What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-03 · 169 added, 130 removed, 317 unchanged (49% of the section changed)

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At or for the Quarters Ended

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

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

SELECTED FINANCIAL CONDITION DATA:

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SELECTED FINANCIAL RATIOS:

Stockholders’ equity per common share at end of period 27.37 27.07 25.73

Book value per common share at end of period 27.56 27.37 26.04

Cash dividend per share 0.20 0.20 0.20

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63.37 62.28 53.10

Loans-to-deposits ratio (8)

Loan-to-deposit ratio (8)

96.10 99.30 97.60

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

(4) Performance ratios for the three months ended September 30, 2023 included a net gain on equity investments of $1.5 million, or $1.1 million, net of tax expense.

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.

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

(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) At September 30, 2023, non-performing loans included the remaining exposure of $8.8 million on a single commercial real estate relationship that was partially charged-off of $8.4 million during the three months ended September 30, 2023.

(10) Non-performing loans and assets generally consist of all loans 90 days or more past due and other loans in the process of foreclosure.

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(11) 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 $9.8 million, $10.5 million, and $15.5 million at June 30, 2023, March 31, 2023 and June 30, 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 $8.8 million, $9.8 million, and $13.6 million at September 30, 2023, June 30, 2023 and September 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 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.

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

• Deposit Growth:

Total deposits increased $375.6 million, or 4%, as compared to the prior linked quarter.

The current quarter includes a reduction in brokered time deposits of $425.7 million and a loan-to-deposit ratio of 96.10% at September 30, 2023.

The Company’s non-interest-bearing deposits declined modestly and represented 17% of the total 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.

Asset quality metrics remain strong, despite the impact of a charge-off related to a single credit relationship.

Criticized and classified loans, and non-performing loans both as a percent of total loans, were 1.30% and 0.20%, respectively, at September 30, 2023.

• 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 Company’s common equity tier 1 capital ratio remained above “well-capitalized” levels, at 10.36% at September 30, 2023.

The current quarter results were impacted by the following matters.

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.

Net interest income and margin were adversely impacted by a continued mix-shift and repricing to higher cost deposits that outpaced the repricing and increase in yields on interest-earning assets.

Deposit betas, which is the change in rates paid to customers relative to the change in federal funds target rate, increased modestly to 35%, from 29%.

Additionally, the current quarter results were impacted by an increase in non-performing loans due to a single commercial real estate credit relationship totaling $17 million, which was written down to an estimated realizable value of $8.8 million.

The credit was originated in June 2019 and is secured by an office building in Midtown Manhattan, New York City.

The credit was also included in total delinquent loans 30 to 89 days at September 30, 2023.

Lastly, the Company recognized one-time compensation and benefits expenses of $2.4 million attributable to severance and other program costs relating to performance improvement initiatives.

Net income available to common stockholders for the three and nine months ended September 30, 2023 decreased to $19.7 million and $73.3 million, respectively, or $0.33 and $1.24 per diluted share, as compared to $37.6 million and $90.3 million, or $0.64 and $1.53 per diluted share, for the corresponding prior year periods.

The dividends paid to preferred stockholders were $1.0 million and $3.0 million for the three and nine months ended September 30, 2023 and 2022, respectively.

On October 19, 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 September 30, 2023, will be paid on November 17, 2023 to common stockholders of record on November 6, 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 August 15, 2023 to preferred stockholders of record on July 31, 2023.

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

Recent Developments

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;

refreshing stress test scenarios;

and evaluating supplemental liquidity and conservation measures.

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

As a result of these procedures, 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 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.

The banking industry continued to experience volatility through the third quarter of 2023, which began earlier in the year with several bank failures coupled with related industry-wide concerns including liquidity, funding, and unrealized losses on securities brought on by a rapid increasing rate environment.

These developments, among other industry concerns, have created volatility in stock prices across the banking industry, including the Company's own stock price.

Despite these industry-concerns, the Company has continued to maintain and strengthen its liquidity and capital position, and serve its customers and communities.

