OceanFirst Financial (US:OCFC)2023-05-01 20:37markdown PART I. FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements (unaudited)](index=19&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(unaudited)) Presents unaudited consolidated financial statements, including statements of financial condition, income, comprehensive income, equity changes, cash flows, and detailed accounting notes [Consolidated Statements of Financial Condition](index=19&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Selected Financial Condition Data | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Total assets | $13,555,175 | $13,103,896 | | Loans receivable, net | $9,986,949 | $9,868,718 | | Deposits | $9,993,095 | $9,675,206 | | Total stockholders' equity | $1,610,371 | $1,585,464 | [Consolidated Statements of Income](index=21&type=section&id=Consolidated%20Statements%20of%20Income) Selected Operating Data | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Net interest income | $98,802 | $84,227 | | Provision for credit losses | $3,013 | $1,851 | | Other income | $2,073 | $8,852 | | Operating expenses | $61,309 | $57,495 | | Net income | $27,899 | $25,759 | | Net income available to common stockholders | $26,879 | $24,755 | | Diluted earnings per share | $0.46 | $0.42 | [Consolidated Statements of Comprehensive Income](index=22&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive Income Data | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Net income | $27,899 | $25,759 | | Net unrealized gain (loss) on debt securities (net of tax) | $5,547 | $(12,372) | | Total other comprehensive income (loss), net of tax | $6,667 | $(12,349) | | Total comprehensive income | $34,566 | $13,410 | [Consolidated Statements of Changes in Stockholders' Equity](index=23&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Key Changes in Stockholders' Equity | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Balance at beginning of period (Dec 31) | $1,585,464 | $1,516,553 | | Net income | $27,899 | $25,759 | | Other comprehensive income (loss), net of tax | $6,667 | $(12,349) | | Cash dividend per share | $0.20 | $0.17 | | Total stockholders' equity at end of period | $1,610,371 | $1,519,334 | [Consolidated Statements of Cash Flows](index=24&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $24,374 | $57,644 | | Net cash used in investing activities | $(146,648) | $(424,685) | | Net cash provided by financing activities | $450,521 | $353,433 | | Net increase (decrease) in cash and due from banks and restricted cash | $328,247 | $(13,608) | | Cash and due from banks and restricted cash at end of period | $496,233 | $211,176 | [Notes to Unaudited Consolidated Financial Statements](index=26&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) [Note 1. Basis of Presentation](index=26&type=section&id=Note%201.%20Basis%20of%20Presentation) - The consolidated financial statements include OceanFirst Financial Corp., OceanFirst Bank N.A., and their wholly-owned subsidiaries, along with a majority controlling interest in Trident Abstract Title Agency, LLC[105](index=105&type=chunk) - Management's preparation of financial statements requires estimates and assumptions, and actual results may differ[106](index=106&type=chunk) [Note 2. Business Combinations](index=27&type=section&id=Note%202.%20Business%20Combinations) - On April 1, **2022**, the Company acquired a **60%** majority controlling interest in Trident Abstract Title Agency, LLC, which provides commercial and residential title services[110](index=110&type=chunk) Trident Acquisition Financials (April 1, 2022) | Metric | Estimated Fair Value (in thousands) | | :--------------------------------- | :-------------------------------- | | Total purchase price | $7,084 | | Total assets acquired | $46,809 | | Total liabilities assumed | $44,716 | | Net assets acquired | $2,093 | | Goodwill recorded | $5,827 | [Note 3. Earnings per Share](index=28&type=section&id=Note%203.