What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-07 · 203 added, 251 removed, 235 unchanged (66% of the section changed)

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At or for the Quarters Ended

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

(dollars in thousands, except per share amounts) March 31, 2024 December 31, 2023 March 31, 2023

SELECTED FINANCIAL CONDITION DATA:

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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 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.

(4) Performance ratios for the quarter ended March 31, 2024 included a net benefit related to a net gain on equity investments, a net gain on sale of trust business and the Federal Deposit Insurance Corporation (“FDIC”) special assessment of $2.7 million, or $2.0 million, net of tax expense.

Performance ratios for the quarter ended December 31, 2023 included a net benefit related to a net gain on equity investments and the FDIC special assessment of $513,000, or $384,000, net of tax expense.

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.

(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.

(9) At March 31, 2024 and December 31, 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 year ended December 31, 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 $8.8 million, $9.8 million, and $13.6 million at September 30, 2023, June 30, 2023 and September 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 $7.0 million, $7.5 million, and $10.5 million at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

OceanFirst Financial Corp.

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(the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston.

The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis.

The term “Company” refers to OceanFirst Financial Corp., the Bank and all their subsidiaries on a consolidated basis.

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

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

The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, and commercial loan swap income.

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

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

Key developments relating to the Company’s financial results and corporate activities for the three months ended September 30, 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.

The Company’s results of operations are 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, 2024 were as follows:

• Net Interest Margin:

Net interest margin of 2.81%, reflecting a level of stabilization.

• Capital Accretion:

The Company continued to build capital, while also resuming share repurchases.

The Company’s common equity tier 1 capital ratio and book value per share were 11.01% and $28.32, respectively, and increased 15 basis points and $0.36 from the prior linked quarter.

The Company repurchased 957,827 shares totaling $15.1 million.

• Expense Management:

The Company continued to exercise disciplined expense control.

Non-interest expense was $58.7 million, which included a FDIC special assessment charge of $418,000.

• Asset Quality:

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:

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

Asset quality metrics remain strong as criticized and classified assets, non-performing loans, and loans 30 to 89 days past due as a percentage of total loans receivable were 1.65%, 0.35%, and 0.17%, respectively.

These metrics continue to reflect strong credit performance and remain low compared to pre-pandemic levels.

The current quarter results were impacted by the following matters.

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.

Net interest income and margin were modestly impacted by a continued mix-shift to and repricing of higher-cost funding that offset the increase in yields on interest-earning assets.

Deposit beta, which is the change in rates paid to customers relative to the change in federal funds target rate, increased modestly to 40%, from 38% in the prior linked quarter.

Additionally, the results included several non-recurring matters, which included a $1.2 million gain on sale of a portion of the Company’s trust business, a $1.2 million write-off in income tax expense, $418,000 in FDIC special assessments, and $345,000 in bank owned life insurance death benefits.

Net income available to common stockholders for the quarter ended March 31, 2024 increased to $27.7 million, or $0.47 per diluted share, as compared to $26.9 million, or $0.46 per diluted share, for the corresponding prior year period.

The dividends paid to preferred stockholders were $1.0 million for each of the three months ended March 31, 2024 and 2023, respectively.

On April 18, 2024, 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 March 31, 2024, will be paid on May 17, 2024 to common stockholders of record on May 6, 2024.

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

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

Recent Developments

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.

This dividend will be paid on May 15, 2024 to preferred stockholders of record on April 30, 2024.

Analysis of Net Interest Income

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

For the three and nine months ended September 30, 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.

For the three months ended March 31, 2024, interest income included net loan fees of $737,000, as compared to $598,000 for the same prior year period.

The following table sets forth certain information relating to the Company for the three months ended March 31, 2024 and 2023.

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

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

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(dollars in thousands) Average Balance Interest Average

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Total cost of deposits (including non-interest-bearing deposits) 2.31 % 0.88 %

For the Nine Months Ended September 30,

(dollars in thousands) Average

Balance Interest Average

Interest-earning assets:

Interest-earning deposits and short-term investments $ 304,184 $ 11,661 5.13 % $ 73,886 $ 472 0.85 %

Securities (2)

1,919,660 51,124 3.56 1,801,978 27,086 2.01

Loans receivable, net (3)

Commercial 6,892,456 295,199 5.73 6,275,836 198,054 4.22

Residential real estate 2,895,601 77,862 3.59 2,685,080 66,899 3.32

Other consumer 257,063 11,694 6.08 254,891 8,387 4.40

Allowance for loan credit losses, net of deferred loan costs and fees (52,626) — — (42,987) — —