The Company will continue to monitor these industry-wide matters 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.

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

For the three and 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.

For the three and nine months ended September 30, 2023, interest income included net loan fees of $621,000 and $2.6 million, respectively, as compared to $832,000 and $5.0 million for the same prior year periods, respectively.

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

For the Three Months Ended September 30,

(dollars in thousands) Average Balance Interest Average

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Other borrowings (4)

317,210 5,159 6.45 194,755 3,053 6.22

Total borrowings 1,095,173 14,127 5.12 643,294 5,296 3.27

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Non-interest-bearing liabilities (4)

272,982 266,564

Total liabilities 11,994,314 10,976,200

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Total cost of deposits (including non-interest-bearing deposits) 1.99 % 0.36 %

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(dollars in thousands) Average

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Other borrowings (4)

302,649 14,008 6.19 205,796 8,306 5.40

Total borrowings 1,431,196 53,082 4.96 619,660 12,313 2.66

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Non-interest-bearing liabilities (4)

253,014 193,147

Total liabilities 11,824,736 10,705,219

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(3) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans.

(4) For the 2023 period, the average balances of derivative cash collateral have been reclassified from non-interest bearing liabilities to other borrowings.

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

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

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.

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

Total assets increased by $394.3 million to $13.50 billion, from $13.10 billion, primarily due to higher cash balances and loan growth.

Cash and due from banks increased $240.9 million to $408.9 million, from $167.9 million as the Company maintained elevated levels of on-balance sheet cash from net deposit inflows.

Total loans increased by $205.5 million to $10.12 billion, from $9.92 billion, due to loan originations.

Total liabilities increased by $342.1 million to $11.86 billion, from $11.52 billion.

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Brokered time deposits increased $122.1 million and retail time deposits increased $988.0 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 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.

The loan-to-deposit ratio was 96.10%, as compared to 102.50%.

FHLB advances decreased by $605.1 million to $606.1 million, from $1.21 billion due to a change in funding mix.

Other liabilities increased by $65.6 million to $411.7 million, from $346.2 million, primarily due to an increase in the market values associated with customer interest rate swaps and related collateral received from counterparties.

Total stockholders’ equity increased to $1.64 billion, as compared to $1.59 billion, primarily reflecting net income net of dividends for the nine months ended September 30, 2023.

Additionally, accumulated other comprehensive loss decreased by $7.2 million primarily due to increases in fair market value of available-for-sale debt securities, net of tax.

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

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

Book value per share increased to $27.56, as compared to $26.81.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2023 and September 30, 2022

Net income for the three and nine months ended September 30, 2023 included net gain on equity investments of $1.5 million and net loss on equity investments of $1.3 million, respectively.

Net income for the nine months ended September 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 increased net income by $1.1 million and decreased net income by $5.1 million, net of tax, for the three and nine months ended September 30, 2023, respectively.

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

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

Interest Income

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 income for the three and nine months ended September 30, 2023 increased to $158.4 million and $447.5 million, respectively, from $110.5 million and $300.9 million for the corresponding prior year periods.

For the three and nine months ended September 30, 2023, the yield on average interest-earning assets increased to 5.08% and 4.90%, respectively, from 3.88% and 3.64% for the corresponding prior year periods, due to the impact of rising rates on interest-earning assets.

Average interest-earning assets increased by $1.06 billion and $1.17 billion for the three and nine months ended September 30, 2023, respectively, primarily driven by commercial loan growth and increases in deposits and short-term investments.

Interest Expense

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.

Interest expense for the three and nine months ended September 30, 2023 increased to $67.4 million and $165.6 million, respectively, from $14.5 million and $29.9 million in the corresponding prior year periods, reflecting rising rates on costs, deposit mix shift to higher cost time deposits, and increased FHLB advances, and repricing of government deposits.

