# OCEANFIRST FINANCIAL CORP (OCFC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OCEANFIRST FINANCIAL CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1004702/000100470223000017/ocfc-20221231.htm
Accession: 0001004702-23-000017
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OCFC/
All MD&A years: /company/OCFC/mda/
Previous year: /company/OCFC/mda/fy2021/ (FY 2021)
Next year: /company/OCFC/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

OceanFirst Financial Corp. (the “Company”) has been the holding company for OceanFirst Bank N.A. (the “Bank”) since it acquired the stock of the Bank upon the Bank’s Conversion.

The Company conducts business primarily through its ownership of the Bank, which, at December 31, 2022, operated its branch office and headquarters located in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, and an administrative office located in Mount Laurel, New Jersey. The Bank also conducts its business at 37 additional branch offices and deposit production facilities located throughout central and southern New Jersey and the greater metropolitan area of New York City and Philadelphia. The Bank also operated commercial loan production offices in New Jersey, New York City, the greater Philadelphia area, Baltimore, and Boston.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on the Company’s 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, gain on sale of loans, securities and equity investments, title-related fees and service charges and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy, 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 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.

Recent Acquisitions

On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60% in Trident Abstract Title Agency, LLC (“Trident”), which provides commercial and residential title services. Total consideration paid was $7.1 million and goodwill from the transaction amounted to $5.8 million. Trident’s results of operations are included in the consolidated results for the period beginning on April 1, 2022.

The Company’s acquisitions over recent years have enhanced its position as the premier community banking franchise in central and southern New Jersey, and metropolitan areas of Philadelphia and New York City and they have grown business lines, expanded the geographic footprint and improved financial performance. The Company will continue to evaluate potential acquisition opportunities to further create stockholder value.

Strategy

The Company operates as a full-service regional community bank delivering comprehensive financial products and services, which can include commercial and consumer financing, deposit services, and wealth management products and services, throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, and Boston. The Bank competes with larger, out-of-market financial service providers through its local and digital focus and the delivery of superior service. The Bank also competes with smaller in-market financial service providers by offering a broad array of products and services and by having an ability to extend larger credits.

The Company’s strategy has been to grow profitability while limiting exposure to credit, interest rate, and operational risks. To accomplish these objectives, the Bank has sought to: (1) grow commercial loans through the offering of commercial lending services to local businesses and through strategic expansions to adjacent markets; (2) grow core deposits (defined as all deposits excluding time deposits) through product offerings appealing to a broadened customer base; and (3) increase non-interest income by expanding the menu of fee-based products and services and investing additional resources in these product lines. The growth in these areas has occurred both organically and through acquisitions and equity investments.

The Company focuses on prudent growth to create value for stockholders, which may include opportunistic acquisitions. The Company will also continue to build additional operational infrastructure and invest in key personnel in response to growth and changing business conditions.

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Growing Commercial Loans

With industry consolidation eliminating many locally-headquartered competitors, the Company fills a void for locally-delivered commercial loan and deposit services. The Bank has strategically and steadily added experienced commercial lenders in various New Jersey counties as well as teams in New York City, the greater Philadelphia area, Baltimore, and Boston. At December 31, 2022, commercial loans (which includes multi-family and commercial real estate loans, commercial construction loans, and commercial and industrial loans) represented 68.5% of the Bank’s total loans, as compared to 65.8% at December 31, 2020. Commercial loan products entail a higher degree of credit risk than residential real estate lending activity. As a result, management continues to employ a well-defined credit policy focusing on quality underwriting and close oversight and Board monitoring. See Risk Factors – Risks Related to Lending Activities – The Bank’s emphasis on commercial lending may expose the Bank to increased lending risks.

Increasing Core Deposits

The Bank seeks to increase core deposits in its primary market area by improving market penetration. The Bank has benefited from efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core products and services. Ongoing product development and design to deepen market penetration will allow the Bank to rely on competencies in commercial lending and the retail branch network to drive core deposit growth while the Bank is marketing non-core time deposit products as a short-term funding resource. The Bank continues to invest in the overall customer experience with the Bank’s customer satisfaction and digital capabilities on par with national banks and fintechs companies.

Enhancing Non-Interest Income

Management continues to diversify the Bank’s product lines and expand related resources in order to enhance non-interest income. The Bank is focused on growth opportunities in areas such as derivative contracts, trust and asset management, digital product offerings, and equity investments in non-bank finance companies.

The Bank also offers investment products for sale through its retail branch network and a hybrid robo-advisor product offered by the Bank’s partner, Nest Egg, a registered investment adviser. Nest Egg is an investment platform that helps customers define and reach financial goals by providing access to high quality and cost-effective investments. It includes web-based tools as well as access to personal financial advisors via telephone, chat, or video. At December 31, 2022, the Company had an ownership interest of less than 20% in Nest Egg and a representative on the Board of Directors. The Company’s minority interest in Nest Egg does not require separate entity reporting.

