OCEANFIRST FINANCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL SUMMARY (1) At or for the Quarters Ended (dollars in thousands, except per share amounts) March 31, 2024 December 31, 2023 March 31, 2023 SELECTED FINANCIAL CONDITION DATA: Total assets $ 13,418,978 $ 13,538,253 $ 13,555,175 Loans receivable, net of allowance for loan credit losses 10,068,209 10,136,721 9,986,949 Deposits 10,236,851 10,434,949 9,993,095 Total stockholders’ equity 1,665,837 1,661,945 1,610,371 SELECTED OPERATING DATA: Net interest income 86,224 87,824 98,802 Provision for credit losses 591 3,153 3,013 Other income 12,286 11,861 2,073 Operating expenses 58,672 60,189 61,309 Net income 28,610 27,752 27,899 Net income attributable to OceanFirst Financial Corp. 28,667 27,682 27,883 Net income available to common stockholders 27,663 26,678 26,879 Diluted earnings per share 0.47 0.46 0.46 SELECTED FINANCIAL RATIOS: Book value per common share at end of period 28.32 27.96 27.07 Cash dividend per share 0.20 0.20 0.20 Dividend payout ratio per common share 42.55 % 43.48 % 43.48 % Stockholders’ equity to total assets 12.41 12.28 11.88 Return on average assets (2) (3) (4) 0.82 0.78 0.82 Return on average stockholders’ equity (2) (3) (4) 6.65 6.41 6.77 Net interest rate spread (5) 2.23 2.25 2.94 Net interest margin (2) (6) 2.81 2.82 3.34 Operating expenses to average assets (2) (4) 1.74 1.76 1.88 Efficiency ratio (4) (7) 59.56 60.38 60.78 Loan-to-deposit ratio (8) 98.90 97.70 100.50 ASSET QUALITY (9) : Non-performing loans (10) $ 35,011 $ 29,548 $ 22,437 Allowance for loan credit losses as a percent of total loans receivable (8) (11) 0.66 % 0.66 % 0.60 % Allowance for loan credit losses as a percent of total non-performing loans (10) (11) 191.86 227.21 268.28 Non-performing loans as a percent of total loans receivable (8) (10) 0.35 0.29 0.22 Non-performing assets as a percent of total assets (10) 0.26 0.22 0.17 (1) With the exception of end of quarter ratios, all ratios are based on average daily balances. (2) Ratios are annualized. (3) Ratios for each period are based on net income available to common stockholders. (4) Performance ratios for the quarter ended March 31, 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. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets. (7) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income. (8) Total loans receivable excludes loans held-for-sale. (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. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest. (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 $7.0 million, $7.5 million, and $10.5 million at March 31, 2024, December 31, 2023 and March 31, 2023, respectively. 4 Table of Contents Summary OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The term “Company” refers to OceanFirst Financial Corp., the Bank and all 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, 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 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 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 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 May 15, 2024 to preferred stockholders of record on April 30, 2024. 5 Table of Contents Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the three months ended March 31, 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. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields. For the Three Months Ended March 31, 2024 2023 (dollars in thousands) Average Balance Interest Average Yield/ Cost (1) Average Balance Interest Average Yield/ Cost (1) Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 163,192 $ 2,226 5.49 % $ 129,740 $ 938 2.93 % Securities (2) 2,098,421 22,255 4.27 1,955,399 16,376 3.40 Loans receivable, net (3) Commercial 6,925,048 104,421 6.06 6,840,006 92,780 5.50 Residential real estate 2,974,468 28,596 3.85 2,872,049 25,161 3.50 Home equity loans and lines and other consumer (“other consumer”) 248,396 4,104 6.65 263,404 3,779 5.82 Allowance for loan credit losses, net of deferred loan costs and fees (59,141) — — (50,554) — — Loans receivable, net 10,088,771 137,121 5.46 9,924,905 121,720 4.96 Total interest-earning assets 12,350,384 161,602 5.26 12,010,044 139,034 4.68 Non-interest-earning assets 1,206,336 1,234,549 Total assets $ 13,556,720 $ 13,244,593 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing checking $ 3,925,965 20,795 2.13 % $ 3,863,338 6,269 0.66 % Money market 1,092,003 9,172 3.38 705,631 1,759 1.01 Savings 1,355,718 4,462 1.32 1,369,118 334 0.10 Time deposits 2,414,063 25,426 4.24 1,826,662 12,968 2.88 Total 8,787,749 59,855 2.74 7,764,749 21,330 1.11 Federal Home Loan Bank (“FHLB”) advances 644,818 7,771 4.85 1,222,791 14,614 4.85 Securities sold under agreements to repurchase 68,500 411 2.41 71,898 90 0.51 Other borrowings (4) 500,901 7,341 5.89 306,156 4,198 5.56 Total borrowings 1,214,219 15,523 5.14 1,600,845 18,902 4.79 Total interest-bearing liabilities 10,001,968 75,378 3.03 9,365,594 40,232 1.74 Non-interest-bearing deposits 1,634,583 2,028,507 Non-interest-bearing liabilities (4) 247,129 240,815 Total liabilities 11,883,680 11,634,916 Stockholders’ equity 1,673,040 1,609,677 Total liabilities and equity $ 13,556,720 $ 13,244,593 Net interest income $ 86,224 $ 98,802 Net interest rate spread (5) 2.23 % 2.94 % Net interest margin (6) 2.81 % 3.34 % Total cost of deposits (including non-interest-bearing deposits) 2.31 % 0.88 % (1) Average yields and costs are annualized. (2) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank (“FRB”) stock, and are recorded at average amortized cost, net of allowance for securities credit losses. (3) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans. (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. 6 Table of Contents 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 $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. 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. 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 General 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 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 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%. 