For the three and nine months ended September 30, 2023, the cost of average interest-bearing liabilities increased to 2.71% and 2.29%, respectively, from 0.69% and 0.49% for the corresponding prior year periods, due to mix shift to higher cost of deposits and higher costs of FHLB advances.

The total cost of deposits (including non-interest-bearing deposits) increased to 1.99% and 1.48% for the three and nine months ended September 30, 2023, respectively, from 0.36% and 0.24% for the same prior year periods.

Net Interest Income and Margin

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.

Net interest income for the three and nine months ended September 30, 2023 decreased to $91.0 million and increased to $281.9 million, respectively, from $96.0 million and $271.0 million in the corresponding prior year periods, primarily reflecting the net impact of the higher interest rate environment.

Net interest margin for the three and nine months ended September 30, 2023 decreased to 2.91% and 3.09%, respectively, from 3.36% and 3.28% for the same prior year periods.

Net interest margin decreased primarily due to the increase in cost of funds outpacing the increase in yield on average interest earnings assets in the current interest rate environment and elevated levels of on-balance sheet cash.

Provision for Credit Losses

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.

Provision for credit losses for the three and nine months ended September 30, 2023 was $10.3 million and $14.5 million, respectively, as compared to $1.0 million and $4.1 million for the corresponding prior year periods.

The current quarter provision included the net impact of the $8.4 million charge-off noted above and, to a lesser extent, elevated risks and uncertainty in macro-economic conditions in a downside forecast scenario.

Net loan charge-offs were $8.3 million for both the three and nine months ended September 30, 2023, respectively, as compared to net loan recoveries of $252,000 and $335,000 for the three and nine months ended September 30, 2022, respectively.

Non-interest Income

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.

Three months ended September 30, 2023 vs.

September 30, 2022

Other income decreased to $10.8 million, as compared to $15.2 million.

Other income was favorably impacted by net gains on equity investments of $1.5 million and $3.4 million, for the respective quarters.

The remaining decrease of $2.5 million was driven by decreases in commercial loan swap income of $1.5 million and fees and service charges of $1.1 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

Nine months ended September 30, 2023 vs.

September 30, 2022

Other income decreased to $21.8 million, as compared to $31.5 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.

Other income was adversely impacted by net losses on equity investments of $6.6 million, which included $5.3 million of losses related to the sale of investments in the first quarter of 2023, and $7.5 million, for the respective periods.

The remaining decrease of $10.7 million was driven by decreases in commercial loan swap income on lower volume of $5.8 million, fees and service charges of $1.1 million on lower title activity, and income from bank owned life insurance of $1.0 million on non-recurring death benefits recognized in the prior year.

Additionally, bankcard services revenue decreased $3.4 million, due to the Durbin Amendment which became effective for the Company on July 1, 2022.

Non-interest Expense

Three months ended June 30, 2023 vs.

June 30, 2022

Three months ended September 30, 2023 vs.

September 30, 2022

Operating expenses increased to $64.5 million, as compared to $59.0 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

The increase of $5.4 million was due to increases in professional fees of $2.8 million and $2.4 million in compensation and employee benefits expenses related to the Company’s ongoing investments to improve profitability and operational efficiencies, and one-time related severance and other program costs.

The increase in compensation and benefits expense were partly offset by decreased employee medical benefit claims.

The current quarter also included increases to federal deposit insurance and regulatory assessments of $800,000 primarily due to new assessment rates that went into effect on January 1, 2023.

Nine months ended September 30, 2023 vs.

September 30, 2022

Operating expenses increased to $188.7 million, as compared to $175.2 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.

The remaining increase of $16.5 million was due to increases in professional fees of $7.1 million and federal deposit insurance and regulatory assessments of $1.3 million that were driven by the same factors for the three months ended.

The increase in compensation and benefits expense of $5.7 million was due to the $2.4 million increase noted above and merit-related increases.

Income Tax Expense

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.

The provision for income taxes was $6.5 million and $24.1 million for the three and nine months ended September 30, 2023, respectively, as compared to $12.3 million and $29.2 million for the same prior year periods.

The effective tax rate was 23.9% and 24.0% for the three and nine months ended September 30, 2023, respectively, as compared to 24.1% and 23.7% for the same prior year periods.

Liquidity and Capital Resources

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

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

As of September 30, 2023, the Bank and Parent Company continued to maintain adequate liquidity under all stress scenarios.

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

As a result of 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 continually evaluates its on-balance sheet liquidity, including cash and unpledged securities;

and funding capacity at the FHLB and FRB Discount Window, and periodically tests each of its lines of credit.

As of September 30, 2023, total on-balance sheet liquidity and funding capacity was $4.3 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 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.

At September 30, 2023, the Bank reported in its Call Report $5.27 billion of estimated uninsured deposits.

This total included $2.16 billion of collateralized government deposits and $1.46 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.65 billion, or 16% of total deposits.

On balance-sheet liquidity and funding capacity represented 262% 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 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.

For the nine months ended September 30, 2023, the Parent Company received dividend payments of $73.5 million from the Bank.

At September 30, 2023, the Parent Company held $70.2 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 .

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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.

As of September 30, 2023, the Company pledged $7.25 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 $1.09 billion of securities with FHLB and FRB to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law.

The Company had $606.1 million of term advances from the FHLB as of September 30, 2023, as compared to $1.21 billion at December 31, 2022, reflecting a shift in funding mix to deposits.

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

The cash was primarily kept on the balance sheet to maintain liquidity on hand, and utilized for loan originations and the reduction of FHLB advances.

Off-Balance Sheet Commitments and Contractual Obligations

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

At 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.

At September 30, 2023, outstanding commitments to originate loans totaled $131.2 million and outstanding undrawn lines of credit totaled $1.56 billion, of which $1.21 billion were commitments to commercial and commercial construction borrowers and $349.3 million were commitments to consumer borrowers and residential construction borrowers.

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

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

Since some of the commitments are

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

Commitments generally have

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

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

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

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.

At September 30, 2023, the Company also had various contractual obligations, which included debt obligations of $885.2 million, including finance lease obligations of $1.7 million, and an additional $20.6 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 $2.51 billion at June 30, 2023.

Time deposits scheduled to mature in one year or less totaled $2.47 billion at September 30, 2023.

Liquidity Used in Stock Repurchases and Cash Dividends

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

common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions.

common stock may be purchased in the open market or through other privately-negotiated transactions, from time-to-time, depending on market conditions.

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

For the 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.

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

At September 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 nine months of September 30, 2023 was $35.4 million.

Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2023 was $3.0 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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Additionally, management performs multiple capital stress test scenarios on a quarterly basis, varying loan growth, earnings, access to the capital markets, credit losses, and more recently, mark-to-market losses in the investment portfolio, including both available-for-sale and held-to-maturity.

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

As of September 30, 2023, the Bank and Parent Company continued to maintain adequate capital under all stress scenarios, including a scenario where all losses related to the investment securities portfolio are realized.

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

Regulatory Capital Requirements

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

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

Actual For capital adequacy

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corrective action

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

As of September 30, 2023 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,200,832 9.14 % $ 525,331 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 June 30, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 12.01% and 12.10%, respectively.

At September 30, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 12.13% 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.

June 30, December 31,

September 30, December 31,

(dollars in thousands)

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Non-performing assets as a percent of total assets 0.22 0.18

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.

The Company’s non-performing loans totaled $30.1 million at September 30, 2023, as compared to $23.3 million at December 31, 2022.

At September 30, 2023, non-performing loans included the remaining exposure of $8.8 million on a single commercial real estate relationship that was partially charged-off during the three months ended September 30, 2023.

At September 30, 2023, total non-performing loans included $869,000 of modified loans to borrowers experiencing financial difficulty and $5.8 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 $3.2 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.