During 2021, the Company made a minority, non-controlling equity investment of $10.0 million in Auxilior Capital Partners, Inc. (“Auxilior”), and received representation on the Auxilior Board of Directors. Auxilior was formed in 2020 as a nationwide specialty commercial equipment finance company focused on five key business verticals: construction and infrastructure, transportation and logistics, franchise finance, healthcare, and bank outsourcing. In addition to origination, underwriting, asset management, and customer service functions within each industry vertical, Auxilior can syndicate full loans as well as participations to banks, funds, and other third-party buyers of assets. On November 29, 2022, the Company invested an additional $2.8 million as part of a new round of financing by the Company and other investors.

On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60% in Trident. Trident provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey. The acquisition is complimentary to the Company’s existing consumer and commercial lending business and provided an additional source of non-interest income to benefit the Company.

Branch Rationalization and Service Delivery

Management continued to evaluate the Bank’s branch network for consolidation opportunities. The Bank consolidated 10 branches in 2022, following the consolidation of 13 branches in 2021 and 13 branches in 2020. The Bank has consolidated 77 branch locations since 2013. The Bank also sold two branches in 2021 with deposits of $100.9 million. In addition to branch consolidations, the Bank is adapting to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff handling sales and service transactions, as well as increasing the marketing of products that feature digital and mobile services. In certain locations, routine transactions are handled through video teller machines, an advanced technology with live team members in a remote location that perform transactions for multiple video teller machines. The Bank is also investing in multiple digital services to enhance the customer experience and improve security. At December 31, 2022, all of the branch staff were trained as certified Digital Bankers to better support customers’ use and adoption of digital services.

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Capital Management

The Company conducts capital stress testing, which includes various scenarios, as one means of evaluating capital adequacy. The results of stress testing are considered in the capital planning process and strategy development. In addition to the objectives described above, the Company actively manages its capital position to ensure adequate coverage and improve return on stockholders’ equity. The Company also analyzes the need to raise additional capital in the future, through issuance of debt or equity, to meet the commitments and business needs. Over the past few years, the Company has implemented or announced six stock repurchase programs. On June 25, 2021, the Company announced the authorization to repurchase up to an additional 5% of the Company’s outstanding common stock, or 3.0 million shares. For the year ended December 31, 2022, the Company repurchased 373,223 shares of its common stock under this repurchase program and 2,934,438 shares remain available for repurchase.

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Selected Financial Data

The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.

[[GREPCENT_TABLE]]
[["","","At December 31,"],["","","2022","","2021","","2020"],["","","(dollars in thousands)"],["Selected Financial Condition Data:"],["Total assets","","$","13,103,896","","","$","11,739,616","","","$","11,448,313"],["Debt securities available-for-sale, at estimated fair value","","457,648","","","568,255","","","183,302"],["Debt securities held-to-maturity, net of allowance for securities credit losses","","1,221,138","","","1,139,193","","","937,253"],["Equity investments","","102,037","","","101,155","","","107,079"],["Restricted equity investments, at cost","","109,278","","","53,195","","","51,705"],["Loans receivable, net of allowance for loan credit losses","","9,868,718","","","8,583,352","","","7,704,857"],["Deposits","","9,675,206","","","9,732,816","","","9,427,616"],["Federal Home Loan Bank (\"FHLB\") advances","","1,211,166","","","\u2014","","","\u2014"],["Securities sold under agreements to repurchase with customers and other borrowings","","264,500","","","347,910","","","363,925"],["Total stockholders\u2019 equity","","1,585,464","","","1,516,553","","","1,484,130"],["","","For the Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(dollars in thousands, except per share amounts)"],["Selected Operating Data:"],["Interest income","","$","431,175","","","$","342,092","","","$","379,608"],["Interest expense","","53,698","","","36,754","","","66,657"],["Net interest income","","377,477","","","305,338","","","312,951"],["Credit loss expense (benefit)","","7,768","","","(11,832)","","","59,404"],["Net interest income after credit loss expense (benefit)","","369,709","","","317,170","","","253,547"],["Other income (excluding net gain on equity investments and gain on sale of Paycheck Protection Program (\u201cPPP\u201d) loans)","","49,409","","","44,786","","","47,611"],["Net gain on equity investments","","9,685","","","7,145","","","21,214"],["Gain on sale of PPP loans","","\u2014","","","\u2014","","","5,101"],["Operating expenses (excluding branch consolidation expense, net, merger related expenses, and FHLB advance prepayment fees)","","231,433","","","213,020","","","208,604"],["FHLB advance prepayment fees","","\u2014","","","\u2014","","","14,257"],["Branch consolidation expense, net","","713","","","12,337","","","7,623"],["Merger related expenses","","2,735","","","1,503","","","15,947"],["Income before provision for income taxes","","193,922","","","142,241","","","81,042"],["Provision for income taxes","","46,565","","","32,165","","","17,733"],["Net income","","$","147,357","","","$","110,076","","","$","63,309"],["Net income attributable to non-controlling interest","","754","","","\u2014","","","\u2014"],["Net income attributable to OceanFirst Financial Corp.","","$","146,603","","","$","110,076","","","$","63,309"],["Net income available to common stockholders","","$","142,587","","","$","106,060","","","$","61,212"],["Basic earnings per share","","$","2.43","","","$","1.79","","","$","1.02"],["Diluted earnings per share","","$","2.42","","","$","1.78","","","$","1.02"]]
[[/GREPCENT_TABLE]]

