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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________________________________ 

FORM 10-Q

 ________________________________________________  

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-11713

________________________________________________  

OceanFirst Financial Corp.

(Exact name of registrant as specified in its charter)

 ________________________________________________ 

Delaware	22-3412577
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

110 West Front Street,	Red Bank,	NJ	07701
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (732) 240-4500

________________________________________________  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	OCFC	NASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)	OCFCP	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No   ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒.

As of May 3, 2021 there were 60,332,307 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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OceanFirst Financial Corp.

INDEX TO FORM 10-Q

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Statements of Financial Condition as of March 31, 2021 (unaudited) and December 31, 2020	18
	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2021 and 2020	19
	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2021 and 2020	20
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2021 and 2020	21
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and 2020	22
	Notes to Unaudited Consolidated Financial Statements	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	17
PART II.	Other Information	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
Signatures		50

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Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the metropolitan areas of Philadelphia and New York City. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees and other general and administrative expenses. The Company’s results of operations are also significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies and actions of regulatory agencies.

The Company has grown significantly through the acquisitions of Capital Bank of New Jersey (“Capital Bank”) on January 31, 2019 and Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”), each on January 1, 2020. These acquisitions added $2.56 billion in assets, $1.87 billion in loans and $2.04 billion in deposits.

Key developments relating to the Company’s financial results and corporate activities were as follows:

•Loan and Deposit Growth: Total loan growth for the quarter was $116.4 million, reflecting record loan originations of $747.8 million. Deposits increased $75.2 million, as compared to the prior linked quarter.

•Operations: The Company continues to expand its commercial banking activities with the hiring of nine commercial bankers. The additional lenders are expected to help fuel organic loan growth throughout the remainder of the year. Additionally, the Company consolidated four branches in April 2021 bringing the total number of branches consolidated to 57 over the past five years. These consolidations will increase the average branch size to $164 million and will help further offset operating expenses in the second quarter.

•Net Interest Margin: Net interest margin for the quarter was 2.93%, as compared to 2.97% in the prior linked quarter. The total costs of deposits decreased to 0.37% from 0.45%, respectively.

Net income available to common stockholders was $31.7 million, or $0.53 per diluted share, for the quarter ended March 31, 2021 as compared to $16.5 million, or $0.27 per diluted share, for the corresponding prior year period. The dividends paid to preferred stockholders was $1.0 million for the quarter ended March 31, 2021. Net income available to common stockholders for the quarter ended March 31, 2021 included merger related expenses of $381,000, branch consolidation expenses of $1.0 million and net gain on equity investments of $8.3 million.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.95% at March 31, 2021.

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, 2021, will be paid on May 21, 2021 to common stockholders of record on May 10, 2021. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock. This dividend will be paid on May 17, 2021 to preferred stockholders of record on April 30, 2021.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FINANCIAL SUMMARY(1)	At or for the Quarters Ended
(dollars in thousands, except per share amounts)	March 31, 2021			December 31, 2020			March 31, 2020
SELECTED FINANCIAL CONDITION DATA:
Total assets	$	11,577,472		$	11,448,313		$	10,489,074
Loans receivable, net of allowance for loan credit losses	7,820,590			7,704,857			7,913,541
Deposits	9,502,812			9,427,616			7,892,067
Stockholders’ equity	1,498,719			1,484,130			1,409,834
SELECTED OPERATING DATA:
Net interest income	73,604			77,851			79,645
Credit loss (benefit) expense	(620)			4,072			9,969
Other income	20,835			40,620			13,697
Operating expenses	51,683			70,916			62,796
Net income	32,697			33,064			16,533
Net income available to common stockholders	31,693			32,060			16,533
Diluted earnings per share	0.53			0.54			0.27
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period	24.84			24.57			23.38
Cash dividend per share	0.17			0.17			0.17
Dividend payout ratio per common share	32.08		%	31.48		%	62.96		%
Stockholders’ equity to total assets	12.95			12.96			13.44
Return on average assets (2) (3)	1.12			1.09			0.64
Return on average stockholders’ equity (2) (3)	8.59			8.65			4.70
Net interest rate spread (4)	2.78			2.79			3.29
Net interest margin (5)	2.93			2.97			3.52
Operating expenses to average assets (2) (3)	1.83			2.40			2.44
Efficiency ratio (3) (6)	54.73			59.86			67.28
Loan to deposit ratio	82.84			82.27			100.51
ASSET QUALITY:
Non-performing loans	$	34,128		$	36,410		$	16,263
Non-performing assets	34,234			36,516			16,747
Allowance for loan credit losses as a percent of total loans receivable (7) (9)	0.76		%	0.78		%	0.37		%
Allowance for loan credit losses as a percent of total non-performing loans (8) (9)	175.74			166.81			182.22
Non-performing loans as a percent of total loans receivable (7) (8)	0.43			0.47			0.21
Non-performing assets as a percent of total assets (8)	0.30			0.32			0.16

(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.

(2) Ratios are annualized.

(3) Performance ratios include the net gain on equity investments, merger related expenses, and branch consolidation expenses of $6.9 million, or $5.2 million, net of tax expense, for the quarter ended March 31, 2021. Performance ratios include net gain on equity investments, gain on sale of Paycheck Protection Program (“PPP”) loans, Federal Home Loan Bank (“FHLB”) advance prepayment fees, merger related expenses, and branch consolidation expenses of $11.7 million, or $8.9 million, net of tax expense, for the quarter ended December 31, 2020. Performance ratios include merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the Current Expected Credit Loss (“CECL”) model of $13.6 million, or $10.4 million, net of tax benefit, for the quarter ended March 31, 2020.

(4) The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities

(5) The net interest margin represents net interest income as a percentage of average interest-earning assets.

(6) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

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

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(8) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

(9) The loans acquired from prior bank acquisitions were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan credit losses, was $25.7 million, $28.0 million, and $38.3 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

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Impact of COVID-19

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities. The Company offers its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of either December 31, 2019 or the date of the modification. In addition, in keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loans are not considered troubled debt restructured (“TDR”) loans at March 31, 2021 and will not be reported as past due during the deferral period.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which contains provisions that directly impact financial institutions. The Act extends the PPP, which was originally established under the CARES Act, and provides the Company the ability to continue its Borrower Relief Program. In keeping with regulatory guidance under the CARES Act, these loan deferrals are not considered TDR loans at March 31, 2021 and the Company will not report them as past due during the deferral period.

Further, due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value. As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable. The Company will assess the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

The Company also accepted and processed applications for loans under the PPP. At March 31, 2021, $109.7 million in PPP loans and $2.5 million in deferred fees remained on the balance sheet, which include $60.0 million of PPP loan originations during the quarter ended March 31, 2021.

For further discussion, refer to Part I, Item 1A in the December 31, 2020 Form 10-K - Risk Factors - Risk Related to the COVID-19 Pandemic.

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Analysis of Net Interest Income

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

The following tables set forth certain information relating to the Company for the three months ended March 31, 2021 and March 31, 2020. The yields and costs are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields.

	For the Three Months Ended
	March 31, 2021						March 31, 2020
(dollars in thousands)	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments	$	1,138,911	$	277	0.10	%	$	63,726	$	342	2.16	%
Securities (1)	1,311,683		6,689		2.07		1,186,535		7,921		2.68
Loans receivable, net (2)
Commercial	5,127,940		53,670		4.24		4,960,991		59,875		4.85
Residential real estate	2,327,838		20,069		3.45		2,473,410		24,628		3.98
Home equity loans and lines	275,943		3,523		5.18		339,003		4,070		4.83
Other consumer	50,964		646		5.14		87,478		1,371		6.30
Allowance for loan credit losses, net of deferred loan fees	(52,887)		—		—		(10,220)		—		—
Loans receivable, net	7,729,798		77,908		4.09		7,850,662		89,944		4.61
Total interest-earning assets	10,180,392		84,874		3.38		9,100,923		98,207		4.34
Non-interest-earning assets	1,259,109						1,231,886
Total assets	$	11,439,501					$	10,332,809
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking	$	3,711,976	4,311		0.47	%	$	2,807,793	5,132		0.74	%
Money market	757,634		367		0.20		614,062		1,040		0.68
Savings	1,522,603		179		0.05		1,403,338		1,555		0.45
Time deposits	1,221,123		3,639		1.21		1,459,348		6,209		1.71
Total	7,213,336		8,496		0.48		6,284,541		13,936		0.89
Federal Home Loan Bank ("FHLB") advances	—		—		—		631,329		2,824		1.80
Securities sold under agreements to repurchase	129,444		95		0.30		82,105		95		0.47
Other borrowings	228,368		2,679		4.76		118,851		1,707		5.78
Total borrowings	357,812		2,774		3.14		832,285		4,626		2.24
Total interest-bearing liabilities	7,571,148		11,270		0.60		7,116,826		18,562		1.05
Non-interest-bearing deposits	2,212,273						1,687,582
Non-interest-bearing liabilities	160,500						113,477
Total liabilities	9,943,921						8,917,885
Stockholders’ equity	1,495,580						1,414,924
Total liabilities and equity	$	11,439,501					$	10,332,809
Net interest income			$	73,604					$	79,645
Net interest rate spread (3)					2.78	%					3.29	%
Net interest margin (4)					2.93	%					3.52	%
Total cost of deposits (including non-interest-bearing deposits)					0.37	%					0.70	%

(1)Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for securities credit losses.

(2)Amount is net of deferred loan fees and costs, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans.

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

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

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Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Total assets increased $129.2 million, to $11.58 billion at March 31, 2021, from $11.45 billion at December 31, 2020. Cash and due from banks decreased $98.5 million, to $1.17 billion at March 31, 2021, from $1.27 billion at December 31, 2020. Total debt securities increased by $230.3 million at March 31, 2021, as compared to December 31, 2020, which was partly offset by a decrease in equity investments of $56.9 million due to sales. Loans receivable, net of allowance for loan credit losses, increased by $115.7 million, to $7.82 billion at March 31, 2021, from $7.70 billion at December 31, 2020.

Deposits increased $75.2 million, to $9.50 billion at March 31, 2021, from $9.43 billion at December 31, 2020. The loan-to-deposit ratio at March 31, 2021 was 82.8%, as compared to 82.3% at December 31, 2020.

Stockholders’ equity increased to $1.50 billion at March 31, 2021, as compared to $1.48 billion at December 31, 2020. For the quarter ended March 31, 2021, the Company repurchased 500,000 shares under its stock repurchase program at a weighted average cost of $19.94, and there were 1.5 million shares available for repurchase at March 31, 2021 under the existing repurchase program.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and March 31, 2020

General

Net income available to common stockholders was $31.7 million, or $0.53 per diluted share, for the quarter ended March 31, 2021 as compared to $16.5 million, or $0.27 per diluted share, for the corresponding prior year period. The dividend paid to preferred stockholders was $1.0 million for the three months ended March 31, 2021. The current quarter results benefited from the modest release of credit loss expense and improved levels of operating expenses. Net income available to common stockholders for the quarter ended March 31, 2021 included merger related expenses of $381,000, branch consolidation expenses of $1.0 million and net gain on equity investments of $8.3 million. These items increased net income by $5.2 million, net of tax, for the quarter ended March 31, 2021. Net income available to common stockholders for the same prior year period included merger related expenses of $8.5 million, branch consolidation expenses of $2.6 million, and Two River and Country Bank opening credit loss expense under the CECL model of $2.4 million. These items decreased net income by $10.4 million, net of tax, for the quarter ended March 31, 2020.

Interest Income

Interest income for the quarter ended March 31, 2021 decreased to $84.9 million, as compared to $98.2 million in the corresponding prior year period. Average interest-earning assets increased by $1.08 billion for the quarter ended March 31, 2021, as compared to the same prior year period, primarily concentrated in interest-earning deposits. Average loans receivable, net of allowance for loan credit losses, decreased by $120.9 million for the quarter ended March 31, 2021, as compared to the same prior year period. For the quarter ended March 31, 2021, the yield on average interest-earning assets decreased to 3.38% from 4.34% in the corresponding prior year period.

Interest Expense

Interest expense for the quarter ended March 31, 2021 was $11.3 million, as compared to $18.6 million in the corresponding prior year period. Average interest-bearing liabilities increased $454.3 million for the quarter ended March 31, 2021, as compared to the same prior year period. For the quarter ended March 31, 2021, the cost of average interest-bearing liabilities decreased to 0.60%, from 1.05% in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.37% for the quarter ended March 31, 2021, as compared to 0.70% in the same prior year period.

Net Interest Income

Net interest income for the quarter ended March 31, 2021 decreased to $73.6 million, as compared to $79.6 million for the same prior year period, reflecting a reduction in net interest margin, partly offset by an increase in interest-earning assets. The net interest margin for the quarter ended March 31, 2021 decreased to 2.93%, from 3.52% for the same prior year period. The net interest margin compression was primarily due to the excess balance sheet liquidity, driven by a strategic decision to accumulate liquidity entering the economic downturn, the lower interest rate environment, and to a lesser extent, the origination of low-yielding PPP loans.

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Credit Loss (Benefit) Expense

For the quarter ended March 31, 2021, the benefit for credit loss expense was $620,000, as compared to a provision for credit loss expense of $10.0 million for the corresponding prior year period. The benefit for credit loss expense for the quarter was significantly influenced by an improved economic outlook with expectations for strong GDP growth and improved employment levels. Net loan recoveries were $280,000 for the quarter ended March 31, 2021, as compared to net loan charge-offs of $1.2 million for the corresponding prior year period. Non-performing loans totaled $34.1 million at March 31, 2021, as compared to $16.3 million at March 31, 2020.

Other Income

For the quarter ended March 31, 2021, other income increased to $20.8 million as compared to $13.7 million for the corresponding prior year period. Other income for the quarter ended March 31, 2021 included $8.3 million of net gain on equity investments. The net gain on equity investments was primarily a result of several programs implemented by the Company in 2020 to invest excess liquidity in high quality equity securities with attractive dividend yields which were sold in January 2021. The remaining items in other income decreased by $1.1 million for the quarter ended March 31, 2021, as compared to the corresponding prior year period, was primarily due to decreases in commercial loan swap income of $2.9 million and fees and service charges of $1.1 million, partially offset by an increase in gain on sale of loans of $1.7 million, and referral fees of $662,000 related to the origination of PPP loans.

Operating Expenses

Operating expenses decreased to $51.7 million for the quarter ended March 31, 2021, as compared to $62.8 million in the same prior year period. Operating expenses for the quarter ended March 31, 2021 included $1.4 million of merger related and branch consolidation expenses, as compared to $11.1 million in the same prior year period. Excluding the impact of merger related and branch consolidation expenses, the $1.4 million decrease in operating expenses for the quarter ended March 31, 2021 was primarily due to decreases in compensation and benefits expense of $1.5 million and occupancy and equipment of $580,000, partially offset by an increase in federal deposit insurance expense of $1.2 million.

Provision for Income Taxes

The provision for income taxes was $10.7 million for the quarter ended March 31, 2021, as compared to $4.0 million for the same prior year period. The effective tax rate was 24.6% for the quarter ended March 31, 2021, as compared to 19.7% for the same prior year period. The higher effective tax rate for the current year period, as compared to the prior year period, is primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances, access to the Federal Reserve discount window, other borrowings, including subordinated debt, and to a lesser extent, investment maturities and proceeds from the sale of loans. While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple banks.

At March 31, 2021 and December 31, 2020, the Bank had no outstanding overnight borrowings from the FHLB. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. There were no FHLB advances at March 31, 2021 and December 31, 2020.

The Company’s cash needs for the quarter ended March 31, 2021 were primarily satisfied by the sale of equity investments, an increase in deposits, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities and loan originations. The Company’s cash needs for the three months ended March 31, 2020 were primarily satisfied by the net proceeds from FHLB advances, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, and acquired cash from acquisitions. The cash was principally utilized for loan originations, to fund short-term borrowing maturities, to fund deposit outflows, and repurchase of stock.

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, 2021, outstanding commitments to originate loans totaled $344.3 million and outstanding undrawn lines of credit totaled $1.10 billion, of which $725.8 million were commitments to commercial borrowers

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and $377.7 million were commitments to consumer borrowers and residential construction borrowers. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $745.3 million at March 31, 2021. Based upon historical experience, management is optimistic about its ability to retain a significant portion of its maturing time deposits.

The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios. In response to COVID-19, management identified additional sources of contingent liquidity, including expanded borrowing capacity with the FHLB, the Federal Reserve and existing correspondent bank relationships. The Company strengthened balance sheet liquidity entering the economic downturn.

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. The Company determined to recommence repurchases under its existing stock repurchase plan in February 2021. For the quarter ended March 31, 2021, the Company repurchased 500,000 shares of common stock. At March 31, 2021, there were 1,519,145 shares available to be repurchased under the stock repurchase program authorized in December of 2019.

Cash dividends on common stock declared and paid during the first three months of March 31, 2021 were $10.2 million, as compared to $10.3 million for the same prior year period. On April 29, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share. The dividend is payable on May 21, 2021 to common stockholders of record at the close of business on May 10, 2021.

Cash dividends on preferred stock declared and paid during the first three months of March 31, 2021 were $1.0 million. The Company 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 17, 2021 to preferred stockholders of record on April 30, 2021.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding Company of OceanFirst Bank, are capital distributions from the Bank, the issuance of preferred and common stock, and debt. For the three months ended March 31, 2021, the Company received a dividend payment of $10.0 million from the Bank. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders. At March 31, 2021, OceanFirst Financial Corp. held $164.5 million in cash.

As of March 31, 2021 and December 31, 2020, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):

	Actual				For capital adequacy purposes					To be well-capitalized under prompt corrective action
As of March 31, 2021	Amount		Ratio		Amount		Ratio			Amount		Ratio
Bank:
Tier 1 capital (to average assets)	$	968,486	8.90	%	$	435,143	4.00	%		$	543,929	5.00	%
Common equity Tier 1 (to risk-weighted assets)	968,486		12.09		560,545		7.00		(1)	520,506		6.50
Tier 1 capital (to risk-weighted assets)	968,486		12.09		680,662		8.50		(1)	640,623		8.00
Total capital (to risk-weighted assets)	1,029,255		12.85		840,818		10.50		(1)	800,779		10.00
Company:
Tier 1 capital (to average assets)	$	1,019,971	9.86	%	$	413,609	4.00	%		N/A		N/A
Common equity Tier 1 (to risk-weighted assets)	893,043		11.09		563,570		7.00		(1)	N/A		N/A
Tier 1 capital (to risk-weighted assets)	1,019,971		12.67		684,334		8.50		(1)	N/A		N/A
Total capital (to risk-weighted assets)	1,244,228		15.45		845,354		10.50		(1)	N/A		N/A

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	Actual				For capital adequacy purposes					To be well-capitalized under prompt corrective action
As of December 31, 2020	Amount		Ratio		Amount		Ratio			Amount		Ratio
Bank:
Tier 1 capital (to average assets)	$	942,122	8.48	%	$	444,648	4.00	%		$	555,810	5.00	%
Common equity Tier 1 (to risk-weighted assets)	942,122		12.11		544,625		7.00		(1)	505,724		6.50
Tier 1 capital (to risk-weighted assets)	942,122		12.11		661,331		8.50		(1)	622,429		8.00
Total capital (to risk-weighted assets)	1,004,480		12.91		816,938		10.50		(1)	778,036		10.00
Company:
Tier 1 capital (to average assets)	$	998,273	9.44	%	$	423,028	4.00	%		N/A		N/A
Common equity Tier 1 (to risk-weighted assets)	871,385		11.05		552,075		7.00		(1)	N/A		N/A
Tier 1 capital (to risk-weighted assets)	998,273		12.66		670,377		8.50		(1)	N/A		N/A
Total capital (to risk-weighted assets)	1,230,370		15.60		828,113		10.50		(1)	N/A		N/A

(1)Includes the Capital Conservation Buffer of 2.50%.

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

At March 31, 2021 and December 31, 2020, the Company maintained a stockholders’ equity to total assets ratio of 12.95% and 12.96%, respectively.

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Off-Balance-Sheet Arrangements and Contractual Obligations

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. 

The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated to repurchase loans previously sold under certain circumstances under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. As a result of the COVID-19 pandemic, some of these loans were placed on forbearance and the Company may be required to repurchase them in future periods. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At each of March 31, 2021 and December 31, 2020, the reserve for repurchased loans and loss sharing obligations was $1.2 million.

The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2021 (in thousands):

Contractual Obligations	Total		Less than One Year		More than 1 year to 3 years		More than 3 years to 5 years		More than 5 years
Debt obligations	$	362,641	$	134,663	$	431	$	483	$	227,064
Commitments to fund undrawn lines of credit
Commercial	725,835		725,835		—		—		—
Consumer/construction	377,656		377,656		—		—		—
Commitments to originate loans	344,329		344,329		—		—		—

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

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Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans and other real estate owned. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Non-performing loans:
Commercial and industrial	$	1,616		$	1,551
Commercial real estate – owner occupied	11,676			13,054
Commercial real estate – investor	12,366			10,660
Residential real estate	6,398			8,642
Home equity loans and lines	2,072			2,503
Total non-performing loans	34,128			36,410
Other real estate owned	106			106
Total non-performing assets	$	34,234		$	36,516
Purchased with credit deterioration (“PCD”) loans (1)	$	44,421		$	48,488
Delinquent loans 30-89 days	$	16,477		$	34,683
Allowance for loan credit losses as a percent of total loans	0.76		%	0.78		%
Allowance for loan credit losses as a percent of total non-performing loans	175.74			166.81
Non-performing loans as a percent of total loans	0.43			0.47
Non-performing assets as a percent of total assets	0.30			0.32

(1)     PCD loans are not included in non-performing loans or delinquent loans totals.

The Company’s non-performing loans totaled $34.1 million at March 31, 2021, as compared to $36.4 million at December 31, 2020. Included in the non-performing loans total was $4.8 million and $5.2 million of TDR loans at March 31, 2021 and December 31, 2020, respectively. Non-performing loans do not include $44.4 million and $48.5 million of acquired PCD loans at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, the allowance for loan credit losses totaled $60.0 million, or 0.76% of total loans, as compared to $60.7 million, or 0.78% of total loans at December 31, 2020. These ratios exclude existing unamortized credit and PCD marks on acquired loans of $25.7 million and $28.0 million at March 31, 2021 and December 31, 2020, respectively. 

In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. For principal and interest deferrals as well as principal only deferrals, all payments received will first be applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at March 31, 2021 and will not be reported as past due during the deferral period.

The Company classifies loans and other assets in accordance with regulatory guidelines. The table below excludes any loans held-for-sale (in thousands):

	March 31, 2021		December 31, 2020
Special Mention	$	150,221	$	165,843
Substandard	189,087		194,477

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

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Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is the most critical accounting policy because it is important to the presentation of the Company’s financial condition and results of operations. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.

The Company’s ability to predict results or the actual effect of plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed in the Company’s 2020 Form 10-K under Item 1A - Risk Factors, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission (the “SEC”) and elsewhere therein and the following: changes in interest rates, general economic conditions, public health crises (such as the governmental, social and economic effects of the novel coronavirus), levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, increased defaults as a result of economic disruptions caused by the novel coronavirus, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes (particularly with respect to the novel coronavirus), monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and Board of Governors of the Federal Reserve System (the “FRB”), the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated, the timing of inoculation against the virus and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: the demand for the Bank’s products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; the Company’s allowance for loan 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 FDIC premiums may increase if the agency experiences additional resolution costs.

These risks and uncertainties are further discussed in the Company’s 2020 Form 10-K under Item 1A - Risk Factors and elsewhere therein and in 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.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of interest rate risk (“IRR”) modeling. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2021, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At March 31, 2021, the Company’s one-year gap was positive 22.82% as compared to positive 18.05% at December 31, 2020.

At March 31, 2021	3 Months or Less			More than 3 Months to 1 Year			More than 1 Year to 3 Years			More than 3 Years to 5 Years			More than 5 Years			Total
(dollars in thousands)
Interest-earning assets: (1)
Interest-earning deposits and short-term investments	$	892,817		$	935		$	2,425		$	—		$	—		$	896,177
Debt securities	260,294			193,546			378,665			229,376			291,219			1,353,100
Equity investments	—			—			—			—			50,159			50,159
Restricted equity investments	—			—			—			—			52,199			52,199
Loans receivable (2)	2,086,681			1,789,639			2,357,314			1,024,286			657,792			7,915,712
Total interest-earning assets	3,239,792			1,984,120			2,738,404			1,253,662			1,051,369			10,267,347
Interest-bearing liabilities:
Interest-bearing checking accounts	1,325,348			169,565			433,608			359,164			1,335,447			3,623,132
Money market deposit accounts	74,189			54,688			128,083			104,901			420,598			782,459
Savings accounts	159,727			114,349			293,030			238,336			763,086			1,568,528
Time deposits	255,552			489,599			304,466			46,312			14,829			1,110,758
FHLB advances	—			—			—			—			—			—
Securities sold under agreements to repurchase and other borrowings	238,080			198			431			122,991			941			362,641
Total interest-bearing liabilities	2,052,896			828,399			1,159,618			871,704			2,534,901			7,447,518
Interest sensitivity gap (3)	$	1,186,896		$	1,155,721		$	1,578,786		$	381,958		$	(1,483,532)		$	2,819,829
Cumulative interest sensitivity gap	$	1,186,896		$	2,342,617		$	3,921,403		$	4,303,361		$	2,819,829		$	2,819,829
Cumulative interest sensitivity gap as a percent of total interest-earning assets	11.56		%	22.82		%	38.19		%	41.91		%	27.46		%	27.46		%

(1)Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.

(2)For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan credit losses unamortized discounts and deferred loan fees.

(3)Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

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Additionally, the table below sets forth the Company’s exposure to IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of March 31, 2021 and December 31, 2020. All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2020 Form 10-K.

	March 31, 2021										December 31, 2020
Change in Interest Rates in Basis Points (Rate Shock)	Economic Value of Equity						Net Interest Income				Economic Value of Equity						Net Interest Income
	Amount		% Change		EVE Ratio		Amount		% Change		Amount		% Change		EVE Ratio		Amount		% Change
(dollars in thousands)
300	$	2,135,781	31.6	%	19.4	%	$	345,402	17.1	%	$	1,890,335	38.5	%	17.3	%	$	340,098	16.2	%
200	2,000,867		23.2		17.9		329,626		11.7		1,752,255		28.4		15.7		325,436		11.2
100	1,831,006		12.8		16.1		312,951		6.1		1,578,917		15.7		13.9		309,644		5.8
Static	1,623,437		—		14.0		294,985		—		1,365,119		—		11.8		292,572		—
(100)	1,336,840		(17.7)		11.4		281,029		(4.7)		1,074,346		(21.3)		9.2		284,763		(2.7)

The interest rate sensitivity at March 31, 2021 and December 31, 2020, continue to be impacted by the loan and debt securities portfolio growth as well as a cash liquidity position that remains elevated.

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, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share amounts)

	March 31, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	1,173,665	$	1,272,134
Debt securities available-for-sale, at estimated fair value	268,511		183,302
Debt securities held-to-maturity, net of allowance for securities credit losses of $1,717 at March 31, 2021 and $1,715 at December 31, 2020 (estimated fair value of $1,099,745 at March 31, 2021 and $968,466 at December 31, 2020)	1,082,326		937,253
Equity investments, at estimated fair value	50,159		107,079
Restricted equity investments, at cost	52,199		51,705
Loans receivable, net of allowance for loan credit losses of $59,976 at March 31, 2021 and $60,735 at December 31, 2020	7,820,590		7,704,857
Loans held-for-sale	43,175		45,524
Interest and dividends receivable	32,819		35,269
Other real estate owned	106		106
Premises and equipment, net	110,093		107,094
Bank owned life insurance	264,548		265,253
Assets held for sale	5,340		5,782
Goodwill	500,319		500,319
Core deposit intangible	22,273		23,668
Other assets	151,349		208,968
Total assets	$	11,577,472	$	11,448,313
Liabilities and Stockholders’ Equity
Deposits	$	9,502,812	$	9,427,616
Securities sold under agreements to repurchase with retail customers	134,465		128,454
Other borrowings	228,176		235,471
Advances by borrowers for taxes and insurance	20,980		17,296
Other liabilities	192,320		155,346
Total liabilities	10,078,753		9,964,183
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, 2021 and December 31, 2020	1		1
Common stock, $0.01 par value, 150,000,000 shares authorized, 61,478,355 and 61,040,894 shares issued at March 31, 2021 and December 31, 2020, respectively; and 60,329,504 and 60,392,043 shares outstanding at March 31, 2021 and December 31, 2020, respectively	610		609
Additional paid-in capital	1,142,290		1,137,715
Retained earnings	398,280		378,268
Accumulated other comprehensive income	312		621
Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")	(7,129)		(7,433)
Treasury stock, 1,148,851 and 648,851 shares at March 31, 2021 and December 31, 2020, respectively	(35,645)		(25,651)
Total stockholders’ equity	1,498,719		1,484,130
Total liabilities and stockholders’ equity	$	11,577,472	$	11,448,313

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

	For the Three Months Ended March 31,
	2021		2020
	(Unaudited)
Interest income:
Loans	$	77,908	$	89,944
Debt securities	5,355		6,772
Equity investments and other	1,611		1,491
Total interest income	84,874		98,207
Interest expense:
Deposits	8,496		13,936
Borrowed funds	2,774		4,626
Total interest expense	11,270		18,562
Net interest income	73,604		79,645
Credit loss (benefit) expense	(620)		9,969
Net interest income after credit loss (benefit) expense	74,224		69,676
Other income:
Bankcard services revenue	3,052		2,481
Trust and asset management revenue	599		515
Fees and service charges	3,737		4,873
Net gain on sales of loans	1,916		173
Net gain on equity investments	8,287		155
Net loss from other real estate operations	(8)		(150)
Income from bank owned life insurance	1,415		1,575
Commercial loan swap income	1,111		4,050
Other	726		25
Total other income	20,835		13,697
Operating expenses:
Compensation and employee benefits	28,366		29,885
Occupancy	5,061		5,276
Equipment	1,578		1,943
Marketing	434		769
Federal deposit insurance and regulatory assessments	1,864		667
Data processing	4,031		4,177
Check card processing	1,372		1,276
Professional fees	2,837		2,302
Other operating expense	3,353		3,802
Amortization of core deposit intangible	1,395		1,578
Branch consolidation expense	1,011		2,594
Merger related expenses	381		8,527
Total operating expenses	51,683		62,796
Income before provision for income taxes	43,376		20,577
Provision for income taxes	10,679		4,044
Net income	32,697		16,533
Dividends on preferred shares	1,004		—
Net income available to common stockholders	$	31,693	$	16,533
Basic earnings per share	$	0.53	$	0.28
Diluted earnings per share	$	0.53	$	0.27
Average basic shares outstanding	59,840		59,876
Average diluted shares outstanding	60,101		60,479

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	For the Three Months Ended March 31,
	2021		2020
	(Unaudited)
Net income	$	32,697	$	16,533
Other comprehensive (loss) income:
Unrealized (loss) gain on debt securities (net of tax benefit of $112 in 2021 and net tax expense of $586 in 2020)	(416)		2,149
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $73 in 2021 and $84 in 2020)	107		115
Reclassification adjustment for gains included in net income (net of tax benefit of $173 in 2020)	—		(547)
Total other comprehensive (loss) income	(309)		1,717
Total comprehensive income	32,388		18,250
Less: Dividends on preferred shares	1,004		—
Comprehensive income available to common stockholders	$	31,384	$	18,250

See accompanying Notes to Unaudited Consolidated Financial Statements.

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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, 2021 and March 31, 2020

	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Employee Stock Ownership Plan		Treasury Stock		Total
Balance at Balance at December 31, 2019	$	—	$	519	$	840,691	$	358,668	$	(1,208)	$	(8,648)	$	(36,903)	$	1,153,119
Net income	—		—		—		16,533		—		—		—		16,533
Other comprehensive income, net of tax	—		—		—		—		1,717		—		—		1,717
Stock compensation	—		2		1,106		—		—		—		—		1,108
Effect of adopting Accounting Standards Update(“ASU”) No. 2016-13	—		—		—		(4)		—		—		—		(4)
Allocation of ESOP stock	—		—		43		—		—		304		—		347
Cash dividend $0.17 per share	—		—		—		(10,274)		—		—		—		(10,274)
Exercise of stock options	—		2		1,305		(650)		—		—		—		657
Purchase 648,851 shares of common stock	—		—		—		—		—		—		(14,814)		(14,814)
Acquisition of Two River Bancorp	—		42		122,501		—		—		—		26,066		148,609
Acquisition of Country Bank Holding Company, Inc.	—		44		112,792		—		—		—		—		112,836
Balance at March 31, 2020	$	—	$	609	$	1,078,438	$	364,273	$	509	$	(8,344)	$	(25,651)	$	1,409,834
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
Purchase 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

See accompanying Notes to Unaudited Consolidated Financial Statements.

20

Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

	For the Three Months Ended March 31,
	2021		2020
	(Unaudited)
Cash flows from operating activities:
Net income	$	32,697	$	16,533
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	2,064		2,126
Allocation of ESOP stock	352		347
Stock compensation	1,237		1,108
Net excess tax expense (benefit) on stock compensation	90		(299)
Amortization of servicing asset	25		12
Net premium amortization in excess of discount accretion on securities	1,467		842
Net amortization of deferred costs on borrowings	212		63
Amortization of core deposit intangible	1,395		1,578
Net accretion of purchase accounting adjustments	(3,804)		(5,637)
Net amortization of deferred costs and discounts on loans	437		40
(Benefit) provision for credit losses	(620)		9,969
Net gain on sale and write-down of other real estate owned	—		(2)
Net write down of fixed assets held-for-sale to net realizable value	427		—
Net gain on equity securities	(8,287)		(155)
Net gain on sales of loans	(1,916)		(173)
Proceeds from sales of residential loans held for sale	69,416		7,673
Mortgage loans originated for sale	(65,151)		(25,282)
Increase in value of bank owned life insurance	(1,415)		(1,575)
Net loss on sale of assets held for sale	22		—
Decrease (increase) in interest and dividends receivable	2,450		(2,095)
Deferred tax (benefit) provision	(57)		245
Decrease in other assets	27,442		10,877
(Decrease) increase in other liabilities	(21,610)		47,501
Total adjustments	4,176		47,163
Net cash provided by operating activities	36,873		63,696
Cash flows from investing activities:
Net increase in loans receivable	(111,302)		(160,211)
Proceeds from sale of loans	—		9,313
Purchase of debt securities available-for-sale	(100,921)		(9,980)
Purchase of debt securities held-to-maturity	(178,316)		—
Purchase of equity investments	(10,575)		(36)
Proceeds from sale of equity investments	99,060		—
Proceeds from maturities and calls of debt securities available-for-sale	22,850		10,223
Proceeds from maturities and calls of debt securities held-to-maturity	6,565		13,001
Proceeds from sales of debt securities available-for-sale	—		5,869
Principal repayments on debt securities available-for-sale	46		—
Principal repayments on debt securities held-to-maturity	52,371		35,401
Proceeds from bank owned life insurance	2,120		155
Proceeds from the redemption of restricted equity investments	344		36,581
Purchases of restricted equity investments	(485)		(47,216)
Proceeds from sales of other real estate owned	—		89
Proceeds from sales of assets held-for-sale	420		—
Purchases of premises and equipment	(5,336)		(1,798)
Net cash consideration received for acquisition	—		23,460
Net cash used in investing activities	(223,159)		(85,149)

21

Table of Contents

Continued

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

	For the Three Months Ended March 31,
	2021		2020
	(Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposits	$	75,694	$	(29,963)
Increase (decrease) in short-term borrowings	6,011		(50,297)
Proceeds from Federal Home Loan Bank advances	—		460,000
Repayments of Federal Home Loan Bank advances	—		(162,700)
Repayments of other borrowings	(7,529)		(27)
Increase in advances by borrowers for taxes and insurance	3,684		4,832
Exercise of stock options	1,762		657
Payment of employee taxes withheld from stock awards	(1,094)		(1,972)
Purchase of treasury stock	(9,994)		(14,814)
Dividends paid	(11,156)		(10,274)
Net cash provided by financing activities	57,378		195,442
Net (decrease) increase in cash and due from banks and restricted cash	(128,908)		173,989
Cash and due from banks and restricted cash at beginning of period	1,318,661		133,226
Cash and due from banks and restricted cash at end of period	$	1,189,753	$	307,215
Supplemental Disclosure of Cash Flow Information:
Cash and due from banks at beginning of period	$	1,272,134	$	120,544
Restricted cash at beginning of period	46,527		12,682
Cash and due from banks and restricted cash at beginning of period	$	1,318,661	$	133,226
Cash and due from banks at end of period	$	1,173,665	$	256,470
Restricted cash at end of period	16,088		50,745
Cash and due from banks and restricted cash at end of period	$	1,189,753	$	307,215
Cash paid during the period for:
Interest	$	10,376	$	19,293
Income taxes	568		—
Non-cash activities:
Accretion of unrealized loss on securities reclassified to held-to-maturity	180		199
Net loan (recoveries) charge-offs	(280)		1,154
Transfer of loans receivable to other real estate owned	—		106
Acquisition:
Non-cash assets acquired:
Securities	$	—	$	208,880
Restricted equity investments	—		5,334
Loans	—		1,559,497
Premises and equipment	—		9,744
Accrued interest receivable	—		4,161
Bank owned life insurance	—		22,440
Deferred tax asset	—		(800)
Other assets	—		10,077
Goodwill and other intangible assets, net	—		139,275
Total non-cash assets acquired	$	—	$	1,958,608
Liabilities assumed:
Deposits	$	—	$	1,594,403
Borrowings	—		92,618
Other liabilities	—		33,602
Total liabilities assumed	$	—	$	1,720,623

See accompanying Notes to Unaudited Consolidated Financial Statements.

22

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. Certain other subsidiaries were dissolved in 2020 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts previously reported have been reclassified to conform to the current year’s presentation.

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, 2021 are not necessarily indicative of the results of operations that may be expected for the full year 2021 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, 2020.

23

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 2. Business Combinations

Two River Bancorp Acquisition

On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which after purchase accounting adjustments added $1.11 billion to assets, $940.1 million to loans, and $941.8 million to deposits. Total consideration paid for Two River was $197.1 million, including cash consideration of $48.4 million. Two River was merged with and into the Company on the date of acquisition.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of total consideration paid (in thousands):

	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	197,050
Assets acquired:
Cash and cash equivalents		$	51,102
Securities		64,381
Loans		940,072
Accrued interest receivable		2,382
Bank owned life insurance		22,440
Deferred tax asset		3,158
Other assets		15,956
Core deposit intangible		12,130
Total assets acquired		1,111,621
Liabilities assumed:
Deposits		(941,750)
Other liabilities		(59,026)
Total liabilities assumed		(1,000,776)
Net assets acquired		$	110,845
Goodwill recorded in the merger		$	86,205

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

24

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Country Bank Holding Company, Inc. Acquisition

On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits. Total consideration paid for Country Bank was $112.8 million. Country Bank was merged with and into the Company on the date of acquisition.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands):

	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	112,836
Assets acquired:
Cash and cash equivalents		$	20,799
Securities		144,499
Loans		618,408
Accrued interest receivable		1,779
Deferred tax asset		(3,117)
Other assets		9,195
Core deposit intangible		2,117
Total assets acquired		793,680
Liabilities assumed:
Deposits		(652,653)
Other liabilities		(67,240)
Total liabilities assumed		(719,893)
Net assets acquired		$	73,787
Goodwill recorded in the merger		$	39,049

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

Fair Value Measurement of Assets Assumed and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Two River and Country Bank acquisitions were as follows. Refer to Note 7, Fair Value Measurements, for a discussion of the fair value hierarchy.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

Loans

The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.

25

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.

The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank or historical loss experiences of peer groups where deemed appropriate. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process. 

To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company identified loans that have experienced more-than-insignificant deterioration in credit quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Premises and Equipment

Fair values are based upon appraisals from independent third parties. In addition to owned properties, Two River operated 14 properties and Country Bank operated five properties, subject to lease agreements.

Deposits and Core Deposit Premium

Core deposit premium represents the value assigned to non-interest-bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs. The core deposit premium totaled $12.1 million, and $2.1 million, for the acquisitions of Two River and Country Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years using an accelerated method.

Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.

Borrowings

Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

26

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 3. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2021 and March 31, 2020 (in thousands):

	Three Months Ended March 31,
	2021	2020
Weighted average shares outstanding	60,300	60,362
Less: Unallocated ESOP shares	(386)	(460)
Unallocated incentive award shares	(74)	(26)
Average basic shares outstanding	59,840	59,876
Add: Effect of dilutive securities:
Incentive awards	261	603
Average diluted shares outstanding	60,101	60,479

For the three months ended March 31, 2021 and 2020, antidilutive stock options of 1,672,000 and 1,033,000, respectively, were excluded from earnings per share calculations.

27

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 4. 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, 2021 and December 31, 2020 are as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
At March 31, 2021
Debt securities available-for-sale:
U.S. government and agency obligations	$	169,337	$	2,570	$	(8)	$	171,899	$	—
Collateralized loan obligations (“CLOs”)	96,410		96		(40)		96,466		—
Mortgage-backed securities - FNMA	144		2		—		146		—
Total debt securities available-for-sale	$	265,891	$	2,668	$	(48)	$	268,511	$	—
Debt securities held-to-maturity:
State, municipal and sovereign debt obligations	278,179		7,043		(1,106)		284,116		(90)
Corporate debt securities	72,821		1,542		(1,912)		72,451		(1,511)
Mortgage-backed securities:
FHLMC	303,539		4,256		(3,178)		304,617		—
FNMA	335,307		5,978		(2,481)		338,804		—
GNMA	59,904		1,614		(23)		61,495		—
SBA	5,190		—		(58)		5,132		—
Other	32,269		861		—		33,130		(116)
Total mortgage-backed securities	736,209		12,709		(5,740)		743,178		(116)
Total debt securities held-to-maturity	$	1,087,209	$	21,294	$	(8,758)	$	1,099,745	$	(1,717)
Total debt securities	$	1,353,100	$	23,962	$	(8,806)	$	1,368,256	$	(1,717)

28

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
At December 31, 2020
Debt securities available-for-sale:
U.S. government and agency obligations	$	173,790	$	3,152	$	(2)	$	176,940	$	—
CLOs	6,174		—		(4)		6,170		—
Mortgage-backed securities - FNMA	190		2		—		192		—
Total debt securities available-for-sale	$	180,154	$	3,154	$	(6)	$	183,302	$	—
Debt securities held-to-maturity:
State and municipal obligations	238,405		11,500		(231)		249,674		(48)
Corporate debt securities	72,305		1,615		(2,652)		71,268		(1,550)
Mortgage-backed securities:
FHLMC	232,942		5,383		(124)		238,201
FNMA	293,615		7,640		(147)		301,108
GNMA	67,334		2,014		(12)		69,336
SBA	5,392		—		(60)		5,332
Other	32,321		1,226		—		33,547		(117)
Total mortgage-backed securities	631,604		16,263		(343)		647,524		(117)
Total debt securities held-to-maturity	$	942,314	$	29,378	$	(3,226)	$	968,466	$	(1,715)
Total debt securities	$	1,122,468	$	32,532	$	(3,232)	$	1,151,768	$	(1,715)

There was no allowance for securities credit losses on debt securities available-for-sale at March 31, 2021 and December 31, 2020.

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, 2021 and March 31, 2020 (in thousands):

	Three Months Ended March 31,
	2021		2020
Allowance for credit losses
Beginning balance	$	(1,715)	$	—
Impact of CECL adoption	—		(1,268)
Provision for credit loss expense	(2)		(1,261)
Total ending allowance balance	$	(1,717)	$	(2,529)

During 2013, the Bank transferred $536.0 million 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 $13.3 million at the time of transfer, which continues to be reflected in accumulated other comprehensive income 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, 2021 and December 31, 2020 is as follows (in thousands): 

	March 31, 2021		December 31, 2020
Amortized cost	$	1,087,209	$	942,314
Net loss on date of transfer from available-for-sale	(13,347)		(13,347)
Allowance for securities credit loss	(1,717)		(1,715)
Accretion of net unrealized loss on securities reclassified as held-to-maturity	10,181		10,001
Carrying value	$	1,082,326	$	937,253

There were no realized gains or losses on debt securities for the three months ended March 31, 2021 and 2020.

29

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

The amortized cost and estimated fair value of debt securities at March 31, 2021 by contractual maturity are shown below (in thousands). 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, 2021, corporate debt securities with an amortized cost of $54.3 million, and estimated fair value of $54.0 million, and CLOs with an amortized cost of $96.4 million, and estimated fair value of $96.5 million, were callable prior to the maturity date.

March 31, 2021	Amortized Cost		Estimated Fair Value
Less than one year	$	105,213	$	105,784
Due after one year through five years	189,783		194,363
Due after five years through ten years	164,010		162,249
Due after ten years	157,741		162,536
	$	616,747	$	624,932

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 as required security for deposits and for other purposes required by law amounted to $533.0 million and $435.9 million at March 31, 2021 and December 31, 2020, respectively, which includes $147.0 million and $152.7 million at March 31, 2021 and December 31, 2020, respectively, pledged as collateral for securities sold under agreements to repurchase.

At March 31, 2021, there were no holdings of securities of any one issuer, other than the US government and its agencies and government-sponsored enterprises, in an amount greater than 10% of stockholders’ equity.

30

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at March 31, 2021 and December 31, 2020, segregated by the duration of the unrealized losses, are as follows (in thousands):

	At March 31, 2021
	Less than 12 months				12 months or longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Debt securities available-for-sale:
U.S. government and agency obligations	$	10,139	$	(8)	$	—	$	—	$	10,139	$	(8)
CLOs	47,053		(40)		—		—		47,053		(40)
Total debt securities available-for-sale	57,192		(48)		—		—		57,192		(48)
Debt securities held-to-maturity:
State, municipal and sovereign debt obligations	$	50,696	$	(890)	$	5,748	$	(216)	$	56,444	$	(1,106)
Corporate debt securities	39,041		(1,774)		3,818		(138)		42,859		(1,912)
Mortgage-backed securities:
FHLMC	158,632		(3,178)		—		—		158,632		(3,178)
FNMA	163,103		(2,478)		293		(3)		163,396		(2,481)
GNMA	6,104		(23)		—		—		6,104		(23)
SBA	2,015		(48)		3,116		(10)		5,131		(58)
Total mortgage-backed securities	329,854		(5,727)		3,409		(13)		333,263		(5,740)
Total debt securities held-to-maturity	419,591		(8,391)		12,975		(367)		432,566		(8,758)
Total debt securities	$	476,783	$	(8,439)	$	12,975	$	(367)	$	489,758	$	(8,806)
	At December 31, 2020
	Less than 12 months				12 months or longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Debt securities available-for-sale:
U.S. government and agency obligations	$	17,029	$	(2)	$	—	$	—	$	17,029	$	(2)
CLOs	4,766		(4)		—		—		4,766		(4)
Total debt securities available-for-sale	21,795		(6)		—		—		21,795		(6)
Debt securities held-to-maturity:
State and municipal obligations	2,823		(23)		7,509		(208)		10,332		(231)
Corporate debt securities	10,192		(255)		35,935		(2,397)		46,127		(2,652)
Mortgage-backed securities:
FHLMC	24,661		(117)		669		(7)		25,330		(124)
FNMA	39,365		(128)		939		(19)		40,304		(147)
GNMA	5,856		(11)		207		(1)		6,063		(12)
SBA	3,626		(12)		1,706		(48)		5,332		(60)
Total mortgage-backed securities	73,508		(268)		3,521		(75)		77,029		(343)
Total debt securities held-to-maturity	86,523		(546)		46,965		(2,680)		133,488		(3,226)
Total debt securities	$	108,318	$	(552)	$	46,965	$	(2,680)	$	155,283	$	(3,232)

31

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

The Company concluded that the corporate debt securities were not impaired at March 31, 2021 and the Company considered several factors in its analysis. 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 Company does not intend to sell these corporate debt securities and it is more likely than not that the Company will not be required to sell the securities. Historically, the Company has not utilized securities sales as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.

The mortgage-backed securities are issued and guaranteed by either FHLMC, FNMA, GNMA, or SBA, corporations which are chartered by the United States Government and whose debt obligations are rated AA+/Aaa by S&P and Moody’s, respectively. Additionally, there are private label commercial mortgage-backed securities with credit ratings ranging between Aaa and Aa2. The Company considers the unrealized losses to be the result of changes in interest rates, and not credit quality, which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were not impaired at March 31, 2021.

State, municipal, and sovereign debt obligations are securities issued by state, local and national governments for various purposes. The Company is not aware of any information subsequent to the purchase of any state, municipal, and sovereign debt obligations that indicates an inability on the part of an issuer to meet all of its financial commitments. The weighted average credit rating of these securities is Aa/AA with no credit rating below Baa2/BBB. The Company has the ability and stated intention to hold these securities to maturity at which time the Company expects to receive full repayment. Current unrealized losses are considered to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the securities. As a result, the Company concluded that these securities were not impaired as of March 31, 2021.

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. The following table summarized the amortized cost of debt securities held-to-maturity at March 31, 2021, aggregated by credit quality indicator (in thousands):

	AAA		AA		A		BBB		BB		Total
As of March 31, 2021
State, municipal and sovereign debt obligations	$	33,421	$	138,734	$	72,959	$	33,065	$	—	$	278,179
Corporate debt securities	—		497		11,995		48,995		11,334		72,821
Mortgage-backed securities - Other	11,111		21,158		—		—		—		32,269
Total debt securities held-to-maturity	$	44,532	$	160,389	$	84,954	$	82,060	$	11,334	$	383,269

Equity investments

At March 31, 2021 and December 31, 2020, the Company held equity investments at an estimated fair value of $50.2 million and $107.1 million, respectively. The equity investments primarily comprised of select financial services institutions’ common and preferred stocks paying attractive dividends.

The realized and unrealized gains or losses on equity securities for the three months ended March 31, 2021 and March 31, 2020 are shown in the table below (in thousands):

	Three Months Ended March 31,
	2021		2020
Net gain on equity investments	$	8,287	$	155
Less: Net gains recognized on equity securities sold	8,123		—
Unrealized gain recognized on equity securities still held	$	164	$	155

32

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 5. Loans Receivable, Net

Loans receivable, net at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):

	March 31, 2021		December 31, 2020
Commercial:
Commercial and industrial (1)	$	498,245	$	470,656
Commercial real estate – owner occupied	1,066,351		1,145,065
Commercial real estate – investor	3,804,351		3,491,464
Total commercial	5,368,947		5,107,185
Consumer:
Residential real estate	2,189,348		2,309,459
Home equity loans and lines	267,591		285,016
Other consumer	46,651		54,446
Total consumer	2,503,590		2,648,921
Total loans receivable	7,872,537		7,756,106
Deferred origination costs, net	8,029		9,486
Allowance for loan credit losses	(59,976)		(60,735)
Total loans receivable, net	$	7,820,590	$	7,704,857

(1) The commercial and industrial loans balance at March 31, 2021 and December 31, 2020 includes Paycheck Protection Program (“PPP”) loans of $109.7 million and $95.4 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 are not re-evaluated until the initial 90-day forbearance period ends. At that time, risk ratings are 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 end 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 liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in our 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.

33

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):

	2021		2020		2019		2018		2017		2016 and prior		Revolving lines of credit		Total
March 31, 2021
Commercial and industrial
Pass	$	68,908	$	85,402	$	35,616	$	25,960	$	13,952	$	88,010	$	161,358	$	479,206
Special Mention	—		334		1,866		776		1,328		706		2,029		7,039
Substandard	—		567		1,279		881		754		2,033		6,486		12,000
Total commercial and industrial	68,908		86,303		38,761		27,617		16,034		90,749		169,873		498,245
Commercial real estate - owner occupied
Pass	20,780		72,657		120,065		122,007		115,902		496,736		10,127		958,274
Special Mention	—		—		3,488		6,556		1,973		32,144		278		44,439
Substandard	—		—		14,377		8,926		2,874		36,912		549		63,638
Total commercial real estate - owner occupied	20,780		72,657		137,930		137,489		120,749		565,792		10,954		1,066,351
Commercial real estate - investor
Pass	399,267		656,812		603,104		306,120		420,926		997,722		214,003		3,597,954
Special Mention	—		—		25,847		17,113		14,086		41,043		—		98,089
Substandard	—		4,311		29,576		1,962		18,244		47,845		6,370		108,308
Total commercial real estate - investor	399,267		661,123		658,527		325,195		453,256		1,086,610		220,373		3,804,351
Residential real estate (1)
Pass	122,744		553,741		387,283		188,276		145,840		789,192		—		2,187,076
Special Mention	—		—		198		—		—		335		—		533
Substandard	—		—		—		—		221		1,518		—		1,739
Total residential real estate	122,744		553,741		387,481		188,276		146,061		791,045		—		2,189,348
Consumer (1)
Pass	5,331		23,648		24,022		72,429		23,595		159,762		2,038		310,825
Special Mention	—		—		54		18		—		49		—		121
Substandard	—		—		—		17		—		3,279		—		3,296
Total consumer	5,331		23,648		24,076		72,464		23,595		163,090		2,038		314,242
Total loans	$	617,030	$	1,397,472	$	1,246,775	$	751,041	$	759,695	$	2,697,286	$	403,238	$	7,872,537

(1)For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.

34

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

	2020		2019		2018		2017		2016		2015 and prior		Revolving lines of credit		Total
December 31, 2020
Commercial and industrial
Pass	$	137,262	$	40,737	$	27,967	$	18,845	$	33,568	$	59,339	$	134,140	$	451,858
Special Mention	150		583		826		1,422		907		118		1,429		5,435
Substandard	581		1,284		1,243		809		439		1,706		7,301		13,363
Total commercial and industrial	137,993		42,604		30,036		21,076		34,914		61,163		142,870		470,656
Commercial real estate - owner occupied
Pass	96,888		114,506		122,962		124,050		104,264		428,423		18,932		1,010,025
Special Mention	—		3,512		8,240		1,023		17,115		17,811		439		48,140
Substandard	—		34,670		9,001		3,404		3,677		35,509		639		86,900
Total commercial real estate - owner occupied	96,888		152,688		140,203		128,477		125,056		481,743		20,010		1,145,065
Commercial real estate - investor
Pass	635,930		628,435		317,104		426,268		281,876		812,062		194,913		3,296,588
Special Mention	—		15,979		17,113		15,225		4,234		55,872		149		108,572
Substandard	4,311		9,217		1,931		17,222		11,474		36,326		5,823		86,304
Total commercial real estate - investor	640,241		653,631		336,148		458,715		297,584		904,260		200,885		3,491,464
Residential real estate (1)
Pass	595,982		437,593		226,435		166,773		146,237		729,037		—		2,302,057
Special Mention	—		532		—		—		446		2,186		—		3,164
Substandard	570		—		1,489		221		—		1,958		—		4,238
Total residential real estate	596,552		438,125		227,924		166,994		146,683		733,181		—		2,309,459
Consumer (1)
Pass	24,954		26,659		83,296		25,469		16,565		156,276		2,145		335,364
Special Mention	—		—		—		—		150		382		—		532
Substandard	—		—		—		—		—		3,566		—		3,566
Total consumer	24,954		26,659		83,296		25,469		16,715		160,224		2,145		339,462
Total loans	$	1,496,628	$	1,313,707	$	817,607	$	800,731	$	620,952	$	2,340,571	$	365,910	$	7,756,106

(1) For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.

35

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, 2021 and March 31, 2020 is as follows (in thousands):

	Commercial and  Industrial		Commercial Real Estate – Owner Occupied		Commercial Real Estate – Investor		Residential Real Estate		Consumer		Unallocated		Total
For the three months ended March 31, 2021
Allowance for credit losses on loans
Balance at beginning of period	$	5,390	$	15,054	$	26,703	$	11,818	$	1,770	$	—	$	60,735
Credit loss (benefit) expense	(2,875)		(7,257)		10,149		(335)		(721)		—		(1,039)
Charge-offs	—		—		(34)		(242)		(80)		—		(356)
Recoveries	26		30		104		39		437		—		636
Balance at end of period	$	2,541	$	7,827	$	36,922	$	11,280	$	1,406	$	—	$	59,976
For the three months ended March 31, 2020
Allowance for credit losses on loans
Balance at beginning of period	$	1,458	$	2,893	$	9,883	$	2,002	$	591	$	25	$	16,852
Impact of CECL adoption	2,416		(1,109)		(5,395)		3,833		2,981		(25)		2,701
Credit loss expense (benefit)	1,529		1,286		2,377		3,585		(180)		—		8,597
Initial allowance for credit losses on PCD loans	1,221		26		260		109		1,023		—		2,639
Charge-offs	—		—		—		(1,275)		(109)		—		(1,384)
Recoveries	25		—		34		163		8		—		230
Balance at end of period	$	6,649	$	3,096	$	7,159	$	8,417	$	4,314	$	—	$	29,635

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. At March 31, 2021 and December 31, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $1.6 million and $1.9 million, respectively, commercial real estate - owner occupied of $12.3 million and $13.8 million, respectively, and commercial real estate - investor of $18.5 million and $18.3 million, 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 $1.3 million and $1.4 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, the amount of foreclosed residential real estate property held by the Company were $106,000 and $106,000, respectively.

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021		December 31, 2020
Commercial and industrial	$	1,689	$	1,908
Commercial real estate – owner occupied	12,345		13,751
Commercial real estate – investor	18,520		18,287
Residential real estate	6,422		8,671
Consumer	3,782		4,246
	$	42,758	$	46,863

At March 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, 2021 and December 31, 2020, there were no loans that were 90 days or greater past due and still accruing interest.

36

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, 2021 and December 31, 2020 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, 2021
Commercial and industrial	$	169	$	669	$	394	$	1,232	$	497,013	$	498,245
Commercial real estate – owner occupied	649		—		7,719		8,368		1,057,983		1,066,351
Commercial real estate – investor	3,377		—		9,047		12,424		3,791,927		3,804,351
Residential real estate	11,031		533		1,739		13,303		2,176,045		2,189,348
Consumer	1,873		120		3,298		5,291		308,951		314,242
	$	17,099	$	1,322	$	22,197	$	40,618	$	7,831,919	$	7,872,537
December 31, 2020
Commercial and industrial	$	3,050	$	628	$	327	$	4,005	$	466,651	$	470,656
Commercial real estate – owner occupied	1,015		—		7,871		8,886		1,136,179		1,145,065
Commercial real estate – investor	8,897		3,233		11,122		23,252		3,468,212		3,491,464
Residential real estate	15,156		3,164		4,238		22,558		2,286,901		2,309,459
Consumer	978		533		3,568		5,079		334,383		339,462
	$	29,096	$	7,558	$	27,126	$	63,780	$	7,692,326	$	7,756,106

The Company classifies certain loans as troubled debt restructured (“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, 2021 and December 31, 2020, TDR loans totaled $16.6 million and $17.5 million, respectively. Included in the non-accrual loan total at March 31, 2021 and December 31, 2020 were $5.1 million and $5.5 million, respectively, of TDR loans. At March 31, 2021 and December 31, 2020, the Company had no specific reserves allocated to loans that are 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 loans classified as accruing TDR loans at March 31, 2021 and December 31, 2020, which totaled $11.5 million and $12.0 million, respectively. 

The following table presents information about TDR loans which occurred during the three months ended March 31, 2021 and March 31, 2020 (dollars in thousands):

	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2021
Troubled debt restructurings:
Consumer	2	$	26	$	33

	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Three Months Ended March 31, 2020
Troubled debt restructurings:
Consumer	4	$	159	$	177
Residential real estate	2	226		234

There were no TDR loans that defaulted during the three months ended March 31, 2021 and March 31, 2020 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 were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. For principal and interest deferrals as well as principal only deferrals, all payments received will first be applied to all accrued and

37

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at March 31, 2021 and will not be reported as past due during the deferral period.

Note 6. Deposits

The major types of deposits at March 31, 2021 and December 31, 2020 were as follows (in thousands):

Type of Account	March 31, 2021		December 31, 2020
Non-interest-bearing	$	2,417,935	$	2,133,195
Interest-bearing checking	3,623,132		3,646,866
Money market deposit	782,459		783,521
Savings	1,568,528		1,491,251
Time deposits	1,110,758		1,372,783
Total deposits	$	9,502,812	$	9,427,616

Included in time deposits at March 31, 2021 and December 31, 2020, was $172.1 million and $409.5 million, respectively, in deposits of $250,000 and over.

38

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 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 securities 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.

39

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Interest Rate Swaps

The Company’s interest rate swaps 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 agreement, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of our 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”)..

40

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2021 and December 31, 2020, 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, 2021
Items measured on a recurring basis:
Debt securities available-for-sale	$	268,511	$	—	$	268,511	$	—
Equity investments	50,159		13,693		28,528		7,938
Interest rate swap asset	27,084		—		27,084		—
Interest rate swap liability	(27,160)		—		(27,160)		—
Items measured on a non-recurring basis:
Other real estate owned	106		—		—		106
Loans measured for impairment based on the fair value of the underlying collateral	33,747		—		—		33,747
December 31, 2020
Items measured on a recurring basis:
Debt securities available-for-sale	$	183,302	$	—	$	183,302	$	—
Equity investments	107,079		104,539		—		2,540
Interest rate swap asset	45,289		—		45,289		—
Interest rate swap liability	(45,429)		—		(45,429)		—
Items measured on a non-recurring basis:
Other real estate owned	106		—		—		106
Loans measured for impairment based on the fair value of the underlying collateral	35,366		—		—		35,366

The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers of assets between Level 1 and Level 2 during the three months ended March 31, 2021 and December 31, 2020.

The following table reconciles, for the three months ended March 31, 2021, the beginning and ending balances for equity investments that are recognized at fair value on a recurring basis, in the consolidated statements of financial condition, using significant unobservable inputs (in thousands):

	Three Months Ended March 31, 2021
Beginning Balance	$	2,540
Total gains (losses) included in earnings	398
Purchases	5,000
Transfers into Level 3	—
Transfers out of Level 3	—
Ending Balance	$	7,938

There were no changes in Level 3 assets or liabilities in the fair value hierarchy for the three months ended March 31, 2020.

The Company purchased $5.0 million of a minority, non-controlling equity investment in Auxilior Capital Partners classified as Level 3 at March 31, 2021 as the security was carried at cost with no observable price changes noted since purchased.

41

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

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 investment and mortgage-backed 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 (“BANs”)) 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 and Federal Reserve Bank stock 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 agencies.

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.

In accordance with the prospective adoption of ASU 2016-01, 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 Retail 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.

42

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of March 31, 2021 and December 31, 2020 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, 2021
Financial Assets:
Cash and due from banks	$	1,173,665	$	1,173,665	$	—	$	—
Debt securities held-to-maturity	1,082,326		—		1,081,590		18,155
Restricted equity investments	52,199		—		—		52,199
Loans receivable, net and loans held-for-sale	7,863,765		—		—		7,822,353
Financial Liabilities:
Deposits other than time deposits	8,392,054		—		8,392,054		—
Time deposits	1,110,758		—		1,118,867		—
Other borrowings	228,176		—		241,122		—
Securities sold under agreements to repurchase with retail customers	134,465		134,465		—		—
December 31, 2020
Financial Assets:
Cash and due from banks	$	1,272,134	$	1,272,134	$	—	$	—
Debt securities held-to-maturity	937,253		—		952,365		16,101
Restricted equity investments	51,705		—		—		51,705
Loans receivable, net and loans held-for-sale	7,750,381		—		—		7,806,743
Financial Liabilities:
Deposits other than time deposits	8,054,833		—		8,054,833		—
Time deposits	1,372,783		—		1,383,173		—
FHLB advances and other borrowings	235,471		—		251,798		—
Securities sold under agreements to repurchase with retail customers	128,454		128,454		—		—

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 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.

43

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

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 interest rate swaps 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 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, 2021 and March 31, 2020, the Company recognized a gain of $64,000 and $303,000, respectively, in other income resulting from fair value adjustments. The notional amount of derivatives not designated as hedging instruments was $815.3 million and $725.9 million at March 31, 2021 and December 31, 2020, 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, 2021		December 31, 2020
Other assets	$	27,084	$	45,289
Other liabilities	27,160		45,429

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 $16.1 million and $46.5 million at March 31, 2021 and December 31, 2020, 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 $27.2 million and $45.4 million at March 31, 2021 and December 31, 2020, respectively.

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 2050. The Company has one existing finance lease, which has a lease term through 2029.

44

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

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, 2021		December 31, 2020
Lease ROU Assets	Classification
Operating lease ROU asset	Other assets	$	21,616	$	22,555
Finance lease ROU asset	Premises and equipment, net	1,644		1,694
Total lease ROU asset		$	23,260	$	24,249
Lease Liabilities
Operating lease liability	Other liabilities	$	22,090	$	22,990
Finance lease liability	Other borrowings	2,052		2,100
Total lease liability		$	24,142	$	25,090

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, 2021		December 31, 2020
Weighted-Average Remaining Lease Term
Operating leases	7.72 years		7.77 years
Finance lease	8.35 years		8.59 years
Weighted-Average Discount Rate
Operating leases	3.00	%	3.01	%
Finance lease	5.63	%	5.63	%

The following table represents lease expenses and other lease information (in thousands):

	Three Months Ended
	March 31, 2021		March 31, 2020
Lease Expense
Operating lease expense	$	1,490	$	1,723
Finance lease expense:
Amortization of ROU assets	50		40
Interest on lease liabilities(1)	29		27
Total	$	1,569	$	1,790
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,450	$	1,648
Operating cash flows from finance leases	29		27
Financing cash flows from finance leases	48		47

(1)Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense.

45

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of March 31, 2021 were as follows (in thousands):

	Finance Lease		Operating Leases
For the Twelve Months Ended March 31,
2022	$	307	$	5,836
2023	307		4,292
2024	307		3,190
2025	307		2,739
2026	307		2,154
Thereafter	1,028		7,164
Total	$	2,563	$	25,375
Less: Imputed interest	(511)		(3,285)
Total lease liabilities	$	2,052	$	22,090

46

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 other routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.

Item 1A. Risk Factors

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2020 Form 10-K. There have been no material changes to risk factors relevant to the Company’s operations since December 31, 2020. Additional risks not presently known to the Company, or that the Company currently deemed immaterial, may also adversely affect the business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 18, 2019, the Company announced the authorization by the Board of Directors to repurchase up to an additional 5% of the Company’s outstanding common stock, or 2.5 million shares. The repurchase plan has no expiration date. The Company repurchased 500,000 shares of its common stock during the three month period ended March 31, 2021. At March 31, 2021, there were 1,519,145 shares available for repurchase under the Company’s stock repurchase program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2021 through January 31, 2021	—	—		—	2,019,145
February 1, 2021 through February 28, 2021	500,000	$	19.94	500,000	1,519,145
March 1, 2021 through March 31, 2021	—	—		—	1,519,145

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

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Item 6. Exhibits

Exhibit No:	Exhibit Description	Reference
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed here within this document
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed here within this document
32.0	Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002	Filed here within this document
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements
104.0	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OceanFirst Financial Corp.

Registrant

DATE:	May 6, 2021	/s/ Christopher D. Maher
		Christopher D. Maher
		Chairman and Chief Executive Officer

DATE:	May 6, 2021	/s/ Michael J. Fitzpatrick
		Michael J. Fitzpatrick
		Executive Vice President and Chief Financial Officer

49