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For the transition period from                      to                     

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Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No   ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐ NO ☒.

As of July 29, 2024, there were 58,484,418 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

(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 three months ended June 30, 2024 included a net gain on equity investments of $887,000, or $699,000, net of tax expense. Performance ratios for the three months 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 a Federal Deposit Insurance Corporation (“FDIC”) special assessment of $2.7 million, or $2.0 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.

(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 June 30, 2024 and March 31, 2024, non-performing loans included the remaining exposure of $7.2 million and $8.8 million, respectively, on a commercial real estate relationship that was partially charged-off during the three months ended June 30, 2024 and in the previous year.

(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 $6.1 million, $7.0 million, and $9.8 million at June 30, 2024, March 31, 2024 and June 30, 2023, respectively.

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 between Massachusetts and Virginia. 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 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 three months ended June 30, 2024 were as follows:

•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 1.42%, 0.33%, and 0.10%, respectively. These metrics continue to reflect strong credit performance and remain low compared to pre-pandemic levels.

•Capital Accretion: Common equity tier 1 capital ratio and book value per share were 11.2% and $28.67, respectively, and increased approximately 20 basis points and $0.35 from the prior linked quarter.

•Share repurchases: The Company repurchased 338,087 shares totaling $5.0 million. The Company has 1,638,524 shares available for repurchase under the authorized repurchase program.

The current quarter net interest income and margin were impacted by a mix-shift to and repricing of higher cost funding, and unanticipated prepayments on commercial loans. Deposit beta, which is the change in rates paid to customers relative to the change in federal funds target rate, increased modestly to 42%, from 40% in the prior linked quarter. Additionally, the current quarter provision for credit losses includes the impact of an additional $1.6 million charge-off on the single commercial real estate relationship that was previously moved to non-accrual and partially charged-off in 2023. The collateral related to the noted credit is currently under an agreement to sell, which is expected to occur during the third quarter of 2024.

Net income available to common stockholders for the three and six months ended June 30, 2024 decreased to $23.4 million and $51.0 million, respectively, or $0.40 and $0.87 per diluted share, as compared to $26.8 million and $53.7 million, or $0.45 and $0.91 per diluted share, for the corresponding prior year periods. The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2024 and 2023, respectively.

On July 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 June 30, 2024, will be paid on August 16, 2024 to common stockholders of record on August 5, 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 August 15, 2024 to preferred stockholders of record on July 31, 2024.

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 and six months ended June 30, 2024, interest income included net loan fees of $708,000 and $1.4 million, respectively, as compared to $1.2 million and $1.8 million for the same prior year periods, respectively.

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

(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 the three and six months ended June 30, 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.

Total assets decreased by $216.5 million to $13.32 billion, from $13.54 billion, primarily due to decreases in loans and debt securities. Total loans decreased by $175.3 million to $10.02 billion, from $10.19 billion, primarily due to a decrease in the total commercial portfolio of $165.3 million driven by loan payoffs and lower loan originations. The loan pipeline increased by $76.1 million to $259.1 million from $183.0 million. For more information on the composition of the loan portfolio, see “Lending Activities.” Held-to-maturity debt securities decreased by $53.9 million to $1.11 billion, from $1.16 billion, primarily due to principal repayments. Debt securities available-for-sale decreased $32.4 million to $721.5 million, from $753.9 million, primarily due to principal reductions and maturities. Other assets increased by $23.3 million to $203.0 million, from $179.7 million, primarily due to an increase in the market values of derivatives associated with customer interest rate swap programs.

Total liabilities decreased by $231.2 million to $11.65 billion, from $11.88 billion primarily related to lower deposits and a funding mix shift. Deposits decreased by $440.9 million to $9.99 billion, from $10.43 billion, primarily due to decreases in high-yield savings accounts of $283.1 million and interest bearing deposits of $243.9 million. Time deposits decreased to $2.37 billion, from $2.45 billion, representing 23.7% and 23.4% of total deposits, respectively, which was primarily related to planned runoff of brokered time deposits, which decreased by $229.9 million, offset by increases in retail time deposits of $161.7 million. The loan-to-deposit ratio was 100.3%, as compared to 97.7%. FHLB advances decreased by $59.3 million to $789.3 million, from $848.6 million due to a mix shift in funding sources to other borrowings, which increased by $228.0 million to $424.5 million, from $196.5 million, as a result of lower cost funding availability.

Other liabilities increased by $31.4 million to $332.1 million, from $300.7 million, primarily due to an increase in the market values of derivatives 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 June 30, 2024, including the Company’s estimated common equity tier one capital ratio, which increased to 11.23%, up approximately 35 basis points from December 31, 2023.

Total stockholders’ equity increased to $1.68 billion, as compared to $1.66 billion, primarily reflecting net income, partially offset by capital returns comprising of share repurchases and dividends. For the six months ended June 30, 2024, the Company repurchased 1,295,914 shares totaling $20.1 million representing a weighted average cost of $15.35. The Company had 1,638,524 shares available for repurchase under the authorized repurchase program. Additionally, accumulated other comprehensive loss decreased by $3.7 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 12.59%, as compared to 12.28% and book value per share increased to $28.67, as compared to $27.96.

Net income available to common stockholders for the three and six months decreased to $23.4 million and $51.0 million, respectively, or $0.40 and $0.87 per diluted share, as compared to $26.8 million and $53.7 million, or $0.45 and $0.91 per diluted share, for the corresponding prior year periods. Net income for the three and six months ended June 30, 2024 included net gains on equity investments of $887,000 and $2.8 million, respectively. Net income for the six months ended June 30, 2024 also included a net gain on sale of a portion of its trust business of $1.2 million, and a special FDIC assessment of $418,000. These items increased net income by $699,000 and $2.7 million, net of tax, for the three and six months ended June 30, 2024, respectively.

Net income for the three and six months ended June 30, 2023 included net loss on equity investments of $559,000 and $2.8 million, respectively. Net income for the six months ended June 30, 2023 also included merger related expenses of $22,000, net branch consolidation expense of $70,000 and net loss on sale of investments of $5.3 million. These items decreased net income by $397,000 and $6.2 million, net of tax, for the three and six months ended June 30, 2023, respectively.

Interest income for the three and six months ended June 30, 2024 increased to $159.4 million and $321.0 million, respectively, from $150.1 million and $289.1 million for the corresponding prior year periods. For the three and six months ended June 30, 2024, the yield on average interest-earning assets increased to 5.25%, for both periods, from 4.91% and 4.80% for the corresponding prior year periods. The average balance of interest-earning assets decreased by $46.3 million for the three months ended June 30, 2024, due to balance sheet contraction. The average balance of interest-earning assets increased by $146.4 million for the six months ended June 30, 2024, primarily driven by securities growth of $135.4 million.

Interest expense for the three and six months ended June 30, 2024 increased to $77.2 million and $152.5 million, respectively, from $58.0 million and $98.2 million in the corresponding prior year periods, primarily due to an increase in the cost of interest-bearing liabilities and an increase in total deposits, partly offset by a decrease in total borrowings. For the three and six months ended June 30, 2024, the cost of average interest-bearing liabilities increased to 3.14% and 3.09%, respectively, from 2.39% and 2.08% for the corresponding prior year periods, primarily due to higher cost of deposits. The total cost of deposits (including non-interest-bearing deposits) increased to 2.37% and 2.34% for the three and six months ended June 30, 2024, respectively, from 1.52% and 1.21% for the same prior year periods.

Net interest income for the three and six months ended June 30, 2024 decreased to $82.3 million and $168.5 million, respectively, from $92.1 million and $190.9 million in the corresponding prior year periods, primarily reflecting the net impact of the higher interest rate environment. The net interest margin for the three and six months ended June 30, 2024 decreased to 2.71% and 2.76%, respectively, from 3.02% and 3.17% for the same prior year periods. The net interest margin decreased primarily due to the increase in cost of funds outpacing the increase in yield on average interest-earning assets.

Provision for credit losses for the three and six months ended June 30, 2024 was $3.1 million and $3.7 million, respectively, as compared to $1.2 million and $4.2 million for the corresponding prior year periods. The current quarter provision was driven by the additional charge-off previously noted in the “Summary” section above and changes in the external macro-economic forecasts, partly offset by lower loan balances. Net loan charge-offs were $1.5 million and $1.8 million for the three and six months ended June 30, 2024, respectively, as compared to $123,000 and $76,000 for the same prior year periods.

Other income increased to $11.0 million, as compared to $8.9 million. Other income was favorably impacted by net gains on equity investments of $887,000 for the current quarter, and adversely impacted by net losses on equity investments of $559,000 for the prior year. The remaining increase of $611,000 was primarily driven by increases in the cash surrender value of bank owned life insurance of $544,000 and net gain on sale of loans of $387,000, partially offset by a decrease in fees and service charges of $587,000 on lower title activity and retail deposit fees.

Other income increased to $23.3 million, as compared to $11.0 million. The current period was favorably impacted by net gains on equity investments of $2.8 million and a net gain on sale of a portion of its trust business of $1.2 million. The prior year was adversely impacted by a net loss on equity investments of $8.1 million, primarily related to losses on sale of investments. The remaining increase of $241,000 was primarily driven by increases in the cash surrender value of bank owned life insurance of $1.1 million, which included one-time death benefits in the current period, and net gain on sale of loans of $724,000. This was partially offset by a decrease in fees and service charges of $1.3 million, which was driven by the same factors as noted above.

Operating expenses decreased $4.3 million to $58.6 million, from $62.9 million. The primary drivers were decreases in professional fees of $2.9 million and compensation and employee benefits expenses of $1.1 million, which reflect the net realization of the Company’s performance improvements initiatives and strategic investments made over the past year.

Operating expenses decreased to $117.3 million, as compared to $124.2 million. Operating expenses were adversely impacted by an FDIC special assessment of $418,000 in the current year, and merger related and net branch consolidation expenses of $92,000 in the prior year. The remaining decrease of $7.3 million were driven by decreases in professional fees of $5.3 million and compensation and employee benefits expenses of $2.2 million, which reflect the net realization of the Company’s performance improvements initiatives and strategic investments made over the past year.

The provision for income taxes was $7.1 million and $17.7 million for the three and six months ended June 30, 2024, respectively, as compared to $9.0 million and $17.7 million for the same prior year periods. The effective tax rate was 22.5% and 25.0% for the three and six months ended June 30, 2024, respectively, as compared to 24.4% and 24.0% for the same prior year periods. The current year’s effective tax rates was negatively impacted by 1.6% due to a non-recurring write-off of a deferred tax asset of $1.2 million.

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 June 30, 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 June 30, 2024, total on-balance sheet liquidity and funding capacity was $3.9 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 FDIC insurance as well as the State of New Jersey under the Government Unit Deposit Protection Act, which requires uninsured government deposits to be further collateralized by the Bank. At June 30, 2024, the Bank reported in its Call Report $5.33 billion of estimated uninsured deposits. This total included $2.24 billion of collateralized government deposits and $1.53 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.55 billion, or 15.4% of total deposits. On-balance-sheet liquidity and funding capacity represented 251.4% 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 six months ended June 30, 2024, the Parent Company received dividend payments of $59.0 million from the Bank. At June 30, 2024, the Parent Company held $87.5 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 June 30, 2024, the Company pledged $7.37 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 $1.26 billion of securities to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law. The Company had $789.3 million of FHLB advances, including $104.5 million of overnight borrowings as of June 30, 2024, as compared to $848.6 million of FHLB term advances and no outstanding overnight borrowings from the FHLB at December 31, 2023. The Company had $424.5 million of other borrowings as of June 30, 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’s cash needs for the six months ended June 30, 2024 were primarily satisfied by the increase in other borrowings. The cash was utilized for the reduction of deposits and FHLB advances.

In the normal course of business, the Bank routinely enters into various off-balance sheet commitments, primarily relating to the origination and funding of loans. At June 30, 2024, outstanding commitments to originate loans totaled $259.1 million and outstanding undrawn lines of credit totaled $1.32 billion, of which $1.00 billion were commitments to commercial and commercial construction borrowers and $315.1 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. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

At June 30, 2024, the Company also had various contractual obligations, which included debt obligations of $1.29 billion, including finance lease obligations of $1.6 million, and an additional $18.8 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 $2.29 billion at June 30, 2024.

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 three and six months ended June 30, 2024, the Company repurchased 338,087 and 1,295,914 shares of its common stock, respectively, totaling $5.0 million and $20.1 million, respectively. At June 30, 2024, there were 1,638,524 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the first six months of June 30, 2024 were $23.6 million. Cash dividends on preferred stock declared and paid during the first six months of June 30, 2024 were $2.0 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.

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 June 30, 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.

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

(1)Includes the Capital Conservation Buffer of 2.50%.

At June 30, 2024 and December 31, 2023, the Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations.

At June 30, 2024 and December 31, 2023, the Company maintained a stockholders’ equity to total assets ratio of 12.59% and 12.28%, respectively.

Loan Portfolio Composition. At June 30, 2024, the Company had total loans outstanding of $10.02 billion, of which $6.18 billion, or 61.7% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of: $616.4 million of commercial and industrial loans, or 6.2% of total loans; $2.98 billion of residential real estate loans, or 29.7% of total loans; and $242.5 million of consumer loans, primarily home equity loans and lines of credit, or 2.4% of total loans.

Commercial real estate. The Bank originates commercial real estate loans that are secured by properties, or properties under construction, that are generally used for business 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 June 30, 2024, of the total commercial real estate portfolio, $5.32 billion or 86.1% was considered investor-owned and $857.7 million or 13.9% 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 table presents the Company’s commercial real estate - investor owned loans by industry as of June 30, 2024:

(1) Represents the weighted average of loan balances as of June 30, 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 11.2%, 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 $14 million, or 0.11% 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 $42 million, or 0.31% 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 June 30, 2024:

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.

			June 30,						December 31,
			2024						2023
			(dollars in thousands)
Non-performing loans (1):
Commercial real estate – investor			$	19,761					$	20,820
Commercial real estate – owner occupied			4,081						351
Commercial and industrial			434						304
Residential real estate			7,213						5,542
Other consumer			1,933						2,531
Total non-performing loans and assets			$	33,422					$	29,548
PCD loans, net of allowance for loan credit losses			$	16,058					$	16,122
Delinquent loans 30-89 days			$	9,655					$	19,202
Allowance for loan credit losses as a percent of total loans (2)			0.69		%				0.66		%
Allowance for loan credit losses as a percent of total non-performing loans (2)			205.97						227.21
Non-performing loans as a percent of total loans receivable			0.33						0.29
Non-performing assets as a percent of total assets			0.25						0.22

(1)At June 30, 2024 and December 31, 2023, non-performing loans included the remaining exposure of $7.2 million and $8.8 million, respectively, on a commercial real estate relationship that was partially charged-off during the three months ended June 30, 2024, and previously partially charged-off during the year ended December 31, 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 $6.1 million and $7.5 million at June 30, 2024 and December 31, 2023, respectively.

Overall asset quality metrics remained stable. The Company’s non-performing loans represented 0.33% and 0.29% of total loans, respectively. The allowance for loan credit losses as a percentage of total non-performing loans was 205.97%, as compared to 227.21%. The level of 30 to 89 days delinquent loans decreased to $9.7 million, from $19.2 million. The Company’s allowance for loan credit losses was 0.69%, as compared to 0.66%.

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):

The increase in special mention loans was primarily due to new downgrades of three commercial relationships totaling $24.8 million, partly offset by four commercial loans totaling $10.1 million, which were upgraded and one commercial loan of $5.9 million moving from special mention to substandard during the six months ended June 30, 2024. Additionally, the decrease in substandard loans was primarily due to eight commercial relationships totaling $17.0 million that were paid off or were upgraded, which was partially offset by the $5.9 million category change noted above.

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 Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other was a critical accounting estimate in the preparation of the consolidated financial statements at June 30, 2024 and December 31, 2023.

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 may result in recording an impairment loss. Any resulting impairment loss may have a material adverse impact on the Company’s financial condition and results of operations and is considered a non-cash event with no impact to the Company’s regulatory capital ratios, liquidity position, and ongoing operations.

