OCEANFIRST FINANCIAL CORP 10-Q

Item 4. Controls and Procedures (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 15 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) March 31, December 31, 2022 2021 (Unaudited) Assets Cash and due from banks $ 210,919 $ 204,949 Debt securities available-for-sale, at estimated fair value 546,470 568,255 Debt securities held-to-maturity, net of allowance for securities credit losses of $ 1,380 at March 31, 2022 and $ 1,467 at December 31, 2021 (estimated fair value of $ 1,050,892 at March 31, 2022 and $ 1,152,744 at December 31, 2021) 1,099,514 1,139,193 Equity investments 93,888 101,155 Restricted equity investments, at cost 56,704 53,195 Loans receivable, net of allowance for loan credit losses of $ 50,598 at March 31, 2022 and $ 48,850 at December 31, 2021 9,065,679 8,583,352 Interest and dividends receivable 33,353 32,606 Other real estate owned 106 106 Premises and equipment, net 126,767 125,828 Bank owned life insurance 259,121 259,207 Assets held for sale 5,676 6,229 Goodwill 500,319 500,319 Core deposit intangible 17,005 18,215 Other assets 149,424 147,007 Total assets $ 12,164,945 $ 11,739,616 Liabilities and Stockholders’ Equity Deposits $ 10,056,233 $ 9,732,816 Federal Home Loan Bank (“FHLB”) advances 75,002 — Securities sold under agreements to repurchase with customers 117,782 118,769 Other borrowings 194,396 229,141 Advances by borrowers for taxes and insurance 25,398 20,305 Other liabilities 176,800 122,032 Total liabilities 10,645,611 10,223,063 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both March 31, 2022 and December 31, 2021 1 1 Common stock, $ 0.01 par value, 150,000,000 shares authorized, 61,849,762 and 61,535,381 shares issued at March 31, 2022 and December 31, 2021, respectively; and 59,388,983 and 59,175,046 shares outstanding at March 31, 2022 and December 31, 2021, respectively 612 611 Additional paid-in capital 1,149,503 1,146,781 Retained earnings 456,251 442,306 Accumulated other comprehensive loss ( 15,170 ) ( 2,821 ) Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") ( 8,009 ) ( 8,615 ) Treasury stock, 2,460,779 and 2,360,335 shares at March 31, 2022 and December 31, 2021, respectively ( 63,854 ) ( 61,710 ) Total stockholders’ equity 1,519,334 1,516,553 Total liabilities and stockholders’ equity $ 12,164,945 $ 11,739,616 See accompanying Notes to Unaudited Consolidated Financial Statements. 16 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the Three Months Ended March 31, 2022 2021 (Unaudited) Interest income: Loans $ 82,468 $ 77,908 Debt securities 7,504 5,355 Equity investments and other 1,011 1,611 Total interest income 90,983 84,874 Interest expense: Deposits 4,041 8,496 Borrowed funds 2,715 2,774 Total interest expense 6,756 11,270 Net interest income 84,227 73,604 Credit loss expense (benefit) 1,851 ( 620 ) Net interest income after credit loss expense (benefit) 82,376 74,224 Other income: Bankcard services revenue 2,963 3,052 Trust and asset management revenue 609 599 Fees and service charges 3,060 3,737 Net gain on sales of loans 177 1,916 Net (loss) gain on equity investments ( 2,786 ) 8,287 Net loss from other real estate operations ( 2 ) ( 8 ) Income from bank owned life insurance 2,103 1,415 Commercial loan swap income 2,781 1,111 Other ( 53 ) 726 Total other income 8,852 20,835 Operating expenses: Compensation and employee benefits 30,695 28,366 Occupancy 5,744 5,061 Equipment 1,370 1,578 Marketing 616 434 Federal deposit insurance and regulatory assessments 1,890 1,864 Data processing 5,736 4,031 Check card processing 982 1,372 Professional fees 3,322 2,837 Amortization of core deposit intangible 1,210 1,395 Branch consolidation expense, net 402 1,011 Merger related expenses 1,965 381 Other operating expense 3,563 3,353 Total operating expenses 57,495 51,683 Income before provision for income taxes 33,733 43,376 Provision for income taxes 7,974 10,679 Net income 25,759 32,697 Dividends on preferred shares 1,004 1,004 Net income available to common stockholders $ 24,755 $ 31,693 Basic earnings per share $ 0.42 $ 0.53 Diluted earnings per share $ 0.42 $ 0.53 Average basic shares outstanding 58,739 59,840 Average diluted shares outstanding 58,943 60,101 See accompanying Notes to Unaudited Consolidated Financial Statements. 17 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Three Months Ended March 31, 2022 2021 (Unaudited) Net income $ 25,759 $ 32,697 Other comprehensive (loss) income: Net unrealized loss on debt securities (net of tax benefit of $ 3,928 in 2022 and $ 112 in 2021) ( 12,372 ) ( 416 ) Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $ 65 in 2022 and $ 73 in 2021) 89 107 Reclassification adjustment for losses included in net income (net of tax benefit of $ 21 in 2022) ( 66 ) — Total other comprehensive loss, net of tax ( 12,349 ) ( 309 ) Total comprehensive income 13,410 32,388 Less: Dividends on preferred shares 1,004 1,004 Comprehensive income available to common stockholders $ 12,406 $ 31,384 See accompanying Notes to Unaudited Consolidated Financial Statements. 18 OceanFirst Financial Corp. Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except per share amounts) (Unaudited) For the Three Months Ended March 31, 2022 and 2021 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Total Balance at December 31, 2020 $ 1 $ 609 $ 1,137,715 $ 378,268 $ 621 $ ( 7,433 ) $ ( 25,651 ) $ 1,484,130 Net income — — — 32,697 — — — 32,697 Other comprehensive loss, net of tax — — — — ( 309 ) — — ( 309 ) Stock compensation — — 1,237 — — — — 1,237 Allocation of ESOP stock — — 48 — — 304 — 352 Cash dividend $ 0.17 per share — — — ( 10,152 ) — — — ( 10,152 ) Exercise of stock options — 1 3,290 ( 1,529 ) — — — 1,762 Repurchase 500,000 shares of common stock — — — — — — ( 9,994 ) ( 9,994 ) Preferred stock dividend — — — ( 1,004 ) — — — ( 1,004 ) Balance at March 31, 2021 $ 1 $ 610 $ 1,142,290 $ 398,280 $ 312 $ ( 7,129 ) $ ( 35,645 ) $ 1,498,719 Balance at December 31, 2021 $ 1 $ 611 $ 1,146,781 $ 442,306 $ ( 2,821 ) $ ( 8,615 ) $ ( 61,710 ) $ 1,516,553 Net income — — — 25,759 — — — 25,759 Other comprehensive loss, net of tax — — — — ( 12,349 ) — — ( 12,349 ) Stock compensation — — 1,552 — — — — 1,552 Allocation of ESOP stock — — 65 — — 606 — 671 Cash dividend $ 0.17 per share — — — ( 9,993 ) — — — ( 9,993 ) Exercise of stock options — 1 1,105 ( 817 ) — — — 289 Repurchase 100,444 shares of common stock — — — — — — ( 2,144 ) ( 2,144 ) Preferred stock dividend — — — ( 1,004 ) — — — ( 1,004 ) Balance at March 31, 2022 $ 1 $ 612 $ 1,149,503 $ 456,251 $ ( 15,170 ) $ ( 8,009 ) $ ( 63,854 ) $ 1,519,334 See accompanying Notes to Unaudited Consolidated Financial Statements. 19 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (dollars in thousands) For the Three Months Ended March 31, 2022 2021 (Unaudited) Cash flows from operating activities: Net income $ 25,759 $ 32,697 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 2,759 2,064 Allocation of ESOP stock 671 352 Stock compensation 1,552 1,237 Net excess tax expense on stock compensation 214 90 Amortization of servicing asset 14 25 Net premium amortization in excess of discount accretion on securities 1,859 1,467 Net amortization of deferred costs on borrowings 137 212 Amortization of core deposit intangible 1,210 1,395 Net accretion of purchase accounting adjustments ( 3,086 ) ( 3,804 ) Net amortization of deferred costs and discounts on loans 255 437 Provision (benefit) for credit losses 1,851 ( 620 ) Net write down of fixed assets held-for-sale to net realizable value 1,404 427 Net loss (gain) on equity securities 2,786 ( 8,287 ) Net gain on sales of loans ( 177 ) ( 1,916 ) Proceeds from sales of residential loans held for sale 724 69,416 Mortgage loans originated for sale ( 703 ) ( 65,151 ) Increase in value of bank owned life insurance ( 2,103 ) ( 1,415 ) Net (gain) loss on sale of assets held for sale ( 1,200 ) 22 (Increase) decrease in interest and dividends receivable ( 747 ) 2,450 Deferred tax benefit ( 30 ) ( 57 ) (Increase) decrease in other assets ( 14,777 ) 27,442 Increase (decrease) in other liabilities 39,272 ( 21,610 ) Total adjustments 31,885 4,176 Net cash provided by operating activities 57,644 36,873 Cash flows from investing activities: Net increase in loans receivable ( 331,568 ) ( 111,302 ) Proceeds from sale of loans 12,167 — Purchase of residential loan pool ( 161,701 ) — Premiums paid on purchased loan pool ( 495 ) — Purchase of debt securities available-for-sale ( 47,817 ) ( 100,921 ) Purchase of debt securities held-to-maturity ( 16,397 ) ( 178,316 ) Purchase of equity investments ( 2,292 ) ( 10,575 ) Proceeds from maturities and calls of debt securities available-for-sale 45,000 22,850 Proceeds from maturities and calls of debt securities held-to-maturity 12,305 6,565 Proceeds from sales of debt securities available-for-sale 22,857 — Proceeds from sale of equity investments 4,579 99,060 Principal repayments on debt securities available-for-sale — 46 Principal repayments on debt securities held-to-maturity 43,213 52,371 Proceeds from bank owned life insurance 2,189 2,120 Proceeds from the redemption of restricted equity investments 26,591 344 Purchases of restricted equity investments ( 30,100 ) ( 485 ) Proceeds from sales of assets held-for-sale 4,492 420 Purchases of premises and equipment ( 7,708 ) ( 5,336 ) Net cash used in investing activities ( 424,685 ) ( 223,159 ) 20 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (Continued) (dollars in thousands) For the Three Months Ended March 31, 2022 2021 (Unaudited) Cash flows from financing activities: Increase in deposits $ 323,641 $ 75,694 (Decrease) increase in short-term borrowings ( 987 ) 6,011 Proceeds from FHLB advances 75,002 — Repayments of other borrowings ( 35,026 ) ( 7,529 ) Increase in advances by borrowers for taxes and insurance 5,093 3,684 Exercise of stock options 289 1,762 Payment of employee taxes withheld from stock awards ( 1,438 ) ( 1,094 ) Purchase of treasury stock ( 2,144 ) ( 9,994 ) Dividends paid ( 10,997 ) ( 11,156 ) Net cash provided by financing activities 353,433 57,378 Net decrease in cash and due from banks and restricted cash ( 13,608 ) ( 128,908 ) Cash and due from banks and restricted cash at beginning of period 224,784 1,318,661 Cash and due from banks and restricted cash at end of period $ 211,176 $ 1,189,753 Supplemental Disclosure of Cash Flow Information: Cash and due from banks at beginning of period $ 204,949 $ 1,272,134 Restricted cash at beginning of period 19,835 46,527 Cash and due from banks and restricted cash at beginning of period $ 224,784 $ 1,318,661 Cash and due from banks at end of period $ 210,919 $ 1,173,665 Restricted cash at end of period 257 16,088 Cash and due from banks and restricted cash at end of period $ 211,176 $ 1,189,753 Cash paid during the period for: Interest $ 5,088 $ 10,376 Income taxes 573 568 Non-cash activities: Accretion of unrealized loss on securities reclassified to held-to-maturity 154 180 Net loan recoveries ( 92 ) ( 280 ) Transfer of loans receivable to loans held-for-sale 12,011 — Transfer of premises and equipment to assets held-for-sale 2,776 — See accompanying Notes to Unaudited Consolidated Financial Statements. 