OceanFirst Financial (OCFC) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) This section presents the unaudited consolidated financial statements of OceanFirst Financial Corp. for the quarter ended March 31, 2022, including the statements of financial condition, income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes Consolidated Statements of Financial Condition The Consolidated Statements of Financial Condition provide a snapshot of the company's assets, liabilities, and stockholders' equity at March 31, 2022, and December 31, 2021. Key changes include increases in total assets, loans receivable, and deposits, alongside a slight increase in stockholders' equity Consolidated Statements of Financial Condition (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Total assets | $12,164,945 | $11,739,616 | | Loans receivable, net of allowance for loan credit losses | $9,065,679 | $8,583,352 | | Deposits | $10,056,233 | $9,732,816 | | Stockholders' equity | $1,519,334 | $1,516,553 | - Total assets increased by $425.3 million, primarily driven by a $486.1 million increase in total loans. Deposits also grew by $323.4 million[25][26] Consolidated Statements of Income The Consolidated Statements of Income detail the company's revenues, expenses, and net income for the three months ended March 31, 2022, and 2021. Net interest income increased significantly, while other income decreased due to a net loss on equity investments in 2022 compared to a gain in 2021 Consolidated Statements of Income (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Interest income | $90,983 | $84,874 | | Interest expense | $6,756 | $11,270 | | Net interest income | $84,227 | $73,604 | | Credit loss expense (benefit) | $1,851 | $(620) | | Other income | $8,852 | $20,835 | | Operating expenses | $57,495 | $51,683 | | Net income | $25,759 | $32,697 | | Net income available to common stockholders | $24,755 | $31,693 | | Diluted earnings per share | $0.42 | $0.53 | - Net interest income increased by $10.6 million YoY, while other income decreased by $11.98 million, largely due to a shift from a net gain on equity investments in 2021 to a net loss in 2022[81][33] Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income present the net income and other comprehensive income (loss) components, primarily driven by increased unrealized losses on debt securities in 2022 due to higher interest rates Consolidated Statements of Comprehensive Income (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net income | $25,759 | $32,697 | | Net unrealized loss on debt securities (net of tax benefit) | $(12,372) | $(416) | | Total comprehensive income | $13,410 | $32,388 | | Comprehensive income available to common stockholders | $12,406 | $31,384 | - Accumulated other comprehensive loss increased by $12.3 million, primarily due to unrealized losses on debt securities available-for-sale, impacted by higher interest rates[27][83] Consolidated Statements of Changes in Stockholders' Equity The Consolidated Statements of Changes in Stockholders' Equity detail the movements in equity, including net income, other comprehensive loss, stock compensation, dividends, and stock repurchases, resulting in a slight increase in total stockholders' equity Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | Balance at December 31, 2021 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | | :----------------------------------- | :---------------------------------------- | :--------------------------------------- | | Balance at beginning of period | $1,516,553 | $1,516,553 | | Net income | — | $25,759 | | Other comprehensive loss, net of tax | — | $(12,349) | | Cash dividend $0.17 per share | — | $(9,993) | | Repurchase 100,444 shares of common stock | — | $(2,144) | | Balance at end of period | — | $1,519,334 | - Stockholders' equity remained relatively stable at $1.52 billion, as net income was largely offset by increased accumulated other comprehensive loss and common/preferred stock dividends[27][86] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows outline cash flows from operating, investing, and financing activities. Operating cash flow increased, while investing activities saw significant cash usage for loan originations and purchases. Financing activities were primarily driven by deposit increases and FHLB advances Consolidated Statements of Cash Flows (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | $57,644 | $36,873 | | Net cash used in investing activities | $(424,685) | $(223,159) | | Net cash provided by financing activities | $353,433 | $57,378 | | Net decrease in cash and due from banks and restricted cash | $(13,608) | $(128,908) | - Cash needs for Q1 2022 were met by increased deposits and FHLB advances, primarily used for loan originations and residential loan pool purchases[41] Notes to Unaudited Consolidated Financial Statements These notes provide additional details and explanations for the unaudited consolidated financial statements, covering areas such as basis of presentation, earnings per share, securities, loans, deposits, borrowed funds, fair value measurements, derivatives, leases, and subsequent events Note 1. Basis of Presentation This note explains that the consolidated financial statements include OceanFirst Financial Corp. and its subsidiaries, reflecting normal recurring adjustments and management estimates. It also notes that certain disclosures are condensed per SEC rules and should be read in conjunction with the 2021 Form 10-K - The financial statements are consolidated for OceanFirst Financial Corp. and its wholly-owned subsidiaries, including OceanFirst Bank N.A.[94] - Interim statements include management estimates and assumptions, and actual results could differ from these estimates[95] Note 2. Earnings per Share This note reconciles the weighted average shares outstanding for basic and diluted earnings per share calculations for the three months ended March 31, 2022 and 2021, noting the exclusion of antidilutive stock options Earnings per Share (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Average basic shares outstanding | 58,739 | 59,840 | | Average diluted shares outstanding | 58,943 | 60,101 | - Antidilutive stock options of 904,000 (2022) and 1,672,000 (2021) were excluded from EPS calculations[100] Note 3. Securities This note provides detailed information on debt securities available-for-sale and held-to-maturity, including amortized cost, fair value, and unrealized gains/losses. It also covers equity investments and the allowance for securities credit losses. The company concluded that debt securities were not impaired at March 31, 2022 Debt Securities (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Total debt securities (Amortized Cost) | $1,668,106 | $1,713,422 | | Total debt securities (Estimated Fair Value) | $1,597,362 | $1,720,999 | | Total Gross Unrealized Losses | $(72,736) | $(12,665) | - The increase in net unrealized losses on debt securities was primarily due to changes in the general interest rate environment, not credit quality[110] Equity Investments (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net (loss) gain on equity investments | $(2,786) | $8,287 | | Unrealized (loss) gain recognized on equity securities still held | $(4,368) | $164 | Note 4. Loans Receivable, Net This note details the composition of the loan portfolio by commercial and consumer categories, including risk classifications (Pass, Special Mention, Substandard, Doubtful). It also provides an analysis of the allowance for credit losses and information on non-accrual and troubled debt restructuring (TDR) loans Loans Receivable and Allowance for Credit Losses (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Total loans receivable | $9,108,976 | $8,622,870 | | Allowance for loan credit losses | $(50,598) | $(48,850) | Allowance for Credit Losses on Loans (in thousands) | Metric | 3 Months Ended March 31, 2022 (in thousands) | 3 Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Allowance for credit losses on loans (Beginning balance) | $48,850 | $60,735 | | Credit loss (benefit) expense | $1,656 | $(1,039) | | Allowance for credit losses on loans (Ending balance) | $50,598 | $59,976 | Non-Performing Loans (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Total non-performing loans | $26,925 | $25,494 | | Non-performing loans as a percent of total loans receivable | 0.30 % | 0.30 % | - The credit loss expense for Q1 2022 was driven by slowing prepayment rate assumptions in the residential real estate portfolio, strong loan growth, and macroeconomic uncertainty related to the Russia-Ukraine war, partly offset by positive trends in criticized assets[32] Note 5. Deposits This note provides a breakdown of deposit types, showing an overall increase in total deposits, with non-interest-bearing and interest-bearing checking accounts being the largest categories Deposits by Type (in thousands) | Type of Account | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Non-interest-bearing | $2,444,833 | $2,412,056 | | Interest-bearing checking | $4,287,745 | $4,201,736 | | Money market deposit | $811,588 | $736,090 | | Savings | $1,624,751 | $1,607,933 | | Time deposits | $887,316 | $775,001 | | Total deposits | $10,056,233 | $9,732,816 | - Deposits increased by $323.4 million, with organic growth across all deposit categories except time deposits, which saw an increase in brokered time deposits[26] Note 6. Borrowed Funds This note details the composition of borrowed funds, highlighting an increase in FHLB advances to fund loan growth and a decrease in other borrowings due to the redemption of subordinated debt Borrowed Funds (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | FHLB advances | $75,002 | $0 | | Securities sold under agreements to repurchase with customers | $117,782 | $118,769 | | Other borrowings | $194,396 | $229,141 | | Total borrowed funds | $387,180 | $347,910 | - The Company redeemed $35.0 million of subordinated debt due September 30, 2026, which carried an interest rate of 4.14%[137] Note 7. Fair Value Measurements This note explains the company's methodology for fair value measurements, categorizing assets and liabilities into Level 1, 2, or 3 inputs based on observability. It provides tables summarizing financial instruments measured at fair value on both a recurring and non-recurring basis, as well as those disclosed at fair value - Fair value measurements are categorized into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (significant unobservable inputs)[141][142][143] Financial Instruments Measured at Fair Value on a Recurring Basis (in thousands) | Item Measured on a Recurring Basis (March 31, 2022) | Total Fair Value (in thousands) | Level 1 Inputs (in thousands) | Level 2 Inputs (in thousands) | Level 3 Inputs (in thousands) | | :-------------------------------------------------- | :------------------------------ | :---------------------------- | :---------------------------- | :---------------------------- | | Debt securities available-for-sale | $546,470 | $— | $546,470 | $— | | Equity investments | $81,588 | $12,517 | $69,071 | $— | | Interest rate derivative asset | $45,611 | $— | $45,611 | $— | | Interest rate derivative liability | $(45,643) | $— | $(45,643) | $— | | Item Measured on a Non-Recurring Basis (March 31, 2022) | | | | | | Equity investments | $12,300 | $— | $— | $12,300 | | Other real estate owned | $106 | $— | $— | $106 | | Loans measured for impairment based on the fair value of the underlying collateral | $16,477 | $— | $— | $16,477 | - During Q1 2022, the Company converted $2.7 million preferred stock into common stock, resulting in a transfer from Level 3 into Level 1[152] Note 8. Derivatives, Hedging Activities and Other Financial Instruments This note describes the company's use of derivative financial instruments, primarily interest rate swaps and cap contracts, to manage interest rate risk for commercial loan customers. These derivatives are not designated as hedges under FASB ASC Topic 815 and are marked to market through earnings - The Company uses interest rate swaps and cap contracts to allow commercial loan customers to effectively convert variable-rate loans to fixed-rate or cap variable rates, and then enters into offsetting agreements with third parties[172] - These derivatives are not designated as hedging instruments and are marked to market through earnings, with fair value adjustments related to credit quality variations potentially impacting earnings[173] Notional Amount of Derivatives | Metric | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------- | :---------------- | | Notional amount of derivatives not designated as hedging instruments | $1.10 billion | $938.7 million | Note 9. Leases This note details the company's lease arrangements, including operating and finance leases for branches and office space. It provides information on ROU assets, lease liabilities, weighted-average lease terms, discount rates, and lease expenses. The company also consolidated branches, leading to accelerated lease expense recognition Lease Assets and Liabilities (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Total lease ROU assets | $15,695 | $18,937 | | Total lease liabilities | $16,574 | $19,886 | - The Company completed the consolidation of 10 branches and one deposit gathering location in early 2022, resulting in accelerated lease expense recognition of $62,000 for the three months ended March 31, 2022[185] Note 10. Subsequent Event This note reports the acquisition of a 60% majority interest in Trident Abstract Title Agency, LLC on April 1, 2022, for $7.1 million, with an estimated goodwill of $5.7 million. This acquisition is expected to complement the company's existing consumer and commercial lending business - On April 1, 2022, OceanFirst Financial Corp. acquired a 60% majority interest in Trident Abstract Title Agency, LLC[189] - The purchase price was $7.1 million, with an estimated goodwill of $5.7 million, and the acquisition is expected to complement existing lending businesses[189] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive discussion and analysis of OceanFirst Financial Corp.'s financial condition and results of operations for the three months ended March 31, 2022, compared to prior periods. It covers key financial metrics, balance sheet changes, income statement performance, liquidity, capital resources, asset quality, accounting policies, and forward-looking statements Financial Summary This summary provides an overview of OceanFirst Financial Corp.'s financial performance and condition, highlighting key metrics for the quarter ended March 31, 2022, compared to prior periods. It notes increases in total assets, loans, and deposits, alongside improved net interest income and margin, but a decrease in net income available to common stockholders due to specific expenses and a net loss on equity investments Financial Summary (in thousands) | Metric | Mar 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Mar 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total assets | $12,164,945 | $11,739,616 | $11,577,472 | | Loans receivable, net of allowance for loan credit losses | $9,065,679 | $8,583,352 | $7,820,590 | | Deposits | $10,056,233 | $9,732,816 | $9,502,812 | | Stockholders' equity | $1,519,334 | $1,516,553 | $1,498,719 | | Net interest income | $84,227 | $80,586 | $73,604 | | Net income | $25,759 | $22,657 | $32,697 | | Diluted earnings per share | $0.42 | $0.37 | $0.53 | - Net income available to common stockholders for Q1 2022 was $24.8 million ($0.42 diluted EPS), down from $31.7 million ($0.53 diluted EPS) for the corresponding prior year period, impacted by merger-related expenses, branch consolidation expenses, and a net loss on equity investments[17] - The Company remains well-capitalized with a stockholders' equity to total assets ratio of 12.49% at March 31, 2022[18] - Loan growth for the quarter was $486.1 million, reflecting record loan originations and residential loan pool purchases. Deposits increased $323.4 million, and the loans-to-deposits ratio increased to 90.60%[19] Analysis of Net Interest Income This section explains that net interest income is the difference between interest earned on assets and interest paid on liabilities. It presents detailed tables showing average balances, interest income/expense, and yields/costs for interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2022 and 2021 Net Interest Income Analysis (in thousands) | Metric | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :----------------------------------- | :---------------------------- | :---------------------------- | | Total interest income (in thousands) | $90,983 | $84,874 | | Total interest expense (in thousands) | $6,756 | $11,270 | | Net interest income (in thousands) | $84,227 | $73,604 | | Net interest rate spread | 3.08 % | 2.78 % | | Net interest margin | 3.18 % | 2.93 % | | Total cost of deposits (including non-interest-bearing deposits) | 0.16 % | 0.37 % | - Interest income included net loan fees of $970,000 for Q1 2022, down from $1.4 million in Q1 2021[20] Comparison of Financial Condition at March 31, 2022 and December 31, 2021 This section compares the company's financial condition at the end of Q1 2022 to the end of Q4 2021, highlighting growth in total assets, loans, and deposits, and changes in debt securities and borrowings. Stockholders' equity remained stable, impacted by net income, comprehensive loss, and stock repurchases - Total assets increased by $425.3 million to $12.16 billion, driven by a $486.1 million increase in total loans, primarily from commercial and residential real estate originations and purchases[25] - Deposits increased by $323.4 million to $10.06 billion, with organic growth in all deposit categories except time deposits, which saw an increase in brokered time deposits[26] - The loans-to-deposit ratio increased to 90.6% from 88.6%. FHLB advances increased to $75.0 million to fund loan growth, while other borrowings decreased due to subordinated debt extinguishment[26] - Stockholders' equity was stable at $1.52 billion, as net income was offset by a $12.3 million increase in accumulated other comprehensive loss (due to unrealized losses on debt securities from higher interest rates) and $11.0 million in dividends[27] Comparison of Operating Results for the Three Months Ended March 31, 2022 and March 31, 2021 This section compares the company's operating results for Q1 2022 against Q1 2021, detailing changes in net income, interest income and expense, credit loss provisions, non-interest income and expense, and income tax expense General This subsection provides an overview of the net income available to common stockholders and diluted earnings per share for Q1 2022 compared to Q1 2021, noting the impact of specific expenses and gains/losses Net Income and Diluted EPS (in millions) | Metric | 3 Months Ended March 31, 2022 | 3 Months Ended March 31, 2021 | | :----------------------------------- | :---------------------------- | :---------------------------- | | Net income available to common stockholders | $24.8 million | $31.7 million | | Diluted earnings per share | $0.42 | $0.53 | - Q1 2022 net income was reduced by $4.0 million (net of tax) due to merger-related expenses ($2.0 million), net branch consolidation expenses ($402,000), and a net loss on equity investments ($2.8 million)[28] - Q1 2021 net income was increased by $5.2 million (net of tax) due to merger-related expenses ($381,000), net branch consolidation expenses ($1.0 million), and a net gain on equity investments ($8.3 million)[28] Interest Income This subsection discusses the increase in interest income for Q1 2022 compared to Q1 2021, primarily driven by growth in average interest-earning assets and a higher yield on these assets due to the deployment of lower-yielding cash into higher-yielding loans and securities - Interest income increased to $91.0 million in Q1 2022 from $84.9 million in Q1 2021[29] - Average interest-earning assets increased by $551.7 million, with average loans receivable increasing by $1.07 billion[29] - The yield on average interest-earning assets increased to 3.43% from 3.38%, mainly due to shifting cash into higher-yielding loans and securities[29] Interest Expense This subsection highlights the decrease in interest expense for Q1 2022 compared to Q1 2021, attributed to the downward repricing of deposits, despite an increase in average interest-bearing liabilities - Interest expense decreased to $6.8 million in Q1 2022 from $11.3 million in Q1 2021[30] - The cost of average interest-bearing liabilities decreased to 0.35% from 0.60% due to deposit repricing[30] - The total cost of deposits (including non-interest-bearing) was 0.16% in Q1 2022, down from 0.37% in Q1 2021[30] Net Interest Income and Margin This subsection reports the increase in net interest income and net interest margin for Q1 2022 compared to Q1 2021, primarily due to the strategic deployment of excess balance sheet liquidity - Net interest income increased to $84.2 million in Q1 2022 from $73.6 million in Q1 2021[31] - Net interest margin expanded to 3.18% from 2.93% YoY[31] - Margin expansion was mainly due to using excess balance sheet liquidity to fund loan and securities growth[31] Provision/Benefit for Credit Losses This subsection discusses the shift from a credit loss benefit in Q1 2021 to a credit loss expense in Q1 2022, driven by factors such as slowing prepayment rates, loan growth, and macroeconomic uncertainty, partially offset by improved asset quality - Credit loss expense was $1.9 million in Q1 2022, compared to a $620,000 benefit in Q1 2021[32] - The expense was due to slowing prepayment rate assumptions (residential real estate), strong loan growth, and Russia-Ukraine war macroeconomic forecast uncertainty, partially offset by positive trends in criticized assets and favorable employment outlook[32] - Non-performing loans decreased to $26.9 million at March 31, 2022, from $42.8 million at March 31, 2021[32] Non-interest Income This subsection explains the significant decrease in non-interest income for Q1 2022 compared to Q1 2021, primarily due to a net loss on equity investments in 2022 versus a net gain in 2021, and decreases in loan sales gains and PPP loan fees - Other income decreased to $8.9 million in Q1 2022 from $20.8 million in Q1 2021[33] - This decrease was largely due to a $2.8 million net loss on equity investments in Q1 2022, compared to an $8.3 million net gain in Q1 2021[33] - Further decreases came from a $1.7 million drop in net gain on sales of loans and $662,000 less in Paycheck Protection Program loan origination referral fees, partially offset by a $1.7 million increase in commercial loan swap income[33] Non-interest Expense This subsection details the increase in operating expenses for Q1 2022 compared to Q1 2021, driven by higher compensation and benefits, data processing, and occupancy expenses, including merger-related and branch consolidation costs - Operating expenses increased to $57.5 million for Q1 2022, compared to $51.7 million in Q1 2021[34] - This includes $2.4 million (2022) vs. $1.4 million (2021) in merger-related and net branch consolidation expenses[34] - The remaining $4.8 million increase was primarily due to $2.3 million in compensation and benefits (commercial banking strategy and hires), $1.7 million in data processing (new core banking system migration), and $683,000 in occupancy expense[34] Income Tax Expense This subsection reports a decrease in income tax provision and a lower effective tax rate for Q1 2022 compared to Q1 2021 - Provision for income taxes was $8.0 million for Q1 2022, down from $10.7 million for Q1 2021[35] - The effective tax rate decreased to 23.6% for Q1 2022 from 24.6% for Q1 2021[35] Liquidity and Capital Resources This section discusses the company's liquidity sources, including dividends from the Bank, proceeds from investments, and stock/debt issuance. It highlights the Bank's funding sources like deposits and FHLB advances, and details cash utilization for loan growth and debt redemption. The company maintains strong capital ratios and monitors liquidity through stress testing - OceanFirst Financial Corp. received a $20.0 million dividend payment from the Bank in Q1 2022 and held $45.1 million in cash at March 31, 2022[37] - The Bank's primary sources of funds are deposits, principal and interest payments on loans, FHLB advances, access to the Federal Reserve discount window, other borrowings, investment maturities, and proceeds from the sale of loans and investments[38] - FHLB advances increased to $75.0 million at March 31, 2022, from $0 at December 31, 2021, to fund short-term liquidity needs and loan growth[39][41] Capital Ratios | Metric | Bank (Mar 31, 2022 Ratio) | Bank (Dec 31, 2021 Ratio) | Company (Mar 31, 2022 Ratio) | Company (Dec 31, 2021 Ratio) | Required for Well-Capitalized | | :----------------------------------- | :------------------------ | :------------------------ | :--------------------------- | :--------------------------- | :---------------------------- | | Tier 1 capital (to average assets) | 9.24 % | 9.08 % | 9.42 % | 9.22 % | 5.00 % | | Common equity Tier 1 (to risk-weighted assets) | 11.15 % | 11.62 % | 9.91 % | 10.26 % | 6.50 % | | Total capital (to risk-weighted assets) | 11.73 % | 12.21 % | 13.16 % | 14.06 % | 10.00 % | Non-Performing Assets This section provides a breakdown of non-performing assets, including non-performing loans and other real estate owned. It details changes in non-performing loans and the allowance for loan credit losses, and discusses the impact of COVID-19 related loan modification programs Non-Performing Assets (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------------- | :-------------------------- | :-------------------------- | | Total non-performing loans | $26,925 | $25,494 | | Other real estate owned | $106 | $106 | | Total non-performing assets | $27,031 | $25,600 | | Allowance for loan credit losses as a percent of total loans receivable | 0.56 % | 0.57 % | | Non-performing loans as a percent of total loans receivable | 0.30 % | 0.30 % | - Non-performing loans increased slightly to $26.9 million at March 31, 2022, from $25.5 million at December 31, 2021[53] - The allowance for loan credit losses totaled $50.6 million (0.56% of total loans) at March 31, 2022, compared to $48.9 million (0.57% of total loans) at December 31, 2021[53] - The decrease in substandard loans was primarily due to improved profitability of borrowers and their ability to service their loans[55] Critical Accounting Policies This section refers to the 2021 Form 10-K for a summary of significant accounting policies and highlights the methodology for determining the allowance for credit losses as a critical accounting policy due to its importance and reliance on estimates and subjective judgments - The methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company's financial condition and results of operations, involving a higher degree of complexity and requiring difficult and subjective judgments[56] - This critical accounting policy and its application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors[56] Impact of New Accounting Pronouncements This section discusses recently adopted and not-yet-adopted accounting pronouncements. ASU 2019-12 (Income Taxes) was adopted in 2022 with no material impact. ASU 2022-01 (Derivatives and Hedging) and ASU 2022-02 (Credit Losses, TDRs) are not yet adopted, and the company is evaluating their potential impact - ASU 2019-12, "Income Taxes," was adopted in 2022 and did not have a material impact on the Company's financial statements[57] - ASU 2022-01, "Derivatives and Hedging," and ASU 2022-02, "Financial Instruments - Credit Losses," are effective for fiscal years beginning after December 15, 2022, and the Company is currently evaluating their potential impact[58][59] Private Securities Litigation Reform Act Safe Harbor Statement This section provides a safe harbor statement regarding forward-looking statements, outlining various factors that could materially affect the company's operations, including changes in interest rates, economic conditions, regulatory policies, and the ongoing impact of the COVID-19 pandemic - This quarterly report contains forward-looking statements based on certain assumptions and describes future plans, strategies, and expectations of OceanFirst Financial Corp.[60] - Factors which could have a material adverse effect on operations include changes in interest rates, general economic conditions, inflation, public health crises (such as COVID-19), levels of unemployment, real estate market values, and legislative/regulatory changes[61][63] - The continuing impact of the COVID-19 outbreak on the Company's business is difficult to predict and could lead to risks such as declining demand for products/services, increased loan delinquencies, and higher credit losses[64] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's interest rate sensitivity through gap analysis and Economic Value of Equity (EVE) and Net Interest Income (NII) modeling. It shows a positive one-year interest sensitivity gap and analyzes the impact of varying rate shocks on EVE and NII, while acknowledging inherent limitations in these models - The Company's interest rate sensitivity is monitored through IRR modeling, with a one-year gap of positive 10.82% at March 31, 2022, compared to positive 14.15% at December 31, 2021[67] Cumulative Interest Sensitivity Gap (in thousands) | Period | Cumulative Interest Sensitivity Gap (in thousands) | Cumulative Interest Sensitivity Gap as a percent of total interest-earning assets | | :----------------------------------- | :--------------------------------------- | :-------------------------------------------------------------------------------- | | 3 Months or Less | $750,503 | 6.84 % | | More than 3 Months to 1 Year | $1,188,015 | 10.82 % | | More than 1 Year to 3 Years | $2,451,282 | 22.33 % | | More than 3 Years to 5 Years | $3,263,786 | 29.73 % | | More than 5 Years | $2,979,955 | 27.14 % | Interest Rate Sensitivity Analysis | Change in Interest Rates (Basis Points) | EVE % Change (March 31, 2022) | Net Interest Income % Change (March 31, 2022) | | :-------------------------------------- | :---------------------------- | :-------------------------------------------- | | 300 | 4.7 % | 16.2 % | | 200 | 5.0 % | 5.3 % | | 100 | 3.7 % | 2.7 % | | (100) | (6.7) % | (4.2) % | - The change in interest rate sensitivity quarter over quarter was impacted by the deployment of cash into loans, an increase in overnight borrowings, shorter-term time deposits, and a significant increase in market interest rates[73] Item 4. Controls and Procedures This section states that the company's management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of March 31, 2022. No material changes in internal control over financial reporting occurred during the quarter - The Company's disclosure controls and procedures were evaluated by management, including the principal executive officer and principal financial officer, and concluded to be effective as of March 31, 2022[75] - There were no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[76] PART II. Other Information Item 1. Legal Proceedings This section states that the company and the Bank are not involved in any legal proceedings other than routine matters considered immaterial to financial condition or results of operations - 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, which are believed to be immaterial to the Company's financial condition or results of operations[191] Item 1A. Risk Factors This section refers to the 2021 Form 10-K for a summary of risk factors and states that no material changes to these factors have occurred since December 31, 2021. It also notes the possibility of additional unknown or currently immaterial risks - There have been no material changes to risk factors relevant to the Company's operations since December 31, 2021, as summarized in the 2021 Form 10-K[192] - Additional risks not presently known to the Company, or that the Company currently deems immaterial, may also adversely affect the business, financial condition or results of operations[192] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchase programs, including authorizations and shares repurchased during the quarter ended March 31, 2022 - The Board of Directors authorized two common stock repurchase programs, totaling up to 5.5 million shares (5% and an additional 5% of outstanding common stock), with no expiration date[193] Common Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :----------------------------- | :--------------------------- | | March 1, 2022 through March 31, 2022 | 100,444 | $21.35 | - As of March 31, 2022, there were 3,207,217 shares available for repurchase under the Company's stock repurchase programs[193][194] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities - Not Applicable[195] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not Applicable[196] Item 5. Other Information This section states that there is no other information to report - Not Applicable[197] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including executive employment agreements, certifications (302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial statements - Exhibits include executive employment agreements, certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, and XBRL formatted financial statements[199] Signatures This section contains the signatures of Christopher D. Maher (Chairman and Chief Executive Officer) and Michael J. Fitzpatrick (Executive Vice President and Chief Financial Officer), certifying the report on May 5, 2022 - The report is signed by Christopher D. Maher, Chairman and Chief Executive Officer, and Michael J. Fitzpatrick, Executive Vice President and Chief Financial Officer, on May 5, 2022[201]