%20Earnings%20per%20Share) Earnings Per Share Calculation (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Weighted average shares outstanding | 59,291 | 59,303 | | Average basic shares outstanding | 58,774 | 58,739 | | Average diluted shares outstanding | 58,918 | 58,943 | - Antidilutive stock options of **852,000** and **904,000** were excluded from EPS calculation for Q1 **2023** and Q1 **2022**, respectively[115](index=115&type=chunk) [Note 4. Securities](index=29&type=section&id=Note%204.%20Securities) Debt Securities Summary (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Total debt securities available-for-sale (Fair Value) | $452,195 | $457,648 | | Total debt securities held-to-maturity (Fair Value) | $1,149,673 | $1,110,041 | | Total debt securities (Fair Value) | $1,601,868 | $1,567,689 | | Total debt securities (Amortized Cost) | $1,738,569 | $1,727,968 | | Total Gross Unrealized Losses | $(139,252) | $(161,524) | - The Company concluded that debt securities were not impaired at March 31, **2023**, as issuers made all contractually due payments, and unrealized losses were primarily due to general credit and interest rate environment changes, not credit quality[127](index=127&type=chunk) Equity Investments Net Loss (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Net loss on equity investments | $(6,801) | $(2,786) | | Net (losses) gains recognized on equity investments sold | $(4,608) | $1,582 | | Unrealized losses recognized on equity investments still held | $(2,193) | $(4,368) | [Note 5. Loans Receivable, Net](index=33&type=section&id=Note%205.%20Loans%20Receivable,%20Net) Loans Receivable, Net (March 31, 2023 vs. December 31, 2022) | Loan Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Commercial real estate – investor | $5,296,661 | $5,171,952 | | Commercial real estate – owner occupied | $986,366 | $997,367 | | Commercial and industrial | $622,201 | $622,372 | | Residential real estate | $2,881,811 | $2,861,991 | | Other consumer | $252,773 | $264,372 | | Total loans receivable | $10,039,812 | $9,918,054 | | Allowance for loan credit losses | $(60,195) | $(56,824) | Non-Performing Loans (March 31, 2023 vs. December 31, 2022) | Loan Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Commercial real estate – investor | $13,643 | $10,483 | | Commercial real estate – owner occupied | $251 | $4,025 | | Commercial and industrial | $162 | $331 | | Residential real estate | $5,650 | $5,969 | | Other consumer | $2,731 | $2,457 | | Total non-accrual loans | $22,437 | $23,265 | - At March 31, **2023**, TDR loans totaled **$13.7 million**, with **$6.3 million** included in non-accrual loans[147](index=147&type=chunk) - The Company ceased recognizing new TDRs after January 1, **2023**, due to ASU **2022-02** adoption[148](index=148&type=chunk) [Note 6. Deposits](index=38&type=section&id=Note%206.%20Deposits) Deposit Composition (March 31, 2023 vs. December 31, 2022) | Type of Account | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Non-interest-bearing | $1,984,197 | $2,101,308 | | Interest-bearing checking | $3,697,223 | $3,829,683 | | Money market deposit | $615,993 | $714,386 | | Savings | $1,308,715 | $1,487,809 | | Time deposits | $2,386,967 | $1,542,020 | | Total deposits | $9,993,095 | $9,675,206 | - Time deposits increased significantly, including brokered deposits of **$1.24 billion** at March 31, **2023**, up from **$873.4 million** at December 31, **2022**[151](index=151&type=chunk) [Note 7. Borrowed Funds](index=38&type=section&id=Note%207.%20Borrowed%20Funds) Borrowed Funds (March 31, 2023 vs. December 31, 2022) | Type of Borrowing | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | FHLB advances | $1,346,566 | $1,211,166 | | Securities sold under agreements to repurchase | $70,938 | $69,097 | | Other borrowings | $195,663 | $195,403 | | Total borrowed funds | $1,613,167 | $1,475,666 | Pledged Assets (March 31, 2023 vs. December 31, 2022) | Pledged To | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | FHLB and FRB (Loans & Debt Securities) | $8,172,980 | $7,318,037 | | Repurchase agreements (Debt Securities) | $75,859 | $105,294 | | Total pledged assets | $8,248,839 | $7,423,331 | [Note 8. Fair Value Measurements](index=39&type=section&id=Note%208.%20Fair%20Value%20Measurements) - Fair value measurements are categorized into Level **1** (unadjusted quoted prices in active markets), Level **2** (observable inputs other than Level **1**), and Level **3** (significant unobservable inputs)[156](index=156&type=chunk)[157](index=157&type=chunk)[158](index=158&type=chunk) Financial Assets and Liabilities Measured at Fair Value (March 31, 2023) | Item | Total Fair Value (in thousands) | Level 1 Inputs (in thousands) | Level 2 Inputs (in thousands) | Level 3 Inputs (in thousands) | | :--------------------------------- | :------------------------------ | :---------------------------- | :---------------------------- | :---------------------------- | | Debt securities available-for-sale | $452,195 | $0 | $452,195 | $0 | | Equity investments (recurring) | $54,440 | $272 | $54,168 | $0 | | Interest rate derivative asset | $92,302 | $0 | $92,302 | $0 | | Interest rate derivative liability | $(91,701) | $0 | $(91,701) | $0 | | Equity investments (non-recurring) | $46,567 | $0 | $0 | $43,576 | | Loans measured for impairment | $9,700 | $0 | $0 | $9,700 | [Note 9. Derivatives and Hedging Activities](index=44&type=section&id=Note%209.%20Derivatives%20and%20Hedging%20Activities) - The Company uses interest rate swaps and cap contracts to convert variable-rate commercial loans to fixed-rate for customers and to economically hedge its own exposure[190](index=190&type=chunk) - A three-year interest rate swap was designated as a cash flow hedge in Q4 **2022** to manage exposure to floating rate commercial loans, with changes in fair value reported in other comprehensive income[192](index=192&type=chunk) Derivative Notional Amounts and Fair Values (March 31, 2023 vs. December 31, 2022) | Derivative Type | Notional (in thousands) | Fair Value (Asset) (in thousands) | Fair Value (Liability) (in thousands) | | :--------------------------------- | :------------------------------ | :-------------------------------- | :---------------------------------- | | Derivatives Not Designated as Hedging Instruments (March 31, 2023) | $1,456,913 | $91,659 | $91,701 | | Derivatives Designated as Cash Flow Hedge (March 31, 2023) | $100,000 | $643 | $0 | | Total Derivatives (March 31, 2023) | $1,556,913 | $92,302 | $91,701 | | Total Derivatives (December 31, 2022) | $1,468,245 | $113,420 | $113,473 | [Note 10. Leases](index=46&type=section&id=Note%2010.%20Leases) Lease ROU Assets and Liabilities (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Operating lease ROU assets | $20,081 | $19,055 | | Finance lease ROU asset | $1,474 | $1,532 | | Total lease ROU assets | $21,555 | $20,587 | | Operating lease liabilities | $21,084 | $20,053 | | Finance lease liability | $1,873 | $1,934 | | Total lease liabilities | $22,957 | $21,987 | - The weighted-average remaining lease term for operating leases was **6.67 years** (**6.87 years** at Dec 31, **2022**) and for finance leases was **6.35 years** (**6.60 years** at Dec 31, **2022**)[203](index=203&type=chunk) [Note 11. Variable Interest Entity](index=47&type=section&id=Note%2011.%20Variable%20Interest%20Entity) - The Company consolidates Trident Abstract Title Agency, LLC as a variable interest entity (VIE), being its primary beneficiary[208](index=208&type=chunk) Summarized Financial Information for Consolidated VIE (Trident) (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $27,557 | $30,062 | | Total assets | $28,414 | $31,003 | | Other liabilities | $26,369 | $28,998 | | Net assets | $2,045 | $2,005 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=4&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes financial condition and operating results, highlighting key performance indicators, changes, and strategic responses to market and regulatory developments for Q1 2023 [Financial Summary & Key Developments](index=4&type=section&id=Financial%20Summary%20%26%20Key%20Developments) Selected Financial Highlights (Q1 2023 vs. Q4 2022 vs. Q1 2022) | Metric | March 31, 2023 | December 31, 2022 | March 31, 2022 | | :--------------------------------- | :------------- | :---------------- | :------------- | | Total assets (in thousands) | $13,555,175 | $13,103,896 | $12,164,945 | | Net interest income (in thousands) | $98,802 | $106,488 | $84,227 | | Net income (in