21 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 1. Basis of Presentation The consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp. Casaba Real Estate Holdings Corporation, CBNJ Investments Corp., Country Property Holdings, Inc., and TRCB Investment Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations that may be expected for the full year 2022 or any other period. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 22 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 2. Earnings per Share The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Weighted average shares outstanding 59,303 60,300 Less: Unallocated ESOP shares ( 422 ) ( 386 ) Unallocated incentive award shares ( 142 ) ( 74 ) Average basic shares outstanding 58,739 59,840 Add: Effect of dilutive securities: Incentive awards 204 261 Average diluted shares outstanding 58,943 60,101 For the three months ended March 31, 2022 and 2021, antidilutive stock options of 904,000 and 1,672,000 , respectively, were excluded from the earnings per share calculations . 23 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 3. Securities The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at March 31, 2022 and December 31, 2021 are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses At March 31, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 145,690 $ 206 $ ( 3,855 ) $ 142,041 $ — Corporate debt securities 5,000 — ( 216 ) 4,784 — Asset-backed securities 302,389 — ( 5,300 ) 297,089 — Agency commercial mortgage-backed securities (“MBS”) 111,399 — ( 8,843 ) 102,556 — Total debt securities available-for-sale $ 564,478 $ 206 $ ( 18,214 ) $ 546,470 $ — Debt securities held-to-maturity: State, municipal and sovereign debt obligations $ 272,250 $ 396 $ ( 12,673 ) $ 259,973 $ ( 69 ) Corporate debt securities 64,198 917 ( 1,951 ) 63,164 ( 1,272 ) Mortgage-backed securities: Agency residential 730,960 467 ( 38,828 ) 692,599 — Agency commercial 4,163 3 ( 45 ) 4,121 — Non-agency commercial 32,057 3 ( 1,025 ) 31,035 ( 39 ) Total mortgage-backed securities 767,180 473 ( 39,898 ) 727,755 ( 39 ) Total debt securities held-to-maturity $ 1,103,628 $ 1,786 $ ( 54,522 ) $ 1,050,892 $ ( 1,380 ) Total debt securities $ 1,668,106 $ 1,992 $ ( 72,736 ) $ 1,597,362 $ ( 1,380 ) At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 164,756 $ 1,135 $ ( 471 ) $ 165,420 $ — Corporate debt securities 5,000 42 ( 11 ) 5,031 — Asset-backed securities 298,976 41 ( 1,489 ) 297,528 — Agency commercial MBS 101,142 57 ( 923 ) 100,276 — Total debt securities available-for-sale $ 569,874 $ 1,275 $ ( 2,894 ) $ 568,255 $ — Debt securities held-to-maturity: State, municipal, and sovereign debt obligations $ 281,389 $ 10,185 $ ( 1,164 ) $ 290,410 $ ( 85 ) Corporate debt securities 68,823 1,628 ( 1,279 ) 69,172 ( 1,343 ) Mortgage-backed securities: Agency residential 756,844 6,785 ( 7,180 ) 756,449 — Agency commercial 4,385 7 ( 44 ) 4,348 — Non-agency commercial 32,107 362 ( 104 ) 32,365 ( 39 ) Total mortgage-backed securities 793,336 7,154 ( 7,328 ) 793,162 ( 39 ) Total debt securities held-to-maturity $ 1,143,548 $ 18,967 $ ( 9,771 ) $ 1,152,744 $ ( 1,467 ) Total debt securities $ 1,713,422 $ 20,242 $ ( 12,665 ) $ 1,720,999 $ ( 1,467 ) 24 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) There was no allowance for securities credit losses on debt securities available-for-sale at March 31, 2022 or December 31, 2021. The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Allowance for securities credit losses Beginning balance $ ( 1,467 ) $ ( 1,715 ) Benefit (provision) for credit loss expense 87 ( 2 ) Total ending allowance balance $ ( 1,380 ) $ ( 1,717 ) During 2021 and 2013, the Bank transferred $ 12.7 million and $ 536.0 million, respectively, of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 209,000 and $ 13.3 million at the time of transfer in 2021 and 2013, respectively, which continues to be reflected in accumulated other comprehensive loss on the Consolidated Statement of Financial Condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at March 31, 2022 and December 31, 2021 is as follows (in thousands): March 31, December 31, 2022 2021 Amortized cost $ 1,103,628 $ 1,143,548 Net loss on date of transfer from available-for-sale ( 13,556 ) ( 13,556 ) Allowance for securities credit losses ( 1,380 ) ( 1,467 ) Accretion of net unrealized loss on securities reclassified as held-to-maturity 10,822 10,668 Carrying value $ 1,099,514 $ 1,139,193 There was $ 87,000 of realized losses on debt securities for the three months ended March 31, 2022. There were no realized gains or losses on debt securities for the three months ended March 31, 2021. The amortized cost and estimated fair value of debt securities at March 31, 2022 by contractual maturity are shown below (in thousands). March 31, 2022 Amortized Cost Estimated Fair Value Less than one year $ 95,878 $ 95,857 Due after one year through five years 153,847 148,910 Due after five years through ten years 242,079 232,695 Due after ten years 297,723 289,589 $ 789,527 $ 767,051 Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2022, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $ 63.1 million, $ 87.6 million, and $ 303.4 million, respectively, and an estimated fair value of $ 61.8 million, $ 85.4 million, and $ 297.1 million, respectively, were callable prior to the maturity date. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments. The estimated fair value of securities pledged for the ability to draw on FHLB advances, access to the Federal Reserve discount window, and other borrowings and for other purposes required by law amounted to $ 1.09 billion and $ 1.14 billion at March 31, 2022 and December 31, 2021, respectively, which includes $ 114.6 million and $ 142.9 million at March 31, 2022 and December 31, 2021, respectively, pledged as collateral for securities sold under agreements to repurchase. 25 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at March 31, 2022 and December 31, 2021, segregated by the duration of the unrealized losses, are as follows (in thousands): Less than 12 months 12 months or longer Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses At March 31, 2022 Debt securities available-for-sale: U.S. government and agency obligations $ 76,857 $ ( 3,811 ) $ 5,017 $ ( 44 ) $ 81,874 $ ( 3,855 ) Corporate debt securities 4,784 ( 216 ) — — 4,784 ( 216 ) Asset-backed securities 266,780 ( 5,058 ) 15,309 ( 242 ) 282,089 ( 5,300 ) Agency commercial MBS 102,556 ( 8,843 ) — — 102,556 ( 8,843 ) Total debt securities available-for-sale 450,977 ( 17,928 ) 20,326 ( 286 ) 471,303 ( 18,214 ) Debt securities held-to-maturity: State, municipal and sovereign debt obligations 203,363 ( 11,481 ) 15,508 ( 1,192 ) 218,871 ( 12,673 ) Corporate debt securities 6,080 ( 87 ) 36,467 ( 1,864 ) 42,547 ( 1,951 ) Mortgage-backed securities: Agency residential 469,893 ( 24,938 ) 170,870 ( 13,890 ) 640,764 ( 38,828 ) Agency commercial 608 ( 2 ) 2,393 ( 43 ) 3,001 ( 45 ) Non-agency commercial 30,032 ( 1,025 ) — — 30,032 ( 1,025 ) Total mortgage-backed securities 500,533 ( 25,965 ) 173,263 ( 13,933 ) 673,797 ( 39,898 ) Total debt securities held-to-maturity 709,976 ( 37,533 ) 225,238 ( 16,989 ) 935,215 ( 54,522 ) Total debt securities $ 1,160,953 $ ( 55,461 ) $ 245,564 $ ( 17,275 ) $ 1,406,518 $ ( 72,736 ) At December 31, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 82,395 $ ( 471 ) $ — $ — $ 82,395 $ ( 471 ) Corporate debt securities 1,989 ( 11 ) — — 1,989 ( 11 ) Asset-backed securities 279,486 ( 1,489 ) — — 279,486 ( 1,489 ) Agency commercial MBS 80,726 ( 923 ) — — 80,726 ( 923 ) Total debt securities available-for-sale 444,596 ( 2,894 ) — — 444,596 ( 2,894 ) Debt securities held-to-maturity: State, municipal, and sovereign debt obligations 75,329 ( 1,063 ) 4,383 ( 101 ) 79,712 ( 1,164 ) Corporate debt securities 38,304 ( 1,279 ) — — 38,304 ( 1,279 ) Mortgage-backed securities: Agency residential 445,399 ( 5,822 ) 50,133 ( 1,358 ) 495,532 ( 7,180 ) Agency commercial 2,255 ( 41 ) 886 ( 3 ) 3,141 ( 44 ) Non-agency commercial 10,722 ( 104 ) — — 10,722 ( 104 ) Total mortgage-backed securities 458,376 ( 5,967 ) 51,019 ( 1,361 ) 509,395 ( 7,328 ) Total debt securities held-to-maturity 572,009 ( 8,309 ) 55,402 ( 1,462 ) 627,411 ( 9,771 ) Total debt securities $ 1,016,605 $ ( 11,203 ) $ 55,402 $ ( 1,462 ) $ 1,072,007 $ ( 12,665 ) The Company concluded that debt securities were not impaired at March 31, 2022 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the change in net unrealized losses were primarily due to changes in the general interest rate environment and not credit quality. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s liquidity plans include adequate sources of liquidity outside the securities portfolio. The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. Credit ratings of BBB- or Baa3 or higher are considered as investment 26 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) grade. The amortized cost of debt securities held-to-maturity at March 31, 2022, aggregated by credit quality indicator are as follows (in thousands): Investment Grade Non-Investment Grade/Non-rated Total As of March 31, 2022 State, municipal and sovereign debt obligations $ 272,250 $ — $ 272,250 Corporate debt securities 48,211 15,987 64,198 Non-agency commercial MBS 32,057 — 32,057 Total debt securities held-to-maturity $ 352,518 $ 15,987 $ 368,505 Equity Investments At March 31, 2022 and December 31, 2021, the Company held equity investments of $ 93.9 million and $ 101.2 million, respectively. The equity investments primarily comprised of select financial services institutions’ common and preferred stocks and to a lesser extent other equity investments in funds and other financial institutions. The realized and unrealized gains or losses on equity securities for the three months ended March 31, 2022 and 2021 are shown in the table below (in thousands): Three Months Ended March 31, 2022 2021 Net (loss) gain on equity investments $ ( 2,786 ) $ 8,287 Less: Net gains recognized on equity securities sold 1,582 8,123 Unrealized (loss) gain recognized on equity securities still held $ ( 4,368 ) $ 164 27 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 4. Loans Receivable, Net Loans receivable, net at March 31, 2022 and December 31, 2021 consisted of the following (in thousands): March 31, December 31, 2022 2021 Commercial: Commercial real estate – investor $ 4,607,880 $ 4,378,061 Commercial real estate – owner occupied 1,057,246 1,055,065 Commercial and industrial (1) 502,739 449,224 Total commercial 6,167,865 5,882,350 Consumer: Residential real estate 2,687,927 2,479,701 Home equity loans and lines and other consumer (“other consumer”) 253,184 260,819 Total consumer 2,941,111 2,740,520 Total loans receivable 9,108,976 8,622,870 Deferred origination costs, net of fees 7,301 9,332 Allowance for loan credit losses ( 50,598 ) ( 48,850 ) Total loans receivable, net $ 9,065,679 $ 8,583,352 (1) The commercial and industrial loans balance at March 31, 2022 and December 31, 2021 includes Paycheck Protection Program loans of $ 15.0 million and $ 22.9 million, respectively. The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. Generally, risk ratings for loans on forbearance pursuant to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, extended by the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021, were not re-evaluated until the initial 90-day forbearance period ended. At that time, risk ratings were updated with an emphasis on industries that were heavily impacted by the pandemic, as well as individual borrower liquidity, and other measures of resiliency as described below. The Company evaluates risk ratings on an ongoing basis and as such, adversely rated loans will be re-evaluated as government restrictions ease and businesses resume normal operations. The Company uses the following definitions for risk ratings: Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower. Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. This includes borrowers that have been negatively affected by the pandemic but demonstrate some degree of liquidity. This liquidity may or may not be adequate to resume operations. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the collection or the liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in the assessment, do not have adequate liquidity available to resume operations at levels sufficient to service their current debt levels. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 28 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands): 2022 2021 2020 2019 2018 2017 and prior Revolving lines of credit Total March 31, 2022 Commercial real estate - investor Pass $ 325,263 $ 1,368,731 $ 611,037 $ 537,525 $ 262,169 $ 1,110,883 $ 277,149 $ 4,492,757 Special Mention — — — 19,416 9,378 31,267 655 60,716 Substandard — — — 21,625 83 30,803 1,896 54,407 Total commercial real estate - investor 325,263 1,368,731 611,037 578,566 271,630 1,172,953 279,700 4,607,880 Commercial real estate - owner occupied Pass 36,220 119,031 73,971 123,635 90,325 530,927 10,408 984,517 Special Mention — — — 10,851 4,610 9,395 260 25,116 Substandard — — — 4,600 7,722 35,128 163 47,613 Total commercial real estate - owner occupied 36,220 119,031 73,971 139,086 102,657 575,450 10,831 1,057,246 Commercial and industrial Pass 17,126 36,479 20,194 19,933 14,809 57,415 324,808 490,764 Special Mention — — — 658 269 325 3,207 4,459 Substandard — — 423 1,764 813 2,124 2,392 7,516 Total commercial and industrial 17,126 36,479 20,617 22,355 15,891 59,864 330,407 502,739 Residential real estate (1) Pass 313,669 869,552 453,895 267,613 114,815 665,096 — 2,684,640 Special Mention — — — 684 — 461 — 1,145 Substandard — — — — — 2,142 — 2,142 Total residential real estate 313,669 869,552 453,895 268,297 114,815 667,699 — 2,687,927 Other consumer (1) Pass 6,056 27,264 17,848 17,712 48,383 133,500 — 250,763 Special Mention — — — — — 175 — 175 Substandard — — — — 60 2,186 — 2,246 Total other consumer 6,056 27,264 17,848 17,712 48,443 135,861 — 253,184 Total loans $ 698,334 $ 2,421,057 $ 1,177,368 $ 1,026,016 $ 553,436 $ 2,611,827 $ 620,938 $ 9,108,976 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 29 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Total December 31, 2021 Commercial real estate - investor Pass $ 1,387,753 $ 609,916 $ 535,551 $ 274,662 $ 375,646 $ 800,089 $ 255,613 $ 4,239,230 Special Mention — — 23,794 9,400 2,731 28,663 582 65,170 Substandard — 4,267 28,802 468 8,495 28,228 3,401 73,661 Total commercial real estate - investor 1,387,753 614,183 588,147 284,530 386,872 856,980 259,596 4,378,061 Commercial real estate - owner occupied Pass 116,355 71,196 125,212 91,531 109,232 449,966 10,913 974,405 Special Mention — — 1,365 3,829 479 14,371 2 20,046 Substandard — — 14,166 8,549 5,606 31,576 717 60,614 Total commercial real estate - owner occupied 116,355 71,196 140,743 103,909 115,317 495,913 11,632 1,055,065 Commercial and industrial Pass 42,955 22,573 22,878 16,404 8,671 50,887 271,818 436,186 Special Mention — — 231 350 85 172 3,645 4,483 Substandard — 457 2,281 813 198 2,029 2,777 8,555 Total commercial and industrial 42,955 23,030 25,390 17,567 8,954 53,088 278,240 449,224 Residential real estate (1) Pass 876,135 475,134 288,699 127,756 105,385 602,331 — 2,475,440 Special Mention — 212 — 61 — 1,313 — 1,586 Substandard — — — — 351 2,324 — 2,675 Total residential real estate 876,135 475,346 288,699 127,817 105,736 605,968 — 2,479,701 Other consumer (1) Pass 26,512 19,168 18,179 51,954 17,955 123,783 — 257,551 Special Mention — — — — — 322 — 322 Substandard — — — 18 — 2,928 — 2,946 Total other consumer 26,512 19,168 18,179 51,972 17,955 127,033 — 260,819 Total loans $ 2,449,710 $ 1,202,923 $ 1,061,158 $ 585,795 $ 634,834 $ 2,138,982 $ 549,468 $ 8,622,870 (1) For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 30 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) An analysis of the allowance for credit losses on loans for the three months ended March 31, 2022 and 2021 is as follows (in thousands): Commercial Real Estate – Investor Commercial Real Estate – Owner Occupied Commercial and Industrial