What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 180 added, 244 removed, 189 unchanged (69% of the section changed)

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At or for the Quarters Ended

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

(dollars in thousands, except per share amounts) March 31, 2022 December 31, 2021 March 31, 2021

SELECTED FINANCIAL CONDITION DATA:

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Net interest income 84,227 80,586 73,604

Credit loss (benefit) expense (3,179) (6,460) 35,714

Credit loss expense (benefit) 1,851 (1,573) (620)

Other income 8,852 9,410 20,835

Operating expenses 57,495 64,834 51,683

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)

Net income 25,759 22,657 32,697

Net income available to common stockholders 24,755 21,653 31,693

Diluted earnings per share 0.42 0.37 0.53

SELECTED FINANCIAL RATIOS:

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ASSET QUALITY:

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

Non-performing loans (8)

$ 26,925 $ 25,494 $ 42,758

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27,031 25,600 42,864

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

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

0.56 % 0.57 % 0.76 %

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

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

187.92 191.61 140.27

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

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

0.30 0.30 0.54

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(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.

(3) Performance ratios included net expenses related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $5.2 million, or $4.0 million, net of tax benefit, for the quarter ended March 31, 2022.

Performance ratios included net expenses related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $9.0 million, or $6.8 million, net of tax benefit, for the quarter ended December 31, 2021.

Performance ratios included net benefit related to merger related expenses, net branch consolidation expenses, and net gain on equity investments of $6.9 million, or $5.2 million, net of tax expense, for the quarter ended March 31, 2021.

(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 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.

(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.

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.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $16.9 million , $18.9 million , and $25.7 million at March 31, 2022, December 31, 2021 and March 31, 2021, 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., and Boston.

(the “Bank”), a regional bank serving business and retail customers throughout New Jersey and 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:

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, inflation, government policies and actions of regulatory agencies.

Key developments relating to the Company’s financial results and corporate activities for the quarter ended March 31, 2022 were as follows:

• Loan and Deposit Growth:

Loan growth for the quarter was $486.1 million, reflecting record loan originations of $1.02 billion and the purchase of residential loan pools of $161.7 million.

The committed loan pipeline remains strong at $515.4 million.

In addition, deposits increased $323.4 million during the first quarter, while cost of deposits decreased four basis points to 0.16%, from 0.20%, in the prior linked quarter.

The loans-to-deposits ratio increased to 90.60%, from 88.60%, in the prior linked quarter.

• Strengthening Net Interest Income and Margin:

Net interest income increased by $3.6 million to $84.2 million, from $80.6 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.

Net interest margin increased to 3.18%, as compared to 2.99% in the prior linked quarter, largely driven by the deployment of excess liquidity to fund interest earning assets.

• Expense Management:

Total operating expenses decreased to $57.5 million, from $64.8 million in the prior linked quarter, reflecting improving trends in the Bank’s cost reduction initiatives.

These efforts improved the efficiency ratio to 61.77%, from 72.04%, in the prior linked quarter.

• Branch Consolidations:

The Company completed its consolidation of 10 branches during the first quarter for a total of 77 branches consolidated since 2013.

Average deposits per branch totaled $264.6 million as of March 31, 2022.

Net income available to common stockholders for the quarter ended March 31, 2022 was $24.8 million, or $0.42 per diluted share, as compared to $31.7 million, or $0.53 per diluted share, for the corresponding prior year period.

The dividends paid to preferred stockholders were $1.0 million for each of the quarters ended March 31, 2022 and 2021.

Net income available to common stockholders for the quarter ended March 31, 2022 included merger related expenses, net branch consolidation expenses, and net loss on equity investments of $2.0 million, $402,000, and $2.8 million, respectively.

Net income available to common stockholders for the quarter ended March 31, 2021 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $381,000, $1.0 million, and $8.3 million, respectively.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.49% at March 31, 2022.

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 dividend, related to the quarter ended March 31, 2022, will be paid on May 20, 2022 to common stockholders of record on May 9, 2022.

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

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 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.

This dividend will be paid on May 16, 2022 to preferred stockholders of record on April 29, 2022.

Analysis of Net Interest Income

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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 nine months ended September 30, 2021 and 2020.

For the three months ended March 31, 2022 and 2021, interest income included net loan fees of $970,000 and $1.4 million, respectively.

The following tables set forth certain information relating to the Company for the three months ended March 31, 2022 and 2021.

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 September 30,

For the Three Months Ended March 31,

(dollars in thousands) Average Balance Interest Average

Cost Average Balance Interest Average

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 %

For the Nine Months Ended September 30,

(dollars in thousands) Average

Balance Interest Average

Average Balance Interest Average

Interest-earning assets:

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Residential real estate 2,542,655 21,339 3.36 2,327,838 20,069 3.45

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

Home equity loans and lines and other consumer (“other consumer”) 257,024 2,774 4.38 326,907 4,169 5.17

Allowance for loan credit losses, net of deferred loan costs and fees (40,457) — — (52,887) — —

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Total 7,542,555 4,041 0.22 7,213,336 8,496 0.48

FHLB Advances — — — 483,267 6,239 1.72

Federal Home Loan Bank (“FHLB”) advances 29,433 35 0.48 — — —

Securities sold under agreements to repurchase 117,623 42 0.14 129,444 95 0.30

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Total cost of deposits (including non-interest-bearing deposits) 0.16 % 0.37 %

(1) Average yields and costs are annualized.

(2) 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.

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

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

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.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Total assets increased by $425.3 million to $12.16 billion at March 31, 2022, from $11.74 billion at December 31, 2021.

Total loans increased by $486.1 million, to $9.11 billion at March 31, 2022, from $8.62 billion at December 31, 2021, primarily due to loan originations in commercial and residential real estate and purchases of $161.7 million of residential real estate loan pools.

Total debt securities decreased by $61.5 million at March 31, 2022, as compared to December 31, 2021.

Deposits increased by $323.4 million to $10.06 billion at March 31, 2022, from $9.73 billion at December 31, 2021.

Total deposits, excluding time deposits, increased by $211.1 million to $9.17 billion at March 31, 2022, from $8.96 billion at December 31, 2021, due to organic growth in all deposit categories.

Time deposits increased to $887.3 million at March 31, 2022, from $775.0 million at December 31, 2021 primarily due to an increase in brokered time deposits, which were less costly than comparable term FHLB advances.

The loans-to-deposit ratio at March 31, 2022 was 90.6%, as compared to 88.6% at December 31, 2021.

FHLB advances increased to $75.0 million at March 31, 2022 from $0 at December 31, 2021 to fund loan growth.

Other borrowings decreased by $34.7 million to $194.4 million at March 31, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt.

Stockholders’ equity was $1.52 billion at March 31, 2022 and December 31, 2021 as net income of $25.8 million for the quarter was primarily offset by increased accumulated other comprehensive loss of $12.3 million, common and preferred stock dividends of $11.0 million, and repurchases of common stock.

Accumulated other comprehensive loss increased by $12.3 million to $15.2 million at March 31, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale, which were impacted by higher interest rates.

For the quarter ended March 31, 2022, the Company repurchased 100,444 shares under its stock repurchase programs at a weighted average cost of $21.35 and there were 3,207,217 shares available for repurchase at March 31, 2022 under the existing repurchase programs.

Stockholders’ equity per common share decreased to $25.58 at March 31, 2022, as compared to $25.63 at December 31, 2021.

Comparison of Operating Results for the Three Months Ended March 31, 2022 and March 31, 2021

These items decreased net income by $4.0 million, net of tax, for the quarter ended March 31, 2022.

These items increased net income by $5.2 million, net of tax, for the quarter ended March 31, 2021.

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.

Interest income for the quarter ended March 31, 2022 increased to $91.0 million, as compared to $84.9 million for the corresponding prior year period.

Average interest-earning assets increased by $551.7 million for the quarter ended March 31, 2022, as compared to the same prior year period, primarily due to loan and securities growth, which was primarily funded by the redeployment of excess cash.

Average loans receivable, net of allowance for loan credit losses, increased by $1.07 billion for the quarter ended March 31, 2022, as compared to the same prior year period.

For the quarter ended March 31, 2022, the yield on average interest-earning assets increased to 3.43%, from 3.38% for the corresponding prior year period, primarily due to the deployment of lower-yielding cash into higher-yielding loans and securities.

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.

Interest expense for the quarter ended March 31, 2022 was $6.8 million, as compared to $11.3 million in the corresponding prior year period.

For the quarter ended March 31, 2022, the cost of average interest-bearing liabilities decreased to 0.35%, from 0.60% for the corresponding prior year period, as a result of the downward repricing of deposits.

The total cost of deposits (including non-interest bearing deposits) was 0.16% for the quarter ended March 31, 2022, as compared to 0.37%, for the same prior year period.

This was partially offset by an increase in average interest-bearing liabilities by $347.0 million for the quarter ended March 31, 2022, as compared to the same prior year period, primarily due to growth in all deposit categories, except time deposits.

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.

Net interest income for the quarter ended March 31, 2022, increased to $84.2 million, as compared to $73.6 million for the corresponding prior year period, reflecting an increase in net interest margin.

Net interest margin for the quarter ended March 31, 2022 increased to 3.18%, from 2.93% for the same prior year period.

The net interest margin expansion was primarily attributable to the decrease in excess balance sheet liquidity used to fund loan and securities growth.

Provision/Benefit for Credit Losses

For the quarter ended March 31, 2022, the credit loss expense was $1.9 million, as compared to a credit loss benefit of $620,000, for the corresponding prior year period.

The credit loss expense for the quarter ended March 31, 2022 was driven by slowing prepayment rate assumptions primarily impacting the residential real estate portfolio.

In addition, strong loan portfolio growth, and macro-economic forecast uncertainty related to the Russia-Ukraine war was partly offset by positive trends in the Bank’s criticized and classified assets and favorable employment outlook.

Net loan recoveries were $92,000 for the quarter ended March 31, 2022, as compared to $280,000 for the corresponding prior year period.

Non-performing loans totaled $26.9 million at March 31, 2022, as compared to $42.8 million at March 31, 2021, primarily due to loans that returned to accrual status and partly due to loans that were paid off.

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.

For the quarter ended March 31, 2022, other income decreased to $8.9 million, as compared to $20.8 million for the corresponding prior year period.

Other income for the quarters ended March 31, 2022 and 2021 included a net loss on equity investments of $2.8 million and a net gain on equity investments of $8.3 million, respectively.

The remaining decrease of $910,000 was primarily due to decreases in net gain on sales of loans of $1.7 million and Paycheck Protection Program loan origination referral fees of $662,000 in the prior year, partly offset by an increase in commercial loan swap income of $1.7 million.

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

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 .

Operating expenses increased to $57.5 million for the quarter ended March 31, 2022, as compared to $51.7 million in the same prior year period.

Operating expenses for the quarters ended March 31, 2022 and 2021 included $2.4 million and $1.4 million, respectively, of merger related and net branch consolidation expenses.

The remaining increase of $4.8 million in operating expenses for the quarter ended March 31, 2022, as compared to the corresponding prior year period, was primarily due to increases in compensation and benefits expense of $2.3 million, relating to the commercial banking strategy and the commercial banking hires in expansion markets of Boston and Baltimore as well as additional hires in New Jersey, New York and Philadelphia, data processing expense of $1.7 million, relating to the Company’s migration to a new core banking system, and occupancy expense of $683,000.

Income Tax Expense

The provision for income taxes was $8.0 million for the quarter ended March 31, 2022, as compared to $10.7 million for the same prior year period.

The effective tax rate was 23.6% for the quarter ended March 31, 2022, as compared to 24.6% for the same prior year period.

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 primary sources of liquidity specifically available to OceanFirst Financial Corp.

are dividends from the Bank, proceeds from sale of investments, and the issuance of preferred and common stock, and debt.

For the three months ended March 31, 2022, the holding company received a dividend payment of $20.0 million from the Bank.

At March 31, 2022, OceanFirst Financial Corp.

held $45.1 million in cash.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans, FHLB advances, access to the Federal Reserve discount window, other borrowings, investment maturities, and proceeds from the sale of loans and investments .

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

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

At March 31, 2022, the Bank had $75.0 million outstanding in overnight borrowings from the FHLB, as compared to $0 at December 31, 2021.

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.

There were no FHLB term advances at March 31, 2022 and December 31, 2021.

During the quarter ended March 31, 2022, the Company redeemed $35.0 million of subordinated debt due September 30, 2026.

The debt carried an interest rate of 4.14% based on a floating rate of three months LIBOR plus 392 basis points.

The Company’s cash needs for the quarter ended March 31, 2022 were primarily satisfied by the increase in deposits, proceeds from FHLB advances, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities.

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

The Company’s cash needs for the quarter ended March 31, 2021 were primarily satisfied by the sale of equity investments, an increase in deposits, 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 and loan originations.

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.

At March 31, 2022, outstanding commitments to originate loans totaled $515.4 million and outstanding undrawn lines of credit totaled $1.63 billion, of which $1.27 billion were commitments to commercial and commercial construction borrowers and $356.0 million were commitments to consumer borrowers and residential construction borrowers.

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

Time deposits scheduled to mature in one year or less totaled $528.6 million at March 31, 2022.

At March 31, 2022, the Company also had various contractual obligations, which included debt obligations of $387.2 million, including finance lease obligations of $1.9 million, and an additional $14.7 million in operating lease obligations included in other liabilities.

The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $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.

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

The Company and Bank continue to maintain significant liquidity under all stress scenarios.

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp.

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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

by capital restraints imposed by applicable regulations.

For the three months ended March 31, 2022, the Company repurchased 100,444 shares of its common stock at a total cost of $2.1 million.

For the three months ended March 31, 2021, the Company repurchased 500,000 shares of its common stock at a total cost of $10.0 million.

At March 31, 2022, there were 3,207,217 shares available to be repurchased under the stock repurchase programs authorized.

Cash dividends on common stock declared and paid during the first three months of March 31, 2022 were $10.0 million, as compared to $10.2 million for the same prior year period.

On April 28, 2022, the Company’s Board of Directors declared a

quarterly cash dividend of $0.17 per common share.

The dividend is payable on May 20, 2022 to common stockholders of record at the close of business on May 9, 2022.

Cash dividends on preferred stock declared and paid during the first three months of March 31, 2022 and 2021 were $1.0 million for both periods.

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 May 16, 2022 to preferred stockholders of record on April 29, 2022.

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.

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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):

As of March 31, 2022 and December 31, 2021, 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 September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

As of March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,045,703 9.24 % $ 452,600 4.00 % $ 565,750 5.00 %

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(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.

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

or less More than 1 year to 3 years More than 3 years to 5 years More than

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.

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

At March 31, 2022 and December 31, 2021, the Company maintained a stockholders’ equity to total assets ratio of 12.49% and 12.92%, respectively.

Non-Performing Assets

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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.

September 30, December 31,

March 31, December 31,

(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 $ 3,575 $ 3,614

Commercial real estate – owner occupied 9,632 11,904

Commercial and industrial 2,830 277

Residential real estate 7,047 6,114

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

Other consumer 3,841 3,585

Total non-performing loans 26,925 25,494

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Total non-performing assets $ 27,031 $ 25,600

PCD loans (1)

$ 37,032 $ 41,817

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187.92 191.61

Non-performing loans as a percent of total loans 0.29 0.47

Non-performing loans as a percent of total loans receivable 0.30 0.30

Non-performing assets as a percent of total assets 0.22 0.22

(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.

The Company’s non-performing loans totaled $26.9 million at March 31, 2022, as compared to $25.5 million at December 31, 2021.

Included in the non-performing loans total was $11.9 million and $11.3 million of troubled debt restructuring (“TDR”) loans at March 31, 2022 and December 31, 2021, respectively.

Included in non-performing loans total was $3.7 million and $6.5 million of PCD loans at March 31, 2022 and December 31, 2021, respectively.

At March 31, 2022, the allowance for loan credit losses totaled $50.6 million, or 0.56% of total loans, as compared to $48.9 million, or 0.57% of total loans, at December 31, 2021.

These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $16.9 million and $18.9 million at March 31, 2022 and December 31, 2021, respectively.

In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, extended by the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021, were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19.

The Bank’s 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, 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.

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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 September 30, 2021 and will not be reported as past due during the deferral period.

Provided these loans were current as of December 31, 2019 or the date of the modification, these loans are not considered TDR loans at March 31, 2022 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,

March 31, December 31,

Special Mention $ 91,611 $ 91,607

Substandard 114,030 148,557

The decrease in special mention and substandard loans was primarily due to the improvement in the Bank’s borrowers’ ability to service their loans.

The decrease in substandard loans was primarily due to improved profitability of borrowers and their ability to service their loans.

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, 2021 (the “2021 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.

Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments.

Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value.

Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations.

The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters.

The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.

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.

The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2022

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes.

The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance.

This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021.

The adoption of this standard did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815):

Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period.

The Company currently does not apply fair value hedge accounting;

however the Company is currently evaluating the potential impact of this standard to the consolidated financial statements.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures”.

The amendments in this ASU were issued to (1) eliminate accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty;

(2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases.

For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022.

Early adoption is permitted.

The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

The Company is currently evaluating the impact of this standard to the consolidated financial statements.

Private Securities Litigation Reform Act Safe Harbor Statement

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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 2021 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.

changes in interest rates, general economic conditions, inflation, 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 current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory

changes (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.

Treasury and Board of Governors of the Federal Reserve System, 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 continuing 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 fully controlled and abated.

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;

if the economy worsens, 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;

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

and Federal Deposit Insurance Corporation 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