OCEANFIRST FINANCIAL CORP 10-Q

Item 4. Controls and Procedures (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 18 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) March 31, December 31, 2023 2022 (Unaudited) Assets Cash and due from banks $ 496,193 $ 167,946 Debt securities available-for-sale, at estimated fair value 452,195 457,648 Debt securities held-to-maturity, net of allowance for securities credit losses of $ 1,043 at March 31, 2023 and $ 1,128 at December 31, 2022 (estimated fair value of $ 1,149,673 at March 31, 2023 and $ 1,110,041 at December 31, 2022) 1,245,424 1,221,138 Equity investments 101,007 102,037 Restricted equity investments, at cost 115,750 109,278 Loans receivable, net of allowance for loan credit losses of $ 60,195 at March 31, 2023 and $ 56,824 at December 31, 2022 9,986,949 9,868,718 Loans held-for-sale 1,885 690 Interest and dividends receivable 47,342 44,704 Premises and equipment, net 126,019 126,705 Bank owned life insurance 262,654 261,603 Assets held for sale 2,719 2,719 Goodwill 506,146 506,146 Core deposit intangible 12,470 13,497 Other assets 198,422 221,067 Total assets $ 13,555,175 $ 13,103,896 Liabilities and Stockholders’ Equity Deposits $ 9,993,095 $ 9,675,206 Federal Home Loan Bank (“FHLB”) advances 1,346,566 1,211,166 Securities sold under agreements to repurchase with customers 70,938 69,097 Other borrowings 195,663 195,403 Advances by borrowers for taxes and insurance 31,198 21,405 Other liabilities 307,344 346,155 Total liabilities 11,944,804 11,518,432 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both March 31, 2023 and December 31, 2022 1 1 Common stock, $ 0.01 par value, 150,000,000 shares authorized, 62,219,644 and 61,877,686 shares issued at March 31, 2023 and December 31, 2022, respectively; and 59,486,086 and 59,144,128 shares outstanding at March 31, 2023 and December 31, 2022, respectively 613 612 Additional paid-in capital 1,158,007 1,154,821 Retained earnings 554,941 540,507 Accumulated other comprehensive loss ( 29,315 ) ( 35,982 ) Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") ( 5,588 ) ( 6,191 ) Treasury stock, 2,733,558 shares at both March 31, 2023 and December 31, 2022 ( 69,106 ) ( 69,106 ) OceanFirst Financial Corp. stockholders’ equity 1,609,553 1,584,662 Non-controlling interest 818 802 Total stockholders’ equity 1,610,371 1,585,464 Total liabilities and stockholders’ equity $ 13,555,175 $ 13,103,896 See accompanying Notes to Unaudited Consolidated Financial Statements. 19 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the Three Months Ended March 31, 2023 2022 (Unaudited) Interest income: Loans $ 121,720 $ 82,468 Debt securities 14,286 7,504 Equity investments and other 3,028 1,011 Total interest income 139,034 90,983 Interest expense: Deposits 21,330 4,041 Borrowed funds 18,902 2,715 Total interest expense 40,232 6,756 Net interest income 98,802 84,227 Provision for credit losses 3,013 1,851 Net interest income after provision for credit losses 95,789 82,376 Other income: Bankcard services revenue 1,330 2,963 Trust and asset management revenue 612 609 Fees and service charges 5,159 3,060 Net gain on sales of loans 20 177 Net loss on equity investments ( 6,801 ) ( 2,786 ) Net loss from other real estate operations — ( 2 ) Income from bank owned life insurance 1,281 2,103 Commercial loan swap income 701 2,781 Other ( 229 ) ( 53 ) Total other income 2,073 8,852 Operating expenses: Compensation and employee benefits 33,920 30,695 Occupancy 5,239 5,744 Equipment 1,205 1,370 Marketing 982 616 Federal deposit insurance and regulatory assessments 1,749 1,890 Data processing 6,154 5,736 Check card processing 1,281 982 Professional fees 5,098 3,322 Amortization of core deposit intangible 1,027 1,210 Branch consolidation expense, net 70 402 Merger related expenses 22 1,965 Other operating expense 4,562 3,563 Total operating expenses 61,309 57,495 Income before provision for income taxes 36,553 33,733 Provision for income taxes 8,654 7,974 Net income 27,899 25,759 Net income attributable to non-controlling interest 16 — Net income attributable to OceanFirst Financial Corp. 27,883 25,759 Dividends on preferred shares 1,004 1,004 Net income available to common stockholders $ 26,879 $ 24,755 Basic earnings per share $ 0.46 $ 0.42 Diluted earnings per share $ 0.46 $ 0.42 Average basic shares outstanding 58,774 58,739 Average diluted shares outstanding 58,918 58,943 See accompanying Notes to Unaudited Consolidated Financial Statements. 20 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Three Months Ended March 31, 2023 2022 (Unaudited) Net income $ 27,899 $ 25,759 Other comprehensive income: Net unrealized gain (loss) on debt securities (net of tax expense of $ 1,766 in 2023 and tax benefit of $ 3,928 in 2022) 5,547 ( 12,372 ) Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $ 56 in 2023 and $ 65 in 2022) 79 89 Unrealized gain on derivative hedges (net of tax expense of $ 131 in 2023) 412 — Reclassification adjustment for losses included in net income (net of tax expense of $ 201 in 2023 and benefit of $ 21 in 2022) 629 ( 66 ) Total other comprehensive income (loss), net of tax 6,667 ( 12,349 ) Total comprehensive income 34,566 13,410 Less: comprehensive income attributable to non-controlling interest 16 — Comprehensive income attributable to OceanFirst Financial Corp. 34,550 13,410 Less: Dividends on preferred shares 1,004 1,004 Total comprehensive income available to common stockholders $ 33,546 $ 12,406 See accompanying Notes to Unaudited Consolidated Financial Statements. 21 OceanFirst Financial Corp. Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except per share amounts) (Unaudited) For the Three Months Ended March 31, 2023 and 2022 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Non-Controlling Interest Total Balance at December 31, 2021 $ 1 $ 611 $ 1,146,781 $ 442,306 $ ( 2,821 ) $ ( 8,615 ) $ ( 61,710 ) $ — $ 1,516,553 Net income — — — 25,759 — — — — 25,759 Other comprehensive loss, net of tax — — — — ( 12,349 ) — — — ( 12,349 ) Stock compensation — — 1,552 — — — — — 1,552 Allocation of ESOP stock — — 65 — — 606 — — 671 Cash dividend $ 0.17 per share — — — ( 9,993 ) — — — — ( 9,993 ) Exercise of stock options — 1 1,105 ( 817 ) — — — — 289 Repurchase 100,444 shares of common stock — — — — — — ( 2,144 ) — ( 2,144 ) Preferred stock dividend — — — ( 1,004 ) — — — — ( 1,004 ) Balance at March 31, 2022 $ 1 $ 612 $ 1,149,503 $ 456,251 $ ( 15,170 ) $ ( 8,009 ) $ ( 63,854 ) $ — $ 1,519,334 Balance at December 31, 2022 $ 1 $ 612 $ 1,154,821 $ 540,507 $ ( 35,982 ) $ ( 6,191 ) $ ( 69,106 ) $ 802 $ 1,585,464 Net income — — — 27,883 — — — 16 27,899 Other comprehensive income, net of tax — — — — 6,667 — — — 6,667 Stock compensation — — 1,828 — — — — — 1,828 Allocation of ESOP stock — — 61 — — 603 — — 664 Cash dividend $ 0.20 per share — — — ( 11,755 ) — — — — ( 11,755 ) Exercise of stock options — 1 1,297 ( 690 ) — — — — 608 Preferred stock dividend — — — ( 1,004 ) — — — — ( 1,004 ) Balance at March 31, 2023 $ 1 $ 613 $ 1,158,007 $ 554,941 $ ( 29,315 ) $ ( 5,588 ) $ ( 69,106 ) $ 818 $ 1,610,371 See accompanying Notes to Unaudited Consolidated Financial Statements. 