OCEANFIRST FINANCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL SUMMARY (1) At or for the Quarters Ended (dollars in thousands, except per share amounts) September 30, 2021 June 30, 2021 September 30, 2020 SELECTED FINANCIAL CONDITION DATA: Total assets $ 11,829,688 $ 11,483,901 $ 11,651,297 Loans receivable, net of allowance for loan credit losses 8,139,961 7,774,351 7,943,390 Deposits 9,774,097 9,415,286 9,283,288 Stockholders’ equity 1,513,249 1,508,789 1,461,714 SELECTED OPERATING DATA: Net interest income 77,132 74,016 76,788 Credit loss (benefit) expense (3,179) (6,460) 35,714 Other income 9,883 11,803 8,179 Operating expenses 58,673 51,670 56,787 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: Stockholders’ equity per common share at end of period 25.47 25.22 24.21 Cash dividend per share 0.17 0.17 0.17 Dividend payout ratio per common share 43.59 % 34.69 % (170.00) % Stockholders’ equity to total assets 12.79 13.14 12.55 Return on average assets (2) (3) 0.78 1.03 (0.21) Return on average stockholders’ equity (2) (3) 6.05 7.88 (1.61) Net interest rate spread (4) 2.80 2.75 2.77 Net interest margin (5) 2.93 2.89 2.97 Operating expenses to average assets (2) (3) 1.98 1.80 1.94 Efficiency ratio (3) (6) 67.43 60.21 66.83 Loans to deposits ratio 83.71 83.06 86.19 ASSET QUALITY: Non-performing loans held-for-investment (8) $ 23,344 $ 31,680 $ 29,895 Non-performing assets (8) 23,450 31,786 97,490 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 held-for-investment (8) (9) 214.84 170.06 188.49 Non-performing loans held-for-investment as a percent of total loans held-for-investment (7) (8) 0.29 0.41 0.37 Non-performing assets as a percent of total assets (8) 0.20 0.28 0.84 (1) With the exception of end of quarter ratios, all ratios are based on average daily balances. (2) Ratios are annualized. (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. (5) Net interest margin represents net interest income as a percentage of average interest-earning assets. (6) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income. (7) Total loans receivable excludes loans held-for-sale. 3 Table of Contents (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 $21.3 million , $23.6 million , and $31.6 million at September 30, 2021, June 30, 2021 and September 30, 2020, respectively. 4 Table of Contents Summary OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and 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, 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. The Company’s results of operations are also significantly affected by competition, general economic conditions, including levels of unemployment and real estate values, as well as changes in market interest rates, government policies and actions of regulatory agencies. The Company has grown significantly through the acquisitions of Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”), each on January 1, 2020. These acquisitions added $2.03 billion in assets, $1.56 billion in loans and $1.59 billion in deposits. Key developments relating to the Company’s financial results and corporate activities were as follows: • 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 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 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 5 Table of Contents 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. 6 Table of Contents 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 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 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. As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable. 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 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. The CRRSA Act extended the PPP and provided the Company the ability to continue its Borrower Relief Programs and related TDR and past due reporting considerations. For further discussion, refer to Part I, Item 1A in the December 31, 2020 Form 10-K - Risk Factors - Risks Related to the COVID-19 Pandemic. 7 Table of Contents Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. 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. 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, 2021 2020 (dollars in thousands) Average Balance Interest Average Yield/ Cost Average Balance Interest Average Yield/ Cost Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 1,053,797 $ 441 0.17 % $ 805,863 $ 236 0.12 % Securities (1) 1,542,630 6,090 1.57 1,112,174 6,793 2.43 Loans receivable, net (2) Commercial 5,361,472 55,387 4.10 5,554,897 58,639 4.20 Residential real estate 2,260,673 20,076 3.55 2,462,513 23,091 3.75 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) — — Loans receivable, net 7,864,720 78,889 3.98 8,350,797 85,933 4.09 Total interest-earning assets 10,461,147 85,420 3.24 10,268,834 92,962 3.60 Non-interest-earning assets 1,276,890 1,353,135 Total assets $ 11,738,037 $ 11,621,969 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing checking $ 3,841,475 2,854 0.29 % $ 3,289,319 4,627 0.56 % Money market 767,854 245 0.13 675,841 571 0.34 Savings 1,609,197 146 0.04 1,460,232 296 0.08 Time deposits 904,384 2,134 0.94 1,606,632 5,876 1.45 Total 7,122,910 5,379 0.30 7,032,024 11,370 0.64 FHLB advances — — — 343,412 1,470 1.70 Securities sold under agreements to repurchase 142,494 51 0.14 144,720 174 0.48 Other borrowings 228,695 2,858 4.96 246,903 3,160 5.09 Total borrowings 371,189 2,909 3.11 735,035 4,804 2.60 Total interest-bearing liabilities 