What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-01 compared with 2022-11-09 · 200 added, 211 removed, 203 unchanged (67% of the section changed)

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At or for the Quarters Ended

(dollars in thousands, except per share amounts) September 30, 2022 June 30, 2022 September 30, 2021

(dollars in thousands, except per share amounts) March 31, 2023 December 31, 2022 March 31, 2022

SELECTED FINANCIAL CONDITION DATA:

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Net interest income 98,802 106,488 84,227

Credit loss expense (benefit) 1,016 1,254 (3,179)

Provision for credit losses 3,013 3,647 1,851

Other income 2,073 27,551 8,852

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Loans-to-deposits ratio (8)

100.50 102.50 90.60

ASSET QUALITY:

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(3) Ratios for each period are based on net income available to common stockholders.

(4) Included a net benefit related to merger related expenses, net branch consolidation (benefit) expense, and gain on equity investments of $3.4 million , or $2.6 million , net of tax expense, for the three months ended September 30, 2022.

Included a net expense related to merger related expenses, net branch consol idation expenses, and net loss on equity investments of $8.8 million , or $6.7 million , net of tax benefit, for the three months ended June 30, 2022.

I ncluded a net expense related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $4.7 million, or $3.6 million, net of tax benefit, for the three months ended September 30, 2021.

(4) Performance ratios for the quarter ended March 31, 2023 included a net expense related to merger related expenses, net branch consolidation expense, net loss on equity investments, and net loss on sale of investments of $7.6 million, or $5.8 million, net of tax benefit.

Performance ratios for the quarter ended December 31, 2022 included a net benefit related to merger related expenses, net branch consolidation expenses, and net gain on equity investments of $16.8 million, or $12.7 million, net of tax expense.

Performance ratio s for the quarter ended March 31, 2022 included a net expense related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $5.2 million, or $4.0 million, net of tax benefit.

(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

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(7) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

(8) Total loans receivable excludes loans held-for-sale.

(9) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure.

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It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

(9) Total loans receivable excludes loans held-for-sale.

(10) Loans acquired from prior bank acquisitions were recorded at fair value.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $13.6 million, $15.5 million, and $21.3 million at September 30, 2022, June 30, 2022 and September 30, 2021, respectively.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $10.5 million, $11.4 million, and $16.9 million at March 31, 2023, December 31, 2022 and March 31, 2022, respectively.

OceanFirst Financial Corp.

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The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings.

The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans, securities and on equity investments, title-related fees and service charges and other fees.

The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans, securities and equity investments, title-related fees and service charges and other fees.

The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees and other general and administrative expenses.

The Company’s results of operations are also significantly affected by competition, general economic conditions, including levels of unemployment and real estate values, as well as changes in market interest rates, inflation, government policies and actions of regulatory agencies.

Key developments relating to the Company’s financial results and corporate activities for the three months ended September 30, 2022 were as follows:

• Strengthening Net Interest Income and Margin:

Net interest income increased by $5.2 million to $96.0 million, from $90.8 million in the prior linked quarter.

Net interest margin increased to 3.36%, as compared to 3.29% in the prior linked quarter, largely driven by the impact of the rising rate environment on interest earning assets, and to a lesser extent an increase in loan balances, partly offset by an increased cost of funds and lower prepayment fees.

• Loan and Deposit Growth:

Loan growth for the quarter was $293.9 million, reflecting originations of $543.8 million.

The committed loan pipeline increased to $439.5 million as of September 30, 2022.

Deposits grew by $128.0 million for the quarter and $226.7 million year-to-date.

• Interchange Fees:

Effective July 1, 2022, the Bank became subject to the Durbin amendment, as contained in the Dodd-Frank Act, which imposes limitations on debit card interchange fees collected by banks with assets of $10 billion or more.

As a result, bankcard services revenue was adversely impacted by $1.7 million.

The Company is strategically positioned to absorb the decreased fee income and continue to grow earnings.

• Partners Bancorp:

On November 9, 2022, the Company and Partners Bancorp (“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 Agreement and Plan of Merger (the “Merger Agreement”) and transactions contemplated thereby.

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.

Net income available to common stockholders for the three and nine months ended September 30, 2022 was $37.6 million and $90.3 million, respectively, or $0.64 and $1.53 per diluted share, as compared to $23.2 million and $84.4 million, or $0.39 and $1.41 per diluted share, for the corresponding prior year periods.

The dividends paid to preferred stockholders were $1.0 million and $3.0 million for the three and nine months ended September 30, 2022 and 2021, respectively.

Net income available to common stockholders for the three and nine months ended September 30, 2022 included merger related expenses of $298,000 and $2.5 million, respectively, net branch consolidation benefit of $346,000 and net branch consolidation expense of $602,000, and gain on equity investments of $3.4 million and net loss on equity investments of $7.5 million.

Net income available to common stockholders for the three and nine months ended September 30, 2021 included merger related expenses of $225,000 and $1.1 million, respectively, net branch consolidation expenses of $4.0 million and $5.1 million, and net loss on equity investments of $466,000 and net gain on equity investments of $8.4 million.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.14% at September 30, 2022.

On October 24, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share.

The dividend, related to the quarter ended September 30, 2022, will be paid on November 18, 2022 to common stockholders of record on November 7, 2022.

Key developments relating to the Company’s financial results and corporate activities for the quarter ended March 31, 2023 were as follows:

• Robust Liquidity Position :

The Company enhanced on-balance sheet liquidity by increasing cash and due from banks by $328.2 million with a corresponding increase in deposits of $317.9 million.

Excluding a $364.2 million increase in brokered time deposits, deposits decreased less than 1%, reflecting stability in the deposit base.

At March 31, 2023, the Company’s loans-to-deposit ratio was 100.5% and the Company had total available liquidity and funding capacity across multiple liquidity sources of $3.6 billion.

• Strong Balance Sheet Quality:

Stockholders’ equity increased to $1.61 billion at March 31, 2023, or 11.88% of total assets, which were adversely impacted this quarter by the increase in on-balance sheet liquidity.

Additionally, the fair values of total debt securities portfolio improved $23.6 million and asset quality remained strong.

• Solid Margin and Earnings:

Net interest margin was 3.34%, an increase from 3.18% in the prior year and a decrease from 3.64% in the prior linked quarter.

The current quarter yield on interest earning assets expanded to 4.68% and the cost of funds increased to 1.76%.

Costs of funds were impacted by the tightening of liquidity across the industry and, to a lesser extent, the increase in on-balance sheet liquidity.

This resulted in net interest income of $98.8 million, an increase of $14.6 million from the prior year and a decrease of $7.7 million from the record prior linked quarter.

While down relative to a very strong linked quarter, the current quarter results compare favorably to the preceding three quarters of 2022.

The current quarter results were impacted by the following matters.

Cost of funds were adversely impacted by the tightening of liquidity across the industry and, to a lesser extent, the Company’s decision to increase liquidity as a result of the recen t industry events.

Also, the Company reviewed its investment securities portfolio and made a strategic decision to sell specific positions in two financial institutions that were adversely impacted or deemed to have an elevated risk profile caused by recent industry events.

This resulted i n a loss of $4.0 million, net of tax, for sales of investments during the current quarter.

The operating results also included strategic investments made to conduct benchmark studies and design detailed strategies to improve future profitability and operational efficiencies.

Net income available to common stockholders for the quarter ended March 31, 2023 increased to $26.9 million, or $0.46 per diluted share, as compared to $24.8 million, or $0.42 per diluted share, for the corresponding prior year period.

The dividends paid to preferred stockholders were $1.0 million for each of the quarters ended March 31, 2023 and 2022, respectively.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 11.88% at March 31, 2023.

On April 20, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share.

The dividend, related to the quarter ended March 31, 2023, will be paid on May 19, 2023 to common stockholders of record on May 8, 2023.

The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing a 1/40th interest in the Series A Preferred Stock.

This dividend will be paid on November 15, 2022 to preferred stockholders of record on October 31, 2022.

This dividend will be paid on May 15, 2023 to preferred stockholders of record on April 28, 2023.

Recent Developments

Recent bank failures have led to uncertainty and volatility in the financial services industry.

In response to these events, the Company took a series of precautionary measures, which included expanding and optimizing its funding and contingency funding sources;

enhanced monitoring of deposit and funding flows;

refreshing stress test scenarios;

and evaluating supplemental liquidity and conservation measures.

Additionally, management executed other timely actions such as re-evaluating the securities portfolio and updating capital and credit stress tests to understand and mitigate other potential risks that were highlighted by these events.

As a result of these procedures, a few key actions taken by the Company included increasing on-balance-sheet liquidity and funding capacity to $3.6 billion;

selling specific positions in two financial institutions and concluding no further impairment existed in the Company’s remaining securities portfolio;

and performing credit stress tests on the Company’s commercial real estate – investor portfolio, which included site visits.

These actions resulted in a robust liquidity position and strong balance sheet.

The Company continues to monitor these events and the impact they may have in future periods, and will respond accordingly.

Refer to the “Liquidity and Capital Resources” section and to Part II.

“Risk Factors” for further information regarding liquidity.

Additionally, the United States government, particularly the Federal Deposit Insurance Company (“FDIC”), U.S Department of Treasury, and the Board of Governors of the Federal Reserve System, have taken measures designed to restore confidence in the financial markets.

Community Reinvestment Act

The Bank received a Community Reinvestment Act (“CRA”) Performance Evaluation from the Office of the Comptroller of the Currency (the “OCC”) with a rating of “Needs to Improve” for the evaluation period January 1, 2018 through December 31, 2020.

Based on its performance on the individual components of the CRA tests, the Bank received a rating of “Low Satisfactory” for the Lending, Investment, and Service Tests.

The Bank’s final overall rating, however, was downgraded to “Needs to Improve” because of a Fair Housing Act violation cited by the OCC.

The Bank’s management has taken actions to address the deficiencies and is committed to taking further voluntary corrective actions.

A “Needs to Improve” rating restricts certain expansionary activities, including certain mergers and acquisitions and the establishment of Bank branches.

The rating will also result in a loss of expedited processing of applications to undertake certain activities.

These restrictions will remain in place until the OCC issues a higher CRA rating following a subsequent CRA examination.

The next CRA examination is expected to commence sometime in 2024 for the CRA examination period 2021 to 2023.

The precise timing of the examination and any results therefrom will not be known until after the completion of the examination.

Analysis of Net Interest Income

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Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

For the three and nine months ended September 30, 2022 interest income included net loan fees of $832,000 and $5.0 million, respectively, as compared to $1.6 million and $4.2 million for the same prior year periods, respectively.

The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 2022 and 2021.

For the three months ended March 31, 2023 and 2022, interest income included net loan fees of $598,000 and $970,000, respectively.

The following tables set forth certain information relating to the Company for the three months ended March 31, 2023 and 2022.

