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 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, deposit accounts, the sale of investment products, loan originations, loan sales, derivative fee 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 and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and the actions of regulatory agencies.

Over the past two years the Company has grown significantly through the acquisitions of Sun Bancorp. Inc. (“Sun”) and Capital Bank of New Jersey (“Capital Bank”), Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”). These acquisitions added $2.5$2.6 billion in assets, $1.9 billion in loans and $2.1$2.0 billion in deposits.

Highlights of the Company’s financial results and corporate activities for the three months ended June 30, 2019March 31, 2020 were as follows:

Strong organic loan originations of $426.2 million provided total loan growth of $158.4 million (excluding acquired loans) with $43.6 million of closed loans and significant contributions to a record pipeline of $297.8$525.3 million asat March 31, 2020.

On January 1, 2020, the Company completed its acquisitions of June 30, 2019.Two River and Country Bank. Two River added $1.2 billion to assets, $940.8 million to loans, $85.2 million to goodwill, and $941.8 million to deposits. Country Bank added $832.8 million to assets, $618.7 million to loans, $39.9 million to goodwill, and $652.7 million to deposits.

The Company anticipates full integration of Capital Bank’s operating systems was completedoperations and the elimination of eight duplicate branches in June, with anticipatedTwo River’s market area in May 2020, resulting in cost savings in future periods. The Bank expects to be realizedconsolidate an additional five branches, also in the second halfMay, independent of the year.

Net income for the three monthsquarter ended June 30, 2019,March 31, 2020, was $19.0$16.5 million, or $0.37$0.27 per diluted share, as compared to $15.7$21.2 million, or $0.32$0.42 per diluted share, for the corresponding prior year period. Net income for the six monthsquarter ended June 30, 2019, was $40.2 million, or $0.79 per diluted share, as compared to $21.1 million, or $0.45 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2019March 31, 2020 included merger related expenses, branch consolidation expenses, and compensationTwo River and Country Bank opening credit loss expense due tounder the retirement of an executive officer,CECL model which decreased net income, net of tax benefit, by $7.0 million and $11.4 million, respectively.$10.4 million. Net income for the three and six monthsquarter ended June 30, 2018March 31, 2019 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $6.7 million and $21.3 million, respectively.$4.4 million. Excluding these items, net income for the three and six monthsquarter ended June 30, 2019,March 31, 2020 increased over the same prior year periods,period, primarily due to the acquisitionacquisitions of Capital BankTwo River and the expense reductions driven by the integration of Sun in the second quarter of 2018.Country Bank.

The Company remains well-capitalized with a tangible common equity to tangible assets ratio of 9.76%8.85% at June 30, 2019.March 31, 2020.

The Company declared a quarterly cash dividend of $0.17 per share. The dividend, related to the quarter ended June 30, 2019,March 31, 2020, of $0.17 per share will be paid on August 16, 2019May 15, 2020 to stockholders of record on August 5, 2019.May 4, 2020.

Analysis of Net Interest Income

Total assets increased by $512.9 million,$2.243 billion, to $8.029$10.489 billion at June 30, 2019,March 31, 2020, from $7.516$8.246 billion at December 31, 2018,2019, primarily as a result of the acquisitionacquisitions of CapitalTwo River and Country Bank, which added $494.7 million$2.031 billion to total assets. Loans receivable, net of allowance for credit losses, increased by $364.7 million,$1.706 billion, to $5.944$7.914 billion at June 30, 2019,March 31, 2020, from $5.579$6.208 billion at December 31, 2018,2019, primarily due to acquired loans from Two River and Country Bank of $307.7 million.$1.559 billion. As part of the acquisitionacquisitions of CapitalTwo River and Country Bank, the Company’s goodwill balance increased to $374.6$500.1 million at June 30, 2019,March 31, 2020, from $338.4$374.6 million at December 31, 2018,2019 and the core deposit intangible increased to $17.6$28.3 million, from $17.0 million at December 31, 2018.$15.6 million.

Deposits increased by $372.9 million,$1.563 billion, to $6.187$7.892 billion at June 30, 2019,March 31, 2020, from $5.815$6.329 billion at December 31, 2018,2019, primarily due to acquired deposits from Two River and Country Bank of $449.0 million, partially offset by the seasonality of government deposit outflows.$1.594 billion. The loan-to-deposit ratio at June 30, 2019March 31, 2020 was 96.1%100.3%, as compared to 96.0%98.1% at December 31, 2018.2019.

Stockholders’ equity increased to $1.137$1.410 billion at June 30, 2019,March 31, 2020, as compared to $1.039$1.153 billion at December 31, 2018.2019. The acquisitionacquisitions of CapitalTwo River and Country Bank added $76.4$261.4 million to stockholders’ equity. At June 30, 2019,March 31, 2020, there were 986,3862,019,145 shares available for repurchase under the Company’s stock repurchase program. For the six monthsquarter ended June 30, 2019,March 31, 2020, the Company repurchased 309,167648,851 shares under the repurchase program at a weighted average cost of $23.93.$22.83. The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic. Tangible stockholders’ equity per common share increaseddecreased to $14.57$14.62 at June 30, 2019,March 31, 2020, as compared to $14.26$15.13 at December 31, 2018.2019.

On January 31, 2018,2019, the Company completed its acquisition of SunCapital Bank of New Jersey (“Capital Bank”) and its results of operations are included in the consolidated results for the three and six monthsquarter ended June 30, 2019,March 31, 2020, but are excluded from the results of operations for the period from January 1, 20182019 to January 31, 2018.2019.

On January 31, 2019,1, 2020, the Company completed its acquisitionacquisitions of CapitalTwo River and Country Bank and itstheir respective results of operations from FebruaryJanuary 1, 20192020 through June 30, 2019March 31, 2020 are included in the consolidated results for the three months and six monthsquarter ended June 30, 2019,March 31, 2020, but are not included in the results of operations for the corresponding prior year periods.period.

Net income for the three monthsquarter ended June 30, 2019,March 31, 2020, was $19.0$16.5 million, or $0.37$0.27 per diluted share, as compared to $15.7$21.2 million, or $0.32$0.42 per diluted share, for the corresponding prior year period. Net income for the six monthsquarter ended June 30, 2019, was $40.2 million, or $0.79 per diluted share, as compared to $21.1 million, or $0.45 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2019March 31, 2020 included merger related expenses, branch consolidation expenses, and compensationTwo River and Country Bank opening credit loss expense due tounder the retirement of an executive officer,CECL model which decreased net income, net of tax benefit, by $7.0 million and $11.4 million, respectively.$10.4 million. Net income for the three and six monthsquarter ended June 30, 2018March 31, 2019 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $6.7 million and $21.3 million, respectively.$4.4 million. Excluding these items, net income for the three and six monthsquarter ended June 30, 2019,March 31, 2020 increased over the same prior year periods,period, primarily due to the acquisitionacquisitions of Capital BankTwo River and the expense reductions driven by the integration of Sun in the second quarter of 2018.Country Bank.

For the three and six monthsquarter ended June 30, 2019,March 31, 2020, other income increased to $9.9$13.7 million, and $19.4 million, respectively, as compared to $8.9$9.5 million, and $17.8 million, respectively, for the corresponding prior year periods.period. The increases wereincrease was partly due to the impact of the CapitalTwo River and Country Bank acquisition,acquisitions, which added $312,000$558,000 and $557,000$162,000, respectively, to other income for the three and six monthsquarter ended June 30, 2019, respectively, as compared to the same prior year periods.March 31, 2020. Excluding the CapitalTwo River and Country Bank acquisition,acquisitions, the increase in other income for the three monthsquarter ended June 30, 2019March 31, 2020 was primarily due to a decrease in the loss from other real estate operations of $860,000 and an increase in derivativecommercial loan swap fee income of $612,000, partially offset by decreases in fees and service charges of $724,000. Excluding the Capital Bank acquisition, the increase in other income for the six months ended June 30, 2019 was primarily due to a decrease in the loss from other real estate operations of $1.3$3.6 million, an increase in derivative fee income of $1.1 million and an increase in bankcard services of $553,000, partially offset by decreases in fees and service charges of $1.0 million, rental income of $704,000 received primarily for January and February 2018 on the Company’s executive office, and the gain on sale of loans of $608,000 (mostly relatedas compared to the sale of one non-performing commercial loan relationship during 2018).corresponding prior year period.

Operating expenses were flat at $50.9 million and decreasedincreased to $98.2$62.8 million for the three and six monthsquarter ended June 30, 2019, respectively,March 31, 2020, as compared to $50.9$47.3 million and $107.7 million, respectively, in the same prior year periods.period. Operating expenses for the three and six monthsquarter ended June 30, 2019March 31, 2020 included $8.9$11.1 million and $14.3 million, respectively, of merger related expenses,and branch consolidation expenses, and compensation expense due to the retirement of an executive officer, as compared to $8.4$5.4 million and $26.7 million, respectively, of merger related and branch consolidation expenses in the same prior year periods.period. Excluding the impact of merger related and branch consolidation expenses, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year waswere due to the CapitalTwo River and Country Bank acquisition,acquisitions, which added $1.9$5.3 million and $3.3$3.2 million, respectively, for the three and six monthsquarter ended June 30, 2019, respectively. Excluding the Capital Bank acquisition, the decreaseMarch 31, 2020. The remaining increase in operating expenses for the three months ended June 30, 2019 from the prior year period was primarily due to decreases in compensation and employee benefits expenseexpenses relating to the COVID-19 outbreak of $2.2 million, occupancy expenses and federal insurance premium, partially offset by increases in check card processing and marketing expenses. Excluding the Capital Bank acquisition, the remaining decrease in operating expenses for the six months ended June 30, 2019 from the prior year period, was primarily due to decreases in compensation and employee benefits expense of $1.8 million, a decrease in federal insurance premium and a decrease in occupancy expense, partially offset by increases in marketing expenses of $611,000, and check card processing of $597,000.$1.0 million.

The provision for income taxes was $4.5 million and $9.3$4.0 million for the three and six monthsquarter ended June 30, 2019, respectively,March 31, 2020, as compared to $3.0$4.8 million, and $4.0 million, respectively, for the same prior year periods.period. The effective tax rate was 19.0% and 18.8%19.7% for the three and six monthsquarter ended June 30, 2019, respectively,March 31, 2020, as compared to 16.1% and 16.0%, respectively,18.6% for the same prior year periods.period. The lowerhigher effective tax ratesrate in the priorcurrent year periods wereperiod is primarily due to largerthe impact of a New Jersey tax benefits from employee stock option exercises.code change.

Liquidity and Capital Resources

At June 30, 2019,March 31, 2020, the Company had $234.0$214.0 million of outstanding overnight borrowings from the FHLB, as compared to $174.0$270.0 million at December 31, 2018.2019. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB advances, including overnight borrowings, totaled $453.6$825.8 million and $449.4$519.3 million, at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

The Company’s cash needs for the sixthree months ended June 30,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 purchase of treasury stock. The Company’s cash needs for the three months ended March 31, 2019 were primarily satisfied by principal payments on loans and mortgage-backed securities, increased deposits, and acquired cash from Capital Bank. The cash was principally utilized for loan originations, the purchase of loans receivable and securities, and the repayment of borrowings. The Company’s cash needs for the six months ended June 30, 2018 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of investment securities, and increased borrowings. The cash was principally utilized for the purchase of loans receivable, loan originations, the purchase of securities, and to fund deposit outlows.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2019,March 31, 2020, outstanding undrawn lines of credit totaled $802.9$979.9 million and outstanding commitments to originate loans totaled $297.8$525.3 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $437.5$794.9 million at June 30, 2019. As needed, managementMarch 31, 2020. Management is opportunistic about renewing these time deposits.deposits, as needed.

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. Due to the uncertainty caused by COVID-19, management has also significantly increased the Company’s balance sheet liquidity.

Under the Company’s common stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held in treasury for general corporate purposes. For the quarter ended June 30,March 31, 2020, the Company repurchased 648,851 shares of common stock. On February 28, 2020, the Company suspended its repurchase activity in light of the COVID-19 pandemic. For the quarter ended March 31, 2019, the Company repurchased 149,860159,307 shares of common stock and did not repurchase any shares of common stock for the quarter ended June 30, 2018.stock. At June 30, 2019,March 31, 2020, there were 986,3862,019,145 shares available to be repurchased under the stock repurchase program authorized in AprilDecember of 2017.2019.

Cash dividends on common stock declared and paid during the first sixthree months of 20192020 were $17.3$10.3 million, as compared to $14.3$8.6 million in the same prior year period. The increase in dividends was a result of an increase in the dividend rate and the additional shares issued in the acquisitionacquisitions of CapitalTwo River and Country Bank. On July 25, 2019,April 23, 2020, the Company’s Board of Directors declared a quarterly cash dividend of seventeen cents ($0.17) per common share. The dividend is payable on August 16, 2019May 15, 2020 to stockholders of record at the close of business on August 5, 2019.May 4, 2020.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., are capital distributions from the bank subsidiary and the issuance of preferred and common stock and debt. For the sixthree months ended June 30, 2019,March 31, 2020, the Company received a dividend payment of $12.0$18.0 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 constraints imposed by the

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

At June 30, 2019,March 31, 2020, the Company maintained tangible common equity of $745.1$881.5 million, for a tangible common equity to assets ratio of 9.76%8.85%. At December 31, 2018,2019, the Company maintained tangible common equity of $683.9$762.9 million, for a tangible common equity to assets ratio of 9.55%9.71%.

Off-Balance-Sheet Arrangements and Contractual Obligations

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 under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. 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 June 30, 2019both March 31, 2020 and December 31, 2018,2019, the reserve for repurchased loans and loss sharing obligations amounted to $1.2 million and $1.3 million, respectively.$1.1 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2019March 31, 2020 (in thousands):

Debt obligations include advances from the FHLB and other borrowings and have defined terms.

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.

Non-Performing Assets

The Company’s non-performing loans totaled $17.8$16.3 million at June 30, 2019,March 31, 2020, as compared to $17.4$17.8 million at December 31, 2018.2019. Included in the non-performing loans total was $6.8$6.2 million and $3.6$6.6 million of troubled debt restructured (“TDR”) loans at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Non-performing loans do not include $13.4$59.8 million and $8.9$13.3 million of acquired PCIPCD loans at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. At June 30, 2019,March 31, 2020, the allowance for loancredit losses totaled $16.1$29.6 million, or 0.37% of total loans, as compared to $16.9 million, or 0.27% of total loans as compared to $16.6 million, or 0.30% of total loans at December 31, 2018. These ratios exclude existing fair value credit marks2019.

In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complies with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. This program allows for a deferral of payments for 90 days, which may extend for an additional 90 days, for a maximum of 180 days on acquired loans of $36.0 milliona cumulative and $31.6 million at June 30, 2019successive basis. The deferred payments along with interest accrued during the deferral period are due and December 31, 2018, respectively. Thesepayable on the maturity date. Under recently issued guidance, provided these loans were acquiredcurrent as of either year end or the date of the modification, these loans are not considered TDR loans at fair value with no related allowances for loan losses. March 31, 2020 and will not be reported as past due during the deferral period.

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):

The increase in special mention and substandard loans is primarily due to the addition of one commercial loan relationshipTwo River and the re-grading of the Capital Bank loan portfolio using the Bank’s risk rating scale. The classification downgrades are consistent with the Company’s due diligence findings prior to the acquisition and reflective of the credit mark at the time of acquisition. The decrease in substandard loans is primarily due to the payoff of four commercial loan relationships.Country Bank.

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, 20182019 (the “2018“2019 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. 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 loancredit losses and judgments regarding securities are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. 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. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

In addition to historical information, this quarterly reportpresentation 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 the Company.OceanFirst Financial Corp. (the “Company” or “OCFC”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,”“believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “10-K”), under Item 1A - Risk Factors, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission 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 the 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, and accounting principles and guidelines and the Company’sBank’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s 2018 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. Further description of the risks and uncertainties to the business are included in Item 1, Business, and Item 1A, Risk Factors, of the Company’s 2018 Form 10-K, as amended by its subsequent SEC filings.

At June 30, 2019,March 31, 2020, the Company’s one-year gap was positive 6.63%4.39% as compared to positive 4.89%4.31% at December 31, 2018.2019. These results were within the approved policy guidelines.

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 June 30, 2019March 31, 2020 and December 31, 2018.2019. 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 20182019 Form 10-K.