OCFC 10-Q Quarterly Report Sept. 30, 2020

OCEANFIRST FINANCIAL CORP

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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)

________________________________________________


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 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)
	Consolidated Statements of Financial Condition as of September 30, 2020 (unaudited) and December 31, 2019	21
	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2020 and 2019	22
	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2020 and 2019	23
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019	24
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019	26
	Notes to Unaudited Consolidated Financial Statements	28
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	20
PART II.	Other Information	56
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
Signatures		58

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, 2020			June 30, 2020			September 30, 2019
SELECTED FINANCIAL CONDITION DATA:
Total assets	$	11,651,297		$	11,345,365		$	8,135,173
Loans receivable, net of allowance for credit losses	7,943,390			8,335,480			6,081,938
Deposits	9,283,288			8,967,754			6,220,855
Stockholders’ equity	1,461,714			1,476,434			1,144,528
SELECTED OPERATING DATA:
Net interest income	76,788			78,667			63,392
Credit loss expense	35,714			9,649			305
Other income	8,179			11,430			11,543
Operating expenses	56,787			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 period	24.21			24.47			22.57
Tangible common stockholders’ equity per common share (2)	14.58			14.79			14.86
Cash dividend per share	0.17			0.17			0.17
Stockholders’ equity to total assets	12.55		%	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 spread	2.77			3.02			3.32
Net interest margin	2.97			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 ratio	86.19			93.43			97.90
ASSET QUALITY:
Non-performing loans held-for-investment	$	29,895		$	21,044		$	17,453
Non-performing assets	97,490			21,292			17,747
Allowance for credit losses as a percent of total loans held-for-investment	0.70		%	0.46		%	0.27		%
Allowance for credit losses as a percent of total non-performing loans held-for-investment	188.49			182.99			95.32
Non-performing loans held-for-investment as a percent of total loans held-for-investment	0.37			0.25			0.29
Non-performing assets as a percent of total assets	0.84			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.

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.

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.

Table of Contents

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 .

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 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, 2020						September 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	$	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)
Commercial	5,554,897		58,639		4.20		3,350,868		42,104		4.99
Residential real estate	2,462,513		23,091		3.75		2,225,837		21,527		3.87
Home equity loans and lines	311,802		3,330		4.25		335,691		4,678		5.53
Other consumer	67,497		873		5.15		104,310		1,406		5.35
Allowance for credit losses, net of deferred loan fees	(45,912)		—		—		(8,381)		—		—
Loans receivable, net	8,350,797		85,933		4.09		6,008,325		69,715		4.60
Total interest-earning assets	10,268,834		92,962		3.60		7,088,817		76,887		4.30
Non-interest-earning assets	1,353,135						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 market	675,841		571		0.34		597,896		1,208		0.80
Savings	1,460,232		296		0.08		905,605		300		0.13
Time deposits	1,606,632		5,876		1.45		920,032		3,998		1.72
Total	7,032,024		11,370		0.64		4,891,412		9,817		0.80
Federal Home Loan Bank ("FHLB") advances	343,412		1,470		1.70		394,124		2,208		2.22
Securities sold under agreements to repurchase	144,720		174		0.48		62,296		73		0.46
Other borrowings	246,903		3,160		5.09		96,578		1,397		5.74
Total interest-bearing liabilities	7,767,059		16,174		0.83		5,444,410		13,495		0.98
Non-interest-bearing deposits	2,209,241						1,396,259
Non-interest-bearing liabilities	162,987						88,868
Total liabilities	10,139,287						6,929,537
Stockholders’ equity	1,482,682						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	%

Table of Contents


	For the Nine Months Ended
	September 30, 2020						September 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	$	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)
Commercial	5,309,275		177,973		4.48		3,291,189		126,091		5.12
Residential real estate	2,480,932		71,590		3.85		2,169,611		65,260		4.01
Home equity loans and lines	326,263		11,253		4.61		345,294		14,041		5.44
Other consumer	77,085		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, net	8,166,369		264,224		4.32		5,909,056		209,633		4.74
Total interest-earning assets	9,718,739		287,046		3.95		7,033,965		231,719		4.40
Non-interest-earning assets	1,306,568						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 market	647,566		2,316		0.48		610,153		3,676		0.81
Savings	1,436,594		2,266		0.21		908,457		887		0.13
Time deposits	1,563,449		18,470		1.58		928,903		11,312		1.63
Total	6,670,702		37,611		0.75		4,949,173		28,218		0.76
FHLB advances	483,267		6,239		1.72		379,786		6,367		2.24
Securities sold under agreements to repurchase	119,495		408		0.46		63,267		192		0.41
Other borrowings	195,754		7,688		5.25		98,562		4,325		5.87
Total interest-bearing liabilities	7,469,218		51,946		0.93		5,490,788		39,102		0.95
Non-interest-bearing deposits	1,971,622						1,303,447
Non-interest-bearing liabilities	133,928						75,988
Total liabilities	9,574,768						6,870,223
Stockholders’ equity	1,450,539						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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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):


	Actual				For capital adequacy purposes					To be well-capitalized under prompt corrective action
As of September 30, 2020	Amount		Ratio		Amount		Ratio			Amount		Ratio
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/A		N/A
Common equity Tier 1 (to risk-weighted assets)	847,036		10.59		559,943		7.000		(1)	N/A		N/A
Tier 1 capital (to risk-weighted assets)	973,763		12.17		679,931		8.500		(1)	N/A		N/A
Total capital (to risk-weighted assets)	1,208,765		15.11		839,915		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%.

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 Obligations	Total		Less than One Year		1-3 years		3-5 years		More than 5 years
Debt obligations	$	733,216	$	142,119	$	139,562	$	195,999	$	255,536

Commitments to fund undrawn lines of credit
Commercial	664,755		664,755		—		—		—
Consumer/construction	361,928		361,928		—		—		—
Commitments to originate loans	377,108		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, 2020			December 31, 2019
	(dollars in thousands)
Non-performing loans held-for-investment:
Commercial and industrial	$	586		$	207
Commercial real estate – owner occupied	11,365			4,811
Commercial real estate – investor	2,978			2,917
Residential mortgage	11,518			7,181
Home equity loans and lines	3,448			2,733

Total non-performing loans held-for-investment	29,895			17,849
Non-performing loans held-for-sale	67,489			—
Other real estate owned	106			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-investment	0.70		%	0.27		%
Allowance for credit losses as a percent of total non-performing loans held-for-investment	188.49			94.41
Non-performing loans held-for-investment as a percent of total loans held-for-investment	0.37			0.29
Non-performing assets as a percent of total assets	0.84			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, 2020		December 31, 2019
Special Mention	$	141,467	$	34,529
Substandard	175,979		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, 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	$	737,376		$	1,470		$	2,220		$	—		$	—		$	741,066
Debt investment securities	66,938			82,997			117,644			63,184			127,068			457,831
Debt mortgage-backed securities	70,870			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 assets	2,956,558			1,839,408			2,843,447			1,423,649			1,242,629			10,305,691
Interest-bearing liabilities:
Interest-bearing checking accounts	1,147,882			159,680			403,942			328,743			1,277,049			3,317,296
Money market deposit accounts	19,445			50,988			119,347			97,727			404,365			691,872
Savings accounts	149,992			103,546			278,284			227,575			712,157			1,471,554
Time deposits	305,000			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 borrowings	232,659			191			37,843			113,525			5,546			389,764
Total interest-bearing liabilities	1,854,978			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 assets	10.69		%	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, 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	$	1,781,491	40.8	%	16.1	%	$	337,643	13.4	%	$	1,242,674	5.1	%	16.4	%	$	253,184	(0.6)	%
200	1,648,440		30.2		14.6		325,125		9.2		1,246,011		5.4		16.0		254,424		(0.1)
100	1,477,787		16.8		12.8		311,811		4.7		1,227,428		3.8		15.3		254,996		0.1
Static	1,265,608		—		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, 2020		December 31, 2019
	(Unaudited)
Assets
Cash and due from banks	$	980,870	$	120,544

Debt securities available-for-sale, at estimated fair value	169,634		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 value	63,846		10,136
Restricted equity investments, at cost	67,505		62,356
Loans receivable, net of allowance for credit losses of $56,350 at September 30, 2020 and $16,852 at December 31, 2019	7,943,390		6,207,680
Loans held-for-sale	388,763		—
Interest and dividends receivable	40,671		21,674
Other real estate owned	106		264
Premises and equipment, net	103,249		102,691

