QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-11713
________________________________________________
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
________________________________________________
Delaware
22-3412577
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
110 West Front Street,
Red Bank,
NJ
07701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732) 240-4500
________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
OCFC
NASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)
OCFCP
NASDAQ
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.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
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
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)
September 30, 2024
June 30, 2024
September 30, 2023
SELECTED FINANCIAL CONDITION DATA:
Total assets
$
13,488,483
$
13,321,755
$
13,498,183
Loans receivable, net of allowance for loan credit losses
9,963,598
9,961,117
10,068,156
Deposits
10,116,167
9,994,017
10,533,929
Total stockholders’ equity
1,694,508
1,676,669
1,637,604
SELECTED OPERATING DATA:
Net interest income
82,219
82,263
90,996
Provision for credit losses
517
3,114
10,283
Other income
14,684
10,985
10,762
Operating expenses
63,736
58,620
64,484
Net income
25,186
24,432
20,532
Net income attributable to OceanFirst Financial Corp.
25,116
24,373
20,667
Net income available to common stockholders
24,112
23,369
19,663
Diluted earnings per share
0.42
0.40
0.33
SELECTED FINANCIAL RATIOS:
Book value per common share at end of period
29.02
28.67
27.56
Cash dividend per share
0.20
0.20
0.20
Dividend payout ratio per common share
47.62
%
50.00
%
60.61
%
Stockholders’ equity to total assets
12.56
12.59
12.13
Return on average assets (2) (3) (4)
0.71
0.70
0.57
Return on average stockholders’ equity (2) (3) (4)
5.68
5.61
4.75
Net interest rate spread (5)
2.06
2.11
2.37
Net interest margin (2) (6)
2.67
2.71
2.91
Operating expenses to average assets (2) (4)
1.89
1.75
1.88
Efficiency ratio (4) (7)
65.77
62.86
63.37
Loan-to-deposit ratio (8)
99.10
100.30
96.10
ASSET QUALITY (9):
Non-performing loans (10)
$
28,139
$
33,422
$
30,098
Allowance for loan credit losses as a percent of total loans receivable (8) (11)
0.69
%
0.69
%
0.63
%
Allowance for loan credit losses as a percent of total non-performing loans (10) (11)
245.45
205.97
212.23
Non-performing loans as a percent of total loans receivable (8) (10)
0.28
0.33
0.30
Non-performing assets as a percent of total assets (10)
0.21
0.25
0.22
(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Ratios are annualized.
(3) Ratios are based on net income available to common stockholders.
(4) Performance ratios for the three months ended September 30, 2024 included a net benefit of $1.2 million, or $919,000, net of tax expense, related to a net gain on equity investments, a net gain on sale of trust business and merger related expenses. 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 September 30, 2023 included a net gain on equity investments of $1.5 million, or $1.1 million, net of tax expense.
(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(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) The quarters ended September 30, 2023 and 2024 include the addition and subsequent resolution of a single commercial relationship exposure of $7.2 million, which had life-to-date charge-offs of $10.0 million.
(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 $5.7 million, $6.1 million, and $8.8 million at September 30, 2024, June 30, 2024 and September 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, sales of loans and investments, 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 September 30, 2024 were as follows:
•Net Interest Income Stabilization:Net interest income of$82.2 millionfor the quarter as compared to $82.3 millionin the prior linked quarter.
•Deposits: Total deposits increased by$122.2 millionto$10.1 billionfrom$10.0 billion,and the loan-to-deposit ratio was99%atSeptember 30, 2024.
•Strategic Investments: The results include $3.3 million of expenses, of which$1.7 millionrelated to merger and acquisition costs for the talent acquisition of Garden State Home Loans, Inc. and acquisition of Spring Garden Capital Group, LLC.1 These are expected to improve future operating performance by expanding fee revenue and specialty finance offerings.
•Asset Quality: Asset quality metrics remain strong as non-performing loans and loans 30 to 89 days past due as a percentage of total loans receivable were 0.28% and 0.15%, respectively. Non-performing loans decreased by $5.3 million, to $28.1 million, and the Company recorded net loan recoveries of $88,000 for the quarter.
The current quarter was impacted by a continued mix-shift and repricing of funding costs. Further, the results were impacted by the following non-recurring events: $1.7 million of merger related expenses, a $1.4 million gain on sale of a portion of the Company’s trust business, a $855,000 gain on sale of assets held for sale, and the resolution, via sale of collateral, of a single commercial real estate relationship of $7.2 million that was moved to non-accrual and partially charged-off in prior periods.
Net income available to common stockholders for the three and nine months ended September 30, 2024 increased to $24.1 million and $75.1 million, respectively, or $0.42 and $1.29 per diluted share, as compared to $19.7 million and $73.3 million, or $0.33 and $1.24 per diluted share, for the corresponding prior year periods. The dividends paid to preferred stockholders were $1.0 million and $3.0 million for the three and nine months ended September 30, 2024 and 2023, respectively.
On October 17, 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 September 30, 2024, will be paid on November 15, 2024 to common stockholders of record on November 4, 2024. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing a 1/40th interest in the Series A Preferred Stock. This dividend will be paid on November 15, 2024 to preferred stockholders of record on October 31, 2024.
1 The talent acquisition of Garden State Home Loans, Inc. was effective August 3, 2024. Additionally, the acquisition of Spring Garden Capital Group, LLC was effective October 1, 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 nine months ended September 30, 2024, interest income included net loan fees of $730,000 and $2.6 million, respectively, as compared to $621,000 and $2.6 million for the same prior year periods, respectively.
The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 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 September 30,
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
$
210,245
$
2,971
5.62
%
$
470,825
$
6,440
5.43
%
Securities (2)
2,063,633
21,919
4.23
1,873,450
18,039
3.82
Loans receivable, net (3)
Commercial
6,782,777
102,881
6.03
6,923,743
103,069
5.91
Residential real estate
2,992,138
29,677
3.97
2,918,612
26,765
3.67
Home equity loans and lines and other consumer (“other consumer”)
242,942
4,077
6.68
252,126
4,097
6.45
Allowance for loan credit losses, net of deferred loan costs and fees
(59,063)
—
—
(53,959)
—
—
Loans receivable, net
9,958,794
136,635
5.46
10,040,522
133,931
5.30
Total interest-earning assets
12,232,672
161,525
5.26
12,384,797
158,410
5.08
Non-interest-earning assets
1,206,024
1,252,416
Total assets
$
13,438,696
$
13,637,213
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking
$
3,856,281
21,731
2.24
%
$
3,692,500
14,938
1.61
%
Money market
1,256,536
11,454
3.63
832,729
5,698
2.71
Savings
1,088,926
2,218
0.81
1,391,811
3,311
0.94
Time deposits
2,339,370
26,915
4.58
2,867,921
29,340
4.06
Total
8,541,113
62,318
2.90
8,784,961
53,287
2.41
Federal Home Loan Bank (“FHLB”) advances
757,535
9,140
4.80
701,343
8,707
4.93
Securities sold under agreements to repurchase
75,871
491
2.57
76,620
261
1.35
Other borrowings
499,839
7,357
5.86
317,210
5,159
6.45
Total borrowings
1,333,245
16,988
5.07
1,095,173
14,127
5.12
Total interest-bearing liabilities
9,874,358
79,306
3.20
9,880,134
67,414
2.71
Non-interest-bearing deposits
1,634,743
1,841,198
Non-interest-bearing liabilities
240,560
272,982
Total liabilities
11,749,661
11,994,314
Stockholders’ equity
1,689,035
1,642,899
Total liabilities and equity
$
13,438,696
$
13,637,213
Net interest income
$
82,219
$
90,996
Net interest rate spread (4)
2.06
%
2.37
%
Net interest margin (5)
2.67
%
2.91
%
Total cost of deposits (including non-interest-bearing deposits)
Interest-earning deposits and short-term investments
$
168,822
$
6,966
5.51
%
$
304,184
$
11,661
5.13
%
Securities (2)
2,073,552
65,782
4.24
1,919,660
51,124
3.56
Loans receivable, net (3)
Commercial
6,851,021
309,922
6.04
6,892,456
295,199
5.73
Residential real estate
2,981,822
87,345
3.91
2,895,601
77,862
3.59
Other consumer
245,777
12,538
6.81
257,063
11,694
6.08
Allowance for loan credit losses, net of deferred loan costs and fees
(58,825)
—
—
(52,626)
—
—
Loans receivable, net
10,019,795
409,805
5.46
9,992,494
384,755
5.15
Total interest-earning assets
12,262,169
482,553
5.25
12,216,338
447,540
4.90
Non-interest-earning assets
1,216,562
1,234,942
Total assets
$
13,478,731
$
13,451,280
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking
$
3,881,344
63,570
2.19
%
$
3,757,417
33,171
1.18
%
Money market
1,177,612
31,107
3.53
744,689
11,136
2.00
Savings
1,202,533
9,284
1.03
1,336,497
4,034
0.40
Time deposits
2,363,542
78,283
4.42
2,388,299
64,210
3.59
Total
8,625,031
182,244
2.82
8,226,902
112,551
1.83
FHLB Advances
704,911
25,657
4.86
1,055,106
38,530
4.88
Securities sold under agreements to repurchase
72,239
1,380
2.55
73,441
544
0.99
Other borrowings
513,951
22,566
5.86
302,649
14,008
6.19
Total borrowings
1,291,101
49,603
5.13
1,431,196
53,082
4.96
Total interest-bearing liabilities
9,916,132
231,847
3.12
9,658,098
165,633
2.29
Non-interest-bearing deposits
1,631,841
1,913,624
Non-interest-bearing liabilities
251,878
253,014
Total liabilities
11,799,851
11,824,736
Stockholders’ equity
1,678,880
1,626,544
Total liabilities and equity
$
13,478,731
$
13,451,280
Net interest income
$
250,706
$
281,907
Net interest rate spread (4)
2.13
%
2.61
%
Net interest margin (5)
2.73
%
3.09
%
Total cost of deposits (including non-interest-bearing deposits)
2.37
%
1.48
%
(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)Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by average interest-earning assets.
Comparison of Financial Condition at September 30, 2024 and December 31, 2023
Total assets decreased by $49.8 million to $13.49 billion, from $13.54 billion, primarily due to decreases in loans, partly offset by an increase in total debt securities. Total loans decreased by $172.4 million to $10.02 billion, from $10.19 billion, primarily due to a decrease in the total commercial portfolio of $188.4 million driven by loan payoffs. The loan pipeline increased by $168.6 million to $351.6 million, from $183.0 million. Loan originations increased $206.4 million to $430.9 million, from $224.5 million, primarily in commercial loans. For more information on the composition of the loan portfolio, see “Lending Activities.” Held-to-maturity debt securities decreased by $84.6 million to $1.08 billion, from $1.16 billion, primarily due to principal repayments. Debt securities available-for-sale increased $157.9 million to $911.8 million, from $753.9 million, primarily due to new purchases. Other assets decreased by $20.3 million to $159.3 million, from $179.7 million, primarily due to a decrease in market values associated with customer interest rate swap programs.
Total liabilities decreased by $82.3 million to $11.79 billion, from $11.88 billion, primarily related to lower deposits offset by a funding mix shift to other borrowings. Deposits decreased by $318.8 million to $10.12 billion, from $10.43 billion, primarily due to decreases in high-yield savings accounts of $326.9 million and time deposits of $224.6 million, offset by increases in money market accounts of $266.8 million. Time deposits decreased to $2.22 billion, from $2.45 billion, representing 22.0% and 23.4% of total deposits, respectively, which was primarily related to planned runoff of brokered time deposits, which decreased by $430.4 million, offset by increases in retail time deposits of $221.4 million. The loan-to-deposit ratio was 99.1%, as compared to 97.7%. FHLB advances increased by $43.2 million to $891.9 million, from $848.6 million, and other borrowings increased by $223.5 million to $419.9 million, from $196.5 million, as a result of lower-cost funding availability.
Other liabilities decreased by $43.1 million to $257.6 million, from $300.7 million, primarily due to a decrease 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 September 30, 2024, including the Company’s common equity tier one capital ratio, which increased to 11.3%, up approximately 40 basis points from December 31, 2023.
Total stockholders’ equity increased to $1.69 billion, as compared to $1.66 billion, primarily reflecting net income, partially offset by capital returns comprising of dividends and share repurchases. For the nine months ended September 30, 2024, the Company repurchased 1,383,238 shares totaling $21.5 million at a weighted average cost of $15.38. The Company had 1,551,200 shares available for repurchase under the authorized repurchase program. Additionally, accumulated other comprehensive loss decreased by $8.7 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 12.56%, as compared to 12.28% and book value per share increased to $29.02, as compared to $27.96.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2024 and September 30, 2023
General
Net income available to common stockholders for the three and nine months increased to $24.1 million and $75.1 million, respectively, or $0.42 and $1.29 per diluted share, as compared to $19.7 million and $73.3 million, or $0.33 and $1.24 per diluted share, for the corresponding prior year periods. Net income for the three and nine months ended September 30, 2024 included net gains on equity investments of $1.4 million and $4.2 million, respectively, a net gain on sale of a portion of its trust business of $1.4 million and $2.6 million, respectively, and merger related expenses of $1.7 million for both periods. Net income for the nine months ended September 30, 2024 included a special Federal Deposit Insurance Corporation (“FDIC”) assessment of $418,000. These items, net of tax, increased net income by $919,000 and $3.6 million for the three and nine months ended September 30, 2024, respectively.
Net income for the three and nine months ended September 30, 2023 included net gain on equity investments of $1.5 million and a net loss on equity investments of $1.3 million, respectively. Net income for the nine months ended September 30, 2023 also included merger related expenses of $22,000, net branch consolidation expense of $70,000 and net loss on sale of investments of $5.3 million. These items increased net income by $1.1 million and decreased net income by $5.1 million, net of tax, for the three and nine months ended September 30, 2023, respectively.
Interest Income
Interest income for the three and nine months ended September 30, 2024 increased to $161.5 million and $482.6 million, respectively, from $158.4 million and $447.5 million for the corresponding prior year periods. For the three and nine months ended September 30, 2024, the yield on average interest-earning assets increased to 5.26% and 5.25%, respectively, from
5.08% and 4.90% for the corresponding prior year periods. The average balance of interest-earning assets decreased by $152.1 million for the three months ended September 30, 2024, due to balance sheet contraction. The average balance of interest-earning assets increased by $45.8 million for the nine months ended September 30, 2024, primarily driven by securities growth of $153.9 million which was funded through the decrease of $135.4 million of interest-earning deposits and short-term investments and additional borrowings.
Interest Expense
Interest expense for the three and nine months ended September 30, 2024 increased to $79.3 million and $231.8 million, respectively, from $67.4 million and $165.6 million in the corresponding prior year periods, primarily due to an increase in the cost of deposits, partly offset by a decrease in the cost of total borrowings. For the three and nine months ended September 30, 2024, the cost of average interest-bearing liabilities increased to 3.20% and 3.12%, respectively, from 2.71% and 2.29% 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 2.44% and 2.37% for the three and nine months ended September 30, 2024, respectively, from 1.99% and 1.48% for the same prior year periods.
Net Interest Income and Margin
Net interest income for the three and nine months ended September 30, 2024 decreased to $82.2 million and $250.7 million, respectively, from $91.0 million and $281.9 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 nine months ended September 30, 2024 decreased to 2.67% and 2.73%, respectively, from 2.91% and 3.09% 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
Provision for credit losses for the three and nine months ended September 30, 2024 was $517,000 and $4.2 million, respectively, as compared to $10.3 million and $14.5 million for the corresponding prior year periods. The lower provision for the current quarter was a result of flat loan growth, net loan recoveries, and the net effect of shifts in the Company’s loan portfolio and external macro economic forecasts. Net loan recoveries were $88,000 and net loan charge-offs were $1.7 million for the three and nine months ended September 30, 2024, respectively, as compared to net loans charge-offs of $8.3 million for both the same prior year periods. The prior year periods included a partial charge-off of $8.4 million for a single commercial real estate relationship, which was resolved through the sale of the underlying collateral in the current quarter.
Non-interest Income
Three months ended September 30, 2024vs.September 30, 2023
Other income increased to $14.7 million, as compared to $10.8 million. Other income was favorably impacted by net gains on equity investments of $1.4 million and $1.5 million, for the respective quarters, and a $1.4 million gain on sale of a portion of the Company’s trust business in the current quarter. The remaining increase of $2.5 million was primarily driven by increases in fees and service charges of $918,000 related to treasury management fees, a non-recurring gain on sale of assets held for sale of $855,000, and net gain on sale of loans of $439,000.
Nine months ended September 30, 2024 vs. September 30, 2023
Other income increased to $38.0 million, as compared to $21.8 million. The current period was favorably impacted by net gains on equity investments of $4.2 million and a net gain on sale of a portion of its trust business of $2.6 million. The prior year was adversely impacted by a net loss on equity investments of $6.6 million, primarily related to losses on sale of investments. The remaining increase of $2.8 million was primarily driven by increases in the cash surrender value of bank owned life insurance of $1.5 million, which included one-time death benefits in the current period, and net gain on sale of loans of $1.2 million, and gain on sale of assets held for sale of $855,000. This was partially offset by a decrease in trust and asset management revenue of $590,000, related to the sale of a portion of the Company’s trust business.
Non-interest Expense
Three months ended September 30, 2024vs.September 30, 2023
Operating expenses decreased to $63.7 million, as compared to $64.5 million. The current quarter was adversely impacted by non-core operations related to merger related expenses of $1.7 million. The remaining decrease of $2.4 million was primarily driven by decreases in professional fees of $3.3 million as the Company realized benefits from the performance improvement
initiatives and investments made in the prior periods. This was partially offset by an increase in other operating expense of $1.1 million, which was partly due to additional loan servicing expenses.
Nine months ended September 30, 2024 vs. September 30, 2023
Operating expenses decreased to $181.0 million, as compared to $188.7 million. Operating expenses were adversely impacted by $2.1 million related to merger related expenses and an FDIC special assessment in the current year, and merger related and net branch consolidation expenses of $92,000 in the prior year. The remaining decrease of $9.7 million was driven by decreases in professional fees of $8.6 million and compensation and employee benefits expenses of $1.9 million, which were due to the same initiatives discussed in the three-month periods above. This was partially offset by an increase in other operating expenses of $1.3 million, which was partly due to additional loan servicing expenses.
Income Tax Expense
The provision for income taxes was $7.5 million and $25.2 million for the three and nine months ended September 30, 2024, respectively, as compared to $6.5 million and $24.1 million for the same prior year periods. The effective tax rate was 22.9% and 24.4% for the three and nine months ended September 30, 2024, respectively, as compared to 23.9% and 24.0% for the same prior year periods. The current quarter’s effective tax rate was positively impacted by geographic mix as compared to the same prior year period and the nine months ended September 30, 2024 was adversely impacted by the non-recurring write-off of a deferred tax asset of $1.2 million net of other state effects.
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 September 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 September 30, 2024, total on-balance sheet liquidity and funding capacity was $4.0 billion.
The Company has a highly operational and granular deposit base, with long-standing client relationships across multiple customer segments providing stable funding. The vast majority of the government deposits are protected by 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 September 30, 2024, the Bank reported in its Call Report $5.70 billion of estimated uninsured deposits. This total included $2.46 billion of collateralized government deposits and $1.58 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.66 billion, or 16.3% of total deposits. On-balance-sheet liquidity and funding capacity represented 242.3% of the estimated adjusted uninsured deposits.
The primary sources of liquidity specifically available to the Parent Company are dividends from the Bank, proceeds from the sale of investments, and the issuance of debt, preferred and common stock. For the nine months ended September 30, 2024, the Parent Company received dividend payments of $69.0 million from the Bank. At September 30, 2024, the Parent Company held $92.7 million in cash and cash equivalents.
The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, 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 September 30, 2024, the Company pledged $7.40 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 $1.22 billion of securities to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law. The Company had $891.9 million of FHLB advances, including $60.0 million of overnight borrowings as of September 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 $419.9 million of other borrowings as of September 30, 2024, as compared to $196.5 million at December 31, 2023, as a result of lower cost funding availability.
The Company’s cash needs for the nine months ended September 30, 2024 were primarily satisfied by the increase in other borrowings and primarily utilized for the reduction of deposits and the purchase of debt securities.
Off-Balance Sheet Commitments and Contractual Obligations
In the normal course of business, the Bank routinely enters into various off-balance sheet commitments, primarily relating to the origination and funding of loans. At September 30, 2024, outstanding commitments to originate loans totaled $351.6 million and outstanding undrawn lines of credit totaled $1.41 billion, of which $1.10 billion were commitments to commercial and commercial construction borrowers and $312.3 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 September 30, 2024, the Company also had various contractual obligations, which included debt obligations of $1.39 billion, including finance lease obligations of $1.5 million, and an additional $17.8 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 $2.16 billion at September 30, 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 three and nine months ended September 30, 2024, the Company repurchased 87,324 and 1,383,238 shares of its common stock, respectively, totaling $1.4 million and $21.5 million, respectively. At September 30, 2024, there were 1,551,200 shares available to be repurchased under the authorized stock repurchase program.
Cash dividends on common stock declared and paid during the first nine months of September 30, 2024 were $35.2 million. Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2024 were $3.0 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 September 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.
Regulatory Capital Requirements
As of September 30, 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 September 30, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Company:
Tier 1 capital (to average assets)
$
1,246,685
9.65
%
$
516,930
4.00
%
N/A
N/A
Common equity Tier 1 (to risk-weighted assets)
1,116,470
11.31
691,086
7.00
(1)
N/A
N/A
Tier 1 capital (to risk-weighted assets)
1,246,685
12.63
839,176
8.50
(1)
N/A
N/A
Total capital (to risk-weighted assets)
1,444,450
14.63
1,036,629
10.50
(1)
N/A
N/A
Bank:
Tier 1 capital (to average assets)
$
1,175,318
9.17
%
$
512,823
4.00
%
$
641,029
5.00
%
Common equity Tier 1 (to risk-weighted assets)
1,175,318
12.02
684,225
7.00
(1)
635,352
6.50
Tier 1 capital (to risk-weighted assets)
1,175,318
12.02
830,844
8.50
(1)
781,971
8.00
Total capital (to risk-weighted assets)
1,248,082
12.77
1,026,337
10.50
(1)
977,464
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%.
At September 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 September 30, 2024 and December 31, 2023, the Company maintained a stockholders’ equity to total assets ratio of 12.56% and 12.28%, respectively.
Loan Portfolio Composition. At September 30, 2024, the Company had total loans outstanding of $10.02 billion, of which $6.12 billion, or 61.0% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of: $660.9 million of commercial and industrial loans, or 6.6% of total loans; $3.00 billion of residential real estate loans, or 30.0% of total loans; and $243.0 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 September 30, 2024, of the total commercial real estate portfolio, $5.27 billion or 86.2% was considered investor-owned and $841.9 million or 13.8% 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 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 September 30, 2024:
As of September 30, 2024
(dollars in thousands)
Amount
Percent of Total
Weighted Average LTV (1)
Weighted Average Debt Service Coverage Ratio (2)
Office
$
533,029
12
%
52
%
1.8x
Medical
283,802
6
57
1.8
Credit Tenant
259,555
6
67
1.5
Total Office (3)
1,076,386
23
57
1.8
Retail
1,071,999
23
54
2.0
Multi-family (4)
886,238
19
63
1.7
Industrial/warehouse
700,467
15
49
2.1
Hospitality
172,804
4
48
2.0
Other (5)
703,650
15
45
1.9
Total
4,611,544
100
%
54
1.9
Construction
661,615
Total CRE investor owned and construction
$
5,273,159
(1) Represents the weighted average of loan balances as of September 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 represented $116 million, or 10.8%, of the total office loan balance at September 30, 2024. Office CBD loans had a weighted average LTV of 64% and weighted average debt service coverage ratio of 1.9x at September 30, 2024. $83 million, or 72%, of the total office CBD exposure are to credit tenants, life sciences and medical borrowers at September 30, 2024. New York City office CBD loans represented $7 million, or 0.05% of the Company’s total assets at September 30, 2024.
(4) New York City rent-regulated multi-family loans, where the property has more than 50% of its units rent-regulated, represent $33 million, or 0.25% of the Company’s total assets at September 30, 2024.
(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 September 30, 2024:
As of September 30, 2024
(dollars in thousands)
Amount
Percent of Total
New York
$
1,494,156
32
%
Pennsylvania and Delaware
1,262,330
27
New Jersey
1,168,290
25
Massachusetts
126,784
3
Maryland and District of Columbia
139,376
3
Other
420,608
9
Total
4,611,544
100
%
Construction
661,615
Total CRE investor owned and construction
$
5,273,159
Asset quality. The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.
September 30,
December 31,
2024
2023
(dollars in thousands)
Non-performing loans (1):
Commercial real estate – investor
$
12,478
$
20,820
Commercial real estate – owner occupied
4,368
351
Commercial and industrial
122
304
Residential real estate
9,108
5,542
Other consumer
2,063
2,531
Total non-performing loans and assets
$
28,139
$
29,548
PCD loans, net of allowance for loan credit losses
$
15,323
$
16,122
Delinquent loans 30-89 days
$
15,458
$
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)
245.45
227.21
Non-performing loans as a percent of total loans receivable
0.28
0.29
Non-performing assets as a percent of total assets
0.21
0.22
(1)At December 31, 2023, non-performing loans includes a single commercial relationship exposure of $8.8 million. During the quarter ended September 30, 2024, the exposure, which had life-to-date charge-offs of $10.0 million, was resolved via sale of collateral.
(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 $5.7 million and $7.5 million at September 30, 2024 and December 31, 2023, respectively.
Overall asset quality metrics remained stable. The Company’s non-performing loans represented 0.28% and 0.29% of total loans, respectively. The allowance for loan credit losses as a percentage of total non-performing loans was 245.45%, as compared to 227.21%. The level of 30 to 89 days delinquent loans decreased to $15.5 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):
September 30,
December 31,
2024
2023
Special Mention
$
85,721
$
40,385
Substandard
103,384
106,552
The increase in special mention loans was primarily due to new downgrades of six commercial relationships totaling $60.4 million, partly offset by four commercial loans totaling $10.1 million, which were upgraded and two commercial loans of $7.8 million migrating to substandard during the nine months ended September 30, 2024. The decrease in substandard loans was primarily due to nine commercial relationships totaling $27.2 million that were paid off or were upgraded, which was partially offset by new downgrades primarily related to four commercial relationships totaling $16.2 million and the $7.8 million of downgraded special mention loans 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.
The evaluation of goodwill was a critical accounting estimate in the preparation of the consolidated financial statements. The Company bypassed the qualitative assessment and proceeded directly to the quantitative test on its annual impairment testing date of August 31, 2024. In addition to the approaches and assumptions disclosed in the Company’s 2023 Form 10-K, the Company considered an additional market approach valuation method, the guideline merged and acquired company method, which utilizes observable transactions of actual prices paid for target companies that operated in comparable industries or markets facing similar risks. This approach requires judgment in the selection of comparable transactions and includes those with similar business activities, and related operating environments. The results of the quantitative assessment indicated that the fair value of the Company’s reporting unit exceeded its carrying amount, which resulted in no impairment loss at August 31, 2024.
Management continued to carefully assess and evaluate all available information for potential triggering events after the August 31 annual testing date, and concluded no triggering events were identified subsequent to the annual test date. Significant negative industry or economic trends, including declines in the market price of the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill in the future, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue evaluating the economic conditions at future reporting periods for triggering events.
Impact of New Accounting Pronouncements
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. The Company adopted this standard in 2024. 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. The Company adopted this standard in 2024. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2023, FASB issued ASU 2023-05, “Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. The amendments in this ASU require that a joint venture, upon formation, apply a new basis of accounting and initially measure assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance. This update will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.
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, including 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, 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 2023 Form 10-K, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk (“IRR”)
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 September 30, 2024 and December 31, 2023.
The net interest income sensitivity results indicate that at September 30, 2024 the Company was modestly asset sensitive. The change in sensitivity between September 30, 2024 and December 31, 2023 was impacted by an increase in floating-rate securities and term borrowings, a deposit mix shift within non-maturity deposits with lower betas as well as a change in loan prepayments, partially offset by an increase in overnight borrowings and a reduction in short-term time deposits.
Overall, the measure of EVE at risk decreased in all rate scenarios from December 31, 2023 to September 30, 2024. This decrease was the result of an increase in floating-rate securities and term borrowings, 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.
Item 4. Controls and Procedures
(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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Debt securities available-for-sale, at estimated fair value
911,753
753,892
Debt securities held-to-maturity, net of allowance for securities credit losses of $902 at September 30, 2024 and $1,133 at December 31, 2023 (estimated fair value of $1,007,781 at September 30, 2024 and $1,068,438 at December 31, 2023)
1,075,131
1,159,735
Equity investments
95,688
100,163
Restricted equity investments, at cost
98,545
93,766
Loans receivable, net of allowance for loan credit losses of $69,066 at September 30, 2024 and $67,137 at December 31, 2023
9,963,598
10,136,721
Loans held-for-sale
23,036
5,166
Interest and dividends receivable
48,821
51,874
Premises and equipment, net
116,087
121,372
Bank owned life insurance
269,138
266,498
Assets held for sale
—
28
Goodwill
506,146
506,146
Core deposit intangible
7,056
9,513
Other assets
159,313
179,661
Total assets
$
13,488,483
$
13,538,253
Liabilities and Stockholders’ Equity
Deposits
$
10,116,167
$
10,434,949
Federal Home Loan Bank (“FHLB”) advances
891,860
848,636
Securities sold under agreements to repurchase with customers
81,163
73,148
Other borrowings
419,927
196,456
Advances by borrowers for taxes and insurance
27,282
22,407
Other liabilities
257,576
300,712
Total liabilities
11,793,975
11,876,308
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both September 30, 2024 and December 31, 2023
1
1
Common stock, $0.01 par value, 150,000,000 shares authorized, 62,515,415 and 62,182,767 shares issued at September 30, 2024 and December 31, 2023, respectively; and 58,397,094 and 59,447,684 shares outstanding at September 30, 2024 and December 31, 2023, respectively
613
613
Additional paid-in capital
1,166,218
1,161,755
Retained earnings
632,476
592,542
Accumulated other comprehensive loss
(12,185)
(20,862)
Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")
(2,852)
(3,780)
Treasury stock, 4,118,321 and 2,735,083 shares at September 30, 2024 and December 31, 2023, respectively
(90,617)
(69,106)
OceanFirst Financial Corp. stockholders’ equity
1,693,654
1,661,163
Non-controlling interest
854
782
Total stockholders’ equity
1,694,508
1,661,945
Total liabilities and stockholders’ equity
$
13,488,483
$
13,538,253
See accompanying Notes to Unaudited Consolidated Financial Statements.
Net unrealized gain on debt securities (net of tax expense of $1,225 and $2,569 in 2024 and $572 and $2,430 in 2023, respectively)
3,847
1,797
8,066
7,626
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $43 and $125 in 2024 and $66 and $176 in 2023, respectively)
62
116
180
277
Unrealized gain (loss) on derivative hedges (net of tax expense of $267 and tax benefit of $133 in 2024 and tax benefit of $198 and $573 in 2023, respectively)
837
(622)
(418)
(1,798)
Reclassification adjustment for losses included in net income (net of tax expense of $80 and $270 in 2024 and $78 and $340 in 2023, respectively)
254
246
849
1,066
Total other comprehensive income, net of tax
5,000
1,537
8,677
7,171
Total comprehensive income
30,186
22,069
86,905
83,484
Less: comprehensive income (loss) attributable to non-controlling interest
70
(135)
72
(34)
Comprehensive income attributable to OceanFirst Financial Corp.
30,116
22,204
86,833
83,518
Less: Dividends on preferred shares
1,004
1,004
3,012
3,012
Total comprehensive income available to common stockholders
$
29,112
$
21,200
$
83,821
$
80,506
See accompanying Notes to Unaudited Consolidated Financial Statements.
22
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended September 30, 2024 and 2023
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of: OceanFirst Financial Corp. (the “Company”); its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc.; the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp., Casaba Real Estate Holdings Corporation, Country Property Holdings, Inc., OFB Acquisition LLC; and a majority controlling interest in Trident Abstract Title Agency, LLC (“Trident”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The interim consolidated financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations that may be expected for the full year 2024 or any other period. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the periods presented. Actual results could differ from these estimates.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 2. Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Weighted average shares outstanding
58,439
59,422
58,770
59,388
Less: Unallocated ESOP shares
(157)
(243)
(173)
(272)
Unallocated incentive award shares
(217)
(75)
(192)
(79)
Average basic shares outstanding
58,065
59,104
58,405
59,037
Add: Effect of dilutive securities:
Incentive awards
3
7
2
31
Average diluted shares outstanding
58,068
59,111
58,407
59,068
For the three and nine months ended September 30, 2024, antidilutive stock options of 1,668,000 and 1,790,000, respectively, were excluded from the earnings per share calculation. For the three and nine months ended September 30, 2023, antidilutive stock options of 1,961,000 and 1,525,000, respectively, were excluded from the earnings per share calculation.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 3. Securities
The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at September 30, 2024 and December 31, 2023 are as follows (in thousands):
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Allowance for securities credit losses
Beginning balance
$
(958)
$
(964)
$
(1,133)
$
(1,128)
Benefit for credit losses
56
32
231
196
Total ending allowance balance
$
(902)
$
(932)
$
(902)
$
(932)
The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. Credit ratings of BBB- or Baa3 or higher are considered investment grade. Where multiple ratings are available, the Company considers the lowest rating when determining the allowance for securities credit losses. Under this approach, the amortized cost of debt securities held-to-maturity at September 30, 2024, aggregated by credit quality indicator, are as follows (in thousands):
Investment Grade
Non-Investment Grade/Non-rated
Total
As of September 30, 2024
State and municipal debt obligations
$
202,983
$
839
$
203,822
Corporate debt securities
52,730
13,991
66,721
Non-agency commercial MBS
20,454
—
20,454
Total debt securities held-to-maturity
$
276,167
$
14,830
$
290,997
There were no realized gains/losses and $106,000 of realized losses on sale of debt securities available-for-sale for the three and nine months ended September 30, 2024, respectively as compared to no realized gains/losses and $697,000 of realized losses for the corresponding prior year periods. These realized gains/losses on debt securities are presented within Other under Total other income of the Consolidated Statements of Income.
The amortized cost and estimated fair value of debt securities at September 30, 2024 by contractual maturity are shown below (in thousands):
September 30, 2024
Amortized Cost
Estimated Fair Value
Less than one year
$
32,613
$
32,323
Due after one year through five years
188,400
179,988
Due after five years through ten years
223,941
220,655
Due after ten years
154,402
150,371
$
599,356
$
583,337
Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2024, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $81.6 million, $58.3 million, and $252.0 million, respectively, and an estimated fair value of $80.0 million, $57.4 million, and $252.1 million, respectively, were callable prior to the maturity date. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.
Notes to Unaudited Consolidated Financial Statements (Continued)
The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at September 30, 2024 and December 31, 2023, segregated by the duration of the unrealized losses, are as follows (in thousands):
Less than 12 months
12 months or longer
Total
Estimated Fair Value
Unrealized Losses
Estimated Fair Value
Unrealized Losses
Estimated Fair Value
Unrealized Losses
At September 30, 2024
Debt securities available-for-sale:
U.S. government and agency obligations
$
2,103
$
(6)
$
50,871
$
(4,173)
$
52,974
$
(4,179)
Corporate debt securities
4,788
(54)
5,988
(741)
10,776
(795)
Asset-backed securities
42,325
(40)
89,004
(107)
131,329
(147)
MBS:
Agency residential
143,284
(195)
—
—
143,284
(195)
Agency commercial
—
—
96,970
(11,895)
96,970
(11,895)
Total MBS
143,284
(195)
96,970
(11,895)
240,254
(12,090)
Total debt securities available-for-sale
192,500
(295)
242,833
(16,916)
435,333
(17,211)
Debt securities held-to-maturity:
State and municipal debt obligations
5,041
(361)
175,161
(10,307)
180,202
(10,668)
Corporate debt securities
—
—
38,713
(1,378)
38,713
(1,378)
MBS:
Agency residential
—
—
514,518
(54,907)
514,518
(54,907)
Agency commercial
1,276
(10)
73,251
(3,425)
74,527
(3,435)
Non-agency commercial
—
—
19,477
(977)
19,477
(977)
Total MBS
1,276
(10)
607,246
(59,309)
608,522
(59,319)
Total debt securities held-to-maturity
6,317
(371)
821,120
(70,994)
827,437
(71,365)
Total debt securities
$
198,817
$
(666)
$
1,063,953
$
(87,910)
$
1,262,770
$
(88,576)
At December 31, 2023
Debt securities available-for-sale:
U.S. government and agency obligations
$
833
$
(2)
$
59,861
$
(5,794)
$
60,694
$
(5,796)
Corporate debt securities
1,543
(165)
6,116
(816)
7,659
(981)
Asset-backed securities
—
—
291,544
(4,252)
291,544
(4,252)
MBS:
Agency residential
169,000
(97)
—
—
169,000
(97)
Agency commercial
—
—
94,335
(15,255)
94,335
(15,255)
Total MBS
169,000
(97)
94,335
(15,255)
263,335
(15,352)
Total debt securities available-for-sale
171,376
(264)
451,856
(26,117)
623,232
(26,381)
Debt securities held-to-maturity:
State and municipal debt obligations
6,671
(23)
191,511
(14,527)
198,182
(14,550)
Corporate debt securities
3,084
(473)
58,386
(3,468)
61,470
(3,941)
MBS:
Agency residential
95,776
(693)
525,751
(69,347)
621,527
(70,040)
Agency commercial
18,902
(370)
55,051
(3,308)
73,953
(3,678)
Non-agency commercial
—
—
18,910
(1,774)
18,910
(1,774)
Total MBS
114,678
(1,063)
599,712
(74,429)
714,390
(75,492)
Total debt securities held-to-maturity
124,433
(1,559)
849,609
(92,424)
974,042
(93,983)
Total debt securities
$
295,809
$
(1,823)
$
1,301,465
$
(118,541)
$
1,597,274
$
(120,364)
The Company concluded that no debt securities were impaired at September 30, 2024 based on consideration of several factors. The Company noted that each issuer made all contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the net unrealized losses were primarily due to changes in the general credit and interest rate environment and not credit quality. Additionally, the Company has not utilized securities sales as a source of liquidity and the Company’s liquidity plans include adequate sources of liquidity outside securities sales.
Notes to Unaudited Consolidated Financial Statements (Continued)
Equity Investments
At September 30, 2024 and December 31, 2023, the Company held equity investments of $95.7 million and $100.2 million, respectively. The equity investments are primarily comprised of select financial services institutions’ preferred stocks, investments in other financial institutions and funds.
The realized and unrealized gains or losses on equity securities for the three and nine months ended September 30, 2024 and 2023 are shown in the table below (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net gain (loss) on equity investments
$
1,420
$
1,452
$
4,230
$
(5,908)
Less: Net losses recognized on equity investments sold
—
—
—
(5,462)
Unrealized gains (losses) recognized on equity investments still held
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 4. Loans Receivable, Net
Loans receivable, net at September 30, 2024 and December 31, 2023 consisted of the following (in thousands):
September 30,
December 31,
2024
2023
Commercial:
Commercial real estate – investor
$
5,273,159
$
5,353,974
Commercial real estate – owner occupied
841,930
943,891
Commercial and industrial
660,879
666,532
Total commercial
6,775,968
6,964,397
Consumer:
Residential real estate
3,003,213
2,979,534
Home equity loans and lines and other consumer (“other consumer”)
242,975
250,664
Total consumer
3,246,188
3,230,198
Total loans receivable
10,022,156
10,194,595
Deferred origination costs, net of fees
10,508
9,263
Allowance for loan credit losses
(69,066)
(67,137)
Total loans receivable, net
$
9,963,598
$
10,136,721
The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company evaluates risk ratings on an ongoing basis. The Company uses the following definitions for risk ratings:
Pass: Loans classified as Pass are well protected by the paying capacity and net worth of the borrower.
