KBRA Affirms Ratings for OceanFirst Financial Corp. and Places the Ratings for Flushing Financial Corporation on Watch Upgrade Following Merger Announcement

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred stock rating of BBB-, and the short-term debt rating of K2 for Toms River, New Jersey-based OceanFirst Financial Corp. (NASDAQ: OCFC) ("OceanFirst" or "the company") following the recently announced merger agreement with Uniondale, New York-based Flushing Financial Corporation (NASDAQ: FFIC) ("Flushing"). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for OceanFirst Bank, N.A., the main subsidiary of OCFC. The Outlook for all long-term ratings is Stable.

KBRA also places Flushing's ratings and its lead subsidiary, Flushing Bank's, long-term ratings on Watch Upgrade following the merger announcement. At the holding company, this includes the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3. At the bank level, this includes the deposit and senior unsecured debt ratings of BBB+ and the subordinated debt rating of BBB. Moreover, KBRA affirms the short-term deposit and debt ratings of K2 for Flushing Bank.

On December 29, 2025, OceanFirst announced a proposed merger agreement with Flushing, pursuant to which Flushing Bank will merge into OceanFirst Bank, N.A. The transaction, valued at ~$580 million, or 0.8x FFIC’s tangible book value at announcement, is expected to close in the second quarter of 2026, subject to customary regulatory approvals. The transaction is projected to create a $23 billion-asset institution with nearly 80 locations across the Northeast and Mid-Atlantic, including a strong presence in New Jersey and New York. Leadership of the combined entity will be primarily drawn from OCFC’s executive team; however, John Buran, Flushing’s current CEO, is expected to serve as non-executive Chairman of the Board during a transitional period, with OCFC's current CEO and Chairman, Chris Maher, expected to succeed him in 2028. In addition, five FFIC directors are projected to join the pro forma 17-member board. Flushing shareholders are expected to own approximately 30% of the combined company on a pro forma basis. Another key component of the transaction from an ownership standpoint is the $225 million committed equity investment from Warburg Pincus, which is expected to result in approximately 12% pro forma ownership and one board seat.

Key Credit Considerations

KBRA views the scale and footprint of the proposed combined company favorably. Beyond the approximate $23 billion in total assets, the institution is expected to reflect roughly $17 billion in total loans, and $18 billion in total deposits. The funding profile, which has historically been a strength of the OCFC franchise, including moderately below average costs and the granular nature, is expected to remain largely centered in core deposits, with NIB and low-cost transactional accounts comprising about half of the total base. However, the deposit mix is expected to shift modestly toward higher-cost products, particularly time deposits and money market accounts, reflecting FFIC’s legacy as a thrift and its comparatively higher-cost funding profile. As a result, the pro forma cost of deposits is projected to increase toward the 2.50% level, placing the combined franchise toward the higher end of the rating group. That said, management anticipates improving the deposit mix over time, driven, in part, by the continued build-out of lower-cost deposits from OCFC’s premier banking teams. Liquidity is also expected to improve on a pro forma basis, with the loan-to-deposit ratio declining to ~96% (from 101% for OCFC as of 3Q25) and on-balance sheet liquidity (cash and securities) growing toward 20% of total assets. Moreover, management has articulated plans to moderate balance sheet growth through remixing of both the loan portfolio and deposit base.

The proposed merger further shifts OceanFirst’s balance sheet toward a more traditional commercial banking profile, reducing the relative concentration in residential mortgage lending and increasing the share of commercial loans, including CRE, multifamily, and C&I, which will comprise the majority of total loans on a pro forma basis. While this evolution is directionally consistent with OCFC’s long-term strategic objectives, it also results in higher investor CRE exposure, including a moderate concentration in New York City rent-regulated multifamily loans (7% of total loans on a pro forma basis). The regulatory investor CRE concentration is expected to increase to ~415% of total risk-based capital at closing, which is elevated relative to similarly rated peers and above OCFC’s historical operating range. However, management has indicated that reducing this concentration is a priority, with a targeted return toward pre-merger levels in the mid-to-high 300% range over time, achievable through natural portfolio runoff and, if market conditions permit, targeted loan sales. Go-forward lending priorities are expected to emphasize C&I and relationship-based commercial banking, while de-emphasizing investor CRE, residential mortgage, and multifamily lending. In addition, diversification across property types is expected to improve, including a reduction in office exposure to approximately 7% of total loans on a pro forma basis from roughly 10% at OCFC on a standalone basis.

Despite the higher near-term investor CRE exposure, KBRA takes comfort in the long-term credit performance of both institutions, as evidenced by consistently low net charge-off ratios since 2008 (below 20 bps for each), reflecting conservative underwriting standards and disciplined risk management through multiple credit cycles. These risks are further mitigated by relatively small average loan sizes, limited exposure to central business districts, and conservative purchase accounting marks applied to Flushing’s rent-regulated multifamily portfolio. KBRA also has a favorable view of the depth of OceanFirst’s loan-level due diligence. Purchase accounting marks include a gross credit mark of 2.6% of Flushing’s gross loans at close ($174 million, or approximately 4.1x current reserves) and an 8% credit mark on the $1.4 billion rent-regulated multifamily portfolio (10%+ total mark inclusive of the interest rate component). These marks contribute to a strong pro forma reserve position, with ACL to loans held for investment of approximately 1.5% at closing.

With respect to the pro forma financial position, the combined company is expected to maintain a solid quantitative profile. Management projects a meaningful improvement in profitability following integration, supported by purchase accounting accretion and cost savings estimated at approximately 35% of Flushing’s noninterest expense base. On a fully phased-in basis, the pro forma company is expected to generate an ROA of ~1.0% (in 2027), driven primarily by NIM expansion and cost synergies, with noninterest expenses to average assets declining to roughly 1.7% from 1.9% for OCFC on a standalone basis. Achieving this level of profitability would align OceanFirst more closely with similarly rated peers, and KBRA views the target as reasonable and achievable, especially given OCFC’s proven track record as a successful acquirer and its ability to execute on identified cost savings. That said, the combined franchise is expected to remain largely spread reliant, with noninterest income contributing a relatively modest share of total revenues, consistent with historical levels at both institutions (approximately 8% for FFIC and 12% for OCFC during 9M25).

Pro forma capital levels are expected to remain adequate, with a CET1 ratio projected at ~10.8% at closing, inclusive of the $225 million committed equity investment from Warburg Pincus and the credit risk transfer on a $1.5 billion pool of residential mortgage loans completed in 4Q25. While capital metrics are broadly in line with OCFC’s historical operating levels, they continue to trail those of similarly rated peers. KBRA nonetheless views the capital position as sufficient given the company’s earnings profile, conservative credit marks, and management’s stated intention to prioritize capital preservation during the integration period. Additionally, meaningful organic capital generation is expected over time, supported by improving profitability and continued balance sheet optimization.

Rating Sensitivities

Given the Stable Outlook for OceanFirst's ratings, an upgrade is not expected in the near term. Over time, however, positive rating momentum could develop if the company meaningfully exceeds its projected earnings and capital targets, continues to improve its liquidity and funding profile, and demonstrates greater diversification in both its loan portfolio - particularly through a reduction in investor CRE concentration - and revenue mix, including growth in fee-based income. Conversely, a downgrade is also not anticipated at this time. That said, the ratings could be revisited if integration or operational execution challenges were to emerge, if management were to adopt a materially more aggressive posture with respect to capital or liquidity management, or if unexpected credit deterioration were to occur.

For Flushing, the Watch Upgrade reflects KBRA’s view that the proposed merger with OceanFirst would result in FFIC being absorbed into a larger, more diversified, and better-positioned banking franchise, which could support an improved credit profile upon transaction completion. Additionally, in the unlikely event that the proposed merger does not receive regulatory approval - an outcome KBRA currently views as improbable given recent regulatory approval trends - the ratings would be reassessed.

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