39

(continued)

[[GREPCENT_TABLE]]
[["","","At or for the Year Ended December 31,"],["","","2022","","2021","","2020"],["Selected Financial Ratios and Other Data (1):"],["Performance Ratios:"],["Return on average assets (2)(3)","","1.15","%","","0.91","%","","0.55","%"],["Return on average stockholders\u2019 equity (2)(3)","","9.24","","","7.02","","","4.20"],["Stockholders\u2019 equity to total assets","","12.10","","","12.92","","","12.96"],["Net interest rate spread (4)","","3.20","","","2.80","","","2.96"],["Net interest margin (5)","","3.37","","","2.93","","","3.16"],["Operating expenses to average assets (2)","","1.90","","","1.94","","","2.20"],["Efficiency ratio (2)(6)","","53.80","","","63.50","","","63.70"],["Loans-to-deposits ratio (7)","","102.50","","","88.60","","","82.27"],["Asset Quality Ratios:"],["Non-performing loans as a percent of total loans receivable (7)(8)","","0.23","","","0.30","","","0.60"],["Non-performing assets as a percent of total assets (8)","","0.18","","","0.22","","","0.41"],["Allowance for loan credit losses as a percent of total loans receivable (7)(9)","","0.57","","","0.57","","","0.78"],["Allowance for loan credit losses as a percent of total non-performing loans (8)(9)","","244.25","","","191.61","","","129.60"],["Wealth Management (dollars in thousands):"],["Wealth assets under administration and management (\u201cAUA/M\u201d)","","$","324,066","","","$","287,404","","","$","245,175"],["Nest Egg AUA/M","","403,538","","","428,558","","","398,174"],["Per Share Data:"],["Cash dividends per common share","","$","0.74","","","$","0.68","","","$","0.68"],["Dividend payout ratio per common share","","30.58","%","","38.20","%","","66.73","%"],["Stockholders\u2019 equity per common share at end of period","","$","26.81","","","$","25.63","","","$","24.57"],["Number of full-service customer facilities:","","38","","","47","","","62"]]
[[/GREPCENT_TABLE]]

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

(2)Performance ratios for 2022 included a net benefit related to merger related expenses, net branch consolidation expense, and gain on equity investments of $6.2 million, or $4.6 million, net of tax expense. Performance ratios for 2021 included a net expense related to merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $6.7 million, or $5.1 million, net of tax benefit. Performance ratios for 2020 included a net expense related to a net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, net branch consolidation expenses, and Two River Bancorp (“Two River”) and Country bank Holding Company, Inc. (“Country Bank”) opening credit loss expense under the CECL model of $14.3 million, or $11.0 million, net of tax benefit.

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

(4)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)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.

(8)Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans generally 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. Amounts and ratios reported in the prior periods have been revised to conform with the current year’s presentation.

(9)The loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $11.4 million, $18.9 million, and $28.0 million at December 31, 2022, 2021, and 2020, respectively.

40

Summary

Highlights of the Company’s financial results for the year ended December 31, 2022 were as follows:

Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, $171.6 million of residential loan pool purchases.

Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021. FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion.

Net income available to common stockholders for the year ended December 31, 2022 was $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share for the prior year. Net income available to common stockholders for the year ended December 31, 2022 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $2.7 million, $713,000, and $9.7 million, respectively. These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax. These items increased diluted earnings per share by $0.08 for the year ended December 31, 2022. Net income for the year ended December 31, 2021 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax. These items reduced diluted earnings per share by $0.08 for the year ended December 31, 2021.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.10% at December 31, 2022.

Critical Accounting Policies and Estimates

Note 1 Summary of Significant Accounting Policies to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated 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 a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires 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. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). Allowance for credit losses in accordance with ASU 2016-13 is a critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended December 31, 2022.

Allowance for Credit Losses (“ACL”)

The Company’s methodology to measure the ACL incorporates both quantitative and qualitative information to assess lifetime

expected credit losses at the portfolio segment level.

The quantitative component of the ACL involves assumptions that require a significant level of estimation; these include historical losses as a predictor of future performance, and the accuracy of macro-economic forecasts over a reasonable and supportable forecast period. The Company has elected to use an open pool method and extends its look back period each quarter to capture as many data points as possible in its historical loss rate calculation. A historical data set is expected to provide the best indication of future credit performance. Alternative loss calculation methods, such as vintage and migration methodologies, limit observable data to closed pools of loans, which excludes performance data from the historical loss rate calculation.

Macro-economic forecasts used in the quantitative analysis are provided by a leader in global forecasting. The Company uses the base case macro-economic forecast to reflect the consensus view of future economic conditions. Electing scenarios that are stronger or weaker than the base case would reduce or increase, respectively, the ACL measurement. The Company measures the accuracy of the macro-economic forecasts quarterly to identify any material deviations that would be considered for a

41

qualitative adjustment. The Company assumes a reasonable and supportable forecast period of 8 quarters and a reversion period of 4 quarters based on the analysis of historical U.S. business cycles.

Prepayment and forward interest rate projections are also assumptions used in the quantitative model subject to estimation. These assumptions are consistent with the assumptions employed by the Company’s Interest Rate Risk (“IRR”) model. Changes in these assumptions have varying implications to the ACL measurement. For example, faster prepayment rates would shorten the life of loans and reduce the lifetime expected credit loss, whereas slower prepayment rates would have the inverse effect.

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative loss factors are grounded in the Company’s long-term credit losses and reflect an assumption that past behavior is a reasonable predictor of future performance. The Company considers the peak two-year net charge off rate to capture maximum potential volatility over the reasonable and supportable forecast period. Historical losses that inform the guardrails for the qualitative adjustments are anchored to 2005 and extended annually. This period is intended to represent the credit profile of the current portfolio and capture prior performance in a severe economic recession. These guardrails are updated annually to capture recent behavior that is indicative of the credit profile of the current portfolio.

Management considers subjective, objective, and unique qualitative factors at each estimation date. Subjective factors incorporate external factors, personnel, and controls, as well as portfolio composition and performances. Subjective factors include local competition; portfolio nature, volume and concentration; credit trends; lending policy, procedure and loan review; lending management and staff; regulatory changes and forecast uncertainty. Objective factors address gaps in the quantitative model, such as the limited loss history and the inherent risk of Special Mention commercial real estate loans. Unique factors will capture one-time events, such as environmental threats and model updates that are expected to impact performance over the forecast period. Unique factors are identified, assessed, and documented in the quarter they are applied. The Company incorporated unique factors in 2022 to address macro-economic uncertainty and alternative economic forecast projections.

Although management believes that it uses the best information available to establish the ACL in conformity with GAAP, future adjustments to the ACL may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. For example, at December 31, 2022, if the Company had elected a contemporaneous downside scenario where it was assumed that commercial borrowers are more adversely impacted by the velocity of interest rate change, the ACL measurement would have been approximately $2.3 million higher. Alternatively, if the Company had elected a severely adverse economic scenario consistent with the Federal Reserve’s severe recession scenario, the ACL measurement would have been approximately $11.3 million higher. These sensitivity scenarios do not represent a change in the Company’s expectations of credit performance or the economic environment but provide hypothetical results to access the sensitivity of the ACL to changes in key inputs.

Given the level of uncertainty and the material impact on the ACL measurement, all assumptions are reviewed and updated as necessary at each estimation date. Other than discussed above, there were no changes in the estimation methodology for these assumptions in 2022.

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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. For the years ended December 31, 2022, 2021, and 2020, interest income included net loan fees of $3.0 million, $2.5 million, and $6.0 million, respectively.

The following table sets forth certain information relating to the Company for each of the years ended December 31, 2022, 2021 and 2020. The yields and costs are derived by dividing income or expense by the average balance of 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.

[[GREPCENT_TABLE]]
[["","For the Year Ended December 31,"],["","2022","","2021","","2020"],["(dollars in thousands)","Average Balance","","Interest","","Average Yield/ Cost","","Average Balance","","Interest","","Average Yield/ Cost","","Average Balance","","Interest","","Average Yield/ Cost"],["Assets:"],["Interest-earning assets:"],["Interest-earning deposits and short-term investments","$","72,913","","$","1,106","","","1.52","%","","$","969,982","","$","1,258","","","0.13","%","","$","613,971","","$","1,034","","","0.17","%"],["Securities (1)","1,792,598","","39,683","","","2.21","","","1,517,649","","25,597","","","1.69","","","1,159,764","","29,353","","","2.53"],["Loans receivable, net (2)"],["Commercial","6,386,755","","287,044","","","4.49","","","5,362,265","","221,144","","","4.12","","","5,299,813","","236,749","","","4.47"],["Residential real estate","2,724,398","","91,432","","","3.36","","","2,309,790","","79,696","","","3.45","","","2,465,740","","93,120","","","3.78"],["Home equity loans and line and other consumer (\u201cother consumer\u201d)","256,912","","11,910","","","4.64","","","298,193","","14,397","","","4.83","","","390,421","","19,352","","","4.96"],["Allowance for loan credit losses, net of deferred loan costs and fees","(44,446)","","\u2014","","","\u2014","","","(48,637)","","\u2014","","","\u2014","","","(33,343)","","\u2014","","","\u2014"],["Loans receivable, net (2)","9,323,619","","390,386","","","4.19","","","7,921,611","","315,237","","","3.98","","","8,122,631","","349,221","","","4.30"],["Total interest-earning assets","11,189,130","","431,175","","","3.85","","","10,409,242","","342,092","","","3.29","","","9,896,366","","379,608","","","3.84"],["Non-interest-earning assets","1,200,725","","","","","","1,260,079","","","","","","1,310,474"],["Total assets","$","12,389,855","","","","","","$","11,669,321","","","","","","","$","11,206,840"],["Liabilities and Stockholders\u2019 Equity:"],["Interest-bearing liabilities:"],["Interest-bearing checking","$","4,063,716","","11,344","","","0.28","%","","$","3,878,465","","13,400","","","0.35","%","","$","3,168,889","","19,395","","","0.61","%"],["Money market","764,837","","2,234","","","0.29","","","769,157","","1,105","","","0.14","","","677,554","","2,902","","","0.43"],["Savings","1,597,648","","758","","","0.05","","","1,581,472","","631","","","0.04","","","1,449,982","","2,505","","","0.17"],["Time deposits","1,167,499","","16,685","","","1.43","","","985,328","","10,074","","","1.02","","","1,531,857","","23,488","","","1.53"],["Total","7,593,700","","31,021","","","0.41","","","7,214,422","","25,210","","","0.35","","","6,828,282","","48,290","","","0.71"],["FHLB advances","389,750","","10,365","","","2.66","","","\u2014","","\u2014","","","\u2014","","","413,290","","7,018","","","1.70"],["Securities sold under agreements to repurchase with customers","101,377","","159","","","0.16","","","134,939","","253","","","0.19","","","125,500","","562","","","0.45"],["Other borrowings","203,117","","12,153","","","5.98","","","228,600","","11,291","","","4.94","","","207,386","","10,787","","","5.20"],["Total borrowings","694,244","","22,677","","","3.27","","","363,539","","11,544","","","3.18","","","746,176","","18,367","","","2.46"],["Total interest-bearing liabilities","8,287,944","","53,698","","","0.65","","","7,577,961","","36,754","","","0.49","","","7,574,458","","66,657","","","0.88"],["Non-interest-bearing deposits","2,319,657","","","","","","2,429,547","","","","","","2,031,100"],["Non-interest-bearing liabilities","239,861","","","","","","151,950","","","","","","144,571"],["Total liabilities","10,847,462","","","","","","10,159,458","","","","","","9,750,129"],["Stockholders\u2019 equity","1,542,393","","","","","","1,509,863","","","","","","1,456,711"],["Total liabilities and equity","$","12,389,855","","","","","","","$","11,669,321","","","","","","$","11,206,840"],["Net interest income","","","$","377,477","","","","","","","$","305,338","","","","","","","$","312,951"],["Net interest rate spread (3)","","","","","3.20","%","","","","","","2.80","%","","","","","","2.96","%"],["Net interest margin (4)","","","","","3.37","%","","","","","","2.93","%","","","","","","3.16","%"],["Total cost of deposits (including non-interest-bearing deposits)","","","","","0.31","%","","","","","","0.26","%","","","","","","0.55","%"],["Ratio of interest-earning assets to interest-bearing liabilities","135.00","%","","","","","","137.36","%","","","","","","130.65","%"]]
[[/GREPCENT_TABLE]]

43

(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 costs and fees, 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.

44

Rate Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. There were no out-of-period amounts excluded from the following table. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022","","Year Ended December 31, 2021"],["","","Compared to","","Compared to"],["","","Year Ended December 31, 2021","","Year Ended December 31, 2020"],["","","Increase (Decrease) Due to","","Increase (Decrease) Due to"],["(in thousands)","","Volume","","Rate","","Net","","Volume","","Rate","","Net"],["Interest-earning assets:"],["Interest-earning deposits and short-term investments","","$","(2,159)","","","$","2,007","","","$","(152)","","","$","509","","","$","(285)","","","$","224"],["Securities (1)","","5,220","","","8,866","","","14,086","","","7,576","","","(11,332)","","","(3,756)"],["Loans receivable, net (2)"],["Commercial","","44,828","","","21,072","","","65,900","","","2,812","","","(18,417)","","","(15,605)"],["Residential real estate","","13,877","","","(2,141)","","","11,736","","","(5,640)","","","(7,784)","","","(13,424)"],["Other consumer","","(1,937)","","","(550)","","","(2,487)","","","(4,460)","","","(495)","","","(4,955)"],["Loans receivable, net (2)","","56,768","","","18,381","","","75,149","","","(7,288)","","","(26,696)","","","(33,984)"],["Total interest-earning assets","","59,829","","","29,254","","","89,083","","","797","","","(38,313)","","","(37,516)"],["Interest-bearing liabilities:"],["Interest-bearing checking","","650","","","(2,706)","","","(2,056)","","","3,611","","","(9,606)","","","(5,995)"],["Money market","","(6)","","","1,135","","","1,129","","","356","","","(2,153)","","","(1,797)"],["Savings","","5","","","122","","","127","","","201","","","(2,075)","","","(1,874)"],["Time deposits","","2,083","","","4,528","","","6,611","","","(6,935)","","","(6,479)","","","(13,414)"],["Total","","2,732","","","3,079","","","5,811","","","(2,767)","","","(20,313)","","","(23,080)"],["FHLB advances","","5,183","","","5,182","","","10,365","","","(3,509)","","","(3,509)","","","(7,018)"],["Securities sold under agreements to repurchase with customers","","(57)","","","(37)","","","(94)","","","40","","","(349)","","","(309)"],["Other borrowings","","(1,348)","","","2,210","","","862","","","1,063","","","(559)","","","504"],["Total borrowings","","3,778","","","7,355","","","11,133","","","(2,406)","","","(4,417)","","","(6,823)"],["Total interest-bearing liabilities","","6,510","","","10,434","","","16,944","","","(5,173)","","","(24,730)","","","(29,903)"],["Net change in net interest income","","$","53,319","","","$","18,820","","","$","72,139","","","$","5,970","","","$","(13,583)","","","$","(7,613)"]]
[[/GREPCENT_TABLE]]

(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 costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held-for-sale and non-performing loans.

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

Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, $171.6 million of residential loan pool purchases. Total debt securities decreased by $28.7 million at December 31, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment. This was partly offset by purchases in the second half of the year. Other assets increased by $74.1 million to $221.1 million at December 31, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs.

Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021. FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as

45

deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion. Total deposits, excluding time deposits, decreased by $824.6 million to $8.13 billion at December 31, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of non-interest-bearing and interest-bearing checking balances. Time deposits increased to $1.54 billion, or 15.9% of total deposits, at December 31, 2022, from $775.0 million, or 8.0% of total deposits, at December 31, 2021, primarily due to an increase in brokered time deposits. The loans-to-deposit ratio at December 31, 2022 was 102.5%, as compared to 88.6% at December 31, 2021. Other borrowings also decreased by $33.7 million to $195.4 million at December 31, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022.

Other liabilities increased by $224.1 million to $346.2 million at December 31, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties.

Stockholders’ equity increased to $1.59 billion at December 31, 2022, as compared to $1.52 billion at December 31, 2021. Accumulated other comprehensive loss increased by $33.2 million to $36.0 million at December 31, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale, which were adversely impacted by the rising interest rate environment. For the year ended December 31, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82. There were 2,934,438 shares available for repurchase at December 31, 2022 under the existing repurchase program. Stockholders’ equity per common share increased to $26.81 at December 31, 2022, as compared to $25.63 at December 31, 2021.

Comparison of Operating Results for the Years Ended December 31, 2022 and December 31, 2021

General

Net income available to common stockholders for the year ended December 31, 2022 was $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share for the prior year. Net income available to common stockholders for the year ended December 31, 2022 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $2.7 million, $713,000, and $9.7 million, respectively. These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax. Net income for the year ended December 31, 2021 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax.

Interest Income

Interest income for the year ended December 31, 2022 increased to $431.2 million, as compared to $342.1 million in the prior year. Average interest-earning assets increased by $779.9 million for the year ended December 31, 2022, as compared to the prior year, primarily due to loan growth and, to a lesser extent securities growth, funded by the redeployment of excess cash and increased FHLB advances. Average loans receivable, net of allowance for loan credit losses, increased by $1.40 billion for the year ended December 31, 2022, as compared to the prior year, primarily in commercial loans. The yield on average interest-earning assets increased to 3.85% for the year ended December 31, 2022, as compared to 3.29% for the prior year, primarily due to the impact of the rising rate environment on interest-earning assets.

Interest Expense

Interest expense for the year ended December 31, 2022 was $53.7 million, as compared to $36.8 million in the prior year. For the year ended December 31, 2022, the cost of average interest-bearing liabilities increased to 0.65%, from 0.49% in the prior year, as a result of higher costs associated with FHLB advances and interest-bearing deposits, including time deposits issued in an elevated rate environment in 2022. The total cost of deposits (including non-interest bearing deposits) increased to 0.31% for the year ended December 31, 2022, as compared to 0.26% for the prior year.

Net Interest Income and Margin

Net interest income for the year ended December 31, 2022 increased to $377.5 million, as compared to $305.3 million for the prior year, reflecting an increase in average interest-earning assets and net interest margin. Net interest margin increased to 3.37% for the year ended December 31, 2022, from 2.93% for the prior year. The net interest margin expansion was enhanced by the impact of the rising rate environment on interest-earning assets and the redeployment of excess cash into loans, partly offset by an increased cost of funds and the growth of interest-bearing liabilities.

46

Credit Loss Expense (Benefit)

Credit loss expense for the year ended December 31, 2022 was $7.8 million, as compared to credit loss benefit of $11.8 million for the prior year. The credit loss expense for the year ended December 31, 2022 was primarily influenced by loan growth, slowing prepayment assumptions, and increasingly uncertain macro-economic forecasts due to persistent inflation, interest rate increases, and global economic headwinds, partly offset by positive trends in the Company’s criticized and classified assets. Net loan recoveries were $340,000 for the year ended December 31, 2022, as compared to $461,000 in the prior year. Non-performing loans totaled $23.3 million at December 31, 2022, as compared to $25.5 million at December 31, 2021. The decrease was primarily due to loans that were paid off and partly due to loans that returned to accrual status.

Non-interest Income

Other income for the year ended December 31, 2022 increased to $59.1 million, as compared to $51.9 million for the prior year. The increase was driven by the impact of Trident, which added $10.4 million primarily related to title-related fees and service charges; an increase in commercial loan swap income of $3.0 million; and an increase in net gain on equity investments of $2.5 million. Net gains on equity investments in the current year included a $17.5 million unrealized gain on the Auxilior investment. These increases were partly offset by decreases in bankcard services of $4.1 million, primarily as a result of the Durbin amendment, net gain on sale of loans of $2.8 million, fees and service charges (excluding Trident) of $814,000, and Paycheck Protection Program loan origination referral fees of $800,000 recognized in the prior year.

Non-interest Expense

Operating expenses for the year ended December 31, 2022 increased to $234.9 million, as compared to $226.9 million in the prior year. Operating expenses for the year ended December 31, 2022 and 2021 included $3.4 million and $13.8 million, respectively, of merger related and net branch consolidation expenses. The remaining increase of $18.4 million in operating expenses for the year ended December 31, 2022, as compared to the prior year, was partly due to the impact of Trident, which added $8.5 million of expenses. Other increases included compensation and benefits expense of $6.6 million, primarily related to higher compensation and incentive costs, professional fees of $1.9 million, data processing expense of $1.5 million, and federal deposit insurance and regulatory assessments of $1.2 million, partly offset by a decrease in amortization of core deposit intangible of $734,000.

Income Tax Expense

The provision for income taxes for the year ended December 31, 2022 was $46.6 million, as compared to $32.2 million for the prior year, primarily reflecting the increase in income before provision for income taxes. The effective tax rate was 24.0% for the year ended December 31, 2022, as compared to 22.6% for the prior year.

Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020

Refer to the Company’s 2021 Form 10-K on pages 48-49.

Liquidity and Capital Resources

The primary sources of liquidity specifically available to OceanFirst Financial Corp. are dividends from the Bank, proceeds from sale of investments, the issuance of preferred and common stock, and debt. For the year ended December 31, 2022, the holding company received dividend payments of $73.0 million primarily from the Bank. At December 31, 2022, OceanFirst Financial Corp. held $43.5 million in cash.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, other borrowings, and proceeds from the sale of loans and investments. While scheduled payments on loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition. The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions and access to the Federal Reserve Bank discount window.

At December 31, 2022 the Bank had $1.21 billion of term advances and no overnight borrowings from the FHLB, as compared to $0 at December 31, 2021. The Bank regularly utilizes overnight and short-term borrowings to fund short-term liquidity needs.

47

The Company’s cash needs for the year ended December 31, 2022 were primarily satisfied by the net proceeds from FHLB advances, principal repayments on debt securities and loans, and proceeds from maturities and calls of debt maturities. The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt securities, dividend payments, and redemption of subordinate debt. The Company’s cash needs for the year ended December 31, 2021 were primarily satisfied by the 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, purchases of residential loan pools, loan originations, and payment for sale of branches.

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 December 31, 2022, outstanding commitments to originate loans totaled $166.1 million and outstanding undrawn lines of credit totaled $1.78 billion, of which $1.37 billion were commitments to commercial and commercial construction borrowers and $410.9 million were commitments to consumer borrowers and residential construction borrowers. Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts. 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. These commitments are further discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements.

Time deposits scheduled to mature in one year or less totaled $1.04 billion at December 31, 2022.

At December 31, 2022, the Company also had various contractual obligations, which included debt obligations of $1.48 billion, including finance lease obligations of $1.9 million and an additional $20.1 million in operating lease obligations included in other liabilities, and purchase obligations of $111.2 million. Refer to Note 9 Borrowed Funds and Note 17 Leases to the Consolidated Financial Statements for further discussion of debt obligations and lease obligations, respectively. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users, and other factors. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

The Company has a detailed contingency funding plan and obtains 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 Company and the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Company and Bank continue to maintain adequate liquidity under all stress scenarios.

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. 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. For the year ended December 31, 2022, the Company repurchased 373,223 shares of its common stock at a total cost of $7.4 million. For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock at a total cost of $36.1 million. At December 31, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the year ended December 31, 2022 were $43.5 million, as compared to $40.5 million for the prior year. The increase in dividends was a result of an increase in the dividend rate from $0.17 to $0.20 per common share. On January 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend was paid on February 17, 2023 to common stockholders of record at the close of business on February 6, 2023.

Cash dividends on preferred stock declared and paid during the years ended December 31, 2022 and 2021 were $4.0 million for both periods. The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, paid on February 15, 2023 to preferred stockholders of record on January 31, 2023.

The Company’s ability to continue to pay dividends remains dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. 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,

48

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

The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations. See Regulation and Supervision—Bank Regulation – Capital Requirements.

At December 31, 2022, the Company maintained stockholders’ equity to total assets ratio of 12.10%.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2022

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In December 2022, Financial Accounting Standards Board issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance. The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024. Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from LIBOR towards alternative reference rates. As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024. The Company does not expect this update to have a material impact on its financial statements.

The Company has exposure to LIBOR-based products within its lending and corporate treasury functions. As of December 31, 2021, the Company ceased issuing LIBOR-based products and has transitioned to alternative reference rates, including, but not limited to, SOFR, and Prime (collectively with other indices, “Alternative Rates”).

To prepare for the transition to the Alternative Rates, management formed a cross-functional project team to address the LIBOR transition. The project team performed an assessment to identify the potential risks related to the transition from LIBOR to the Alternative Rates. The project team provides updates to executive leadership and the Board.

The Company’s LIBOR transition plan is organized around key work streams, including continued engagement with regulators, industry working groups, counterparties, and clients; comprehensive review of legacy documentation, internal operational and technological readiness; and risk management, among other things.

For the tenors of U.S. dollar LIBOR utilized by the Company, the administrator of LIBOR has extended publication until June 30, 2023. The Company has developed a transition plan for existing LIBOR-based products that are not expected to mature or settle prior to the cessation date. Contract language for existing loans, securities, derivatives, and borrowings is under review and certain contracts will need updated provisions for the transition. Other contracts will automatically convert to an Alternative Rate with no action required. The Company has plans for impacted lines of business to remediate these contracts, train impacted functions, and provide timely notice to clients and counterparties. The Company has approximately $1.2 billion of loans that reference LIBOR, a majority of which have related swaps that also reference LIBOR. In addition, the Company has approximately $250 million of securities, and has issued approximately $80 million of other borrowings that reference LIBOR. The Company expects them all to be converted to the Alternative Rates before LIBOR cessation except for certain contracts, such as a loan in bankruptcy or workout, and may be unable to completely remove exposure to LIBOR prior to the cessation date.

Current fallback language used for recent, renewed, and modified contracts is generally consistent with ARRC recommendations and includes use of “hardwired fallback” language, where appropriate. The Company continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition.

49

Recent Accounting Pronouncements Not Yet Adopted

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restriction. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. The amendments in this ASU were issued to (1) eliminate accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty; (2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company plans to adopt this standard on January 1, 2023. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.

In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. The Company does not expect this standard to have a material impact to the consolidated financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.