Loans receivable, net 9,992,494 384,755 5.15 9,172,820 273,340 3.98

Total interest-earning assets 12,216,338 447,540 4.90 11,048,684 300,898 3.64

Non-interest-earning assets 1,234,942 1,191,358

Total assets $ 13,451,280 $ 12,240,042

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Interest-bearing checking $ 3,757,417 33,171 1.18 % $ 4,088,759 6,433 0.21 %

Money market 744,689 11,136 2.00 773,666 1,317 0.23

Savings 1,336,497 4,034 0.40 1,617,354 473 0.04

Time deposits 2,388,299 64,210 3.59 1,060,027 9,373 1.18

Total 8,226,902 112,551 1.83 7,539,806 17,596 0.31

FHLB Advances 1,055,106 38,530 4.88 308,043 3,890 1.69

Securities sold under agreements to repurchase 73,441 544 0.99 105,821 117 0.15

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

Total interest-bearing liabilities 9,658,098 165,633 2.29 8,159,466 29,909 0.49

Non-interest-bearing deposits 1,913,624 2,352,606

Non-interest-bearing liabilities (4)

253,014 193,147

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

Stockholders’ equity 1,626,544 1,534,823

Total liabilities and equity $ 13,451,280 $ 12,240,042

Net interest income $ 281,907 $ 270,989

Net interest rate spread (5)

2.61 % 3.15 %

Net interest margin (6)

3.09 % 3.28 %

Total cost of deposits (including non-interest-bearing deposits) 1.48 % 0.24 %

(1) Average yields and costs are annualized.

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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.

(4) For 2023, includes reclassifications to conform with current period presentation.

(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 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.

Deposits increased by $858.7 million to $10.53 billion, from $9.68 billion.

Time deposits increased to $2.65 billion, from $1.54 billion, or 25.2% and 15.9% of total deposits, respectively.

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

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Total assets decreased by $119.3 million to $13.42 billion, from $13.54 billion, primarily due to decreases in loans and debt securities.

Total loans decreased by $68.9 million to $10.13 billion, from $10.19 billion, due to loan payoffs and lower loan originations.

For more information on the composition of the loan portfolio, see “Lending Activities.” Held-to-maturity debt securities decreased by $31.1 million to $1.13 billion, from $1.16 billion, primarily due to principal repayments.

Other assets increased by $20.3 million to $200.0 million, from $179.7 million, primarily due to an increase in market values associated with customer interest rate swap programs.

Total liabilities decreased by $123.2 million to $11.75 billion, from $11.88 billion primarily related to lower deposits and a funding mix shift.

Deposits decreased by $198.1 million to $10.24 billion, from $10.43 billion.

Time deposits decreased to $2.32 billion, from $2.45 billion, or 22.7% and 23.4% of total deposits, respectively, which was primarily related to planned runoff of brokered time deposits, which decreased by $88.1 million.

The loan-to-deposit ratio was 98.9%, as compared to 97.7%.

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

FHLB advances decreased by $190.2 million to $658.4 million, from $848.6 million due to mix shift in funding sources to other borrowings, which increased by $229.3 million to $425.7 million, from $196.5 million, as a result of lower cost funding availability.

Other liabilities increased by $36.4 million to $337.1 million, from $300.7 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.

Capital levels remain strong and in excess of “well-capitalized” regulatory levels at March 31, 2024, including the Company’s common equity tier one capital ratio which increased to 11.01%, up 15 basis points from December 31, 2023.

Total stockholders’ equity increased to $1.67 billion, as compared to $1.66 billion, primarily reflecting net income, partially offset by capital returns comprising of share repurchases and dividends.

For the quarter ended March 31, 2024, the Company repurchased 957,827 shares totaling $15.1 million representing a weighted average cost per share of $15.64.

The Company had 1,976,611 shares available for repurchase under the authorized repurchase program.

Additionally, accumulated other comprehensive loss decreased by $1.4 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.

The Company’s stockholders’ equity to assets ratio was 12.41%, as compared to 12.28% and book value per share increased to $28.32, as compared to $27.96.

Comparison of Operating Results for the Three Months Ended March 31, 2024 and March 31, 2023

Net income available to common stockholders increased to $27.7 million, or $0.47 per diluted share, as compared to $26.9 million, or $0.46 per diluted share.

Net income for the quarter ended March 31, 2024 included net gains on equity investments of $1.9 million, a net gain on sale of a portion of its trust business of $1.2 million, and the special FDIC assessment of $418,000.

These items increased net income by $2.0 million, net of tax, for the quarter ended March 31, 2024.

Net income 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.

Interest Income

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 income increased to $161.6 million, from $139.0 million and the yield on average interest-earning assets increased to 5.26%, from 4.68%.

The average balance of interest-earning assets increased by $340.3 million, primarily driven by growth of $163.9 million in total loans and $143.0 million in securities.

Interest Expense

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.

Interest expense increased to $75.4 million, from $40.2 million, primarily due to a $1.02 billion increase in the average balance of deposits and a $194.7 million increase in the average balance of other borrowings, partly offset by a $578.0 million decrease in the average balance of FHLB advances, which reflect a shift in funding sources.

The cost of average interest-bearing liabilities increased to 3.03%, from 1.74%, primarily due to higher cost of deposits.

The total cost of deposits (including non-interest-bearing deposits) increased to 2.31%, from 0.88%.

Net Interest Income and Margin

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.

Net interest income decreased to $86.2 million, from $98.8 million, primarily reflecting the net impact of the higher interest rate environment.

The net interest margin decreased to 2.81%, from 3.34%, primarily due to the increase in cost of funds outpacing the increase in yield on average interest-earning assets.

Provision for Credit Losses

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.

Provision for credit losses was $591,000, as compared to $3.0 million.

The current quarter provision was driven by the net effect of continued uncertainty impacting the banking industry and improvements in macro-economic forecasts.

Net loan charge-offs were $349,000 primarily related to a single consumer borrower, as compared to net loan recoveries of $47,000.

Non-interest Income

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.

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 $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.

Other income increased to $12.3 million, as compared to $2.1 million.

Other income was favorably impacted by net gains on equity investments of $1.9 million and a net gain on sale of a portion of its trust business of $1.2 million.

The prior year period’s other income was adversely impacted by a net loss equity investments of $2.2 million and net loss on sale of investment of $5.3 million.

The remaining decrease of $370,000 was driven by a decrease in fees and service charges of $686,000 on lower retail deposit fees and title activity.

Non-interest Expense

Three months ended September 30, 2023 vs.

September 30, 2022

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

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 $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.

Operating expenses decreased to $58.7 million, as compared to $61.3 million.

Operating expenses were adversely impacted by an FDIC special assessment of $418,000 in the current year, and $92,000 from merger-related and net branch consolidation expenses in the prior year.

The remaining decrease of $3.0 million was driven by decreases in professional fees of $2.4 million and compensation and employee benefits expenses of $1.2 million, which reflect the net realization of the Company’s performance improvements initiatives and strategic investments made over the past year.

Income Tax Expense

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.

The provision for income taxes was $10.6 million, as compared to $8.7 million.

The effective tax rate was 27.1%, as compared to 23.7%.

The current quarter's effective tax rate was negatively impacted by 3.0% due to a write-off of a deferred tax asset of $1.2 million.

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

As of March 31, 2024, the Bank and the 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.

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 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 March 31, 2024, total on-balance sheet liquidity and funding capacity was $3.7 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 September 30, 2023, the Bank reported in its Call Report $5.27 billion of estimated uninsured deposits.

At March 31, 2024, the Bank reported in its Call Report $5.36 billion of estimated uninsured deposits.

This total included $2.45 billion of collateralized government deposits and $1.40 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.52 billion, or 14.7% of total deposits.

On-balance-sheet liquidity and funding capacity represented 243.8% 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 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 .

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

For the three months ended March 31, 2024, the Parent Company received dividend payments of $41.0 million from the Bank.

At March 31, 2024, the Parent Company held $90.5 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, and other borrowings .

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 Bank Term Funding Program (“BTFP”).

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.

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

As of March 31, 2024, the Company pledged $7.34 billion of loans with the FHLB and FRB to enhance the Company’s borrowing capacity, which included collateral pledged to the FHLB to obtain a municipal letter of credit to collateralize certain municipal deposits.

The Company also pledged $1.35 billion of securities to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law.

The Company had $658.4 million of FHLB advances, including $49.8 million of overnight borrowings as of March 31, 2024, as compared to $848.6 million of FHLB term advances at December 31, 2023, and no outstanding overnight borrowings from the FHLB.

The Company had $425.7 million of other borrowings as of March 31, 2024, as compared to $196.5 million at December 31, 2023, reflecting a shift in funding sources from FHLB advances to other borrowings.

The Company had no outstanding borrowings from the FRB discount window at both March 31, 2024 or December 31, 2023.

The Com pany’s cash needs for the quarter ended March 31, 2024 were primarily satisfied by the increase in other borrowings.

The cash was utilized for the reduction of FHLB advances and deposits.

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 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.

At March 31, 2024, outstanding commitments to originate loans totaled $136.5 million and outstanding undrawn lines of credit totaled $1.40 billion, of which $1.07 billion were commitments to commercial and commercial construction borrowers and $330.4 million were commitments to consumer 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.

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 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.

At March 31, 2024, the Company also had various contractual obligations, which included debt obligations of $1.15 billion, including finance lease obligations of $1.6 million, and an additional $19.1 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 $2.47 billion at September 30, 2023.

Time deposits scheduled to mature in one year or less totaled $2.24 billion at March 31, 2024.

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 or through other privately-negotiated transactions, from time-to-time, depending on market conditions.

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

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

For the 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.

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

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

For the quarter ended March 31, 2024, the Company resumed repurchase activity, repurchasing 957,827 shares of its common stock totaling $15.1 million.

At March 31, 2024, there were 1,976,611 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, 2024 were $11.9 million.

Cash dividends on preferred stock declared and paid during the first three months of March 31, 2024 were $1.0 million.

The Company’s ability to continue to repurchase shares of common stock and pay dividends remain dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations.

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

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

These regulatory policies may affect the ability of the Parent Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions.

Capital Management

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

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

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.

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

As of March 31, 2024, 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 September 30, 2023 and December 31, 2022, the Company and the Bank satisfied all regulatory capital requirements currently applicable as follows (dollars in thousands):

As of March 31, 2024 and December 31, 2023, 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 September 30, 2023 Amount Ratio Amount Ratio Amount Ratio

As of March 31, 2024 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,223,658 9.38 % $ 521,831 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 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

At March 31, 2024 and December 31, 2023, the Company maintained a stockholders’ equity to total assets ratio of 12.41% and 12.28%, respectively.

Lending Activities

Loan Portfolio Composition .

At March 31, 2024, the Company had total loans outstanding of $10.13 billion, of which $6.24 billion, or 61.6% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”).

The remainder of the portfolio consisted of $677.2 million of commercial and industrial loans, or 6.7% of total loans;

$2.97 billion of residential real estate loans, or 29.3% of total loans;

and $245.9 million of consumer loans, primarily home equity loans and lines of credit, or 2.4% of total loans.

Commercial real estate .

Th e Bank originates commercial real estate loans that are secured by properties, or properties under construction, that are generally used for busin ess purposes such as office, industrial, multi-family or retail facilities.

Commercial real estate loans are provided on owner-occupied properties and on investor-owned properties.

At March 31, 2024, of the total commercial real estate portfolio, $5.32 billion or 85.3% was considered investor-owned and $914.6 million or 14.7% was considered owner-occupied.

The Bank performs extensive due diligence in underwriting commercial real estate loans due to the larger loan amounts and the riskier nature of such loans.

The Bank assesses and mitigates the risk in several ways, including inspection of all such properties and the review of the overall financial condition of the borrower and guarantors, which include, for example, the review of the rent rolls and applicable leases/lease terms and conditions and the verification of income.

A tenant analysis and market analysis are part of the underwriting.

For investor-owned properties, because repayment is often dependent on the successful management of the properties, repayment of commercial real estate loans may be affected by adverse conditions in the real estate market or the economy.

As a result, the Bank is particularly vigilant of this portfolio.

The Bank believes this portfolio is highly diversified with loans secured by a variety of property types in multiple geographies and the portfolio exhibits stable credit quality.

The following tables present additional information on the Company’s commercial real estate - investor owned loans.

The Company’s commercial real estate - investor owned loans by industry as of March 31, 2024:

As of March 31, 2024

(dollars in thousands) Amount Percent of Total Weighted Average LTV (1)

Weighted Average Debt Service Coverage Ratio (2)

Office $ 531,666 11 % 52 % 1.7x

Medical 311,497 7 57 1.7

Credit Tenant 262,224 6 64 1.5

Total Office (3)

1,105,387 24 56 1.7

Retail 1,081,900 23 57 1.9

Multi-family (4)

883,877 19 58 1.6

Industrial/warehouse 721,762 15 52 2.0

Hospitality 153,524 3 48 1.9

739,773 16 46 1.8

Total $ 4,686,223 100 % 54 1.8

Construction 636,532

Total CRE Investor owned and construction $ 5,322,755

(1) Represents the weighted average of loan balances as of March 31, 2024 divided by their most recent appraisal value, which is generally obtained at the time of origination.

(2) Represents the weighted average of net operating income on the property before debt service divided by the loan’s respective annual debt service based on the most recent credit review of the borrower.

(3) Central business district (“CBD”) exposure represents $123 million, or 11.1%, of the total office loan balance.

Office CBD loans had a weighted average LTV of 66% and weighted average debt service coverage ratio of 1.6x.

$82 million, or 67%, of the total office CBD exposure are to credit tenants, life sciences and medical borrowers.

New York City office CBD loans represent $16 million, or 0.12% of the Company’s total assets.

(4) New York City rent-regulated multi-family loans, where the property has more than 50% of its units rent-regulated, represent $36 million, or 0.27% of the Company’s total assets.

(5) Other includes co-operatives, single purpose, stores and some living units / mixed use, investor owned 1-4 family, land / development, and other.

The following table presents total commercial real estate - investor owned loans by geography (generally based on location of collateral) as of March 31, 2024:

As of March 31, 2024

(dollars in thousands) Amount Percent of Total

New York $ 1,546,423 33 %

Pennsylvania and Delaware 1,254,500 27

New Jersey 1,177,786 25

Maryland and District of Columbia 149,624 3

Massachusetts 149,020 3

Other 408,870 9

Total $ 4,686,223 100 %

Construction 636,532

Total CRE investor owned and construction $ 5,322,755

Asset quality .

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

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

September 30, December 31,

March 31, December 31,

(dollars in thousands)

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Allowance for loan credit losses as a percent of total loans (2)

0.66 % 0.66 %

Allowance for loan credit losses as a percent of total non-performing loans (2)

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Non-performing assets as a percent of total assets 0.26 0.22

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 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.

(1) As of March 31, 2024 and December 31, 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 2023

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

The net unamortized credit and PCD marks on these loans, not reflected in the allowance for loan credit losses, were $7.0 million and $7.5 million at March 31, 2024 and December 31, 2023, respectively.

Overall asset quality metrics remained strong for the quarter.

The Company’s non-performing loans represented 0.35% and 0.29% of total loans, respectively.

The allowance for loan credit losses as a percentage of total non-performing loans was 191.86%, as compared to 227.21%.

The level of 30 to 89 days delinquent loans decreased to $17.5 million, from $19.2 million.

The Company’s allowance for loan credit losses was 0.66% of total loans for each period.

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

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

September 30, December 31,

March 31, December 31,

Special Mention $ 69,283 $ 40,385

Substandard 98,241 106,552

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.

The increase in special mention loans was primarily due to new downgrades of three commercial relationships totaling $33.5 million, partly offset by three commercial loans totaling $3.5 million which were upgraded during the quarter.

Additionally, the decrease in substandard loans was primarily due to two CRE-Investor Owned relationships totaling $7.6 million that migrated from substandard to pass.

Critical Accounting Policies and Estimates

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Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments.

Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value.

Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations.

Certain assets are carried on the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value.

The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters.

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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.

Goodwill in accordance with ASC 350, Intangibles – Goodwill and Other was a critical accounting estimate in the preparation of the consolidated financial statements.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2024

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.

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

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

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

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

Troubled Debt Restructurings and Vintage Disclosures”.

The amendments in this ASU were issued to (1) eliminate accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty;

(2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases.

For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted.

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

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

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

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

In June 2022, the financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

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

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

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

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

Early adoption is permitted.

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

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

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

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

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

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

Early adoption is permitted.

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

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

Recent Accounting Pronouncements Not Yet Adopted

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

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

In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures”.

The amendments in this ASU require improved reportable segment information on an annual and interim basis, primarily through enhanced disclosures about significant segment expenses.

This update will be effective for financial statements issued for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024.

Early adoption is permitted.

The Company does not expect this standard to have an impact on the consolidated financial statements.

In December 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures”.

The amendments in this ASU require improved annual income tax disclosures surrounding rate reconciliation, income taxes paid, and other disclosures.

This update will be effective for financial statements issued for fiscal years beginning after December 15, 2024.

Early adoption is permitted.

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

Private Securities Litigation Reform Act Safe Harbor Statement

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The Company’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:

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.

Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed under Item 1A.

Risk Factors herein and the following:

changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Company’s lending area, real estate market values in the Company’s lending area, potential goodwill impairment, natural disasters, potential increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S.

Government including policies of the U.S.

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

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, the availability of low-cost funding, changes in liquidity, including the size and composition of the Company’s deposit portfolio, including the percentage of uninsured deposits in the portfolio, changes in capital management and balance sheet strategies and the ability to successfully implement such strategies, 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 effect of the Company’s rating under the Community Reinvestment Act, the impact of pandemics 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, 2023, 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.

1 unchanged sentence

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What changed 10-Q

Item 2. Management’s Discussion and Analysis