OCEANFIRST FINANCIAL CORP 10-Q

Item 4. Controls and Procedures (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 18 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) September 30, December 31, 2022 2021 (Unaudited) Assets Cash and due from banks $ 170,668 $ 204,949 Debt securities available-for-sale, at estimated fair value 470,300 568,255 Debt securities held-to-maturity, net of allowance for securities credit losses of $ 1,234 at September 30, 2022 and $ 1,467 at December 31, 2021 (estimated fair value of $ 905,426 at September 30, 2022 and $ 1,152,744 at December 31, 2021) 1,027,712 1,139,193 Equity investments 81,722 101,155 Restricted equity investments, at cost 77,556 53,195 Loans receivable, net of allowance for loan credit losses of $ 53,521 at September 30, 2022 and $ 48,850 at December 31, 2021 9,672,488 8,583,352 Loans held-for-sale 3,549 — Interest and dividends receivable 38,388 32,606 Other real estate owned — 106 Premises and equipment, net 127,868 125,828 Bank owned life insurance 261,118 259,207 Assets held for sale 3,216 6,229 Goodwill 506,146 500,319 Core deposit intangible 14,656 18,215 Other assets 228,066 147,007 Total assets $ 12,683,453 $ 11,739,616 Liabilities and Stockholders’ Equity Deposits $ 9,959,469 $ 9,732,816 Federal Home Loan Bank (“FHLB”) advances 514,200 — Securities sold under agreements to repurchase with customers 96,289 118,769 Other borrowings 194,914 229,141 Advances by borrowers for taxes and insurance 25,457 20,305 Other liabilities 352,908 122,032 Total liabilities 11,143,237 10,223,063 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both September 30, 2022 and December 31, 2021 1 1 Common stock, $ 0.01 par value, 150,000,000 shares authorized, 61,872,065 and 61,535,381 shares issued at September 30, 2022 and December 31, 2021, respectively; and 59,138,507 and 59,175,046 shares outstanding at September 30, 2022 and December 31, 2021, respectively 612 611 Additional paid-in capital 1,153,072 1,146,781 Retained earnings 499,967 442,306 Accumulated other comprehensive loss ( 38,496 ) ( 2,821 ) Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") ( 6,797 ) ( 8,615 ) Treasury stock, 2,733,558 and 2,360,335 shares at September 30, 2022 and December 31, 2021, respectively ( 69,106 ) ( 61,710 ) OceanFirst Financial Corp. stockholders’ equity 1,539,253 1,516,553 Non-controlling interest 963 — Total stockholders’ equity 1,540,216 1,516,553 Total liabilities and stockholders’ equity $ 12,683,453 $ 11,739,616 See accompanying Notes to Unaudited Consolidated Financial Statements. 19 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Interest income: Loans $ 100,141 $ 78,889 $ 273,340 $ 233,845 Debt securities 8,479 5,040 23,456 16,379 Equity investments and other 1,879 1,491 4,102 3,411 Total interest income 110,499 85,420 300,898 253,635 Interest expense: Deposits 9,238 5,379 17,596 20,200 Borrowed funds 5,296 2,909 12,313 8,683 Total interest expense 14,534 8,288 29,909 28,883 Net interest income 95,965 77,132 270,989 224,752 Credit loss expense (benefit) 1,016 ( 3,179 ) 4,121 ( 10,259 ) Net interest income after credit loss expense (benefit) 94,949 80,311 266,868 235,011 Other income: Bankcard services revenue 1,509 3,409 7,782 10,052 Trust and asset management revenue 568 584 1,835 1,774 Fees and service charges 6,320 2,973 17,026 10,519 Net gain (loss) on sales of loans 168 ( 15 ) 348 3,180 Net gain (loss) on equity investments 3,362 ( 466 ) ( 7,502 ) 8,397 Net gain (loss) from other real estate operations — ( 3 ) 48 ( 12 ) Income from bank owned life insurance 1,356 1,640 4,881 4,771 Commercial loan swap income 1,471 1,588 6,546 2,772 Other 396 173 579 1,068 Total other income 15,150 9,883 31,543 42,521 Operating expenses: Compensation and employee benefits 34,124 30,730 97,972 89,008 Occupancy 5,288 5,005 15,790 15,380 Equipment 1,150 1,124 3,856 4,008 Marketing 655 496 2,242 1,555 Federal deposit insurance and regulatory assessments 1,757 1,459 5,435 4,422 Data processing 6,560 5,363 18,466 13,796 Check card processing 1,231 1,337 3,728 4,012 Professional fees 2,502 3,089 8,296 8,317 Amortization of core deposit intangible 1,171 1,354 3,559 4,110 Branch consolidation (benefit) expense, net ( 346 ) 4,014 602 5,051 Merger related expenses 298 225 2,459 1,052 Other operating expense 4,607 4,477 12,748 11,315 Total operating expenses 58,997 58,673 175,153 162,026 Income before provision for income taxes 51,102 31,521 123,258 115,506 Provision for income taxes 12,298 7,354 29,212 28,087 Net income 38,804 24,167 94,046 87,419 Net income attributable to non-controlling interest 193 — 715 — Net income attributable to OceanFirst Financial Corp. 38,611 24,167 93,331 87,419 Dividends on preferred shares 1,004 1,004 3,012 3,012 Net income available to common stockholders $ 37,607 $ 23,163 $ 90,319 $ 84,407 Basic earnings per share $ 0.64 $ 0.40 $ 1.54 $ 1.42 Diluted earnings per share $ 0.64 $ 0.39 $ 1.53 $ 1.41 Average basic shares outstanding 58,681 59,311 58,777 59,619 Average diluted shares outstanding 58,801 59,515 58,918 59,862 See accompanying Notes to Unaudited Consolidated Financial Statements. 20 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) Net income $ 38,804 $ 24,167 $ 94,046 $ 87,419 Other comprehensive loss: Net unrealized loss on debt securities (net of tax benefit of $ 3,023 and $ 11,411 in 2022 and ta x benefit of $ 232 and $ 446 in 2021) ( 9,490 ) ( 855 ) ( 35,858 ) ( 1,658 ) Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense o f $ 60 and $ 186 in 2022 and tax expense of $ 66 and $ 209 in 2021) 87 95 265 303 Reclassification adjustment for gains included in net income (net of tax benefit of $ 26 in 2022) — — ( 82 ) — Total other comprehensive loss, net of tax ( 9,403 ) ( 760 ) ( 35,675 ) ( 1,355 ) Total comprehensive income 29,401 23,407 58,371 86,064 Less: comprehensive income attributable to non-controlling interest 193 — 715 — Comprehensive income attributable to OceanFirst Financial Corp. 29,208 23,407 57,656 86,064 Less: Dividends on preferred shares 1,004 1,004 3,012 3,012 Comprehensive income available to common stockholders $ 28,204 $ 22,403 $ 54,644 $ 83,052 See accompanying Notes to Unaudited Consolidated Financial Statements. 21 OceanFirst Financial Corp. Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except per share amounts) (Unaudited) For the Three Months Ended September 30, 2022 and 2021 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Non-Controlling Interest Total Balance at June 30, 2021 $ 1 $ 611 $ 1,143,907 $ 417,658 $ 26 $ ( 6,824 ) $ ( 46,590 ) $ — $ 1,508,789 Net income — — — 24,167 — — — — 24,167 Other comprehensive loss, net of tax — — — — ( 760 ) — — — ( 760 ) Stock compensation — — 1,505 — — — — — 1,505 Allocation of ESOP stock — — 31 — — 305 — — 336 Cash dividend $ 0.17 per share — — — ( 10,100 ) — — — — ( 10,100 ) Exercise of stock options — — 5 — — — — — 5 Repurchase 460,009 shares of common stock — — — — — — ( 9,689 ) — ( 9,689 ) Preferred stock dividend — — — ( 1,004 ) — — — — ( 1,004 ) Balance at September 30, 2021 $ 1 $ 611 $ 1,145,448 $ 430,721 $ ( 734 ) $ ( 6,519 ) $ ( 56,279 ) $ — $ 1,513,249 Balance at June 30, 2022 $ 1 $ 612 $ 1,151,363 $ 474,114 $ ( 29,093 ) $ ( 7,403 ) $ ( 69,106 ) $ 944 $ 1,521,432 Net income — — — 38,611 — — — 193 38,804 Other comprehensive loss, net of tax — — — — ( 9,403 ) — — — ( 9,403 ) Stock compensation — — 1,619 — — — — — 1,619 Allocation of ESOP stock — — ( 5 ) — — 606 — — 601 Cash dividend $ 0.20 per share — — — ( 11,752 ) — — — — ( 11,752 ) Exercise of stock options — — 95 — — — — — 95 Preferred stock dividend — — — ( 1,004 ) — — — — ( 1,004 ) Distributions to non-controlling interest — — — ( 2 ) — — — ( 174 ) ( 176 ) Balance at September 30, 2022 $ 1 $ 612 $ 1,153,072 $ 499,967 $ ( 38,496 ) $ ( 6,797 ) $ ( 69,106 ) $ 963 $ 1,540,216 See accompanying Notes to Unaudited Consolidated Financial Statements. 22 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except per share amounts) (Unaudited) For the Nine Months Ended September 30, 2022 and 2021 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Non-Controlling Interest Total Balance at December 31, 2020 $ 1 $ 609 $ 1,137,715 $ 378,268 $ 621 $ ( 7,433 ) $ ( 25,651 ) $ — $ 1,484,130 Net income — — — 87,419 — — — — 87,419 Other comprehensive loss, net of tax — — — — ( 1,355 ) — — — ( 1,355 ) Stock compensation — — 4,231 — — — — — 4,231 Allocation of ESOP stock — — 142 — — 914 — — 1,056 Cash dividend $ 0.51 per share — — — ( 30,425 ) — — — — ( 30,425 ) Exercise of stock options — 2 3,360 ( 1,529 ) — — — — 1,833 Repurchase 1,460,009 shares of common stock — — — — — — ( 30,628 ) — ( 30,628 ) Preferred stock dividend — — — ( 3,012 ) — — — — ( 3,012 ) Balance at September 30, 2021 $ 1 $ 611 $ 1,145,448 $ 430,721 $ ( 734 ) $ ( 6,519 ) $ ( 56,279 ) $ — $ 1,513,249 Balance at December 31, 2021 $ 1 $ 611 $ 1,146,781 $ 442,306 $ ( 2,821 ) $ ( 8,615 ) $ ( 61,710 ) $ — $ 1,516,553 Net income — — — 93,331 — — — 715 94,046 Other comprehensive loss, net of tax — — — — ( 35,675 ) — — — ( 35,675 ) Stock compensation — — 5,019 — — — — — 5,019 Allocation of ESOP stock — — 30 — — 1,818 — — 1,848 Cash dividend $ 0.54 per share — — — ( 31,767 ) — — — — ( 31,767 ) Exercise of stock options — 1 1,242 ( 897 ) — — — — 346 Repurchase 373,223 shares of common stock — — — — — — ( 7,396 ) — ( 7,396 ) Preferred stock dividend — — — ( 3,012 ) — — — — ( 3,012 ) Acquisition of Trident Abstract Title Agency, LLC (“Trident”) — — — — — — — 836 836 Distributions to non-controlling interest — — — 6 — — — ( 588 ) ( 582 ) Balance at September 30, 2022 $ 1 $ 612 $ 1,153,072 $ 499,967 $ ( 38,496 ) $ ( 6,797 ) $ ( 69,106 ) $ 963 $ 1,540,216 See accompanying Notes to Unaudited Consolidated Financial Statements. 23 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (dollars in thousands) For the Nine Months Ended September 30, 2022 2021 (Unaudited) Cash flows from operating activities: Net income $ 94,046 $ 87,419 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 8,526 6,150 Allocation of ESOP stock 1,848 1,056 Stock compensation 5,019 4,231 Net excess tax expense on stock compensation 215 93 Amortization of servicing asset 77 60 Net premium amortization in excess of discount accretion on securities 5,522 5,719 Net amortization of deferred costs on borrowings 416 688 Amortization of core deposit intangible 3,559 4,110 Net accretion of purchase accounting adjustments ( 7,433 ) ( 10,720 ) Net amortization of deferred costs and discounts on loans 349 606 Provision (benefit) for credit losses 4,121 ( 10,259 ) Net gain on sale of other real estate owned ( 54 ) — Net write down of fixed assets held-for-sale to net realizable value 1,427 3,114 Net (gain) loss on sale of fixed assets ( 52 ) 11 Net loss (gain) on equity securities 7,502 ( 8,397 ) Net gain on sales of loans ( 348 ) ( 3,180 ) Proceeds from sales of residential loans held for sale 10,266 101,992 Mortgage loans originated for sale ( 13,677 ) ( 53,935 ) Increase in value of bank owned life insurance ( 4,881 ) ( 4,771 ) Net gain on sale of assets held for sale ( 1,947 ) ( 318 ) (Increase) decrease in interest and dividends receivable ( 5,782 ) 2,757 Deferred tax (benefit) expense ( 66 ) 570 (Increase) decrease in other assets ( 84,582 ) 29,366 Increase (decrease) in other liabilities 185,927 ( 37,311 ) Total adjustments 115,952 31,632 Net cash provided by operating activities 209,998 119,051 Cash flows from investing activities: Net increase in loans receivable ( 938,915 ) ( 203,104 ) Proceeds from sale of loans 13,388 825 Purchase of residential loan pool ( 161,701 ) ( 219,745 ) Premiums paid on purchased loan pool ( 495 ) ( 6,318 ) Purchase of debt securities available-for-sale ( 64,862 ) ( 200,034 ) Purchase of debt securities held-to-maturity ( 26,666 ) ( 381,032 ) Purchase of equity investments ( 5,935 ) ( 85,077 ) Proceeds from maturities and calls of debt securities available-for-sale 84,200 93,835 Proceeds from maturities and calls of debt securities held-to-maturity 25,126 22,125 Proceeds from sales of debt securities available-for-sale 30,257 — Proceeds from sale of equity investments 19,235 98,776 Principal repayments on debt securities available-for-sale — 114 Principal repayments on debt securities held-to-maturity 111,283 168,059 Proceeds from bank owned life insurance 2,970 9,952 Proceeds from the redemption of restricted equity investments 164,939 1,110 Purchases of restricted equity investments ( 189,300 ) ( 2,069 ) Proceeds from sale of other real estate owned 160 — Proceeds from sales of assets held-for-sale 7,676 2,601 Purchases of premises and equipment ( 14,358 ) ( 26,493 ) Purchases of operating lease equipment ( 4,789 ) — Net cash consideration received for acquisition 38,609 — Net cash used in investing activities ( 909,178 ) ( 726,475 ) 24 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (Continued) (dollars in thousands) For the Nine Months Ended September 30, 2022 2021 (Unaudited) Cash flows from financing activities: Increase in deposits $ 227,192 $ 347,672 (Decrease) increase in short-term borrowings ( 22,480 ) 14,838 Net proceeds from FHLB advances 514,200 — Repayments