OCEANFIRST FINANCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL SUMMARY (1) At or for the Quarters Ended (dollars in thousands, except per share amounts) March 31, 2023 December 31, 2022 March 31, 2022 SELECTED FINANCIAL CONDITION DATA: Total assets $ 13,555,175 $ 13,103,896 $ 12,164,945 Loans receivable, net of allowance for loan credit losses 9,986,949 9,868,718 9,065,679 Deposits 9,993,095 9,675,206 10,056,233 Total stockholders’ equity 1,610,371 1,585,464 1,519,334 SELECTED OPERATING DATA: Net interest income 98,802 106,488 84,227 Provision for credit losses 3,013 3,647 1,851 Other income 2,073 27,551 8,852 Operating expenses 61,309 59,728 57,495 Net income 27,899 53,311 25,759 Net income attributable to OceanFirst Financial Corp. 27,883 53,272 25,759 Net income available to common stockholders 26,879 52,268 24,755 Diluted earnings per share 0.46 0.89 0.42 SELECTED FINANCIAL RATIOS: Stockholders’ equity per common share at end of period 27.07 26.81 25.58 Cash dividend per share 0.20 0.20 0.17 Dividend payout ratio per common share 43.48 % 22.47 % 40.48 % Stockholders’ equity to total assets 11.88 12.10 12.49 Return on average assets (2) (3) (4) 0.82 1.62 0.84 Return on average stockholders’ equity (2) (3) (4) 6.77 13.25 6.57 Net interest rate spread (5) 2.92 3.37 3.08 Net interest margin (2) (6) 3.34 3.64 3.18 Operating expenses to average assets (2) (4) 1.88 1.85 1.95 Efficiency ratio (4) (7) 60.78 44.56 61.77 Loans-to-deposits ratio (8) 100.50 102.50 90.60 ASSET QUALITY: Non-performing loans (9) $ 22,437 $ 23,265 $ 26,925 Non-performing assets (9) 22,437 23,265 27,031 Allowance for loan credit losses as a percent of total loans receivable (8) (10) 0.60 % 0.57 % 0.56 % Allowance for loan credit losses as a percent of total non-performing loans (9) (10) 268.28 244.25 187.92 Non-performing loans as a percent of total loans receivable (8) (9) 0.22 0.23 0.30 Non-performing assets as a percent of total assets (9) 0.17 0.18 0.22 (1) With the exception of end of quarter ratios, all ratios are based on average daily balances. (2) Ratios are annualized. (3) Ratios for each period are based on net income available to common stockholders. (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. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets. (7) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income. 4 Table of Contents (8) Total loans receivable excludes loans held-for-sale. (9) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans generally consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest. (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 $10.5 million, $11.4 million, and $16.9 million at March 31, 2023, December 31, 2022 and March 31, 2022, respectively. 5 Table of Contents Summary OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. 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 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 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 May 15, 2023 to preferred stockholders of record on April 28, 2023. 6 Table of Contents 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. Item 1A. “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. 7 Table of Contents Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. 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 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. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields. For the Three Months Ended March 31, 2023 2022 (dollars in thousands) Average Balance Interest Average Yield/ Cost (1) Average Balance Interest Average Yield/ Cost (1) Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 129,740 $ 938 2.93 % $ 88,826 $ 37 0.17 % Securities (2) 1,955,399 16,376 3.40 1,846,452 8,478 1.86 Loans receivable, net (3) Commercial 6,840,006 92,780 5.50 6,037,639 58,355 3.92 Residential real estate 2,872,049 25,161 3.50 2,542,655 21,339 3.36 Home equity loans and lines and other consumer (“other consumer”) 263,404 3,779 5.82 257,024 2,774 4.38 Allowance for loan credit losses, net of deferred loan costs and fees (50,554) — — (40,457) — — Loans receivable, net 9,924,905 121,720 4.96 8,796,861 82,468 3.79 Total interest-earning assets 12,010,044 139,034 4.68 10,732,139 90,983 3.43 Non-interest-earning assets 1,234,549 1,215,071 Total assets $ 13,244,593 $ 11,947,210 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing checking $ 3,863,338 6,269 0.66 % $ 4,377,368 2,149 0.20 % Money market 705,631 1,759 1.01 788,063 318 0.16 Savings 1,369,118 334 0.10 1,609,415 125 0.03 Time deposits 1,826,662 12,968 2.88 767,709 1,449 0.77 Total 7,764,749 21,330 1.11 7,542,555 4,041 0.22 Federal Home Loan Bank (“FHLB”) advances 1,222,791 14,614 4.85 29,433 35 0.48 Securities sold under agreements to repurchase 71,898 90 0.51 117,623 42 0.14 Other borrowings 212,159 4,198 8.02 228,522 2,638 4.68 Total borrowings 1,506,848 18,902 5.09 375,578 2,715 2.93 Total interest-bearing liabilities 9,271,597 40,232 1.76 7,918,133 6,756 0.35 Non-interest-bearing deposits 2,028,507 2,401,797 Non-interest-bearing liabilities 334,812 99,441 Total liabilities 11,634,916 10,419,371 Stockholders’ equity 1,609,677 1,527,839 Total liabilities and equity $ 13,244,593 $ 11,947,210 Net interest income $ 98,802 $ 84,227 Net interest rate spread (4) 2.92 % 3.08 % Net interest margin (5) 3.34 % 3.18 % Total cost of deposits (including non-interest-bearing deposits) 0.88 % 0.16 % (1) Average yields and costs are annualized. (2) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for securities credit losses. (3) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans. (4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. 8 Table of Contents 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 General 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 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 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 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. 9 Table of Contents 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 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 $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 $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. 10 Table of Contents Liquidity and Capital Resources 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, 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 11 Table of Contents 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. 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. 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. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. 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 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. 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. 12 Table of Contents 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 purposes To be well-capitalized under prompt corrective action As of March 31, 2023 Amount Ratio Amount Ratio Amount Ratio Company: 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) 1,043,141 10.02 728,736 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,172,246 11.26 884,894 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,361,267 13.08 1,093,104 10.50 (1) N/A N/A Bank: 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) 1,134,107 11.01 721,130 7.00 (1) 669,621 6.50 Tier 1 capital (to risk-weighted assets) 1,134,107 11.01 875,658 8.50 (1) 824,149 8.00 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 Company: 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) 1,021,774 9.93 720,641 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,150,690 11.18 875,064 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,336,652 12.98 1,080,961 10.50 (1) N/A N/A Bank: 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) 1,122,946 11.02 713,194 7.00 (1) 662,251 6.50 Tier 1 capital (to risk-weighted assets) 1,122,946 11.02 866,021 8.50 (1) 815,078 8.00 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 March 31, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 11.88% and 12.10%, respectively. 13 Table of Contents Non-Performing Assets 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. March 31, December 31, 2023 2022 (dollars in thousands) Non-performing loans: Commercial real estate – investor $ 13,643 $ 10,483 Commercial real estate – owner occupied 251 4,025 Commercial and industrial 162 331 Residential real estate 5,650 5,969 Other consumer 2,731 2,457 Total non-performing loans and assets $ 22,437 $ 23,265 PCD loans, net of allowance for loan credit losses $ 20,513 $ 27,129 Delinquent loans 30-89 days $ 11,232 $ 14,148 Allowance for loan credit losses as a percent of total loans 0.60 % 0.57 % Allowance for loan credit losses as a percent of total non-performing loans 268.28 244.25 Non-performing loans as a percent of total loans receivable 0.22 0.23 Non-performing assets as a percent of total assets 0.17 0.18 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): March 31, December 31, 2023 2022 Special Mention $ 23,980 $ 48,214 Substandard 86,765 50,776 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. 14 Table of Contents Critical Accounting Policies Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors. Impact of New Accounting Pronouncements Accounting Pronouncements Adopted in 2023 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 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): Troubled Debt Restructurings and Vintage Disclosures”. The amendments in this ASU were issued to (1) eliminate accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty; (2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, 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 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 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 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 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. 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 In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” 15 Table of Contents “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: 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 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. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 16 Table of Contents