22 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (dollars in thousands) For the Three Months Ended March 31, 2023 2022 (Unaudited) Cash flows from operating activities: Net income $ 27,899 $ 25,759 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 3,094 2,759 Allocation of ESOP stock 664 671 Stock compensation 1,828 1,552 Net excess tax expense on stock compensation 250 214 Amortization of servicing asset 15 14 Net premium amortization in excess of discount accretion on securities 1,093 1,859 Net amortization of deferred costs on borrowings 147 137 Amortization of core deposit intangible 1,027 1,210 Net accretion of purchase accounting adjustments ( 1,267 ) ( 3,086 ) Net amortization of deferred fees/costs and premiums/discounts on loans ( 138 ) 255 Provision for credit losses 3,013 1,851 Net write down of fixed assets held-for-sale to net realizable value — 1,404 Net gain on sale of fixed assets ( 6 ) — Net loss on sales of available-for-sale securities 697 — Net loss on equity investments 6,801 2,786 Net gain on sales of loans ( 20 ) ( 177 ) Proceeds from sales of residential loans held for sale 3,881 724 Mortgage loans originated for sale ( 5,056 ) ( 703 ) Increase in value of bank owned life insurance ( 1,281 ) ( 2,103 ) Net gain on sale of assets held for sale — ( 1,200 ) Increase in interest and dividends receivable ( 2,638 ) ( 747 ) Deferred tax benefit ( 16 ) ( 30 ) Decrease (increase) in other assets 23,221 ( 14,777 ) (Decrease) increase in other liabilities ( 38,834 ) 39,272 Total adjustments ( 3,525 ) 31,885 Net cash provided by operating activities 24,374 57,644 Cash flows from investing activities: Net increase in loans receivable ( 120,505 ) ( 331,568 ) Proceeds from sale of loans — 12,167 Purchase of residential loan pool — ( 161,701 ) Premiums paid on purchased loan pool — ( 495 ) Purchase of debt securities available-for-sale ( 4,287 ) ( 47,817 ) Purchase of debt securities held-to-maturity ( 55,444 ) ( 16,397 ) Purchase of equity investments ( 6,736 ) ( 2,292 ) Proceeds from maturities and calls of debt securities available-for-sale 15,500 45,000 Proceeds from maturities and calls of debt securities held-to-maturity 6,980 12,305 Proceeds from sales of debt securities available-for-sale 1,300 22,857 Proceeds from sale of equity investments 661 4,579 Principal repayments on debt securities held-to-maturity 24,273 43,213 Proceeds from bank owned life insurance 230 2,189 Proceeds from the redemption of restricted equity investments 58,129 26,591 Purchases of restricted equity investments ( 64,596 ) ( 30,100 ) Proceeds from sales of assets held-for-sale — 4,492 Purchases of premises and equipment ( 2,153 ) ( 7,708 ) Net cash used in investing activities ( 146,648 ) ( 424,685 ) 23 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (Continued) (dollars in thousands) For the Three Months Ended March 31, 2023 2022 (Unaudited) Cash flows from financing activities: Increase in deposits $ 317,973 $ 323,641 Increase (decrease) in short-term borrowings 1,814 ( 987 ) Net proceeds from FHLB advances 135,400 75,002 Repayments of other borrowings — ( 35,026 ) Increase in advances by borrowers for taxes and insurance 9,793 5,093 Exercise of stock options 608 289 Payment of employee taxes withheld from stock awards and phantom stock units ( 2,308 ) ( 1,438 ) Purchase of treasury stock — ( 2,144 ) Dividends paid ( 12,759 ) ( 10,997 ) Net cash provided by financing activities 450,521 353,433 Net increase (decrease) in cash and due from banks and restricted cash 328,247 ( 13,608 ) Cash and due from banks and restricted cash at beginning of period 167,986 224,784 Cash and due from banks and restricted cash at end of period $ 496,233 $ 211,176 Supplemental Disclosure of Cash Flow Information: Cash and due from banks at beginning of period $ 167,946 $ 204,949 Restricted cash at beginning of period 40 19,835 Cash and due from banks and restricted cash at beginning of period $ 167,986 $ 224,784 Cash and due from banks at end of period $ 496,193 $ 210,919 Restricted cash at end of period 40 257 Cash and due from banks and restricted cash at end of period $ 496,233 $ 211,176 Cash paid during the period for: Interest $ 33,914 $ 5,088 Income taxes 1,268 573 Non-cash activities: Accretion of unrealized loss on securities reclassified to held-to-maturity 135 154 Net loan recoveries ( 47 ) ( 92 ) Transfer of loans receivable to loans held-for-sale — 12,011 Transfer of premises and equipment to assets held-for-sale — 2,776 See accompanying Notes to Unaudited Consolidated Financial Statements. 24 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 1. Basis of Presentation The consolidated financial statements include: the accounts of OceanFirst Financial Corp. (the “Company”); its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc.; the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp., Casaba Real Estate Holdings Corporation, and Country Property Holdings, Inc; and a majority controlling interest in Trident Abstract Title Agency, LLC (“Trident”). Certain other subsidiaries were dissolved in 2022 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the full year 2023 or any other period. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 25 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 2. Business Combinations Trident Acquisition On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60 % in Trident. Trident provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey. The acquisition is complimentary to the Company’s existing consumer and commercial lending business. Total consideration paid was $ 7.1 million and goodwill from the transaction amounted to $ 5.8 million. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values. The excess of consideration paid over the estimated fair value of the net assets acquired, excluding the net assets attributable to the non-controlling interest, has been recorded as goodwill. The Company consolidated Trident’s assets, liabilities and components of comprehensive income within its consolidated results. Thus, the consolidated results include amounts attributable to the Company and the non-controlling interest. Amounts attributable to the non-controlling interest are presented separately as a single line on the Consolidated Statements of Income (net income attributable to non-controlling interest) and the Consolidated Statements of Financial Condition (non-controlling interest in stockholders’ equity). Amounts attributed to the non-controlling interest are based upon the ownership interest in Trident that the Company does not own. For further discussion on the accounting for this arrangement refer to Note 11 Variable Interest Entity, of this Form 10-Q. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed by the Company at the date of the acquisition for Trident, net of total consideration paid (in thousands): At April 1, 2022 Estimated Fair Value Total purchase price: $ 7,084 Assets acquired: Cash and cash equivalents $ 45,693 Other current assets 238 Premises and equipment 18 Right-of-use (“ROU”) asset 779 Other assets 81 Total assets acquired 46,809 Liabilities assumed: Lease liability 779 Other liabilities 43,937 Total liabilities assumed $ 44,716 Net assets acquired $ 2,093 Net assets attributable to non-controlling interest $ 836 Goodwill recorded $ 5,827 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As of December 31, 2022, the Company finalized its review of the acquired assets and liabilities and did not record any further adjustments to the carrying value. 26 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 3. Earnings per Share The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Weighted average shares outstanding 59,291 59,303 Less: Unallocated ESOP shares ( 302 ) ( 422 ) Unallocated incentive award shares ( 215 ) ( 142 ) Average basic shares outstanding 58,774 58,739 Add: Effect of dilutive securities: Incentive awards 144 204 Average diluted shares outstanding 58,918 58,943 For the three months ended March 31, 2023 and 2022, antidilutive stock options of 852,000 and 904,000 , respectively, were excluded from the earnings per share calculation. 27 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 4. Securities The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at March 31, 2023 and December 31, 2022 are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses At March 31, 2023 Debt securities available-for-sale: U.S. government and agency obligations $ 73,305 $ 4 $ ( 6,643 ) $ 66,666 $ — Corporate debt securities 10,077 — ( 616 ) 9,461 — Asset-backed securities 296,217 — ( 14,448 ) 281,769 — Agency commercial mortgage-backed securities (“MBS”) 110,340 — ( 16,041 ) 94,299 — Total debt securities available-for-sale $ 489,939 $ 4 $ ( 37,748 ) $ 452,195 $ — Debt securities held-to-maturity: State, municipal and sovereign debt obligations $ 254,311 $ 104 $ ( 19,342 ) $ 235,073 $ ( 56 ) Corporate debt securities 54,930 42 ( 4,171 ) 50,801 ( 976 ) Mortgage-backed securities: Agency residential 882,211 2,311 ( 75,309 ) 809,213 — Agency commercial 31,887 90 ( 553 ) 31,424 — Non-agency commercial 25,291 — ( 2,129 ) 23,162 ( 11 ) Total mortgage-backed securities 939,389 2,401 ( 77,991 ) 863,799 ( 11 ) Total debt securities held-to-maturity $ 1,248,630 $ 2,547 $ ( 101,504 ) $ 1,149,673 $ ( 1,043 ) Total debt securities $ 1,738,569 $ 2,551 $ ( 139,252 ) $ 1,601,868 $ ( 1,043 ) At December 31, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 87,648 $ 1 $ ( 7,635 ) $ 80,014 $ — Corporate debt securities 8,928 — ( 756 ) 8,172 — Asset-backed securities 296,222 — ( 19,349 ) 276,873 — Agency commercial MBS 110,606 — ( 18,017 ) 92,589 — Total debt securities available-for-sale $ 503,404 $ 1 $ ( 45,757 ) $ 457,648 $ — Debt securities held-to-maturity: State, municipal, and sovereign debt obligations $ 260,249 $ 46 $ ( 24,940 ) $ 235,355 $ ( 60 ) Corporate debt securities 56,893 380 ( 3,778 ) 53,495 ( 1,059 ) Mortgage-backed securities: Agency residential 849,985 795 ( 83,586 ) 767,194 — Agency commercial 32,127 23 ( 1,189 ) 30,961 — Non-agency commercial 25,310 — ( 2,274 ) 23,036 ( 9 ) Total mortgage-backed securities 907,422 818 ( 87,049 ) 821,191 ( 9 ) Total debt securities held-to-maturity $ 1,224,564 $ 1,244 $ ( 115,767 ) $ 1,110,041 $ ( 1,128 ) Total debt securities $ 1,727,968 $ 1,245 $ ( 161,524 ) $ 1,567,689 $ ( 1,128 ) There was no allowance for securities credit losses on debt securities available-for-sale at March 31, 2023 or December 31, 2022. 28 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Allowance for securities credit losses Beginning balance $ ( 1,128 ) $ ( 1,467 ) Provision for credit loss benefit 85 87 Total ending allowance balance $ ( 1,043 ) $ ( 1,380 ) The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. Credit ratings of BBB- or Baa3 or higher are considered investment grade. Where multiple ratings are available, the Company considers the lowest rating when determining the allowance for securities credit losses. Under this approach, the amortized cost of debt securities held-to-maturity at March 31, 2023, aggregated by credit quality indicator, are as follows (in thousands): Investment Grade Non-Investment Grade/Non-rated Total As of March 31, 2023 State, municipal and sovereign debt obligations $ 254,311 $ — $ 254,311 Corporate debt securities 40,654 14,276 54,930 Non-agency commercial MBS 25,291 — 25,291 Total debt securities held-to-maturity $ 320,256 $ 14,276 $ 334,532 During 2021 and 2013, the Bank transferred $ 12.7 million and $ 536.0 million, respectively, of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 209,000 and $ 13.3 million at the time of transfer in 2021 and 2013, respectively, which continues to be reflected in accumulated other comprehensive loss on the Consolidated Statement of Financial Condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of debt securities held-to-maturity at March 31, 2023 and December 31, 2022 is as follows (in thousands): March 31, December 