The yields and costs, which are annualized, are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise.

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The yields and costs include certain fees and costs which are considered adjustments to yields.

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(dollars in thousands) Average Balance Interest Average

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Total cost of deposits (including non-interest-bearing deposits) 0.88 % 0.16 %

For the Nine Months Ended September 30,

(dollars in thousands) Average

Balance Interest Average

Interest-earning assets:

Interest-earning deposits and short-term investments $ 73,886 $ 472 0.85 % $ 1,061,419 $ 958 0.12 %

Securities (2)

1,801,978 27,086 2.01 1,452,778 18,832 1.73

Loans receivable, net (3)

Commercial 6,275,836 198,054 4.22 5,270,138 163,315 4.14

Residential real estate 2,685,080 66,899 3.32 2,269,066 59,242 3.48

Other consumer 254,891 8,387 4.40 306,681 11,288 4.92

Allowance for loan credit losses, net of deferred loan costs and fees (42,987) — — (50,912) — —

Loans receivable, net 9,172,820 273,340 3.98 7,794,973 233,845 4.01

Total interest-earning assets 11,048,684 300,898 3.64 10,309,170 253,635 3.29

Non-interest-earning assets 1,191,358 1,264,347

Total assets $ 12,240,042 $ 11,573,517

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Interest-bearing checking $ 4,088,759 6,433 0.21 % $ 3,753,457 10,549 0.38 %

Money market 773,666 1,317 0.23 761,975 823 0.14

Savings 1,617,354 473 0.04 1,571,345 490 0.04

Time deposits 1,060,027 9,373 1.18 1,041,371 8,338 1.07

Total 7,539,806 17,596 0.31 7,128,148 20,200 0.38

FHLB Advances 308,043 3,890 1.69 — — —

Securities sold under agreements to repurchase 105,821 117 0.15 135,754 203 0.20

Other borrowings 205,796 8,306 5.40 228,472 8,480 4.96

Total borrowings 619,660 12,313 2.66 364,226 8,683 3.19

Total interest-bearing liabilities 8,159,466 29,909 0.49 7,492,374 28,883 0.52

Non-interest-bearing deposits 2,352,606 2,416,866

Non-interest-bearing liabilities 193,147 157,821

Total liabilities 10,705,219 10,067,061

Stockholders’ equity 1,534,823 1,506,456

Total liabilities and equity $ 12,240,042 $ 11,573,517

Net interest income $ 270,989 $ 224,752

Net interest rate spread (4)

3.15 % 2.77 %

Net interest margin (5)

3.28 % 2.91 %

Total cost of deposits (including non-interest-bearing deposits) 0.24 % 0.28 %

(1) Average yields and costs are annualized.

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(5) Net interest margin represents net interest income divided by average interest-earning assets.

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets increased by $943.8 million to $12.68 billion at September 30, 2022, from $11.74 billion at December 31, 2021.

Total loans increased by $1.10 billion to $9.72 billion at September 30, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations.

Total debt securities decreased by $209.4 million at September 30, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment.

Other assets increased by $81.1 million to $228.1 million at September 30, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs.

Total liabilities increased by $920.2 million to $11.14 billion at September 30, 2022, from $10.22 billion at December 31, 2021.

Deposits increased by $226.7 million to $9.96 billion at September 30, 2022, from $9.73 billion at December 31, 2021.

Total deposits, excluding time deposits, decreased by $402.7 million to $8.56 billion at September 30, 2022, from $8.96 billion at December 31, 2021, primarily due to the net runoff of interest-bearing checking balances.

Time deposits increased to $1.40 billion at September 30, 2022, from $775.0 million at December 31, 2021, primarily due to an increase in brokered time deposits, which increased to $828.7 million at September 30, 2022 from $25.0 million at December 31, 2021.

The loans-to-deposit ratio at September 30, 2022 was 97.6%, as compared to 88.6% at December 31, 2021.

FHLB advances increased to $514.2 million at September 30, 2022 from $0 at December 31, 2021 to fund liquidity needs.

Other borrowings decreased by $34.2 million to $194.9 million at September 30, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022.

Other liabilities increased by $230.9 million to $352.9 million at September 30, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties.

Stockholders’ equity increased to $1.54 billion at September 30, 2022, as compared to $1.52 billion at December 31, 2021.

Accumulated other comprehensive loss increased by $35.7 million to $38.5 million at September 30, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale which were adversely impacted by the rising interest rate environment.

For the nine months ended September 30, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82.

There were 2,934,438 shares available for repurchase at September 30, 2022 under the existing repurchase program.

Stockholders’ equity per common share increased to $26.04 at September 30, 2022, as compared to $25.63 at December 31, 2021.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2022 and September 30, 2021

These items increased net income by $2.6 million and decreased net income by $8.1 million, net of tax, for the three and nine months ended September 30, 2022, respectively.

Net income available to common stockholders for the three and nine months ended September 30, 2021 included merger related expenses of $225,000 and $1.1 million, respectively, net branch consolidation expenses of $4.0 million and $5.1 million, and a net loss on equity investments of $466,000 and net gain on equity investments of $8.4 million.

These items decreased net income by $3.6 million and increased net income by $1.7 million, net of tax, for the three and nine months ended September 30, 2021, respectively.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets increased by $451.3 million to $13.56 billion, from $13.10 billion, due to higher cash and due from banks and loans, partially offset by lower other assets.

Cash and due from banks increased $328.2 million to $496.2 million, from $167.9 million as the Company strategically increased cash on hand.

Total loans increased by $121.8 million to $10.04 billion, from $9.92 billion, due to loan originations.

Total debt securities increased modestly by $18.8 million, primarily due to purchases earlier in the quarter.

Other assets decreased by $22.6 million to $198.4 million, from $221.1 million, primarily due to a decrease in market values associated with customer interest rate swap programs.

Total liabilities increased by $426.4 million to $11.94 billion, from $11.52 billion, due to an increase in funding across deposits and FHLB advances.

Deposits increased by $317.9 million to $9.99 billion, from $9.68 billion.

Time deposits increased to $2.39 billion, or 23.9% of total deposits, from $1.54 billion, or 15.9% of total deposits, due to increases of $364.2 million in brokered time deposits and $481.0 million in retail time deposits.

The increase in deposits aided in reducing the loans-to-deposit ratio to 100.5%, as compared to 102.5%.

FHLB advances increased by $135.4 million to $1.35 billion from $1.21 billion to increase cash liquidity reserves.

Other liabilities decreased by $38.8 million to $307.3 million, from $346.2 million, primarily due to a decrease in the market values associated with customer interest rate swap programs and related collateral received from counterparties.

Total stockholders’ equity increased to $1.61 billion, as compared to $1.59 billion, reflecting net income available to common stockholders of $26.9 million for the quarter and a net gain on available-for-sale debt securities, which decreased accumulated other comprehensive loss by $6.7 million to $29.3 million, from $36.0 million.

For the quarter ended March 31, 2023, the Company did not repurchase shares under its stock repurchase program.

There were 2,934,438 shares available for repurchase at March 31, 2023 under the existing repurchase program.

Stockholders’ equity per common share increased to $27.07, as compared to $26.81.

Comparison of Operating Results for the Three Months Ended March 31, 2023 and March 31, 2022

Net income available to common stockholders was $26.9 million, or $0.46 per diluted share, as compared to $24.8 million, or $0.42 per diluted share.

Net income available to common stockholders for the quarter ended March 31, 2023 included merger related expenses of $22,000, net branch consolidation expense of $70,000, net loss on equity investments of $2.2 million and net loss on sale of investments of $5.3 million.

These items decreased net income by $5.8 million, net of tax, for the quarter ended March 31, 2023.

Net income available to common stockholders for the quarter ended March 31, 2022 included merger related expenses of $2.0 million, net branch consolidation expenses of $402,000, and a net loss on equity investments of $2.8 million.

These items decreased net income by $4.0 million, net of tax, for the quarter ended March 31, 2022.

Interest Income

Interest income for the three and nine months ended September 30, 2022 increased to $110.5 million and $300.9 million, respectively, as compared to $85.4 million and $253.6 million for the corresponding prior year periods.

Average interest-earning assets increased by $865.6 million and $739.5 million for the three and nine months ended September 30, 2022, respectively, as compared to the same prior year periods, primarily due to loan and securities growth funded by the redeployment of excess cash.

Average loans receivable, net of allowance for loan credit losses, increased by $1.65 billion and $1.38 billion for the three and nine months ended September 30, 2022, respectively, as compared to the same prior year periods.

For the three and nine months ended September 30, 2022, the yield on average interest-earning assets increased to 3.88% and

3.64%, respectively, from 3.24% and 3.29%, for the corresponding prior year periods due to interest earning asset growth funded by the redeployment of excess cash and the rising rate environment.

Interest income increased to $139.0 million from $91.0 million reflecting an increase in average interest-earning assets and higher related yield.

Average interest-earning assets increased by $1.28 billion, primarily due to loan growth.

Average loans receivable, net of allowance for loan credit losses, increased by $1.13 billion, primarily concentrated in commercial loan growth.

The yield on average interest-earning assets increased to 4.68% from 3.43% due to the impact of rising rates on interest-earning assets growth.

Interest Expense

Interest expense for the three and nine months ended September 30, 2022 was $14.5 million and $29.9 million, respectively, as compared to $8.3 million and $28.9 million in the corresponding prior year periods.

For the three months ended September 30, 2022, the cost of average interest-bearing liabilities increased to 0.69% from 0.44% for corresponding prior year period, as a result of higher costs associated with FHLB advances and time deposits issued in an elevated rate environment in 2022.

For the nine months ended September 30, 2022, the cost of average interest-bearing liabilities decreased to 0.49% from 0.52% for the corresponding prior year period, as a result of downward repricing of deposits that began in the prior year and continued through the current year, partly offset by the recent pace of the rising rate environment in the current quarter and increased funding costs on FHLB advances.

The total cost of deposits (including non-interest bearing deposits) was 0.36% and 0.24% for the three and nine months ended September 30, 2022, respectively, as compared to 0.22% and 0.28%, for the same prior year periods.

Interest expense increased to $40.2 million from $6.8 million reflecting an increase in cost of funds and higher average balances.

The cost of average interest-bearing liabilities increased to 1.76% from 0.35%, as a result of higher costs associated with the expansion in FHLB advances and interest-bearing deposits, particularly time deposits, in a rising rate environment.

The total cost of deposits (including non-interest bearing deposits) increased to 0.88% from 0.16% for the prior year.

Net Interest Income and Margin

Net interest income for the three and nine months ended September 30, 2022 increased to $96.0 million and $271.0 million, respectively, as compared to $77.1 million and $224.8 million for the corresponding prior year periods, reflecting an increase in average interest-earning assets and net interest margin.

Net interest margin for the three and nine months ended September 30, 2022 increased to 3.36% and 3.28%, respectively, from 2.93% and 2.91% from the same prior year periods.

The net interest margin expansion was positively impacted by the redeployment of excess cash into loans and the impact of the rising rate environment on interest earning assets, partly offset by an increased cost of funds and the growth in interest-bearing liabilities balances.

Credit Loss Expense (Benefit)

Credit loss expense for the three and nine months ended September 30, 2022 was $1.0 million and $4.1 million, respectively, as compared to a credit loss benefit of $3.2 million and $10.3 million, for the corresponding prior year periods.

The credit loss expense for the three and nine months ended September 30, 2022 was influenced by loan growth, slowing prepayment rates, and increasingly uncertain macro-economic forecasts due to rising interest rates, inflation, and global economic headwinds, partly offset by positive trends in the Company’s criticized and classified assets.

Net loan recoveries were $252,000 and $386,000 for the three months ended September 30, 2022 and 2021, respectively.

Net loan recoveries were $335,000 and $442,000 for the nine months ended September 30, 2022 and 2021, respectively.

Non-performing loans totaled $21.5 million at September 30, 2022, as compared to $30.3 million at September 30, 2021, primarily due to loans that were paid off and partly due to loans that returned to accrual status.

Net interest income increased to $98.8 million from $84.2 million, reflecting an increase in average interest-earning assets and net interest margin.

Net interest margin increased to 3.34% from 3.18%.

Net interest margin increased due to the net impact of the rising rate environment on both interest earning assets and liabilities and total growth.

Provision for Credit Losses

Provision for credit losses was $3.0 million, as compared to $1.9 million.

The provision for credit losses for the quarter was primarily influenced by further slowing of loan prepayment experience and, to a lesser extent, loan growth and modest migrations within risk rating categories.

Net loan recoveries were $47,000 for the quarter, as compared to $92,000 for the prior year period.

Non-performing loans totaled $22.4 million, as compared to $26.9 million, primarily due to loans that were paid off and partly due to loans that returned to accrual status.

Non-interest Income

Other income increased to $15.2 million for the three months ended September 30, 2022, as compared to $9.9 million for the corresponding prior year period.

The increase was driven by a gain on equity investments of $3.4 million as compared to a net loss on equity investments of $466,000 in the prior year period, along with the acquisition of a majority interest in Trident Abstract Title Agency, LLC (“Trident”), which added $3.3 million of title-related fees and service charges.

These increases were partially offset by lower income from bankcard services of $1.9 million, primarily as a result of the impact of the Durbin amendment, which became effective for the Company on July 1, 2022.

Other income decreased to $31.5 million for the nine months ended September 30, 2022, as compared to $42.5 million for the corresponding prior year period.

The decrease was driven by a net loss on equity investments of $7.5 million as compared to a net gain on equity investments of $8.4 million in the prior year period, along with decreases in net gain on sale of loans of $2.8 million, income from bankcard services of $2.3 million primarily as a result of the impact of the Durbin amendment, fees and service charges of $849,000, and Paycheck Protection Program (“PPP”) loan origination referral fees of $800,000.

These decreases were partially offset by the impact of Trident, which added $7.8 million of title-related fees and service charges and an increase in commercial loan swap income of $3.8 million.

Other income decreased to $2.1 million, as compared to $8.9 million in the prior year.

The decrease was driven by a net loss on equity investments of $2.2 million and net loss on sale of investments of $5.3 million, related to the sale of specific positions in two financial institutions which impacted both equity investments and debt securities, as compared to a net loss on equity investments of $2.8 million in the prior year period.

The remaining decrease of $2.1 million was primarily due to decreases in commercial loan swap income of $2.1 million, income from bankcard services of $1.6 million primarily as a result of the Durbin amendment, which became effective for the Company on July 1, 2022, and income from bank owned life insurance of $822,000.

The decrease was partly offset by $2.2 million of title-related fees and service charges related to Trident Abstract Title Agency, LLC (“Trident”), which was acquired on April 1, 2022.

Non-interest Expense

Operating expenses increased to $59.0 million for the three months ended September 30, 2022, as compared to $58.7 million in the same prior year period.

Operating expenses for the three months ended September 30, 2022 and 2021 included $48,000 and $4.2 million, respectively, of merger related expenses and net branch consolidation benefit/expense.

The remaining increase of $4.6 million in operating expenses for the three months ended September 30, 2022, as compared to the corresponding prior year

period, was partly due to the acquisition of a majority interest in Trident, which added $2.8 million of expenses, compensation and benefits expense of $1.8 million primarily related to increased employee medical benefit claims, and data processing expense of $1.2 million, as a result of the migration to a new core banking system.

These increases were partly offset by a decrease in professional fees of $615,000.

Operating expenses increased to $175.2 million for the nine months ended September 30, 2022, as compared to $162.0 million in the same prior year period.

Operating expenses for the nine months ended September 30, 2022 and 2021 included $3.1 million and $6.1 million, respectively, of merger related and net branch consolidation expenses.

The remaining increase of $16.2 million in operating expenses for the nine months ended September 30, 2022, as compared to the corresponding prior year period, was partly due to the impact of Trident, which added $6.0 million of expenses, and increases in compensation and benefits expense of $5.3 million partly relating to the commercial banking strategy and commercial banking hires in expansion markets of Boston and Baltimore, data processing expense of $4.6 million as a result of the migration to a new core banking system, and federal deposit insurance and regulatory assessments of $1.0 million as a result of a higher assessment base and multiplier.