Residential Real Estate Other Consumer Unallocated Total For the three months ended March 31, 2022 Allowance for credit losses on loans Balance at beginning of period $ 25,504 $ 5,884 $ 5,039 $ 11,155 $ 1,268 $ — $ 48,850 Credit loss (benefit) expense ( 1,867 ) ( 840 ) ( 406 ) 5,028 ( 259 ) — 1,656 Charge-offs — ( 4 ) — — ( 139 ) — ( 143 ) Recoveries — 13 16 94 112 — 235 Balance at end of period $ 23,637 $ 5,053 $ 4,649 $ 16,277 $ 982 $ — $ 50,598 For the three months ended March 31, 2021 Allowance for credit losses on loans Balance at beginning of period $ 26,703 $ 15,054 $ 5,390 $ 11,818 $ 1,770 $ — $ 60,735 Credit loss expense (benefit) 10,149 ( 7,257 ) ( 2,875 ) ( 335 ) ( 721 ) — ( 1,039 ) Charge-offs ( 34 ) — — ( 242 ) ( 80 ) — ( 356 ) Recoveries 104 30 26 39 437 — 636 Balance at end of period $ 36,922 $ 7,827 $ 2,541 $ 11,280 $ 1,406 $ — $ 59,976 A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral and therefore, non-accruing. At March 31, 2022 and December 31, 2021, the Company had collateral dependent loans with an amortized cost balance as follows: commercial real estate - investor of $ 3.6 million for each period, commercial real estate - owner occupied of $ 9.6 million and $ 11.9 million, respectively, and commercial and industrial of $ 2.8 million and $ 277,000 , respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 440,000 and $ 438,000 at March 31, 2022 and December 31, 2021, respectively. At both March 31, 2022 and December 31, 2021, the amount of foreclosed residential real estate property held by the Company was $ 106,000 . The following table presents the recorded investment in non-accrual loans, by loan portfolio segment as of March 31, 2022 and December 31, 2021 (in thousands): March 31, December 31, 2022 2021 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 $ 26,925 $ 25,494 At March 31, 2022 and December 31, 2021, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At March 31, 2022, there were no loans that were 90 days or greater past due and still accruing. At December 31, 2021, there was one loan for $ 46,000 that was 90 days or greater past due and still accruing interest that was fully paid on January 14, 2022. 31 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the aging of the recorded investment in past due loans as of March 31, 2022 and December 31, 2021 by loan portfolio segment (in thousands): 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total March 31, 2022 Commercial real estate – investor $ 2,109 $ 74 $ 1,663 $ 3,846 $ 4,604,034 $ 4,607,880 Commercial real estate – owner occupied 4,465 18 373 4,856 1,052,390 1,057,246 Commercial and industrial 66 43 356 465 502,274 502,739 Residential real estate 9,816 1,146 2,142 13,104 2,674,823 2,687,927 Other consumer 779 175 2,246 3,200 249,984 253,184 $ 17,235 $ 1,456 $ 6,780 $ 25,471 $ 9,083,505 $ 9,108,976 December 31, 2021 Commercial real estate – investor $ 1,717 $ 102 $ 1,709 $ 3,528 $ 4,374,533 $ 4,378,061 Commercial real estate – owner occupied 599 — 575 1,174 1,053,891 1,055,065 Commercial and industrial 25 151 277 453 448,771 449,224 Residential real estate 9,705 1,586 2,675 13,966 2,465,735 2,479,701 Other consumer 339 322 2,946 3,607 257,212 260,819 $ 12,385 $ 2,161 $ 8,182 $ 22,728 $ 8,600,142 $ 8,622,870 The Company classifies certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Bank retains its security interest in the real estate collateral. At March 31, 2022 and December 31, 2021, TDR loans totaled $ 19.6 million and $ 23.6 million, respectively. At March 31, 2022 and December 31, 2021, there were $ 11.9 million and $ 11.3 million, respectively, of TDR loans included in the non-accrual loan totals. At March 31, 2022 and December 31, 2021, the Company had no specific reserves allocated to loans that were classified as TDR loans. Non-accrual loans which become TDR loans are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has TDR loans classified as accruing loans which totaled $ 7.7 million and $ 12.3 million at March 31, 2022 and December 31, 2021, respectively. The following table presents information about TDR loans which occurred during the three months ended March 31, 2022 and 2021 (dollars in thousands): Number of Loans Pre-modification Recorded Investment Post-modification Recorded Investment Three months ended March 31, 2022 Troubled debt restructurings: Commercial and industrial 1 $ 65 $ 65 Other consumer 3 991 1,109 Three months ended March 31, 2021 Troubled debt restructurings: Other consumer 2 $ 26 $ 33 There were no TDR loans that defaulted during the three months ended March 31, 2022 and 2021, which were modified within the preceding year. 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 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 32 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either December 31, 2019 or the date of the modification, these loans are not considered TDR loans at March 31, 2022 and 2021 and will not be reported as past due during the deferral period. Note 5. Deposits The major types of deposits at March 31, 2022 and December 31, 2021 were as follows (in thousands): Type of Account March 31, December 31, 2022 2021 Non-interest-bearing $ 2,444,833 $ 2,412,056 Interest-bearing checking 4,287,745 4,201,736 Money market deposit 811,588 736,090 Savings 1,624,751 1,607,933 Time deposits 887,316 775,001 Total deposits $ 10,056,233 $ 9,732,816 Included in time deposits at March 31, 2022 and December 31, 2021 was $ 104.6 million and $ 145.4 million, respectively, in deposits of $250,000 or more. Note 6. Borrowed Funds Borrowed funds at March 31, 2022 and December 31, 2021 were as follows (in thousands): March 31, December 31, 2022 2021 FHLB advances $ 75,002 $ — Securities sold under agreements to repurchase with customers 117,782 118,769 Other borrowings 194,396 229,141 Total borrowed funds $ 387,180 $ 347,910 At March 31, 2022, there was $ 75.0 million outstanding in overnight borrowings from the FHLB, as compared to $ 0 at December 31, 2021. There were no FHLB term advances at March 31, 2022 and December 31, 2021. During the three months 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. 33 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 7. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means. Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. Assets and Liabilities Measured at Fair Value A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Debt Securities Available-for-Sale Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities. Equity Investments Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity investments without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. 34 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Interest Rate Derivatives The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty. Other Real Estate Owned and Loans Individually Measured for Impairment Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3). The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): Fair Value Measurements at Reporting Date Using: Total Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs March 31, 2022 Items measured on a recurring basis: Debt securities available-for-sale $ 546,470 $ — $ 546,470 $ — Equity investments 81,588 12,517 69,071 — Interest rate derivative asset 45,611 — 45,611 — Interest rate derivative liability ( 45,643 ) — ( 45,643 ) — Items measured on a non-recurring basis: Equity investments 12,300 — — 12,300 Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 16,477 — — 16,477 December 31, 2021 Items measured on a recurring basis: Debt securities available-for-sale $ 568,255 $ — $ 568,255 $ — Equity investments 90,726 14,608 73,400 2,718 Interest rate derivative asset 22,787 — 22,787 — Interest rate derivative liability ( 22,855 ) — ( 22,855 ) — Items measured on a non-recurring basis: Equity investments 10,429 — — 10,429 Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 16,233 — — 16,233 35 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table reconciles, for the three months ended March 31, 2022 and 2021, the beginning and ending balances for equity investments available-for-sale that are recognized at fair value on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs (in thousands): For the Three Months Ended March 31, 2022 2021 Equity Investments Beginning balance $ 2,718 $ 2,540 Total gains included in earnings — 398 Sales — — Transfers out of Level 3 ( 2,718 ) — Ending balance $ — $ 2,938 The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. During the three months ended March 31, 2022, the Company executed its right to convert $ 2.7 million preferred stock into common stock, which resulted in a transfer from Level 3 into Level 1. There were no transfers into or out of Level 3 assets and liabilities in the fair value hierarchy for the three months ended March 31, 2021. Assets and Liabilities Disclosed at Fair Value A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below. Cash and Due from Banks For cash and due from banks, the carrying amount approximates fair value. Debt Securities Held-to-Maturity Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations, known as bond anticipation notes, as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency. Restricted Equity Investments The fair value for Federal Home Loan Bank of New York, Federal Reserve Bank stock, and Atlantic Community Bankers Bank is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities. Loans Receivable and Loans Held-for-Sale Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms. Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. 36 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The fair value of loans was measured using the exit price notion. Deposits Other than Time Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. Time Deposits The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase with Customers Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly. Borrowed Funds Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of March 31, 2022 and December 31, 2021 are presented in the following tables (in thousands): Fair Value Measurements at Reporting Date Using: Book Value Level 1 Inputs Level 2 Inputs Level 3 Inputs March 31, 2022 Financial Assets: Cash and due from banks $ 210,919 $ 210,919 $ — $ — Debt securities held-to-maturity 1,099,514 — 1,038,041 12,851 Restricted equity investments 56,704 — — 56,704 Loans receivable, net and loans held-for-sale 9,065,679 — — 8,798,688 Financial Liabilities: Deposits other than time deposits 9,168,917 — 9,168,917 — Time deposits 887,316 — 872,733 — FHLB advances and other borrowings 269,398 — 290,103 — Securities sold under agreements to repurchase with customers 117,782 117,782 — — December 31, 2021 Financial Assets: Cash and due from banks $ 204,949 $ 204,949 $ — $ — Debt securities held-to-maturity 1,139,193 — 1,138,529 14,215 Restricted equity investments 53,195 — — 53,195 Loans receivable, net and loans held-for-sale 8,583,352 — — 8,533,506 Financial Liabilities: Deposits other than time deposits 8,957,815 — 8,957,815 — Time deposits 775,001 — 773,766 — Other borrowings 229,141 — 251,491 — Securities sold under agreements to repurchase with customers 118,769 118,769 — — Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time 37 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 38 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 8. Derivatives, Hedging Activities and Other Financial Instruments The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to Bank customers. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. For the three months ended March 31, 2022 and 2021, the Company recognized a gain of $ 37,000 and $ 64,000 , respectively, in commercial loan swap income resulting from fair value adjustments. The notional amount of derivatives not designated as hedging instruments was $ 1.10 billion and $ 938.7 million at March 31, 2022 and December 31, 2021, respectively. The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands): Fair Value Balance Sheet Location March 31, December 31, 2022 2021 Other assets $ 45,611 $ 22,787 Other liabilities 45,643 22,855 Credit Risk-Related Contingent Features The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 257,000 and $ 19.8 million at March 31, 2022 and December 31, 2021, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 45.6 million and $ 22.9 million at March 31, 2022 and December 31, 2021, respectively. 39 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 9. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2038. The Company has one existing finance lease, which has a lease term through 2029. The following table represents the classification of the Company’s right-of-use (“ROU”) assets and lease liabilities on the consolidated statements of financial condition (in thousands): March 31, December 31, 2022 2021 Lease ROU Assets Classification Operating lease ROU assets Other assets $ 14,249 $ 17,442 Finance lease ROU asset Premises and equipment, net 1,446 1,495 Total lease ROU assets $ 15,695 $ 18,937 Lease Liabilities Operating lease liabilities (1) Other liabilities $ 14,720 $ 17,982 Finance lease liability Other borrowings 1,854 1,904 Total lease liabilities $ 16,574 $ 19,886 (1) Operating lease liabilities excludes liabilities for future rent and estimated lease termination payments related to closed branches of $ 8.6 million and $ 8.2 million as of March 31, 2022 and December 31, 2021, respectively. The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Leases (Topic 842) requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception. March 31, December 31, 2022 2021 Weighted-Average Remaining Lease Term Operating leases 7.86 years 8.22 years Finance lease 7.35 years 7.59 years Weighted-Average Discount Rate Operating leases 2.84 % 2.97 % Finance lease 5.63 5.63 40 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table represents lease expenses and other lease information (in thousands): Three Months Ended March 31, 2022 2021 Lease Expense Operating lease expense $ 1,258 $ 1,490 Finance lease expense: Amortization of ROU assets 50 50 Interest on lease liabilities (1) 26 29 Total $ 1,334 $ 1,569 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,162 $ 1,450 Operating cash flows from finance leases 26 29 Financing cash flows from finance leases 51 48 (1) Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense. The Company sold two branches, including owned premises and equipment, all deposits associated with the branches, and selected performing loans in December 2021. The Company also consolidated four branches in early 2021, nine branches in late 2021, and 10 branches and one deposit gathering location in early 2022. These plans have resulted in a shortened estimated useful life for premises and equipment and accelerated recognition of lease expenses, including the gains or losses related to subsequent sales or lease terminations, associated with these locations, totaling $ 62,000 and $ 980,000 , for the three months ended March 31, 2022 and 2021, respectively, which is presented in branch consolidation expense, net, and is excluded from the table above. Other operating expenses related to these closures totaled $ 340,000 and $ 31,000 , for the three months ended March 31, 2022 and 2021, respectively, and are presented in branch consolidation expense, net. Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of March 31, 2022 were as follows (in thousands): Finance Lease Operating Leases For the Twelve Months Ending March 31, 2023 $ 307 $ 3,366 2024 307 2,579 2025 307 2,448 2026 307 1,879 2027 307 1,224 Thereafter 721 5,283 Total 2,256 16,779 Less: Imputed interest ( 402 ) ( 2,059 ) Total lease liabilities $ 1,854 $ 14,720 41 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 10. Subsequent Event On April 1, 2022, the Company completed its previously announced agreement to acquire a majority interest of 60 % in Trident Abstract Title Agency, LLC (“Trident”). Trident provides commercial and residential title services throughout New Jersey; and through strategic alliances can also service client’s title insurance needs outside of New Jersey. The acquisition is expected to be complimentary to the Company’s existing consumer and commercial lending business. The purchase price was $ 7.1 million and estimated goodwill from the transaction amounted to $ 5.7 million. 42 Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.