Partners Bancorp(PTRS) - 2023 Q3 - Quarterly Report

Financial Performance - Net income attributable to the Company for Q3 2023 was $4.5 million, or $0.25 per share, a 10.4% increase from $4.1 million, or $0.23 per share, in Q3 2022 [257]. - For the nine months ended September 30, 2023, net income attributable to the Company was $11.6 million, or $0.65 per share, a 23.8% increase from $9.4 million, or $0.52 per share, in the same period of 2022 [258]. - The increase in net income was primarily driven by higher net interest income and a lower provision for credit losses, despite a decrease in noninterest income and an increase in noninterest expenses [266]. - The efficiency ratio for Q3 2023 was 63.37%, an improvement from 64.00% in Q3 2022 [264]. - Noninterest income for the three months ended September 30, 2023 decreased by $134 thousand, or 10.8%, compared to the same period in 2022 [346]. Deposits and Loans - The Company's total deposits decreased by 1.2% as of September 30, 2023, compared to December 31, 2022, but increased by 0.3% in the third quarter of 2023 [239]. - Total deposits decreased to $1.32 billion, a decrease of $16.6 million, or 1.2%, due to competitive pressures and negative banking industry developments [267]. - Loans, net of unamortized discounts, increased to $1.30 billion, an increase of $64.6 million, or 5.2%, driven by organic growth and expansion into the Greater Washington market [267]. - The loan-to-deposit ratio increased to 98.1% at September 30, 2023, compared to 92.0% at December 31, 2022 [383]. - Average total deposits decreased by $150.7 million, or 10.2%, for the three months ended September 30, 2023, compared to the same period in 2022 [377]. Interest Income and Margin - The Company recorded a higher net interest margin on a tax-equivalent basis, driven by increased average loan balances and higher yields earned [262]. - The Company's net interest margin increased to 4.09%, representing an increase of 41 basis points for the three months ended September 30, 2023, compared to the same period in 2022 [282]. - Net interest income for the three months ended September 30, 2023, was $15.3 million, an increase of $404 thousand, or 2.7%, compared to the same period in 2022 [278]. - Total interest income increased by $12.0 million, or 26.8%, while total interest expense increased by $6.3 million, or 127.8%, for the nine months ended September 30, 2023 [291]. - The Company anticipates that overall costs of funds will continue to increase throughout the balance of 2023, likely leading to a compression of the net interest margin [304]. Credit Losses and Allowance - The Company maintains an allowance for credit losses to absorb expected losses on loans, with provisions charged against operating earnings as needed [237]. - The provision for credit losses was lower due to more favorable economic assessments and lower net charge-offs, partially offset by a higher required reserve on unfunded credit commitments [262]. - As of September 30, 2023, the company's allowance for credit losses was $16.1 million, representing 1.24% of total outstanding loans, an increase from $14.3 million or 1.16% at December 31, 2022 [321]. - The provision for credit losses in Q3 2023 was $2 thousand, a significant decrease of $417 thousand or 99.5% compared to $419 thousand in Q3 2022 [321]. - The allowance for credit losses as a percentage of nonaccrual loans was 842.51% at September 30, 2023, compared to 664.58% at December 31, 2022 [331]. Market Conditions and Economic Outlook - The Federal Reserve's target rates have increased to a range of 5.25% to 5.50%, impacting the Company's financial results throughout 2023 [245]. - The Company continues to face uncertainties related to inflation, rising interest rates, and potential recessionary conditions in the U.S. economy [245]. - The Company’s financial performance is highly dependent on the business environment in its primary markets and the overall U.S. economy [244]. - The Company is actively monitoring balance sheet trends and liquidity needs in response to recent banking industry developments and economic conditions [240]. - The Company is closely monitoring liquidity impacts from industry developments and market conditions, particularly regarding traditional liquidity sources [403]. Merger and Growth Strategy - The Company anticipates closing the merger with LINK in the fourth quarter of 2023, with shareholders owning approximately 56% and 44% of the combined company, respectively [242]. - The Company is focused on growth in the Greater Washington market and anticipates benefits from the merger with LINK [242]. - The Company has taken preemptive actions to address deposit outflows and maximize funding sources in light of recent banking industry challenges [239]. - The overall increase in loans from December 31, 2022, to September 30, 2023, was primarily due to organic growth, including approximately $4.0 million related to expansion into the Greater Washington market [364]. - The Company aims to manage interest-sensitive assets and liabilities to mitigate risks from interest rate fluctuations and inflation [404].