of other borrowings ( 35,076 ) ( 7,585 ) Increase in advances by borrowers for taxes and insurance 5,152 4,918 Exercise of stock options 346 1,833 Payment of employee taxes withheld from stock awards ( 1,473 ) ( 1,176 ) Purchase of treasury stock ( 7,396 ) ( 30,628 ) Dividends paid ( 34,779 ) ( 33,437 ) Distributions to non-controlling interest ( 582 ) — 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 beginning of period 224,784 1,318,661 Cash and due from banks and restricted cash at end of period $ 170,708 $ 1,007,672 Supplemental Disclosure of Cash Flow Information: Cash and due from banks at beginning of period $ 204,949 $ 1,272,134 Restricted cash at beginning of period 19,835 46,527 Cash and due from banks and restricted cash at beginning of period $ 224,784 $ 1,318,661 Cash and due from banks at end of period $ 170,668 $ 981,126 Restricted cash at end of period 40 26,546 Cash and due from banks and restricted cash at end of period $ 170,708 $ 1,007,672 Cash paid during the period for: Interest $ 27,953 $ 28,009 Income taxes 12,633 38,707 Non-cash activities: Accretion of unrealized loss on securities reclassified to held-to-maturity 451 512 Net loan recoveries ( 335 ) ( 442 ) Transfer of loans receivable to loans held-for-sale 13,178 12,781 Transfer of premises and equipment to assets held-for-sale 2,776 1,476 Acquisition: Non-cash assets acquired: Other current assets $ 238 $ — Premises and equipment 18 — Right of use (“ROU”) asset 779 — Other assets 81 — Total non-cash assets acquired $ 1,116 $ — Liabilities assumed: Lease liability $ 779 $ — Other liabilities 43,937 — Total liabilities assumed $ 44,716 $ — See accompanying Notes to Unaudited Consolidated Financial Statements. 25 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 1. Basis of Presentation The consolidated financial statements include: the accounts of OceanFirst Financial Corp. (the “Company”), its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc.; the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp., Casaba Real Estate Holdings Corporation, and Country Property Holdings, Inc; and a majority controlling interest in Trident Abstract Title Agency, LLC. Certain other subsidiaries were dissolved in 2022 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations that may be expected for the full year 2022 or any other period. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 26 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 2. Business Combinations Trident Acquisition On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60 % in Trident. Trident provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey. The acquisition is complimentary to the Company’s existing consumer and commercial lending business. Total consideration paid was $ 7.1 million and goodwill from the transaction amounted to $ 5.8 million. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values. The excess of consideration paid over the estimated fair value of the net assets acquired, excluding the net assets attributable to the non-controlling interest, has been recorded as goodwill. The Company consolidated Trident’s assets, liabilities and components of comprehensive income within its consolidated results. Thus, the consolidated results include amounts attributable to the Company and the non-controlling interest. Amounts attributable to the non-controlling interest are presented separately as a single line on the Consolidated Statements of Income (net income attributable to non-controlling interest) and the Consolidated Statements of Financial Condition (non-controlling interest in stockholders’ equity). Amounts attributed to the non-controlling interest are based upon the ownership interest in Trident that the Company does not own. For further discussion on the accounting for this arrangement refer to Note 11 Variable Interest Entity, of this Form 10-Q. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed by the Company at the date of the acquisition for Trident, net of total consideration paid (in thousands): At April 1, 2022 Estimated Fair Value Total purchase price: $ 7,084 Assets acquired: Cash and cash equivalents $ 45,693 Other current assets 238 Premises and equipment 18 ROU asset 779 Other assets 81 Total assets acquired 46,809 Liabilities assumed: Lease liability 779 Other liabilities 43,937 Total liabilities assumed 44,716 Net assets acquired $ 2,093 Net assets attributable to non-controlling interest $ 836 Goodwill recorded $ 5,827 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required. 27 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 3. Earnings per Share The following reconciles shares outstanding for basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Weighted average shares outstanding 59,134 59,722 59,245 60,050 Less: Unallocated ESOP shares ( 363 ) ( 353 ) ( 393 ) ( 369 ) Unallocated incentive award shares ( 90 ) ( 58 ) ( 75 ) ( 62 ) Average basic shares outstanding 58,681 59,311 58,777 59,619 Add: Effect of dilutive securities: Incentive awards 120 204 141 243 Average diluted shares outstanding 58,801 59,515 58,918 59,862 For both the three and nine months ended September 30, 2022, antidilutive stock options of 1,552,000 were excluded from the earnings per share calculation. For the three and nine months ended September 30, 2021, antidilutive stock options of 1,573,000 and 1,566,000 , respectively, were excluded from the earnings per share calculation. 28 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 4. Securities The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at September 30, 2022 and December 31, 2021 are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses At September 30, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 107,198 $ ( 8,099 ) $ 99,099 $ — Corporate debt securities 5,000 — ( 628 ) 4,372 — Asset-backed securities 296,228 — ( 21,355 ) 274,873 — Agency commercial mortgage-backed securities (“MBS”) 110,871 — ( 18,915 ) 91,956 — Total debt securities available-for-sale $ 519,297 $ — $ ( 48,997 ) $ 470,300 $ — Debt securities held-to-maturity: State, municipal and sovereign debt obligations $ 263,614 $ — $ ( 31,052 ) $ 232,562 $ ( 63 ) Corporate debt securities 59,000 403 ( 3,135 ) 56,268 ( 1,135 ) Mortgage-backed securities: Agency residential 674,356 103 ( 89,696 ) 584,763 — Agency commercial 7,440 6 ( 279 ) 7,167 — Non-agency commercial 26,973 — ( 2,307 ) 24,666 ( 36 ) Total mortgage-backed securities 708,769 109 ( 92,282 ) 616,596 ( 36 ) Total debt securities held-to-maturity $ 1,031,383 $ 512 $ ( 126,469 ) $ 