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Section 1: 10-Q (10-Q)

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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 March 31, 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 May 4, 2020 there were 60,577,925 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

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


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL SUMMARY
At or for the Quarters Ended
(dollars in thousands, except per share amounts)
March 31, 2020
 
December 31, 2019
 
March 31, 2019
SELECTED FINANCIAL CONDITION DATA(1):
 
 
 
 
 
Total assets
$
10,489,074

 
$
8,246,145

 
$
8,092,948

Loans receivable, net
7,913,541

 
6,207,680

 
5,968,830

Deposits
7,892,067

 
6,328,777

 
6,290,485

Stockholders’ equity
1,409,834

 
1,153,119

 
1,127,163

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
79,645

 
63,354

 
64,388

Provision for loan losses
9,969

 
355

 
620

Other income
13,697

 
11,231

 
9,512

Operating expenses
62,796

 
47,599

 
47,271

Net income
16,533

 
23,450

 
21,173

Diluted earnings per share
0.27

 
0.47

 
0.42

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share at end of period
23.38

 
22.88

 
22.00

Tangible stockholders’ equity per common share (2)
14.62

 
15.13

 
14.32

Cash dividend per share
0.17

 
0.17

 
0.17

Stockholders’ equity to total assets
13.44
%
 
13.98
%
 
13.93
%
Tangible stockholders’ equity to total tangible assets (2)
8.85

 
9.71

 
9.53

Return on average assets (3) (4)
0.64

 
1.14

 
1.10

Return on average tangible assets (2) (3) (4)
0.68

 
1.19

 
1.15

Return on average stockholders’ equity (3) (4)
4.70

 
8.12

 
7.82

Return on average tangible stockholders’ equity  (2) (3) (4)
7.50

 
12.33

 
11.97

Net interest rate spread
3.29

 
3.26

 
3.59

Net interest margin
3.52

 
3.48

 
3.78

Operating expenses to average assets (3) (4)
2.44

 
2.31

 
2.45

Efficiency ratio (4) (5)
67.28

 
63.82

 
63.97

Loan to deposit ratio
100.27

 
98.09

 
94.89

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
16,263

 
$
17,849

 
$
20,895

Non-performing assets
16,747

 
18,113

 
22,489

Allowance for credit losses as a percent of total loans receivable
0.37
%
 
0.27
%
 
0.28
%
Allowance for credit losses as a percent of total non-performing loans
182.22

 
94.41

 
79.95

Non-performing loans as a percent of total loans receivable
0.21

 
0.29

 
0.35

Non-performing assets as a percent of total assets
0.16

 
0.22

 
0.28

 
(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.
(3)
Ratios are annualized.
(4)
Performance ratios include the net adverse impact of merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the Current Expected Credit Loss (“CECL”) model of $13.6 million, or $10.4 million, net of tax benefit, for the quarter ended March 31, 2020. Performance ratios include the net adverse impact of merger related expenses, branch consolidation expenses, non-recurring professional fees, and income tax benefit related to change in New Jersey tax code of $3.1 million, or $2.3 million, net of tax benefit, for the quarter ended December 31, 2019. Performance ratios include the net adverse impact of merger related and branch consolidation expenses of $5.4 million, or $4.4 million, net of tax benefit, for the quarter ended March 31, 2019.
(5)
Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.


3

Table of Contents

Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the metropolitan areas of Philadelphia and New York City. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management, deposit accounts, the sale of investment products, loan originations, loan sales, derivative fee income, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance and regulatory assessments, data processing and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and the actions of regulatory agencies.
Over the past two years the Company has grown significantly through the acquisitions of Capital Bank of New Jersey (“Capital Bank”), Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”). These acquisitions added $2.6 billion in assets, $1.9 billion in loans and $2.0 billion in deposits.
Highlights of the Company’s financial results and corporate activities for the three months ended March 31, 2020 were as follows:

Strong organic loan originations of $426.2 million provided total loan growth of $158.4 million (excluding acquired loans) with a record pipeline of $525.3 million at March 31, 2020.

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

The Company anticipates full integration of operations and the elimination of eight duplicate branches in Two River’s market area in May 2020, resulting in cost savings in future periods. The Bank expects to consolidate an additional five branches, also in May, independent of the acquisitions; bringing the total number of branches consolidated to 53 over the past four years.

The Company adopted Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments,” and increased credit loss expense by $9.6 million from the prior linked quarter.

The Company’s first quarter results were adversely impacted by the COVID-19 outbreak, including an estimated increase in credit loss expense of $7.2 million and an increase in operating expense of $1.0 million.
Net income for the quarter ended March 31, 2020, was $16.5 million, or $0.27 per diluted share, as compared to $21.2 million, or $0.42 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2020 included merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the CECL model which decreased net income, net of tax benefit, by $10.4 million. Net income for the quarter ended March 31, 2019 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $4.4 million. Excluding these items, net income for the quarter ended March 31, 2020 increased over the same prior year period, primarily due to the acquisitions of Two River and Country Bank.
The Company remains well-capitalized with a tangible common equity to tangible assets ratio of 8.85% at March 31, 2020.
The Company declared a quarterly cash dividend of $0.17 per share. The dividend, related to the quarter ended March 31, 2020, of $0.17 per share will be paid on May 15, 2020 to stockholders of record on May 4, 2020.

4

Table of Contents

Impact of COVID-19

On March 16, 2020 the Company announced a series of actions intended to mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities. The Company offers its Borrower Relief Program to addresses both commercial and consumer needs to customers who were current as of either year end or the date of the modification. In addition, in keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loans are not considered troubled debt restructured (“TDR”) loans at March 31, 2020 and will not be reported as past due during the deferral period.

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

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

Through May 3, 2020, commercial and consumer loans with a principal amount outstanding of $1.2 billion had requested payment deferrals. In accordance with the CARES Act, none of these loans are considered TDR loans and will not be reported as past due during the deferral period.

The Company also accepted and processed applications for loans under the Paycheck Protection Program beginning April 3, 2020. Through May 3, 2020, the Company received over 3,100 applications, received conditional approval from the SBA of $491 million, disbursed $403 million and expects to generate processing fee income of approximately $17 million. Management expects to fund these short-term loans through a combination of excess cash held at the Federal Reserve, short-term Federal Home Loan Bank (“FHLB”) advances, and participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

In addition, COVID-19 could cause a goodwill impairment test where a triggering event has occurred, and under certain circumstances, result in an impairment charge recorded in that period. Such a charge would not impact the Company’s tangible common equity to tangible assets ratio of 8.85% or regulatory capital. At March 31, 2020, the Company’s goodwill balance was $500.1 million and the Company concluded that 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 March 31, 2020, the Company recognized an estimated increase in credit loss expense of $7.2 million and an increase in operating expense of $1.0 million.

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

5

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 months ended March 31, 2020 and March 31, 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
 
March 31, 2020
 
March 31, 2019
 
Average Balance
 
Interest
 
Average
Yield/
Cost
 
Average Balance
 
Interest
 
Average
Yield/
Cost
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
63,726

 
$
342

 
2.16
%
 
$
79,911

 
$
467

 
2.37
%
Securities (1)
1,186,535

 
7,921

 
2.68

 
1,067,150

 
6,954

 
2.64

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
4,960,991

 
59,875

 
4.85

 
3,211,296

 
41,408

 
5.23

Residential
2,473,410

 
24,628

 
3.98

 
2,094,131

 
21,404

 
4.09

Home Equity
339,003

 
4,070

 
4.83

 
353,358

 
4,707

 
5.40

Other
87,478

 
1,371

 
6.30

 
119,185

 
1,482

 
5.04

Allowance for credit losses net of deferred loan fees
(10,220
)
 

 

 
(10,083
)
 

 

Loans Receivable, net
7,850,662

 
89,944

 
4.61

 
5,767,887

 
69,001

 
4.85

Total interest-earning assets
9,100,923

 
98,207

 
4.34

 
6,914,948

 
76,422

 
4.48

Non-interest-earning assets
1,231,886

 
 
 
 
 
924,368

 
 
 
 
Total assets
$
10,332,809

 
 
 
 
 
$
7,839,316

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,807,793

 
5,132

 
0.74
%
 
$
2,508,669

 
3,745

 
0.61
%
Money market
614,062

 
1,040

 
0.68

 
623,868

 
1,157

 
0.75

Savings
1,403,338

 
1,555

 
0.45

 
904,047

 
286

 
0.13

Time deposits
1,459,348

 
6,209

 
1.71

 
932,341

 
3,451

 
1.50

Total
6,284,541

 
13,936

 
0.89

 
4,968,925

 
8,639

 
0.71

FHLB Advances
631,329

 
2,824

 
1.80

 
339,686

 
1,839

 
2.20

Securities sold under agreements to repurchase
82,105

 
95

 
0.47

 
65,295

 
55

 
0.34

Other borrowings
118,851

 
1,707

 
5.78

 
99,517

 
1,501

 
6.12

Total interest-bearing liabilities
7,116,826

 
18,562

 
1.05

 
5,473,423

 
12,034

 
0.89

Non-interest-bearing deposits
1,687,582

 
 
 
 
 
1,211,934

 
 
 
 
Non-interest-bearing liabilities
113,477

 
 
 
 
 
55,975

 
 
 
 
Total liabilities
8,917,885

 
 
 
 
 
6,741,332

 
 
 
 
Stockholders’ equity
1,414,924

 
 
 
 
 
1,097,984

 
 
 
 
Total liabilities and equity
$
10,332,809

 
 
 
 
 
$
7,839,316

 
 
 
 
Net interest income
 
 
$
79,645

 
 
 
 
 
$
64,388

 
 
Net interest rate spread (3)
 
 
 
 
3.29
%
 
 
 
 
 
3.59
%
Net interest margin (4)
 
 
 
 
3.52
%
 
 
 
 
 
3.78
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.70
%
 
 
 
 
 
0.57
%
 
(1)
Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for credit losses.
(2)
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loss allowances and includes loans held for sale and non-performing loans.
(3)
Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.

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Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Total assets increased by $2.243 billion, to $10.489 billion at March 31, 2020, from $8.246 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.031 billion to total assets. Loans receivable, net of allowance for credit losses, increased by $1.706 billion, to $7.914 billion at March 31, 2020, from $6.208 billion at December 31, 2019, primarily due to acquired loans from Two River and Country Bank of $1.559 billion. As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $500.1 million at March 31, 2020, from $374.6 million at December 31, 2019 and the core deposit intangible increased to $28.3 million, from $15.6 million.
    
Deposits increased by $1.563 billion, to $7.892 billion at March 31, 2020, from $6.329 billion at December 31, 2019, primarily due to acquired deposits from Two River and Country Bank of $1.594 billion. The loan-to-deposit ratio at March 31, 2020 was 100.3%, as compared to 98.1% at December 31, 2019.
    
Stockholders’ equity increased to $1.410 billion at March 31, 2020, as compared to $1.153 billion at December 31, 2019. The acquisitions of Two River and Country Bank added $261.4 million to stockholders’ equity. At March 31, 2020, there were 2,019,145 shares available for repurchase under the Company’s stock repurchase program. For the quarter ended March 31, 2020, the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of $22.83. The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic. Tangible stockholders’ equity per common share decreased to $14.62 at March 31, 2020, as compared to $15.13 at December 31, 2019.

Comparison of Operating Results for the Three Months Ended March 31, 2020 and March 31, 2019
General
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”) and its results of operations are included in the consolidated results for the quarter ended March 31, 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 March 31, 2020 are included in the consolidated results for the quarter ended March 31, 2020, but are not included in the results of operations for the corresponding prior year period.
Net income for the quarter ended March 31, 2020, was $16.5 million, or $0.27 per diluted share, as compared to $21.2 million, or $0.42 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2020 included merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the CECL model which decreased net income, net of tax benefit, by $10.4 million. Net income for the quarter ended March 31, 2019 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $4.4 million. Excluding these items, net income for the quarter ended March 31, 2020 increased over the same prior year period, primarily due to the acquisitions of Two River and Country Bank.

Interest Income
Interest income for the quarter ended March 31, 2020 increased to $98.2 million as compared to $76.4 million in the corresponding prior year period. Average interest-earning assets increased by $2.186 billion for the quarter ended March 31, 2020 as compared to the same prior year period. The averages for the quarter ended March 31, 2020 were favorably impacted by $1.762 billion of interest-earning assets acquired from Two River and Country Bank. Average loans receivable, net, increased by $2.083 billion for the quarter ended March 31, 2020, as compared to the same prior year period. The increase attributable to the acquisitions of Two River and Country Bank were $1.546 billion. For the quarter ended March 31, 2020, the yield on average interest-earning assets decreased to 4.34% from 4.48% in the corresponding prior year period.
Interest Expense
Interest expense for the quarter ended March 31, 2020 was $18.6 million as compared to $12.0 million in the corresponding prior year period. Average interest-bearing liabilities increased $1.643 billion for the quarter ended March 31, 2020 as compared to the same prior year period. For the quarter ended March 31, 2020, the cost of average interest-bearing liabilities increased to 1.05% from 0.89% in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.70% for the quarter ended March 31, 2020 as compared to 0.57% in the same prior year period. Deposit costs increased primarily due to the addition of higher priced deposits as a result of the Two River and Country Bank acquisitions.

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Net Interest Income
Net interest income for the quarter ended March 31, 2020 increased to $79.6 million, as compared to $64.4 million for the same prior year period, reflecting an increase in interest-earning assets. The net interest margin for the quarter ended March 31, 2020 decreased to 3.52% from 3.78%, for the same prior year period.
Credit Loss Expense
For the quarter ended March 31, 2020, the credit loss expense was $10.0 million, as compared to $620,000 for the corresponding prior year period. Net loan charge-offs were $1.2 million for the quarter ended March 31, 2020, as compared to $492,000 in the corresponding prior year period. Net charge-offs for the quarter ended March 31, 2020 included $949,000 from the sale of higher risk residential loans. Non-performing loans totaled $16.3 million at March 31, 2020, as compared to $20.9 million at March 31, 2019. Credit expense was significantly influenced by the adoption of the CECL model coupled with actual and expected economic conditions due to the COVID-19 outbreak.
Other Income
For the quarter ended March 31, 2020, other income increased to $13.7 million, as compared to $9.5 million, for the corresponding prior year period. The increase was partly due to the impact of the Two River and Country Bank acquisitions, which added $558,000 and $162,000, respectively, to other income for the quarter ended March 31, 2020. Excluding the Two River and Country Bank acquisitions, the increase in other income for the quarter ended March 31, 2020 was primarily due to an increase in commercial loan swap fee income of $3.6 million, as compared to the corresponding prior year period.
Operating Expenses
Operating expenses increased to $62.8 million for the quarter ended March 31, 2020, as compared to $47.3 million in the same prior year period. Operating expenses for the quarter ended March 31, 2020 included $11.1 million of merger related and branch consolidation expenses, as compared to $5.4 million of merger related and branch consolidation expenses in the same prior year period. Excluding the impact of merger related and branch consolidation expenses, the change in operating expenses over the prior year were due to the Two River and Country Bank acquisitions, which added $5.3 million and $3.2 million, respectively, for the quarter ended March 31, 2020. The remaining increase in operating expenses was primarily due to expenses relating to the COVID-19 outbreak of $1.0 million.
Provision for Income Taxes
The provision for income taxes was $4.0 million for the quarter ended March 31, 2020, as compared to $4.8 million, for the same prior year period. The effective tax rate was 19.7% for the quarter ended March 31, 2020, as compared to 18.6% for the same prior year period. The higher effective tax rate in the current year period is primarily due to the impact of a New Jersey tax code change.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (“FHLB”) advances, Federal Reserve Discount Window, and other borrowings 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 March 31, 2020, the Company had $214.0 million of 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 $825.8 million and $519.3 million, at March 31, 2020 and December 31, 2019, respectively.
The Company’s cash needs for the three months ended March 31, 2020 were primarily satisfied by the net proceeds from FHLB advances, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, and acquired cash from acquisitions. The cash was principally utilized for loan originations, to fund short-term borrowing maturities, to fund deposit outflows, and purchase of treasury stock. The Company’s cash needs for the three months ended March 31, 2019 were primarily satisfied by principal payments on loans and mortgage-backed securities, increased deposits, and acquired cash from Capital Bank. The cash was principally utilized for loan originations, the purchase of loans receivable and securities, and the repayment of borrowings.

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In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At March 31, 2020, outstanding undrawn lines of credit totaled $979.9 million and outstanding commitments to originate loans totaled $525.3 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $794.9 million at March 31, 2020. Management 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. Due to the uncertainty caused by COVID-19, management has also significantly increased the Company’s balance sheet liquidity.
Under the Company’s common stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held in treasury for general corporate purposes. For the quarter ended March 31, 2020, the Company repurchased 648,851 shares of common stock. On February 28, 2020, the Company suspended its repurchase activity in light of the COVID-19 pandemic. For the quarter ended March 31, 2019, the Company repurchased 159,307 shares of common stock. At March 31, 2020, there were 2,019,145 shares available to be repurchased under the stock repurchase program authorized in December of 2019.
Period
 
Total Number 
of Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares Purchased 
as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2020 through January 31, 2020
 
167,996

 
23.58

 
167,996

 
2,500,000

February 1, 2020 through February 29, 2020
 
480,855

 
22.57

 
480,855

 
2,019,145

March 1, 2020 through March 31, 2020
 

 

 

 
2,019,145

Cash dividends on common stock declared and paid during the first three months of 2020 were $10.3 million, as compared to $8.6 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 April 23, 2020, the Company’s Board of Directors declared a quarterly cash dividend of seventeen cents ($0.17) per common share. The dividend is payable on May 15, 2020 to stockholders of record at the close of business on May 4, 2020.
The primary sources of liquidity specifically available to OceanFirst Financial Corp., are capital distributions from the bank subsidiary and the issuance of preferred and common stock and debt. For the three months ended March 31, 2020, the Company received a dividend payment of $18.0 million from the Bank. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the 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. At March 31, 2020, OceanFirst Financial Corp. held $23.5 million in cash.

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As of March 31, 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 March 31, 2020
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
931,370

 
9.53
%
 
$
390,977

 
4.000
%
 
$
488,721

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
931,370

 
11.76

 
554,227

 
7.000

(1) 
514,639

 
6.50

Tier 1 capital (to risk-weighted assets)
 
931,370

 
11.76

 
672,990

 
8.500

(1) 
633,402

 
8.00

Total capital (to risk-weighted assets)
 
964,237

 
12.18

 
831,341

 
10.500

(1) 
791,753

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
918,912

 
9.39
%
 
$
391,540

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
848,028

 
10.71

 
554,034

 
7.000

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
918,912

 
11.61

 
672,756

 
8.500

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
1,002,279

 
12.66

 
831,052

 
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 March 31, 2020, the Company maintained tangible common equity of $881.5 million, for a tangible common equity to assets ratio of 8.85%. At December 31, 2019, the Company maintained tangible common equity of $762.9 million, for a tangible common equity to 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. 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 both March 31, 2020 and December 31, 2019, the reserve for repurchased loans and loss sharing obligations amounted to $1.1 million.
The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2020 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
1,036,212

 
$
560,984

 
$
153,680

 
$
199,024

 
$
122,524

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
598,823

 
598,823

 

 

 

Consumer/Construction
381,046

 
381,046

 

 

 

Commitments to Originate Loans
525,281

 
525,281

 

 

 

Debt obligations include advances from the FHLB and other borrowings and have defined terms.
Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

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Non-Performing Assets
The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and other real estate owned. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.
 
March 31, 2020
 
December 31, 2019
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
207

 
$
207

Commercial real estate – owner occupied
4,219

 
4,811

Commercial real estate – investor
3,384

 
2,917

Residential mortgage
5,920

 
7,181

Home equity loans and lines
2,533

 
2,733

Total non-performing loans
16,263

 
17,849

Other real estate owned
484

 
264

Total non-performing assets
$
16,747

 
$
18,113

Purchased with credit deterioration (“PCD”) loans (1)
$
59,783

 
$
13,265

Delinquent loans 30-89 days
$
48,905

 
$
14,798

Allowance for credit losses as a percent of total loans receivable
0.37
%
 
0.27
%
Allowance for credit losses as a percent of total non-performing loans
182.22

 
94.41

Non-performing loans as a percent of total loans receivable
0.21

 
0.29

Non-performing assets as a percent of total assets
0.16

 
0.22

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

The Company’s non-performing loans totaled $16.3 million at March 31, 2020, as compared to $17.8 million at December 31, 2019. Included in the non-performing loans total was $6.2 million and $6.6 million of troubled debt restructured (“TDR”) loans at March 31, 2020 and December 31, 2019, respectively. Non-performing loans do not include $59.8 million and $13.3 million of acquired PCD loans at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, the allowance for credit losses totaled $29.6 million, or 0.37% of total loans, as compared to $16.9 million, or 0.27% of total loans at December 31, 2019.

In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complies with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. This program allows for a deferral of payments for 90 days, which may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under recently issued guidance, provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans at March 31, 2020 and will not be reported as past due during the deferral period.

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Special Mention
$
48,697

 
$
34,529

Substandard
87,365

 
73,178


The increase in special mention and substandard loans is primarily due to the addition of Two River and Country Bank.

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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 March 31, 2020.

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

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the ACL. Accrued interest receivable at March 31, 2020 was $27.9 million.

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

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

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

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments will not be made for information that has already been considered and included in the quantitative allowance. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in

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underlying loan composition of specific portfolios, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics.

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

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

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

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

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

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

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

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For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense.
The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this presentation contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company” or “OCFC”). These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.
The Company’s ability to predict results or the actual effect of plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “10-K”), under Item 1A - Risk Factors, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission and elsewhere therein and the following: changes in interest rates, general economic conditions, public health crises (such as the governmental, social and economic effects of the novel coronavirus), levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, increased defaults as a result of economic disruptions caused by the novel coronavirus, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes (particularly with respect to the novel coronavirus), monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and Board of Governors of the Federal Reserve System (the “FRB”), the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the 10-K under Item 1A - Risk Factors and elsewhere therein and in subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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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 March 31, 2020, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At March 31, 2020, the Company’s one-year gap was positive 4.39% as compared to positive 4.31% at December 31, 2019. These results were within the approved policy guidelines.
 
At March 31, 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
$
25,534

 
$
980

 
$
2,695

 
$

 
$

 
$
29,209

Debt investment securities
82,046

 
53,365

 
137,652

 
62,143

 
134,762

 
469,968

Debt mortgage-backed securities
69,379

 
102,983

 
194,541

 
133,333

 
100,166

 
600,402

Equity investments

 

 

 

 
14,409

 
14,409

Restricted equity investments

 

 

 

 
81,005

 
81,005

Loans receivable (2)
1,718,498

 
1,450,598

 
2,266,365

 
1,338,119

 
1,176,792

 
7,950,372

Total interest-earning assets
1,895,457

 
1,607,926

 
2,601,253

 
1,533,595

 
1,507,134

 
9,145,365

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking accounts
958,586

 
132,002

 
314,248

 
257,409

 
985,242

 
2,647,487

Money market deposit accounts
37,639

 
41,109

 
103,420

 
89,221

 
348,756

 
620,145

Savings accounts
266,997

 
79,008

 
245,727

 
291,628

 
537,268

 
1,420,628

Time deposits
259,624

 
675,409

 
394,778

 
81,710

 
9,070

 
1,420,591

FHLB advances
359,000

 
112,254

 
154,599

 
199,971

 

 
825,824

Securities sold under agreements to repurchase and other borrowings
172,675

 
7,555

 
21,790

 
472

 
7,896

 
210,388

Total interest-bearing liabilities
2,054,521

 
1,047,337

 
1,234,562

 
920,411

 
1,888,232

 
7,145,063

Interest sensitivity gap (3)
$
(159,064
)
 
$
560,589

 
$
1,366,691

 
$
613,184

 
$
(381,098
)
 
$
2,000,302

Cumulative interest sensitivity gap
$
(159,064
)
 
$
401,525

 
$
1,768,216

 
$
2,381,400

 
$
2,000,302

 
$
2,000,302

Cumulative interest sensitivity gap as a percent of total interest-earning assets
(1.74
)%
 
4.39
%
 
19.33
%
 
26.04
%
 
21.87
%
 
21.87
%
 
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2)
For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3)
Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

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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 March 31, 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.
 
 
March 31, 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
$
1,558,187

 
9.6
 %
 
15.8
%
 
$
310,545

 
0.3
 %
 
$
1,242,674

 
5.1
 %
 
16.4
%
 
$
253,184

 
(0.6
)%
200
1,544,902

 
8.7

 
15.3

 
310,808

 
0.4

 
1,246,011

 
5.4

 
16.0

 
254,424

 
(0.1
)
100
1,499,384

 
5.5

 
14.5

 
310,443

 
0.3

 
1,227,428

 
3.8

 
15.3

 
254,996

 
0.1

Static
1,421,585

 

 
13.4

 
309,631

 

 
1,182,696

 

 
14.4

 
254,721

 

(100)
1,193,206

 
(16.1
)
 
11.1

 
301,301

 
(2.7
)
 
1,090,184

 
(7.8
)
 
12.9

 
252,662

 
(0.8
)
The change in interest rate sensitivity at March 31, 2020, as compared to December 31, 2019, is primarily due to the additions of Two River and Country Bank.
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
Other than the changes in internal controls listed below, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Implementation of Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326)”
On January 1, 2020 the Company adopted ASU 2016-13 and its related amendments. The standard replaced the “incurred loss” approach with an “expected loss” model, which necessitates a forecast of lifetime losses. The adoption of ASU 2016-13 resulted in the implementation of additional models and systems. As a result, the Company has modified existing and implemented additional internal controls related to data validation, enhanced disclosure requirements and governance related activities into the overall internal controls over financial reporting.




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OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
 
March 31, 2020
 
December 31, 2019
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
256,470

 
$
120,544

Debt securities available-for-sale, at estimated fair value
153,738

 
150,960

Debt securities held-to-maturity, net of allowance for credit losses of $2,529 at March 31, 2020 (estimated fair value of $928,582 at March 31, 2020 and $777,290 at December 31, 2019)
914,255

 
768,873

Equity investments, at estimated fair value
14,409

 
10,136

Restricted equity investments, at cost
81,005

 
62,356

Loans receivable, net of allowance for credit losses of $29,635 at March 31, 2020, $16,852 at December 31, 2019 and $16,705 at March 31, 2019
7,913,541

 
6,207,680

Loans held-for-sale
17,782

 

Interest and dividends receivable
27,930

 
21,674

Other real estate owned
484

 
264

Premises and equipment, net
104,560

 
102,691

Bank Owned Life Insurance
261,270

 
237,411

Assets held for sale
3,785

 
3,785

Other assets
211,476

 
169,532

Core deposit intangible
28,276

 
15,607

Goodwill
500,093

 
374,632

Total assets
$
10,489,074

 
$
8,246,145

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
7,892,067

 
$
6,328,777

Federal Home Loan Bank advances
825,824

 
519,260

Securities sold under agreements to repurchase with retail customers
90,175

 
71,739

Other borrowings
120,213

 
96,801

Advances by borrowers for taxes and insurance
24,931

 
13,884

Other liabilities
126,030

 
62,565

Total liabilities
9,079,240

 
7,093,026

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000
shares authorized, no shares issued

 

Common stock, $.01 par value, 150,000,000 shares authorized, 60,960,568 shares issued and 60,311,717 and 50,405,048 shares outstanding at March 31, 2020 and December 31, 2019, respectively
609

 
519

Additional paid-in capital
1,078,438

 
840,691

Retained earnings
364,273

 
358,668

Accumulated other comprehensive loss
509

 
(1,208
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(8,344
)
 
(8,648
)
  Treasury stock, 648,851 and 1,586,808 shares at March 31, 2020 and December 31, 2019, respectively
(25,651
)
 
(36,903
)
Common stock acquired by Deferred Compensation Plan
(94
)
 
(92
)
Deferred Compensation Plan Liability
94

 
92

Total stockholders’ equity
1,409,834

 
1,153,119

Total liabilities and stockholders’ equity
$
10,489,074

 
$
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 March 31,
 
2020
 
2019
 
(Unaudited)
Interest income:
 
 
 
Loans
$
89,944

 
$
69,001

Mortgage-backed securities
3,844

 
4,041

Debt securities, equity investments and other
4,419

 
3,380

Total interest income
98,207

 
76,422

Interest expense:
 
 
 
Deposits
13,936

 
8,639

Borrowed funds
4,626

 
3,395

Total interest expense
18,562

 
12,034

Net interest income
79,645

 
64,388

Credit loss expense
9,969

 
620

Net interest income after credit loss expense
69,676

 
63,768

Other income:
 
 
 
Bankcard services revenue
2,481

 
2,285

Trust and asset management revenue
515

 
498

Fees and service charges
4,873

 
4,516

Net gain on sales of loans
173

 
8

Net unrealized gain on equity investments
155

 
108

Net loss from other real estate operations
(150
)
 
(6
)
Income from Bank Owned Life Insurance
1,575

 
1,321

Commercial loan swap income
4,050

 
472

Other
25

 
310

Total other income
13,697

 
9,512

Operating expenses:
 
 
 
Compensation and employee benefits
29,885

 
22,414

Occupancy
5,276

 
4,530

Equipment
1,943

 
1,946

Marketing
769

 
930

Federal deposit insurance and regulatory assessments
667

 
832

Data processing
4,177

 
3,654

Check card processing
1,276

 
1,438

Professional fees
2,302

 
1,709

Other operating expense
3,802

 
3,369

Amortization of core deposit intangible
1,578

 
1,005

Branch consolidation expense
2,594

 
391

Merger related expenses
8,527

 
5,053

Total operating expenses
62,796

 
47,271

Income before provision for income taxes
20,577

 
26,009

Provision for income taxes
4,044

 
4,836

Net income
$
16,533

 
$
21,173

Basic earnings per share
$
0.28

 
$
0.43

Diluted earnings per share
$
0.27

 
$
0.42

Average basic shares outstanding
59,876

 
49,526

Average diluted shares outstanding
60,479

 
50,150

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 March 31,
 
2020
 
2019
 
(Unaudited)
Net income
$
16,533

 
$
21,173

Other comprehensive income:
 
 
 
Unrealized gain on debt securities (net of tax expense of $586 and $175 in 2020 and 2019, respectively)
2,149