Management continued to carefully assess and evaluate all available information for potential triggering events and concluded no triggering events were identified through the reporting period. The Company customarily performs its annual goodwill impairment assessment during the third quarter.

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 a material impact on the financial condition or results of operations but is currently assessing the impact of additional disclosures to 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.

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, 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, and 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.

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from the IRR inherent in its lending, investment, deposit-taking, and funding activities. The Company’s profitability is affected by fluctuations in interest rates. Changes in interest rates may negatively or positively impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. Changes in interest rates may also negatively or positively impact the market value of the Company’s investment securities, in particular fixed-rate instruments. Net gains or losses in available-for-sale securities can increase or decrease accumulated other comprehensive income or loss and total stockholders’ equity. Management actively monitors and manages IRR. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings and stockholders’ equity of the Company.

The principal objectives of the IRR management function are to: evaluate the IRR inherent in the Company’s business; determine the level of risk appropriate given the Company’s business focus, operating and interest rate environment, capital and liquidity requirements, and performance objectives; and manage the risk consistent with Board approved guidelines. The Company’s Board maintains an Asset Liability Committee (“ALCO”) consisting of members of management, responsible for reviewing asset liability policies and the IRR position. ALCO meets regularly and reports the Company’s IRR position and trends to the Board on a regular basis.

The Company utilizes a number of strategies to manage IRR including, but not limited to: (1) managing the origination, purchase, sale, and retention of various types of loans with differing IRR profiles; (2) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing stable relationship-based deposits and longer-term deposits; (3) selectively purchasing interest rate swaps and caps converting the rates for customer loans to manage individual loans and the Bank’s overall IRR profile; (4) managing the investment portfolio IRR profile; (5) managing the maturities and rate structures of borrowings and time deposits; and (6) purchasing interest rate swaps to manage overall balance sheet interest rate risk.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” Interest rate sensitivity is monitored through the use of an IRR model, which measures the change in the institution’s economic value of equity (“EVE”) and net interest income under various interest rate scenarios. EVE is the difference between the net present value of assets, liabilities and off-balance-sheet contracts. Interest rate sensitivity is monitored by management through the use of a model which measures IRR by modeling the change in EVE and net interest income over a range of interest rate scenarios. Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates. Pricing caps and floors are included in the results, where applicable. The Company uses prepayment expectations set forth by market sources as well as Company generated data where applicable. Generally, cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet. Other assumptions about balance sheet mix are generally held constant. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2023 Form 10-K and this Quarterly Report on Form 10-Q.

The methodologies and assumptions used in this analysis are periodically evaluated and refined in response to changes in the market environment, changes in the Company’s balance sheet composition, enhancements in the Company’s modeling and other factors. Such changes may affect historical comparisons of these results.

The Company performs a variety of EVE and twelve-month net interest income sensitivity scenarios. The following table sets forth sensitivity for a specific range of interest rate scenarios as of June 30, 2024 and December 31, 2023.

The net interest income sensitivity results indicate that at June 30, 2024 the Company was modestly asset sensitive. The change in sensitivity between June 30, 2024 and December 31, 2023 was impacted by a deposit mix shift within non-maturity deposits with lower betas as well as a change in loan prepayments, partially offset by a decrease in floating rate loans, an increase in overnight and short-term borrowings and reduction in short-term time deposits.

Overall, the measure of EVE at risk decreased in all rate scenarios from December 31, 2023 to June 30, 2024. This decrease was the result of a deposit mix shift within non-maturity deposits with lower betas and longer average lives, as well as a change in loan prepayments.

Certain shortcomings are inherent in the methodology used in the EVE and net interest income IRR measurements. The model requires the making of certain assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the model assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the model assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Company’s business or strategic plans or any steps it may take to respond to changes in rates. Fourth, prepayment, rate sensitivity, and average life assumptions can have a significant impact on the IRR model results. Lastly, the model utilizes data derived from historical performance. Accordingly, although the above measurements provide an indication of the Company’s IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income can be expected to significantly differ from actual results.

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(in thousands, except per share amounts)