thousands) | $27,899 | $53,311 | $25,759 | | Diluted earnings per share | $0.46 | $0.89 | $0.42 | | Net interest margin | 3.34% | 3.64% | 3.18% | | Loans-to-deposits ratio | 100.50% | 102.50% | 90.60% | - Net income available to common stockholders increased to **$26.9 million** (**$0.46** diluted EPS) for Q1 **2023**, up from **$24.8 million** (**$0.42** diluted EPS) in Q1 **2022**[18](index=18&type=chunk) - The Company increased on-balance sheet liquidity by **$328.2 million**, resulting in **$3.6 billion** in total available liquidity and funding capacity at March 31, **2023**[20](index=20&type=chunk) - The Bank received a "**Needs to Improve**" CRA rating due to a Fair Housing Act violation, which restricts certain expansionary activities like mergers and branch establishments[24](index=24&type=chunk)[25](index=25&type=chunk) [Analysis of Net Interest Income](index=8&type=section&id=Analysis%20of%20Net%20Interest%20Income) Net Interest Income Analysis (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Total interest income | $139,034 | $90,983 | | Total interest expense | $40,232 | $6,756 | | Net interest income | $98,802 | $84,227 | | Average yield on interest-earning assets | 4.68% | 3.43% | | Average cost of interest-bearing liabilities | 1.76% | 0.35% | | Net interest margin | 3.34% | 3.18% | - Interest income increased by **$48.0 million**, primarily due to a **$1.28 billion** increase in average interest-earning assets and a higher yield (**4.68%** vs. **3.43%**)[39](index=39&type=chunk) - Interest expense rose by **$33.4 million**, driven by increased cost of funds (**1.76%** vs. **0.35%**) and higher average balances of FHLB advances and interest-bearing deposits[40](index=40&type=chunk) [Comparison of Financial Condition](index=10&type=section&id=Comparison%20of%20Financial%20Condition) - Total assets increased by **$451.3 million** to **$13.56 billion**, primarily due to higher cash (**$328.2 million** increase) and loans (**$121.8 million** increase)[33](index=33&type=chunk) - Deposits increased by **$317.9 million** to **$9.99 billion**, with time deposits rising to **$2.39 billion** (**23.9%** of total deposits) from **$1.54 billion** (**15.9%**)[34](index=34&type=chunk) - The loans-to-deposit ratio improved to **100.5%** from **102.5%** at December 31, **2022**[34](index=34&type=chunk) - Total stockholders' equity increased to **$1.61 billion**, reflecting net income and a **$6.7 million** net gain on available-for-sale debt securities[36](index=36&type=chunk) [Comparison of Operating Results](index=10&type=section&id=Comparison%20of%20Operating%20Results) Net Income Available to Common Stockholders (Q1 2023 vs. Q1 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Net income available to common stockholders | $26,900 | $24,800 | | Diluted earnings per share | $0.46 | $0.42 | - Q1 **2023** net income was reduced by **$5.8 million** (net of tax) due to merger-related expenses, branch consolidation, and net losses on equity and other investments[38](index=38&type=chunk) - Q1 **2022** net income was reduced by **$4.0 million** (net of tax) due to similar merger-related expenses, branch consolidation, and net loss on equity investments[38](index=38&type=chunk) [Provision for Credit Losses](index=11&type=section&id=Provision%20for%20Credit%20Losses) Provision for Credit Losses (Q1 2023 vs. Q1 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Provision for credit losses | $3,013 | $1,851 | | Net loan recoveries | $47 | $92 | | Non-performing loans | $22,400 | $26,900 | - Non-performing loans decreased to **$22.4 million** from **$26.9 million**, mainly due to payoffs and loans returning to accrual status[42](index=42&type=chunk) [Non-interest Income](index=11&type=section&id=Non-interest%20Income) Other Income Components (Q1 2023 vs. Q1 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Total other income | $2,073 | $8,852 | | Net loss on equity investments | $(6,801) | $(2,786) | | Net loss on sale of investments | $(5,300) | N/A (implied from total other income change) | | Bankcard services revenue | $1,330 | $2,963 | | Commercial loan swap income | $701 | $2,781 | | Title-related fees and service charges (Trident) | $2,200 | N/A | - The decrease was largely due to a **$2.2 million** net loss on equity investments and a **$5.3 million** net loss on sale of investments in Q1 **2023**[43](index=43&type=chunk) [Non-interest Expense](index=11&type=section&id=Non-interest%20Expense) Operating Expenses (Q1 2023 vs. Q1 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Total operating expenses | $61,309 | $57,495 | | Compensation and employee benefits | $33,920 | $30,695 | | Professional fees | $5,098 | $3,322 | | Merger related expenses | $22 | $1,965 | | Branch consolidation expense, net | $70 | $402 | - The acquisition of Trident added **$2.1 million** in expenses, and compensation and benefits increased by **$1.9 million** due to inflation adjustments and merit increases[44](index=44&type=chunk) [Income Tax Expense](index=11&type=section&id=Income%20Tax%20Expense) Income Tax Expense (Q1 2023 vs. Q1 2022) | Metric | March 31, 2023 (in thousands) | March 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------ | | Provision for income taxes | $8,654 | $7,974 | | Effective tax rate | 23.7% | 23.6% | [Liquidity and Capital Resources](index=12&type=section&id=Liquidity%20and%20Capital%20Resources) [Liquidity Management](index=12&type=section&id=Liquidity%20Management) - The Company increased on-balance-sheet liquidity and funding capacity to **$3.6 billion** as of March 31, **2023**, in response to recent industry events[49](index=49&type=chunk) - Estimated adjusted uninsured deposits were **$1.9 billion** (**19%** of total deposits) at March 31, **2023**, with on-balance-sheet liquidity and funding capacity representing **192%** of these uninsured deposits[50](index=50&type=chunk) - The Parent Company received **$29.5 million** in dividends from the Bank and held **$53.7 million** in cash for Q1 **2023**[51](index=51&type=chunk) [Off-Balance Sheet Commitments and Contractual Obligations](index=12&type=section&id=Off-Balance%20Sheet%20Commitments%20and%20Contractual%20Obligations) Off-Balance Sheet Commitments (March 31, 2023) | Commitment Type | Amount (in thousands) | | :--------------------------------- | :-------------------- | | Outstanding commitments to originate loans | $318,400 | | Outstanding undrawn lines of credit | $1,730,000 | - Contractual obligations at March 31, **2023**, included **$1.6 billion** in debt obligations and **$21.1 million** in operating lease obligations[57](index=57&type=chunk) [Liquidity Used in Stock Repurchases and Cash Dividends](index=13&type=section&id=Liquidity%20Used%20in%20Stock%20Repurchases%20and%20Cash%20Dividends) - No shares were repurchased under the stock repurchase program in Q1 **2023**; **2,934,438 shares** remained available for repurchase[58](index=58&type=chunk) Cash Dividends Paid (Q1 2023) | Dividend Type | Amount (in thousands) | | :--------------------------------- | :-------------------- | | Common stock dividends | $11,800 | | Preferred stock dividends | $1,000 | - The Company's ability to pay future dividends depends on capital distributions from the Bank, which are subject to regulatory restraints[59](index=59&type=chunk) [Capital Management](index=13&type=section&id=Capital%20Management) - The Company performs quarterly capital stress tests, varying loan growth, earnings, capital market access, credit losses, and mark-to-market losses in the investment portfolio[61](index=61&type=chunk) - Both the Bank and Parent Company maintain adequate capital under all stress scenarios, including a scenario where all investment portfolio losses are realized[61](index=61&type=chunk) [Regulatory Capital Requirements](index=14&type=section&id=Regulatory%20Capital%20Requirements) Regulatory Capital Ratios (March 31, 2023) | Capital Ratio | Company Actual | Company Minimum for Adequacy | Bank Actual | Bank Minimum for Adequacy | Bank Minimum for Well-Capitalized | | :--------------------------------- | :------------- | :--------------------------- | :---------- | :-------------------------- | :-------------------------------- | | Tier 1 capital (to average assets) | 9.23% | 4.00% | 9.00% | 4.00% | 5.00% | | Common equity Tier 1 (to risk-weighted assets) | 10.02% | 7.00% | 11.01% | 7.00% | 6.50% | | Tier 1 capital (to risk-weighted assets) | 11.26% | 8.50% | 11.01% | 8.50% | 8.00% | | Total capital (to risk-weighted assets) | 13.08% | 10.50% | 11.63% | 10.50% | 10.00% | - The Company and the Bank satisfied the criteria to be "**well-capitalized**" under Prompt Corrective Action regulations[64](index=64&type=chunk) - Stockholders' equity to total assets ratio was **11.88%** at March 31, **2023**, down from **12.10%** at December 31, **2022**[64](index=64&type=chunk) [Non-Performing Assets](index=15&type=section&id=Non-Performing%20Assets) Non-Performing Loans and Ratios (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Total non-performing loans and assets | $22,437 | $23,265 | | Allowance for loan credit losses | $60,200 | $56,800 | | Allowance for loan credit losses as a percent of total loans | 0.60% | 0.57% | | Non-performing loans as a percent of total loans receivable | 0.22% | 0.23% | - Non-performing loans decreased by **$0.8 million**, mainly due to payoffs and loans returning to accrual status[67](index=67&type=chunk) Special Mention and Substandard Assets (March 31, 2023 vs. December 31, 2022) | Classification | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Special Mention | $23,980 | $48,214 | | Substandard | $86,765 | $50,776 | [Critical Accounting Policies](index=16&type=section&id=Critical%20Accounting%20Policies) - The methodology for determining the allowance for credit losses is a critical accounting policy, involving complex and subjective judgments and estimates[70](index=70&type=chunk) - This policy is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors[70](index=70&type=chunk) [Impact of New Accounting Pronouncements](index=16&type=section&id=Impact%20of%20New%20Accounting%20Pronouncements) - Adoption of ASU **2022-01** (Fair Value Hedging – Portfolio Layer Method) had no impact as the Company has no fair value hedges[71](index=71&type=chunk) - Adoption of ASU **2022-02** (Troubled Debt Restructurings and Vintage Disclosures) prospectively eliminated TDR accounting guidance for creditors and had no impact on consolidated financial statements[72](index=72&type=chunk) - The Company is evaluating the impact of ASU **2023-02** (Accounting for Investments in Tax Credit Structures) for future periods[74](index=74&type=chunk) [Private Securities Litigation Reform Act Safe Harbor Statement](index=16&type=section&id=Private%20Securities%20Litigation%20Reform%20Act%20Safe%20Harbor%20Statement) - The report contains forward-looking statements based on assumptions about future plans, strategies, and expectations, which are inherently uncertain[75](index=75&type=chunk) - Key risk factors include changes in interest rates, inflation, general economic conditions, potential recession, legislative/regulatory changes, and the quality of loan/investment portfolios[76](index=76&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=17&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Details interest rate risk (IRR) management, objectives, strategies, and modeling to assess interest rate impact on EVE and net interest income [Management of Interest Rate Risk ("IRR")](index=18&type=section&id=Management%20of%20Interest%20Rate%20Risk%20(%22IRR%22)) - The Company's profitability and market value of investment securities are affected by interest rate fluctuations[79](index=79&type=chunk) - The Asset Liability Committee (ALCO) manages IRR through strategies like managing loan profiles, emphasizing core deposits, using interest rate swaps/caps, and managing investment portfolio IRR[80](index=80&type=chunk)[81](index=81&type=chunk) - IRR is monitored using a model that measures changes in Economic Value of Equity (EVE) and net interest income under various interest rate scenarios[82](index=82&type=chunk) Interest Rate Sensitivity Scenarios (March 31, 2023) | Change in Interest Rates (Basis Points) | Economic Value of Equity (Amount, in thousands) | EVE % Change | Net Interest Income (Amount, in thousands) | NII % Change | | :-------------------------------------- | :-------------------------------------------- | :------------- | :----------------------------------------- | :------------- | | 200 | $1,357,372 | (13.0)% | $405,929 | 3.0% | | 100 | $1,445,725 | (7.3)% | $400,033 | 1.5% | | Static | $1,559,654 | — | $394,125 | — | | (100) | $1,700,426 | 9.0% | $384,961 | (2.3)% | | (200) | $1,810,221 | 16.1% | $371,839 | (5.7)% | [Item 4. Controls and Procedures](index=18&type=section&id=Item%204.