7,494,099 8,288 0.44 7,767,059 16,174 0.83 Non-interest-bearing deposits 2,576,123 2,209,241 Non-interest-bearing liabilities 148,327 162,987 Total liabilities 10,218,549 10,139,287 Stockholders’ equity 1,519,488 1,482,682 Total liabilities and equity $ 11,738,037 $ 11,621,969 Net interest income $ 77,132 $ 76,788 Net interest rate spread (3) 2.80 % 2.77 % Net interest margin (4) 2.93 % 2.97 % Total cost of deposits (including non-interest-bearing deposits) 0.22 % 0.49 % 8 Table of Contents For the Nine Months Ended September 30, 2021 2020 (dollars in thousands) Average Balance Interest Average Yield/ Cost Average Balance Interest Average Yield/ Cost Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 1,061,419 $ 958 0.12 % $ 409,321 $ 693 0.23 % Securities (1) 1,452,778 18,832 1.73 1,143,049 22,129 2.59 Loans receivable, net (2) Commercial 5,270,138 163,315 4.14 5,309,275 177,973 4.48 Residential real estate 2,269,066 59,242 3.48 2,480,932 71,590 3.85 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) — — Loans receivable, net 7,794,973 233,845 4.01 8,166,369 264,224 4.32 Total interest-earning assets 10,309,170 253,635 3.29 9,718,739 287,046 3.95 Non-interest-earning assets 1,264,347 1,306,568 Total assets $ 11,573,517 $ 11,025,307 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing checking $ 3,753,457 10,549 0.38 % $ 3,023,093 14,559 0.64 % Money market 761,975 823 0.14 647,566 2,316 0.48 Savings 1,571,345 490 0.04 1,436,594 2,266 0.21 Time deposits 1,041,371 8,338 1.07 1,563,449 18,470 1.58 Total 7,128,148 20,200 0.38 6,670,702 37,611 0.75 FHLB Advances — — — 483,267 6,239 1.72 Securities sold under agreements to repurchase 135,754 203 0.20 119,495 408 0.46 Other borrowings 228,472 8,480 4.96 195,754 7,688 5.25 Total borrowings 364,226 8,683 3.19 798,516 14,335 2.40 Total interest-bearing liabilities 7,492,374 28,883 0.52 7,469,218 51,946 0.93 Non-interest-bearing deposits 2,416,866 1,971,622 Non-interest-bearing liabilities 157,821 133,928 Total liabilities 10,067,061 9,574,768 Stockholders’ equity 1,506,456 1,450,539 Total liabilities and equity $ 11,573,517 $ 11,025,307 Net interest income $ 224,752 $ 235,100 Net interest rate spread (3) 2.77 % 3.02 % Net interest margin (4) 2.91 % 3.23 % Total cost of deposits (including non-interest-bearing deposits) 0.28 % 0.58 % (1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for securities credit losses. (2) 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. (3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 9 Table of Contents 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 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 General 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. 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. 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 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 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 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. 10 Table of Contents Interest Expense 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 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 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 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 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 11 Table of Contents 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 . 12 Table of Contents 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 and equity investments . 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 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 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 $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. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios. In response to COVID-19, management identified additional sources of contingent liquidity, including expanded borrowing capacity with the FHLB, the Federal Reserve and existing correspondent bank relationships. The Company also strengthened balance sheet liquidity entering the economic downturn. 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. 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 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 13 Table of Contents 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. Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders. At September 30, 2021, OceanFirst Financial Corp. held $83.9 million in cash. 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 purposes To be well-capitalized under prompt corrective action As of September 30, 2021 Amount Ratio Amount Ratio Amount Ratio Bank: Tier 1 capital (to average assets) $ 1,012,471 9.12 % $ 444,076 4.00 % $ 555,096 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,012,471 12.19 581,498 7.00 (1) 539,963 6.50 Tier 1 capital (to risk-weighted assets) 1,012,471 12.19 706,105 8.50 (1) 664,570 8.00 Total capital (to risk-weighted assets) 1,065,583 12.83 872,248 10.50 (1) 830,712 10.00 Company: Tier 1 capital (to average assets) $ 1,037,940 9.34 % $ 444,531 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 910,679 10.84 588,214 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,037,940 12.35 714,260 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,252,349 14.90 882,321 10.50 (1) N/A N/A Actual For capital adequacy purposes To be well-capitalized under prompt corrective action As of December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Bank: Tier 1 capital (to average assets) $ 942,122 8.48 % $ 444,648 4.00 % $ 555,810 5.00 % Common equity Tier 1 (to risk-weighted assets) 942,122 12.11 544,625 7.00 (1) 505,724 6.50 Tier 1 capital (to risk-weighted assets) 942,122 12.11 661,331 8.50 (1) 622,429 8.00 Total capital (to risk-weighted assets) 1,004,480 12.91 816,938 10.50 (1) 778,036 10.00 Company: Tier 1 capital (to average assets) $ 998,273 9.44 % $ 423,028 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 871,385 11.05 552,075 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 998,273 12.66 670,377 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,230,370 15.60 828,113 10.50 (1) N/A N/A (1) Includes the Capital Conservation Buffer of 2.50%. The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations. 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. 14 Table of Contents Off-Balance-Sheet Arrangements and Contractual Obligations In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated to repurchase loans previously sold under certain circumstances under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. As a result of the COVID-19 pandemic, some of these loans were placed on forbearance and the Company may be required to repurchase them in future periods. 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 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 One year or less More than 1 year to 3 years More than 3 years to 5 years More than 5 years Debt obligations $ 372,179 $ 143,496 $ 444 $ 35,496 $ 192,743 Commitments to fund undrawn lines of credit Commercial 870,672 870,672 — — — Consumer and residential construction 352,986 352,986 — — — Commitments to originate loans 651,432 651,432 — — — 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 contract. 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. 15 Table of Contents Non-Performing Assets The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans and other real estate owned. 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, 2021 2020 (dollars in thousands) Non-performing loans: Commercial and industrial $ 354 $ 1,551 Commercial real estate – owner occupied 8,997 13,054 Commercial real estate – investor 6,904 10,660 Residential real estate 5,484 8,642 Home equity loans and lines and other consumer 1,605 2,503 Total non-performing loans 23,344 36,410 Other real estate owned 106 106 Total non-performing assets $ 23,450 $ 36,516 PCD loans (1) $ 41,372 $ 48,488 Delinquent loans 30-89 days $ 6,647 $ 34,683 Allowance for loan credit losses as a percent of total loans 0.61 % 0.78 % Allowance for loan credit losses as a percent of total non-performing loans 214.84 166.81 Non-performing loans as a percent of total loans 0.29 0.47 Non-performing assets as a percent of total assets 0.20 0.32 (1) PCD loans are not included in non-performing loans or delinquent loans totals. 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. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. All payments received will first be applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. 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 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): September 30, December 31, 2021 2020 Special Mention $ 98,687 $ 165,843 Substandard 158,575 194,477 The decrease in special mention and substandard loans was primarily due to the improvement in the Bank’s borrowers’ ability to service their loans. 16 Table of Contents Critical Accounting Policies 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, 2020 (the “2020 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 inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These judgments and policies involve a higher degree of complexity and require 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. Certain assets are carried in the consolidated statements of financial condition at 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 the most critical accounting policy because it is important to the presentation of the Company’s financial condition and results of operations. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors. Private Securities Litigation Reform Act Safe Harbor Statement In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of 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 in the Company’s 2020 Form 10-K under Item 1A - Risk Factors, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission (the “SEC”) and elsewhere therein and the following: changes in interest rates, general economic conditions, public health crises (such as the governmental, social and economic effects of the novel coronavirus), levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes (particularly with respect to the novel coronavirus), monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and Board of Governors of the Federal Reserve System (the “FRB”), the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated, the timing of inoculation against the virus and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: the demand for the Bank’s products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; 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; if legislation or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges the Bank may receive or on its ability to charge overdraft or other fees, it could adversely impact the Company’s financial results; 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 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. 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. 17 Table of Contents