31, 2023 2022 Amortized cost $ 1,248,630 $ 1,224,564 Allowance for securities credit losses ( 1,043 ) ( 1,128 ) Net loss on date of transfer from available-for-sale ( 13,556 ) ( 13,556 ) Accretion of net unrealized loss on securities reclassified as held-to-maturity 11,393 11,258 Carrying value $ 1,245,424 $ 1,221,138 There was $ 697,000 and $ 87,000 of realized losses on sale of debt securities available-for-sale for the three months ended March 31, 2023 and 2022, respectively. These realized losses on debt securities are presented within Other under Total other income of the Consolidated Statements of Income. The amortized cost and estimated fair value of debt securities at March 31, 2023 by contractual maturity are shown below (in thousands): March 31, 2023 Amortized Cost Estimated Fair Value Less than one year $ 33,091 $ 32,799 Due after one year through five years 165,074 153,196 Due after five years through ten years 216,802 203,049 Due after ten years 273,873 254,726 $ 688,840 $ 643,770 29 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2023, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $ 60.4 million, $ 80.3 million, and $ 296.2 million, respectively, and an estimated fair value of $ 56.1 million, $ 76.7 million, and $ 281.8 million, respectively, were callable prior to the maturity date. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments. The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at March 31, 2023 and December 31, 2022, segregated by the duration of the unrealized losses, are as follows (in thousands): Less than 12 months 12 months or longer Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses At March 31, 2023 Debt securities available-for-sale: U.S. government and agency obligations $ 13,126 $ ( 203 ) $ 53,539 $ ( 6,440 ) $ 66,665 $ ( 6,643 ) Corporate debt securities 6,909 ( 168 ) 2,552 ( 448 ) 9,461 ( 616 ) Asset-backed securities 59,683 ( 3,577 ) 222,086 ( 10,871 ) 281,769 ( 14,448 ) Agency commercial MBS — — 94,299 ( 16,041 ) 94,299 ( 16,041 ) Total debt securities available-for-sale 79,718 ( 3,948 ) 372,476 ( 33,800 ) 452,194 ( 37,748 ) Debt securities held-to-maturity: State, municipal and sovereign debt obligations 29,809 ( 284 ) 195,955 ( 19,058 ) 225,764 ( 19,342 ) Corporate debt securities 6,779 ( 535 ) 39,610 ( 3,636 ) 46,389 ( 4,171 ) MBS: Agency residential 132,107 ( 1,962 ) 516,190 ( 73,347 ) 648,297 ( 75,309 ) Agency commercial 18,628 ( 513 ) 1,990 ( 40 ) 20,618 ( 553 ) Non-agency commercial — — 23,162 ( 2,129 ) 23,162 ( 2,129 ) Total MBS 150,735 ( 2,475 ) 541,342 ( 75,516 ) 692,077 ( 77,991 ) Total debt securities held-to-maturity 187,323 ( 3,294 ) 776,907 ( 98,210 ) 964,230 ( 101,504 ) Total debt securities $ 267,041 $ ( 7,242 ) $ 1,149,383 $ ( 132,010 ) $ 1,416,424 $ ( 139,252 ) At December 31, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 27,232 $ ( 450 ) $ 52,782 $ ( 7,185 ) $ 80,014 $ ( 7,635 ) Corporate debt securities 4,735 ( 193 ) 3,437 ( 563 ) 8,172 ( 756 ) Asset-backed securities 143,392 ( 9,179 ) 133,481 ( 10,170 ) 276,873 ( 19,349 ) Agency commercial MBS 8,782 ( 1,675 ) 83,807 ( 16,342 ) 92,589 ( 18,017 ) Total debt securities available-for-sale 184,141 ( 11,497 ) 273,507 ( 34,260 ) 457,648 ( 45,757 ) Debt securities held-to-maturity: State, municipal, and sovereign debt obligations 133,492 ( 11,952 ) 97,135 ( 12,988 ) 230,627 ( 24,940 ) Corporate debt securities 11,783 ( 598 ) 36,152 ( 3,180 ) 47,935 ( 3,778 ) MBS: Agency residential 297,296 ( 12,404 ) 397,036 ( 71,182 ) 694,332 ( 83,586 ) Agency commercial 25,936 ( 1,150 ) 2,062 ( 39 ) 27,998 ( 1,189 ) Non-agency commercial 16,839 ( 1,621 ) 6,198 ( 653 ) 23,037 ( 2,274 ) Total MBS 340,071 ( 15,175 ) 405,296 ( 71,874 ) 745,367 ( 87,049 ) Total debt securities held-to-maturity 485,346 ( 27,725 ) 538,583 ( 88,042 ) 1,023,929 ( 115,767 ) Total debt securities $ 669,487 $ ( 39,222 ) $ 812,090 $ ( 122,302 ) $ 1,481,577 $ ( 161,524 ) 30 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The Company concluded that debt securities were not impaired at March 31, 2023 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the change in net unrealized losses were primarily due to changes in the general credit and interest rate environment and not credit quality. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s liquidity plans include adequate sources of liquidity outside securities sales. Equity Investments At March 31, 2023 and December 31, 2022, the Company held equity investments of $ 101.0 million and $ 102.0 million, respectively. The equity investments primarily comprised of select financial services institutions’ preferred stocks, investments in funds and other financial institutions. The realized and unrealized gains or losses on equity securities for the three months ended March 31, 2023 and 2022 are shown in the table below (in thousands): Three Months Ended March 31, 2023 2022 Net loss on equity investments $ ( 6,801 ) $ ( 2,786 ) Less: Net (losses) gains recognized on equity investments sold ( 4,608 ) 1,582 Unrealized losses recognized on equity investments still held $ ( 2,193 ) $ ( 4,368 ) 31 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 5. Loans Receivable, Net Loans receivable, net at March 31, 2023 and December 31, 2022 consisted of the following (in thousands): March 31, December 31, 2023 2022 Commercial: Commercial real estate – investor $ 5,296,661 $ 5,171,952 Commercial real estate – owner occupied 986,366 997,367 Commercial and industrial 622,201 622,372 Total commercial 6,905,228 6,791,691 Consumer: Residential real estate 2,881,811 2,861,991 Home equity loans and lines and other consumer (“other consumer”) 252,773 264,372 Total consumer 3,134,584 3,126,363 Total loans receivable 10,039,812 9,918,054 Deferred origination costs, net of fees 7,332 7,488 Allowance for loan credit losses ( 60,195 ) ( 56,824 ) Total loans receivable, net $ 9,986,949 $ 9,868,718 The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company evaluates risk ratings on an ongoing basis. The Company uses the following definitions for risk ratings: Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower. Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection or the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 32 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands): 2023 2022 2021 2020 2019 2018 and prior Revolving lines of credit Total March 31, 2023 Commercial real estate - investor Pass $ 78,614 $ 1,186,386 $ 1,335,178 $ 543,587 $ 515,939 $ 1,048,169 $ 512,846 $ 5,220,719 Special Mention — — 2,484 190 65 14,283 2,188 19,210 Substandard — — — 3,750 19,871 32,240 871 56,732 Total commercial real estate - investor 78,614 1,186,386 1,337,662 547,527 535,875 1,094,692 515,905 5,296,661 Commercial real estate - owner occupied Pass 36,361 118,959 109,499 63,663 109,652 506,145 16,212 960,491 Special Mention — — — — — 1,878 — 1,878 Substandard — — — — 2,019 21,978 — 23,997 Total commercial real estate - owner occupied 36,361 118,959 109,499 63,663 111,671 530,001 16,212 986,366 Commercial and industrial Pass 27,482 54,551 22,682 12,450 15,762 59,487 424,541 616,955 Special Mention — — 7 — — 223 1,836 2,066 Substandard — — 21 52 1,041 1,949 117 3,180 Total commercial and industrial 27,482 54,551 22,710 12,502 16,803 61,659 426,494 622,201 Residential real estate (1) Pass 48,611 928,107 588,525 413,922 243,055 658,129 — 2,880,349 Special Mention — 390 — — — 153 — 543 Substandard — — 193 — — 726 — 919 Total residential real estate 48,611 928,497 588,718 413,922 243,055 659,008 — 2,881,811 Other consumer (1) Pass 3,723 23,767 22,999 14,355 14,812 137,925 32,972 250,553 Special Mention — — — — 96 187 — 283 Substandard — — — — 67 1,870 — 1,937 Total other consumer 3,723 23,767 22,999 14,355 14,975 139,982 32,972 252,773 Total loans $ 194,791 $ 2,312,160 $ 2,081,588 $ 1,051,969 $ 922,379 $ 2,485,342 $ 991,583 $ 10,039,812 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 33 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) 2022 2021 2020 2019 2018 2017 and prior Revolving lines of credit Total December 31, 2022 Commercial real estate - investor Pass $ 1,144,763 $ 1,339,289 $ 555,937 $ 524,428 $ 220,999 $ 881,344 $ 450,787 $ 5,117,547 Special Mention — 2,508 192 17,094 — 12,818 2,188 34,800 Substandard — — — 893 — 18,180 532 19,605 Total commercial real estate - investor 1,144,763 1,341,797 556,129 542,415 220,999 912,342 453,507 5,171,952 Commercial real estate - owner occupied Pass 119,912 110,440 59,952 115,385 88,204 458,708 14,932 967,533 Special Mention — — — — 748 5,679 — 6,427 Substandard — — 3,750 2,037 4,817 12,803 — 23,407 Total commercial real estate - owner occupied 119,912 110,440 63,702 117,422 93,769 477,190 14,932 997,367 Commercial and industrial Pass 60,078 23,724 14,072 17,175 10,992 47,370 443,211 616,622 Special Mention — 7 — — — 250 1,680 1,937 Substandard — 21 76 1,083 301 2,212 120 3,813 Total commercial and industrial 60,078 23,752 14,148 18,258 11,293 49,832 445,011 622,372 Residential real estate (1) Pass 919,364 591,745 419,712 247,387 99,945 577,392 — 2,855,545 Special Mention — 193 1,514 204 59 2,407 — 4,377 Substandard — — — 656 286 1,127 — 2,069 Total residential real estate 919,364 591,938 421,226 248,247 100,290 580,926 — 2,861,991 Other consumer (1) Pass 24,069 24,111 15,440 15,471 39,057 108,818 34,851 261,817 Special Mention — — — 75 — 598 — 673 Substandard — — — 157 18 1,707 — 1,882 Total other consumer 24,069 24,111 15,440 15,703 39,075 111,123 34,851 264,372 Total loans $ 2,268,186 $ 2,092,038 $ 1,070,645 $ 942,045 $ 465,426 $ 2,131,413 $ 948,301 $ 9,918,054 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 34 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) An analysis of the allowance for credit losses on loans for the three months ended March 31, 2023 and 2022 was as follows (in thousands): Commercial Real Estate – Investor Commercial Real Estate – Owner Occupied Commercial and Industrial Residential Real Estate Other Consumer Total For the three months ended March 31, 2023 Allowance for credit losses on loans Balance at beginning of period $ 21,070 $ 4,423 $ 5,695 $ 24,530 $ 1,106 $ 56,824 Provision (benefit) for credit losses 1,379 ( 304 ) 131 2,390 ( 272 ) 3,324 Charge-offs (1) — ( 6 ) ( 3 ) — ( 1 ) ( 10 ) Recoveries 2 3 4 8 40 57 Balance at end of period $ 22,451 $ 4,116 $ 5,827 $ 26,928 $ 873 $ 60,195 For the three months ended March 31, 2022 Allowance for credit losses on loans Balance at beginning of period $ 25,504 $ 5,884 $ 5,039 $ 11,155 $ 1,268 $ 48,850 (Benefit) provision for credit losses ( 1,867 ) ( 840 ) ( 406 ) 5,028 ( 259 ) 1,656 Charge-offs — ( 4 ) — — ( 139 ) ( 143 ) Recoveries — 13 16 94 112 235 Balance at end of period $ 23,637 $ 5,053 $ 4,649 $ 16,277 $ 982 $ 50,598 (1) Gross charge-offs for the three months ended March 31, 2023, related to loans that originated prior to 2018. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral and, therefore, is classified as non-accruing. At March 31, 2023 and December 31, 2022, the Company had collateral dependent loans with an amortized cost balance as follows: commercial real estate - investor of $ 7.8 million and $ 4.6 million, respectively, commercial real estate - owner occupied of $ 251,000 and $ 4.0 million, respectively, and commercial and industrial of $ 141,000 and $ 160,000 , respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 1.5 million and $ 858,000 at March 31, 2023 and December 31, 2022, respectively. The following table presents the recorded investment in non-accrual loans, by loan portfolio segment as of March 31, 2023 and December 31, 2022 (in thousands): March 31, December 31, 2023 2022 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 $ 22,437 $ 23,265 At March 31, 2023 and December 31, 2022, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At March 31, 2023, there were no loans that were past due 90 days or greater and still accruing interest. At December 31, 2022, there was one Paycheck Protection Program (“PPP”) loan for $ 14,000 that was past due 90 days or greater and still accruing interest. Per SBA guidelines, the SBA will pay accrued interest through the deferral period up to a maximum of 120 days past due. Given these servicing guidelines, PPP loans that are 90 to 120 days past due will be reported as accruing loans. 35 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the aging of the recorded investment in past due loans as of March 31, 2023 and December 31, 2022 by loan portfolio segment (in thousands): 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total March 31, 2023 Commercial real estate – investor $ 634 $ 50 $ 6,983 $ 7,667 $ 5,288,994 $ 5,296,661 Commercial real estate – owner occupied 740 74 — 814 985,552 986,366 Commercial and industrial 176 135 21 332 621,869 622,201 Residential real estate 8,362 543 919 9,824 2,871,987 2,881,811 Other consumer 235 283 1,937 2,455 250,318 252,773 $ 10,147 $ 1,085 $ 9,860 $ 21,092 $ 10,018,720 $ 10,039,812 December 31, 2022 Commercial real estate – investor $ 217 $ 875 $ 3,700 $ 4,792 $ 5,167,160 $ 5,171,952 Commercial real estate – owner occupied 143 80 3,750 3,973 993,394 997,367 Commercial and industrial 159 47 180 386 621,986 622,372 Residential real estate 7,003 4,377 2,069 13,449 2,848,542 2,861,991 Other consumer 573 673 1,882 3,128 261,244 264,372 $ 8,095 $ 6,052 $ 11,581 $ 25,728 $ 9,892,326 $ 9,918,054 The Company modified certain loans to borrowers experiencing financial difficulty. These modifications may have included a reduction in interest rate, an extension in term, principal forgiveness and/or other than insignificant payment delay. At March 31, 2023, loans with modifications to borrowers experiencing financial difficulty totaled $ 475,000 , which included residential real estate of $ 435,000 and other consumer of $ 40,000 . The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Of the $ 475,000 of loans with modifications to borrowers experiencing financial difficulty, $ 337,000 were current, and one loan for $ 138,000 was 30 days past due (which became current subsequent to March 31, 2023). No loans that were modified to borrowers experiencing financial difficulty since adoption had a payment default during the three months ended March 31, 2023. Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company classified certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty were modified, in accordance with ASC 310-40. With the adoption of ASU 2022-02 as of January 1, 2023, the Company has ceased to recognize or measure for new TDRs but those existing at December 31, 2022 will remain until settled. At March 31, 2023 and December 31, 2022, TDR loans totaled $ 13.7 million and $ 13.9 million, respectively. At March 31, 2023 and December 31, 2022, there were $ 6.3 million and $ 6.4 million, respectively, of TDR loans included in the non-accrual loan totals. At March 31, 2023 and December 31, 2022 the Company had $ 513,000 and $ 590,000 , respectively, of specific reserve allocated to one loan that was classified as a TDR loan. Non-accrual loans which become TDR loans are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has TDR loans classified as accruing loans, which totaled $ 7.4 million and $ 7.5 million at March 31, 2023 and December 31, 2022, respectively. The following table presents information about TDR loans which occurred during the three months ended March 31, 2022 (dollars in thousands): Number of Loans Pre-modification Recorded Investment Post-modification Recorded Investment Three months ended March 31, 2022 Troubled debt restructurings: Commercial and industrial 1 $ 65 $ 65 Other consumer 3 991 1,109 There were no TDR loans that defaulted during the three months ended March 31, 2023 and 2022, which were modified within the preceding year. 36 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 6. Deposits The major types of deposits at March 31, 2023 and December 31, 2022 were as follows (in thousands): Type of Account March 31, December 31, 2023 2022 Non-interest-bearing $ 1,984,197 $ 2,101,308 Interest-bearing checking 3,697,223 3,829,683 Money market deposit 615,993 714,386 Savings 1,308,715 1,487,809 Time deposits 2,386,967 1,542,020 Total deposits $ 9,993,095 $ 9,675,206 Included in time deposits at March 31, 2023 and December 31, 2022 was $ 257.1 million and $ 117.7 million, respectively, in deposits of $250,000 or more. Time deposits also include brokered deposits of $ 1.24 billion and $ 873.4 million at March 31, 2023 and December 31, 2022, respectively. Note 7. Borrowed Funds Borrowed funds at March 31, 2023 and December 31, 2022 were as follows (in thousands): March 31, December 31, 2023 2022 FHLB advances $ 1,346,566 $ 1,211,166 Securities sold under agreements to repurchase with customers 70,938 69,097 Other borrowings 195,663 195,403 Total borrowed funds $ 1,613,167 $ 1,475,666 The Company had no FHLB overnight advances or borrowings from the Federal Reserve Bank (“FRB”) Discount Window or Bank Term Funding Program at March 31, 2023 and December 31, 2022. Pledged assets The following table presents the assets pledged to secure borrowings, borrowing capacity, repurchase agreements, letters of credit, and for other purposes required by law at carrying value (in thousands): Loans Debt securities Total March 31, 2023 FHLB and FRB $ 7,052,912 $ 1,120,068 $ 8,172,980 Repurchase agreements — 75,859 75,859 Total pledged assets $ 7,052,912 $ 1,195,927 $ 8,248,839 December 31, 2022 FHLB and FRB $ 6,487,980 $ 830,057 $ 7,318,037 Repurchase agreements — 105,294 105,294 Total pledged assets $ 6,487,980 $ 935,351 $ 7,423,331 The securities pledged, which collateralize the repurchase agreements are delivered to the lender, with whom each transaction is executed, or to a third-party custodian. The lender, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agrees to resell to the Company substantially the same securities at the maturity of the repurchase agreements. 37 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 8. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means. Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. Assets and Liabilities Measured at Fair Value A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Debt Securities Available-for-Sale Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities. Equity Investments Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer (measurement alternative). Certain equity investments without readily 38 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) determinable fair values are measured at net asset value (“NAV”) per share as a practical expedient, which are excluded from the fair value hierarchy levels in the table below. Interest Rate Derivatives The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty. Loans Individually Measured for Impairment Loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3). The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): Fair Value Measurements at Reporting Date Using: Total Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs March 31, 2023 Items measured on a recurring basis: Debt securities available-for-sale $ 452,195 $ — $ 452,195 $ — Equity investments 54,440 272 54,168 — Interest rate derivative asset 92,302 — 92,302 — Interest rate derivative liability ( 91,701 ) — ( 91,701 ) — Items measured on a non-recurring basis: Equity investments (1) (2) 46,567 — — 43,576 Loans measured for impairment based on the fair value of the underlying collateral (3) 9,700 — — 9,700 December 31, 2022 Items measured on a recurring basis: Debt securities available-for-sale $ 457,648 $ — $ 457,648 $ — Equity investments 61,942 430 61,511 — Interest rate derivative asset 113,420 — 113,420 — Interest rate derivative liability ( 113,473 ) — ( 113,473 ) — Items measured on a non-recurring basis: Equity investments (1) (2) 40,095 — — 37,076 Loans measured for impairment based on the fair value of the underlying collateral (3) 9,635 — — 9,635 (1) As of March 31, 2023 and December 31, 2022, primarily consists of $ 43.6 million and $ 37.1 million, respectively, of equity investments measured under the measurement alternative. This included no unrealized gains or losses for the three months ended March 31, 2023 as a result of observable price changes in the investment and $ 20.0 million of unrealized gains for the year ended December 31, 2022. (2) As of March 31, 2023 and December 31, 2022, equity investments of $ 46.6 million and $ 40.1 million, respectively, included $ 3.0 million for both periods, of certain equity investment funds measured at NAV per share (or its equivalent) as a practical expedient to fair value and these equity investments have not been classified in the fair value hierarchy levels. (3) Primarily consists of commercial loans, which are collateral dependent. The amounts are based on independent appraisals, which may be adjusted by management for qualitative factors, such as economic factors and estimated liquidation expenses. The range may vary but is generally 0 % to 8 % on the discount for costs to sell and 0 % to 10 % on appraisal adjustments. 39 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table reconciles the beginning and ending balances for equity investments that are recognized at fair value on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs (in thousands): For the Three Months Ended March 31, 2022 Beginning balance $ 2,718 Transfers out of Level 3 ( 2,718 ) Ending balance $ — The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no assets in Level 3 that were recognized at fair value on a recurring basis or transfers into or out of Level 3 for the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company executed its right to convert $ 2.7 million of preferred stock into common stock, which resulted in a transfer from Level 3 into Level 1. Assets and Liabilities Disclosed at Fair Value A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below. Cash and Due from Banks For cash and due from banks, the carrying amount approximates fair value. Debt Securities Held-to-Maturity Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency. Restricted Equity Investments The fair value for Federal Home Loan Bank of New York, Federal Reserve Bank stock, and Atlantic Community Bankers Bank is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities. Loans Receivable and Loans Held-for-Sale Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms. Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. The fair value of loans was measured using the exit price notion. Deposits Other than Time Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related 40 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. Time Deposits The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase with Customers Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly. FHLB Advances and Other Borrowings Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of March 31, 2023 and December 31, 2022 are presented in the following tables (in thousands): Fair Value Measurements at Reporting Date Using: Book Value Level 1 Inputs Level 2 Inputs Level 3 Inputs March 31, 2023 Financial Assets: Cash and due from banks $ 496,193 $ 496,193 $ — $ — Debt securities held-to-maturity 1,245,424 — 1,140,797 8,876 Restricted equity investments 115,750 — — 115,750 Loans receivable, net and loans held-for-sale 9,988,834 — — 9,196,738 Financial Liabilities: Deposits other than time deposits 7,606,128 — 7,606,128 — Time deposits 2,386,967 — 2,356,875 — FHLB advances and other borrowings 1,542,229 — 1,524,195 — Securities sold under agreements to repurchase with customers 70,938 70,938 — — December 31, 2022 Financial Assets: Cash and due from banks $ 167,946 $ 167,946 $ — $ — Debt securities held-to-maturity 1,221,138 — 1,097,984 12,057 Restricted equity investments 109,278 — — 109,278 Loans receivable, net and loans held-for-sale 9,869,408 — — 9,103,137 Financial Liabilities: Deposits other than time deposits 8,133,186 — 8,133,186 — Time deposits 1,542,020 — 1,504,601 — FHLB advances and other borrowings 1,406,569 — 1,416,384 — Securities sold under agreements to repurchase with customers 69,097 69,097 — — Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 41 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 42 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 9. Derivatives and Hedging Activities The Company enters into derivative financial instruments which involve, to varying degrees, interest rate and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes derivative financial instruments to accommodate the business needs of its customers as well as to economically hedge the exposure that this creates for the Company. Additionally, the Company enters into certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. These interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under ASC Topic 815, Derivatives and Hedging, therefore changes in fair value are reported in earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC Topic 820, Fair Value Measurements. The Company recognized losses of $ 22,000 and gains of $ 37,000 in commercial loan swap income resulting from the fair value adjustment for the three months ended March 31, 2023 and 2022, respectively. Derivatives Designated as Hedging Instruments During the fourth quarter of 2022, the Company entered into a three-year interest rate swap intended to add stability to its net interest income and to manage its exposure to future interest rate movements associated with a pool of floating rate commercial loans. The swap requires the Company to pay variable-rate amounts indexed to one-month term SOFR to the counterparty in exchange for the receipt of fixed-rate amounts at 4.0 % from the counterparty. The swap was designated and qualified as a cash flow hedge, under ASC Topic 815, Derivatives and Hedging. The changes in the fair value of cash flow hedges are initially reported in other comprehensive income. Amounts are subsequently reclassified from accumulated other comprehensive income to earnings when the hedged transactions occur, specifically within the same line item as the hedged item (interest income). Therefore a portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are made or received on the Company’s interest rate swaps. The table below presents the effect on the Company’s accumulated other comprehensive income/loss (“AOCI” or “AOCL”) attributable to the cash flow hedge derivative, net of tax, and the related gains/(losses) reclassified from AOCI into income (in thousands): For the Three Months Ended March 31, 2023 AOCL balance at beginning of period, net of tax $ ( 25 ) Unrealized gains recognized in OCI 412 Losses reclassified from AOCI into interest income 101 AOCI balance at end of period, net of tax $ 488 During the next twelve months, the Company estimates that an additional $ 640,000 will be reclassified as a reduction to interest income. 43 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The table below presents the notional amount and fair value of derivatives designated and not designated as hedging instruments, as well as their location on the Consolidated Statements of Financial Condition (in thousands): Notional Fair Value Other assets Other liabilities As of March 31, 2023 Derivatives Not Designated as Hedging Instruments Interest rate swaps and cap contracts $ 1,456,913 $ 91,659 $ 91,701 Derivatives Designated as Cash Flow Hedge Interest rate swap contract 100,000 643 — Total Derivatives $ 1,556,913 $ 92,302 $ 91,701 December 31, 2022 Derivatives Not Designated as Hedging Instruments Interest rate swaps and cap contracts $ 1,368,245 $ 113,420 $ 113,440 Derivatives Designated as Cash Flow Hedge Interest rate swap contract 100,000 — 33 Total Derivatives $ 1,468,245 $ 113,420 $ 113,473 Credit Risk-Related Contingent Features The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by being a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 40,000 at both March 31, 2023 and December 31, 2022. The amount of collateral received from third parties was $ 89.0 million and $ 104.5 million at March 31, 2023 and December 31, 2022, respectively. The amount of collateral posted with third parties and received from third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 91.7 million and $ 113.5 million at March 31, 2023 and December 31, 2022, respectively. The interest rate derivatives which the Company executes with the commercial borrowers are collateralized by the borrowers’ commercial real estate financed by the Company. 44 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 10. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2038. The Company has one existing finance lease, which has a lease term through 2029. The following table represents the classification of the Company’s ROU assets and lease liabilities on the Consolidated Statements of Financial Condition (in thousands): March 31, December 31, 2023 2022 Lease ROU Assets Classification Operating lease ROU assets Other assets $ 20,081 $ 19,055 Finance lease ROU asset Premises and equipment, net 1,474 1,532 Total lease ROU assets $ 21,555 $ 20,587 Lease Liabilities Operating lease liabilities (1) Other liabilities $ 21,084 $ 20,053 Finance lease liability Other borrowings 1,873 1,934 Total lease liabilities $ 22,957 $ 21,987 (1) Operating lease liabilities excludes liabilities for future rent and estimated lease termination payments related to closed branches of $ 7.2 million and $ 7.7 million at March 31, 2023 and December 31, 2022, respectively. The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, ASC Topic 842, Leases requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is not readily determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception. March 31, December 31, 2023 2022 Weighted-Average Remaining Lease Term Operating leases 6.67 years 6.87 years Finance lease 6.35 years 6.60 years Weighted-Average Discount Rate Operating leases 2.89 % 2.86 % Finance lease 5.63 5.63 45 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table represents lease expenses and other lease information (in thousands): Three Months Ended March 31, 2023 2022 Lease Expense Operating lease expense $ 1,145 $ 1,258 Finance lease expense: Amortization of ROU assets 58 50 Interest on lease liabilities (1) 26 26 Total $ 1,229 $ 1,334 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,139 $ 1,162 Operating cash flows from finance leases 26 26 Financing cash flows from finance leases 61 51 (1) Included in borrowed funds interest expense on the Consolidated Statements of Income. All other costs are included in occupancy expense on the Consolidated Statements of Income. Future minimum payments for the finance lease and operating leases with initial or remaining terms were as follows (in thousands): Finance Lease Operating Leases For the Year Ending December 31, 2023 $ 263 $ 3,487 2024 350 4,407 2025 350 4,203 2026 350 3,428 2027 350 2,269 Thereafter 559 5,832 Total 2,222 23,625 Less: Imputed interest ( 349 ) ( 2,541 ) Total lease liabilities $ 1,873 $ 21,084 Note 11. Variable Interest Entity The Company accounts for Trident as a variable interest entity (“VIE”) under ASC 810, Consolidation, for which the Company is considered the primary beneficiary (i.e. the party that has a controlling financial interest). In accordance with ASC 810, Consolidation, the Company has consolidated Trident’s assets and liabilities. For further discussion on the acquisition of Trident refer to Note 2 Business Combinations, to this Form 10-Q. The summarized financial information for the Company’s consolidated VIE at March 31, 2023 and December 31, 2022 consisted of the following (in thousands): March 31, 2023 December 31, 2022 Cash and cash equivalents $ 27,557 $ 30,062 Other assets 857 941 Total assets 28,414 31,003 Other liabilities 26,369 28,998 Net assets $ 2,045 $ 2,005 46 Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.