These increases were partly offset by a decrease in amortization of core deposit intangible of $551,000.

Operating expenses increased to $61.3 million, as compared to $57.5 million in the prior year.

Operating expenses for the quarter ended March 31, 2023 and 2022 included $92,000 and $2.4 million, respectively, of merger related expenses and net branch consolidation expense.

The remaining increase of $6.1 million was partly due to the acquisition of Trident, which added $2.1 million of expenses.

Other increases included compensation and benefits expense of $1.9 million primarily related to a mid-year 2022 inflation adjustment and annual merit-related compensation increases, and professional fees of $1.8 million primarily due to the ongoing strategies to improve profitability and operational efficiencies discussed above in ‘Summary’ section of this 10-Q.

Income Tax Expense

The provision for income taxes was $12.3 million and $29.2 million for the three and nine months ended September 30, 2022, respectively, as compared to $7.4 million and $28.1 million for the same prior year periods.

The effective tax rate was 24.1% and 23.7% for the three and nine months ended September 30, 2022, respectively, as compared to 23.3% and 24.3% for the same prior year periods.

The provision for income taxes was $8.7 million, as compared to $8.0 million for the prior year.

The effective tax rate was 23.7%, as compared to 23.6% for the prior year.

Liquidity and Capital Resources

The primary sources of liquidity specifically available to OceanFirst Financial Corp.

are dividends from the Bank, proceeds from sale of investments, and the issuance of preferred and common stock, and debt.

For the nine months ended September 30, 2022, the holding company received dividend payments of $50.0 million from the Bank.

At September 30, 2022, OceanFirst Financial Corp.

held $38.2 million in cash.

Liquidity Management

The Company manages its liquidity and funding needs through its Treasury function and the Asset Liability Committee.

The Company has an internal policy that addresses liquidity and management monitors the adherence to policy limits to satisfy current and future cash flow needs.

The policy includes internal limits, monitoring of key indicators, deposit concentrations, liquidity sources and availability, quarterly stress testing, collateral management, and other qualitative and quantitative metrics.

Management monitors cash on a daily basis to determine the liquidity needs of the Bank and OceanFirst Financial Corp.

(the “Parent Company”), a separate legal entity from the Bank.

Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis.

The Bank and Parent Company continue to maintain adequate liquidity under all stress scenarios.

The Company also has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.

As a result of recent bank failures, the Company took a series of precautionary measures and opted to bolster liquidity by increasing cash on hand, pledging securities to the Federal Reserve Bank (“FRB”) discount window and the FRB’s Bank Term Funding Program (“BTFP”), and testing each line of credit including the FRB discount window and BTFP.

As of March 31, 2023, the Company had on balance-sheet liquidity and funding capacity of $3.6 billion from multiple sources.

Refer to the ‘Recent Developments’ section for further actions taken by management as a result of recent industry events.

The Company has a highly operational and granular deposit base, with long-standing client relationships across multiple customer segments providing stable funding.

The vast majority of the government deposits are protected by FDIC insurance as well as the State of New Jersey under the Government Unit Deposit Protection Act, which is required to be collateralized by the Bank.

At March 31, 2023, the Bank had collateralized $2.2 billion of government deposits.

Excluding the collateralized government deposits and intercompany deposits of fully consolidated subsidiaries, the Bank had estimated adjusted uninsured deposits of $1.9 billion, or 19% of total deposits.

On balance-sheet liquidity and funding capacity represent 192% of the estimated adjusted uninsured deposits.

The primary sources of liquidity specifically available to the Parent Company are dividends from the Bank, proceeds from the sale of investments, and the issuance of debt, preferred and common stock.

For the three months ended March 31, 2023, the Parent Company received dividend payments of $29.5 million from the Bank.

At March 31, 2023, the Parent Company held $53.7 million in cash.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, other borrowings, and proceeds from the sale of loans and investments .

While scheduled payments on loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition.

The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions and access to the Federal Reserve Bank discount window.

At September 30, 2022, the Bank had $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.

The Bank regularly utilizes overnight and short-term borrowings to fund short-term liquidity needs.

The Com pany’s cash needs for the nine months ended September 30, 2022 were primarily satisfied by the net proceeds from FHLB advances, deposits, which included the issuance of brokered time deposits, principal repayments on debt securities and loans, and proceeds from maturities and calls of debt maturities.

The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt and equity securities, redemption of subordinated debt, and dividend payments.

The Company’s cash needs for the nine months ended September 30, 2021 were primarily satisfied by the increase in deposits, proceeds from sales of loans and equity investments, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities.

The cash was principally utilized for purchases of debt and equity securities, a purchase of a residential loan pool, and loan originations.

In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans.

At September 30, 2022, outstanding commitments to originate loans totaled $439.5 million and outstanding undrawn lines of credit totaled $1.72 billion, of which $1.34 billion were commitments to commercial and commercial construction borrowers and $382.3 million were commitments to consumer borrowers and residential construction borrowers.

The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions, access to the FRB discount window, and the BTFP.

The Company has pledged $8.25 billion of loans and securities with the FHLB and FRB to enhance the Company’s borrowing capacity, as noted above, and includes collateral pledged to the FHLB used to obtain municipal letters of credit to collateralize certain municipal deposits.

The Company had $1.35 billion of term advances from the FHLB as of March 31, 2023, as compared to $1.21 billion at December 31, 2022.