Special Mention: Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection or the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands):
2024
2023
2022
2021
2020
2019 and prior
Revolving lines of credit
Total
September 30, 2024
Commercial real estate - investor
Pass
$
66,729
$
138,564
$
1,147,606
$
1,307,012
$
524,774
$
1,288,200
$
669,660
$
5,142,545
Special Mention
—
—
21,405
2,340
—
42,018
—
65,763
Substandard
—
—
1,869
595
4,523
50,536
7,328
64,851
Total commercial real estate - investor
66,729
138,564
1,170,880
1,309,947
529,297
1,380,754
676,988
5,273,159
Commercial real estate - owner occupied
Pass
28,705
62,077
111,308
91,752
42,050
465,999
22,742
824,633
Special Mention
—
—
—
—
—
4,130
—
4,130
Substandard
—
—
—
—
257
12,287
623
13,167
Total commercial real estate - owner occupied
28,705
62,077
111,308
91,752
42,307
482,416
23,365
841,930
Commercial and industrial
Pass
62,399
75,414
41,917
15,638
4,990
47,784
384,477
632,619
Special Mention
—
8,663
—
—
—
—
106
8,769
Substandard
—
652
3,609
775
—
541
13,914
19,491
Total commercial and industrial
62,399
84,729
45,526
16,413
4,990
48,325
398,497
660,879
Residential real estate (1)
Pass
176,774
274,782
555,502
806,071
372,414
807,021
—
2,992,564
Special Mention
2,925
—
250
657
—
2,040
—
5,872
Substandard
—
415
1,495
—
—
2,867
—
4,777
Total residential real estate
179,699
275,197
557,247
806,728
372,414
811,928
—
3,003,213
Other consumer (1)
Pass
21,864
28,253
17,743
17,671
11,992
113,644
29,523
240,690
Special Mention
—
97
34
343
—
713
—
1,187
Substandard
—
—
—
72
—
1,026
—
1,098
Total other consumer
21,864
28,350
17,777
18,086
11,992
115,383
29,523
242,975
Total loans
$
359,396
$
588,917
$
1,902,738
$
2,242,926
$
961,000
$
2,838,806
$
1,128,373
$
10,022,156
(1)For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
Notes to Unaudited Consolidated Financial Statements (Continued)
2023
2022
2021
2020
2019
2018 and prior
Revolving lines of credit
Total
December 31, 2023
Commercial real estate - investor
Pass
$
137,028
$
1,165,955
$
1,328,012
$
529,745
$
490,438
$
930,337
$
679,804
$
5,261,319
Special Mention
—
—
2,413
790
1,446
22,147
—
26,796
Substandard
—
—
648
3,750
13,275
48,186
—
65,859
Total commercial real estate - investor
137,028
1,165,955
1,331,073
534,285
505,159
1,000,670
679,804
5,353,974
Commercial real estate - owner occupied
Pass
66,642
120,280
103,104
59,179
102,703
441,713
21,052
914,673
Special Mention
—
—
—
—
1,272
8,314
—
9,586
Substandard
—
—
—
—
2,019
16,900
713
19,632
Total commercial real estate - owner occupied
66,642
120,280
103,104
59,179
105,994
466,927
21,765
943,891
Commercial and industrial
Pass
112,914
64,770
19,473
8,645
7,778
51,082
383,013
647,675
Special Mention
—
—
—
—
—
184
2,859
3,043
Substandard
—
622
117
—
145
1,385
13,545
15,814
Total commercial and industrial
112,914
65,392
19,590
8,645
7,923
52,651
399,417
666,532
Residential real estate (1)
Pass
283,296
916,153
564,515
388,392
223,247
600,118
—
2,975,721
Special Mention
—
—
—
—
131
271
—
402
Substandard
323
366
—
258
487
1,977
—
3,411
Total residential real estate
283,619
916,519
564,515
388,650
223,865
602,366
—
2,979,534
Other consumer (1)
Pass
32,859
19,918
20,737
12,675
12,937
118,486
30,658
248,270
Special Mention
—
172
—
—
—
386
—
558
Substandard
—
—
—
—
6
1,698
132
1,836
Total other consumer
32,859
20,090
20,737
12,675
12,943
120,570
30,790
250,664
Total loans
$
633,062
$
2,288,236
$
2,039,019
$
1,003,434
$
855,884
$
2,243,184
$
1,131,776
$
10,194,595
(1)For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
Notes to Unaudited Consolidated Financial Statements (Continued)
2019
2018 and prior
Total
For the three months ended September 30, 2023
Commercial real estate – investor (1)
$
(8,350)
$
—
$
(8,350)
Other consumer
—
(29)
(29)
Total charge-offs
$
(8,350)
$
(29)
$
(8,379)
For the nine months ended September 30, 2023
Commercial real estate – investor (1)
$
(8,350)
$
—
$
(8,350)
Commercial real estate – owner occupied
—
(6)
(6)
Commercial and industrial
—
(128)
(128)
Other consumer
—
(111)
(111)
Total charge-offs
$
(8,350)
$
(245)
$
(8,595)
(1) Gross charge-offs of $1.6 million and $8.4 million primarily related to a single commercial relationship which had partial charge-offs during the nine months ended September 30, 2024 and the three and nine months ended September 30, 2023. This was resolved via sale of collateral during the current quarter.
A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral and, therefore, is classified as non-accruing. At September 30, 2024 and December 31, 2023, the Company had collateral dependent loans with an amortized cost balance as follows: commercial real estate - investor of $7.1 million and $15.2 million, respectively, commercial real estate - owner occupied of $3.7 million and $352,000, respectively, and commercial and industrial of $122,000 and $304,000, respectively. In addition, the Company had collateral dependent residential and consumer loans with an amortized cost balance of $5.9 million and $2.6 million at September 30, 2024 and December 31, 2023, respectively.
The following table presents the recorded investment in non-accrual loans, by loan portfolio segment as of September 30, 2024 and December 31, 2023 (in thousands):
September 30,
December 31,
2024
2023
Commercial real estate – investor (1)
$
12,478
$
20,820
Commercial real estate – owner occupied
4,368
351
Commercial and industrial
122
304
Residential real estate
9,108
5,542
Other consumer
2,063
2,531
$
28,139
$
29,548
(1) December 31, 2023 includes the exposure of $8.8 million of the single commercial real estate relationship resolved during the quarter.
At September 30, 2024 and December 31, 2023, non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At September 30, 2024 and December 31, 2023, there were no loans that were past due 90 days or greater and still accruing interest.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table presents the aging of the recorded investment in past due loans as of September 30, 2024 and December 31, 2023 by loan portfolio segment (in thousands):
30-59 Days Past Due
60-89 Days Past Due
90 Days or Greater Past Due
Total Past Due
Loans Not Past Due
Total
September 30, 2024
Commercial real estate – investor (1)
$
366
$
1,604
$
6,828
$
8,798
$
5,264,361
$
5,273,159
Commercial real estate – owner occupied
924
—
1,447
2,371
839,559
841,930
Commercial and industrial
266
17
122
405
660,474
660,879
Residential real estate
1,700
5,872
4,777
12,349
2,990,864
3,003,213
Other consumer
3,522
1,187
1,098
5,807
237,168
242,975
$
6,778
$
8,680
$
14,272
$
29,730
$
9,992,426
$
10,022,156
December 31, 2023
Commercial real estate – investor (1)
$
978
$
684
$
15,201
$
16,863
$
5,337,111
$
5,353,974
Commercial real estate – owner occupied
335
352
293
980
942,911
943,891
Commercial and industrial
163
—
145
308
666,224
666,532
Residential real estate
14,858
402
3,411
18,671
2,960,863
2,979,534
Other consumer
872
558
1,836
3,266
247,398
250,664
$
17,206
$
1,996
$
20,886
$
40,088
$
10,154,507
$
10,194,595
(1) December 31, 2023 includes the exposure of $8.8 million of the single commercial real estate relationship resolved during the quarter.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Company adopted Accounting Standards Update (“ASU”) 2022-02 on January 1, 2023. Since adoption, the Company has modified and may modify in the future certain loans to borrowers experiencing financial difficulty. These modifications may include a reduction in interest rate, an extension in term, principal forgiveness and/or other than insignificant payment delay. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount, and the allowance for credit losses is subsequently adjusted by an amount equal to the total loss rate as applied to the reduced amortized cost basis. As of September 30, 2024 and December 31, 2023, loans with modifications to borrowers experiencing financial difficulty totaled $23.7 million and $8.9 million, respectively. There were no outstanding commitments to lend additional funds to such borrowers with loan modifications as of September 30, 2024 or December 31, 2023.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table presents loans modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 and 2023 (in thousands):
Term Extension
Interest Rate Reduction
Combination of Term Extension and Interest Rate Reduction
Other Than Insignificant Payment Delay
Total
% of Total by Loan Portfolio Segment
For the three months ended September 30, 2024
$
—
$
—
$
—
$
—
$
—
—
%
For the three months ended September 30, 2023
Residential real estate
$
65
$
—
$
—
$
—
$
65
—
%
Other consumer
—
—
170
—
170
0.07
$
65
$
—
$
170
$
—
$
235
—
%
For the nine months ended September 30, 2024
Commercial real estate – investor
$
—
$
4,878
$
7,000
$
—
$
11,878
0.23
%
Commercial real estate – owner occupied
—
—
—
2,994
2,994
0.36
Residential real estate
129
—
—
—
129
—
Other consumer
—
—
148
—
148
0.06
$
129
$
4,878
$
7,148
$
2,994
$
15,149
0.15
%
For the nine months ended September 30, 2023
Residential real estate
$
723
$
—
$
—
$
—
$
723
0.02
%
Other consumer
240
—
170
—
410
0.16
$
963
$
—
$
170
$
—
$
1,133
0.01
%
The modifications during the periods presented had an insignificant financial effect on the Company.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table provides the performance of loans modified to borrowers experiencing financial difficulty during the twelve months ended September 30, 2024 and since adoption of the standard for September 30, 2023 (in thousands):
Current
60 - 89 Days past due
90 Days or Greater past due
Total
September 30, 2024
Commercial real estate – investor
$
19,645
$
—
$
—
$
19,645
Commercial real estate – owner occupied
2,896
—
—
2,896
Residential real estate
128
—
—
128
Other consumer
47
147
—
194
$
22,716
$
147
$
—
$
22,863
September 30, 2023
Residential real estate
$
583
$
—
$
140
(1)
$
723
Other consumer
410
—
—
410
$
993
$
—
$
140
$
1,133
(1) Represents one residential loan that defaulted during the three and nine months ended September 30, 2023, which had been modified since the adoption of the standard.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 5. Deposits
The major types of deposits at September 30, 2024 and December 31, 2023 were as follows (in thousands):
Type of Account
September 30,
December 31,
2024
2023
Non-interest-bearing
$
1,638,447
$
1,657,119
Interest-bearing checking
3,896,348
3,911,766
Money market deposit
1,288,555
1,021,805
Savings
1,071,946
1,398,837
Time deposits
2,220,871
2,445,422
Total deposits
$
10,116,167
$
10,434,949
Included in time deposits at September 30, 2024 and December 31, 2023 was $451.1 million and $412.0 million, respectively, of deposits of $250,000 or more. Time deposits also include brokered deposits of $201.0 million and $631.5 million at September 30, 2024 and December 31, 2023, respectively.
Note 6. Borrowed Funds
Borrowed funds at September 30, 2024 and December 31, 2023 were as follows (in thousands):
September 30,
December 31,
2024
2023
FHLB advances
$
891,860
$
848,636
Securities sold under agreements to repurchase with customers
81,163
73,148
Other borrowings
419,927
196,456
Total borrowed funds
$
1,392,950
$
1,118,240
At September 30, 2024, there were $831.9 million of FHLB term advances and $60.0 million outstanding in overnight borrowings from the FHLB, as compared to $848.6 million and $0 at December 31, 2023, respectively.
At September 30, 2024, there were $419.9 million of other borrowings as compared to $196.5 million at December 31, 2023 as a result of lower-cost funding availability.
Pledged assets
The following table presents the assets pledged to secure borrowings, borrowing capacity, repurchase agreements, letters of credit, and for other purposes required by law at carrying value (in thousands):
Loans
Debt securities
Total
September 30, 2024
FHLB and FRB
$
7,399,276
$
1,131,698
$
8,530,974
Repurchase agreements
—
86,440
86,440
Total pledged assets
$
7,399,276
$
1,218,138
$
8,617,414
December 31, 2023
FHLB and FRB
$
7,255,671
$
1,051,558
$
8,307,229
Repurchase agreements
—
103,416
103,416
Total pledged assets
$
7,255,671
$
1,154,974
$
8,410,645
The securities that collateralize the repurchase agreements are delivered to the lender, with whom each transaction is executed, to a third-party custodian, or held at the Company. The lender agrees to resell to the Company substantially the same securities at the maturity of the repurchase agreements.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.
Assets and Liabilities Measured at Fair Value
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Debt Securities Available-for-Sale
Debt securities classified as available-for-sale are reported at fair value. Fair value of U.S. Treasuries are determined using quoted prices in active markets (Level 1). The majority of the other debt securities are determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities.
Equity Investments
Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer (measurement alternative). Certain equity investments without readily determinable fair values are measured at net asset value (“NAV”) per share as a practical expedient, which are excluded from the fair value hierarchy levels in the table below.
Notes to Unaudited Consolidated Financial Statements (Continued)
Interest Rate Derivatives
The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty.
Loans Individually Measured for Impairment
Loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is generally based on independent appraisals (Level 3), which may be adjusted by management for qualitative factors, such as economic factors and estimated liquidation expenses.
The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
Fair Value Measurements at Reporting Date Using:
Total Fair Value
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
September 30, 2024
Items measured on a recurring basis:
Debt securities available-for-sale
$
911,753
$
48,542
$
863,211
$
—
Equity investments
45,631
—
45,631
—
Interest rate derivative asset
67,791
—
67,791
—
Interest rate derivative liability
(67,415)
—
(67,415)
—
Items measured on a non-recurring basis:
Equity investments (1) (2)
50,057
—
—
46,176
Loans measured for impairment based on the fair value of the underlying collateral (3)
16,814
—
—
16,814
December 31, 2023
Items measured on a recurring basis:
Debt securities available-for-sale
$
753,892
$
43,036
$
710,856
$
—
Equity investments
53,166
—
53,166
—
Interest rate derivative asset
87,776
—
87,776
—
Interest rate derivative liability
(87,848)
—
(87,848)
—
Items measured on a non-recurring basis:
Equity investments (1) (2)
46,997
—
—
43,576
Loans measured for impairment based on the fair value of the underlying collateral (3)
18,509
—
—
18,509
(1) As of September 30, 2024 and December 31, 2023, equity investmentsincluded $46.2 million and $43.6 million, respectively, of equity investments measured under the measurement alternative. This included no unrealized gains or losses for the nine months ended September 30, 2024 and the year ended December 31, 2023.
(2) As of September 30, 2024 and December 31, 2023, equity investments included $3.9 million and $3.4 million, respectively, of certain equity investment funds measured at NAV per share (or its equivalent) as a practical expedient to fair value and these equity investments have not been classified in the fair value hierarchy levels.
(3) Primarily consists of commercial loans, which are collateral dependent. The range may vary but is generally 0% to 8% on the discount for costs to sell and 0% to 10% on appraisal adjustments.
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no assets in Level 3 that were recognized at fair value on a recurring basis or transfers into or out of Level 3 for the three and nine months ended September 30, 2024 and 2023.
Notes to Unaudited Consolidated Financial Statements (Continued)
Assets and Liabilities Disclosed at Fair Value
A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.
Cash and Due from Banks
For cash and due from banks, the carrying amount approximates fair value.
Debt Securities Held-to-Maturity
Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities.
Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities.
Restricted Equity Investments
The fair value of these investments, which are primarily Federal Home Loan Bank of New York and Federal Reserve Bank stock, is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities.
Loans Receivable and Loans Held-for-Sale
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.
Fair value of performing and non-performing loans, which is based on an exit price notion, was estimated by discounting the future cash flows, net of estimated prepayments, at market discount rates that reflect the credit and interest rate risk inherent in the loan.
Loans held for sale are carried at the lower of unpaid principal balance, net, or estimated fair value on an aggregate basis. Estimated fair value is generally determined based on bid quotations from secondary markets.
Deposits Other than Time Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported.
Time Deposits
The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase with Customers
Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.
FHLB Advances and Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.
Notes to Unaudited Consolidated Financial Statements (Continued)
The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of September 30, 2024 and December 31, 2023 are presented in the following tables (in thousands):
Fair Value Measurements at Reporting Date Using:
Book Value
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
September 30, 2024
Financial Assets:
Cash and due from banks
$
214,171
$
214,171
$
—
$
—
Debt securities held-to-maturity
1,075,131
—
1,007,781
—
Restricted equity investments
98,545
—
—
98,545
Loans receivable, net and loans held-for-sale
9,986,634
—
—
9,545,091
Financial Liabilities:
Deposits other than time deposits (1)
7,895,296
—
7,895,296
—
Time deposits
2,220,871
—
2,220,572
—
FHLB advances and other borrowings
1,311,787
—
1,308,840
—
Securities sold under agreements to repurchase with customers
81,163
81,163
—
—
December 31, 2023
Financial Assets:
Cash and due from banks
$
153,718
$
153,718
$
—
$
—
Debt securities held-to-maturity
1,159,735
—
1,068,438
—
Restricted equity investments
93,766
—
—
93,766
Loans receivable, net and loans held-for-sale
10,141,887
—
—
9,606,498
Financial Liabilities:
Deposits other than time deposits (1)
7,989,527
—
7,989,527
—
Time deposits
2,445,422
—
2,421,058
—
FHLB advances and other borrowings
1,045,092
—
1,008,351
—
Securities sold under agreements to repurchase with customers
73,148
73,148
—
—
(1) The estimated fair value of non-maturity deposits does not consider any inherent value and represents the amount payable on demand. However, non-maturity deposits do contain significant inherent value to the Company, particularly when overnight funding costs are greater than the deposit costs.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 8. Derivatives and Hedging Activities
The Company enters into derivative financial instruments which involve, to varying degrees, interest rate and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes derivative financial instruments to accommodate the business needs of its customers as well as to economically hedge the exposure that this creates for the Company. Additionally, the Company enters into certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The Company does not use derivative financial instruments for trading purposes.
Customer Derivatives – Interest Rate Swaps and Cap Contracts
Derivatives Not Designated as Hedging Instruments
The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement.
These interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under ASC Topic 815, Derivatives and Hedging, therefore changes in fair value are reported in earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC Topic 820, Fair Value Measurements. The Company recognized losses of $25,000 and $14,000 in commercial loan swap income resulting from the fair value adjustments for the three and nine months ended September 30, 2024, respectively, as compared to losses of $2,000 and $2,000 for the corresponding prior year periods.
Derivatives Designated as Hedging Instruments
During 2022, the Company entered into a three-year interest rate swap intended to add stability to its net interest income and to manage its exposure to future interest rate movements associated with a pool of floating-rate commercial loans. The swap requires the Company to pay variable-rate amounts indexed to one-month term Secured Overnight Financing Rate (“SOFR”) to the counterparty in exchange for the receipt of fixed-rate amounts at 4.0% from the counterparty. The swap was designated and qualified as a cash flow hedge under ASC Topic 815, Derivatives and Hedging. The changes in the fair value of cash flow hedges are initially reported in other comprehensive income. Amounts are subsequently reclassified from accumulated other comprehensive income to earnings when the hedged transactions occur, specifically within the same line item as the hedged item (interest income). Therefore, a portion of the balance reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are made or received on the Company’s interest rate swaps.
The table below presents the effect on the Company’s accumulated other comprehensive income/loss (“AOCI” or “AOCL”) attributable to the cash flow hedge derivative, net of tax, and the related gains/(losses) reclassified from AOCI into income (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
AOCL balance at beginning of period, net of tax
$
(776)
$
(909)
$
(36)
$
(25)
Unrealized gains (losses) recognized in OCI
837
(622)
(418)
(1,798)
Losses reclassified from AOCI into interest income
253
246
768
538
AOCI (AOCL) balance at end of period, net of tax
$
314
$
(1,285)
$
314
$
(1,285)
During the next twelve months ending September 30, 2025, the Company estimates that an additional $174,000 will be reclassified as an addition to interest income.
Notes to Unaudited Consolidated Financial Statements (Continued)
The table below presents the notional amount and fair value of derivatives designated and not designated as hedging instruments, as well as their location on the Consolidated Statements of Financial Condition (in thousands):
Notional
Fair Value
Other assets
Other liabilities
As of September 30, 2024
Derivatives Not Designated as Hedging Instruments
Interest rate swaps and cap contracts
$
1,488,359
$
67,376
$
67,415
Derivatives Designated as Cash Flow Hedge
Interest rate swap contract
100,000
415
—
Total Derivatives
$
1,588,359
$
67,791
$
67,415
As of December 31, 2023
Derivatives Not Designated as Hedging Instruments
Interest rate swaps and cap contracts
$
1,418,276
$
87,776
$
87,801
Derivatives Designated as Cash Flow Hedge
Interest rate swap contract
100,000
—
47
Total Derivatives
$
1,518,276
$
87,776
$
87,848
Credit Risk-Related Contingent Features
The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by being a party to International Swaps and Derivatives Association agreements with third-party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $0 at both September 30, 2024 and December 31, 2023. The amount of collateral received from third parties was $55.8 million and $88.3 million at September 30, 2024 and December 31, 2023, respectively. The amount of collateral posted with third parties and received from third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $67.4 million and $87.8 million at September 30, 2024 and December 31, 2023, respectively.
The interest rate derivatives which the Company executes with the commercial borrowers are collateralized by the borrowers’ commercial real estate financed by the Company.
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 9. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2038. The Company has one existing finance lease, which has a lease term through 2029.
The following table represents the classification of the Company’s Right of Use (“ROU”) assets and lease liabilities on the Consolidated Statements of Financial Condition (in thousands):
September 30,
December 31,
2024
2023
Lease ROU Assets
Classification
Operating lease ROU assets
Other assets
$
16,098
$
18,979
Finance lease ROU asset
Premises and equipment, net
1,129
1,304
Total lease ROU assets
$
17,227
$
20,283
Lease Liabilities
Operating lease liabilities (1)
Other liabilities
$
17,831
$
20,018
Finance lease liability
Other borrowings
1,489
1,685
Total lease liabilities
$
19,320
$
21,703
(1) Operating lease liabilities excludes liabilities for future rent and estimated lease termination payments related to closed branches of $4.8 million and $5.9 million at September 30, 2024 and December 31, 2023, respectively.
The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, ASC Topic 842, Leases requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is not readily determinable, the Company generally utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table represents lease expenses and other lease information (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Lease Expense
Operating lease expense
$
1,136
$
1,153
$
3,441
$
3,472
Finance lease expense:
Amortization of ROU assets
59
58
175
170
Interest on lease liabilities (1)
21
25
66
77
Total
$
1,216
$
1,236
$
3,682
$
3,719
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
1,214
$
1,154
$
3,336
$
3,414
Operating cash flows from finance leases
21
25
66
77
Financing cash flows from finance leases
66
63
196
186
(1)Included in borrowed funds interest expense on the Consolidated Statements of Income. All other costs are included in occupancy expense on the Consolidated Statements of Income.
Future minimum payments for the finance lease and operating leases with initial or remaining terms were as follows (in thousands):
Finance Lease
Operating Leases
For the Year Ending December 31,
2024
$
88
$
1,226
2025
350
4,719
2026
350
4,070
2027
350
2,696
2028
350
1,524
Thereafter
208
5,545
Total
1,696
19,780
Less: Imputed interest
(207)
(1,949)
Total lease liabilities
$
1,489
$
17,831
Note 10. Variable Interest Entity
The Company accounts for Trident as a variable interest entity (“VIE”) under ASC 810, Consolidation, for which the Company is considered the primary beneficiary (i.e. the party that has a controlling financial interest). In accordance with ASC 810, Consolidation, the Company has consolidated Trident’s assets and liabilities.
The summarized financial information for the Company’s consolidated VIE at September 30, 2024 and December 31, 2023 consisted of the following (in thousands):
Notes to Unaudited Consolidated Financial Statements (Continued)
Note 11. Subsequent Events
On October 1, 2024, the Company completed the acquisition of Spring Garden Capital Group, LLC (“Spring Garden”) for a purchase price of $68 million. The transaction will be complementary to the Company’s existing products and will expand the Company’s specialty finance offerings.
The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.
Item 1A. Risk Factors
For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2023 Form 10-K. There have been no material changes to risk factors relevant to the Company’s operations since December 31, 2023. Additional risks not presently known to the Company, or that the Company currently deems immaterial, may also adversely affect the business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Purchases of Equity Securities
On June 25, 2021, the Company announced the authorization by the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 3.0 million shares. The stock repurchase plan has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the plan at any time. The Company repurchased 87,324 shares of its common stock during the three month period ended September 30, 2024. At September 30, 2024, there were 1,551,200 shares available for repurchase under the Company’s stock repurchase program.
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program
July 1, 2024 through July 31, 2024
—
$
—
—
1,638,524
August 1, 2024 through August 31, 2024
87,324
15.85
87,324
1,551,200
September 1, 2024 through September 30, 2024
—
—
—
1,551,200
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended September 30, 2024, no directors or executive officers of the Company adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and/or any “Rule 10b5-1 trading arrangement.”
Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002
Filed with this document
101.0
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements
104.0
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OceanFirst Financial Corp.
Registrant
DATE:
October 31, 2024
/s/ Christopher D. Maher
Christopher D. Maher
Chairman and Chief Executive Officer
DATE:
October 31, 2024
/s/ Patrick S. Barrett
Patrick S. Barrett
Executive Vice President and Chief Financial Officer