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

At September 30, 2023, the allowance for loan credit losses totaled $63.9 million, or 0.63% 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 $8.8 million and $11.4 million at September 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):

June 30, December 31,

September 30, December 31,

Special Mention $ 44,940 $ 48,214

Substandard 86,597 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 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

The change in substandard loans was primarily due to a migration of certain loans from special mention to substandard risk rating, which partly consisted of two CRE-Investor Owned relationships totaling $16.1 million.

The remaining increase in substandard loans was primarily due to three commercial relationships for $13.7 million, which were downgraded to substandard during the nine months ended September 30, 2023.

Additionally, the change in special mention loans was primarily due to two commercial relationships totaling $22.9 million that were downgraded during the nine months ended September 30, 2023, partly offset by the commercial real estate relationship that was charged-off for $8.4 million for the three months ended September 30, 2023.

Critical Accounting Policies and Estimates

Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies.

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The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired through purchase acquisitions.

Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates (i.e.

triggering events).

For the purposes of goodwill impairment testing, management has concluded that the Company has one reporting unit and the annual impairment test is performed as of August 31.

Testing of goodwill impairment comprises a two-step process.

First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill.

The factors considered in the qualitative assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the Company, among other factors.

If the Company determines that it is more likely than not that the fair value of the Company is less than its carrying amounts, then it proceeds to the quantitative impairment test, whereby it calculates the fair value of the Company.

In its performance of impairment testing, management has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment.

If the carrying amount of the Company exceeds its fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge.

If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the Company that is greater than the carrying amount, then no impairment charge is recorded.

As of the annual impairment testing date of August 31, 2023, the Company bypassed the qualitative assessment and proceeded directly to the quantitative impairment test based on the stock price on the measurement date and economic uncertainty and market volatility impacting the banking sector.

To perform the quantitative assessment, the Company engaged a third-party service provider to assist management with the determination of the fair value of the Company.

A combination of an income valuation methodology, comprising a discounted cash flow analysis, and a market valuation methodology, comprising the guideline public company method, was employed.

Management then assigned weightings to the two approaches to conclude on the estimated fair value.

The weightings took into consideration recent market volatility and suppressed stock price of the Company and the banking industry.

The discounted cash flow (“DCF”) estimated the present value of future cash flows.

A DCF analysis requires significant judgment to model financial forecasts, which included loan and deposit growth, funding mix, income on securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations.

For periods beyond those forecasted, a terminal value was estimated based on an assumed long-term growth rate, which was derived using the Gordon Growth Model.

The discount rate applied to the forecasted cash flows was calculated using a build-up approach, which starts with the risk-free interest rate and then calibrated for market and company specific risk premiums, including a beta, equity risk, size, and company-specific risk premiums to reflect risks and uncertainties in the financial market and in the Company’s business projections.

The market approach utilizes observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value.

The market approach also incorporates a control premium to represent the Company’s expectation of a hypothetical acquisition.

Management uses judgment in the selection of comparable companies and includes those with similar business activities, and related operating environments.

The results of the quantitative assessment indicated that the fair value of the Company’s reporting unit exceeded its carrying amount, though not substantially, which resulted in no impairment loss at August 31, 2023.

Management continued to carefully assess and evaluate all available information for potential triggering events after the August 31 annual testing date.

Though it observed some deterioration in inputs to the market approach, management believes that the banking sector continues to experience market dislocation and concluded no triggering events were identified subsequent to the annual test date.

Significant negative industry or economic trends, including declines in the market price of the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill in the future, which would result in recording an impairment loss.

Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

Management will continue evaluating the economic conditions at future reporting periods for triggering events.

Impact of New Accounting Pronouncements

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

In August 2023, FASB issued ASU 2023-05, “Business Combinations - Joint Venture Formations (Subtopic 805-60):

Recognition and Initial Measurement”.

The amendments in this ASU require that a joint venture, upon formation, apply a new basis of accounting and initially measure assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance.

This update will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025.

Early adoption is permitted.

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

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, including specific loan exposures, such as lending for office space, potential goodwill impairment, 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, 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.

Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, 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 saving 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 operation s .

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