As of March 31, 2023, the Company had no overnight borrowings from the FHLB and no outstanding borrowings from the FRB discount window or the BTFP.

The Com pany’s cash needs for the quarter ended March 31, 2023 were primarily satisfied by the increase in deposits and net proceeds from FHLB advances.

The cash was primarily maintained on the balance sheet, to increase liquidity on hand, and utilized for loan originations and purchases of debt securities.

Off-Balance Sheet Commitments and Contractual Obligations

In the normal course of business, the Bank routinely enters into various off-balance sheet commitments, primarily relating to the origination and funding of loans.

At March 31, 2023, outstanding commitments to originate loans totaled $318.4 million and outstanding undrawn lines of credit totaled $1.73 billion, of which $1.36 billion were commitments to commercial and commercial construction borrowers and $376.1 million were commitments to consumer borrowers and residential construction borrowers.

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Since some of the commitments are

expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

Time deposits scheduled to mature in one year or less totaled $866.3 million at September 30, 2022.

At September 30, 2022, the Company also had various contractual obligations, which included debt obligations of $805.4 million, including finance lease obligations of $1.8 million, and an additional $20.4 million in operating lease obligations included in other liabilities.

At March 31, 2023, the Company also had various contractual obligations, which included debt obligations of $1.6 billion, including finance lease obligations of $1.9 million, and an additional $21.1 million in operating lease obligations included in other liabilities.

The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

The Company has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.

Management also monitors cash on a daily basis to determine the liquidity needs of the Company and the Bank.

Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis.

The Company and Bank continue to maintain adequate liquidity under all stress scenarios.

Time deposits scheduled to mature in one year or less totaled $1.93 billion at March 31, 2023.

Liquidity Used in Stock Repurchases and Cash Dividends

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp.

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The repurchased shares are held as treasury stock for general corporate purposes.

For the three months ended September 30, 2022, the Company did not repurchase any shares of its common stock.

For the nine months ended September 30, 2022, the Company repurchased 373,223 shares of its common stock, at a total cost of $7.4 million.

For the three and nine months ended September 30, 2021, the Company repurchased 460,009 and 1.5 million shares of its common stock, respectively, at a total cost of $9.7 million and $30.6 million, respectively.

At September 30, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the first nine months of September 30, 2022 were $31.8 million, as compared to $30.4 million for the same prior year period.

The increase in dividends was a result of an increase in the dividend rate from $0.17 to $0.20 per common share.

On October 24, 2022, the Company’s Board of Directors declared a quarterly cash

dividend of $0.20 per common share.

The dividend is payable on November 18, 2022 to common stockholders of record at the close of business on November 7, 2022.

Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2022 and 2021 were $3.0 million for both periods.

The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on November 15, 2022 to preferred stockholders of record on October 31, 2022.

For the quarter ended March 31, 2023, the Company did not repurchase any shares of its common stock.

At March 31, 2023, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the first three months of March 31, 2023 was $11.8 million.

Cash dividends on preferred stock declared and paid during the first three months of March 31, 2023 was $1.0 million

The Company’s ability to continue to pay dividends remains dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations.

The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company.

If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations.

The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Parent Company.

If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Parent Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations.

Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.

As of September 30, 2022 and December 31, 2021, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

Capital Management

The Company manages its capital sources, uses, and expected future needs through its Treasury function and the Asset Liability Committee.

The Company has an internal policy that addresses capital and management monitors the adherence to policy limits to satisfy current and future capital needs.

The policy includes internal limits, monitoring of key indicators, sources and availability, intercompany transactions, forecasts and stress testing, and other qualitative and quantitative metrics.

Additionally, management performs multiple capital stress test scenarios on a quarterly basis, varying loan growth, earnings, access to the capital markets, credit losses, and more recently, mark-to-market losses in the investment portfolio, including both available-for-sale and held-to-maturity.

The Bank and Parent Company continue to maintain adequate capital under all stress scenarios, including a scenario where all losses related to the investment securities portfolio are realized.

The Bank and the Parent Company also have detailed contingency capital plans and obtain comprehensive reporting of capital trends on a regular basis, which are reviewed by management and the Board.

Regulatory Capital Requirements

As of March 31, 2023 and December 31, 2022, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

Actual For capital adequacy

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corrective action

As of September 30, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,097,654 9.23 % $ 475,574 4.00 % $ 594,467 5.00 %

As of March 31, 2023 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,172,246 9.23 % $ 508,176 4.00 % N/A N/A

Common equity Tier 1 (to risk-weighted assets)

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Total capital (to risk-weighted assets) 1,361,267 13.08 1,093,104 10.50 (1)

999,903 10.00

Tier 1 capital (to average assets) $ 1,106,915 9.30 % $ 475,873 4.00 % N/A N/A

Tier 1 capital (to average assets) $ 1,134,107 9.00 % $ 504,052 4.00 % $ 630,065 5.00 %

Common equity Tier 1 (to risk-weighted assets)

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Total capital (to risk-weighted assets) 1,197,952 11.63 1,081,695 10.50 (1)

1,030,186 10.00

As of December 31, 2022

Tier 1 capital (to average assets) $ 1,027,660 9.08 % $ 452,669 4.00 % $ 565,836 5.00 %

Tier 1 capital (to average assets) $ 1,150,690 9.43 % $ 488,297 4.00 % N/A N/A

Common equity Tier 1 (to risk-weighted assets)

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Total capital (to risk-weighted assets) 1,336,652 12.98 1,080,961 10.50 (1)

884,541 10.00

Tier 1 capital (to average assets) $ 1,044,518 9.22 % $ 453,087 4.00 % N/A N/A

Tier 1 capital (to average assets) $ 1,122,946 9.20 % $ 488,033 4.00 % $ 610,041 5.00 %

Common equity Tier 1 (to risk-weighted assets)

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Total capital (to risk-weighted assets) 1,183,705 11.62 1,069,791 10.50 (1)

1,018,848 10.00

(1) Includes the Capital Conservation Buffer of 2.50%.

The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations.

At September 30, 2022 and December 31, 2021, the Company maintained a stockholders’ equity to total assets ratio of 12.14% and 12.92%, respectively.

At March 31, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 11.88% and 12.10%, respectively.

Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans and other real estate owned.

The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans.

It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.

September 30, December 31,

March 31, December 31,

(dollars in thousands)

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Other consumer 2,731 2,457

Total non-performing loans 21,498 25,494

Other real estate owned — 106

Total non-performing assets $ 21,498 $ 25,600

Total non-performing loans and assets $ 22,437 $ 23,265

PCD loans, net of allowance for loan credit losses

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Non-performing assets as a percent of total assets 0.17 0.18

The Company’s non-performing loans totaled $21.5 million at September 30, 2022, as compared to $25.5 million at December 31, 2021, primarily due to loans that were paid off and partly due to loans that returned to accrual status.

Included in the non-performing loans total was $10.0 million and $11.3 million of troubled debt restructuring (“TDR”) loans at September 30, 2022 and December 31, 2021, respectively.

Included in the non-performing loans total was $3.0 million and $6.5 million of PCD loans at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022, the allowance for loan credit losses totaled $53.5 million, or 0.55% of total loans, as compared to $48.9 million, or 0.57% of total loans, at December 31, 2021.

These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $13.6 million and $18.9 million at September 30, 2022 and December 31, 2021, respectively.

The Company’s non-performing loans totaled $22.4 million at March 31, 2023, as compared to $23.3 million at December 31, 2022, primarily due to loans that were paid off and partly due to loans that returned to accrual status.

At March 31, 2023, total non-performing loans included $6.3 million of troubled debt restructuring (“TDR”) loans that existed prior to adoption of ASU 2022-02 on January 1, 2023.

At December 31, 2022, total non-performing loans included $6.4 million of TDR loans.

Included in the non-performing loans total was $3.9 million of PCD loans at both March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the allowance for loan credit losses totaled $60.2 million, or 0.60% of total loans, as compared to $56.8 million, or 0.57% of total loans, at December 31, 2022.

These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $10.5 million and $11.4 million at March 31, 2023 and December 31, 2022, respectively.

The Company classifies loans and other assets in accordance with regulatory guidelines.

The table below excludes any loans held-for-sale and represents Special Mention and Substandard assets (in thousands):

September 30, December 31,

March 31, December 31,

Special Mention $ 23,980 $ 48,214

Substandard 86,765 50,776

The decreases in special mention and substandard loans were primarily due to improved profitability of borrowers and their ability to service their loans.

The decrease in special mention also included one commercial loan of $14.1 million, which was repaid in full during the nine months ended September 30, 2022.

The change in special mention and substandard loans was due to a migration of certain loans from special mention to substandard risk rating, which primarily included one CRE-Investor Owned loan for $16.9 million.

The remaining increase in substandard loans was primarily due to one CRE-Investor Owned relationship for $7.0 million, which was downgraded to substandard during the quarter ended March 31, 2023.

Critical Accounting Policies

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Accounting Pronouncements Adopted in 2023

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes.

The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance.

This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.

In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restricti on.

In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815):

Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted.

The Company does not expect this standard to have a material impact to the consolidated financial statements.

Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period.

The adoption of this standard did not have an impact on the Company’s consolidated financial statements, as the Company currently does not have any fair value hedges.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326):

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The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

The Company plans to adopt this standard on January 1, 2023 and is currently evaluating the impact of this standard to the consolidated financial statements.

In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815):

The Company adopted this guidance prospectively, and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.

In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restriction.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023.

Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period.

The Company does not expect this standard to have a material impact to the consolidated financial statement s.

Early adoption is permitted.

The Company does not expect this standard to have a material impact to the consolidated financial statements.

In March 2023, FASB issued ASU 2023-02, “Investments - Equity Method and Joint Venture (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”.

The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023.

Early adoption is permitted.

The Company is currently evaluating the impact of this standard on the consolidated financial statements.

Private Securities Litigation Reform Act Safe Harbor Statement

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(the “Company”).

These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.

These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,”

“opportunity,” “potential,” or similar expressions or expressions of confidence.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.

Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

implications arising from the termination of the proposed merger with Partners Bancorp;

the impact of the COVID-19 or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, volatility and deterioration in the credit and equity markets, our ability to access low-cost funding, monetary and fiscal policies of the U.S.

the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters, potential increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S.

Government including policies of the U.S.

Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in accounting principles, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks;

and the Bank’s ability to successfully integrate acquired operations.

Treasury and the Board of Governors of the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, changes in liquidity, including the size and composition of the Company’s deposit portfolio, including the percentage of uninsured deposits in the portfolio, competition, demand for financial services in the Company’s market area, changes in consumer spending, borrowing and savings habits, changes in accounting principles, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks, the failure to maintain current technologies, failure to retain or attract employees and the Bank’s ability to successfully integrate acquired operations.

These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, under Item 1A - Risk Factors and elsewhere, and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis