What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 189 added, 144 removed, 225 unchanged (60% of the section changed)

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At or for the Quarters Ended

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

(dollars in thousands, except per share amounts) June 30, 2022 March 31, 2022 June 30, 2021

SELECTED FINANCIAL CONDITION DATA:

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Deposits 9,831,484 10,056,233 9,415,286

Stockholders’ equity 1,519,334 1,516,553 1,498,719

Total stockholders’ equity 1,521,432 1,519,334 1,508,789

SELECTED OPERATING DATA:

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Net income 29,483 25,759 30,555

Net income attributable to OceanFirst Financial Corp.

28,961 25,759 30,555

Net income available to common stockholders 27,957 24,755 29,551

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(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.

(3) Ratios for each period are based on net income available to common stockholders.

(4) Included net expenses related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $8.8 million, or $6.7 million, net of tax benefit, for the three months ended June 30, 2022.

Included net expenses related to merger related expenses, net branch consol idation expenses, and net loss on equity investments of $5.2 million, or $4.0 million, net of tax benefit, for the three months ended March 31, 2022.

I ncluded a net benefit related to merger related expenses, net branch consolidation expenses, and net gain on equity investments of $104,000, or $78,000, net of tax expense, for the three months ended June 30, 2021.

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

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(7) 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.

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It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

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

(10) 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.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $15.5 million, $16.9 million, and $23.6 million at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

OceanFirst Financial Corp.

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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 also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans, securities and on equity investments, title-related fees and service charges 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.

Key developments relating to the Company’s financial results and corporate activities for the three months ended June 30, 2022 were as follows:

• Strengthening Net Interest Income and Margin:

Net interest income increased by $6.6 million to $90.8 million, from $84.2 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.

Net interest margin increased to 3.29%, as compared to 3.18% in the prior linked quarter, largely driven by the impact of the rising rate environment on interest earning assets, as well as elevated prepayment fees, partly offset by increased cost of funds.

• Balance Sheet Growth and Improving Asset Quality:

Loan growth for the quarter was $315.9 million, reflecting originations of $835.5 million, and the committed loan pipeline was $385.0 million as of June 30, 2022.

Non-performing loans decreased to $20.8 million, as compared to $26.9 million in the prior linked quarter.

Deposits grew by $98.7 million year-to-date and $416.2 million as compared to June 30, 2021.

• Expense Management Discipline:

Total operating expenses increased modestly to $58.7 million, from $57.5 million in the prior linked quarter.

Operating expenses for the current quarter included $3.2 million of expenses related to the acquisition of a majority interest in Trident Abstract Title Agency, LLC (“Trident”).

The efficiency ratio improved to 59.65% from 61.77% in the prior linked quarter.

• Dividend Increase:

On July 27, 2022, the Board of Directors approved an increase to the quarterly cash dividend by $0.03, or 18%, to $0.20 per share.

Net income available to common stockholders for the three and six months ended June 30, 2022 was $28.0 million and $52.7 million, respectively, or $0.47 and $0.89 per diluted share, respectively, as compared to $29.6 million and $61.2 million, or $0.49 and $1.02 per diluted share, for the corresponding prior year periods, respectively.

The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2022 and 2021, respectively.

Net income available to common stockholders for the three and six months ended June 30, 2022 included merger related expenses of $196,000 and $2.2 million, respectively, net branch consolidation expenses of $546,000 and $948,000, respectively, and net loss on equity investments of $8.1 million and $10.9 million, respectively.

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

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.23% at June 30, 2022.

On July 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share.

The dividend, related to the quarter ended June 30, 2022, will be paid on August 19, 2022 to common stockholders of record on August 8, 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.

This dividend will be paid on August 15, 2022 to preferred stockholders of record on July 29, 2022.

Analysis of Net Interest Income

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

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.

For the three and six months ended June 30, 2022 interest income included net loan fees of $3.2 million and $4.2 million, respectively, as compared to $1.2 million and $2.6 million for the same prior year periods, respectively.

The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2022 and 2021.

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

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

(dollars in thousands) Average Balance Interest Average

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Total cost of deposits (including non-interest-bearing deposits) 0.18 % 0.27 %

For the Six Months Ended June 30,

(dollars in thousands) Average

Balance Interest Average

Interest-earning assets:

Interest-earning deposits and short-term investments $ 78,074 $ 136 0.35 % $ 1,065,294 $ 518 0.10 %

Securities (2)

1,829,065 17,064 1.88 1,407,108 12,741 1.83

Loans receivable, net (3)

Commercial 6,157,060 123,745 4.05 5,223,714 107,927 4.17

Residential real estate 2,631,208 44,081 3.35 2,273,332 39,166 3.45

Other consumer 254,002 5,373 4.27 315,662 7,863 5.02

Allowance for loan credit losses, net of deferred loan costs and fees (42,080) — — (53,187) — —

Loans receivable, net 9,000,190 173,199 3.87 7,759,521 154,956 4.03

Total interest-earning assets 10,907,329 190,399 3.51 10,231,923 168,215 3.32

Non-interest-earning assets 1,191,453 1,257,970

Total assets $ 12,098,782 $ 11,489,893

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Interest-bearing checking $ 4,197,935 3,762 0.18 % $ 3,707,398 7,695 0.42 %

Money market 763,721 596 0.16 758,986 579 0.15

Savings 1,624,575 286 0.04 1,552,106 345 0.04

Time deposits 853,017 3,714 0.88 1,111,000 6,202 1.13

Total 7,439,248 8,358 0.23 7,129,490 14,821 0.42

FHLB Advances 285,501 1,682 1.19 — — —

Securities sold under agreements to repurchase 110,738 83 0.15 132,328 151 0.23

Other borrowings 211,407 5,252 5.01 228,359 5,623 4.97

Total borrowings 607,646 7,017 2.33 360,687 5,774 3.23

Total interest-bearing liabilities 8,046,894 15,375 0.39 7,490,177 20,595 0.55

Non-interest-bearing deposits 2,364,757 2,337,238

Non-interest-bearing liabilities 155,832 162,647

Total liabilities 10,567,483 9,990,062

Stockholders’ equity 1,531,299 1,499,831

Total liabilities and equity $ 12,098,782 $ 11,489,893

Net interest income $ 175,024 $ 147,620

Net interest rate spread (4)

3.12 % 2.77 %

Net interest margin (5)

3.24 % 2.91 %

Total cost of deposits (including non-interest-bearing deposits) 0.17 % 0.32 %

(1) Average yields and costs are annualized.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets increased by $699.0 million to $12.44 billion at June 30, 2022, from $11.74 billion at December 31, 2021.

Total loans increased by $802.0 million to $9.42 billion at June 30, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations.

Total debt securities decreased by $132.1 million at June 30, 2022, as compared to December 31, 2021, primarily due to principal repayments, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment.

Other assets increased by $46.5 million to $193.6 million at June 30, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with the Company’s customer interest rate swap programs.

Total liabilities increased by $694.2 million to $10.92 billion at June 30, 2022, from $10.22 billion at December 31, 2021.

Deposits increased by $98.7 million to $9.83 billion at June 30, 2022, from $9.73 billion at December 31, 2021.

Total deposits, excluding time deposits, decreased by $626.3 million to $8.33 billion at June 30, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of interest-bearing checking balances.

Time deposits increased to $1.50 billion at June 30, 2022, from $775.0 million at December 31, 2021, primarily due to an increase in brokered time deposits.

The Company largely completed a program to extend maturities on price sensitive deposits in a cost-effective manner, consisting of the addition of $689.2 million in brokered time deposits with laddered maturities ranging from 1 to 24 months.

The brokered time deposits carry a weighted average rate of 2.12%, a weighted average life of 9.5 months, and were issued at costs less than comparable wholesale borrowings.

The loans-to-deposit ratio at June 30, 2022 was 95.9%, as compared to 88.6% at December 31, 2021.

Overnight FHLB advances increased to $488.8 million at June 30, 2022 from $0 at December 31, 2021 to fund liquidity needs.

Other borrowings decreased by $34.5 million to $194.7 million at June 30, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022.

Other liabilities increased by $151.2 million to $273.2 million at June 30, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with the Company’s customer interest rate swap programs and collateral received from counterparties.

Stockholders’ equity was $1.52 billion at June 30, 2022 and December 31, 2021 as net income of $55.2 million was primarily offset by an increase in accumulated other comprehensive loss, cash dividends of $0.34 per share for a cost of $20.0 million, stock repurchases of $7.4 million, and preferred stock dividends of $2.0 million.

Accumulated other comprehensive loss increased by $26.3 million to $29.1 million at June 30, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale which were adversely impacted by the rising interest rate environment.

For the six months ended June 30, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase programs at a weighted average cost of $19.82.

There were 2,934,438 shares available for repurchase at June 30, 2022 under the existing repurchase program.

Stockholders’ equity per common share increased to $25.73 at June 30, 2022, as compared to $25.63 at December 31, 2021.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2022 and June 30, 2021

These items decreased net income by $6.7 million and $10.7 million, net of tax, for the three and six months ended June 30, 2022, respectively.

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

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

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 income for the three and six months ended June 30, 2022 increased to $99.4 million and $190.4 million, respectively, as compared to $83.3 million and $168.2 million for the corresponding prior year periods, respectively.

Average interest-earning assets increased by $801.0 million and $675.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same prior year periods, primarily due to loan and securities growth funded by the redeployment of excess cash and, to a lesser extent, funding from increased deposits and borrowings.

Average loans receivable, net of allowance for loan credit losses, increased by $1.42 billion and $1.24 billion for the three and six months ended June 30, 2022, respectively, as compared to the same prior year periods.

For the three and six months ended June 30, 2022, the yield on average interest-

earning assets increased to 3.60% and 3.51%, respectively, from 3.25% and 3.32%, for the corresponding prior year periods, respectively.

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.

Interest expense for the three and six months ended June 30, 2022 was $8.6 million and $15.4 million, respectively, as compared to $9.3 million and $20.6 million in the corresponding prior year periods, respectively.

For the three and six months ended June 30, 2022, the cost of average interest-bearing liabilities decreased to 0.42% and 0.39%, respectively, from 0.50% and 0.55% for the corresponding prior year periods, respectively, as a result of the downward repricing of deposits.

The total cost of deposits (including non-interest bearing deposits) was 0.18% and 0.17% for the three and six months ended June 30, 2022, respectively, as compared to 0.27% and 0.32%, for the same prior year periods, respectively, and a weighted average rate of 0.28% at June 30, 2022.

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.

Net interest income for the three and six months ended June 30, 2022 increased to $90.8 million and $175.0 million, respectively, as compared to $74.0 million and $147.6 million for the corresponding prior year periods, respectively, reflecting increases in average interest-earning assets and net interest margin.

Net interest margin for the three and six months ended June 30, 2022 increased to 3.29% and 3.24%, from 2.89% and 2.91% for the same prior year periods, respectively.

The net interest margin expansion was primarily attributable to the redeployment of excess cash into loans and securities and, to a lesser extent, the impact of the rising interest rate environment on interest earning assets and a decreased cost of funds.

Credit Loss Expense (Benefit)

For the three and six months ended June 30, 2022, the credit loss expense was $1.3 million and $3.1 million, respectively, as compared to a credit loss benefit of $6.5 million and $7.1 million, for the corresponding prior year periods, respectively.

The credit loss expense for the three and six months ended June 30, 2022 was influenced by strong loan portfolio growth, cooling and increasingly uncertain macro-economic forecasts due to conflicting economic signals, partly offset by ongoing positive trends in the Company’s asset quality and continued robust employment levels.

Net loan charge-offs were $9,000 and $224,000 for the three months ended June 30, 2022 and 2021, respectively.

Net loan recoveries were $83,000 and $56,000 for the six months ended June 30, 2022 and 2021, respectively.

Non-performing loans totaled $20.8 million at June 30, 2022, as compared to $38.7 million at June 30, 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.

For the three months ended June 30, 2022, other income decreased to $7.5 million, as compared to $11.8 million for the corresponding prior year period.

The decrease was driven by a net loss on equity investments of $8.1 million compared to a net gain on equity investments of $576,000 in the prior year period, along with lower net gain on sale of loans of $1.3 million and fees and service charges of $510,000.

The decrease was partially offset by the acquisition of a majority interest in Trident, which added $4.5 million of title-related fees and service charges and an increase in commercial loan swap income of $2.2 million.

For the six months ended June 30, 2022, other income decreased to $16.4 million, as compared to $32.6 million for the corresponding prior year period.

The decrease was driven by a net loss on equity investments of $10.9 million compared to a net gain on equity investments of $8.9 million in the prior period, along with lower net gain on sale of loans of $3.0 million, deposit fees and service charges of $1.2 million, and Paycheck Protection Program (“PPP”) loan origination referral fees of $776,000.

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.

Operating expenses increased to $58.7 million for the three months ended June 30, 2022, as compared to $51.7 million in the same prior year period.

Operating expenses for the three months ended June 30, 2022 and 2021 included $742,000 and $472,000, respectively, of merger related and net branch consolidation expenses.

The remaining increase of $6.7 million in operating expenses for the three months ended June 30, 2022, as compared to the corresponding prior year period, was partly due to the acquisition of majority interest in Trident, which added $3.2 million of expenses.

The further remaining increase of $3.5 million in operating expense for the three months ended June 30, 2022 was due to increases in data processing expense of $1.8 million, as a result of the migration to a new core banking system, compensation and benefits expense of $1.2 million partly relating to the commercial banking strategy and the commercial banking hires in expansion markets of Boston and

Baltimore, and an increase in the Company’s federal deposit insurance and regulatory assessments of $689,000 as a result of a higher assessment base and multiplier.

Operating expenses increased to $116.2 million for the six months ended June 30, 2022, as compared to $103.4 million in the same prior year period.

Operating expenses for the six months ended June 30, 2022 and 2021 included $3.1 million and $1.9 million, respectively, of merger related and net branch consolidation expenses.

The remaining increase of $11.6 million in operating expenses for the six months ended June 30, 2022, as compared to the corresponding prior year period, was partly due to the acquisition of majority interest in Trident, which added $3.2 million of expenses.

The further remaining increase of $8.4 million in operating expense for the six months ended June 30, 2022 was primarily due to increases in data processing expense of $3.5 million as a result of the migration to a new core banking system, compensation and benefits expense of $3.5 million partly relating to the commercial banking strategy and the commercial banking hires in expansion markets of Boston and Baltimore, federal deposit insurance and regulatory assessments of $715,000 as a result of a higher assessment base and multiplier, and professional fees of $547,000.

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.

The provision for income taxes was $8.9 million and $16.9 million for the three and six months ended June 30, 2022, respectively, as compared to $10.1 million and $20.7 million for the same prior year periods.

The effective tax rate was 23.3% and 23.4% for the three and six months ended June 30, 2022, respectively, as compared to 24.8% and 24.7% for the same prior year periods, respectively.

Liquidity and Capital Resources

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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.

For the six months ended June 30, 2022, the holding company received dividend payments of $30.0 million from the Bank.

At June 30, 2022, OceanFirst Financial Corp.

held $32.8 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’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, access to the Federal Reserve discount window, other borrowings, and proceeds from the sale of loans and investments .

While scheduled payments on 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.

At June 30, 2022, the Bank had $488.8 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.

There were no FHLB term advances at June 30, 2022 and December 31, 2021.

The Company’s cash needs for the six months ended June 30, 2022 were primarily satisfied by the increase in net proceeds from FHLB advances, deposits, which included the issuance of brokered time deposits, proceeds from maturities and calls of debt maturities, and principal repayments on 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 Company’s cash needs for the six months ended June 30, 2021 were primarily satisfied by principal repayments on debt securities held-to-maturity, proceeds from sales of loans and equity investments, and proceeds from maturities and calls of debt securities.

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

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.

At June 30, 2022, outstanding commitments to originate loans totaled $385.0 million and outstanding undrawn lines of credit totaled $1.78 billion, of which $1.42 billion were commitments to commercial and commercial construction borrowers and $359.5 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.

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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.

Time deposits scheduled to mature in one year or less totaled $1.01 billion at June 30, 2022.

At June 30, 2022, the Company also had various contractual obligations, which included debt obligations of $788.9 million, including finance lease obligations of $1.8 million, and an additional $21.2 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.

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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.

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

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

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

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

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

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

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

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

quarterly cash dividend of $0.17 per common share.

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

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

The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on May 16, 2022 to preferred stockholders of record on April 29, 2022.

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

For the three and six months ended June 30, 2022, the Company repurchased 272,779 and 373,223 shares of its common stock, respectively, at a total cost of $5.3 million and $7.4 million, respectively.

For the three and six months ended June 30, 2021, the Company repurchased 500,000 and 1.0 million shares of its common stock, respectively, at a total cost of $10.9 million and $20.9 million, respectively.

At June 30, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the first six months of June 30, 2022 were $20.0 million, as compared to $20.3 million for the same prior year period.

On July 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per common share.

The dividend is payable on August 19, 2022 to common stockholders of record at the close of business on August 8, 2022.

Cash dividends on preferred stock declared and paid during the first six months of June 30, 2022 and 2021 were $2.0 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 August 15, 2022 to preferred stockholders of record on July 29, 2022.

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

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

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Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.

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):

As of June 30, 2022 and December 31, 2021, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

Actual For capital adequacy

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corrective action

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

As of June 30, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital (to average assets) $ 1,075,202 9.26 % $ 464,250 4.00 % $ 580,313 5.00 %

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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.

At June 30, 2022 and December 31, 2021, the Company maintained a stockholders’ equity to total assets ratio of 12.23% and 12.92%, respectively.

Non-Performing Assets

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

March 31, December 31,

June 30, December 31,

(dollars in thousands)

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Non-performing assets as a percent of total assets 0.17 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’s non-performing loans totaled $20.8 million at June 30, 2022, as compared to $25.5 million at December 31, 2021, primarily due to loans that returned to accrual status and partly due to loans that were paid off.

Included in the non-performing loans total was $10.5 million and $11.3 million of troubled debt restructuring (“TDR”) loans at June 30, 2022 and December 31, 2021, respectively.

Included in the non-performing loans total was $3.5 million and $6.5 million of PCD loans at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022, the allowance for loan credit losses totaled $52.1 million, or 0.55% 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 $15.5 million and $18.9 million at June 30, 2022 and December 31, 2021, respectively.

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,

The table below represents Special Mention and Substandard assets (in thousands):

June 30, December 31,

Special Mention $ 60,812 $ 91,607

Substandard 103,294 148,557

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

The decreases in special mention and substandard loans were primarily due to improved profitability of borrowers and their ability to service their loans.

The decrease in special mention also included one commercial loan of $14.1 million, which paid in full during the six months ended June 30, 2022.

Critical Accounting Policies

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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.

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.

In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restricti on.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023.

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.

Early adoption is permitted.

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):

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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.

The Company plans to adopt this standard on January 1, 2023 and is currently evaluating the impact of this standard to the consolidated financial statements.

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

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.

Private Securities Litigation Reform Act Safe Harbor Statement

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(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

changes (particularly with respect to the novel coronavirus), monetary and fiscal policies of the U.S.

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 future 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:

the impact of the COVID-19 or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, volatility and deterioration in the credit and equity markets, our ability to access low-cost funding, 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.

Treasury and the 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, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks;

and the Bank’s ability to successfully integrate acquired operations.

These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, under Item 1A - Risk Factors and elsewhere, and subsequent securities filings and 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis