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) March 31, 2022 December 31, 2021 March 31, 2021 SELECTED FINANCIAL CONDITION DATA: Total assets $ 12,164,945 $ 11,739,616 $ 11,577,472 Loans receivable, net of allowance for loan credit losses 9,065,679 8,583,352 7,820,590 Deposits 10,056,233 9,732,816 9,502,812 Stockholders’ equity 1,519,334 1,516,553 1,498,719 SELECTED OPERATING DATA: Net interest income 84,227 80,586 73,604 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 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: Stockholders’ equity per common share at end of period 25.58 25.63 24.84 Cash dividend per share 0.17 0.17 0.17 Dividend payout ratio per common share 40.48 % 45.95 % 32.08 % Stockholders’ equity to total assets 12.49 12.92 12.95 Return on average assets (2) (3) 0.84 0.72 1.12 Return on average stockholders’ equity (2) (3) 6.57 5.65 8.59 Net interest rate spread (4) 3.08 2.88 2.78 Net interest margin (5) 3.18 2.99 2.93 Operating expenses to average assets (2) (3) 1.95 2.15 1.83 Efficiency ratio (3) (6) 61.77 72.04 54.73 Loans-to-deposits ratio 90.60 88.60 82.84 ASSET QUALITY: Non-performing loans (8) $ 26,925 $ 25,494 $ 42,758 Non-performing assets (8) 27,031 25,600 42,864 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 (8) (9) 187.92 191.61 140.27 Non-performing loans as a percent of total loans receivable (7) (8) 0.30 0.30 0.54 Non-performing assets as a percent of total assets (8) 0.22 0.22 0.37 (1) With the exception of end of quarter ratios, all ratios are based on average daily balances. (2) Ratios are annualized. (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. (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. (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. 3 Table of Contents (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 $16.9 million , $18.9 million , and $25.7 million at March 31, 2022, December 31, 2021 and March 31, 2021, 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 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, gain on sale of loans and on equity investments, 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, 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 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 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 May 16, 2022 to preferred stockholders of record on April 29, 2022. 5 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. 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. 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 March 31, 2022 2021 (dollars in thousands) Average Balance Interest Average Yield/ Cost (1) Average Balance Interest Average Yield/ Cost (1) Assets: Interest-earning assets: Interest-earning deposits and short-term investments $ 88,826 $ 37 0.17 % $ 1,138,911 $ 277 0.10 % Securities (2) 1,846,452 8,478 1.86 1,311,683 6,689 2.07 Loans receivable, net (3) Commercial 6,037,639 58,355 3.92 5,127,940 53,670 4.24 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 (“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) — — Loans receivable, net 8,796,861 82,468 3.79 7,729,798 77,908 4.09 Total interest-earning assets 10,732,139 90,983 3.43 10,180,392 84,874 3.38 Non-interest-earning assets 1,215,071 1,259,109 Total assets $ 11,947,210 $ 11,439,501 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing checking $ 4,377,368 2,149 0.20 % $ 3,711,976 4,311 0.47 % Money market 788,063 318 0.16 757,634 367 0.20 Savings 1,609,415 125 0.03 1,522,603 179 0.05 Time deposits 767,709 1,449 0.77 1,221,123 3,639 1.21 Total 7,542,555 4,041 0.22 7,213,336 8,496 0.48 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 Other borrowings 228,522 2,638 4.68 228,368 2,679 4.76 Total borrowings 375,578 2,715 2.93 357,812 2,774 3.14 Total interest-bearing liabilities 7,918,133 6,756 0.35 7,571,148 11,270 0.60 Non-interest-bearing deposits 2,401,797 2,212,273 Non-interest-bearing liabilities 99,441 160,500 Total liabilities 10,419,371 9,943,921 Stockholders’ equity 1,527,839 1,495,580 Total liabilities and equity $ 11,947,210 $ 11,439,501 Net interest income $ 84,227 $ 73,604 Net interest rate spread (4) 3.08 % 2.78 % Net interest margin (5) 3.18 % 2.93 % 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. (3) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans. (4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average interest-earning assets. 6 Table of Contents 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 General 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. 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. These items decreased net income by $4.0 million, net of tax, for the quarter ended March 31, 2022. 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. 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 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 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. 7 Table of Contents Net Interest Income and Margin 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 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 $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. 8 Table of Contents Liquidity and Capital Resources 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 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 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. 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 Company and the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. 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. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the three 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 9 Table of Contents 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. 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. 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 purposes To be well-capitalized under prompt corrective action As of March 31, 2022 Amount Ratio Amount Ratio Amount Ratio Bank: Tier 1 capital (to average assets) $ 1,045,703 9.24 % $ 452,600 4.00 % $ 565,750 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,045,703 11.15 656,368 7.00 (1) 609,484 6.50 Tier 1 capital (to risk-weighted assets) 1,045,703 11.15 797,018 8.50 (1) 750,135 8.00 Total capital (to risk-weighted assets) 1,099,803 11.73 984,552 10.50 (1) 937,668 10.00 Company: Tier 1 capital (to average assets) $ 1,066,349 9.42 % $ 453,009 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 938,751 9.91 662,817 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,066,349 11.26 804,849 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,246,146 13.16 994,226 10.50 (1) N/A N/A Actual For capital adequacy purposes To be well-capitalized under prompt corrective action As of December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Bank: Tier 1 capital (to average assets) $ 1,027,660 9.08 % $ 452,669 4.00 % $ 565,836 5.00 % Common equity Tier 1 (to risk-weighted assets) 1,027,660 11.62 619,178 7.00 (1) 574,951 6.50 Tier 1 capital (to risk-weighted assets) 1,027,660 11.62 751,860 8.50 (1) 707,633 8.00 Total capital (to risk-weighted assets) 1,079,766 12.21 928,768 10.50 (1) 884,541 10.00 Company: Tier 1 capital (to average assets) $ 1,044,518 9.22 % $ 453,087 4.00 % N/A N/A Common equity Tier 1 (to risk-weighted assets) 917,088 10.26 625,801 7.00 (1) N/A N/A Tier 1 capital (to risk-weighted assets) 1,044,518 11.68 759,902 8.50 (1) N/A N/A Total capital (to risk-weighted assets) 1,257,372 14.06 938,702 10.50 (1) N/A N/A (1) Includes the Capital Conservation Buffer of 2.50%. 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. 10 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. March 31, December 31, 2022 2021 (dollars in thousands) Non-performing loans: 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 Other consumer 3,841 3,585 Total non-performing loans 26,925 25,494 Other real estate owned 106 106 Total non-performing assets $ 27,031 $ 25,600 PCD loans $ 37,032 $ 41,817 Delinquent loans 30-89 days $ 18,691 $ 14,546 Allowance for loan credit losses as a percent of total loans 0.56 % 0.57 % Allowance for loan credit losses as a percent of total non-performing loans 187.92 191.61 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 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. 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 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): March 31, December 31, 2022 2021 Special Mention $ 91,611 $ 91,607 Substandard 114,030 148,557 The decrease in substandard loans was primarily due to improved profitability of borrowers and their ability to service their loans. 11 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, 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 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. 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 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 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, 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 12 Table of Contents 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 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 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; 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 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. 13 Table of Contents