%20Controls%20and%20Procedures) Addresses effectiveness of disclosure controls and procedures, reporting material changes to internal control over financial reporting [Disclosure Controls and Procedures](index=19&type=section&id=Disclosure%20Controls%20and%20Procedures) - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, **2023**[86](index=86&type=chunk) - Disclosure controls are designed to ensure timely recording, processing, summarizing, and reporting of information required by the Exchange Act[86](index=86&type=chunk) [Changes in Internal Control Over Financial Reporting](index=19&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - No material changes in internal control over financial reporting occurred during Q1 **2023**[87](index=87&type=chunk) PART II. Other Information [Item 1. Legal Proceedings](index=47&type=section&id=Item%201.%20Legal%20Proceedings) Confirms no significant legal proceedings beyond routine, immaterial matters affecting financial condition or operations - The Company is not involved in any material legal proceedings beyond routine business operations[210](index=210&type=chunk) [Item 1A. Risk Factors](index=47&type=section&id=Item%201A.%20Risk%20Factors) Updates risk factors, highlighting new risks from CRA rating, rising interest rates on securities, and banking industry volatility post-bank failures - The "**Needs to Improve**" CRA rating restricts certain expansionary activities, including mergers, acquisitions, and branch establishments[212](index=212&type=chunk)[213](index=213&type=chunk) - Rising interest rates have significantly decreased the value of the Company's fixed-income securities portfolio, and forced sales could result in losses and impair capital[215](index=215&type=chunk) - Recent bank failures have led to increased scrutiny of liquidity, deposit composition (especially uninsured deposits), capital levels, and interest rate risk management, potentially impacting the Company's stock price and financial condition[216](index=216&type=chunk)[218](index=218&type=chunk) - Eroded customer confidence in the banking system due to recent failures could lead to deposit outflows to larger institutions or higher-yielding securities, adversely affecting the Company's liquidity and net interest margin[219](index=219&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Reports no common stock repurchases in Q1 2023, with significant shares remaining available for future repurchases - No common stock shares were repurchased in Q1 **2023**[220](index=220&type=chunk) - **2,934,438 shares** remain available for repurchase under the existing program as of March 31, **2023**[220](index=220&type=chunk) [Item 3. Defaults Upon Senior Securities](index=48&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities for the reporting period - Not Applicable[221](index=221&type=chunk) [Item 4. Mine Safety Disclosures](index=48&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) No mine safety disclosures applicable to the Company for the reporting period - Not Applicable[222](index=222&type=chunk) [Item 5. Other Information](index=48&type=section&id=Item%205.%20Other%20Information) No other information to report for the period - Not Applicable[223](index=223&type=chunk) [Item 6. Exhibits](index=49&type=section&id=Item%206.%20Exhibits) Lists all exhibits filed with the Form 10-Q, including certifications and XBRL financial statements - Exhibits include certifications (CEO, CFO), XBRL formatted financial statements (Consolidated Statements of Financial Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and Notes), and the Cover Page Interactive Data File[225](index=225&type=chunk) Signatures - The report is signed by Christopher D. Maher (Chairman and CEO) and Patrick S. Barrett (EVP and CFO) on May 1, **2023**[228](index=228&type=chunk)