What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-01 · 181 added, 137 removed, 266 unchanged (54% of the section changed)

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At or for the Quarters Ended

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

(dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 June 30, 2022

SELECTED FINANCIAL CONDITION DATA:

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$ 22,758 $ 22,437 $ 20,753

Non-performing assets (9)

22,437 23,265 27,031

Allowance for loan credit losses as a percent of total loans receivable (8) (10)

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(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.

(4) Performance ratios for the three months ended June 30, 2023 included a net loss on equity investments of $559,000, or $397,000, net of tax benefit.

Performance ratios for the three months ended March 31, 2023 included a net expense related to merger related expenses, net branch consolidation expenses, 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 ratio s for the three months ended June 30, 2022 included a net expense related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $8.8 million, or $6.7 million, net of tax benefit.

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

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(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.

(9) Non-performing loans and assets 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.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $9.8 million, $10.5 million, and $15.5 million at June 30, 2023, March 31, 2023 and June 30, 2022, respectively.

OceanFirst Financial Corp.

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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.

Key developments relating to the Company’s financial results and corporate activities for the three months ended June 30, 2023 were as follows:

• Excess Liquidity:

The Company maintained elevated levels of on-balance sheet cash and funding availability of $4.0 billion at June 30, 2023.

Deposits increased $165.2 million during the quarter, which included a shift from non-maturity deposits to time deposits.

• Asset Quality:

Continued strong asset quality as criticized assets, non-performing loans, and loans 30 to 89 days past due as a percent of total loans receivable were 1.18%, 0.23%, and 0.03%, respectively, at June 30, 2023.

Net charge-off activity continues to remain at zero percent of total average loans on an annualized basis.

• Strong Capital:

Capital ratios remained above “well-capitalized” levels, including the Company’s common equity tier 1 capital, which increased 19 basis points from the prior quarter, to 10.21% at June 30, 2023.

Stockholders’ equity per common share was $27.37, up $0.30 from the prior quarter.

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.

Net interest income and cost of funds were adversely impacted by shifts to higher cost time deposits, repricing of government deposits, and maintaining excess liquidity on balance sheet, which outpaced the increase in interest-earning assets.

This drove an increase in deposit betas, which is the change in rates paid to customers relative to the change in federal funds target rate, to 29%.

Net income available to common stockholders for the three and six months ended June 30, 2023 decreased to $26.8 million and increased to $53.7 million, respectively, or $0.45 and $0.91 per diluted share, as compared to $28.0 million and $52.7 million, or $0.47 and $0.89 per diluted share, for the corresponding prior year periods.

The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2023 and 2022, respectively.

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

The dividend, related to the quarter ended June 30, 2023, will be paid on August 18, 2023 to common stockholders of record on August 7, 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.

This dividend will be paid on August 15, 2023 to preferred stockholders of record on July 31, 2023.

Recent Developments

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

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

Bank failures earlier in the year led to uncertainty and volatility in the financial services industry.

In response to these events, in March 2023 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;

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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.

As a result of these procedures, the Company took a few key actions such as increasing on-balance sheet liquidity and funding capacity to $4.0 billion at June 30, 2023;

sold specific positions in two financial institutions for the three months ended March 31, 2023, reviewed and concluded no further impairment existed in the Company’s remaining securities portfolio;

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

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

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

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

“Risk Factors” for further information regarding liquidity.

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

Community Reinvestment Act

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

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

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

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

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

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

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

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

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

The Company will continue to monitor these events and the impact they may have in future periods, and will respond accordingly as economic and industry conditions change.

Refer to the “Liquidity and Capital Resources” section for further information regarding liquidity.

Analysis of Net Interest Income

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

For the three 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.

For the three and six months ended June 30, 2023, interest income included net loan fees of $1.2 million and $1.8 million, respectively, as compared to $3.2 million and $4.2 million for the same prior year periods, respectively.

The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2023 and 2022.

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

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

(dollars in thousands) Average Balance Interest Average

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Total cost of deposits (including non-interest-bearing deposits) 1.52 % 0.18 %

For the Six Months Ended June 30,

(dollars in thousands) Average

Balance Interest Average

Interest-earning assets:

Interest-earning deposits and short-term investments $ 219,482 $ 5,221 4.80 % $ 78,074 $ 136 0.35 %

Securities (2)

1,943,148 33,085 3.43 1,829,065 17,064 1.88

Loans receivable, net (3)

Commercial 6,876,553 192,130 5.63 6,157,060 123,745 4.05

Residential real estate 2,883,904 51,097 3.54 2,631,208 44,081 3.35

Other consumer 259,573 7,597 5.90 254,002 5,373 4.27

Allowance for loan credit losses, net of deferred loan costs and fees (51,948) — — (42,080) — —

Loans receivable, net 9,968,082 250,824 5.07 9,000,190 173,199 3.87

Total interest-earning assets 12,130,712 289,130 4.80 10,907,329 190,399 3.51

Non-interest-earning assets 1,226,061 1,191,453

Total assets $ 13,356,773 $ 12,098,782

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Interest-bearing checking $ 3,790,413 18,234 0.97 % $ 4,197,935 3,762 0.18 %

Money market 699,940 5,437 1.57 763,721 596 0.16

Savings 1,308,381 723 0.11 1,624,575 286 0.04

Time deposits 2,144,514 34,870 3.28 853,017 3,714 0.88

Total 7,943,248 59,264 1.50 7,439,248 8,358 0.23

FHLB Advances 1,234,919 29,824 4.87 285,501 1,682 1.19

Securities sold under agreements to repurchase 71,825 282 0.79 110,738 83 0.15

Other borrowings 203,911 8,849 8.75 211,407 5,252 5.01

Total borrowings 1,510,655 38,955 5.20 607,646 7,017 2.33

Total interest-bearing liabilities 9,453,903 98,219 2.10 8,046,894 15,375 0.39

Non-interest-bearing deposits 1,950,437 2,364,757

Non-interest-bearing liabilities 334,201 155,832

Total liabilities 11,738,541 10,567,483

Stockholders’ equity 1,618,232 1,531,299

Total liabilities and equity $ 13,356,773 $ 12,098,782

Net interest income $ 190,911 $ 175,024

Net interest rate spread (4)

2.70 % 3.12 %

Net interest margin (5)

3.17 % 3.24 %

Total cost of deposits (including non-interest-bearing deposits) 1.21 % 0.17 %

(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.

(2) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank (“FRB”) 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.

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

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.

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total assets increased by $435.0 million to $13.54 billion, from $13.10 billion, due to higher cash and due from banks and loans.

Cash and due from banks increased $289.8 million to $457.7 million, from $167.9 million as the Company maintained excess liquidity on balance sheet.

Total loans increased by $165.6 million to $10.08 billion, from $9.92 billion, due to loan originations primarily in commercial.

Total liabilities increased by $394.2 million to $11.91 billion, from $11.52 billion.

Deposits increased by $483.1 million to $10.16 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.

Time deposits increased to $2.77 billion from $1.54 billion, or 27.2% and 15.9% of total deposits, respectively.

Brokered time deposits increased $547.9 million and retail time deposits increased $674.9 million.

The loans-to-deposit ratio was 99.3%, as compared to 102.5%.

FHLB advances decreased by $119.5 million to $1.09 billion, from $1.21 billion.

Total stockholders’ equity increased to $1.63 billion, as compared to $1.59 billion, reflecting net income for the six months ended June 30, 2023 and a net increase in the fair market value of available-for-sale debt securities, net of tax, which decreased accumulated other comprehensive loss by $5.6 million.

For the six months ended June 30, 2023, the Company did not repurchase shares under its stock repurchase program.

There were 2,934,438 shares available for repurchase at June 30, 2023 under the existing repurchase program.

Stockholders’ equity per common share increased to $27.37, as compared to $26.81.

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

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

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

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

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

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

Comparison of Operating Results for the Three and Six Months Ended June 30, 2023 and June 30, 2022

Net income for the three and six months ended June 30, 2023 included net loss on equity investments of $559,000 and $2.8 million, respectively.

Net income for the six months ended June 30, 2023 also included merger related expenses of $22,000, net branch consolidation expense of $70,000 and net loss on sale of investments of $5.3 million.

These items decreased net income by $397,000 and $6.2 million, net of tax, for the three and six months ended June 30, 2023, respectively.

Net income for the three and six months ended June 30, 2022 included merger related expenses of $196,000 and $2.2 million, respectively, net branch consolidation expenses of $546,000 and $948,000, and a net loss on equity investments of $8.1 million and $10.9 million.

These items decreased net income by $6.7 million and $10.7 million, net of tax, for the three and six months ended June 30, 2022, respectively.

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 income for the three and six months ended June 30, 2023 increased to $150.1 million and $289.1 million, respectively, from $99.4 million and $190.4 million for the corresponding prior year periods.

For the three and six months ended June 30, 2023, the yield on average interest-earning assets increased to 4.91% and 4.80%, respectively, from 3.60% and 3.51% for the corresponding prior year periods, due to the impact of rising rates on interest-earning asset growth.

Average interest-earning assets increased by $1.17 billion and $1.22 billion for the three and six months ended June 30, 2023, respectively, primarily driven by organic commercial loan 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.

Interest expense for the three and six months ended June 30, 2023 increased to $58.0 million and $98.2 million, respectively, from $8.6 million and $15.4 million in the corresponding prior year periods, reflecting rising rates on costs, deposit mix shift to higher cost time deposits and FHLB advances, repricing of government deposits, and maintaining excess liquidity on balance sheet.

For the three and six months ended June 30, 2023, the cost of average interest-bearing liabilities increased to 2.41% and 2.10%, respectively, from 0.42% and 0.39% for the corresponding prior year periods, due to higher cost of deposits and FHLB advances.

The total cost of deposits (including non-interest-bearing deposits) increased to 1.52% and 1.21% for the three and six months ended June 30, 2023, respectively, from 0.18% and 0.17% for the same prior year periods.

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.

Net interest income for the three and six months ended June 30, 2023 increased to $92.1 million and $190.9 million, respectively, from $90.8 million and $175.0 million in the corresponding prior year periods, reflecting a net impact of higher interest rates and to a lesser extent, an increase in average interest-earning assets.

Net interest margin for the three and six months ended June 30, 2023 decreased to 3.02% and 3.17%, respectively, from 3.29% and 3.24% for the same prior year periods.

Net interest margin decreased primarily due to the increase in cost of funds outpacing that of average interest earning assets in the current interest rate environment.

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.

Provision for credit losses for the three and six months ended June 30, 2023 was $1.2 million and $4.2 million, respectively, as compared to $1.3 million and $3.1 million for the corresponding prior year periods.

The provision for credit losses for the current quarter reflected an increase to the allowance for loan credit losses, primarily related to commercial real estate, which was driven by sustained macroeconomic headwinds.

Net loan charge-offs were $123,000 and $76,000 for the three and six months ended June 30, 2023, respectively.

Net loan charge-offs were $9,000 and net loan recoveries were $83,000 for the three and six months ended June 30, 2022, respectively.

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.

Three months ended June 30, 2023 vs.

June 30, 2022

Other income increased to $8.9 million, as compared to $7.5 million.

Other income was adversely impacted by net losses on equity investments of $559,000 and $8.1 million, for the respective quarters.

The remaining decrease of $6.1 million was driven by decreases in commercial loan swap income of $2.3 million and fees and service charges of $2.0 million, which were adversely impacted by the current interest rate environment resulting in lower swap volume and mortgage activity.

Bankcard services revenue decreased $1.8 million due to the Durbin amendment, which became effective for the Company on July 1, 2022.

Six months ended June 30, 2023 vs.

June 30, 2022

Other income decreased to $11.0 million, as compared to $16.4 million.

Other income was adversely impacted by net losses on equity investments of $8.1 million and $10.9 million, for the respective periods.

The current year also included $5.3 million of losses related to the sale of investments in the first quarter.

The remaining decrease of $8.2 million was driven by decreases in commercial loan swap income on lower volume of $4.4 million, bankcard services revenue of $3.4 million due to the Durbin amendment, and income from bank owned life insurance of $1.1 million on lower claims.

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.

Three months ended June 30, 2023 vs.

June 30, 2022

Operating expenses increased to $62.9 million, as compared to $58.7 million.

Operating expenses were adversely impacted by $742,000 of merger related expenses and net branch consolidation expense in the prior year period.

The remaining increase of $5.0 million was due to increases in professional fees of $2.6 million related to the ongoing investments to improve profitability and operational efficiencies, and compensation and benefits expense of $1.1 million primarily related to inflation, annual merit-related compensation increases and higher medical costs.

The current quarter also included increases to federal deposit insurance and regulatory assessments of $677,000 due to new assessment rates that went into effect on January 1, 2023, and real estate charges on assets held for sale of $580,000.

Six months ended June 30, 2023 vs.

June 30, 2022

Operating expenses increased to $124.2 million, as compared to $116.2 million.

Operating expenses were adversely impacted by $92,000 and $3.1 million, for the respective periods, related to merger related expenses and net branch consolidation expense.

The remaining increase of $11.1 million was due to increases in professional fees of $4.4 million and compensation and benefits expense of $4.3 million.

The drivers of changes in expenses for the three months ended, as noted above, were also the drivers for the six months ended.

Additionally, other operating expenses included higher expenses of $580,000 and $427,000 related to real estate charges on assets held for sale and mortgage title search fees, respectively.

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.

The provision for income taxes was $9.0 million and $17.7 million for the three and six months ended June 30, 2023, respectively, as compared to $8.9 million and $16.9 million for the same prior year periods.

The effective tax rate was 24.4% and 24.0% for the three and six months ended June 30, 2023, respectively, as compared to 23.3% and 23.4% for the same prior year periods.

Liquidity and Capital Resources

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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.

As a result of bank failures during the first quarter of the year, the Company took a series of precautionary measures and opted to bolster on-balance sheet liquidity, including cash and unpledged securities;

and funding capacity at the FHLB and FRB Discount Window.

As of June 30, 2023, total on-balance sheet liquidity and funding capacity was $4.0 billion.

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.

The vast majority of the government deposits are protected by the Federal Deposit Insurance Corporation insurance as well as the State of New Jersey under the Government Unit Deposit Protection Act, which requires uninsured government deposits to be further collateralized by the Bank.

At June 30, 2023, the Bank reported in its respective Call Report $5.06 billion of estimated uninsured deposits.

Excluding $2.03 billion of collateralized government deposits and $1.48 billion of intercompany deposits of fully consolidated subsidiaries, the Bank had estimated adjusted uninsured deposits of $1.55 billion, or 15% of total deposits.

On balance-sheet liquidity and funding capacity represent 260% 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.

For the six months ended June 30, 2023, the Parent Company received dividend payments of $51.5 million from the Bank.

At June 30, 2023, the Parent Company held $62.7 million in cash and cash equivalents.

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 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 Bank Term Funding Program (“BTFP”).

As of June 30, 2023, the Company pledged $7.15 billion of loans with the FHLB and FRB to enhance the Company’s borrowing capacity, and includes collateral pledged to the FHLB to obtain a municipal letter of credit to collateralize certain municipal deposits.

The Company also pledged $97.0 million of securities to collateralize its repurchase agreements and for other purposes required by law.

The Company had $1.09 billion of term advances from the FHLB as of June 30, 2023, as compared to $1.21 billion at December 31, 2022.

As of June 30, 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 six months ended June 30, 2023 were primarily satisfied by the increase in deposits.

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

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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.

At June 30, 2023, outstanding commitments to originate loans totaled $115.8 million and outstanding undrawn lines of credit totaled $1.65 billion, of which $1.29 billion were commitments to commercial and commercial construction borrowers and $364.6 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.

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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.

At June 30, 2023, the Company also had various contractual obligations, which included debt obligations of $1.4 billion, including finance lease obligations of $1.8 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.

Time deposits scheduled to mature in one year or less totaled $2.51 billion at June 30, 2023.

Liquidity Used in Stock Repurchases and Cash Dividends

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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

For the three months ended June 30, 2023, the Company did not repurchase any shares of its common stock.

At June 30, 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 six months of June 30, 2023 was $23.6 million.

Cash dividends on preferred stock declared and paid during the first six months of June 30, 2023 was $2.0 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.

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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):

As of June 30, 2023 and December 31, 2022, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

Actual For capital adequacy

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corrective action

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

As of June 30, 2023 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,190,122 9.21 % $ 517,131 4.00 % N/A N/A

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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.

At June 30, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 12.01% and 12.10%, respectively.

Non-Performing Assets

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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,

June 30, December 31,

(dollars in thousands)

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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.

The Company’s non-performing loans totaled $22.8 million at June 30, 2023, as compared to $23.3 million at December 31, 2022.

At June 30, 2023, total non-performing loans included $718,000 of modified loans to borrowers experiencing financial difficulty and $6.2 million of troubled debt restructuring (“TDR”) loans that existed prior to adoption of Accounting Standards Update (“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.

Included in the non-performing loans total was $3.2 million and $3.9 million of PCD loans at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the allowance for loan credit losses totaled $61.8 million, or 0.61% 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 $9.8 million and $11.4 million at June 30, 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,

June 30, December 31,

Special Mention $ 30,859 $ 48,214

Substandard 88,152 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.

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 consisted of two CRE-Investor Owned relationships totaling $24.3 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 six months ended June 30, 2023.

Critical Accounting Policies

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Accounting Pronouncements Adopted in 2023

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

In March 2022, the Financial Accounting Standards Board (“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.

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

In December 2022, FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance.

The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024.

Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from London Inter-Bank Offered Rate (“LIBOR”) towards alternative reference rates.

As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024.

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

Transition from LIBOR

As of December 31, 2021, the Company ceased issuing LIBOR-based products and transitioned to Alternative Rates.

For the tenors of U.S.

dollar LIBOR utilized by the Company, the administrator of LIBOR extended publication until June 30, 2023.

As of June 30, 2023, the Company has transitioned substantially all of its previously existing LIBOR-based products that were not expected to mature or settle prior to the cessation date.

Contract language for all remaining LIBOR-based loans, securities, and borrowings has been reviewed and updated as necessary to automatically convert to an Alternative Rate at their next rate reset date with no action required.

Recent Accounting Pronouncements Not Yet Adopted

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(the “Company”).

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

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

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.

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.

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, the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers and the Bank’s ability to successfully integrate acquired operations.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis