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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 September 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)
 ________________________________________________ 
Delaware22-3412577
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
110 West Front Street, Red Bank,NJ07701
(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 classTrading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par value per shareOCFCNASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)OCFCPNASDAQ
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 November 2, 2020 there were 60,378,120 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(1)
At or for the Quarters Ended
(dollars in thousands, except per share amounts)September 30, 2020June 30, 2020September 30, 2019
SELECTED FINANCIAL CONDITION DATA:
Total assets$11,651,297 $11,345,365 $8,135,173 
Loans receivable, net of allowance for credit losses7,943,390 8,335,480 6,081,938 
Deposits9,283,288 8,967,754 6,220,855 
Stockholders’ equity1,461,714 1,476,434 1,144,528 
SELECTED OPERATING DATA:
Net interest income76,788 78,667 63,392 
Credit loss expense35,714 9,649 305 
Other income8,179 11,430 11,543 
Operating expenses56,787 55,932 43,357 
Net (loss) income(4,926)18,638 24,971 
Net (loss) income available to common stockholders(6,019)18,638 24,971 
Diluted (loss) earnings per share(0.10)0.31 0.49 
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period24.21 24.47 22.57 
Tangible common stockholders’ equity per common share (2)
14.58 14.79 14.86 
Cash dividend per share0.17 0.17 0.17 
Stockholders’ equity to total assets12.55 %13.01 %14.07 %
Tangible stockholders’ equity to total tangible assets (2)
8.41 8.77 9.73 
Tangible common stockholders’ equity to tangible assets (2)
7.91 8.25 9.73 
Return on average assets (3) (4)
(0.17)0.67 1.23 
Return on average tangible assets (2) (3) (4)
(0.18)0.71 1.29 
Return on average stockholders’ equity (3) (4)
(1.32)5.16 8.66 
Return on average tangible stockholders’ equity (2) (3) (4)
(2.05)8.10 13.18 
Net interest rate spread2.77 3.02 3.32 
Net interest margin2.97 3.24 3.55 
Operating expenses to average assets (3) (4)
1.94 2.02 2.13 
Efficiency ratio (4) (5)
66.83 62.08 57.86 
Loan to deposit ratio86.19 93.43 97.90 
ASSET QUALITY:
Non-performing loans held-for-investment$29,895 $21,044 $17,453 
Non-performing assets97,490 21,292 17,747 
Allowance for credit losses as a percent of total loans held-for-investment0.70 %0.46 %0.27 %
Allowance for credit losses as a percent of total non-performing loans held-for-investment188.49 182.99 95.32 
Non-performing loans held-for-investment as a percent of total loans held-for-investment0.37 0.25 0.29 
Non-performing assets as a percent of total assets0.84 0.19 0.22 
 
(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 stock.
(3)Ratios are annualized.
(4)Performance ratios include the net adverse impact of merger related expenses, branch consolidation expenses, and net unrealized loss on equity investments of $7.6 million, or $5.8 million, net of tax, for the quarter ended September 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 $3.9 million, or $3.0 million, net of tax, for the quarter ended June 30, 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 $3.2 million, or $2.6 million, net of tax, for the quarter ended September 30, 2019.
(5)Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.
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Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the metropolitan areas of Philadelphia and New York City. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on 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.
Key developments relating to the Company’s financial results and corporate activities for the three months ended September 30, 2020 were as follows:

COVID-19: The Company’s third quarter results were adversely impacted by the COVID-19 pandemic, including an elevated credit loss provision of $35.7 million and an additional $1.7 million in operating expenses. Net charge-offs, excluding $14.2 million related to higher risk commercial loans transferred to held-for-sale, amounted to a modest $748,000.
Credit Quality: The Company made a strategic decision to accelerate the resolution of credit losses through the sale of higher risk loans. As part of this strategy, the Company transferred $45.5 million of forbearance loans to held-for-sale at September 30, 2020. Excluding the loans held-for-sale, loans under full forbearance were $209.6 million, or 2.6% of total loans, at October 23, 2020, a significant reduction from a peak for all forbearance requests of almost 20% of total loans.
Deposits: Deposits increased by $315.5 million, of which $79.0 million were non-interest bearing deposits. The total cost of deposits decreased to 0.49% for the quarter ended September 30, 2020.
Capital: The Company continues to maintain strong capital levels with tangible stockholders’ equity of $935.7 million for a tangible stockholders’ equity to tangible assets ratio of 8.41%.
Sale of Paycheck Protection Program (“PPP”) loans: The Company made a strategic decision to sell $298.1 million in PPP loans to improve operational efficiency and continue the Company’s efforts to focus on the core business. The sale closed in the fourth quarter of 2020.
Net loss available to common stockholders was $6.0 million, or $(0.10) per diluted share, for the three months ended September 30, 2020 as compared to net income available to common stockholders of $25.0 million, or $0.49 per diluted share, for the corresponding prior year period. For the nine months ended September 30, 2020, the Company reported net income available to common stockholders of $29.2 million, or $0.49 per diluted share, as compared to $65.1 million, or $1.28 per diluted share, for the corresponding prior year period. The dividend paid to preferred stockholders was $1.1 million for both the three and nine months ended September 30, 2020. The quarter and year to date results were impacted by the COVID-19 pandemic, through both higher credit losses and increased operating expenses. Net loss available to common stockholders for the three months and net income available to common stockholders for the nine months ended September 30, 2020 included merger related expenses, branch consolidation expenses and net unrealized loss on equity investments. Net income available to common stockholders for the nine months ended September 30, 2020 also included the opening credit loss expense under the CECL model related to the acquisitions of Two River and Country Bank. These items increased net loss by $5.8 million, net of tax, and decreased net income by $19.2 million, net of tax, for the three and nine months ended September 30, 2020, respectively. Excluding these items, net losses for the three months and net income for the nine months ended September 30, 2020 were $266,000 and $48.3 million, respectively.
The Company remains well-capitalized with a tangible equity to tangible assets ratio of 8.41% at September 30, 2020.
The Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share. The dividend, related to the quarter ended September 30, 2020, will be paid on November 20, 2020 to common stockholders of record on November 9, 2020. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depository share, representing 1/40th interest in the Series A Preferred Stock. This dividend will be paid on November 16, 2020 to preferred stockholders of record on October 30, 2020.
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Impact of COVID-19

On March 16, 2020 the Company announced a series of actions intended to help mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities. The Company offers its Borrower Relief Programs to address 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 September 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, including but not limited to extension of initial forbearance periods, 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 deferral of residential mortgage or consumer loan payments (principal and interest) for 90 days upon request. To be eligible, the borrower must have experienced a financial hardship related to COVID-19. Borrowers may apply for a second 90 day deferral period for hardships related to COVID-19. Subsequent deferral requests may be available on an individualized basis, depending on the borrower’s circumstances.

COVID-19 related loans under full forbearance (excluding forbearance loans held-for-sale) decreased to $209.6 million, or 2.6%, of total loans at October 23, 2020, as compared to a peak of almost 20% of total loans in mid-2020 as borrowers have returned to monthly payments. 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.

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

The Company also accepted and processed applications for loans under the Paycheck Protection Program beginning April 3, 2020. The Company disbursed $504 million and recorded deferred processing fees of $17.7 million. At September 30, 2020, $298.1 million of these loans were held-for-sale in order to improve operational efficiency and continue the Company’s efforts to focus on the core business. The sale of these loans was completed on October 29, 2020.

In addition, COVID-19 could cause a goodwill impairment test where a triggering event has occurred, and under certain circumstances may 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 8.41% or regulatory capital. The Company completed its annual goodwill impairment test as of August 31, 2020. As part of this test, a quantitative assessment was performed to estimate the fair value of the Company by utilizing a weighted discounted cash flow method, guideline public company method and transaction method. The results of the evaluation concluded that the fair value of the Company exceeded the carrying value, and therefore goodwill impairment did not exist as of the test date. At September 30, 2020, the Company performed a qualitative assessment to ensure no events or circumstances had occurred subsequent to August 31, 2020 that would impact goodwill. The Company determined based on the September 30, 2020 qualitative evaluation, no triggering events 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 September 30, 2020, the Company recognized an elevated credit loss expense of $35.7 million and an increase in operating expense of $1.7 million.

For further discussion, refer to Part II, Item 1A, “Risk Factors,” in the June 30, 2020 Form 10-Q - 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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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 nine months ended September 30, 2020 and September 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
 September 30, 2020September 30, 2019
(dollars in thousands)Average BalanceInterestAverage
Yield/
Cost
Average BalanceInterestAverage
Yield/
Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments$805,863 $236 0.12 %$40,932 $264 2.56 %
Securities (1)
1,112,174 6,793 2.43 1,039,560 6,908 2.64 
Loans receivable, net (2)
Commercial5,554,897 58,639 4.20 3,350,868 42,104 4.99 
Residential real estate2,462,513 23,091 3.75 2,225,837 21,527 3.87 
Home equity loans and lines311,802 3,330 4.25 335,691 4,678 5.53 
Other consumer67,497 873 5.15 104,310 1,406 5.35 
Allowance for credit losses, net of deferred loan fees(45,912)— — (8,381)— — 
Loans receivable, net8,350,797 85,933 4.09 6,008,325 69,715 4.60 
Total interest-earning assets10,268,834 92,962 3.60 7,088,817 76,887 4.30 
Non-interest-earning assets1,353,135 984,421 
Total assets$11,621,969 $8,073,238 
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking$3,289,319 4,627 0.56 %$2,467,879 4,311 0.69 %
Money market675,841 571 0.34 597,896 1,208 0.80 
Savings1,460,232 296 0.08 905,605 300 0.13 
Time deposits1,606,632 5,876 1.45 920,032 3,998 1.72 
Total7,032,024 11,370 0.64 4,891,412 9,817 0.80 
Federal Home Loan Bank ("FHLB") advances343,412 1,470 1.70 394,124 2,208 2.22 
Securities sold under agreements to repurchase144,720 174 0.48 62,296 73 0.46 
Other borrowings246,903 3,160 5.09 96,578 1,397 5.74 
Total interest-bearing liabilities7,767,059 16,174 0.83 5,444,410 13,495 0.98 
Non-interest-bearing deposits2,209,241 1,396,259 
Non-interest-bearing liabilities162,987 88,868 
Total liabilities10,139,287 6,929,537 
Stockholders’ equity1,482,682 1,143,701 
Total liabilities and equity$11,621,969 $8,073,238 
Net interest income$76,788 $63,392 
Net interest rate spread (3)
2.77 %3.32 %
Net interest margin (4)
2.97 %3.55 %
Total cost of deposits (including non-interest-bearing deposits)0.49 %0.62 %
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 For the Nine Months Ended
 September 30, 2020September 30, 2019
(dollars in thousands)Average BalanceInterestAverage
Yield/
Cost
Average BalanceInterestAverage
Yield/
Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments$409,321 $693 0.23 %$62,543 $1,103 2.36 %
Securities (1)
1,143,049 22,129 2.59 1,062,366 20,983 2.64 
Loans receivable, net (2)
Commercial5,309,275 177,973 4.48 3,291,189 126,091 5.12 
Residential real estate2,480,932 71,590 3.85 2,169,611 65,260 4.01 
Home equity loans and lines326,263 11,253 4.61 345,294 14,041 5.44 
Other consumer77,085 3,408 5.91 112,162 4,241 5.06 
Allowance for credit losses, net of deferred loan fees(27,186)— — (9,200)— — 
Loans receivable, net8,166,369 264,224 4.32 5,909,056 209,633 4.74 
Total interest-earning assets9,718,739 287,046 3.95 7,033,965 231,719 4.40 
Non-interest-earning assets1,306,568 960,709 
Total assets$11,025,307 $7,994,674 
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking$3,023,093 14,559 0.64 %$2,501,660 12,343 0.66 %
Money market647,566 2,316 0.48 610,153 3,676 0.81 
Savings1,436,594 2,266 0.21 908,457 887 0.13 
Time deposits1,563,449 18,470 1.58 928,903 11,312 1.63 
Total6,670,702 37,611 0.75 4,949,173 28,218 0.76 
FHLB advances483,267 6,239 1.72 379,786 6,367 2.24 
Securities sold under agreements to repurchase119,495 408 0.46 63,267 192 0.41 
Other borrowings195,754 7,688 5.25 98,562 4,325 5.87 
Total interest-bearing liabilities7,469,218 51,946 0.93 5,490,788 39,102 0.95 
Non-interest-bearing deposits1,971,622 1,303,447 
Non-interest-bearing liabilities133,928 75,988 
Total liabilities9,574,768 6,870,223 
Stockholders’ equity1,450,539 1,124,451 
Total liabilities and equity$11,025,307 $7,994,674 
Net interest income$235,100 $192,617 
Net interest rate spread (3)
3.02 %3.45 %
Net interest margin (4)
3.23 %3.66 %
Total cost of deposits (including non-interest-bearing deposits)0.58 %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 credit losses and includes loans held for sale and non-performing loans.
(3)Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average interest-earning assets.
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Comparison of Financial Condition at September 30, 2020 and December 31, 2019
Total assets increased $3.41 billion, to $11.65 billion at September 30, 2020, from $8.25 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.03 billion to total assets. Cash and due from banks increased $860.3 million, to $980.9 million at September 30, 2020, from $120.5 million at December 31, 2019, due to increased deposits, 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 $1.74 billion, to $7.94 billion at September 30, 2020, from $6.21 billion at December 31, 2019, due to acquired loans from Two River and Country Bank of $1.56 billion coupled with organic loan growth. Loans held-for-sale increased to $388.8 million at September 30, 2020, of which $298.1 million were PPP loans. Non-performing loans held-for-sale totaled $67.5 million at September 30, 2020. As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $500.8 million at September 30, 2020, from $374.6 million at December 31, 2019 and core deposit intangibles increased to $25.2 million, from $15.6 million. Other assets increased by $55.1 million to $224.6 million at September 30, 2020, from $169.5 million at December 31, 2019, primarily due to the increase in swap positions.

Deposits increased $2.95 billion, to $9.28 billion at September 30, 2020, from $6.33 billion at December 31, 2019, due to acquired deposits from Two River and Country Bank of $1.59 billion and organic deposit growth, including deposits generated from PPP borrowers, of $1.4 billion. The loan-to-deposit ratio at September 30, 2020 was 86.2%, as compared to 98.2% at December 31, 2019. The deposit growth funded a decrease in FHLB advances of $175.8 million to $343.5 million at September 30, 2020, from $519.3 million at December 31, 2019. The increase in other borrowings of $150.1 million to $246.9 million at September 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 $90.4 million to $153.0 million at September 30, 2020, from $62.6 million at December 31, 2019, primarily due to the increase in swap positions.

Stockholders’ equity increased to $1.46 billion at September 30, 2020, as compared to $1.15 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 September 30, 2020. The Company suspended its repurchase activity on February 28, 2020. For the nine months ended September 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 Nine Months Ended September 30, 2020 and September 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 nine months ended September 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 September 30, 2020 are included in the consolidated results for the three and nine months ended September 30, 2020, but are not included in the results of operations for the corresponding prior year periods.

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Net loss available to common stockholders was $6.0 million, or $(0.10) per diluted share, for the three months ended September 30, 2020 as compared to net income available to common stockholders of $25.0 million, or $0.49 per diluted share, for the corresponding prior year period. For the nine months ended September 30, 2020, the Company reported net income available to common stockholders of $29.2 million, or $0.49 per diluted share, as compared to $65.1 million, or $1.28 per diluted share, for the corresponding prior year period. The dividend paid to preferred stockholders was $1.1 million for both the three and nine months ended September 30, 2020. The quarter and year to date results were impacted by the COVID-19 pandemic, through both higher credit losses and increased operating expenses. Net loss available to common stockholders for the three months and net income available to common stockholders for the nine months ended September 30, 2020 included merger related expenses, branch consolidation expenses and net unrealized loss on equity investments. Net income available to common stockholders for the nine months ended September 30, 2020 also included the opening credit loss expense under the CECL model related to the acquisitions of Two River and Country Bank. These items increased net loss by $5.8 million, net of tax, and decreased net income by $19.2 million, net of tax, for the three and nine months ended September 30, 2020, respectively. Excluding these items, net losses for the three months and net income for the nine months ended September 30, 2020 were $266,000 and $48.3 million, respectively, representing a decrease from net income of $27.5 million and $79.1 million for the same prior year periods, respectively. The decrease as compared to the prior periods was largely driven by the adverse impact of the COVID-19 pandemic.

Interest Income
Interest income for the three and nine months ended September 30, 2020 increased to $93.0 million and $287.0 million, respectively, as compared to $76.9 million and $231.7 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased by $3.18 billion and $2.68 billion for the three and nine months ended September 30, 2020, respectively, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2020 were favorably impacted by $1.81 billion and $1.80 billion, respectively, of interest-earning assets acquired from Two River and Country Bank and $461.6 million and $227.8 million, respectively, of interest-earning assets from PPP loans. Average loans receivable, net of allowance for credit losses, increased by $2.34 billion and $2.26 billion for the three and nine months ended September 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 nine months ended September 30, 2020 were $1.60 billion and $1.58 billion, respectively. For the three and nine months ended September 30, 2020, the yield on average interest-earning assets decreased to 3.60% and 3.95%, respectively, from 4.30% and 4.40%, respectively, in the corresponding prior year periods.
Interest Expense
Interest expense for the three and nine months ended September 30, 2020 was $16.2 million and $51.9 million, respectively, as compared to $13.5 million and $39.1 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $2.32 billion and $1.98 billion for the three and nine months ended September 30, 2020, respectively, as compared to the same prior year periods. For the three months ended September 30, 2020, the cost of average interest-bearing liabilities decreased to 0.83% from 0.98% in the corresponding prior year period. For the nine months ended September 30, 2020, the cost of average interest-bearing liabilities decreased to 0.93% from 0.95%, in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.49% and 0.58% for the three and nine months ended September 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 nine months ended September 30, 2020 increased to $76.8 million, and $235.1 million, as compared to $63.4 million and $192.6 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 nine months ended September 30, 2020 decreased to 2.97% and 3.23%, respectively, from 3.55% and 3.66%, 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.
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Credit Loss Expense
For the three and nine months ended September 30, 2020, the credit loss expense was $35.7 million and $55.3 million, respectively, as compared to $305,000 and $1.3 million, respectively, for the corresponding prior year periods. Net loan charge-offs were $15.0 million and $15.9 million for the three and nine months ended September 30, 2020, respectively, as compared to net loan recoveries of $196,000 and net loan charge-offs of $1.2 million for the three and nine months ended September 30, 2019, respectively. The three months ended September 30, 2020 included $14.2 million of charge-offs related to higher risk commercial loans transferred to held-for-sale. Non-performing loans held-for-investment totaled $29.9 million at September 30, 2020, as compared to $17.5 million at September 30, 2019.

Credit loss expense for the three and nine months ended September 30, 2020 was significantly influenced by the decision to sell higher risk commercial loans as well as economic conditions related to the COVID-19 pandemic and estimates of how those conditions may impact the Company’s borrowers.
Other Income
For the three and nine months ended September 30, 2020, other income decreased to $8.2 million and increased to $33.3 million, respectively, as compared to $11.5 million and $30.9 million, respectively, for the corresponding prior year periods. Other income for both the three and nine months ended September 30, 2020 included $3.6 million of net unrealized loss on equity investments. Excluding the Two River and Country Bank acquisitions, which added $882,000, and the impact of the net unrealized loss on equity investments, the decrease in other income for the three months ended September 30, 2020, compared to the corresponding prior year period was due to a decrease in fees and service charges of $1.4 million, partly offset by an increase in net gain on sale of loans of $800,000. For the nine months ended September 30, 2020, excluding the Two River and Country Bank acquisitions which added $2.3 million, and the impact of the net unrealized loss on equity investments, the increase in other income was due to increases in commercial loan swap income of $4.7 million and net gain on sales of loans of $1.5 million, partly offset by a decrease in fees and service charges of $3.2 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 $56.8 million and $175.5 million for the three and nine months ended September 30, 2020, respectively, as compared to $43.4 million and $141.5 million, respectively, in the same prior year periods. Operating expenses for the three and nine months ended September 30, 2020 included $4.0 million and $19.0 million, respectively, of merger related and branch consolidation expenses, as compared to $3.2 million and $17.5 million, respectively, of merger related expenses, branch consolidation expenses, non-recurring professional fees, 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, non-recurring professional fees, 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 $6.9 million and $23.0 million, respectively, for the three and nine months ended September 30, 2020. The remaining increase in operating expenses for the three months ended September 30, 2020 was primarily due to operating expenses attributable to the COVID-19 pandemic of $1.7 million, increases in compensation and benefits expense of $3.0 million and federal deposit insurance expense of $770,000. The increase in operating expenses for the nine months ended September 30, 2020 was primarily due to operating expenses attributable to the COVID-19 pandemic of $3.8 million, increases in compensation and benefits expense of $6.3 million, professional fees of $2.3 million, and FHLB prepayment penalty fee of $924,000, partly offset by decreases in occupancy expense of $1.5 million, and equipment expense of $1.4 million.
(Benefit) Provision for Income Taxes
The benefit for income taxes was $2.6 million for the three months ended September 30, 2020, and the provision for income taxes was $7.3 million for the nine months ended September 30, 2020 as compared to provision for income taxes of $6.3 million and $15.6 million, respectively, for the same prior year periods. The effective tax rate was 34.6% and 19.5% for the three and nine months ended September 30, 2020, respectively, as compared to 20.2% and 19.3%, respectively, for the same prior year periods. The higher effective tax rate for the three months ended September 30, 2020 is primarily attributable to the net loss recognized during the quarter. The three and nine months ended September 30, 2020, included the adverse impacts of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank.

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Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances, access to the Federal Reserve discount window, other borrowings, 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 September 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 $343.5 million and $519.3 million, at September 30, 2020 and December 31, 2019, respectively.
The Company’s cash needs for the nine months ended September 30, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, proceeds from sale of loans, and acquired cash from acquisitions. The cash was principally utilized for loan originations, the repayment of short-term borrowings, and investment purchases. The Company’s cash needs for the nine months ended September 30, 2019 were primarily satisfied by principal payments on mortgage-backed securities, proceeds from maturities and calls of debt securities, increased borrowings and acquired cash from Capital Bank. The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of debt securities, and to fund deposit outflows.
In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At September 30, 2020, outstanding undrawn lines of credit totaled $1.03 billion and outstanding commitments to originate loans totaled $377.1 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 $1.04 billion at September 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 September 30, 2020, the Company did not repurchase any shares of common stock. At September 30, 2020, there were 2,019,145 shares available to be repurchased under the stock repurchase program authorized in December of 2019. The Company is currently preparing a capital stress test and after consideration of these results, may resume common stock repurchases.
Cash dividends on common stock declared and paid during the first nine months of September 30, 2020 were $30.6 million, as compared to $25.9 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 October 29, 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 November 20, 2020 to common stockholders of record at the close of business on November 9, 2020. The Company also declared a quarterly cash dividend of $0.4375 per depository share, representing 1/40th interest in the Series A Preferred Stock, payable on November 16, 2020 to preferred stockholders of record on October 30, 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 nine months ended September 30, 2020, the
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Company received a dividend payment of $54.0 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 stockholders. At September 30, 2020, OceanFirst Financial Corp. held $154.4 million in cash.
As of September 30, 2020 and December 31, 2019, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (dollars in thousands):
ActualFor capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
As of September 30, 2020AmountRatioAmountRatioAmountRatio
Bank:
Tier 1 capital (to average assets)$922,597 8.36 %$441,626 4.000 %$552,032 5.00 %
Common equity Tier 1 (to risk-weighted assets)
922,597 11.62 555,564 7.000 
(1)
515,881 6.50 
Tier 1 capital (to risk-weighted assets)922,597 11.62 674,613 8.500 
(1)
634,930 8.00 
Total capital (to risk-weighted assets)982,099 12.37 833,346 10.500 
(1)
793,663 10.00 
OceanFirst Financial Corp:
Tier 1 capital (to average assets)$973,763 8.80 %$442,729 4.000 %N/AN/A
Common equity Tier 1 (to risk-weighted assets)
847,036 10.59 559,943 7.000 
(1)
N/AN/A
Tier 1 capital (to risk-weighted assets)973,763 12.17 679,931 8.500 
(1)
N/AN/A
Total capital (to risk-weighted assets)1,208,765 15.11 839,915 10.500 
(1)
N/AN/A
ActualFor capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
As of December 31, 2019AmountRatioAmountRatioAmountRatio
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/AN/A
Common equity Tier 1 (to risk-weighted assets)
729,095 12.14 420,273 7.000 
(1)
N/AN/A
Tier 1 capital (to risk-weighted assets)791,746 13.19 510,331 8.500 
(1)
N/AN/A
Total capital (to risk-weighted assets)844,977 14.07 630,409 10.500 
(1)
N/AN/A
(1)Includes the Capital Conservation Buffer of 2.500%.
The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At September 30, 2020, the Company maintained tangible equity of $935.7 million, for a tangible equity to tangible assets ratio of 8.41%. 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 the Company may be required to repurchase them in future periods. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At September 30, 2020 and December 31, 2019, the reserve for repurchased loans and loss sharing obligations amounted to $1.2 million and $1.1 million, respectively. In addition, the Company transferred certain high risk commercial loans to held-for-sale during the quarter. Based on limited representations and warranties contained in the loan sale agreements related to such sales, the Company determined a related repurchase reserve was not necessary.
The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2020 (in thousands):
Contractual ObligationsTotalLess than
One Year
1-3 years3-5 yearsMore than
5 years
Debt obligations$733,216 $142,119 $139,562 $195,999 $255,536 
Commitments to fund undrawn lines of credit
Commercial664,755 664,755 — — — 
Consumer/construction361,928 361,928 — — — 
Commitments to originate loans377,108 377,108 — — — 
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 held-for-investment, non-performing loans held-for-sale 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.
September 30, 2020December 31, 2019
 (dollars in thousands)
Non-performing loans held-for-investment:
Commercial and industrial$586 $207 
Commercial real estate – owner occupied11,365 4,811 
Commercial real estate – investor2,978 2,917 
Residential mortgage11,518 7,181 
Home equity loans and lines3,448 2,733 
Total non-performing loans held-for-investment29,895 17,849 
Non-performing loans held-for-sale67,489 — 
Other real estate owned106 264 
Total non-performing assets$97,490 $18,113 
Purchased with credit deterioration (“PCD”) loans (1)
$56,422 $13,265 
Delinquent loans 30-89 days$13,753 $14,798 
Allowance for credit losses as a percent of total loans held-for-investment0.70 %0.27 %
Allowance for credit losses as a percent of total non-performing loans held-for-investment188.49 94.41 
Non-performing loans held-for-investment as a percent of total loans held-for-investment0.37 0.29 
Non-performing assets as a percent of total assets0.84 0.22 
(1)     PCD loans are not included in non-performing loans held-for-investment or delinquent loans totals.

The Company’s non-performing loans held-for-investment totaled $29.9 million at September 30, 2020, as compared to $17.8 million at December 31, 2019. Included in the non-performing loans held-for-investment total was $9.9 million and $6.6 million of TDR loans at September 30, 2020 and December 31, 2019, respectively. Non-performing loans held-for-investment do not include $56.4 million and $13.3 million of acquired PCD loans at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, the allowance for credit losses totaled $56.4 million, or 0.70% 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 $31.6 million and $30.3 million at September 30, 2020 and December 31, 2019, respectively. 

In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. For principal and interest deferrals as well as principal only deferrals, all payments received will first be applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments shall continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at September 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. The table below excludes any loans held-for-sale (in thousands):
September 30, 2020December 31, 2019
Special Mention$141,467 $34,529 
Substandard175,979 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, and the adverse impact of COVID-19 and the economic downturn in borrowers’ ability to service their loans.
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Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 September 30, 2020.

Allowance for Credit Losses (“ACL”)
Under the 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 measurement of the ACL. Accrued interest receivable at September 30, 2020 was $40.7 million, of which $12.6 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 financial 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 the ACL 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’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 includes the calculation of loss rates using an open pool method. Under this method, the Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The historical loss rate is adjusted for the forecast of select macroeconomic variables that consider both historical trends as well as forecasted trends. The adjusted loss rate is calculated for a reasonable and supportable forecast period then reverts to the historical loss rate on a straight-line basis over four quarters. 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 these financial assets by applying loss rates to the amortized cost basis of each asset taking into consideration amortization, prepayment and default assumptions.

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

Troubled Debt Restructured Loans
A loan that has been modified or renewed is considered a 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. Loans modified in accordance with the CARES Act are not considered TDRs.

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 acquired 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 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
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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.
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 quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company” 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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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 September 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 September 30, 2020, the Company’s one-year gap was positive 17.28% 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 September 30, 20203 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$737,376 $1,470 $2,220 $— $— $741,066 
Debt investment securities66,938 82,997 117,644 63,184 127,068 457,831 
Debt mortgage-backed securities70,870 113,816 210,173 136,108 54,735 585,702 
Equity investments— — — — 63,846 63,846 
Restricted equity investments— — — — 67,505 67,505 
Loans receivable (2)
2,081,374 1,641,125 2,513,410 1,224,357 929,475 8,389,741 
Total interest-earning assets2,956,558 1,839,408 2,843,447 1,423,649 1,242,629 10,305,691 
Interest-bearing liabilities:
Interest-bearing checking accounts1,147,882 159,680 403,942 328,743 1,277,049 3,317,296 
Money market deposit accounts19,445 50,988 119,347 97,727 404,365 691,872 
Savings accounts149,992 103,546 278,284 227,575 712,157 1,471,554 
Time deposits305,000 845,359 337,365 65,772 8,271 1,561,767 
FHLB advances— — 136,475 196,980 9,997 343,452 
Securities sold under agreements to repurchase and other borrowings232,659 191 37,843 113,525 5,546 389,764 
Total interest-bearing liabilities1,854,978 1,159,764 1,313,256 1,030,322 2,417,385 7,775,705 
Interest sensitivity gap (3)
$1,101,580 $679,644 $1,530,191 $393,327 $(1,174,756)$2,529,986 
Cumulative interest sensitivity gap$1,101,580 $1,781,224 $3,311,415 $3,704,742 $2,529,986 $2,529,986 
Cumulative interest sensitivity gap as a percent of total interest-earning assets10.69 %17.28 %32.13 %35.95 %24.55 %24.55 %
(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 credit losses unamortized discounts and deferred loan fees.
(3)Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
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Additionally, the table below sets forth the Company’s exposure to IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of September 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.
 
 September 30, 2020December 31, 2019
Change in Interest Rates in Basis Points (Rate Shock)Economic Value of EquityNet Interest IncomeEconomic Value of EquityNet Interest Income
Amount% ChangeEVE RatioAmount% ChangeAmount% ChangeEVE RatioAmount% Change
(dollars in thousands)          
300$1,781,491 40.8 %16.1 %$337,643 13.4 %$1,242,674 5.1 %16.4 %$253,184 (0.6)%
2001,648,440 30.2 14.6 325,125 9.2 1,246,011 5.4 16.0 254,424 (0.1)
1001,477,787 16.8 12.8 311,811 4.7 1,227,428 3.8 15.3 254,996 0.1 
Static1,265,608 — 10.8 297,800 — 1,182,696 — 14.4 254,721 — 
(100)979,110 (22.6)8.2 292,281 (1.9)1,090,184 (7.8)12.9 252,662 (0.8)
The change in interest rate sensitivity at September 30, 2020, as compared to December 31, 2019, is primarily due to the addition of Two River and Country Bank, the significant decline in interest rates during the period and the increase in cash liquidity and short-term PPP loans.

Item 4.    Controls and Procedures
(a) Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, 2020December 31, 2019
 (Unaudited) 
Assets
Cash and due from banks$980,870 $120,544 
Debt securities available-for-sale, at estimated fair value169,634 150,960 
Debt securities held-to-maturity, net of allowance for credit losses of $2,393 at September 30, 2020 (estimated fair value of $902,418 at September 30, 2020 and $777,290 at December 31, 2019)871,688 768,873 
Equity investments, at estimated fair value63,846 10,136 
Restricted equity investments, at cost67,505 62,356 
Loans receivable, net of allowance for credit losses of $56,350 at September 30, 2020 and $16,852 at December 31, 20197,943,390 6,207,680 
Loans held-for-sale388,763  
Interest and dividends receivable40,671 21,674 
Other real estate owned106 264 
Premises and equipment, net103,249 102,691 
Bank owned life insurance264,167 237,411 
Assets held for sale6,717 3,785 
Goodwill500,849 374,632 
Core deposit intangible25,194 15,607 
Other assets224,648 169,532 
Total assets$11,651,297 $8,246,145 
Liabilities and Stockholders’ Equity
Deposits$9,283,288 $6,328,777 
Federal Home Loan Bank advances343,452 519,260 
Securities sold under agreements to repurchase with retail customers142,823 71,739 
Other borrowings246,941 96,801 
Advances by borrowers for taxes and insurance20,104 13,884 
Other liabilities152,975 62,565 
Total liabilities10,189,583 7,093,026 
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at September 30, 2020 and no shares issued at December 31, 20191  
Common stock, $.01 par value, 150,000,000 shares authorized, 61,026,971 shares issued and 60,378,120 and 50,405,048 shares outstanding at September 30, 2020 and December 31, 2019, respectively609 519 
Additional paid-in capital1,137,155 840,691 
Retained earnings356,397 358,668 
Accumulated other comprehensive income (loss)940 (1,208)
Less: Unallocated common stock held by Employee Stock Ownership Plan(7,737)(8,648)
Treasury stock, 648,851 and 1,586,808 shares at September 30, 2020 and December 31, 2019, respectively(25,651)(36,903)
Total stockholders’ equity1,461,714 1,153,119 
Total liabilities and stockholders’ equity$11,651,297 $8,246,145 

See accompanying Notes to Unaudited Consolidated Financial Statements.
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OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2020201920202019
 (Unaudited)(Unaudited)
Interest income:
Loans$85,933 $69,715 $264,224 $209,633 
Mortgage-backed securities3,212 3,761 10,649 11,748 
Debt securities, equity investments and other3,817 3,411 12,173 10,338 
Total interest income92,962 76,887 287,046 231,719 
Interest expense:
Deposits11,370 9,817 37,611 28,218 
Borrowed funds4,804 3,678 14,335 10,884 
Total interest expense16,174 13,495 51,946 39,102 
Net interest income76,788 63,392 235,100 192,617 
Credit loss expense35,714 305 55,332 1,281 
Net interest income after credit loss expense41,074 63,087 179,768 191,336 
Other income:
Bankcard services revenue3,097 2,658 8,319 7,622 
Trust and asset management revenue490 557 1,560 1,624 
Fees and service charges3,732 4,679 11,858 13,790 
Net gain on sales of loans1,001  1,930 15 
Net (loss) gain on equity investments(3,576)89 (3,273)330 
Net gain (loss) from other real estate operations214 (108)12 (235)
Income from bank owned life insurance1,530 1,431 4,626 4,045 
Commercial loan swap income1,425 2,138 7,964 3,223 
Other266 99 310 520 
Total other income8,179 11,543 33,306 30,934 
Operating expenses:
Compensation and employee benefits29,012 21,276 86,832 67,394 
Occupancy5,270 4,159 15,814 13,088 
Equipment1,906 2,062 5,831 5,944 
Marketing963 562 2,485 2,629 
Federal deposit insurance and regulatory assessments1,212 297 3,012 1,931 
Data processing4,517 3,398 12,843 10,736 
Check card processing1,385 1,639 3,951 4,399 
Professional fees3,354 2,580 8,339 5,697 
Other operating expense3,644 3,902 12,708 11,153 
Amortization of core deposit intangible1,538 1,009 4,660 3,029 
Branch consolidation expense830 1,696 4,287 8,782 
Merger related expenses3,156 777 14,753 6,761 
Total operating expenses56,787 43,357 175,515 141,543 
(Loss) income before (benefit) provision for income taxes(7,534)