executive Officer, and Patrick S. Barrett, Executive Vice President and Chief Financial Officer - The report was signed on November 9, 2022, by Christopher D. Maher, Chairman and Chief Executive Officer, and Patrick S. Barrett, Executive Vice President and Chief Financial Officer[211][212]