Bank owned life insurance	264,167		237,411

Assets held for sale	6,717		3,785
Goodwill	500,849		374,632
Core deposit intangible	25,194		15,607
Other assets	224,648		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 advances	343,452		519,260
Securities sold under agreements to repurchase with retail customers	142,823		71,739
Other borrowings	246,941		96,801
Advances by borrowers for taxes and insurance	20,104		13,884
Other liabilities	152,975		62,565
Total liabilities	10,189,583		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, 2019	1		—
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, respectively	609		519
Additional paid-in capital	1,137,155		840,691
Retained earnings	356,397		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’ equity	1,461,714		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,
	2020		2019		2020		2019
	(Unaudited)				(Unaudited)
Interest income:
Loans	$	85,933	$	69,715	$	264,224	$	209,633
Mortgage-backed securities	3,212		3,761		10,649		11,748
Debt securities, equity investments and other	3,817		3,411		12,173		10,338
Total interest income	92,962		76,887		287,046		231,719
Interest expense:
Deposits	11,370		9,817		37,611		28,218
Borrowed funds	4,804		3,678		14,335		10,884
Total interest expense	16,174		13,495		51,946		39,102
Net interest income	76,788		63,392		235,100		192,617
Credit loss expense	35,714		305		55,332		1,281
Net interest income after credit loss expense	41,074		63,087		179,768		191,336
Other income:
Bankcard services revenue	3,097		2,658		8,319		7,622
Trust and asset management revenue	490		557		1,560		1,624
Fees and service charges	3,732		4,679		11,858		13,790



Net gain on sales of loans	1,001		—		1,930		15
Net (loss) gain on equity investments	( 3,576 )		89		( 3,273 )		330
Net gain (loss) from other real estate operations	214		( 108 )		12		( 235 )
Income from bank owned life insurance	1,530		1,431		4,626		4,045
Commercial loan swap income	1,425		2,138		7,964		3,223
Other	266		99		310		520
Total other income	8,179		11,543		33,306		30,934
Operating expenses:
Compensation and employee benefits	29,012		21,276		86,832		67,394
Occupancy	5,270		4,159		15,814		13,088
Equipment	1,906		2,062		5,831		5,944
Marketing	963		562		2,485		2,629
Federal deposit insurance and regulatory assessments	1,212		297		3,012		1,931
Data processing	4,517		3,398		12,843		10,736
Check card processing	1,385		1,639		3,951		4,399
Professional fees	3,354		2,580		8,339		5,697
Other operating expense	3,644		3,902		12,708		11,153

Amortization of core deposit intangible	1,538		1,009		4,660		3,029
Branch consolidation expense	830		1,696		4,287		8,782
Merger related expenses	3,156		777		14,753		6,761
Total operating expenses	56,787		43,357		175,515		141,543
(Loss) income before (benefit) provision for income taxes	( 7,534 )		31,273		37,559		80,727
(Benefit) provision for income taxes	( 2,608 )		6,302		7,314		15,603
Net (loss) income	$	( 4,926 )	$	24,971	$	30,245	$	65,124
Dividends on preferred shares	1,093		—		1,093		—
Net (loss) income available to common stockholders	$	( 6,019 )	$	24,971	$	29,152	$	65,124
Basic (loss) earnings per share	$	( 0.10 )	$	0.50	$	0.49	$	1.30
Diluted (loss) earnings per share	$	( 0.10 )	$	0.49	$	0.49	$	1.28
Average basic shares outstanding	59,935		50,491		59,901		50,242
Average diluted shares outstanding	59,935		50,966		60,076		50,830

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(Unaudited)				(Unaudited)
Net (loss) income	$	( 4,926 )	$	24,971	$	30,245	$	65,124
Other comprehensive (loss) income:
Unrealized (loss) gain on debt securities (net of tax benefit of $105 and tax expense of $604 in 2020, and net of tax expense of $55 and $489 in 2019, respectively)	( 461 )		164		1,644		1,723
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $75 and $235 in 2020, and net of tax expense of $86 and $257 in 2019, respectively)	108		124		336		372
Reclassification adjustment for gains included in net income (net of tax expense of $45 and $45 in 2020 and $0 in 2019)	168		—		168		—

Total other comprehensive (loss) income	( 185 )		288		2,148		2,095
Total comprehensive (loss) income	$	( 5,111 )	$	25,259	$	32,393	$	67,219
Less: Dividends on preferred shares	1,093		—		1,093		—
Comprehensive (loss) income available to common stockholders	$	( 6,204 )	$	25,259	$	31,300	$	67,219

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except per share amounts)

(Unaudited)

For the Three Months Ended September 30, 2020 and September 30, 2019


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Employee Stock Ownership Plan		Treasury Stock		Total
Balance at June 30, 2019	$	—	$	518	$	838,610	$	327,297	$	( 1,643 )	$	( 9,252 )	$	( 18,235 )	$	1,137,295
Net income	—		—		—		24,971		—		—		—		24,971
Other comprehensive income, net of tax	—		—		—		—		288		—		—		288
Stock awards	—		—		538		—		—		—		—		538




Allocation of ESOP stock	—		—		79		—		—		302		—		381

Cash dividend $0.17 per share	—		—		—		( 8,639 )		—		—		—		( 8,639 )
Exercise of stock options	—		1		349		—		—		—		—		350
Purchase 477,400 shares of common stock	—		—		—		—		—		—		( 10,656 )		( 10,656 )


Balance at September 30, 2019	$	—	$	519	$	839,576	$	343,629	$	( 1,355 )	$	( 8,950 )	$	( 28,891 )	$	1,144,528

Balance at June 30, 2020	$	1	$	609	$	1,135,839	$	372,552	$	1,125	$	( 8,041 )	$	( 25,651 )	$	1,476,434
Net income	—		—		—		( 4,926 )		—		—		—		( 4,926 )
Other comprehensive loss, net of tax	—		—		—		—		( 185 )		—		—		( 185 )
Stock awards	—		—		1,250		—		—		—		—		1,250



Allocation of ESOP stock	—		—		( 46 )		—		—		304		—		258
Cash dividend $0.17 per share	—		—		—		( 10,136 )		—		—		—		( 10,136 )
Exercise of stock options	—		—		296		—		—		—		—		296



Proceeds from preferred stock issuance, net of costs	—		—		( 184 )		—		—		—		—		( 184 )
Preferred stock dividend	—		—		—		( 1,093 )		—		—		—		( 1,093 )


Balance at September 30, 2020	$	1	$	609	$	1,137,155	$	356,397	$	940	$	( 7,737 )	$	( 25,651 )	$	1,461,714

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OceanFirst Financial Corp.

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except per share amounts)

(Unaudited)

For the Nine Months Ended September 30, 2020 and September 30, 2019


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Employee Stock Ownership Plan		Treasury Stock		Total
Balance at December 31, 2018	$	—	$	483	$	757,963	$	305,056	$	( 3,450 )	$	( 9,857 )	$	( 10,837 )	$	1,039,358
Net income	—		—		—		65,124		—		—		—		65,124
Other comprehensive income, net of tax	—		—		—		—		2,095		—		—		2,095
Stock awards	—		2		3,138		—		—		—		—		3,140





Allocation of ESOP stock	—		—		275		—		—		907		—		1,182
Cash dividend $0.51 per share	—		—		—		( 25,943 )		—		—		—		( 25,943 )
Exercise of stock options	—		2		1,751		( 608 )		—		—		—		1,145
Purchase 786,567 shares of common stock	—		—		—		—		—		—		( 18,054 )		( 18,054 )
Acquisition of Capital Bank of New Jersey	—		32		76,449		—		—		—		—		76,481

Balance at September 30, 2019	$	—	$	519	$	839,576	$	343,629	$	( 1,355 )	$	( 8,950 )	$	( 28,891 )	$	1,144,528

Balance at December 31, 2019	$	—	$	519	$	840,691	$	358,668	$	( 1,208 )	$	( 8,648 )	$	( 36,903 )	$	1,153,119
Net income	—		—		—		30,245		—		—		—		30,245
Other comprehensive loss, net of tax	—		—		—		—		2,148		—		—		2,148
Stock awards	—		2		3,727		—		—		—		—		3,729
Effect of adopting Accounting Standards Update ("ASU") No. 2016-13	—		—		—		( 4 )		—		—		—		( 4 )


Allocation of ESOP stock	—		—		( 45 )		—		—		911		—		866
Cash dividend $0.51 per share	—		—		—		( 30,630 )		—		—		—		( 30,630 )
Exercise of stock options	—		2		1,961		( 789 )		—		—		—		1,174

Purchase 648,851 shares of common stock	—		—		—		—		—		—		( 14,814 )		( 14,814 )
Proceeds from preferred stock issuance, net of costs	1		—		55,528		—		—		—		—		55,529
Preferred stock dividend	—		—		—		( 1,093 )		—		—		—		( 1,093 )
Acquisition of Two River Bancorp	—		42		122,501		—		—		—		26,066		148,609
Acquisition of Country Bank Holdings Company	—		44		112,792		—		—		—		—		112,836

Balance at September 30, 2020	$	1	$	609	$	1,137,155	$	356,397	$	940	$	( 7,737 )	$	( 25,651 )	$	1,461,714

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)


	For the Nine Months Ended September 30,
	2020		2019
	(Unaudited)
Cash flows from operating activities:
Net income	$	30,245	$	65,124
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment	6,291		6,448
Allocation of ESOP stock	866		1,182
Stock awards	3,729		3,140

Net excess tax benefit on stock compensation	123		( 243 )
Amortization of servicing asset	65		33
Net premium amortization in excess of discount accretion on securities	2,126		2,387
Net amortization of deferred costs on borrowings	355		161
Amortization of core deposit intangible	4,660		3,029
Net accretion of purchase accounting adjustments	( 15,802 )		( 10,588 )
Net amortization of deferred costs and discounts on loans	1,135		1,028
Provision for credit losses	55,332		1,281
Net (gain) loss on sale and write-down of other real estate owned	( 101 )		20
Net loss on sale and write down of fixed assets held-for-sale to net realizable value	4,193		7,289
Net loss (gain) on sale of fixed assets	6		( 27 )

Net unrealized loss (gain) on equity securities	3,220		( 330 )
Net gain on sales of loans	( 1,930 )		( 15 )
Proceeds from sales of mortgage loans held for sale	113,708		912
Mortgage loans originated for sale	( 134,907 )		( 1,007 )
Increase in value of bank owned life insurance	( 4,626 )		( 4,045 )
Net loss on sale of assets held for sale	—		5
Increase in interest and dividends receivable	( 14,836 )		( 462 )
Deferred tax provision	99		336


Decrease (increase) in other assets	2,301		( 27,786 )
Increase in other liabilities	71,285		34,110
Total adjustments	97,292		16,858
Net cash provided by operating activities	127,537		81,982
Cash flows from investing activities:
Net increase in loans receivable	( 654,461 )		( 92,658 )
Proceeds from sale of loans	71,604		5,901
Purchase of loans receivable	—		( 101,674 )
Purchase of debt investment securities available-for-sale	( 57,487 )		( 35,106 )
Purchase of debt investment securities held-to-maturity	( 651 )		( 3,577 )
Purchase of debt mortgage-backed securities held-to-maturity	( 78,464 )		—
Purchase of equity investments	( 53,726 )		( 160 )
Proceeds from sale of equity investments	891		—
Proceeds from maturities and calls of debt investment securities available-for-sale	41,101		28,447
Proceeds from maturities and calls of debt investment securities held-to-maturity	41,583		25,547
Proceeds from sales of debt investment securities available-for-sale	5,869		—

Principal repayments on debt mortgage-backed securities available-for-sale	256		—
Principal repayments on debt investment securities held-to-maturity	857		1,334
Principal repayments on debt mortgage-backed securities held-to-maturity	127,826		89,282
Proceeds from bank owned life insurance	310		716
Proceeds from the redemption of restricted equity investments	62,354		85,894
Purchases of restricted equity investments	( 59,489 )		( 90,892 )
Proceeds from sales of other real estate owned	713		2,060
Proceeds from sales of assets held-for-sale	—		412
Purchases of premises and equipment	( 9,014 )		( 3,245 )
Net cash consideration received for acquisition	23,460		59,395

Net cash used in investing activities	( 536,468 )		( 28,324 )

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Continued

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)


	For the Nine Months Ended September 30,
	2020		2019
	(Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposits	$	1,362,996	$	( 42,306 )
(Decrease) increase in short-term borrowings	( 211,649 )		107,307
Proceeds from Federal Home Loan Bank advances	525,000		35,000
Repayments of Federal Home Loan Bank advances	( 496,200 )		( 76,618 )
Proceeds from Federal Reserve Bank advances	3,778		—
Net proceeds from issuance of subordinated notes	122,180		—
Repayments of other borrowings	( 80 )		( 216 )
Increase in advances by borrowers for taxes and insurance	5		2,164
Exercise of stock options	1,174		1,145
Payment of employee taxes withheld from stock awards	( 2,084 )		( 2,786 )
Purchase of treasury stock	( 14,814 )		( 18,054 )
Net proceeds from the issuance of preferred stock	55,529		—

Dividends paid	( 31,723 )		( 25,943 )
Net cash provided by (used in) financing activities	1,314,112		( 20,307 )
Net increase in cash and due from banks and restricted cash	905,181		33,351
Cash and due from banks and restricted cash at beginning of period	133,226		122,328
Cash and due from banks and restricted cash at end of period	$	1,038,407	$	155,679
Supplemental Disclosure of Cash Flow Information:
Cash and due from banks at beginning of period	$	120,544	$	120,792
Restricted cash at beginning of period	12,682		1,536

Cash and due from banks and restricted cash at beginning of period	$	133,226	$	122,328
Cash and due from banks at end of period	$	980,870	$	140,901
Restricted cash at end of period	57,537		14,778

Cash and due from banks and restricted cash at end of period	$	1,038,407	$	155,679
Cash paid during the period for:
Interest	$	51,494	$	39,293
Income taxes	5,232		16,506
Non-cash activities:
Accretion of unrealized loss on securities reclassified to held-to-maturity	570		629
Net loan charge-offs	15,917		1,222
Transfer of premises and equipment to assets held-for-sale	4,043		1,607

Transfer of loans receivable to loans held-for-sale	365,634		—
Transfer of loans receivable to other real estate owned	106		993
Acquisition:
Non-cash assets acquired:
Securities	$	208,880	$	103,775
Restricted equity investments	5,334		313
Loans	1,558,480		307,778
Premises and equipment	9,744		3,389
Accrued interest receivable	4,161		1,390
Bank owned life insurance	22,440		10,460
Deferred tax asset	( 509 )		3,829
Other assets	10,073		1,405
Goodwill and other intangible assets, net	140,031		38,780
Total non-cash assets acquired	$	1,958,634	$	471,119
Liabilities assumed:
Deposits	$	1,594,403	$	449,018
Borrowings	92,618		—
Other liabilities	33,628		5,015
Total liabilities assumed	$	1,720,649	$	454,033

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., and its wholly-owned subsidiary OceanFirst Management Corp., and its wholly-owned subsidiary OceanFirst Realty Corp., OceanFirst Services, LLC and its wholly-owned subsidiary Hooper Holdings, LLC., TRREO Holdings LLC, Casaba Real Estate Holdings Corporation, Cohensey Bridge, L.L.C., Prosperis Financial, LLC, CBNJ Investments Corp., Country Property Holdings, Inc., and TRCB Investment Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the full year 2020. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates.

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326).” This ASU significantly changed how entities measure credit losses for financial assets and certain other instruments that are measured at amortized cost. The standard replaced the “incurred loss” approach with an “expected loss” model, which necessitates a forecast of lifetime losses. The new model, referred to as the CECL model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. The ASU simplifies the accounting model for purchased credit-impaired debt securities and loans. The standard’s provisions are to be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASU 2016-13, or Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $ 4,000 , net of tax, as of January 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment included a decrease in the allowance for credit losses on loans of $ 475,000 , an increase in the allowance for credit losses on held to maturity debt securities of $ 1.3 million, and a decrease in the allowance for credit losses on off-balance sheet credit exposures of $ 788,000 .

As allowed by ASC 326, the Company elected not to maintain pools of loans accounted for under ASC 310-30. At December 31, 2019, purchase credit impaired (“PCI”) loans totaled $ 13.3 million. In accordance with the standard, management did not reassess whether modifications individually acquired financial assets accounted for in pools were troubled debt restructured loans as of the date of adoption. Upon adoption, the Company’s PCI loans were converted to PCD loans as defined by ASC 326. The transition adjustment for the PCI loans to PCD loans resulted in a reclassification of $ 3.2 million from the specific credit fair value adjustment to the allowance for credit losses on loans.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. At

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

September 30, 2020, the Company utilized the September 15, 2020 forecast, from Oxford Economics, the most recent forecast available as of quarter end, to provide the macroeconomic forecasts for select variables.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” This ASU intends to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge by which the carrying amount exceeds the reporting unit’s fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. The adoption of this update did not have an impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU updates the disclosure requirements on Fair Value measurements by 1) removing: the disclosures for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements; 2) modifying: disclosures for timing of liquidation of an investee’s assets and disclosures for uncertainty in measurement as of reporting date; and 3) adding: disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring level 3 fair value measurements and disclosures for the range and weighted average of the significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted to any removed or modified disclosures and delay adoption of additional disclosures until the effective date. With the exception of the following, which should be applied prospectively, disclosures relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the disclosures for uncertainty measurement, all other changes should be applied retrospectively to all periods presented upon the effective date. The adoption of this update did not have an impact on the Company’s consolidated financial statements. Refer to Note 7 Fair Value Measurements, for additional information.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 2. Business Combinations

Capital Bank of New Jersey Acquisition

On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”), which after purchase accounting adjustments added $ 494.4 million to assets, $ 307.3 million to loans, and $ 449.0 million to deposits. Total consideration paid for Capital Bank was $ 76.8 million, including cash consideration of $ 353,000 . Capital Bank was merged with and into the Bank on the date of acquisition.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Capital Bank, net of total consideration paid (in thousands):


	At January 31, 2019
	Fair Value
Total purchase price:	$	76,834
Assets acquired:
Cash and cash equivalents	$	59,748
Securities	103,775
Loans	307,300
Accrued interest receivable	1,390
Bank owned life insurance	10,460
Deferred tax asset	4,101
Other assets	4,980
Core deposit intangible	2,662
Total assets acquired	494,416
Liabilities assumed:
Deposits	( 449,018 )

Other liabilities	( 5,210 )
Total liabilities assumed	( 454,228 )
Net assets acquired	$	40,188
Goodwill recorded in the merger	$	36,646

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. On January 31, 2020, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Two River Bancorp Acquisition

On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which after purchase accounting adjustments added $ 1.11 billion to assets, $ 940.1 million to loans, and $ 941.8 million to deposits. Total consideration paid for Two River was $ 197.1 million, including cash consideration of $ 48.4 million. Two River was merged with and into the Company on the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of total consideration paid (in thousands):


	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	197,050
Assets acquired:
Cash and cash equivalents		$	51,102
Securities		64,381
Loans		940,072
Accrued interest receivable		2,382
Bank owned life insurance		22,440
Deferred tax asset		3,578
Other assets		15,956
Core deposit intangible		12,130
Total assets acquired		1,112,041
Liabilities assumed:
Deposits		( 941,750 )

Other liabilities		( 59,006 )
Total liabilities assumed		( 1,000,756 )
Net assets acquired		$	111,285
Goodwill recorded in the merger		$	85,765

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Country Bank Holding Company, Inc. Acquisition

On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $ 792.7 million to assets, $ 618.4 million to loans, and $ 652.7 million to deposits. Total consideration paid for Country Bank was $ 112.8 million. Country Bank was merged with and into the Company on the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands):


	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	112,836
Assets acquired:
Cash and cash equivalents		$	20,799
Securities		144,499
Loans		618,408
Accrued interest receivable		1,779

Deferred tax asset		( 4,087 )
Other assets		9,195
Core deposit intangible		2,117
Total assets acquired		792,710
Liabilities assumed:
Deposits		( 652,653 )

Other liabilities		( 67,240 )
Total liabilities assumed		( 719,893 )
Net assets acquired		$	72,817
Goodwill recorded in the merger		$	40,019

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.

Supplemental Pro Forma Financial Information

The following table presents financial information regarding the former Two River and Country Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 1, 2020) through September 30, 2020. The table also presents financial information regarding the former Capital Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 31, 2019) through September 30, 2020. In addition, the table provides unaudited condensed pro forma financial information assuming the Two River, Country Bank, and Capital Bank acquisitions had been completed as of January 1, 2019 for the nine months ended September 30, 2019. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings or the impact of conforming certain accounting policies of the acquired company to the Company’s policies that may have occurred as a result of the integration and consolidation of Two River, Country Bank, and Capital Bank’s operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)


(in thousands)	Two River Actual for Nine Months Ended September 30, 2020		Country Bank Actual for Nine Months Ended September 30, 2020		Capital Bank Actual from February 1, 2019 to September 30, 2019		Pro Forma Nine Months Ended September 30, 2019
Net interest income	$	31,354	$	20,456	$	12,700	$	247,550
Credit loss expense	6,471		4,398		280		2,211
Non-interest income	1,886		408		991		35,010
Non-interest expense	23,422		14,470		11,035		176,294
Provision for income taxes	809		482		499		20,233
Net income	$	2,538	$	1,514	$	1,877	$	83,822
Fully diluted earnings per share							$	1.36

Fair Value Measurement of Assets Assumed and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Capital Bank, Two River and Country Bank acquisitions were as follows. Refer to Note 7, Fair Value Measurements, for a discussion of the fair value hierarchy.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

Loans

The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.

To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.

The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank or historical loss experiences of peer groups where deemed appropriate. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.

To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company identified loans that have experienced more-than-insignificant deterioration in credit quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Premises and Equipment

Fair values are based upon appraisals from independent third parties. In addition to owned properties, Capital Bank, Two River and Country Bank operated one , 14 , and five properties, respectively, subject to lease agreements.

Deposits and Core Deposit Premium

Core deposit premium represents the value assigned to non-interest-bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs. The core deposit premium totaled $ 2.7 million, $ 12.1 million, and $ 2.1 million, for the acquisitions of Capital Bank, Two River, and Country Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years using an accelerated method.

Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.

Borrowings

Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 3. Earnings/(Loss) per Share

The following reconciles shares outstanding for basic and diluted earnings/(loss) per share for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Weighted average shares outstanding	60,363	51,039	60,349	50,792
Less: Unallocated ESOP shares	( 418 )	( 484 )	( 435 )	( 501 )
Unallocated incentive award shares and shares held by deferred compensation plan	( 10 )	( 64 )	( 13 )	( 49 )
Average basic shares outstanding	59,935	50,491	59,901	50,242
Add: Effect of dilutive securities:
Incentive awards and shares held by deferred compensation plan	—	475	175	588

Average diluted shares outstanding	59,935	50,966	60,076	50,830

For the three and nine months ended September 30, 2020, antidilutive stock options of 2,251,000 and 2,067,000 , respectively, were excluded from earnings/(loss) per share calculations. For the three and nine months ended September 30, 2019, antidilutive stock options of 997,000 and 993,000 , respectively, were excluded from earnings/(loss) per share calculations. For the three months ended September 30, 2020, 87,000 shares related to incentive awards and shares held by deferred compensation plan were excluded from the diluted earnings/(loss) per share calculation as they were antidilutive.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 4. Securities

The amortized cost, estimated fair value, and allowance for credit losses of debt securities available-for-sale and held-to-maturity at September 30, 2020, and December 31, 2019, are as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
At September 30, 2020
Debt securities available-for-sale:
Investment securities:
U.S. government and agency obligations	$	158,778	$	3,653	$	( 3 )	$	162,428	$	—
State and municipal obligations	2,402		—		—		2,402		—
Corporate debt securities	4,500		61		—		4,561		—
Total investment securities	165,680		3,714		( 3 )		169,391		—
Mortgage-backed securities - FNMA	240		3		—		243		—
Total debt securities available-for-sale	$	165,920	$	3,717	$	( 3 )	$	169,634	$	—



Debt securities held-to-maturity:
Investment securities:
U.S. government and agency obligations	$	4,997	$	14	$	—	$	5,011	$	—
State and municipal obligations	214,865		9,375		( 225 )		224,015		( 33 )
Corporate debt securities	72,289		1,700		( 3,867 )		70,122		( 1,579 )
Total investment securities	292,151		11,089		( 4,092 )		299,148		( 1,612 )
Mortgage-backed securities:
FHLMC	202,329		6,093		( 135 )		208,287		—
FNMA	245,524		7,799		( 141 )		253,182		—
GNMA	82,230		2,457		( 16 )		84,671		—
SBA	5,634		—		( 60 )		5,574		—
CMO	49,745		1,811		—		51,556		( 781 )
Total mortgage-backed securities	585,462		18,160		( 352 )		603,270		( 781 )
Total debt securities held-to-maturity	$	877,613	$	29,249	$	( 4,444 )	$	902,418	$	( 2,393 )
Total debt securities	$	1,043,533	$	32,966	$	( 4,447 )	$	1,072,052	$	( 2,393 )

There was no allowance for credit losses on debt securities available-for-sale at September 30, 2020.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
At December 31, 2019
Debt securities available-for-sale:
Investment securities:
U.S. government and agency obligations	$	149,120	$	1,408	$	( 93 )	$	150,435
State and municipal obligations	25		—		—		25
Total investment securities	149,145		1,408		( 93 )		150,460
Mortgage-backed securities - FNMA	495		5		—		500
Total debt securities available-for-sale	$	149,640	$	1,413	$	( 93 )	$	150,960



Debt securities held-to-maturity:
Investment securities:
U.S. government and agency obligations	$	4,984	$	14	$	—	$	4,998
State and municipal obligations	124,430		1,537		( 208 )		125,759
Corporate debt securities	79,547		833		( 2,421 )		77,959
Total investment securities	208,961		2,384		( 2,629 )		208,716
Mortgage-backed securities:
FHLMC	206,985		2,221		( 524 )		208,682
FNMA	244,428		2,680		( 493 )		246,615
GNMA	110,661		939		( 212 )		111,388
SBA	1,940		—		( 51 )		1,889
Total mortgage-backed securities	564,014		5,840		( 1,280 )		568,574
Total debt securities held-to-maturity	$	772,975	$	8,224	$	( 3,909 )	$	777,290
Total debt securities	$	922,615	$	9,637	$	( 4,002 )	$	928,250

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity by major security type for the nine months ended September 30, 2020 (in thousands):


	Investment securities		Mortgage-backed securities
Allowance for credit losses
Beginning balance	$	—	$	—
Impact of CECL adoption	( 1,268 )		—
Provision for credit loss expense	( 344 )		( 781 )



Total ending allowance balance	$	( 1,612 )	$	( 781 )

During the third quarter 2013, the Bank transferred $ 536.0 million of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at September 30, 2020, and December 31, 2019, is as follows (in thousands):


	September 30, 2020		December 31, 2019
Amortized cost	$	877,613	$	772,975
Net loss on date of transfer from available-for-sale	( 13,347 )		( 13,347 )
Allowance for credit loss	( 2,393 )		—
Accretion of net unrealized loss on securities reclassified as held-to-maturity	9,815		9,245
Carrying value	$	871,688	$	768,873

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

During the three and nine months ended September 30, 2020 there were $ 244,000 of realized gains on debt securities. There were no realized gains or losses on debt securities for the three and nine months ended September 30, 2019.

During the three and nine months ended September 30, 2020, there were $ 0 and $ 53,000 , respectively, of realized losses on equity securities. There were no realized gains or losses on equity securities in the three and nine months ended September 30, 2019. The realized and unrealized gains or losses on equity securities for the three and nine months ended September 30, 2020 and September 30, 2019 are shown in the table below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net (loss) gain on equity investments	$	( 3,576 )	$	89	$	( 3,273 )	$	330
Less: Net losses recognized on equity securities sold	—		—		( 53 )		—
Unrealized (loss) gain recognized on equity securities still held	$	( 3,576 )	$	89	$	( 3,220 )	$	330

The amortized cost and estimated fair value of investment securities at September 30, 2020 by contractual maturity are shown below (in thousands). Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2020, corporate debt securities with an amortized cost of $ 38.5 million and estimated fair value of $ 39.8 million were callable prior to the maturity date.


September 30, 2020	Amortized Cost		Estimated Fair Value
Less than one year	$	95,990	$	96,765
Due after one year through five years	180,827		186,965
Due after five years through ten years	78,064		75,630
Due after ten years	102,950		109,180
	$	457,831	$	468,540

Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.

The estimated fair value of securities pledged as required security for deposits and for other purposes amounted to $ 456.6 million and $ 475.6 million, at September 30, 2020 and December 31, 2019, respectively, which includes $ 148.1 million and $ 81.4 million at September 30, 2020 and December 31, 2019, respectively, pledged as collateral for securities sold under agreements to repurchase.

At September 30, 2020, there were no holdings of securities of any one issuer, other than the US government and its agencies, in an amount greater than 10% of stockholders’ equity.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements

The estimated fair value and unrealized losses of debt securities available-for-sale and held-to-maturity at September 30, 2020 and December 31, 2019, segregated by the duration of the unrealized losses, are as follows (in thousands):


	At September 30, 2020
	Less than 12 months				12 months or longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Debt securities available-for-sale:
Investment securities - U.S. government and agency obligations	$	17,060	$	( 3 )	$	—	$	—	$	17,060	$	( 3 )

Total debt securities available-for-sale	17,060		( 3 )		—		—		17,060		( 3 )
Debt securities held-to-maturity:
Investment securities:

State and municipal obligations	$	3,635	$	( 42 )	$	7,383	$	( 183 )	$	11,018	$	( 225 )
Corporate debt securities	9,429		( 434 )		34,899		( 3,433 )		44,328		( 3,867 )
Total investment securities	13,064		( 476 )		42,282		( 3,616 )		55,346		( 4,092 )
Mortgage-backed securities:
FHLMC	31,267		( 127 )		965		( 8 )		32,232		( 135 )
FNMA	39,572		( 127 )		485		( 14 )		40,057		( 141 )
GNMA	6,008		( 14 )		228		( 2 )		6,236		( 16 )
SBA	3,850		( 11 )		1,724		( 49 )		5,574		( 60 )
CMO	—		—		—		—		—		—
Total mortgage-backed securities	80,697		( 279 )		3,402		( 73 )		84,099		( 352 )
Total debt securities held-to-maturity	93,761		( 755 )		45,684		( 3,689 )		139,445		( 4,444 )
Total debt securities	$	110,821	$	( 758 )	$	45,684	$	( 3,689 )	$	156,505	$	( 4,447 )

	At December 31, 2019
	Less than 12 months				12 months or longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Debt securities available-for-sale:
Investment securities - U.S. government and agency obligations	$	25,021	$	( 54 )	$	22,451	$	( 39 )	$	47,472	$	( 93 )

Total debt securities available-for-sale	25,021		( 54 )		22,451		( 39 )		47,472		( 93 )
Debt securities held-to-maturity:
Investment securities:

State and municipal obligations	7,308		( 58 )		14,531		( 150 )		21,839		( 208 )
Corporate debt securities	9,727		( 213 )		37,628		( 2,208 )		47,355		( 2,421 )
Total investment securities	17,035		( 271 )		52,159		( 2,358 )		69,194		( 2,629 )
Mortgage-backed securities:
FHLMC	6,329		( 29 )		38,641		( 495 )		44,970		( 524 )
FNMA	13,682		( 59 )		38,568		( 434 )		52,250		( 493 )
GNMA	30,268		( 93 )		19,828		( 119 )		50,096		( 212 )
SBA	—		—		1,889		( 51 )		1,889		( 51 )
Total mortgage-backed securities	50,279		( 181 )		98,926		( 1,099 )		149,205		( 1,280 )
Total debt securities held-to-maturity	67,314		( 452 )		151,085		( 3,457 )		218,399		( 3,909 )
Total debt securities	$	92,335	$	( 506 )	$	173,536	$	( 3,496 )	$	265,871	$	( 4,002 )

At September 30, 2020, the amortized cost, estimated fair value and credit rating of the individual corporate debt securities in an unrealized loss position for greater than one year are as follows (in thousands):

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements


Security Description	Amortized Cost		Estimated Fair Value		Credit Rating Moody’s/ S&P

Chase Capital	$	10,000	$	9,205	Baa1/BBB-
Wells Fargo Capital	5,000		4,495		A1/BBB-
Huntington Capital	5,000		4,432		Baa2/BB+
Keycorp Capital	5,000		4,513		Baa2/BB+
PNC Capital	5,000		4,577		Baa1/BBB-
SunTrust Capital	5,000		4,670		Not Rated/BBB-
State Street Capital	3,332		3,007		A3/BBB






	$	38,332	$	34,899

At September 30, 2020, the estimated fair value of each of the above corporate debt securities was below cost. The Company concluded that these corporate debt securities were only temporarily impaired at September 30, 2020. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not intend to sell these corporate debt securities and it is more likely than not that the Company will not be required to sell the securities. Historically, the Company has not utilized securities sales as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.

The mortgage-backed securities are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), or the Small Business Administration (“SBA”), corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally-recognized credit rating services. Additionally, there are private label commercial mortgage-backed securities with credit ratings from multiple credit rating services ranging between Aaa and Aa2. The Company considers the unrealized losses to be the result of changes in interest rates, and not credit quality, which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were only temporarily impaired at September 30, 2020.

The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of credit ratings. The following table summarized the amortized cost of debt securities held-to-maturity at September 30, 2020, aggregated by credit quality indicator (in thousands):



	AAA		AA		A		BBB		BB		Total
As of September 30, 2020
Investment securities:
U.S. government and agency obligations	$	—	$	4,997	$	—	$	—	$	—	$	4,997
State and municipal obligations	35,280		128,128		46,390		5,067		—		214,865
Corporate debt securities	—		1,495		11,960		47,502		11,332		72,289
Total investment securities	35,280		134,620		58,350		52,569		11,332		292,151
Mortgage-backed securities:




CMO	16,909		32,836		—		—		—		49,745
Total mortgage-backed securities	16,909		32,836		—		—		—		49,745
Total debt securities held-to-maturity	$	52,189	$	167,456	$	58,350	$	52,569	$	11,332	$	341,896

A debt security is considered to be past due once it is 30 days past due under the terms of the agreement. At September 30, 2020, there were no debt securities that were past due, on non-accrual, or past due over 89 days and still accruing.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 5. Loans Receivable, Net

Loans receivable, net at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Commercial:
Commercial and industrial	$	599,188	$	396,434
Commercial real estate – owner occupied	1,176,529		792,653
Commercial real estate – investor	3,453,276		2,296,410
Total commercial	5,228,993		3,485,497
Consumer:
Residential real estate	2,407,178		2,321,157

Home equity loans and lines	301,712		318,576
Other consumer	63,095		89,422
Total consumer	2,771,985		2,729,155
Total loans	8,000,978		6,214,652
Deferred origination (fees) costs, net	( 1,238 )		9,880
Allowance for credit losses	( 56,350 )		( 16,852 )
Total loans, net	$	7,943,390	$	6,207,680

The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. The Company uses the following definitions for risk ratings:

Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower.

Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. This includes borrowers that have been negatively affected by the pandemic but demonstrate some degree of liquidity. This liquidity may or may not be adequate to resume operations. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in our assessment, do not have adequate liquidity available to resume operations at levels sufficient to service their current debt levels. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands):


	2020		2019		2018		2017		2016		2015 and prior		Revolving lines of credit		Total
September 30, 2020

Commercial and industrial
Pass	$	238,326	$	47,785	$	32,607	$	23,576	$	38,353	$	70,681	$	123,071	$	574,399
Special Mention	—		629		759		1,431		892		200		2,597		6,508
Substandard	355		1,092		1,351		1,557		53		3,264		10,609		18,281
Total commercial and industrial	238,681		49,506		34,717		26,564		39,298		74,145		136,277		599,188
Commercial real estate - owner occupied
Pass	78,646		125,479		132,958		136,186		117,713		466,072		10,742		1,067,796
Special Mention	—		1,736		8,263		1,374		5,440		15,477		393		32,683
Substandard	—		33,661		5,924		3,700		5,947		25,975		843		76,050
Total commercial real estate - owner occupied	78,646		160,876		147,145		141,260		129,100		507,524		11,978		1,176,529
Commercial real estate - investor
Pass	479,468		632,528		309,128		437,510		323,544		894,433		209,485		3,286,096
Special Mention	—		7,296		22,274		9,756		9,657		48,393		150		97,526
Substandard	4,311		7,673		2,058		11,251		8,129		32,523		3,709		69,654
Total commercial real estate - investor	483,779		647,497		333,460		458,517		341,330		975,349		213,344		3,453,276


Residential real estate (1)
Pass	464,423		489,832		268,996		185,249		161,255		825,373		—		2,395,128
Special Mention	162		—		—		1,112		—		2,891		—		4,165
Substandard	—		—		895		368		—		6,622		—		7,885
Total residential real estate	464,585		489,832		269,891		186,729		161,255		834,886		—		2,407,178
Consumer (1)
Pass	18,711		28,994		94,536		28,558		17,947		166,364		5,003		360,113
Special Mention	90		167		—		—		—		328		—		585
Substandard	—		225		33		—		69		3,782		—		4,109
Total consumer	18,801		29,386		94,569		28,558		18,016		170,474		5,003		364,807

Total loans	$	1,284,492	$	1,377,097	$	879,782	$	841,628	$	688,999	$	2,562,378	$	366,602	$	8,000,978

(1) For residential and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

An analysis of the allowance for credit losses on loans for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows (in thousands):


	Commercial and Industrial		Commercial Real Estate – Owner Occupied		Commercial Real Estate – Investor		Residential Real Estate		Consumer		Unallocated		Total
For the three months ended September 30, 2020
Allowance for credit losses on loans
Balance at beginning of period	$	4,979	$	2,765	$	8,860	$	17,685	$	4,220	$	—	$	38,509

Credit loss (benefit) expense	( 106 )		5,166		30,131		( 1,891 )		( 464 )		—		32,836

Charge-offs	( 575 )		( 2,252 )		( 12,037 )		( 6 )		( 541 )		—		( 15,411 )
Recoveries	29		2		32		320		33		—		416
Balance at end of period	$	4,327	$	5,681	$	26,986	$	16,108	$	3,248	$	—	$	56,350
For the three months ended September 30, 2019
Allowance for credit losses on loans
Balance at beginning of period	$	1,639	$	2,868	$	8,406	$	1,966	$	512	$	744	$	16,135
Credit loss (benefit) expense	( 352 )		80		711		193		10		( 337 )		305
Charge-offs	—		( 142 )		( 57 )		( 27 )		( 127 )		—		( 353 )
Recoveries	49		114		292		39		55		—		549
Balance at end of period	$	1,336	$	2,920	$	9,352	$	2,171	$	450	$	407	$	16,636
For the nine months ended September 30, 2020
Allowance for credit losses on loans
Balance at beginning of period	$	1,458	$	2,893	$	9,883	$	2,002	$	591	$	25	$	16,852
Impact of CECL adoption	2,416		( 1,109 )		( 5,395 )		3,833		2,981		( 25 )		2,701
Credit loss (benefit) expense	( 275 )		6,120		34,208		10,749		( 727 )		—		50,075
Initial allowance for credit losses on PCD loans	1,221		26		260		109		1,023		—		2,639
Charge-offs	( 575 )		( 2,253 )		( 12,062 )		( 1,351 )		( 723 )		—		( 16,964 )
Recoveries	82		4		92		766		103		—		1,047
Balance at end of period	$	4,327	$	5,681	$	26,986	$	16,108	$	3,248	$	—	$	56,350
For the nine months ended September 30, 2019
Allowance for credit losses on loans
Balance at beginning of period	$	1,609	$	2,277	$	8,770	$	2,413	$	486	$	1,022	$	16,577
Credit loss (benefit) expense	( 406 )		1,192		26		899		185		( 615 )		1,281
Charge-offs	—		( 663 )		( 143 )		( 1,221 )		( 332 )		—		( 2,359 )
Recoveries	133		114		699		80		111		—		1,137
Balance at end of period	$	1,336	$	2,920	$	9,352	$	2,171	$	450	$	407	$	16,636

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At September 30, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $ 3.3 million, commercial real estate - owner occupied of $ 12.4 million, and commercial real estate - investor of $ 10.3 million. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 1.7 million at September 30, 2020. The amount of foreclosed residential real estate property held by the Company was $ 106,000 at September 30, 2020.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

In accordance with ASC 310, prior to the adoption of ASU 2016-13, the following table presents the balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019, excluding PCD loans (in thousands):


	Commercial and Industrial		Commercial Real Estate – Owner Occupied		Commercial Real Estate – Investor		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2019
Allowance for credit losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	—	$	474	$	—	$	—	$	2	$	—	$	476
Collectively evaluated for impairment	1,458		2,419		9,883		2,002		589		25		16,376
Total ending allowance balance	$	1,458	$	2,893	$	9,883	$	2,002	$	591	$	25	$	16,852
Loans:
Loans individually evaluated for impairment	$	243	$	6,163	$	5,584	$	11,009	$	3,511	$	—	$	26,510
Loans collectively evaluated for impairment	395,848		785,778		2,279,114		2,309,812		404,325		—		6,174,877
Total ending loan balance	$	396,091	$	791,941	$	2,284,698	$	2,320,821	$	407,836	$	—	$	6,201,387

As of December 31, 2019, the Company defined an impaired loan as non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $ 250,000 . Impaired loans also include all loans modified as troubled debt restructurings. At December 31, 2019, the impaired loan portfolio totaled $ 26.5 million for which there was $ 476,000 specific allocation in the allowance for credit losses. The average balance of impaired loans for the three and nine months ended September 30, 2019 were $ 31.5 million and $ 30.9 million, respectively.

In accordance with ASC 310, prior to the adoption of ASU 2016-13, the summary of loans individually evaluated for impairment by loan portfolio segment as of December 31, 2019 and for the three and nine months ended September 30, 2019, is as follows, excluding PCI loans (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Credit Losses Allocated















As of December 31, 2019
With no related allowance recorded:
Commercial and industrial	$	265	$	243	$	—
Commercial real estate – owner occupied	4,062		3,968		—
Commercial real estate – investor	6,665		5,584		—
Residential real estate	11,009		11,009		—
Consumer	3,734		3,509		—
	$	25,735	$	24,313	$	—
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—
Commercial real estate – owner occupied	2,376		2,195		474
Commercial real estate – investor	—		—		—
Residential real estate	—		—		—
Consumer	2		2		2
	$	2,378	$	2,197	$	476

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)


	Three Months Ended September 30, 2019				Nine months ended September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	249	$	1	$	708	$	4
Commercial real estate – owner occupied	3,808		80		4,337		122
Commercial real estate – investor	10,882		22		10,501		158
Residential real estate	10,104		140		10,090		271
Consumer	3,270		48		3,171		94
	$	28,313	$	291	$	28,807	$	649
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—
Commercial real estate – owner occupied	3,197		—		—		—
Commercial real estate – investor	—		—		2,131		36
Residential real estate	—		—		—		—
Consumer	—		—		—		—
	$	3,197	$	—	$	2,131	$	36

The following table presents the recorded investment in non-accrual loans held-for-investment by loan portfolio segment as of September 30, 2020 and December 31, 2019 (in thousands). The September 30, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).


	September 30, 2020		December 31, 2019
Commercial and industrial	$	3,263	$	207
Commercial real estate – owner occupied	12,376		4,811
Commercial real estate – investor	10,259		2,917
Residential real estate	12,620		7,181
Consumer	3,524		2,733
	$	42,042	$	17,849

At September 30, 2020, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At September 30, 2020 and December 31, 2019, there were no loans that were ninety days or greater past due and still accruing interest.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020 and December 31, 2019 by loan portfolio segment (in thousands). The September 30, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
September 30, 2020
Commercial and industrial	$	680	$	123	$	1,663	$	2,466	$	596,722	$	599,188
Commercial real estate – owner occupied	68		78		8,302		8,448		1,168,081		1,176,529
Commercial real estate – investor	212		7,248		4,969		12,429		3,440,847		3,453,276
Residential real estate	612		4,165		7,885		12,662		2,394,516		2,407,178
Consumer	747		585		4,109		5,441		359,366		364,807
	$	2,319	$	12,199	$	26,928	$	41,446	$	7,959,532	$	8,000,978
December 31, 2019
Commercial and industrial	$	100	$	—	$	207	$	307	$	395,784	$	396,091
Commercial real estate – owner occupied	1,541		1,203		1,040		3,784		788,157		791,941
Commercial real estate – investor	381		938		2,792		4,111		2,280,587		2,284,698
Residential real estate	8,161		3,487		2,859		14,507		2,306,314		2,320,821
Consumer	1,048		491		2,388		3,927		403,909		407,836
	$	11,231	$	6,119	$	9,286	$	26,636	$	6,174,751	$	6,201,387

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. One-to-four family and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered troubled debt restructurings. For these loans, the Bank retains its security interest in the real estate collateral. At September 30, 2020 and December 31, 2019, troubled debt restructured (“TDR”) loans totaled $ 22.6 million and $ 24.6 million, respectively. Included in the non-accrual loan total at September 30, 2020, and December 31, 2019, were $ 9.9 million and $ 6.6 million, respectively, of troubled debt restructurings. At September 30, 2020, and December 31, 2019, the Company had $ 448,000 and $ 476,000 , respectively, of specific reserves allocated to loans that are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as accruing troubled debt restructurings at September 30, 2020 and December 31, 2019, which totaled $ 12.8 million and $ 18.0 million, respectively.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table presents information about troubled debt restructurings which occurred during the three and nine months ended September 30, 2020 and September 30, 2019, and troubled debt restructurings modified within the previous year and which defaulted during the three and nine months ended September 30, 2020 and September 30, 2019 (dollars in thousands):


	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended September 30, 2020
Troubled Debt Restructurings:
Consumer	1	$	16	$	16

Commercial real estate – investor	1	928		993
Residential real estate	1	418		418


	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None


	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment

Nine months ended September 30, 2020
Troubled Debt Restructurings:
Consumer	5	$	175	$	193
Commercial real estate – owner occupied	1	1,112		1,143
Commercial real estate – investor	1	928		993
Residential real estate	5	849		865


	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None


	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Three Months Ended September 30, 2019
Troubled Debt Restructurings:
Consumer	1	$	54	$	54


	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted	None	None


	Number of Loans	Pre-modification Recorded Investment		Post-modification Recorded Investment
Nine months ended September 30, 2019
Troubled Debt Restructurings:
Consumer	5	$	496	$	516


Residential real estate	5	921		972


	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

As part of the Two River and Country Bank acquisitions, the Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows (in thousands):


	Two River January 1, 2020		Country Bank January 1, 2020
Purchase price of loans at acquisition	$	26,354	$	24,667
Allowance for credit losses at acquisition	1,343		1,296
Non-credit discount at acquisition	3,589		5,334
Par value of acquired loans at acquisition	$	31,286	$	31,297

In accordance with ASC 310, prior to the adoption of ASU 2016-13, the following table summarizes the changes in accretable yield for PCI loans during the three and nine months ended September 30, 2019 (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2019			2019
Beginning balance	$	3,183		$	3,630
Acquisition	—			691
Accretion	( 599 )			( 1,783 )
Reclassification from non-accretable difference	69			115
Ending balance	$	2,653		$	2,653

Note 6. Deposits

The major types of deposits at September 30, 2020 and December 31, 2019 were as follows (in thousands):


Type of Account	September 30, 2020		December 31, 2019
Non-interest-bearing	$	2,240,799	$	1,377,396
Interest-bearing checking	3,317,296		2,539,428
Money market deposit	691,872		578,147
Savings	1,471,554		898,174
Time deposits	1,561,767		935,632
Total deposits	$	9,283,288	$	6,328,777

Included in time deposits at September 30, 2020 and December 31, 2019, is $ 544.3 million and $ 150.6 million, respectively, in deposits of $250,000 and over.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the three and nine months ended September 30, 2020. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.

Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

Assets and Liabilities Measured at Fair Value

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Debt Securities Available-For-Sale

Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2) and Level 3 inputs which were utilized for certain state and municipal obligations known as bond anticipation notes (“BANs”). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities.

Equity Investments

Equity investments are reported at fair value. Fair value for these investments is determined using a quoted price in an active market or exchange (Level 1).

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Interest Rate Swaps

The Company’s interest rate swaps are reported at fair value utilizing models provided by an independent, third-party and observable market data. When entering into an interest rate swap agreement, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of our contract counterparty.

Other Real Estate Owned and Impaired Loans

Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals.

The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):


			Fair Value Measurements at Reporting Date Using:
	Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
September 30, 2020
Items measured on a recurring basis:
Debt securities available-for-sale	$	169,634	$	—	$	167,232	$	2,402
Equity investments	63,846		63,846		—		—
Interest rate swap asset	55,516		—		55,516		—
Interest rate swap liability	( 55,719 )		—		( 55,719 )		—

Items measured on a non-recurring basis:
Other real estate owned	106		—		—		106
Loans measured for impairment based on the fair value of the underlying collateral	27,562		—		—		27,562
December 31, 2019
Items measured on a recurring basis:
Debt securities available-for-sale	$	150,960	$	—	$	150,935	$	25
Equity investments	10,136		10,136		—		—
Interest rate swap asset	10,141		—		10,141		—
Interest rate swap liability	( 10,708 )		—		( 10,708 )		—
Items measured on a non-recurring basis:
Other real estate owned	264		—		—		264
Loans measured for impairment based on the fair value of the underlying collateral	8,794		—		—		8,794

The following table reconciles, for the three and nine months ended September 30, 2020, the beginning and ending balances for debt securities available-for-sale that are recognized at fair value on a recurring basis, in the consolidated statements of financial condition, using significant unobservable inputs (in thousands):


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Beginning Balance	$	2,402	$	25
Total gains (losses) included in earnings	—		—
Purchases	—		2,377
Transfers into Level 3	—		—
Transfers out of Level 3	—		—
Ending Balance	$	2,402	$	2,402

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Assets and Liabilities Disclosed at Fair Value

A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

Cash and Due from Banks

For cash and due from banks, the carrying amount approximates fair value.

Debt Securities Held-to-Maturity

Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 1, Level 2 and, infrequently, Level 3 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities.

Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations known as BANs where management utilized Level 3 inputs.

Restricted Equity Investments

The fair value for Federal Home Loan Bank of New York and Federal Reserve Bank of Philadelphia stock is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective agencies.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.

Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms.

In accordance with the prospective adoption of ASU 2016-01, the fair value of loans was measured using the exit price notion.

Deposits Other than Time Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported.

Time Deposits

The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase with Retail Customers

Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.

Borrowed Funds

Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of September 30, 2020 and December 31, 2019 are presented in the following tables (in thousands):


			Fair Value Measurements at Reporting Date Using:
	Book Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
September 30, 2020
Financial Assets:
Cash and due from banks	$	980,870	$	980,870	$	—	$	—
Debt securities held-to-maturity	871,688		—		900,099		2,320
Restricted equity investments	67,505		—		—		67,505
Loans receivable, net and loans held-for-sale	8,332,153		—		—		8,400,464
Financial Liabilities:
Deposits other than time deposits	7,721,521		—		7,721,521		—
Time deposits	1,561,767		—		1,578,325		—
Federal Home Loan Bank advances and other borrowings	590,393		—		619,102		—
Securities sold under agreements to repurchase with retail customers	142,823		142,823		—		—
December 31, 2019
Financial Assets:
Cash and due from banks	$	120,544	$	120,544	$	—	$	—
Debt securities held-to-maturity	768,873		—		774,805		2,485
Restricted equity investments	62,356		—		—		62,356
Loans receivable, net and loans held-for-sale	6,207,680		—		—		6,173,237
Financial Liabilities:
Deposits other than time deposits	5,393,145		—		5,393,145		—
Time deposits	935,632		—		936,318		—
Federal Home Loan Bank advances and other borrowings	616,061		—		626,225		—
Securities sold under agreements to repurchase with retail customers	71,739		71,739		—		—

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, Bank Owned Life Insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Note 8. Derivatives, Hedging Activities and Other Financial Instruments

The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. In general, the derivative transactions entered into by the Company fall into one of two types: an economic hedge of a derivative offering to Bank customers, or a cash flow hedge related to counter the cash variability of a recognized financial asset or liability. The Company does not use derivative financial instruments for trading purposes.

Customer Derivatives – Interest Rate Swaps

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company recognized gains of $ 15,000 and $ 364,000 , respectively, in other income resulting from fair value adjustments for the three and nine months ended September 30, 2020 as compared to losses of $ 407,000 and $ 602,000 , respectively, during the three and nine months ended September 30, 2019. The notional amount of derivatives not designated as hedging instruments was $ 711.4 million and $ 337.6 million at September 30, 2020 and December 31, 2019, respectively.

The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands):


	Fair Value
Balance Sheet Location	September 30, 2020		December 31, 2019
Other assets	$	55,516	$	10,141
Other liabilities	55,719		10,708

Credit Risk-Related Contingent Features

The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 57.5 million and $ 13.7 million at September 30, 2020 and December 31, 2019, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 55.7 million and $ 10.7 million at September 30, 2020 and December 31, 2019, respectively.

Note 9. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

The Company’s leases are comprised of real estate property for branches, ATM locations and office space with terms extending through 2050. The majority of the Company’s leases are classified as operating leases, which are required to be recognized on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Company has one existing finance lease, which has a lease term through 2029.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table represents the classification of the Company’s ROU assets and lease liabilities on the consolidated statements of financial condition (in thousands):


		September 30, 2020		December 31, 2019
Lease ROU Assets	Classification
Operating lease ROU asset	Other assets	$	24,843	$	18,682
Finance lease ROU asset	Premises and equipment, net	1,744		1,534
Total Lease ROU Asset		$	26,587	$	20,216

Lease Liabilities
Operating lease liability	Other liabilities	$	25,232	$	18,893
Finance lease liability	Other borrowings	2,145		1,953
Total Lease Liability		$	27,377	$	20,846

The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, the Company uses the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception.


	September 30, 2020		December 31, 2019
Weighted-Average Remaining Lease Term
Operating leases	7.64 years		9.69 years
Finance lease	8.85 years		9.60 years
Weighted-Average Discount Rate
Operating leases	2.95	%	3.45	%
Finance lease	5.63	%	5.63	%

The following table represents lease expenses and other lease information (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Lease Expense
Operating Lease Expense	$	1,585	$	995	$	4,898	$	2,963
Finance Lease Expense:
Amortization of ROU assets	43		41		124		234
Interest on lease liabilities (1)	27		29		80		147
Total	$	1,655	$	1,065	$	5,102	$	3,344

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,756	$	969	$	4,808	$	2,834
Operating cash flows from finance leases	27		29		80		147
Financing cash flows from finance leases	47		46		141		217

(1) Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense.

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OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

Future minimum payments for the finance lease and operating leases as of September 30, 2020 were as follows (in thousands):


	Finance Lease		Operating Leases
For the Twelve Months Ended September 30,
2021	$	306	$	6,188
2022	307		5,634
2023	307		3,547
2024	307		2,813
2025	307		2,471
Thereafter	1,182		8,236
Total	$	2,716	$	28,889
Less: Imputed Interest	( 571 )		( 3,657 )
Total Lease Liabilities	$	2,145	$	25,232

Note 10. Subsequent Events

On October 16, 2020, the Company completed the sale of $ 25.4 million in commercial loans. These loans were considered non-performing held-for-sale and were carried at market value at September 30, 2020. An additional loss of $ 92,000 was recorded in the fourth quarter associated with this transaction.

On October 29, 2020, the Company completed the sale of $ 298.1 million in PPP loans. These loans were considered held-for-sale and were carried at amortized cost at September 30, 2020. The Company recognized a net gain of $ 5.1 million in the fourth quarter associated with this transaction.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to routine legal proceedings within the normal course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.

Item 1A. Risk Factors

In addition to the risk factors relevant to the Company, set forth in Part I, Item IA, “Risk Factors,” in the 2019 Form 10-K and Part II, Item 1A, “Risk Factors,” in the June 30, 2020 Form 10-Q, stockholders and investors of the Company should consider the following risk factor. There were no other material changes to risk factors relevant to the Company’s operations since December 31, 2019.

A wide variety of government regulation and actions may adversely impact the Company’s operations, financial results or prevent the orderly liquidation of collateral on loans under forbearance, deferral and foreclosure. Federal, state and local regulations and moratoriums may adversely impact the Company’s operations or financial results, or delay the Company’s ability to resolve non-performing loans through the sale of the underlying collateral and/or the eviction of tenants. Although the Company is not currently impacted, longer timelines may result in a material adverse effect on the liquidation of collateral and the Bank’s ability to minimize losses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 18, 2019, the Company announced the authorization by the Board of Directors to repurchase up to an additional 5% of the Company’s outstanding common stock, or 2.5 million shares, of which 2,019,145 shares are available for repurchase at September 30, 2020 under this stock repurchase program. On February 28, 2020 the Company suspended its repurchase activity in light of the COVID-19 pandemic. The Company did not repurchase any shares of its common stock during the three month period ended September 30, 2020 but may resume repurchases in the fourth quarter of 2020 or a subsequent period. See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

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Item 6. Exhibits

Exhibit No:

Exhibit Description

Reference

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed here within this document

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed here within this document

32.0

Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002

Filed here within this document

101.0

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			OceanFirst Financial Corp.
			Registrant


DATE:	November 6, 2020	/s/ Christopher D. Maher
		Christopher D. Maher
		Chairman, President and Chief Executive Officer


DATE:	November 6, 2020	/s/ Michael J. Fitzpatrick
		Michael J. Fitzpatrick
		Executive Vice President and Chief Financial Officer

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Exhibit Index


Exhibit						Description



31.1						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0						Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002
101.0						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

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Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Note 1. Basis Of Presentation Note 2. Business Combinations Note 3. Earnings/(loss) Per Share Note 4. Securities Note 5. Loans Receivable, Net Note 6. Deposits Note 7. Fair Value Measurements Note 8. Derivatives, Hedging Activities and Other Financial Instruments Note 9. Leases Note 10. Subsequent Events Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed here within this document 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed here within this document 32.0 Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002 Filed here within this document

OCFC 10-Q Quarter ended Sept. 30, 2020

Exhibits