905,426 $ ( 1,234 ) Total debt securities $ 1,550,680 $ 512 $ ( 175,466 ) $ 1,375,726 $ ( 1,234 ) At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 164,756 $ 1,135 $ ( 471 ) $ 165,420 $ — Corporate debt securities 5,000 42 ( 11 ) 5,031 — Asset-backed securities 298,976 41 ( 1,489 ) 297,528 — Agency commercial MBS 101,142 57 ( 923 ) 100,276 — Total debt securities available-for-sale $ 569,874 $ 1,275 $ ( 2,894 ) $ 568,255 $ — Debt securities held-to-maturity: State, municipal, and sovereign debt obligations $ 281,389 $ 10,185 $ ( 1,164 ) $ 290,410 $ ( 85 ) Corporate debt securities 68,823 1,628 ( 1,279 ) 69,172 ( 1,343 ) Mortgage-backed securities: Agency residential 756,844 6,785 ( 7,180 ) 756,449 — Agency commercial 4,385 7 ( 44 ) 4,348 — Non-agency commercial 32,107 362 ( 104 ) 32,365 ( 39 ) Total mortgage-backed securities 793,336 7,154 ( 7,328 ) 793,162 ( 39 ) Total debt securities held-to-maturity $ 1,143,548 $ 18,967 $ ( 9,771 ) $ 1,152,744 $ ( 1,467 ) Total debt securities $ 1,713,422 $ 20,242 $ ( 12,665 ) $ 1,720,999 $ ( 1,467 ) There was no allowance for securities credit losses on debt securities available-for-sale at September 30, 2022 or December 31, 2021. The unrealized losses across security classes were due to interest rate movements. In addition, the asset-backed securities, which are largely comprised of collateralized-loan obligations, and the corporate debt securities were also impacted by credit spread widening across the fixed income markets. All of these securities are rated investment grade. 29 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Allowance for securities credit losses Beginning balance $ ( 1,293 ) $ ( 1,609 ) $ ( 1,467 ) $ ( 1,715 ) Credit loss benefit 59 106 233 212 Total ending allowance balance $ ( 1,234 ) $ ( 1,503 ) $ ( 1,234 ) $ ( 1,503 ) The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. Credit ratings of BBB- or Baa3 or higher are considered investment grade. Where multiple ratings are available, the Company considers the lowest rating when determining the allowance for securities credit losses. Under this approach, the amortized cost of debt securities held-to-maturity at September 30, 2022, aggregated by credit quality indicator, are as follows (in thousands): Investment Grade Non-Investment Grade/Non-rated Total As of September 30, 2022 State, municipal and sovereign debt obligations $ 263,614 $ — $ 263,614 Corporate debt securities 43,635 15,365 59,000 Non-agency commercial MBS 26,973 — 26,973 Total debt securities held-to-maturity $ 334,222 $ 15,365 $ 349,587 During 2021 and 2013, the Bank transferred $ 12.7 million and $ 536.0 million, respectively, of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 209,000 and $ 13.3 million at the time of transfer in 2021 and 2013, respectively, which continues to be reflected in accumulated other comprehensive loss on the Consolidated Statement of Financial Condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at September 30, 2022 and December 31, 2021 is as follows (in thousands): September 30, December 31, 2022 2021 Amortized cost $ 1,031,383 $ 1,143,548 Net loss on date of transfer from available-for-sale ( 13,556 ) ( 13,556 ) Allowance for securities credit losses ( 1,234 ) ( 1,467 ) Accretion of net unrealized loss on securities reclassified as held-to-maturity 11,119 10,668 Carrying value $ 1,027,712 $ 1,139,193 There were $ 131,000 and $ 23,000 of realized gains on debt securities for the three and nine months ended September 30, 2022. There were no realized gains or losses on debt securities for the three and nine months ended September 30, 2021. The amortized cost and estimated fair value of debt securities at September 30, 2022 by contractual maturity are shown below (in thousands). September 30, 2022 Amortized Cost Estimated Fair Value Less than one year $ 55,326 $ 54,972 Due after one year through five years 166,980 154,459 Due after five years through ten years 225,771 205,348 Due after ten years 282,963 252,395 $ 731,040 $ 667,174 30 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2022, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $ 56.0 million, $ 75.0 million, and $ 296.2 million , respectively, and an estimated fair valu e of $ 52.7 million, $ 68.7 million, and $ 274.9 million , respectively, were callable prior to the maturity date. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments. The estimated fair value of securities pledged for the ability to draw on FHLB advances, access to the Federal Reserve discount window, and other borrowings and for other purposes required by law amounted to $ 866.5 million and $ 1.14 billion at September 30, 2022 and December 31, 2021, respectively, which included $ 105.5 million and $ 142.9 million at September 30, 2022 and December 31, 2021, respectively, pledged as collateral for securities sold under agreements to repurchase. 31 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at September 30, 2022 and December 31, 2021, segregated by the duration of the unrealized losses, are as follows (in thousands): Less than 12 months 12 months or longer Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses At September 30, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 75,464 $ ( 5,924 ) $ 23,635 $ ( 2,175 ) $ 99,099 $ ( 8,099 ) Corporate debt securities 3,496 ( 504 ) 877 ( 124 ) 4,373 ( 628 ) Asset-backed securities 216,926 ( 16,650 ) 57,947 ( 4,705 ) 274,873 ( 21,355 ) Agency commercial MBS 77,878 ( 16,233 ) 14,078 ( 2,682 ) 91,956 ( 18,915 ) Total debt securities available-for-sale 373,764 ( 39,311 ) 96,537 ( 9,686 ) 470,301 ( 48,997 ) Debt securities held-to-maturity: State, municipal and sovereign debt obligations 172,090 ( 22,460 ) 58,649 ( 8,592 ) 230,739 ( 31,052 ) Corporate debt securities 14,142 ( 319 ) 36,516 ( 2,816 ) 50,658 ( 3,135 ) MBS: Agency residential 252,724 ( 26,933 ) 318,925 ( 62,763 ) 571,649 ( 89,696 ) Agency commercial 3,609 ( 242 ) 2,092 ( 37 ) 5,701 ( 279 ) Non-agency commercial 20,512 ( 1,981 ) 4,154 ( 326 ) 24,666 ( 2,307 ) Total MBS 276,845 ( 29,156 ) 325,171 ( 63,126 ) 602,016 ( 92,282 ) Total debt securities held-to-maturity 463,077 ( 51,935 ) 420,336 ( 74,534 ) 883,413 ( 126,469 ) Total debt securities $ 836,841 $ ( 91,246 ) $ 516,873 $ ( 84,220 ) $ 1,353,714 $ ( 175,466 ) At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 82,395 $ ( 471 ) $ — $ — $ 82,395 $ ( 471 ) Corporate debt securities 1,989 ( 11 ) — — 1,989 ( 11 ) Asset-backed securities 279,486 ( 1,489 ) — — 279,486 ( 1,489 ) Agency commercial MBS 80,726 ( 923 ) — — 80,726 ( 923 ) Total debt securities available-for-sale 444,596 ( 2,894 ) — — 444,596 ( 2,894 ) Debt securities held-to-maturity: State, municipal, and sovereign debt obligations 75,329 ( 1,063 ) 4,383 ( 101 ) 79,712 ( 1,164 ) Corporate debt securities 38,304 ( 1,279 ) — — 38,304 ( 1,279 ) MBS: Agency residential 445,399 ( 5,822 ) 50,133 ( 1,358 ) 495,532 ( 7,180 ) Agency commercial 2,255 ( 41 ) 886 ( 3 ) 3,141 ( 44 ) Non-agency commercial 10,722 ( 104 ) — — 10,722 ( 104 ) Total MBS 458,376 ( 5,967 ) 51,019 ( 1,361 ) 509,395 ( 7,328 ) Total debt securities held-to-maturity 572,009 ( 8,309 ) 55,402 ( 1,462 ) 627,411 ( 9,771 ) Total debt securities $ 1,016,605 $ ( 11,203 ) $ 55,402 $ ( 1,462 ) $ 1,072,007 $ ( 12,665 ) The Company concluded that debt securities were not impaired at September 30, 2022 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the change in net unrealized losses were primarily due to changes in the general credit and interest rate environment and not credit quality. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s liquidity plans include adequate sources of liquidity outside the securities portfolio. 32 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Equity Investments At September 30, 2022 and December 31, 2021, the Company held equity investments of $ 81.7 million and $ 101.2 million, respectively. The equity investments primarily comprised of select financial services institutions’ preferred and common stocks and, to a lesser extent, other equity investments in funds and other financial institutions. The realized and unrealized gains or losses on equity securities for the three and nine months ended September 30, 2022 and 2021 are shown in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net gain (loss) on equity investments $ 3,362 $ ( 466 ) $ ( 7,502 ) $ 8,397 Less: Net gains recognized on equity securities sold — — 1,351 8,123 Unrealized gain (loss) recognized on equity securities still held $ 3,362 $ ( 466 ) $ ( 8,853 ) $ 274 33 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 5. Loans Receivable, Net Loans receivable, net at September 30, 2022 and December 31, 2021 consisted of the following (in thousands): September 30, December 31, 2022 2021 Commercial: Commercial real estate – investor $ 5,007,637 $ 4,378,061 Commercial real estate – owner occupied 983,784 1,055,065 Commercial and industrial (1) 652,620 449,224 Total commercial 6,644,041 5,882,350 Consumer: Residential real estate 2,813,209 2,479,701 Home equity loans and lines and other consumer (“other consumer”) 261,510 260,819 Total consumer 3,074,719 2,740,520 Total loans receivable 9,718,760 8,622,870 Deferred origination costs, net of fees 7,249 9,332 Allowance for loan credit losses ( 53,521 ) ( 48,850 ) Total loans receivable, net $ 9,672,488 $ 8,583,352 (1) The commercial and industrial loans balance at September 30, 2022 and December 31, 2021 includes Paycheck Protection Program (“PPP”) loans of $ 3.0 million and $ 22.9 million, respectively. The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company evaluates risk ratings on an ongoing basis. The Company uses the following definitions for risk ratings: Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower. Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection or the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 34 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands): 2022 2021 2020 2019 2018 2017 and prior Revolving lines of credit Total September 30, 2022 Commercial real estate - investor Pass $ 936,746 $ 1,354,997 $ 574,752 $ 507,749 $ 214,473 $ 948,538 $ 374,043 $ 4,911,298 Special Mention — — 193 19,021 9,303 8,628 2,188 39,333 Substandard — — — 20,759 — 35,703 544 57,006 Total commercial real estate - investor 936,746 1,354,997 574,945 547,529 223,776 992,869 376,775 5,007,637 Commercial real estate - owner occupied Pass 67,572 118,428 61,004 115,273 90,050 479,174 9,837 941,338 Special Mention — — — — 757 10,018 — 10,775 Substandard — — 3,750 5,730 4,860 16,231 1,100 31,671 Total commercial real estate - owner occupied 67,572 118,428 64,754 121,003 95,667 505,423 10,937 983,784 Commercial and industrial Pass 45,285 25,101 15,232 17,468 11,921 49,371 481,519 645,897 Special Mention — — — — — 262 1,722 1,984 Substandard — — 106 1,586 316 2,606 125 4,739 Total commercial and industrial 45,285 25,101 15,338 19,054 12,237 52,239 483,366 652,620 Residential real estate (1) Pass 829,041 595,233 431,072 253,353 103,330 597,224 — 2,809,253 Special Mention — — — 131 — 1,690 — 1,821 Substandard — — — — 287 1,848 — 2,135 Total residential real estate 829,041 595,233 431,072 253,484 103,617 600,762 — 2,813,209 Other consumer (1) Pass 19,582 25,869 16,332 15,940 42,026 117,718 21,824 259,291 Special Mention — — — 164 22 231 — 417 Substandard — — — — 18 1,784 — 1,802 Total other consumer 19,582 25,869 16,332 16,104 42,066 119,733 21,824 261,510 Total loans $ 1,898,226 $ 2,119,628 $ 1,102,441 $ 957,174 $ 477,363 $ 2,271,026 $ 892,902 $ 9,718,760 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 35 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Total December 31, 2021 Commercial real estate - investor Pass $ 1,387,753 $ 609,916 $ 535,551 $ 274,662 $ 375,646 $ 800,089 $ 255,613 $ 4,239,230 Special Mention — — 23,794 9,400 2,731 28,663 582 65,170 Substandard — 4,267 28,802 468 8,495 28,228 3,401 73,661 Total commercial real estate - investor 1,387,753 614,183 588,147 284,530 386,872 856,980 259,596 4,378,061 Commercial real estate - owner occupied Pass 116,355 71,196 125,212 91,531 109,232 449,966 10,913 974,405 Special Mention — — 1,365 3,829 479 14,371 2 20,046 Substandard — — 14,166 8,549 5,606 31,576 717 60,614 Total commercial real estate - owner occupied 116,355 71,196 140,743 103,909 115,317 495,913 11,632 1,055,065 Commercial and industrial Pass 42,955 22,573 22,878 16,404 8,671 50,887 271,818 436,186 Special Mention — — 231 350 85 172 3,645 4,483 Substandard — 457 2,281 813 198 2,029 2,777 8,555 Total commercial and industrial 42,955 23,030 25,390 17,567 8,954 53,088 278,240 449,224 Residential real estate (1) Pass 876,135 475,134 288,699 127,756 105,385 602,331 — 2,475,440 Special Mention — 212 — 61 — 1,313 — 1,586 Substandard — — — — 351 2,324 — 2,675 Total residential real estate 876,135 475,346 288,699 127,817 105,736 605,968 — 2,479,701 Other consumer (1) Pass 26,512 19,168 18,179 51,954 17,955 123,783 — 257,551 Special Mention — — — — — 322 — 322 Substandard — — — 18 — 2,928 — 2,946 Total other consumer 26,512 19,168 18,179 51,972 17,955 127,033 — 260,819 Total loans $ 2,449,710 $ 1,202,923 $ 1,061,158 $ 585,795 $ 634,834 $ 2,138,982 $ 549,468 $ 8,622,870 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 36 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) An analysis of the allowance for credit losses on loans for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands): Commercial Real Estate – Investor Commercial Real Estate – Owner Occupied Commercial and Industrial Residential Real Estate Other Consumer Total For the three months ended September 30, 2022 Allowance for credit losses on loans Balance at beginning of period $ 22,608 $ 5,021 $ 5,240 $ 18,196 $ 996 $ 52,061 Credit loss expense (benefit) 82 ( 1,047 ) 554 1,618 1 1,208 Charge-offs ( 3 ) — — — ( 2 ) ( 5 ) Recoveries 3 48 69 44 93 257 Balance at end of period $ 22,690 $ 4,022 $ 5,863 $ 19,858 $ 1,088 $ 53,521 For the three months ended September 30, 2021 Allowance for credit losses on loans Balance at beginning of period $ 33,037 $ 6,350 $ 4,404 $ 8,818 $ 1,267 $ 53,876 Credit loss (benefit) expense ( 9,902 ) 515 1,962 3,081 235 ( 4,109 ) Charge-offs — ( 64 ) ( 50 ) ( 12 ) ( 37 ) ( 163 ) Recoveries 5 26 50 292 176 549 Balance at end of period $ 23,140 $ 6,827 $ 6,366 $ 12,179 $ 1,641 $ 50,153 For the nine months ended September 30, 2022 Allowance for credit losses on loans Balance at beginning of period $ 25,504 $ 5,884 $ 5,039 $ 11,155 $ 1,268 $ 48,850 Credit loss (benefit) expense ( 2,865 ) ( 2,003 ) 720 8,612 ( 128 ) 4,336 Charge-offs ( 3 ) ( 18 ) — ( 56 ) ( 358 ) ( 435 ) Recoveries 54 159 104 147 306 770 Balance at end of period $ 22,690 $ 4,022 $ 5,863 $ 19,858 $ 1,088 $ 53,521 For the nine months ended September 30, 2021 Allowance for credit losses on loans Balance at beginning of period $ 26,703 $ 15,054 $ 5,390 $ 11,818 $ 1,770 $ 60,735 Credit loss (benefit) expense ( 3,336 ) ( 8,225 ) 958 284 ( 705 ) ( 11,024 ) Charge-offs ( 345 ) ( 64 ) ( 83 ) ( 254 ) ( 193 ) ( 939 ) Recoveries 118 62 101 331 769 1,381 Balance at end of period $ 23,140 $ 6,827 $ 6,366 $ 12,179 $ 1,641 $ 50,153 A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral and, therefore, is classified as non-accruing. At September 30, 2022 and December 31, 2021, the Company had collateral dependent loans with an amortized cost balance as follows: commercial real estate - investor of $ 3.9 million and $ 3.6 million, respectively, commercial real estate - owner occupied of $ 2.0 million and $ 11.9 million, respectively, and commercial and industrial of $ 321,000 and $ 277,000 , respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 1.1 million and $ 438,000 at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, the amount of foreclosed residential real estate property held by the Company was $ 0 and $ 106,000 , respectively. 37 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the recorded investment in non-accrual loans, by loan portfolio segment as of September 30, 2022 and December 31, 2021 (in thousands): September 30, December 31, 2022 2021 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 $ 21,498 $ 25,494 At September 30, 2022 and December 31, 2021, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At September 30, 2022, there was one PPP loan for $ 21,000 that was past due greater than 90 days and still accruing interest. Per Small Business Association (“SBA”) guidelines, the SBA will pay accrued interest through the deferral period up to a maximum of 120 days past due. Given these servicing guidelines, PPP loans that are 90 to120 days past due will be reported as accruing loans. At December 31, 2021, there was one loan for $ 46,000 that was 90 days or greater past due and still accruing interest that was fully paid on January 14, 2022. The following table presents the aging of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021 by loan portfolio segment (in thousands): 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total September 30, 2022 Commercial real estate – investor $ — $ 968 $ 2,025 $ 2,993 $ 5,004,644 $ 5,007,637 Commercial real estate – owner occupied 428 5,613 85 6,126 977,658 983,784 Commercial and industrial 1,472 450 — 1,922 650,698 652,620 Residential real estate 6 1,821 2,136 3,963 2,809,246 2,813,209 Other consumer 671 417 1,801 2,889 258,621 261,510 $ 2,577 $ 9,269 $ 6,047 $ 17,893 $ 9,700,867 $ 9,718,760 December 31, 2021 Commercial real estate – investor $ 1,717 $ 102 $ 1,709 $ 3,528 $ 4,374,533 $ 4,378,061 Commercial real estate – owner occupied 599 — 575 1,174 1,053,891 1,055,065 Commercial and industrial 25 151 277 453 448,771 449,224 Residential real estate 9,705 1,586 2,675 13,966 2,465,735 2,479,701 Other consumer 339 322 2,946 3,607 257,212 260,819 $ 12,385 $ 2,161 $ 8,182 $ 22,728 $ 8,600,142 $ 8,622,870 The Company classifies certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Bank retains its security interest in the real estate collateral. At September 30, 2022 and December 31, 2021, TDR loans totaled $ 16.1 million and $ 23.6 million, respectively. At September 30, 2022 and December 31, 2021, there were $ 10.0 million and $ 11.3 million, respectively, of TDR loans included in the non-accrual loan totals. At September 30, 2022 the Company had a $ 667,000 specific reserve allocated to a loan that was classified as a TDR loan. At December 31, 2021, the Company had no specific reserves allocated to loans that were classified as TDR loans. Non-accrual loans which become TDR loans are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has TDR loans classified as accruing loans, which totaled $ 6.1 million and $ 12.3 million at September 30, 2022 and December 31, 2021, respectively. 38 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents information about TDR loans which occurred during the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Number of Loans Pre-modification Recorded Investment Post-modification Recorded Investment Three months ended September 30, 2022 Troubled debt restructurings: Other consumer 3 $ 114 $ 124 Three months ended September 30, 2021 Troubled debt restructurings: Commercial real estate - owner occupied 1 $ 93 $ 110 Nine months ended September 30, 2022 Troubled debt restructurings: Commercial and industrial 1 $ 65 $ 65 Other consumer 6 1,105 1,233 Nine months ended September 30, 2021 Troubled debt restructurings: Commercial real estate – investor 1 $ 4,903 $ 4,903 Commercial real estate - owner occupied 1 93 110 Residential real estate 3 244 336 Other consumer 2 26 33 There were no TDR loans that defaulted during the three and nine months ended September 30, 2022, which were modified within the preceding year. There was one TDR commercial real estate - investor loan for $ 923,000 that defaulted during the three and nine months ended September 30, 2021, which was modified within the preceding year and the loan was subsequently paid in full as of June 30, 2022. Note 6. Deposits The major types of deposits at September 30, 2022 and December 31, 2021 were as follows (in thousands): Type of Account September 30, December 31, 2022 2021 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 Included in time deposits at September 30, 2022 and December 31, 2021 was $ 94.1 million and $ 145.4 million, respectively, in deposits of $250,000 or more. Time deposits also include brokered deposits of $ 828.7 million and $ 25.0 million at September 30, 2022 and December 31, 2021, respectively. 39 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 7. Borrowed Funds Borrowed funds at September 30, 2022 and December 31, 2021 were as follows (in thousands): September 30, December 31, 2022 2021 FHLB advances $ 514,200 $ — 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 At September 30, 2022, there were $ 500.0 million of short-term advances and $ 14.2 million of overnight borrowings from the FHLB, as compared to $ 0 at December 31, 2021. In March 2022, the Company redeemed $ 35.0 million of subordinated debt due September 30, 2026. The debt carried an interest rate of 4.14 % based on a floating rate of three months LIBOR plus 392 basis points. 40 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 8. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means. Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. Assets and Liabilities Measured at Fair Value A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Debt Securities Available-for-Sale Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities. Equity Investments Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from 41 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) observable price changes in orderly transactions for the identical or similar investment of the same issuer (measurement alternative). Interest Rate Derivatives The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty. Other Real Estate Owned and Loans Individually Measured for Impairment Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3). The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): Fair Value Measurements at Reporting Date Using: Total Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs September 30, 2022 Items measured on a recurring basis: Debt securities available-for-sale $ 470,300 $ — $ 470,300 $ — Equity investments 62,343 566 61,777 — Interest rate derivative asset 122,605 — 122,605 — Interest rate derivative liability ( 122,618 ) — ( 122,618 ) — Items measured on a non-recurring basis: Equity investments (1) 19,379 — — 19,379 Loans measured for impairment based on the fair value of the underlying collateral (2) 7,268 — — 7,268 December 31, 2021 Items measured on a recurring basis: Debt securities available-for-sale $ 568,255 $ — $ 568,255 $ — Equity investments 90,726 14,608 73,400 2,718 Interest rate derivative asset 22,787 — 22,787 — Interest rate derivative liability ( 22,855 ) — ( 22,855 ) — Items measured on a non-recurring basis: Equity investments 10,429 — — 10,429 Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral (2) 16,233 — — 16,233 (1) Primarily consists of $ 16.8 million of equity investments measured under the measurement alternative, which included a $ 2.5 million unrealized gain for the three months ended September 30, 2022. (2) Primarily consists of commercial loans, which are collateral dependent. The amounts are based on independent appraisals, which may be adjusted by management for qualitative factors, such as economic factors and estimated liquidation expenses. The range may vary but is generally 0 % to 8 % on the discount for costs to sell and 0 % to 10 % on appraisal adjustments. 42 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table reconciles, for the three and nine months ended September 30, 2022 and 2021, the beginning and ending balances for equity investments that are recognized at fair value on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 Beginning balance $ — $ 2,978 $ 2,718 $ 2,540 Total losses included in earnings — ( 622 ) — ( 184 ) Transfers out of Level 3 — — ( 2,718 ) — Ending balance $ — $ 2,356 $ — $ 2,356 The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers into or out of Level 3 for the three months ended September 30, 2022. During the nine months ended September 30, 2022, the Company executed its right to convert $ 2.7 million of preferred stock into common stock, which resulted in a transfer from Level 3 into Level 1. There were no transfers into or out of Level 3 assets and liabilities in the fair value hierarchy for the three and nine months ended September 30, 2021. Assets and Liabilities Disclosed at Fair Value A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below. Cash and Due from Banks For cash and due from banks, the carrying amount approximates fair value. Debt Securities Held-to-Maturity Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations, known as bond anticipation notes, as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency. Restricted Equity Investments The fair value for Federal Home Loan Bank of New York, Federal Reserve Bank stock, and Atlantic Community Bankers Bank is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities. Loans Receivable and Loans Held-for-Sale Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms. Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. The fair value of loans was measured using the exit price notion. 43 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Deposits Other than Time Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. Time Deposits The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase with Customers Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly. Borrowed Funds Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of September 30, 2022 and December 31, 2021 are presented in the following tables (in thousands): Fair Value Measurements at Reporting Date Using: Book Value Level 1 Inputs Level 2 Inputs Level 3 Inputs September 30, 2022 Financial Assets: Cash and due from banks $ 170,668 $ 170,668 $ — $ — Debt securities held-to-maturity 1,027,712 — 893,044 12,382 Restricted equity investments 77,556 — — 77,556 Loans receivable, net and loans held-for-sale 9,676,037 — — 8,992,317 Financial Liabilities: Deposits other than time deposits 8,555,112 — 8,555,112 — Time deposits 1,404,357 — 1,365,574 — FHLB advances and other borrowings 709,114 — 722,430 — Securities sold under agreements to repurchase with customers 96,289 96,289 — — December 31, 2021 Financial Assets: Cash and due from banks $ 204,949 $ 204,949 $ — $ — Debt securities held-to-maturity 1,139,193 — 1,138,529 14,215 Restricted equity investments 53,195 — — 53,195 Loans receivable, net and loans held-for-sale 8,583,352 — — 8,533,506 Financial Liabilities: Deposits other than time deposits 8,957,815 — 8,957,815 — Time deposits 775,001 — 773,766 — Other borrowings 229,141 — 251,491 — Securities sold under agreements to repurchase with customers 118,769 118,769 — — Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 44 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 45 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 9. Derivatives, Hedging Activities and Other Financial Instruments The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to its customers. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company recognized a gain of $ 19,000 and $ 56,000 in commercial loan swap income resulting from the fair value adjustment for the three and nine months ended September 30, 2022, respectively, as compared to gains of $ 14,000 and $ 55,000 for the three and nine months ended September 30, 2021, respectively. The notional amount of derivatives not designated as hedging instruments was $ 1.30 billion and $ 938.7 million at September 30, 2022 and December 31, 2021, respectively. The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands): Fair Value Balance Sheet Location September 30, December 31, 2022 2021 Other assets $ 122,605 $ 22,787 Other liabilities 122,618 22,855 Credit Risk-Related Contingent Features The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 40,000 and $ 19.8 million at September 30, 2022 and December 31, 2021, respectively. The amount of collateral received from third parties was $ 112.1 million and $ 0 at September 30, 2022 and December 31, 2021, respectively. The amount of collateral posted with third parties and received from third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 122.6 million and $ 22.9 million at September 30, 2022 and December 31, 2021, respectively. 46 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 10. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2038. The Company has one existing finance lease, which has a lease term through 2029. The following table represents the classification of the Company’s right-of-use assets and lease liabilities on the consolidated statements of financial condition (in thousands): September 30, December 31, 2022 2021 Lease ROU Assets Classification Operating lease ROU assets Other assets $ 19,474 $ 17,442 Finance lease ROU asset Premises and equipment, net 1,347 1,495 Total lease ROU assets $ 20,821 $ 18,937 Lease Liabilities Operating lease liabilities (1) Other liabilities $ 20,430 $ 17,982 Finance lease liability Other borrowings 1,750 1,904 Total lease liabilities $ 22,180 $ 19,886 (1) Operating lease liabilities excludes liabilities for future rent and estimated lease termination payments related to closed branches of $ 8.2 million at both September 30, 2022 and December 31, 2021. The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Leases (Topic 842) requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception. September 30, December 31, 2022 2021 Weighted-Average Remaining Lease Term Operating leases 7.04 years 8.22 years Finance lease 6.85 years 7.59 years Weighted-Average Discount Rate Operating leases 2.84 % 2.97 % Finance lease 5.63 5.63 47 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table represents lease expenses and other lease information (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Lease Expense Operating lease expense $ 1,159 $ 1,498 $ 3,857 $ 4,459 Finance lease expense: Amortization of ROU assets 49 50 149 149 Interest on lease liabilities (1) 24 28 76 85 Total $ 1,232 $ 1,576 $ 4,082 $ 4,693 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 955 $ 1,322 $ 3,366 $ 4,119 Operating cash flows from finance leases 24 28 76 85 Financing cash flows from finance leases 52 50 154 146 (1) Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense. Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of September 30, 2022 were as follows (in thousands): Finance Lease Operating Leases For the Twelve Months Ending September 30, 2023 $ 307 $ 4,268 2024 307 3,790 2025 307 3,841 2026 307 3,075 2027 307 2,198 Thereafter 568 5,721 Total 2,103 22,893 Less: Imputed interest ( 353 ) ( 2,463 ) Total lease liabilities $ 1,750 $ 20,430 48 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 11. Variable Interest Entity On April 1, 2022, the Company acquired a 60 % ownership in Trident, and held a variable interest in the entity. Trident meets the definition of a variable interest entity (“VIE”) under ASC 810, Consolidation, for which the Company is considered the primary beneficiary (i.e. the party that has a controlling financial interest). In accordance with ASC 810, Consolidation, the Company has consolidated Trident’s assets and liabilities. For further discussion on the acquisition of Trident refer to Note 2 Business Combinations, to this Form 10-Q. The summarized financial information for the Company’s consolidated VIE consisted of the following (in thousands): As of September 30, 2022 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 As previously disclosed, on November 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Partners Bancorp (“Partners”) and Coastal Merger Sub Corp. (“Merger Sub”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub would merge with and into Partners, with Partners as the surviving entity, and (ii) immediately thereafter, Partners would merge with and into the Company, with the Company as the surviving entity. On November 9, 2022, the Company and Partners entered into a Mutual Termination Agreement (the “Termination Agreement”) pursuant to which, among other things, the Company and Partners mutually agreed to terminate the Merger Agreement and transactions contemplated thereby, which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 9, 2022. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the Merger Agreement. The Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the Merger Agreement and the terminated transaction. 49 Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings 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. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.