What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 143 added, 133 removed, 290 unchanged (49% of the section changed)

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At or for the Quarters Ended

(dollars in thousands, except per share amounts) June 30, 2021 March 31, 2021 June 30, 2020

(dollars in thousands, except per share amounts) September 30, 2021 June 30, 2021 September 30, 2020

SELECTED FINANCIAL CONDITION DATA:

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Operating expenses 58,673 51,670 56,787

Net income 30,555 32,697 18,638

Net income available to common stockholders 29,551 31,693 18,638

Diluted earnings per share 0.49 0.53 0.31

Net income (loss) 24,167 30,555 (4,926)

Net income (loss) available to common stockholders 23,163 29,551 (6,019)

Diluted earnings (loss) per share 0.39 0.49 (0.10)

SELECTED FINANCIAL RATIOS:

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ASSET QUALITY:

Non-performing loans (8)

Non-performing loans held-for-investment (8)

$ 23,344 $ 31,680 $ 29,895

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23,450 31,786 97,490

Allowance for loan credit losses as a percent of total loans receivable (7) (9)

Allowance for loan credit losses as a percent of total loans held-for-investment (7) (9)

0.61 % 0.69 % 0.70 %

Allowance for loan credit losses as a percent of total non-performing loans (8) (9)

Allowance for loan credit losses as a percent of total non-performing loans held-for-investment (8) (9)

214.84 170.06 188.49

Non-performing loans as a percent of total loans receivable (7) (8)

Non-performing loans held-for-investment as a percent of total loans held-for-investment (7) (8)

0.29 0.41 0.37

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(2) Ratios are annualized.

(3) Performance ratios include merger related expenses, branch consolidation expenses, and net gain on equity investments of $104,000 and $6.9 million, or $78,000 and $5.2 million, net of tax expense, for the quarters ended June 30, 2021 and March 31, 2021, respectively.

Performance ratios include merger related expenses, branch consolidation expenses, and Federal Home Loan Bank (“FHLB”) advance prepayment fees of $4.9 million, or $3.7 million, net of tax benefit, for the quarter ended June 30, 2020.

(3) Performance ratios include merger related expenses, branch consolidation expenses, and net loss on equity investments of $4.7 million, or $3.6 million, net of tax benefit, for the quarter ended September 30, 2021.

Performance ratios include merger related expenses, branch consolidation expenses, and net gain on equity investments of $104,000, or $78,000, net of tax expense, for the quarter ended June 30, 2021.

Performance ratios include merger related expenses, branch consolidation expenses, and net loss on equity investments of $7.6 million, or $5.8 million, net of tax benefit, for the quarter ended September 30, 2020.

(4) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

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(7) Total loans receivable excludes loans held-for-sale.

(8) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure.

Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure.

(8) Non-performing assets consist of non-performing loans held-for-investment and real estate acquired through foreclosure.

Non-performing loans held-for-investment 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.

(9) 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 $23.6 million, $25.7 million, and $35.4 million at June 30, 2021, March 31, 2021 and June 30, 2020, respectively.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $21.3 million , $23.6 million , and $31.6 million at September 30, 2021, June 30, 2021 and September 30, 2020, 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 in the major metropolitan areas of Philadelphia, New York, Baltimore, Washington D.C.

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

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

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

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

The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, sales of loans and securities, deposit account services, bank owned life insurance, commercial loan swap income, and other fees.

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.

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Key developments relating to the Company’s financial results and corporate activities were as follows:

• Operations:

Commercial banking expansion remains a strategic focus with seven commercial bankers added to the team in this quarter, for a total of 16 this year.

This has contributed to a record loan pipeline of $628.6 million as of June 30, 2021.

• Net Interest Income:

Net interest income increased by $412,000 to $74.0 million from $73.6 million in the prior linked quarter, as non-interest bearing deposits grew by $372.2 million year-to-date, reflecting the continued trend in improving deposit quality.

• Expense Management:

Operating expenses were $51.7 million, which includes the impact of additional commercial banking hires for a portion of the period, partially offset by savings related to four branch consolidations completed in April 2021.

Since 2015, the Bank has consolidated 57 branch locations.

• Interchange Fees:

Under the temporary relief provisions of a joint rule published by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (“FDIC”), and the Board of Governors of the Federal Reserve System, the Bank received relief from Dodd-Frank limitations on debit card interchange fees collected by banks with assets of $10 billion or more.

The Bank will remain exempt from limits on debit card interchange fees until June 30, 2022.

Net income available to common stockholders for the three months ended June 30, 2021 was $29.6 million, or $0.49 per diluted share, as compared to $18.6 million, or $0.31 per diluted share, for the corresponding prior year period.

Net income available to common stockholders for the six months ended June 30, 2021 was $61.2 million, or $1.02 per diluted share, as compared to $35.2 million, or $0.58 per diluted share, for the corresponding prior year period.

The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2021, respectively.

Net income available to common stockholders for the three and six months ended June 30, 2021 included merger related expenses of $446,000 and $827,000, respectively, branch consolidation expenses of $26,000 and $1.0 million, respectively, and net gain on equity investments of $576,000 and $8.9 million, respectively.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 13.14% at June 30, 2021.

• Loan Growth:

Total loan growth for the quarter was $361.0 million.

Total loan growth, excluding the impact of Paycheck Protection Program (“PPP”) loans of $30.5 million, was $391.5 million for the quarter, reflecting quarterly loan originations of $771.8 million and the purchase of a residential loan pool of $219.7 million.

Along with record loan production during the quarter, the committed loan pipeline remains strong at $651.4 million.

• Deposit Growth:

Deposits increased $358.8 million during the third quarter, while cost of deposits decreased 5 basis points to 0.22% from 0.27% in the prior linked quarter, reflecting a trend in improving deposit quality.

• Net Interest Income and Margin:

Net interest income increased by $3.1 million to $77.1 million from $74.0 million in the prior linked quarter.

Net interest margin increased to 2.93%, compared to 2.89% in the prior linked quarter, largely driven by the Bank’s disciplined deposit pricing practices .

Net income available to common stockholders for the three months ended September 30, 2021 was $23.2 million, or $0.39 per diluted share, as compared to net loss available to common stockholders of $6.0 million, or $0.10 per diluted share, for the corresponding prior year period.

Net income available to common stockholders for the nine months ended September 30, 2021 was $84.4 million, or $1.41 per diluted share, as compared to $29.2 million, or $0.49 per diluted share, for the corresponding prior year period.

The dividends paid to preferred stockholders were $1.0 million and $3.0 million for the three and nine months ended September 30, 2021, respectively, as compared to $1.1 million for each of the corresponding prior year periods.

Net income available to common stockholders for the three and nine months ended September 30, 2021 included merger related expenses of $225,000 and $1.1 million, respectively, branch consolidation expenses of $4.0 million and $5.1 million, respectively, and net loss on equity investments of $466,000 and net gain on equity investments of $8.4 million, respectively.

Net loss available to common stockholders for the three months ended September 30, 2020, included merger related expenses, branch consolidation expenses and a net loss on equity investments of $3.2 million, $830,000, and $3.6 million, respectively.

Net income for the nine months ended September 30, 2020, included merger related expenses, branch consolidation expenses, a net loss on equity investments, the impact of the Two River and Country Bank opening credit loss expense under the Current Expected Credit Loss (“CECL”) model, and Federal Home Loan Bank (“FHLB”) advance prepayment fees of $14.8 million, $4.3 million, $3.6 million, $2.4 million and $924,000, respectively.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.79% at September 30, 2021.

The Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share.

The dividend, related to the quarter ended June 30, 2021, will be paid on August 20, 2021 to common stockholders of record on August 9, 2021.

The dividend, related to the quarter ended September 30, 2021, will be paid on November 19, 2021 to common stockholders of record on November 8, 2021.

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

This dividend will be paid on August 16, 2021 to preferred stockholders of record on July 30, 2021.

This dividend will be paid on November 15, 2021 to preferred stockholders of record on October 29, 2021.

As previously announced on August 4, 2021, the Bank entered into a definitive agreement to sell two New Jersey branch locations to First Bank, including the owned premises and equipment, all deposits associated with the branches, which totaled

approximately $124 million as of June 30, 2021, as well as selected performing loans totaling approximately $14 million as of June 30, 2021.

The Bank has received the required regulatory approval and the closing of the sale and customer conversion is expected to take place in early December.

Impact of COVID-19

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities.

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 pandemic on customers, employees and communities.

The Company began offering its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of either December 31, 2019 or the date of the modification.

In keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loan deferrals were not considered troubled debt restructured (“TDR”) loans at June 30, 2021 and will not be reported as past due during the deferral period.

As of June 30, 2021, 98.3% of total loans comply with pre-COVID-19 terms.

In keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loan deferrals were not considered troubled debt restructured (“TDR”) loans at September 30, 2021 and will not be reported as past due during the deferral period.

As of September 30, 2021, 98.7% of total loans comply with pre-COVID-19 terms.

Further, due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value.

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The Company will assess the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

The Company also accepted and processed applications for loans under the Paycheck Protection Program (the “PPP”), which was originally established under the CARES Act.

At June 30, 2021, $83.0 million in PPP loans and $3.2 million in deferred fees remained on the balance sheet, which include $13.0 million of PPP loans originated during the quarter ended June 30, 2021.

The Company also accepted and processed applications for loans under the PPP, which was originally established under the CARES Act.

At September 30, 2021, $52.5 million in PPP loans and $2.0 million in deferred fees remained on the consolidated statements of financial condition.

There were no PPP loans originated during the quarter ended September 30, 2021.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021 was signed into law, which contained provisions that directly impacted financial institutions.

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

The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2021 and June 30, 2020.

The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 2021 and 2020.

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

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

For the Three Months Ended

June 30, 2021 June 30, 2020

For the Three Months Ended September 30,

(dollars in thousands) Average Balance Interest Average

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Residential real estate 2,260,673 20,076 3.55 2,462,513 23,091 3.75

Home equity loans and lines 260,374 3,163 4.87 328,144 3,853 4.72

Other consumer 44,167 530 4.81 76,382 1,164 6.13

Home equity loans and lines and other consumer 289,011 3,426 4.70 379,299 4,203 4.41

Allowance for loan credit losses, net of deferred loan costs and fees (46,436) — — (45,912) — —

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Total cost of deposits (including non-interest-bearing deposits) 0.22 % 0.49 %

For the Six Months Ended

June 30, 2021 June 30, 2020

For the Nine Months Ended September 30,

(dollars in thousands) Average

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Residential real estate 2,269,066 59,242 3.48 2,480,932 71,590 3.85

Home equity loans and lines 268,115 6,686 5.03 333,574 7,923 4.78

Other consumer 47,547 1,177 4.99 81,930 2,534 6.22

Home equity loans and lines and other consumer 306,681 11,288 4.92 403,348 14,661 4.86

Allowance for loan credit losses, net of deferred loan costs and fees (50,912) — — (27,186) — —

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(4) Net interest margin represents net interest income divided by average interest-earning assets.

Comparison of Financial Condition at June 30, 2021 and December 31, 2020

Total assets increased by $35.6 million to $11.48 billion at June 30, 2021, from $11.45 billion at December 31, 2020.

Cash and due from banks decreased $188.1 million, to $1.08 billion at June 30, 2021, from $1.27 billion at December 31, 2020.

Total debt securities increased by $275.5 million at June 30, 2021, as compared to December 31, 2020, while equity investments decreased $16.2 million due to $90.7 million in sales of common stock partly offset by $73.8 million in purchases of preferred stock and a non-controlling equity investment.

Total loans, excluding PPP loans of $83.0 million and $95.4 million at June 30, 2021 and December 31, 2020, respectively, increased by $77.1 million, to $7.74 billion at June 30, 2021, from $7.66 billion at December 31, 2020.

Deposits decreased by $12.3 million, to $9.42 billion at June 30, 2021, from $9.43 billion at December 31, 2020, which reflected a decrease in time deposits of $416.4 million, partly offset by an increase in non-interest bearing deposits of $372.2 million.

The loan-to-deposit ratio at June 30, 2021 was 83.1%, as compared to 82.3% at December 31, 2020.

Stockholders’ equity increased to $1.51 billion at June 30, 2021, as compared to $1.48 billion at December 31, 2020.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets increased by $381.4 million to $11.83 billion at September 30, 2021, from $11.45 billion at December 31, 2020.

Cash and due from banks decreased $291.0 million, to $981.1 million at September 30, 2021, from $1.27 billion at December 31, 2020 as excess liquidity was primarily used to purchase securities and fund loan growth.

Total debt securities increased by $319.4 million at September 30, 2021, as compared to December 31, 2020.

Total loans, excluding PPP loans of $52.5 million and $95.4 million at September 30, 2021 and December 31, 2020, respectively, increased by $468.6 million, to $8.13 billion at September 30, 2021, from $7.66 billion at December 31, 2020.

Deposits increased by $346.5 million to $9.77 billion at September 30, 2021, from $9.43 billion at December 31, 2020.

Excluding time deposits of $855.4 million at September 30, 2021 and $1.37 billion at December 31, 2020, total deposits increased by $863.8 million to $8.92 billion at September 30, 2021 from $8.05 billion at December 31, 2020.

The loans-to-deposit ratio at September 30, 2021 was 83.7%, as compared to 82.3% at December 31, 2020.

Stockholders’ equity increased to $1.51 billion at September 30, 2021, as compared to $1.48 billion at December 31, 2020.

On June 25, 2021, the Company announced the authorization of the Board of Directors of the 2021 Stock Repurchase Program to repurchase up to an additional 3.0 million shares, which is approximately 5% of the Company’s outstanding common stock.

For the six months ended June 30, 2021, the Company repurchased 1.0 million shares under its stock repurchase program at a weighted average cost of $20.94, and there were 4,019,145 shares available for repurchase at June 30, 2021 under the existing repurchase programs.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2021 and June 30, 2020

These items increased net income by $78,000 and $5.3 million, net of tax, for the three and six months ended June 30, 2021, respectively.

Net income available to common stockholders for three and six months ended June 30, 2020 included merger related expenses of $3.1 million and $11.6 million, respectively, branch consolidation expenses of $863,000 and $3.5 million, respectively, FHLB advance prepayment fees of $924,000 for both periods, and Two River and Country Bank opening credit loss expense under the Current Expected Credit Loss (“CECL”) model of $2.4 million for the six months ended June 30, 2020.

These items decreased net income by $3.7 million and $14.1 million, net of tax, for the three and six months ended June 30, 2020, respectively.

For the nine months ended September 30, 2021, the Company repurchased 1,460,009 shares under its stock repurchase program at a weighted average cost of $20.98, and there were 3,559,136 shares available for repurchase at September 30, 2021 under the existing repurchase programs.

Stockholders’ equity per common share increased to $25.47 at September 30, 2021, as compared to $24.57 at December 31, 2020.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2021 and September 30, 2020

These items decreased net income by $3.6 million and increased net income by $1.7 million, net of tax, for the three and nine months ended September 30, 2021, respectively.

Net income for the nine months ended September 30, 2020, included merger related expenses, branch consolidation expenses, a net loss on equity investments, the impact of the Two River and Country Bank opening credit loss expense under the CECL model, and FHLB advance prepayment fees of $14.8 million, $4.3 million, $3.6 million, $2.4 million and $924,000, respectively.

These items decreased net loss by $5.8 million and decreased net income by $19.9 million, net of tax, for the three and nine months ended September 30, 2020, respectively.

Interest Income

Interest income for the three and six months ended June 30, 2021 decreased to $83.3 million and $168.2 million, respectively, as compared to $95.9 million and $194.1 million for the corresponding prior year periods, respectively.

Average interest-earning assets increased by $502.5 million and $791.3 million for the three and six months ended June 30, 2021, respectively, as compared to the same prior year periods, primarily concentrated in excess balance sheet liquidity.

Average loans receivable, net of allowance for loan credit losses, decreased by $506.7 million and $313.6 million for the three and six months ended June 30, 2021, respectively, as compared to the same prior year periods.

For the three and six months ended June 30, 2021, the yield on average interest-earning assets decreased to 3.25% and 3.32%, respectively, from 3.94% and 4.13%, respectively, for the corresponding prior year periods.

Interest income for the three and nine months ended September 30, 2021 decreased to $85.4 million and $253.6 million, respectively, as compared to $93.0 million and $287.0 million for the corresponding prior year periods, respectively.

Average interest-earning assets increased by $192.3 million and $590.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same prior year periods, primarily concentrated in excess balance sheet liquidity.

Average loans receivable, net of allowance for loan credit losses, decreased by $486.1 million and $371.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same prior year periods, primarily due to reductions in PPP loans.

For the three and nine months ended September 30, 2021, the yield on average interest-earning assets decreased to 3.24% and 3.29%, respectively, from 3.60% and 3.95% for the corresponding prior year periods, respectively.

Interest Expense

Interest expense for the three and six months ended June 30, 2021 was $9.3 million and $20.6 million, respectively, as compared to $17.2 million and $35.8 million in the corresponding prior year periods, respectively.

Average interest-bearing liabilities decreased $109.2 million and increased $172.8 million for the three and six months ended June 30, 2021, respectively, as compared to the same prior year periods.

For the three and six months ended June 30, 2021, the cost of average interest-bearing liabilities decreased to 0.50% and 0.55%, respectively, from 0.92% and 0.98%, respectively, for the corresponding prior year periods.

The total cost of deposits (including non-interest bearing deposits) was 0.27% and 0.32% for the three and six months ended June 30, 2021, respectively, as compared to 0.57% and 0.63%, respectively, for the same prior year periods.

Interest expense for the three and nine months ended September 30, 2021 was $8.3 million and $28.9 million, respectively, as compared to $16.2 million and $51.9 million in the corresponding prior year periods, respectively.

Average interest-bearing liabilities decreased $273.0 million and increased $23.2 million for the three and nine months ended September 30, 2021, respectively, as compared to the same prior year periods.

For the three and nine months ended September 30, 2021, the cost of average interest-bearing liabilities decreased to 0.44% and 0.52%, respectively, from 0.83% and 0.93%, respectively, for the corresponding prior year periods.

The total cost of deposits (including non-interest bearing deposits) was 0.22% and 0.28% for the three and nine months ended September 30, 2021, respectively, as compared to 0.49% and 0.58%, respectively, for the same prior year periods.

Net Interest Income and Margin

Net interest income for the three and six months ended June 30, 2021 decreased to $74.0 million and $147.6 million, respectively, as compared to $78.7 million and $158.3 million, respectively, for the corresponding prior year periods, reflecting a reduction in net interest margin, partly offset by an increase in interest-earning assets.

Net interest margin for the three and six months ended June 30, 2021 decreased to 2.89% and 2.91%, respectively, from 3.24% and 3.37%, respectively, for the same prior year periods.

Net interest income for the three months ended September 30, 2021, increased to $77.1 million, as compared to $76.8 million for the corresponding prior year period.

Net interest income for the nine months ended September 30, 2021 decreased to $224.8 million as compared to $235.1 million for the corresponding prior year period, as a result of the lower interest rate environment.

Net interest margin for the three and nine months ended September 30, 2021 decreased to 2.93% and 2.91%, respectively, from 2.97% and 3.23%, respectively, for the same prior year periods.

The net interest margin compression was primarily due to the excess balance sheet liquidity and the lower interest rate environment.

Benefit/Provision for Credit Losses

For the three and six months ended June 30, 2021, the benefit for credit loss expense was $6.5 million and $7.1 million, respectively, as compared to a provision for credit loss expense of $9.6 million and $19.6 million, respectively, for the corresponding prior year periods.

The benefit for credit loss expense for the three and six months ended June 30, 2021 was significantly influenced by improved economic forecasts, including stronger employment levels and GDP growth, combined with stabilizing trends in the Bank’s asset quality.

Net loan charge-offs were $224,000 for the quarter and net loan recoveries were $56,000 for the six months ended June 30, 2021, as compared to net loan recoveries of $232,000 and net loan charge-offs of $922,000 for the corresponding prior year periods, respectively.

The six months ended June 30, 2020 included $949,000 in charge-offs on the sale of higher risk residential loans.

Non-performing loans totaled $31.7 million at June 30, 2021, as compared to $21.0 million at June 30, 2020.

For the three and nine months ended September 30, 2021, the credit loss benefit was $3.2 million and $10.3 million, respectively, as compared to a credit loss expense of $35.7 million and $55.3 million, respectively, for the corresponding prior year periods.

The credit loss benefit for the three and nine months ended September 30, 2021 was significantly influenced by positive trends in the Bank’s asset quality combined with stabilizing trends in economic forecasts, including strong employment levels and GDP growth, partly offset by the economic uncertainty related to supply chain and labor market constraints.

Net loan recoveries were $386,000 and $442,000 for the three and nine months ended September 30, 2021, respectively, as compared to net loan charge-offs of $15.0 million and $15.9 million for the corresponding prior year periods, respectively.

The three months ended September 30, 2020 included $14.2 million in charge-offs related to the transfer of higher-risk commercial loans to held-for-sale, which were ultimately sold in the fourth quarter of 2020.

Non-performing loans held-for-investment totaled $23.3 million at September 30, 2021, as compared to $29.9 million at September 30, 2020.

Non-interest Income

For the three and six months ended June 30, 2021, other income increased to $11.8 million and $32.6 million, respectively, as compared to $11.4 million and $25.1 million, respectively, for the corresponding prior year periods.

Other income for the three and six months ended June 30, 2021 included net gain on equity investments of $576,000 and $8.9 million, respectively.

The remaining decrease in other income for the three months ended June 30, 2021, as compared to the corresponding prior year period, was primarily due to a decrease in commercial loan swap income of $2.4 million, as a result of lower activity, partially offset by increases in bankcard services of $850,000, due to lower card activity in the prior period as a result of the pandemic, fees and service charges of $556,000, and gain on sale of loans of $523,000.

The remaining decrease in other income for the six months ended June 30, 2021, as compared to the corresponding prior year period, was primarily due to a decrease in commercial loan swap income of $5.4 million, as a result of lower activity, partially offset by increases in gain on sale of loans of $2.3 million and bankcard services of $1.4 million due to lower card activity in the prior period as a result of the pandemic.

For the three and nine months ended September 30, 2021, other income increased to $9.9 million and $42.5 million, respectively, as compared to $8.2 million and $33.3 million, respectively, for the corresponding prior year periods.

Other income for the three and nine months ended September 30, 2021 included a net loss on equity investments of $466,000 and a net gain on equity investments of $8.4 million, respectively.

Other income for both the three and nine months ended September 30, 2020 included $3.6 million of net losses on equity investments.

The remaining decrease of $1.4 million in other income for the three months ended September 30, 2021, as compared to the corresponding prior year period, was primarily due to decreases in gain on sale of loans of $1.0 million and fees and service charges of $759,000.

The remaining decrease of $2.8 million in other income for the nine months ended September 30, 2021, as compared to the corresponding prior year period, was primarily due to a decrease in commercial loan swap income of $5.2 million, as a result of lower activity, and lower fees and service charges of $1.3 million, partially offset by increases in bankcard services of $1.7 million, due to lower card activity in the prior year period as a result of the pandemic, gain on sale of loans of $1.3 million, and PPP loan referral fees of $800,000.

Non-interest Expense

Operating expenses decreased to $51.7 million and $103.4 million for the three and six months ended June 30, 2021, respectively, as compared to $55.9 million and $118.7 million, respectively, in the same prior year periods.

Operating expenses for the three and six months ended June 30, 2021 included $472,000 and $1.9 million, respectively, of merger related and branch consolidation expenses.

Operating expenses for the three and six months ended June 30, 2020 included $4.9 million and $16.0 million, respectively, of merger related expenses, branch consolidation expenses and FHLB prepayment fees.

The remaining increase of $123,000 in operating expenses for the three months ended June 30, 2021, as compared to the corresponding prior year period, was primarily due to an increase in compensation and benefits expense of $2.0 million, primarily relating to higher benefit costs, partly offset by decreases in other operating expenses of $853,000, and equipment of $676,000.

The remaining decrease of $1.3 million in operating expenses for the six months ended June 30, 2021, as compared to the corresponding prior year period, was primarily due to decreases in other operating expense of $1.3 million and equipment expense of $1.0 million, partly offset by an increase in federal deposit insurance and regulatory assessments of $1.2 million.

Income Tax Expense

The provision for income taxes was $10.1 million and $20.7 million for the three and six months ended June 30, 2021, respectively, as compared to $5.9 million and $9.9 million for the same prior year periods, respectively.

The effective tax rate was 24.8% and 24.7% for the three and six months ended June 30, 2021, respectively, as compared to 24.0% and 22.0% for the same prior year periods, respectively.

The higher effective tax rate for the current year period, as compared to the prior year period, was primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York.

Operating expenses increased to $58.7 million and decreased to $162.0 million for the three and nine months ended September 30, 2021, respectively, as compared to $56.8 million and $175.5 million, respectively, in the same prior year periods.

Operating expenses for the three and nine months ended September 30, 2021 included $4.2 million and $6.1 million, respectively, of merger related and branch consolidation expenses.

Operating expenses for the three months ended September 30, 2020 included $4.0 million of merger related and branch consolidation expenses.

Operating expenses for the nine months ended September 30, 2020 included $20.0 million of merger related expenses, branch consolidation expenses and FHLB advance prepayment fees.

The remaining increase of $1.6 million in operating expenses for the three months ended September 30, 2021, as compared to the corresponding prior year period, was primarily due to increases in compensation and benefits expense of $1.7 million and data processing expense of $846,000, partly offset by a decrease in equipment expense of $782,000 .

The remaining increase of $372,000 in operating expenses for the nine months ended September 30, 2021, as compared to the corresponding prior year

period, was primarily due to increases in compensation and benefits expense of $2.2 million, primarily related to higher benefit costs, federal deposit insurance and regulatory assessments of $1.4 million, and data processing expense of $953,000, partly offset by decreases in equipment expense of $1.8 million, marketing expense of $930,000, other operating expense of $469,000, and occupancy expense of $434,000.

Income Tax Expense/Benefit

The provision for income taxes was $7.4 million and $28.1 million for the three and nine months ended September 30, 2021, respectively, as compared to a benefit for income taxes of $2.6 million and provision for income taxes of $7.3 million for the same prior year periods, respectively.

The effective tax rate was 23.3% and 24.3% for the three and nine months ended September 30, 2021, respectively, as compared to 34.6% and 19.5% for the same prior year periods, respectively.

The higher effective tax rate for the three months ended September 30, 2020 was primarily attributable to the net loss recognized during the quarter.

The higher effective tax rate for the nine months ended September 30, 2021, as compared to the prior year period, was primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York .

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances, access to the Federal Reserve discount window, other borrowings, including subordinated debt, and to a lesser extent, investment maturities and proceeds from the sale of loans.

While scheduled amortization of loans and mortgage-backed securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by interest rates, economic conditions and competition.

The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple banks.

At June 30, 2021 and December 31, 2020, the Bank had no outstanding overnight borrowings from the FHLB.

While scheduled amortization of loans and mortgage-backed securities are predictable sources of funds, deposit flows, loan prepayments, and loan and equity sales are greatly influenced by interest rates, economic conditions and competition.

The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions.

At September 30, 2021 and December 31, 2020, the Bank had no outstanding overnight borrowings from the FHLB.

The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs.

There were no FHLB advances at June 30, 2021 and December 31, 2020.

The Company’s cash needs for the six months ended June 30, 2021 were primarily satisfied by principal repayments on debt securities held-to-maturity, proceeds from sales of loans and equity investments, and proceeds from maturities and calls of debt securities.

The cash was principally utilized for purchases of debt and equity securities, and loan originations.

The Company’s cash needs for the six months ended June 30, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, proceeds from sale of loans, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, and acquired cash from acquisitions.

The cash was principally utilized for loan originations, and the repayment of short-term borrowings.

There were also no FHLB term advances at September 30, 2021 and December 31, 2020.

The Company’s cash needs for the nine months ended September 30, 2021 were primarily satisfied by the increase in deposits, proceeds from sales of loans and equity investments, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities.

The cash was principally utilized for purchases of debt and equity securities, a purchase of a residential loan pool, and loan originations.

The Company’s cash needs for the nine months ended September 30, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt securities, proceeds from sale of loans, and acquired cash from acquisitions.

The cash was principally utilized for loan originations, the repayment of short-term borrowings, and investment purchases.

In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans.

At June 30, 2021, outstanding commitments to originate loans totaled $628.6 million and outstanding undrawn lines of credit totaled $1.12 billion, of which $753.6 million were commitments to commercial borrowers and $366.0 million were commitments to consumer borrowers and residential construction borrowers.

At September 30, 2021, outstanding commitments to originate loans totaled $651.4 million and outstanding undrawn lines of credit totaled $1.22 billion, of which $870.7 million were commitments to commercial borrowers and $353.0 million were commitments to consumer borrowers and residential construction borrowers.

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 $673.7 million at June 30, 2021.

Based upon historical experience, management is optimistic about its ability to retain a significant portion of its maturing time deposits.

The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management.

Time deposits scheduled to mature in one year or less totaled $586.7 million at September 30, 2021.

Management is optimistic about its ability to retain funds from maturing time deposits and placing them in market comparable deposit products.

The Company has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.

Management also monitors cash on a daily basis to determine the liquidity needs of the Bank.

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

The Company repurchased 500,000 shares of common stock for the three months ended June 30, 2021, bringing the total shares repurchased to 1.0 million for six months ended June 30, 2021.

At June 30, 2021, there were 4,019,145 shares available to be repurchased under the stock repurchase programs authorized in June of 2021 and December of 2019.

Cash dividends on common stock declared and paid during the first six months of June 30, 2021 were $20.3 million, as compared to $20.5 million for the same prior year period.

On July 29, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share.

The dividend is payable on August 20, 2021 to common stockholders of record at the close of business on August 9, 2021.

Cash dividends on preferred stock declared and paid during the first six months of June 30, 2021 were $2.0 million.

The Company also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on August 16, 2021 to preferred stockholders of record on July 30, 2021.

The Company repurchased 460,009 shares of common stock for the three months ended September 30, 2021, bringing the total shares repurchased to 1,460,009 for the nine months ended September 30, 2021.

At September 30, 2021, there were 3,559,136 shares available to be repurchased under the stock repurchase programs authorized.

Cash dividends on common stock declared and paid during the first nine months of September 30, 2021 were $30.4 million, as compared to $30.6 million for the same prior year period.

On October 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share.

The dividend is payable on November 19, 2021 to common stockholders of record at the close of business on November 8, 2021.

Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2021 were $3.0 million, as compared to $1.1 million for the same prior year period .

The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on November 15, 2021 to preferred stockholders of record on October 29, 2021.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of the Bank, are capital distributions from the Bank, the issuance of preferred and common stock, and debt.

For the six months ended June 30, 2021, the Company received a dividend payment of $20.0 million from the Bank.

The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations.

For the nine months ended September 30, 2021, the Company received a dividend payment of $30.0 million from the Bank.

The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected

by capital restraints imposed by applicable regulations.

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

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 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.

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 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.

At June 30, 2021, OceanFirst Financial Corp.

At September 30, 2021, OceanFirst Financial Corp.

held $83.9 million in cash.

As of June 30, 2021 and December 31, 2020, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

As of September 30, 2021 and December 31, 2020, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

Actual For capital adequacy

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corrective action

As of June 30, 2021 Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,012,471 9.12 % $ 444,076 4.00 % $ 555,096 5.00 %

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The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.

At June 30, 2021 and December 31, 2020, the Company maintained a stockholders’ equity to total assets ratio of 13.14% and 12.96%, respectively.

At September 30, 2021 and December 31, 2020, the Company maintained a stockholders’ equity to total assets ratio of 12.79% and 12.96% , respectively.

Off-Balance-Sheet Arrangements and Contractual Obligations

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In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities.

At each of June 30, 2021 and December 31, 2020, the reserve for repurchased loans and loss sharing obligations was $1.2 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2021 (in thousands):

At each of September 30, 2021 and December 31, 2020, the reserve for repurchased loans and loss sharing obligations was $1.2 million.

The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2021 (in thousands).

Refer to Note 9 Leases, to the Consolidated Financial Statements for lease obligations.

Contractual Obligations Total

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Commercial 870,672 870,672 — — —

Consumer/construction 365,997 365,997 — — —

Consumer and residential construction 352,986 352,986 — — —

Commitments to originate loans 651,432 651,432 — — —

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

June 30, 2021 December 31, 2020

September 30, December 31,

(dollars in thousands)

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Residential real estate 5,484 8,642

Home equity loans and lines 1,924 2,503

Home equity loans and lines and other consumer 1,605 2,503

Total non-performing loans 23,344 36,410

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(1) PCD loans are not included in non-performing loans or delinquent loans totals.

The Company’s non-performing loans totaled $31.7 million at June 30, 2021, as compared to $36.4 million at December 31, 2020.

Included in the non-performing loans total was $9.8 million and $5.2 million of TDR loans at June 30, 2021 and December 31, 2020, respectively.

Non-performing loans do not include $40.1 million and $48.5 million of acquired PCD loans at June 30, 2021 and December 31, 2020, respectively.

At June 30, 2021, the allowance for loan credit losses totaled $53.9 million, or 0.69% of total loans, as compared to $60.7 million, or 0.78% of total loans, at December 31, 2020.

These ratios exclude existing unamortized credit and PCD marks on acquired loans of $23.6 million and $28.0 million at June 30, 2021 and December 31, 2020, respectively.

The Company’s non-performing loans totaled $23.3 million at September 30, 2021, as compared to $36.4 million at December 31, 2020.

Included in the non-performing loans total was $9.6 million and $5.2 million of TDR loans at September 30, 2021 and December 31, 2020, respectively.

Non-performing loans do not include $41.4 million and $48.5 million of acquired PCD loans at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021, the allowance for loan credit losses totaled $50.2 million, or 0.61% of total loans, as compared to $60.7 million, or 0.78% of total loans, at December 31, 2020.

These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $21.3 million and $28.0 million at September 30, 2021 and December 31, 2020, respectively.

In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act, extended by the CRRSA Act, were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19.

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The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date.

Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at June 30, 2021 and will not be reported as past due during the deferral period.

Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at September 30, 2021 and will not be reported as past due during the deferral period.

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

The table below excludes any loans held-for-sale (in thousands):

June 30, 2021 December 31, 2020

September 30, December 31,

Special Mention $ 98,687 $ 165,843

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collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

the Company’s allowance for loan credit losses may increase if borrowers experience financial difficulties, which will adversely affect the Company’s net income;

the Company’s allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect the Company’s net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank;

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the Company’s cyber security risks would be increased as the result of an increased use of the Bank’s online banking platform or an increase in the number of employees working remotely;

and FDIC premiums may increase if the agency experiences additional resolution costs.

and Federal Deposit Insurance Corporation (“FDIC”) premiums may increase if the agency experiences additional resolution costs.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis