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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________ 
FORM 10-Q
 ________________________________________________  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-11713
________________________________________________  
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
 ________________________________________________ 
Delaware
22-3412577
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
110 West Front Street,
Red Bank,
NJ
07701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732) 240-4500
________________________________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common stock, $0.01 par value per share
 
OCFC
 
NASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)
 
OCFCP
 
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No   .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated Filer
 
 
 
 
 
 
 
Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  .
As of August 3, 2020 there were 60,359,511 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

OceanFirst Financial Corp.
INDEX TO FORM 10-Q
 
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL SUMMARY
At or for the Quarters Ended
(dollars in thousands, except per share amounts)
June 30, 2020
 
March 31, 2020
 
June 30, 2019
SELECTED FINANCIAL CONDITION DATA(1):
 
 
 
 
 
Total assets
$
11,345,365

 
$
10,489,074

 
$
8,029,057

Loans receivable, net
8,335,480

 
7,913,541

 
5,943,930

Deposits
8,967,754

 
7,892,067

 
6,187,487

Stockholders’ equity
1,476,434

 
1,409,834

 
1,137,295

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
78,667

 
79,645

 
64,837

Credit loss expense
9,649

 
9,969

 
356

Other income
11,430

 
13,697

 
9,879

Operating expenses
55,932

 
62,796

 
50,915

Net income
18,638

 
16,533

 
18,980

Diluted earnings per share
0.31

 
0.27

 
0.37

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share at end of period
24.47

 
23.38

 
22.24

Tangible common stockholders’ equity per common share (2)
14.79

 
14.62

 
14.57

Cash dividend per share
0.17

 
0.17

 
0.17

Stockholders’ equity to total assets
13.01
%
 
13.44
%
 
14.16
%
Tangible stockholders’ equity to total tangible assets (2)
8.77

 
8.85

 
9.76

Tangible common stockholders’ equity to tangible assets (2)
8.25

 
8.85

 
9.76

Return on average assets (3) (4)
0.67

 
0.64

 
0.94

Return on average tangible assets (2) (3) (4)
0.71

 
0.68

 
0.99

Return on average stockholders’ equity (3) (4)
5.16

 
4.70

 
6.73

Return on average tangible stockholders’ equity  (2) (3) (4)
8.10

 
7.50

 
10.32

Net interest rate spread
3.02

 
3.29

 
3.45

Net interest margin
3.24

 
3.52

 
3.66

Operating expenses to average assets (3) (4)
2.02

 
2.44

 
2.53

Efficiency ratio (4) (5)
62.08

 
67.28

 
68.14

Loan to deposit ratio
93.43

 
100.51

 
96.19

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
21,044

 
$
16,263

 
$
17,796

Non-performing assets
21,292

 
16,747

 
18,661

Allowance for credit losses as a percent of total loans receivable
0.46
%
 
0.37
%
 
0.27
%
Allowance for credit losses as a percent of total non-performing loans
182.99

 
182.22

 
90.67

Non-performing loans as a percent of total loans receivable
0.25

 
0.21

 
0.30

Non-performing assets as a percent of total assets
0.19

 
0.16

 
0.23

 
(1)
With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2)
Tangible stockholders’ equity and tangible assets exclude intangible assets relating to goodwill and core deposit intangible. Tangible common stockholders’ equity also excludes preferred equity.
(3)
Ratios are annualized.
(4)
Performance ratios include the net adverse impact of merger related and branch consolidation expenses of $3.9 million, or $3.0 million, net of tax benefit, for the quarter ended June 30, 2020. Performance ratios include the net adverse impact of merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the Current Expected Credit Loss (“CECL”) model of $13.6 million, or $10.4 million, net of tax benefit, for the quarter ended March 31, 2020. Performance ratios include the net adverse impact of merger related expenses, branch consolidation expenses and compensation expense due to the retirement of an executive officer of $8.9 million, or $7.0 million, net of tax benefit, for the quarter ended June 30, 2019.
(5)
Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.


3

Table of Contents

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 Capital Bank of New Jersey (“Capital Bank”), Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”). These acquisitions added $2.6 billion in assets, $1.9 billion in loans and $2.0 billion in deposits.
Highlights of the Company’s financial results and corporate activities for the three months ended June 30, 2020 were as follows:

Loans and Deposits: Drove record loan and deposit growth, including quarterly originations of $975 million, which included $504 million of Paycheck Protection Program (“PPP”) loans and total loan growth of $450 million after loan sales of $110 million. Deposits increased by $1.076 billion, driven by deposits from PPP borrowers of $504 million, ordinary course growth of $291 million, and short-term brokered deposits of $281 million.

Capital: Bolstered a strong balance sheet with the addition of $181 million of subordinated notes and non-cumulative perpetual preferred stock. The increased capital further strengthened resources available to the Bank while credit metrics, including delinquencies, forbearances, and net charge-offs all evidenced significant positive trends.

Operating Expenses: Improved operating leverage with the consolidation of thirteen branch locations, eight of which were driven by the completed integration of the Two River acquisition bringing the total number of branches consolidated over the past four years to 53. These consolidations increased the average branch size to $145 million and will help reduce operating expenses beginning in the third quarter.

COVID-19: The Company’s second quarter results were adversely impacted by the COVID-19 pandemic, including an elevated credit loss provision of $9.6 million and an additional $1.1 million in operating expense.
Net income for the three months ended June 30, 2020, was $18.6 million, or $0.31 per diluted share, as compared to $19.0 million, or $0.37 per diluted share, for the corresponding prior year period. Net income for the six months ended June 30, 2020 was $35.2 million, or $0.58 per diluted share, as compared to $40.2 million, or $0.79 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2020 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $3.0 million. Net income for the six months ended June 30, 2020 included merger related expenses, branch consolidation expenses, and the Two River and Country Bank opening credit loss expense under the CECL model, which decreased net income, net of tax benefit, by $13.4 million. Net income for the three and six months ended June 30, 2019 included merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, which decreased net income, net of tax benefit, by $7.0 million and $11.4 million, respectively. Excluding these items, net income for the three and six months ended June 30, 2020 was $21.6 million and $48.6 million, respectively, a decrease from $26.0 million and $51.6 million for the same prior year periods, respectively, primarily due to the adverse impact of the COVID-19 outbreak.
The Company remains well-capitalized with a tangible equity to tangible assets ratio of 8.77% at June 30, 2020.
The Company declared a quarterly cash dividend of $0.17 per share. The dividend, related to the quarter ended June 30, 2020, of $0.17 per share will be paid on August 14, 2020 to common stockholders of record on August 3, 2020. The Company also declared a quarterly cash dividend of $0.4764 per share for every depository share, representing 1/40th interest in the Series A Preferred Stock, payable on August 17, 2020 to preferred stockholders of record on July 31, 2020.

4

Table of Contents

Impact of COVID-19

On March 16, 2020 the Company announced a series of actions intended to mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities. The Company offers its Borrower Relief Program to addresses both commercial and consumer needs to customers who were current as of either year end or the date of the modification. In addition, in keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loans are not considered troubled debt restructured (“TDR”) loans at June 30, 2020 and will not be reported as past due during the deferral period.

The Commercial Borrower Relief Program includes: 1) public accommodation businesses, such as restaurants/caterers, and certain retail establishments, that are forced to close are eligible for full deferral of loan payments (principal and interest) for 90 days and immediate working capital facilities up to $200,000; 2) public accommodation businesses that are reducing services in response to the pandemic (such as reducing capacity, transitioning to take-out only, etc.) are eligible to make interest-only payments and defer principal payments for 90 days, and immediate working capital facilities up to $100,000; and 3) additional relief programs may be available to the Bank’s commercial borrowers on an individualized basis, depending on the borrower’s circumstances.

The Consumer Borrower Relief Program includes automatic deferral of residential mortgage or consumer loan payments (principal and interest) for 90 days upon request. Borrowers who request a second 90-day deferral are required to provide reason(s) for financial hardship as a result of COVID-19.

As a result of the COVID-19 outbreak, loans under forbearance totaled $1.5 billion at June 30, 2020. The forbearance pool is expected to decrease substantially as customers return to regular payments. As of July 15, 2020, borrowers with balances totaling $650 million have indicated to the Bank that they will return to regular payments in the third quarter. In accordance with the CARES Act, none of these loans are considered TDR loans and will not be reported as past due during the deferral period.

The Company also accepted and processed applications for loans under the Paycheck Protection Program beginning April 3, 2020. Through July 15, 2020, the Company disbursed $504 million and recorded deferred processing fees of $17.7 million, which will be recognized over the life of the loans.

In addition, COVID-19 could cause a goodwill impairment test where a triggering event has occurred, and under certain circumstances, result in an impairment charge recorded in that period. Such a charge would not impact the Company’s tangible equity to tangible assets ratio of 8.77% or regulatory capital. At June 30, 2020, the Company’s goodwill balance was $501.5 million and the Company concluded that no triggering event occurred and therefore no impairment existed.

The full impact of COVID-19 is unknown and rapidly evolving. It is impacting the Company’s operations and financial results, as well as those of the Bank’s customers. For the quarter ended June 30, 2020, the Company recognized an elevated credit loss expense of $9.6 million and an increase in operating expense of $1.1 million.

For further discussion, see Risk Factors - The ongoing COVID-19 pandemic and measures intended to prevent its spread could adversely affect business activities, financial condition, and results of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.

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Table of Contents

Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.
The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2020 and June 30, 2019. The yields and costs are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.
 
For the Three Months Ended
 
June 30, 2020
 
June 30, 2019
(dollars in thousands)
Average Balance
 
Interest
 
Average
Yield/
Cost
 
Average Balance
 
Interest
 
Average
Yield/
Cost
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
354,016

 
$
115

 
0.13
%
 
$
67,214

 
$
372

 
2.22
%
Securities (1)
1,130,779

 
7,415

 
2.64

 
1,080,690

 
7,121

 
2.64

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,409,238

 
59,460

 
4.42

 
3,309,869

 
42,579

 
5.16

Residential
2,507,076

 
23,870

 
3.81

 
2,187,417

 
22,329

 
4.08

Home Equity
328,144

 
3,853

 
4.72

 
347,028

 
4,656

 
5.38

Other
76,382

 
1,164

 
6.13

 
113,153

 
1,353

 
4.80

Allowance for credit losses net of deferred loan fees
(25,218
)
 

 

 
(9,155
)
 

 

Loans Receivable, net
8,295,622

 
88,347

 
4.28

 
5,948,312

 
70,917

 
4.78

Total interest-earning assets
9,780,417

 
95,877

 
3.94

 
7,096,216

 
78,410

 
4.43

Non-interest-earning assets
1,334,169

 
 
 
 
 
972,683

 
 
 
 
Total assets
$
11,114,586

 
 
 
 
 
$
8,068,899

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,966,631

 
4,800

 
0.65
%
 
$
2,504,541

 
4,240

 
0.68
%
Money market
652,485

 
705

 
0.43

 
631,297

 
1,358

 
0.86

Savings
1,445,953

 
414

 
0.12

 
915,701

 
301

 
0.13

Time deposits
1,623,890

 
6,386

 
1.58

 
934,470

 
3,863

 
1.66

Total
6,688,959

 
12,305

 
0.74

 
4,986,009

 
9,762

 
0.79

FHLB Advances
476,598

 
1,946

 
1.64

 
404,951

 
2,320

 
2.30

Securities sold under agreements to repurchase
131,382

 
138

 
0.42

 
62,243

 
64

 
0.41

Other borrowings
220,948

 
2,821

 
5.14

 
99,591

 
1,427

 
5.75

Total interest-bearing liabilities
7,517,887

 
17,210

 
0.92

 
5,552,794

 
13,573

 
0.98

Non-interest-bearing deposits
2,018,044

 
 
 
 
 
1,302,147

 
 
 
 
Non-interest-bearing liabilities
124,997

 
 
 
 
 
82,793

 
 
 
 
Total liabilities
9,660,928

 
 
 
 
 
6,937,734

 
 
 
 
Stockholders’ equity
1,453,658

 
 
 
 
 
1,131,165

 
 
 
 
Total liabilities and equity
$
11,114,586

 
 
 
 
 
$
8,068,899

 
 
 
 
Net interest income
 
 
$
78,667

 
 
 
 
 
$
64,837

 
 
Net interest rate spread (3)
 
 
 
 
3.02
%
 
 
 
 
 
3.45
%
Net interest margin (4)
 
 
 
 
3.24
%
 
 
 
 
 
3.66
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.57
%
 
 
 
 
 
0.62
%

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Table of Contents

 
For the Six Months Ended
 
June 30, 2020
 
June 30, 2019
(dollars in thousands)
Average Balance
 
Interest
 
Average
Yield/
Cost
 
Average Balance
 
Interest
 
Average
Yield/
Cost
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
208,871

 
$
457

 
0.44
%
 
$
73,527

 
$
839

 
2.30
%
Securities (1)
1,158,657

 
15,336

 
2.66

 
1,073,957

 
14,075

 
2.64

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,185,114

 
119,335

 
4.63

 
3,260,855

 
83,987

 
5.19

Residential
2,490,243

 
48,499

 
3.90

 
2,141,032

 
43,733

 
4.09

Home Equity
333,574

 
7,923

 
4.78

 
350,175

 
9,363

 
5.39

Other
81,930

 
2,534

 
6.22

 
116,153

 
2,835

 
4.92

Allowance for credit losses net of deferred loan fees
(17,720
)
 

 

 
(9,616
)
 

 

Loans Receivable, net
8,073,141

 
178,291

 
4.44

 
5,858,599

 
139,918

 
4.82

Total interest-earning assets
9,440,669

 
194,084

 
4.13

 
7,006,083

 
154,832

 
4.46

Non-interest-earning assets
1,283,029

 
 
 
 
 
948,658

 
 
 
 
Total assets
$
10,723,698

 
 
 
 
 
$
7,954,741

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,887,212

 
9,931

 
0.69
%
 
$
2,518,062

 
8,032

 
0.64
%
Money market
633,273

 
1,745

 
0.55

 
616,384

 
2,468

 
0.81

Savings
1,424,646

 
1,969

 
0.28

 
909,906

 
587

 
0.13

Time deposits
1,541,619

 
12,596

 
1.64

 
933,410

 
7,314

 
1.58

Total
6,486,750

 
26,241

 
0.81

 
4,977,762

 
18,401

 
0.75

FHLB Advances
553,963

 
4,770

 
1.73

 
372,499

 
4,160

 
2.25

Securities sold under agreements to repurchase
106,743

 
234

 
0.44

 
63,761

 
119

 
0.38

Other borrowings
169,900

 
4,527

 
5.36

 
99,569

 
2,927

 
5.93

Total interest-bearing liabilities
7,317,356

 
35,772

 
0.98

 
5,513,591

 
25,607

 
0.94

Non-interest-bearing deposits
1,852,813

 
 
 
 
 
1,257,041

 
 
 
 
Non-interest-bearing liabilities
119,237

 
 
 
 
 
69,443

 
 
 
 
Total liabilities
9,289,406

 
 
 
 
 
6,840,075

 
 
 
 
Stockholders equity
1,434,292

 
 
 
 
 
1,114,666

 
 
 
 
Total liabilities and equity
$
10,723,698

 
 
 
 
 
$
7,954,741

 
 
 
 
Net interest income
 
 
$
158,312

 
 
 
 
 
$
129,225

 
 
Net interest rate spread (3)
 
 
 
 
3.15
%
 
 
 
 
 
3.52
%
Net interest margin (4)
 
 
 
 
3.37
%
 
 
 
 
 
3.72
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.63
%
 
 
 
 
 
0.60
%
(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 credit losses.
(2)
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loss allowances and includes loans held for sale and non-performing loans.
(3)
Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.

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Table of Contents

Comparison of Financial Condition at June 30, 2020 and December 31, 2019
Total assets increased by $3.099 billion, to $11.345 billion at June 30, 2020, from $8.246 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.031 billion to total assets. Cash and due from banks increased by $600.5 million, to $721.0 million at June 30, 2020, from $120.5 million at December 31, 2019, due to the Company’s decision to build liquidity during the economic downturn and the cash received from the issuance of subordinated notes and non-cumulative perpetual preferred stock as described below. Loans receivable, net of allowance for credit losses, increased by $2.128 billion, to $8.335 billion at June 30, 2020, from $6.208 billion at December 31, 2019, due to acquired loans from Two River and Country Bank of $1.558 billion coupled with strong organic loan growth. As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $501.5 million at June 30, 2020, from $374.6 million at December 31, 2019 and the core deposit intangible increased to $26.7 million, from $15.6 million. Other assets increased by $57.1 million to $226.6 million at June 30, 2020, from $169.5 million at December 31, 2019, primarily due to the increase in swap positions.

Deposits increased by $2.639 billion, to $8.968 billion at June 30, 2020, from $6.329 billion at December 31, 2019, primarily due to acquired deposits from Two River and Country Bank of $1.594 billion. The loan-to-deposit ratio at June 30, 2020 was 93.4%, as compared to 98.2% at December 31, 2019. The deposit growth funded a decrease in FHLB advances of $175.9 million to $343.4 million at June 30, 2020, from $519.3 million at December 31, 2019. The increase in other borrowings of $150.0 million to $246.8 million at June 30, 2020, from $96.8 million at December 31, 2019, primarily resulted from the May 2020 issuance of $125.0 million in subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030. Other liabilities increased by $76.0 million to $138.5 million at June 30, 2020, from $62.6 million at December 31, 2019, primarily due to the increase in swap positions.

Stockholders’ equity increased to $1.476 billion at June 30, 2020, as compared to $1.153 billion at December 31, 2019. The acquisitions of Two River and Country Bank added $261.4 million to stockholders’ equity. During the three months ended June 30, 2020, the Company raised $55.7 million from the issuance of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share. Under the Company’s stock repurchase program, there were 2,019,145 shares available for repurchase at June 30, 2020. The Company suspended its repurchase activity on February 28, 2020. For the six months ended June 30, 2020, the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of $22.83.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2020 and June 30, 2019
General
On January 31, 2019, the Company completed its acquisition of Capital Bank and its results of operations are included in the consolidated results for the three and six months ended June 30, 2020, but are excluded from the results of operations for the period from January 1, 2019 to January 31, 2019.

On January 1, 2020, the Company completed its acquisitions of Two River and Country Bank and their respective results of operations from January 1, 2020 through June 30, 2020 are included in the consolidated results for the three and six months ended June 30, 2020, but are not included in the results of operations for the corresponding prior year periods.

Net income for the three months ended June 30, 2020 was $18.6 million, or $0.31 per diluted share, as compared to $19.0 million, or $0.37 per diluted share, for the corresponding prior year period. Net income for the six months ended June 30, 2020 was $35.2 million, or $0.58 per diluted share, as compared to $40.2 million, or $0.79 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2020 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $3.0 million. Net income for the six months ended June 30, 2020 included merger related expenses, branch consolidation expenses, and the Two River and Country Bank opening credit loss expense under the CECL model, which decreased net income, net of tax benefit, by $13.4 million. Net income for the three and six months ended June 30, 2019 included merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, which decreased net income, net of tax benefit, by $7.0 million and $11.4 million, respectively. Excluding these items, net income for the three and six months ended June 30, 2020 was $21.6 million and $48.6 million, respectively, a decrease from $26.0 million and $51.6 million for the same prior year periods, respectively, primarily due to the adverse impact of the COVID-19 outbreak.

Interest Income
Interest income for the three and six months ended June 30, 2020 increased to $95.9 million and $194.1 million, respectively, as compared to $78.4 million and $154.8 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased by $2.684 billion and $2.435 billion for the three and six months ended June 30, 2020, respectively, as compared

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to the same prior year periods. The averages for the three and six months ended June 30, 2020 were favorably impacted by $1.815 billion and $1.793 billion, respectively, of interest-earning assets acquired from Two River and Country Bank and $373.7 million and $186.8 million, respectively, of PPP loans. Average loans receivable, net, increased by $2.347 billion and $2.215 billion for the three and six months ended June 30, 2020, respectively, as compared to the same prior year periods. The increases attributable to the acquisitions of Two River and Country Bank for the three and six months ended June 30, 2020 were $1.606 billion and $1.581 billion, respectively. For the three and six months ended June 30, 2020, the yield on average interest-earning assets decreased to 3.94% and 4.13%, respectively, from 4.43% and 4.46%, respectively, in the corresponding prior year periods.
Interest Expense
Interest expense for the three and six months ended June 30, 2020 was $17.2 million and $35.8 million, respectively, as compared to $13.6 million and $25.6 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $1.965 billion and $1.804 billion for the three and six months ended June 30, 2020, respectively, as compared to the same prior year periods. For the three months ended June 30, 2020, the cost of average interest-bearing liabilities decreased to 0.92% from 0.98% in the corresponding prior year period. For the six months ended June 30, 2020, the cost of average interest-bearing liabilities increased to 0.98% from 0.94%, in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.57% and 0.63% for the three and six months ended June 30, 2020, respectively, as compared to 0.62% and 0.60%, respectively, in the same prior year periods.
Net Interest Income
Net interest income for the three and six months ended June 30, 2020 increased to $78.7 million, and $158.3 million, as compared to $64.8 million and $129.2 million for the same prior year periods, reflecting an increase in interest-earning assets, partly offset by a reduction in net interest margin. The net interest margin for the three and six months ended June 30, 2020 decreased to 3.24% and 3.37%, respectively, from 3.66% and 3.72%, respectively, for the same prior year periods. The compression in net interest margin is primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn.
Credit Loss Expense
For the three and six months ended June 30, 2020, the credit loss expense was $9.6 million and $19.6 million, respectively, as compared to $356,000 and $976,000, respectively, for the corresponding prior year periods. Net loan recoveries were $232,000 for the quarter and net loan charge-offs were $922,000 for the six months ended June 30, 2020, as compared to net loan charge-offs of $926,000 and $1.4 million in the corresponding prior year periods. Non-performing loans totaled $21.0 million at June 30, 2020, as compared to $17.8 million at June 30, 2019. Credit expense for the three and six months ended June 30, 2020 was significantly influenced by economic conditions related to the COVID-19 outbreak and estimates of how those conditions may impact the Company’s customers.
Other Income
For the three and six months ended June 30, 2020, other income increased to $11.4 million and $25.1 million, respectively, as compared to $9.9 million and $19.4 million, respectively, for the corresponding prior year periods. Excluding the Two River and Country Bank acquisitions, which added $692,000, the increase in other income for the three months ended June 30, 2020 was due to an increase in commercial loan swap income of $1.9 million, and an increase in the net gain on sales of loans of $619,000, partially offset by lower fees and service charges of $1.7 million, as compared to the corresponding prior year period. For the six months ended June 30, 2020, excluding the Two River and Country Bank acquisitions which added $1.4 million, the increase in other income was due to the increase in commercial swap income of $5.5 million, and an increase in the net gain on sales of loans of $733,000, partially offset by decreases in fees and service charges of $1.8 million. The waiver of certain fees during the COVID-19 pandemic may continue to suppress deposit fee income for the remainder of the public health crisis.
Operating Expenses
Operating expenses increased to $55.9 million and $118.7 million for the three and six months ended June 30, 2020, respectively, as compared to $50.9 million and $98.2 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2020 included $3.9 million and $15.1 million, respectively, of merger related and branch consolidation expenses, as compared to $8.9 million and $14.3 million, respectively, of merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, respectively, in the same prior year periods. Excluding the impact of merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year was due to the Two River and Country Bank acquisitions, which added $7.6 million and $16.1 million, respectively, for the three and six months ended June 30, 2020. The remaining increase

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in operating expenses for the three months ended June 30, 2020 was primarily due to a Federal Home Loan Bank (“FHLB”) prepayment penalty fee of $924,000 and expenses related to COVID-19 of $1.1 million. The increase in operating expenses for the six months ended June 30, 2020 was primarily due to a FHLB prepayment penalty fee of $924,000 and expenses related to COVID-19 of $2.1 million.
Provision for Income Taxes
The provision for income taxes was $5.9 million and $9.9 million for the three and six months ended June 30, 2020, respectively, as compared to $4.5 million and $9.3 million, respectively, for the same prior year periods. The effective tax rate was 24.0% and 22.0% for the three and six months ended June 30, 2020, respectively, as compared to 19.0% and 18.8%, respectively, for the same prior year periods. The higher effective tax rate in the current year period is primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank.

Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (“FHLB”) advances, access to the Federal Reserve Discount Window, other borrowings, which includes subordinated debt, and to a lesser extent, investment maturities and proceeds from the sale of loans. While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple banks.
At June 30, 2020, the Company had no outstanding overnight borrowings from the FHLB, as compared to $270.0 million at December 31, 2019. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB advances, including overnight borrowings, totaled $343.4 million and $519.3 million, at June 30, 2020 and December 31, 2019, respectively.
The Company’s cash needs for the six months ended June 30, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, proceeds from sale of loans, 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, and the repayment of short-term borrowings. The Company’s cash needs for the six months ended June 30, 2019 were primarily satisfied by principal payments on loans and mortgage-backed securities, 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.
In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2020, outstanding undrawn lines of credit totaled $1.031 billion and outstanding commitments to originate loans totaled $359.2 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 $1.038 billion at June 30, 2020. Management strategically manages these maturities and is opportunistic about renewing these time 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. In addition, in May 2020, the Company issued $125.0 million of subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030. The Company also issued $55.9 million of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share. The proceeds were retained to strengthen balance sheet liquidity entering the economic downturn.
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. On February 28, 2020, the Company suspended its repurchase activity in light of the COVID-19 pandemic. As such, for the quarter ended June 30, 2020, the Company did not repurchase any shares of common stock. At June 30, 2020, there were 2,019,145 shares available to be repurchased under the stock repurchase program authorized in December of 2019.

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Table of Contents

Cash dividends on common stock declared and paid during the first six months of 2020 were $20.5 million, as compared to $17.3 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the acquisitions of Two River and Country Bank. On July 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 14, 2020 to common stockholders of record at the close of business on August 3, 2020. The Company also declared a quarterly cash dividend of $0.4764 per share for every depository share, representing 1/40th interest in the Series A Preferred Stock, payable on August 17, 2020 to preferred stockholders of record on July 31, 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 six months ended June 30, 2020, the Company received a dividend payment of $36.0 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 applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. Additionally, regulations of the Federal Reserve, under certain circumstances, may prevent the Company from either paying or increasing the cash dividend to common shareholders. At June 30, 2020, OceanFirst Financial Corp. held $198.4 million in cash.
As of June 30, 2020 and December 31, 2019, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (dollars in thousands):
 
 
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
As of June 30, 2020
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
937,101

 
8.86
%
 
$
423,058

 
4.000
%
 
$
528,822

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
937,101

 
11.86

 
552,884

 
7.000

(1) 
513,393

 
6.50

Tier 1 capital (to risk-weighted assets)
 
937,101

 
11.86

 
671,359

 
8.500

(1) 
631,868

 
8.00

Total capital (to risk-weighted assets)
 
974,030

 
12.33

 
829,326

 
10.500

(1) 
789,835

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
986,320

 
9.31
%
 
$
423,758

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
859,570

 
10.86

 
553,980

 
7.000

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
986,320

 
12.46

 
672,689

 
8.500

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
1,198,749

 
15.15

 
830,969

 
10.500

(1) 
N/A

 
N/A

 
 
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
As of December 31, 2019
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
779,108

 
10.03
%
 
$
310,798

 
4.000
%
 
$
388,498

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
779,108

 
12.98

 
420,106

 
7.000

(1) 
390,099

 
6.50

Tier 1 capital (to risk-weighted assets)
 
779,108

 
12.98

 
510,129

 
8.500

(1) 
480,121

 
8.00

Total capital (to risk-weighted assets)
 
797,339

 
13.29

 
630,159

 
10.500

(1) 
600,152

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
791,746

 
10.17
%
 
$
311,289

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
729,095

 
12.14

 
420,273

 
7.000

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
791,746

 
13.19

 
510,331

 
8.500

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
844,977

 
14.07

 
630,409

 
10.500

(1) 
N/A

 
N/A

(1)
Includes the Capital Conservation Buffer of 2.500%.

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The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At June 30, 2020, the Company maintained tangible equity of $948.2 million, for a tangible equity to tangible assets ratio of 8.77%. At December 31, 2019, the Company maintained tangible equity of $762.9 million, for a tangible equity to tangible assets ratio of 9.71%.

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Off-Balance-Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. 
The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. As a result of the COVID-19 pandemic, some of these loans were placed on forbearance and may be required to be repurchased in future periods. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At June 30, 2020 and December 31, 2019, the reserve for repurchased loans and loss sharing obligations amounted to $1.0 million and $1.1 million, respectively.
The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2020 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
743,053

 
$
152,132

 
$
131,517

 
$
204,019

 
$
255,385

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
672,736

 
672,736

 

 

 

Consumer/Construction
358,727

 
358,727

 

 

 

Commitments to Originate Loans
359,175

 
359,175

 

 

 

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.

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Non-Performing Assets
The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and other real estate owned. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.
 
June 30, 2020
 
December 31, 2019
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
1,586

 
$
207

Commercial real estate – owner occupied
4,582

 
4,811

Commercial real estate – investor
5,274

 
2,917

Residential mortgage
6,568

 
7,181

Home equity loans and lines
3,034

 
2,733

Total non-performing loans
21,044

 
17,849

Other real estate owned
248

 
264

Total non-performing assets
$
21,292

 
$
18,113

Purchased with credit deterioration (“PCD”) loans (1)
$
61,694

 
$
13,265

Delinquent loans 30-89 days
$
13,640

 
$
14,798

Allowance for credit losses as a percent of total loans receivable
0.46
%
 
0.27
%
Allowance for credit losses as a percent of total non-performing loans
182.99

 
94.41

Non-performing loans as a percent of total loans receivable
0.25

 
0.29

Non-performing assets as a percent of total assets
0.19

 
0.22

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

The Company’s non-performing loans totaled $21.0 million at June 30, 2020, as compared to $17.8 million at December 31, 2019. Included in the non-performing loans total was $6.2 million and $6.6 million of troubled debt restructured (“TDR”) loans at June 30, 2020 and December 31, 2019, respectively. Non-performing loans do not include $61.7 million and $13.3 million of acquired PCD loans at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, the allowance for credit losses totaled $38.5 million, or 0.46% of total loans, as compared to $16.9 million, or 0.27% of total loans at December 31, 2019. These ratios exclude existing fair value credit marks on acquired loans of $35.4 million and $30.3 million at June 30, 2020 and December 31, 2019, respectively. 

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. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at June 30, 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):
 
June 30, 2020
 
December 31, 2019
Special Mention
$
66,441

 
$
34,529

Substandard
106,344

 
73,178


The increase in special mention and substandard loans is primarily due to the application of the Company’s risk rating methodologies to the Two River and Country Bank loan portfolios.

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Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “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 credit 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.

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changed the Company’s allowance for credit losses accounting policy that existed at December 31, 2019. ASU 2016-13 is the most critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended June 30, 2020.

Allowance for Credit Losses (“ACL”)
Under the current expected credit loss (“CECL”) model, the allowance for credit losses on financial assets is a valuation allowance estimated at each balance sheet date in accordance with generally accepted accounting principles (“GAAP”) that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial assets. The CECL model also applies to certain off-balance sheet credit exposures.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the ACL. For loans under forbearance as a result of COVID-19, the Company made a policy election to include the accrued interest receivable related to such loans in the amortized cost basis and therefore includes it in the measurment of the ACL. Accrued interest receivable at June 30, 2020 was $37.8 million, of which $14.7 million relates to forbearance loans.

Expected credit losses are reflected in the ACL through a charge to credit loss expense. The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible. When available information confirms that specific loans, securities, other assets, or portions thereof, are uncollectible, these amounts are charged-off against the ACL. Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets on a collective portfolio segment basis when the financial assets share similar risk characteristics. The Company has identified the following portfolio segments of financial assets with similar risk characteristics for measuring expected credit losses: commercial and industrial, commercial real estate - owner occupied, commercial real estate - investor (including commercial real estate - construction and land), residential real estate, consumer (including student loans) and held-to-maturity (“HTM”) debt securities.

The Company uses an open pool loss-rate method to calculate a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The Company’s methodology considers relevant information about past and current economic conditions, as well as economic forecasts over a reasonable and supportable period. The historical loss rate is adjusted for the forecast of select macroeconomic variables based upon historic relationships. The adjusted loss rate reverts to the historical loss rate on a straight-line basis over four quarters when it can no longer develop reasonable and supportable forecasts. The Company differentiates its loss-rate method for HTM debt securities by looking to publicly available historical default and recovery statistics based on the attributes of issuer type, rating category and time to maturity. The Company measures expected credit losses of financial assets by applying loss rates to the amortized cost basis of each asset taking into consideration amortization, prepayment and defaults.

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments will not be made for information that has already been considered and included in the quantitative allowance.

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Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics.

Collateral Dependent Financial Assets
For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable and where the borrower is experiencing financial difficulty, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. Fair value is calculated based on the value of the underlying collateral less an appraisal discount, and in certain circumstances, the estimated cost to sell.

Troubled Debt Restructured Loans
A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. So long as they share similar risk characteristics, TDRs may be collectively evaluated and included in the Company’s existing portfolio segments to measure the ACL, unless the TDR is collateral dependent.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial assets include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to credit loss expense for off-balance sheet credit exposures. The ACL on off-balance sheet credit exposures is estimated by portfolio segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration management’s assumption of the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.

Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”). PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.

Beginning on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

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Table of Contents

For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense.
The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this presentation contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company” 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”, or similar expressions or expressions of confidence.
The Company’s ability to predict results or the actual effect of plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed in the Company’s 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 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, accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the 10-K under Item 1A - Risk Factors and elsewhere therein and in subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2020, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At June 30, 2020, the Company’s one-year gap was positive 14.06% as compared to positive 4.31% at December 31, 2019. The significant increase in the one-year gap was due to the Company’s decision to build liquidity during the economic downturn.
 
At June 30, 2020
3 Months
or Less
 
More than
3 Months to
1 Year
 
More than
1 Year to
3 Years
 
More than
3 Years to
5 Years
 
More than
5 Years
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
460,740

 
$
1,225

 
$
2,715

 
$

 
$

 
$
464,680

Debt investment securities
73,925

 
51,592

 
133,172

 
63,173

 
136,565

 
458,427

Debt mortgage-backed securities
74,611

 
100,727

 
196,711

 
122,702

 
70,113

 
564,864

Equity investments

 

 

 

 
13,830

 
13,830

Restricted equity investments

 

 

 

 
68,091

 
68,091

Loans receivable (2)
1,897,476

 
1,597,818

 
2,531,089

 
1,283,516

 
1,090,189

 
8,400,088

Total interest-earning assets
2,506,752

 
1,751,362

 
2,863,687

 
1,469,391

 
1,378,788

 
9,969,980

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking accounts
1,003,159

 
145,262

 
370,188

 
301,515

 
1,202,763

 
3,022,887

Money market deposit accounts
19,170

 
50,222

 
117,560

 
96,262

 
396,985

 
680,199

Savings accounts
145,394

 
106,258

 
275,800

 
225,714

 
703,765

 
1,456,931

Time deposits
286,091

 
857,536

 
423,164

 
72,715

 
6,465

 
1,645,971

FHLB advances

 

 
128,419

 
204,979

 
9,994

 
343,392

Securities sold under agreements to repurchase and other borrowings
242,675

 
197

 
37,857

 
113,360

 
5,572

 
399,661

Total interest-bearing liabilities
1,696,489

 
1,159,475

 
1,352,988

 
1,014,545

 
2,325,544

 
7,549,041

Interest sensitivity gap (3)
$
810,263

 
$
591,887

 
$
1,510,699

 
$
454,846

 
$
(946,756
)
 
$
2,420,939

Cumulative interest sensitivity gap
$
810,263

 
$
1,402,150

 
$
2,912,849

 
$
3,367,695

 
$
2,420,939

 
$
2,420,939

Cumulative interest sensitivity gap as a percent of total interest-earning assets
8.13
%
 
14.06
%
 
29.22
%
 
33.78
%
 
24.28
%
 
24.28
%
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2)
For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3)
Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

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Table of Contents

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, 2020 and December 31, 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 2019 Form 10-K.
 
 
June 30, 2020
 
December 31, 2019
Change in Interest Rates in Basis Points (Rate Shock)
Economic Value of Equity
 
Net Interest Income
 
Economic Value of Equity
 
Net Interest Income
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
 
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
300
$
1,732,029

 
31.7
 %
 
16.2
%
 
$
328,074

 
10.0
 %
 
$
1,242,674

 
5.1
 %
 
16.4
%
 
$
253,184

 
(0.6
)%
200
1,621,536

 
23.3

 
14.8

 
318,904

 
6.9

 
1,246,011

 
5.4

 
16.0

 
254,424

 
(0.1
)
100
1,493,438

 
13.5

 
13.3

 
309,078

 
3.6

 
1,227,428

 
3.8

 
15.3

 
254,996

 
0.1

Static
1,315,514

 

 
11.5

 
298,358