7 Table of Contents Net Interest Income and Margin 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 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 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 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 $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. 8 Table of Contents Liquidity and Capital Resources Liquidity Management The Company manages its liquidity and funding needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses liquidity and management monitors the adherence to policy limits to satisfy current and future cash flow needs. The policy includes internal limits, monitoring of key indicators, deposit concentrations, liquidity sources and availability, 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 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 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 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 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 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 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 9 Table of Contents 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 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 $2.24 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 and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the quarter ended March 31, 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 The Company manages its capital sources, uses, and expected future needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses capital and management monitors the adherence to policy limits to satisfy current and future capital needs. The policy includes internal limits, monitoring of key indicators, sources and availability, intercompany transactions, forecasts and stress testing, and other qualitative and quantitative metrics. Additionally, management performs multiple capital stress test scenarios 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. 10 Table of Contents Regulatory Capital Requirements 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 purposes To be well-capitalized under prompt corrective action As of March 31, 2024 Amount Ratio Amount Ratio Amount Ratio Company: Tier 1 capital (to average assets) $ 1,223,658 9.38 % $ 521,831 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 1,093,935 11.01 695,214 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,223,658 12.32 844,189 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,419,157 14.29 1,042,821 10.50 (1) N/A N/A Bank: Tier 1 capital (to average assets) $ 1,148,120 8.87 % $ 517,815 4.00 % $ 647,269 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,148,120 11.68 687,868 7.00 (1) 638,734 6.50 Tier 1 capital (to risk-weighted assets) 1,148,120 11.68 835,268 8.50 (1) 786,134 8.00 Total capital (to risk-weighted assets) 1,218,619 12.40 1,031,802 10.50 (1) 982,668 10.00 As of December 31, 2023 Company: Tier 1 capital (to average assets) $ 1,218,142 9.31 % $ 523,588 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 1,088,542 10.86 701,778 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,218,142 12.15 852,159 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,413,400 14.10 1,052,667 10.50 (1) N/A N/A Bank: Tier 1 capital (to average assets) $ 1,155,896 8.90 % $ 519,690 4.00 % $ 649,612 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,155,896 11.65 694,620 7.00 (1) 645,004 6.50 Tier 1 capital (to risk-weighted assets) 1,155,896 11.65 843,467 8.50 (1) 793,852 8.00 Total capital (to risk-weighted assets) 1,226,154 12.36 1,041,930 10.50 (1) 992,315 10.00 (1) Includes the Capital Conservation Buffer of 2.50%. The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations. At March 31, 2024 and December 31, 2023, the Company maintained a stockholders’ equity to total assets ratio of 12.41% and 12.28%, respectively. 11 Table of Contents 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 Other (5) 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. 12 Table of Contents 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. March 31, December 31, 2024 2023 (dollars in thousands) Non-performing loans (1) : Commercial real estate – investor $ 21,507 $ 20,820 Commercial real estate – owner occupied 3,355 351 Commercial and industrial 567 304 Residential real estate 7,181 5,542 Other consumer 2,401 2,531 Total non-performing loans and assets $ 35,011 $ 29,548 PCD loans, net of allowance for loan credit losses $ 16,700 $ 16,122 Delinquent loans 30-89 days $ 17,534 $ 19,202 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) 191.86 227.21 Non-performing loans as a percent of total loans receivable 0.35 0.29 Non-performing assets as a percent of total assets 0.26 0.22 (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. 13 Table of Contents The Company classifies loans and other assets in accordance with regulatory guidelines. The table below excludes any loans held-for-sale and represents Special Mention and Substandard assets (in thousands): March 31, December 31, 2024 2023 Special Mention $ 69,283 $ 40,385 Substandard 98,241 106,552 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. 14 Table of Contents 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, 2023 (the “2023 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried on 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 and high level of subjectivity. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors. 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 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. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restriction. This update is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. 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): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. 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): 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. 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. 15 Table of Contents Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, 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, 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. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 16 Table of Contents