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OCFC OceanFirst Financial

Filed: 6 May 21, 4:05pm
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, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number 001-11713
________________________________________________  
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
 ________________________________________________ 
Delaware22-3412577
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
110 West Front Street,Red Bank,NJ07701
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (732) 240-4500
________________________________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par value per shareOCFCNASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)OCFCPNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No   .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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 3, 2021 there were 60,332,307 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


OceanFirst Financial Corp.
INDEX TO FORM 10-Q
 


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 its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, 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, check card processing, professional fees and other general and administrative expenses. The Company’s results of operations are also significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies and actions of regulatory agencies.
The Company has grown significantly through the acquisitions of Capital Bank of New Jersey (“Capital Bank”) on January 31, 2019 and Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”), each on January 1, 2020. These acquisitions added $2.56 billion in assets, $1.87 billion in loans and $2.04 billion in deposits.
Key developments relating to the Company’s financial results and corporate activities were as follows:

Loan and Deposit Growth: Total loan growth for the quarter was $116.4 million, reflecting record loan originations of $747.8 million. Deposits increased $75.2 million, as compared to the prior linked quarter.
Operations: The Company continues to expand its commercial banking activities with the hiring of nine commercial bankers. The additional lenders are expected to help fuel organic loan growth throughout the remainder of the year. Additionally, the Company consolidated four branches in April 2021 bringing the total number of branches consolidated to 57 over the past five years. These consolidations will increase the average branch size to $164 million and will help further offset operating expenses in the second quarter.
Net Interest Margin: Net interest margin for the quarter was 2.93%, as compared to 2.97% in the prior linked quarter. The total costs of deposits decreased to 0.37% from 0.45%, respectively.
Net income available to common stockholders was $31.7 million, or $0.53 per diluted share, for the quarter ended March 31, 2021 as compared to $16.5 million, or $0.27 per diluted share, for the corresponding prior year period. The dividends paid to preferred stockholders was $1.0 million for the quarter ended March 31, 2021. Net income available to common stockholders for the quarter ended March 31, 2021 included merger related expenses of $381,000, branch consolidation expenses of $1.0 million and net gain on equity investments of $8.3 million.
The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.95% at March 31, 2021.
The Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share. The dividend, related to the quarter ended March 31, 2021, will be paid on May 21, 2021 to common stockholders of record on May 10, 2021. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock. This dividend will be paid on May 17, 2021 to preferred stockholders of record on April 30, 2021.
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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)March 31, 2021December 31, 2020March 31, 2020
SELECTED FINANCIAL CONDITION DATA:
Total assets$11,577,472 $11,448,313 $10,489,074 
Loans receivable, net of allowance for loan credit losses7,820,590 7,704,857 7,913,541 
Deposits9,502,812 9,427,616 7,892,067 
Stockholders’ equity1,498,719 1,484,130 1,409,834 
SELECTED OPERATING DATA:
Net interest income73,604 77,851 79,645 
Credit loss (benefit) expense(620)4,072 9,969 
Other income20,835 40,620 13,697 
Operating expenses51,683 70,916 62,796 
Net income32,697 33,064 16,533 
Net income available to common stockholders31,693 32,060 16,533 
Diluted earnings per share0.53 0.54 0.27 
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period24.84 24.57 23.38 
Cash dividend per share0.17 0.17 0.17 
Dividend payout ratio per common share32.08 %31.48 %62.96 %
Stockholders’ equity to total assets12.95 12.96 13.44 
Return on average assets (2) (3)
1.12 1.09 0.64 
Return on average stockholders’ equity (2) (3)
8.59 8.65 4.70 
Net interest rate spread (4)
2.78 2.79 3.29 
Net interest margin (5)
2.93 2.97 3.52 
Operating expenses to average assets (2) (3)
1.83 2.40 2.44 
Efficiency ratio (3) (6)
54.73 59.86 67.28 
Loan to deposit ratio82.84 82.27 100.51 
ASSET QUALITY:
Non-performing loans$34,128 $36,410 $16,263 
Non-performing assets34,234 36,516 16,747 
Allowance for loan credit losses as a percent of total loans receivable (7) (9)
0.76 %0.78 %0.37 %
Allowance for loan credit losses as a percent of total non-performing loans (8) (9)
175.74 166.81 182.22 
Non-performing loans as a percent of total loans receivable (7) (8)
0.43 0.47 0.21 
Non-performing assets as a percent of total assets (8)
0.30 0.32 0.16 
(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Ratios are annualized.
(3) Performance ratios include the net gain on equity investments, merger related expenses, and branch consolidation expenses of $6.9 million, or $5.2 million, net of tax expense, for the quarter ended March 31, 2021. Performance ratios include net gain on equity investments, gain on sale of Paycheck Protection Program (“PPP”) loans, Federal Home Loan Bank (“FHLB”) advance prepayment fees, merger related expenses, and branch consolidation expenses of $11.7 million, or $8.9 million, net of tax expense, for the quarter ended December 31, 2020. Performance ratios include 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.
(4) The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities
(5) The net interest margin represents net interest income as a percentage of average interest-earning assets.
(6) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.
(7) Total loans receivable excludes loans held-for-sale.
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(8) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.
(9) The loans acquired from prior bank acquisitions were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan credit losses, was $25.7 million, $28.0 million, and $38.3 million at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

5

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 the needs of customers who were current on their loan payments as of either December 31, 2019 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, 2021 and will not be reported as past due during the deferral period.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which contains provisions that directly impact financial institutions. The Act extends the PPP, which was originally established under the CARES Act, and provides the Company the ability to continue its Borrower Relief Program. In keeping with regulatory guidance under the CARES Act, these loan deferrals are not considered TDR loans at March 31, 2021 and the Company will not report them 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 PPP. At March 31, 2021, $109.7 million in PPP loans and $2.5 million in deferred fees remained on the balance sheet, which include $60.0 million of PPP loan originations during the quarter ended March 31, 2021.

For further discussion, refer to Part I, Item 1A in the December 31, 2020 Form 10-K - Risk Factors - Risk Related to the COVID-19 Pandemic.


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Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.
The following tables set forth certain information relating to the Company for the three months ended March 31, 2021 and March 31, 2020. 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 and costs which are considered adjustments to yields.
 For the Three Months Ended
 March 31, 2021March 31, 2020
(dollars in thousands)Average BalanceInterestAverage
Yield/
Cost
Average BalanceInterestAverage
Yield/
Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments$1,138,911 $277 0.10 %$63,726 $342 2.16 %
Securities (1)
1,311,683 6,689 2.07 1,186,535 7,921 2.68 
Loans receivable, net (2)
Commercial5,127,940 53,670 4.24 4,960,991 59,875 4.85 
Residential real estate2,327,838 20,069 3.45 2,473,410 24,628 3.98 
Home equity loans and lines275,943 3,523 5.18 339,003 4,070 4.83 
Other consumer50,964 646 5.14 87,478 1,371 6.30 
Allowance for loan credit losses, net of deferred loan fees(52,887)— — (10,220)— — 
Loans receivable, net7,729,798 77,908 4.09 7,850,662 89,944 4.61 
Total interest-earning assets10,180,392 84,874 3.38 9,100,923 98,207 4.34 
Non-interest-earning assets1,259,109 1,231,886 
Total assets$11,439,501 $10,332,809 
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking$3,711,976 4,311 0.47 %$2,807,793 5,132 0.74 %
Money market757,634 367 0.20 614,062 1,040 0.68 
Savings1,522,603 179 0.05 1,403,338 1,555 0.45 
Time deposits1,221,123 3,639 1.21 1,459,348 6,209 1.71 
Total7,213,336 8,496 0.48 6,284,541 13,936 0.89 
Federal Home Loan Bank ("FHLB") advances— — — 631,329 2,824 1.80 
Securities sold under agreements to repurchase129,444 95 0.30 82,105 95 0.47 
Other borrowings228,368 2,679 4.76 118,851 1,707 5.78 
Total borrowings357,812 2,774 3.14 832,285 4,626 2.24 
Total interest-bearing liabilities7,571,148 11,270 0.60 7,116,826 18,562 1.05 
Non-interest-bearing deposits2,212,273 1,687,582 
Non-interest-bearing liabilities160,500 113,477 
Total liabilities9,943,921 8,917,885 
Stockholders’ equity1,495,580 1,414,924 
Total liabilities and equity$11,439,501 $10,332,809 
Net interest income$73,604 $79,645 
Net interest rate spread (3)
2.78 %3.29 %
Net interest margin (4)
2.93 %3.52 %
Total cost of deposits (including non-interest-bearing deposits)0.37 %0.70 %
(1)Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for securities credit losses.
(2)Amount is net of deferred loan fees and costs, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans.
(3)Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average interest-earning assets.
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Comparison of Financial Condition at March 31, 2021 and December 31, 2020
Total assets increased $129.2 million, to $11.58 billion at March 31, 2021, from $11.45 billion at December 31, 2020. Cash and due from banks decreased $98.5 million, to $1.17 billion at March 31, 2021, from $1.27 billion at December 31, 2020. Total debt securities increased by $230.3 million at March 31, 2021, as compared to December 31, 2020, which was partly offset by a decrease in equity investments of $56.9 million due to sales. Loans receivable, net of allowance for loan credit losses, increased by $115.7 million, to $7.82 billion at March 31, 2021, from $7.70 billion at December 31, 2020.

Deposits increased $75.2 million, to $9.50 billion at March 31, 2021, from $9.43 billion at December 31, 2020. The loan-to-deposit ratio at March 31, 2021 was 82.8%, as compared to 82.3% at December 31, 2020.

Stockholders’ equity increased to $1.50 billion at March 31, 2021, as compared to $1.48 billion at December 31, 2020. For the quarter ended March 31, 2021, the Company repurchased 500,000 shares under its stock repurchase program at a weighted average cost of $19.94, and there were 1.5 million shares available for repurchase at March 31, 2021 under the existing repurchase program.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and March 31, 2020
General
Net income available to common stockholders was $31.7 million, or $0.53 per diluted share, for the quarter ended March 31, 2021 as compared to $16.5 million, or $0.27 per diluted share, for the corresponding prior year period. The dividend paid to preferred stockholders was $1.0 million for the three months ended March 31, 2021. The current quarter results benefited from the modest release of credit loss expense and improved levels of operating expenses. Net income available to common stockholders for the quarter ended March 31, 2021 included merger related expenses of $381,000, branch consolidation expenses of $1.0 million and net gain on equity investments of $8.3 million. These items increased net income by $5.2 million, net of tax, for the quarter ended March 31, 2021. Net income available to common stockholders for the same prior year period included merger related expenses of $8.5 million, branch consolidation expenses of $2.6 million, and Two River and Country Bank opening credit loss expense under the CECL model of $2.4 million. These items decreased net income by $10.4 million, net of tax, for the quarter ended March 31, 2020.
Interest Income
Interest income for the quarter ended March 31, 2021 decreased to $84.9 million, as compared to $98.2 million in the corresponding prior year period. Average interest-earning assets increased by $1.08 billion for the quarter ended March 31, 2021, as compared to the same prior year period, primarily concentrated in interest-earning deposits. Average loans receivable, net of allowance for loan credit losses, decreased by $120.9 million for the quarter ended March 31, 2021, as compared to the same prior year period. For the quarter ended March 31, 2021, the yield on average interest-earning assets decreased to 3.38% from 4.34% in the corresponding prior year period.
Interest Expense
Interest expense for the quarter ended March 31, 2021 was $11.3 million, as compared to $18.6 million in the corresponding prior year period. Average interest-bearing liabilities increased $454.3 million for the quarter ended March 31, 2021, as compared to the same prior year period. For the quarter ended March 31, 2021, the cost of average interest-bearing liabilities decreased to 0.60%, from 1.05% in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.37% for the quarter ended March 31, 2021, as compared to 0.70% in the same prior year period.
Net Interest Income
Net interest income for the quarter ended March 31, 2021 decreased to $73.6 million, as compared to $79.6 million for the same prior year period, reflecting a reduction in net interest margin, partly offset by an increase in interest-earning assets. The net interest margin for the quarter ended March 31, 2021 decreased to 2.93%, from 3.52% for the same prior year period. The net interest margin compression was primarily due to the excess balance sheet liquidity, driven by a strategic decision to accumulate liquidity entering the economic downturn, the lower interest rate environment, and to a lesser extent, the origination of low-yielding PPP loans.
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Credit Loss (Benefit) Expense
For the quarter ended March 31, 2021, the benefit for credit loss expense was $620,000, as compared to a provision for credit loss expense of $10.0 million for the corresponding prior year period. The benefit for credit loss expense for the quarter was significantly influenced by an improved economic outlook with expectations for strong GDP growth and improved employment levels. Net loan recoveries were $280,000 for the quarter ended March 31, 2021, as compared to net loan charge-offs of $1.2 million for the corresponding prior year period. Non-performing loans totaled $34.1 million at March 31, 2021, as compared to $16.3 million at March 31, 2020.
Other Income
For the quarter ended March 31, 2021, other income increased to $20.8 million as compared to $13.7 million for the corresponding prior year period. Other income for the quarter ended March 31, 2021 included $8.3 million of net gain on equity investments. The net gain on equity investments was primarily a result of several programs implemented by the Company in 2020 to invest excess liquidity in high quality equity securities with attractive dividend yields which were sold in January 2021. The remaining items in other income decreased by $1.1 million for the quarter ended March 31, 2021, as compared to the corresponding prior year period, was primarily due to decreases in commercial loan swap income of $2.9 million and fees and service charges of $1.1 million, partially offset by an increase in gain on sale of loans of $1.7 million, and referral fees of $662,000 related to the origination of PPP loans.
Operating Expenses
Operating expenses decreased to $51.7 million for the quarter ended March 31, 2021, as compared to $62.8 million in the same prior year period. Operating expenses for the quarter ended March 31, 2021 included $1.4 million of merger related and branch consolidation expenses, as compared to $11.1 million in the same prior year period. Excluding the impact of merger related and branch consolidation expenses, the $1.4 million decrease in operating expenses for the quarter ended March 31, 2021 was primarily due to decreases in compensation and benefits expense of $1.5 million and occupancy and equipment of $580,000, partially offset by an increase in federal deposit insurance expense of $1.2 million.
Provision for Income Taxes
The provision for income taxes was $10.7 million for the quarter ended March 31, 2021, as compared to $4.0 million for the same prior year period. The effective tax rate was 24.6% for the quarter ended March 31, 2021, as compared to 19.7% for the same prior year period. The higher effective tax rate for the current year period, as compared to the prior year period, is primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York.
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, including 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 greatly 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, 2021 and December 31, 2020, the Bank had no outstanding overnight borrowings from the FHLB. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. There were no FHLB advances at March 31, 2021 and December 31, 2020.
The Company’s cash needs for the quarter ended March 31, 2021 were primarily satisfied by the sale of equity investments, an increase in deposits, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities and loan originations. 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 repurchase of stock.
In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At March 31, 2021, outstanding commitments to originate loans totaled $344.3 million and outstanding undrawn lines of credit totaled $1.10 billion, of which $725.8 million were commitments to commercial borrowers
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and $377.7 million were commitments to consumer borrowers and residential construction borrowers. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $745.3 million at March 31, 2021. Based upon historical experience, management is optimistic about its ability to retain a significant portion of its maturing time deposits.
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. The Company strengthened balance sheet liquidity entering the economic downturn.
Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. The Company determined to recommence repurchases under its existing stock repurchase plan in February 2021. For the quarter ended March 31, 2021, the Company repurchased 500,000 shares of common stock. At March 31, 2021, there were 1,519,145 shares available to be repurchased under the stock repurchase program authorized in December of 2019.
Cash dividends on common stock declared and paid during the first three months of March 31, 2021 were $10.2 million, as compared to $10.3 million for the same prior year period. On April 29, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share. The dividend is payable on May 21, 2021 to common stockholders of record at the close of business on May 10, 2021.
Cash dividends on preferred stock declared and paid during the first three months of March 31, 2021 were $1.0 million. The Company also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on May 17, 2021 to preferred stockholders of record on April 30, 2021.
The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding Company of OceanFirst Bank, are capital distributions from the Bank, the issuance of preferred and common stock, and debt. For the three months ended March 31, 2021, the Company received a dividend payment of $10.0 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 restraints 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 may prevent the Company from either paying or increasing the cash dividend to common stockholders. At March 31, 2021, OceanFirst Financial Corp. held $164.5 million in cash.
As of March 31, 2021 and December 31, 2020, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):
ActualFor capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
As of March 31, 2021AmountRatioAmountRatioAmountRatio
Bank:
Tier 1 capital (to average assets)$968,486 8.90 %$435,143 4.00 %$543,929 5.00 %
Common equity Tier 1 (to risk-weighted assets)968,486 12.09 560,545 7.00 (1)520,506 6.50 
Tier 1 capital (to risk-weighted assets)968,486 12.09 680,662 8.50 (1)640,623 8.00 
Total capital (to risk-weighted assets)1,029,255 12.85 840,818 10.50 (1)800,779 10.00 
Company:
Tier 1 capital (to average assets)$1,019,971 9.86 %$413,609 4.00 %N/AN/A
Common equity Tier 1 (to risk-weighted assets)893,043 11.09 563,570 7.00 (1)N/AN/A
Tier 1 capital (to risk-weighted assets)1,019,971 12.67 684,334 8.50 (1)N/AN/A
Total capital (to risk-weighted assets)1,244,228 15.45 845,354 10.50 (1)N/AN/A
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ActualFor capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
As of December 31, 2020AmountRatioAmountRatioAmountRatio
Bank:
Tier 1 capital (to average assets)$942,122 8.48 %$444,648 4.00 %$555,810 5.00 %
Common equity Tier 1 (to risk-weighted assets)942,122 12.11 544,625 7.00 (1)505,724 6.50 
Tier 1 capital (to risk-weighted assets)942,122 12.11 661,331 8.50 (1)622,429 8.00 
Total capital (to risk-weighted assets)1,004,480 12.91 816,938 10.50 (1)778,036 10.00 
Company:
Tier 1 capital (to average assets)$998,273 9.44 %$423,028 4.00 %N/AN/A
Common equity Tier 1 (to risk-weighted assets)871,385 11.05 552,075 7.00 (1)N/AN/A
Tier 1 capital (to risk-weighted assets)998,273 12.66 670,377 8.50 (1)N/AN/A
Total capital (to risk-weighted assets)1,230,370 15.60 828,113 10.50 (1)N/AN/A
(1)Includes the Capital Conservation Buffer of 2.50%.
The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At March 31, 2021 and December 31, 2020, the Company maintained a stockholders’ equity to total assets ratio of 12.95% and 12.96%, respectively.
11

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 to repurchase loans previously sold under certain circumstances 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 each of March 31, 2021 and December 31, 2020, the reserve for repurchased loans and loss sharing obligations was $1.2 million.
The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2021 (in thousands):
Contractual ObligationsTotalLess than
One Year
More than 1 year to 3 yearsMore than 3 years to 5 yearsMore than
5 years
Debt obligations$362,641 $134,663 $431 $483 $227,064 
Commitments to fund undrawn lines of credit
Commercial725,835 725,835 — — — 
Consumer/construction377,656 377,656 — — — 
Commitments to originate loans344,329 344,329 — — — 
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.
12

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, 2021December 31, 2020
 (dollars in thousands)
Non-performing loans:
Commercial and industrial$1,616 $1,551 
Commercial real estate – owner occupied11,676 13,054 
Commercial real estate – investor12,366 10,660 
Residential real estate6,398 8,642 
Home equity loans and lines2,072 2,503 
Total non-performing loans34,128 36,410 
Other real estate owned106 106 
Total non-performing assets$34,234 $36,516 
Purchased with credit deterioration (“PCD”) loans (1)
$44,421 $48,488 
Delinquent loans 30-89 days$16,477 $34,683 
Allowance for loan credit losses as a percent of total loans0.76 %0.78 %
Allowance for loan credit losses as a percent of total non-performing loans175.74 166.81 
Non-performing loans as a percent of total loans0.43 0.47 
Non-performing assets as a percent of total assets0.30 0.32 
(1)     PCD loans are not included in non-performing loans or delinquent loans totals.

The Company’s non-performing loans totaled $34.1 million at March 31, 2021, as compared to $36.4 million at December 31, 2020. Included in the non-performing loans total was $4.8 million and $5.2 million of TDR loans at March 31, 2021 and December 31, 2020, respectively. Non-performing loans do not include $44.4 million and $48.5 million of acquired PCD loans at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, the allowance for loan credit losses totaled $60.0 million, or 0.76% of total loans, as compared to $60.7 million, or 0.78% of total loans at December 31, 2020. These ratios exclude existing unamortized credit and PCD marks on acquired loans of $25.7 million and $28.0 million at March 31, 2021 and December 31, 2020, 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 will 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 March 31, 2021 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):
March 31, 2021December 31, 2020
Special Mention$150,221 $165,843 
Substandard189,087 194,477 
The decrease in special mention and substandard loans was primarily due to the improvement in the Bank’s borrowers’ ability to service their loans.
13

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, 2020 (the “2020 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. 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. 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 is the most critical accounting policy because it is important to the presentation of the Company’s financial condition and results of operations. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.
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”). 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 2020 Form 10-K under Item 1A - Risk Factors, as supplemented by the Company’s subsequent filings with the Securities and Exchange Commission (the “SEC”) 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, changes in accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations.
Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated, the timing of inoculation against the virus and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: the demand for the Bank’s products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; the Company’s allowance for loan credit losses may increase if borrowers experience financial difficulties, which will adversely affect the Company’s net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank; if legislation or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges the Bank may receive or on its ability to charge overdraft or other fees, it could adversely impact the Company’s financial results; the Company’s cyber security risks would be increased as the result of an increased use of the Bank’s online banking platform or an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.
These risks and uncertainties are further discussed in the Company’s 2020 Form 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.
14

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
The Company’s interest rate sensitivity is monitored through the use of interest rate risk (“IRR”) modeling. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2021, 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, 2021, the Company’s one-year gap was positive 22.82% as compared to positive 18.05% at December 31, 2020.
 
At March 31, 20213 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$892,817 $935 $2,425 $— $— $896,177 
Debt securities260,294 193,546 378,665 229,376 291,219 1,353,100 
Equity investments— — — — 50,159 50,159 
Restricted equity investments— — — — 52,199 52,199 
Loans receivable (2)
2,086,681 1,789,639 2,357,314 1,024,286 657,792 7,915,712 
Total interest-earning assets3,239,792 1,984,120 2,738,404 1,253,662 1,051,369 10,267,347 
Interest-bearing liabilities:
Interest-bearing checking accounts1,325,348 169,565 433,608 359,164 1,335,447 3,623,132 
Money market deposit accounts74,189 54,688 128,083 104,901 420,598 782,459 
Savings accounts159,727 114,349 293,030 238,336 763,086 1,568,528 
Time deposits255,552 489,599 304,466 46,312 14,829 1,110,758 
FHLB advances— — — — — — 
Securities sold under agreements to repurchase and other borrowings238,080 198 431 122,991 941 362,641 
Total interest-bearing liabilities2,052,896 828,399 1,159,618 871,704 2,534,901 7,447,518 
Interest sensitivity gap (3)
$1,186,896 $1,155,721 $1,578,786 $381,958 $(1,483,532)$2,819,829 
Cumulative interest sensitivity gap$1,186,896 $2,342,617 $3,921,403 $4,303,361 $2,819,829 $2,819,829 
Cumulative interest sensitivity gap as a percent of total interest-earning assets11.56 %22.82 %38.19 %41.91 %27.46 %27.46 %
(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 credit losses unamortized discounts and deferred loan fees.
(3)Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
15

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, 2021 and December 31, 2020. 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 2020 Form 10-K.
 
 March 31, 2021December 31, 2020
Change in Interest Rates in Basis Points (Rate Shock)Economic Value of EquityNet Interest IncomeEconomic Value of EquityNet Interest Income
Amount% ChangeEVE RatioAmount% ChangeAmount% ChangeEVE RatioAmount% Change
(dollars in thousands)          
300$2,135,781 31.6 %19.4 %$345,402 17.1 %$1,890,335 38.5 %17.3 %$340,098 16.2 %
2002,000,867 23.2 17.9 329,626 11.7 1,752,255 28.4 15.7 325,436 11.2 
1001,831,006 12.8 16.1 312,951 6.1 1,578,917 15.7 13.9 309,644 5.8 
Static1,623,437 — 14.0 294,985 — 1,365,119 — 11.8 292,572 — 
(100)1,336,840 (17.7)11.4 281,029 (4.7)1,074,346 (21.3)9.2 284,763 (2.7)
The interest rate sensitivity at March 31, 2021 and December 31, 2020, continue to be impacted by the loan and debt securities portfolio growth as well as a cash liquidity position that remains elevated.

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 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 March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

16

OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31, 2021December 31, 2020
 (Unaudited) 
Assets
Cash and due from banks$1,173,665 $1,272,134 
Debt securities available-for-sale, at estimated fair value268,511 183,302 
Debt securities held-to-maturity, net of allowance for securities credit losses of $1,717 at March 31, 2021 and $1,715 at December 31, 2020 (estimated fair value of $1,099,745 at March 31, 2021 and $968,466 at December 31, 2020)1,082,326 937,253 
Equity investments, at estimated fair value50,159 107,079 
Restricted equity investments, at cost52,199 51,705 
Loans receivable, net of allowance for loan credit losses of $59,976 at March 31, 2021 and $60,735 at December 31, 20207,820,590 7,704,857 
Loans held-for-sale43,175 45,524 
Interest and dividends receivable32,819 35,269 
Other real estate owned106 106 
Premises and equipment, net110,093 107,094 
Bank owned life insurance264,548 265,253 
Assets held for sale5,340 5,782 
Goodwill500,319 500,319 
Core deposit intangible22,273 23,668 
Other assets151,349 208,968 
Total assets$11,577,472 $11,448,313 
Liabilities and Stockholders’ Equity
Deposits$9,502,812 $9,427,616 
Securities sold under agreements to repurchase with retail customers134,465 128,454 
Other borrowings228,176 235,471 
Advances by borrowers for taxes and insurance20,980 17,296 
Other liabilities192,320 155,346 
Total liabilities10,078,753 9,964,183 
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both March 31, 2021 and December 31, 2020
Common stock, $0.01 par value, 150,000,000 shares authorized, 61,478,355 and 61,040,894 shares issued at March 31, 2021 and December 31, 2020, respectively; and 60,329,504 and 60,392,043 shares outstanding at March 31, 2021 and December 31, 2020, respectively610 609 
Additional paid-in capital1,142,290 1,137,715 
Retained earnings398,280 378,268 
Accumulated other comprehensive income312 621 
Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")(7,129)(7,433)
Treasury stock, 1,148,851 and 648,851 shares at March 31, 2021 and December 31, 2020, respectively(35,645)(25,651)
Total stockholders’ equity1,498,719 1,484,130 
Total liabilities and stockholders’ equity$11,577,472 $11,448,313 

See accompanying Notes to Unaudited Consolidated Financial Statements.
17

OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 For the Three Months Ended March 31,
 20212020
 (Unaudited)
Interest income:
Loans$77,908 $89,944 
Debt securities5,355 6,772 
Equity investments and other1,611 1,491 
Total interest income84,874 98,207 
Interest expense:
Deposits8,496 13,936 
Borrowed funds2,774 4,626 
Total interest expense11,270 18,562 
Net interest income73,604 79,645 
Credit loss (benefit) expense(620)9,969 
Net interest income after credit loss (benefit) expense74,224 69,676 
Other income:
Bankcard services revenue3,052 2,481 
Trust and asset management revenue599 515 
Fees and service charges3,737 4,873 
Net gain on sales of loans1,916 173 
Net gain on equity investments8,287 155 
Net loss from other real estate operations(8)(150)
Income from bank owned life insurance1,415 1,575 
Commercial loan swap income1,111 4,050 
Other726 25 
Total other income20,835 13,697 
Operating expenses:
Compensation and employee benefits28,366 29,885 
Occupancy5,061 5,276 
Equipment1,578 1,943 
Marketing434 769 
Federal deposit insurance and regulatory assessments1,864 667 
Data processing4,031 4,177 
Check card processing1,372 1,276 
Professional fees2,837 2,302 
Other operating expense3,353 3,802 
Amortization of core deposit intangible1,395 1,578 
Branch consolidation expense1,011 2,594 
Merger related expenses381 8,527 
Total operating expenses51,683 62,796 
Income before provision for income taxes43,376 20,577 
Provision for income taxes10,679 4,044 
Net income32,697 16,533 
Dividends on preferred shares1,004 
Net income available to common stockholders$31,693 $16,533 
Basic earnings per share$0.53 $0.28 
Diluted earnings per share$0.53 $0.27 
Average basic shares outstanding59,840 59,876 
Average diluted shares outstanding60,101 60,479 
See accompanying Notes to Unaudited Consolidated Financial Statements.
18

OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 For the Three Months Ended March 31,
 20212020
 (Unaudited)
Net income$32,697 $16,533 
Other comprehensive (loss) income:
Unrealized (loss) gain on debt securities (net of tax benefit of $112 in 2021 and net tax expense of $586 in 2020)(416)2,149 
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $73 in 2021 and $84 in 2020)107 115 
Reclassification adjustment for gains included in net income (net of tax benefit of $173 in 2020)(547)
Total other comprehensive (loss) income(309)1,717 
Total comprehensive income32,388 18,250 
Less: Dividends on preferred shares1,004 
Comprehensive income available to common stockholders$31,384 $18,250 
See accompanying Notes to Unaudited Consolidated Financial Statements.
19

OceanFirst Financial Corp.
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended March 31, 2021 and March 31, 2020
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Employee
Stock
Ownership
Plan
Treasury
Stock
Total
Balance at Balance at December 31, 2019$$519 $840,691 $358,668 $(1,208)$(8,648)$(36,903)$1,153,119 
Net income— — — 16,533 — — — 16,533 
Other comprehensive income, net of tax— — — — 1,717 — — 1,717 
Stock compensation— 1,106 — — — — 1,108 
Effect of adopting Accounting Standards Update(“ASU”) No. 2016-13— — — (4)— — — (4)
Allocation of ESOP stock— — 43 — — 304 — 347 
Cash dividend $0.17 per share— — — (10,274)— — — (10,274)
Exercise of stock options— 1,305 (650)— — — 657 
Purchase 648,851 shares of common stock— — — — — — (14,814)(14,814)
Acquisition of Two River Bancorp— 42 122,501 — — — 26,066 148,609 
Acquisition of Country Bank Holding Company, Inc.— 44 112,792 — — — — 112,836 
Balance at March 31, 2020$$609 $1,078,438 $364,273 $509 $(8,344)$(25,651)$1,409,834 
Balance at December 31, 2020$$609 $1,137,715 $378,268 $621 $(7,433)$(25,651)$1,484,130 
Net income— — — 32,697 — — — 32,697 
Other comprehensive loss, net of tax— — — — (309)— — (309)
Stock compensation— — 1,237 — — — — 1,237 
Allocation of ESOP stock— — 48 — — 304 — 352 
Cash dividend $0.17 per share— — — (10,152)— — — (10,152)
Exercise of stock options— 3,290 (1,529)— — — 1,762 
Purchase 500,000 shares of common stock— — — — — — (9,994)(9,994)
Preferred stock dividend— — — (1,004)— — — (1,004)
Balance at March 31, 2021$$610 $1,142,290 $398,280 $312 $(7,129)$(35,645)$1,498,719 
See accompanying Notes to Unaudited Consolidated Financial Statements.
20

OceanFirst Financial Corp.
Consolidated Statements of Cash Flows
(dollars in thousands)
 For the Three Months Ended March 31,
 20212020
 (Unaudited)
Cash flows from operating activities:
Net income$32,697 $16,533 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment2,064 2,126 
Allocation of ESOP stock352 347 
Stock compensation1,237 1,108 
Net excess tax expense (benefit) on stock compensation90 (299)
Amortization of servicing asset25 12 
Net premium amortization in excess of discount accretion on securities1,467 842 
Net amortization of deferred costs on borrowings212 63 
Amortization of core deposit intangible1,395 1,578 
Net accretion of purchase accounting adjustments(3,804)(5,637)
Net amortization of deferred costs and discounts on loans437 40 
(Benefit) provision for credit losses(620)9,969 
Net gain on sale and write-down of other real estate owned(2)
Net write down of fixed assets held-for-sale to net realizable value427 
Net gain on equity securities(8,287)(155)
Net gain on sales of loans(1,916)(173)
Proceeds from sales of residential loans held for sale69,416 7,673 
Mortgage loans originated for sale(65,151)(25,282)
Increase in value of bank owned life insurance(1,415)(1,575)
Net loss on sale of assets held for sale22 
Decrease (increase) in interest and dividends receivable2,450 (2,095)
Deferred tax (benefit) provision(57)245 
Decrease in other assets27,442 10,877 
(Decrease) increase in other liabilities(21,610)47,501 
Total adjustments4,176 47,163 
Net cash provided by operating activities36,873 63,696 
Cash flows from investing activities:
Net increase in loans receivable(111,302)(160,211)
Proceeds from sale of loans9,313 
Purchase of debt securities available-for-sale(100,921)(9,980)
Purchase of debt securities held-to-maturity(178,316)
Purchase of equity investments(10,575)(36)
Proceeds from sale of equity investments99,060 
Proceeds from maturities and calls of debt securities available-for-sale22,850 10,223 
Proceeds from maturities and calls of debt securities held-to-maturity6,565 13,001 
Proceeds from sales of debt securities available-for-sale5,869 
Principal repayments on debt securities available-for-sale46 
Principal repayments on debt securities held-to-maturity52,371 35,401 
Proceeds from bank owned life insurance2,120 155 
Proceeds from the redemption of restricted equity investments344 36,581 
Purchases of restricted equity investments(485)(47,216)
Proceeds from sales of other real estate owned89 
Proceeds from sales of assets held-for-sale420 
Purchases of premises and equipment(5,336)(1,798)
Net cash consideration received for acquisition23,460 
Net cash used in investing activities(223,159)(85,149)
21

Continued
OceanFirst Financial Corp.
Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
 For the Three Months Ended March 31,
 20212020
 (Unaudited)
Cash flows from financing activities:
Increase (decrease) in deposits$75,694 $(29,963)
Increase (decrease) in short-term borrowings6,011 (50,297)
Proceeds from Federal Home Loan Bank advances460,000 
Repayments of Federal Home Loan Bank advances(162,700)
Repayments of other borrowings(7,529)(27)
Increase in advances by borrowers for taxes and insurance3,684 4,832 
Exercise of stock options1,762 657 
Payment of employee taxes withheld from stock awards(1,094)(1,972)
Purchase of treasury stock(9,994)(14,814)
Dividends paid(11,156)(10,274)
Net cash provided by financing activities57,378 195,442 
Net (decrease) increase in cash and due from banks and restricted cash(128,908)173,989 
Cash and due from banks and restricted cash at beginning of period1,318,661 133,226 
Cash and due from banks and restricted cash at end of period$1,189,753 $307,215 
Supplemental Disclosure of Cash Flow Information:
Cash and due from banks at beginning of period$1,272,134 $120,544 
Restricted cash at beginning of period46,527 12,682 
Cash and due from banks and restricted cash at beginning of period$1,318,661 $133,226 
Cash and due from banks at end of period$1,173,665 $256,470 
Restricted cash at end of period16,088 50,745 
Cash and due from banks and restricted cash at end of period$1,189,753 $307,215 
Cash paid during the period for:
Interest$10,376 $19,293 
Income taxes568 
Non-cash activities:
Accretion of unrealized loss on securities reclassified to held-to-maturity180 199 
Net loan (recoveries) charge-offs(280)1,154 
Transfer of loans receivable to other real estate owned106 
Acquisition:
Non-cash assets acquired:
Securities$$208,880 
Restricted equity investments5,334 
Loans1,559,497 
Premises and equipment9,744 
Accrued interest receivable4,161 
Bank owned life insurance22,440 
Deferred tax asset(800)
Other assets10,077 
Goodwill and other intangible assets, net139,275 
Total non-cash assets acquired$$1,958,608 
Liabilities assumed:
Deposits$$1,594,403 
Borrowings92,618 
Other liabilities33,602 
Total liabilities assumed$$1,720,623 
See accompanying Notes to Unaudited Consolidated Financial Statements.
22

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 direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp. Casaba Real Estate Holdings Corporation, CBNJ Investments Corp., Country Property Holdings, Inc., and TRCB Investment Corp. Certain other subsidiaries were dissolved in 2020 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts previously reported have been reclassified to conform to the current year’s presentation.
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 months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the full year 2021 or any other period. 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, 2020.

23

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

Note 2. Business Combinations
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 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 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 
Securities64,381 
Loans940,072 
Accrued interest receivable2,382 
Bank owned life insurance22,440 
Deferred tax asset3,158 
Other assets15,956 
Core deposit intangible12,130 
Total assets acquired1,111,621 
Liabilities assumed:
Deposits(941,750)
Other liabilities(59,026)
Total liabilities assumed(1,000,776)
Net assets acquired$110,845 
Goodwill recorded in the merger$86,205 
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
24

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 $793.7 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 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 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 
Securities144,499 
Loans618,408 
Accrued interest receivable1,779 
Deferred tax asset(3,117)
Other assets9,195 
Core deposit intangible2,117 
Total assets acquired793,680 
Liabilities assumed:
Deposits(652,653)
Other liabilities(67,240)
Total liabilities assumed(719,893)
Net assets acquired$73,787 
Goodwill recorded in the merger$39,049 
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
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 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.
25

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

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, Two River operated 14 properties and Country Bank operated 5 properties, 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 an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs. The core deposit premium totaled $12.1 million, and $2.1 million, for the acquisitions of 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.
26

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

Note 3. Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2021 and March 31, 2020 (in thousands):
Three Months Ended
March 31,
 20212020
Weighted average shares outstanding60,300 60,362 
Less: Unallocated ESOP shares(386)(460)
 Unallocated incentive award shares(74)(26)
Average basic shares outstanding59,840 59,876 
Add: Effect of dilutive securities:
Incentive awards261 603 
Average diluted shares outstanding60,101 60,479 
For the three months ended March 31, 2021 and 2020, antidilutive stock options of 1,672,000 and 1,033,000, respectively, were excluded from earnings per share calculations.
27

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

Note 4. Securities
The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at March 31, 2021 and December 31, 2020 are as follows (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Allowance for Credit Losses
At March 31, 2021
Debt securities available-for-sale:
U.S. government and agency obligations$169,337 $2,570 $(8)$171,899 $
Collateralized loan obligations (“CLOs”)96,410 96 (40)96,466 
Mortgage-backed securities - FNMA144 146 
Total debt securities available-for-sale$265,891 $2,668 $(48)$268,511 $
Debt securities held-to-maturity:
State, municipal and sovereign debt obligations278,179 7,043 (1,106)284,116 (90)
Corporate debt securities72,821 1,542 (1,912)72,451 (1,511)
Mortgage-backed securities:
FHLMC303,539 4,256 (3,178)304,617 
FNMA335,307 5,978 (2,481)338,804 
GNMA59,904 1,614 (23)61,495 
SBA5,190 (58)5,132 
Other32,269 861 33,130 (116)
Total mortgage-backed securities736,209 12,709 (5,740)743,178 (116)
Total debt securities held-to-maturity$1,087,209 $21,294 $(8,758)$1,099,745 $(1,717)
Total debt securities$1,353,100 $23,962 $(8,806)$1,368,256 $(1,717)

28

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Allowance for Credit Losses
At December 31, 2020
Debt securities available-for-sale:
U.S. government and agency obligations$173,790 $3,152 $(2)$176,940 $
CLOs6,174 (4)6,170 
Mortgage-backed securities - FNMA190 192 
Total debt securities available-for-sale$180,154 $3,154 $(6)$183,302 $
Debt securities held-to-maturity:
State and municipal obligations238,405 11,500 (231)249,674 (48)
Corporate debt securities72,305 1,615 (2,652)71,268 (1,550)
Mortgage-backed securities:
FHLMC232,942 5,383 (124)238,201 0
FNMA293,615 7,640 (147)301,108 0
GNMA67,334 2,014 (12)69,336 0
SBA5,392 (60)5,332 0
Other32,321 1,226 33,547 (117)
Total mortgage-backed securities631,604 16,263 (343)647,524 (117)
Total debt securities held-to-maturity$942,314 $29,378 $(3,226)$968,466 $(1,715)
Total debt securities$1,122,468 $32,532 $(3,232)$1,151,768 $(1,715)
There was no allowance for securities credit losses on debt securities available-for-sale at March 31, 2021 and December 31, 2020.
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended March 31, 2021 and March 31, 2020 (in thousands):
Three Months Ended March 31,
20212020
Allowance for credit losses
Beginning balance$(1,715)$
Impact of CECL adoption(1,268)
Provision for credit loss expense(2)(1,261)
Total ending allowance balance$(1,717)$(2,529)

During 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 income on the consolidated statement of financial condition, 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 March 31, 2021 and December 31, 2020 is as follows (in thousands): 
March 31, 2021December 31, 2020
Amortized cost$1,087,209 $942,314 
Net loss on date of transfer from available-for-sale(13,347)(13,347)
Allowance for securities credit loss(1,717)(1,715)
Accretion of net unrealized loss on securities reclassified as held-to-maturity10,181 10,001 
Carrying value$1,082,326 $937,253 
There were 0 realized gains or losses on debt securities for the three months ended March 31, 2021 and 2020.
29

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

The amortized cost and estimated fair value of debt securities at March 31, 2021 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 March 31, 2021, corporate debt securities with an amortized cost of $54.3 million, and estimated fair value of $54.0 million, and CLOs with an amortized cost of $96.4 million, and estimated fair value of $96.5 million, were callable prior to the maturity date.
 
March 31, 2021Amortized
Cost
Estimated
Fair Value
Less than one year$105,213 $105,784 
Due after one year through five years189,783 194,363 
Due after five years through ten years164,010 162,249 
Due after ten years157,741 162,536 
$616,747 $624,932 
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 required by law amounted to $533.0 million and $435.9 million at March 31, 2021 and December 31, 2020, respectively, which includes $147.0 million and $152.7 million at March 31, 2021 and December 31, 2020, respectively, pledged as collateral for securities sold under agreements to repurchase.
At March 31, 2021, there were no holdings of securities of any one issuer, other than the US government and its agencies and government-sponsored enterprises, in an amount greater than 10% of stockholders’ equity.
30

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at March 31, 2021 and December 31, 2020, segregated by the duration of the unrealized losses, are as follows (in thousands):
 At March 31, 2021
 Less than 12 months12 months or longerTotal
 Estimated
Fair
Value
Unrealized
Losses
Estimated
Fair
Value
Unrealized
Losses
Estimated
Fair
Value
Unrealized
Losses
Debt securities available-for-sale:
U.S. government and agency obligations$10,139 $(8)$$$10,139 $(8)
CLOs47,053 (40)47,053 (40)
Total debt securities available-for-sale57,192 (48)57,192 (48)
Debt securities held-to-maturity:
State, municipal and sovereign debt obligations$50,696 $(890)$5,748 $(216)$56,444 $(1,106)
Corporate debt securities39,041 (1,774)3,818 (138)42,859 (1,912)
Mortgage-backed securities:
FHLMC158,632 (3,178)158,632 (3,178)
FNMA163,103 (2,478)293 (3)163,396 (2,481)
GNMA6,104 (23)6,104 (23)
SBA2,015 (48)3,116 (10)5,131 (58)
Total mortgage-backed securities329,854 (5,727)3,409 (13)333,263 (5,740)
Total debt securities held-to-maturity419,591 (8,391)12,975 (367)432,566 (8,758)
Total debt securities$476,783 $(8,439)$12,975 $(367)$489,758 $(8,806)
 At December 31, 2020
 Less than 12 months12 months or longerTotal
 Estimated
Fair
Value
Unrealized
Losses
Estimated
Fair
Value
Unrealized
Losses
Estimated
Fair
Value
Unrealized
Losses
Debt securities available-for-sale:
U.S. government and agency obligations$17,029 $(2)$$$17,029 $(2)
CLOs4,766 (4)4,766 (4)
Total debt securities available-for-sale21,795 (6)21,795 (6)
Debt securities held-to-maturity:
State and municipal obligations2,823 (23)7,509 (208)10,332 (231)
Corporate debt securities10,192 (255)35,935 (2,397)46,127 (2,652)
Mortgage-backed securities:
FHLMC24,661 (117)669 (7)25,330 (124)
FNMA39,365 (128)939 (19)40,304 (147)
GNMA5,856 (11)207 (1)6,063 (12)
SBA3,626 (12)1,706 (48)5,332 (60)
Total mortgage-backed securities73,508 (268)3,521 (75)77,029 (343)
Total debt securities held-to-maturity86,523 (546)46,965 (2,680)133,488 (3,226)
Total debt securities$108,318 $(552)$46,965 $(2,680)$155,283 $(3,232)









 
31

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements

The Company concluded that the corporate debt securities were not impaired at March 31, 2021 and 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 FHLMC, FNMA, GNMA, or SBA, corporations which are chartered by the United States Government and whose debt obligations are rated AA+/Aaa by S&P and Moody’s, respectively. Additionally, there are private label commercial mortgage-backed securities with credit ratings 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 not impaired at March 31, 2021.
State, municipal, and sovereign debt obligations are securities issued by state, local and national governments for various purposes. The Company is not aware of any information subsequent to the purchase of any state, municipal, and sovereign debt obligations that indicates an inability on the part of an issuer to meet all of its financial commitments. The weighted average credit rating of these securities is Aa/AA with no credit rating below Baa2/BBB. The Company has the ability and stated intention to hold these securities to maturity at which time the Company expects to receive full repayment. Current unrealized losses are considered to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the securities. As a result, the Company concluded that these securities were not impaired as of March 31, 2021.
The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. The following table summarized the amortized cost of debt securities held-to-maturity at March 31, 2021, aggregated by credit quality indicator (in thousands):
AAAAAABBBBBTotal
As of March 31, 2021
State, municipal and sovereign debt obligations$33,421 $138,734 $72,959 $33,065 $$278,179 
Corporate debt securities497 11,995 48,995 11,334 72,821 
Mortgage-backed securities - Other11,111 21,158 32,269 
Total debt securities held-to-maturity$44,532 $160,389 $84,954 $82,060 $11,334 $383,269 
Equity investments
At March 31, 2021 and December 31, 2020, the Company held equity investments at an estimated fair value of $50.2 million and $107.1 million, respectively. The equity investments primarily comprised of select financial services institutions’ common and preferred stocks paying attractive dividends.
The realized and unrealized gains or losses on equity securities for the three months ended March 31, 2021 and March 31, 2020 are shown in the table below (in thousands):
Three Months Ended March 31,
20212020
Net gain on equity investments$8,287 $155 
Less: Net gains recognized on equity securities sold8,123 
Unrealized gain recognized on equity securities still held$164 $155 
32

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

Note 5. Loans Receivable, Net
Loans receivable, net at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
March 31, 2021December 31, 2020
Commercial:
Commercial and industrial (1)
$498,245 $470,656 
Commercial real estate – owner occupied1,066,351 1,145,065 
Commercial real estate – investor3,804,351 3,491,464 
Total commercial5,368,947 5,107,185 
Consumer:
Residential real estate2,189,348 2,309,459 
Home equity loans and lines267,591 285,016 
Other consumer46,651 54,446 
Total consumer2,503,590 2,648,921 
Total loans receivable7,872,537 7,756,106 
Deferred origination costs, net8,029 9,486 
Allowance for loan credit losses(59,976)(60,735)
Total loans receivable, net$7,820,590 $7,704,857 
(1) The commercial and industrial loans balance at March 31, 2021 and December 31, 2020 includes Paycheck Protection Program (“PPP”) loans of $109.7 million and $95.4 million, respectively.
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. Generally, risk ratings for loans on forbearance pursuant to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act are not re-evaluated until the initial 90-day forbearance period ends. At that time, risk ratings are updated with an emphasis on industries that were heavily impacted by the pandemic, as well as individual borrower liquidity, and other measures of resiliency as described below. The Company evaluates risk ratings on an ongoing basis and as such, adversely rated loans will be re-evaluated as government restrictions end and businesses resume normal operations. 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.

33

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands):
202120202019201820172016 and priorRevolving lines of creditTotal
March 31, 2021
Commercial and industrial
Pass$68,908 $85,402 $35,616 $25,960 $13,952 $88,010 $161,358 $479,206 
Special Mention334 1,866 776 1,328 706 2,029 7,039 
Substandard567 1,279 881 754 2,033 6,486 12,000 
Total commercial and industrial68,908 86,303 38,761 27,617 16,034 90,749 169,873 498,245 
Commercial real estate - owner occupied
Pass20,780 72,657 120,065 122,007 115,902 496,736 10,127 958,274 
Special Mention3,488 6,556 1,973 32,144 278 44,439 
Substandard14,377 8,926 2,874 36,912 549 63,638 
Total commercial real estate - owner occupied20,780 72,657 137,930 137,489 120,749 565,792 10,954 1,066,351 
Commercial real estate - investor
Pass399,267 656,812 603,104 306,120 420,926 997,722 214,003 3,597,954 
Special Mention25,847 17,113 14,086 41,043 98,089 
Substandard4,311 29,576 1,962 18,244 47,845 6,370 108,308 
Total commercial real estate - investor399,267 661,123 658,527 325,195 453,256 1,086,610 220,373 3,804,351 
Residential real estate (1)
Pass122,744 553,741 387,283 188,276 145,840 789,192 2,187,076 
Special Mention198 335 533 
Substandard221 1,518 1,739 
Total residential real estate122,744 553,741 387,481 188,276 146,061 791,045 2,189,348 
Consumer (1)
Pass5,331 23,648 24,022 72,429 23,595 159,762 2,038 310,825 
Special Mention54 18 49 121 
Substandard17 3,279 3,296 
Total consumer5,331 23,648 24,076 72,464 23,595 163,090 2,038 314,242 
Total loans$617,030 $1,397,472 $1,246,775 $751,041 $759,695 $2,697,286 $403,238 $7,872,537 
(1)For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
34

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

202020192018201720162015 and priorRevolving lines of creditTotal
December 31, 2020
Commercial and industrial
Pass$137,262 $40,737 $27,967 $18,845 $33,568 $59,339 $134,140 $451,858 
Special Mention150 583 826 1,422 907 118 1,429 5,435 
Substandard581 1,284 1,243 809 439 1,706 7,301 13,363 
Total commercial and industrial137,993 42,604 30,036 21,076 34,914 61,163 142,870 470,656 
Commercial real estate - owner occupied
Pass96,888 114,506 122,962 124,050 104,264 428,423 18,932 1,010,025 
Special Mention3,512 8,240 1,023 17,115 17,811 439 48,140 
Substandard34,670 9,001 3,404 3,677 35,509 639 86,900 
Total commercial real estate - owner occupied96,888 152,688 140,203 128,477 125,056 481,743 20,010 1,145,065 
Commercial real estate - investor
Pass635,930 628,435 317,104 426,268 281,876 812,062 194,913 3,296,588 
Special Mention15,979 17,113 15,225 4,234 55,872 149 108,572 
Substandard4,311 9,217 1,931 17,222 11,474 36,326 5,823 86,304 
Total commercial real estate - investor640,241 653,631 336,148 458,715 297,584 904,260 200,885 3,491,464 
Residential real estate (1)
Pass595,982 437,593 226,435 166,773 146,237 729,037 2,302,057 
Special Mention532 446 2,186 3,164 
Substandard570 1,489 221 1,958 4,238 
Total residential real estate596,552 438,125 227,924 166,994 146,683 733,181 2,309,459 
Consumer (1)
Pass24,954 26,659 83,296 25,469 16,565 156,276 2,145 335,364 
Special Mention150 382 532 
Substandard3,566 3,566 
Total consumer24,954 26,659 83,296 25,469 16,715 160,224 2,145 339,462 
Total loans$1,496,628 $1,313,707 $817,607 $800,731 $620,952 $2,340,571 $365,910 $7,756,106 
(1) For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
35

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

An analysis of the allowance for credit losses on loans for the three months ended March 31, 2021 and March 31, 2020 is as follows (in thousands):
 Commercial
and 
Industrial
Commercial
Real Estate –
Owner
Occupied
Commercial
Real Estate –
Investor
Residential
Real Estate
ConsumerUnallocatedTotal
For the three months ended
March 31, 2021
Allowance for credit losses on loans
Balance at beginning of period$5,390 $15,054 $26,703 $11,818 $1,770 $$60,735 
Credit loss (benefit) expense(2,875)(7,257)10,149 (335)(721)(1,039)
Charge-offs(34)(242)(80)(356)
Recoveries26 30 104 39 437 636 
Balance at end of period$2,541 $7,827 $36,922 $11,280 $1,406 $$59,976 
For the three months ended
March 31, 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 adoption2,416 (1,109)(5,395)3,833 2,981 (25)2,701 
Credit loss expense (benefit)1,529 1,286 2,377 3,585 (180)8,597 
Initial allowance for credit losses on PCD loans1,221 26 260 109 1,023 2,639 
Charge-offs(1,275)(109)(1,384)
Recoveries25 34 163 230 
Balance at end of period$6,649 $3,096 $7,159 $8,417 $4,314 $$29,635 
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 March 31, 2021 and December 31, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $1.6 million and $1.9 million, respectively, commercial real estate - owner occupied of $12.3 million and $13.8 million, respectively, and commercial real estate - investor of $18.5 million and $18.3 million, respectively. 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 $1.3 million and $1.4 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, the amount of foreclosed residential real estate property held by the Company were $106,000 and $106,000, respectively.
The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of March 31, 2021 and December 31, 2020 (in thousands):
March 31, 2021December 31, 2020
Commercial and industrial$1,689 $1,908 
Commercial real estate – owner occupied12,345 13,751 
Commercial real estate – investor18,520 18,287 
Residential real estate6,422 8,671 
Consumer3,782 4,246 
$42,758 $46,863 
 
At March 31, 2021, 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 March 31, 2021 and December 31, 2020, there were 0 loans that were 90 days or greater past due and still accruing interest.


36

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 March 31, 2021 and December 31, 2020 by loan portfolio segment (in thousands):
30-59
Days
Past Due
60-89
Days
Past Due
90 Days or Greater Past DueTotal
Past Due
Loans Not
Past Due
Total
March 31, 2021
Commercial and industrial$169 $669 $394 $1,232 $497,013 $498,245 
Commercial real estate – owner occupied649 7,719 8,368 1,057,983 1,066,351 
Commercial real estate – investor3,377 9,047 12,424 3,791,927 3,804,351 
Residential real estate11,031 533 1,739 13,303 2,176,045 2,189,348 
Consumer1,873 120 3,298 5,291 308,951 314,242 
$17,099 $1,322 $22,197 $40,618 $7,831,919 $7,872,537 
December 31, 2020
Commercial and industrial$3,050 $628 $327 $4,005 $466,651 $470,656 
Commercial real estate – owner occupied1,015 7,871 8,886 1,136,179 1,145,065 
Commercial real estate – investor8,897 3,233 11,122 23,252 3,468,212 3,491,464 
Residential real estate15,156 3,164 4,238 22,558 2,286,901 2,309,459 
Consumer978 533 3,568 5,079 334,383 339,462 
$29,096 $7,558 $27,126 $63,780 $7,692,326 $7,756,106 
The Company classifies certain loans as troubled debt restructured (“TDR”) loans 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. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Bank retains its security interest in the real estate collateral. At March 31, 2021 and December 31, 2020, TDR loans totaled $16.6 million and $17.5 million, respectively. Included in the non-accrual loan total at March 31, 2021 and December 31, 2020 were $5.1 million and $5.5 million, respectively, of TDR loans. At March 31, 2021 and December 31, 2020, the Company had 0 specific reserves allocated to loans that are classified as TDR loans. Non-accrual loans which become TDR loans are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has loans classified as accruing TDR loans at March 31, 2021 and December 31, 2020, which totaled $11.5 million and $12.0 million, respectively. 
 
The following table presents information about TDR loans which occurred during the three months ended March 31, 2021 and March 31, 2020 (dollars in thousands):
Number of LoansPre-modification
Recorded Investment
Post-modification
Recorded Investment
Three months ended March 31, 2021
Troubled debt restructurings:
Consumer$26 $33 
Number of LoansPre-modification
Recorded Investment
Post-modification
Recorded Investment
Three Months Ended March 31, 2020
Troubled debt restructurings:
Consumer$159 $177 
Residential real estate2226 234 
There were no TDR loans that defaulted during the three months ended March 31, 2021 and March 31, 2020 which were modified within the preceding year.

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
37

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

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 will 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 March 31, 2021 and will not be reported as past due during the deferral period.
Note 6. Deposits
The major types of deposits at March 31, 2021 and December 31, 2020 were as follows (in thousands):
Type of AccountMarch 31, 2021December 31, 2020
Non-interest-bearing$2,417,935 $2,133,195 
Interest-bearing checking3,623,132 3,646,866 
Money market deposit782,459 783,521 
Savings1,568,528 1,491,251 
Time deposits1,110,758 1,372,783 
Total deposits$9,502,812 $9,427,616 
Included in time deposits at March 31, 2021 and December 31, 2020, was $172.1 million and $409.5 million, respectively, in deposits of $250,000 and over.
38

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 principal (or most advantageous) 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 principal 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. 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). 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 primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity securities without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
39

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 discounted cash flow models provided by an independent, third-party and observable market data (Level 2). 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 Loans Individually Measured for Impairment
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 (“Level 3”)..
40

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2021 and December 31, 2020, 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
March 31, 2021
Items measured on a recurring basis:
Debt securities available-for-sale$268,511 $$268,511 $
Equity investments50,159 13,693 28,528 7,938 
Interest rate swap asset27,084 27,084 
Interest rate swap liability(27,160)(27,160)
Items measured on a non-recurring basis:
Other real estate owned106 106 
Loans measured for impairment based on the fair value of the underlying collateral33,747 33,747 
December 31, 2020
Items measured on a recurring basis:
Debt securities available-for-sale$183,302 $$183,302 $
Equity investments107,079 104,539 2,540 
Interest rate swap asset45,289 45,289 
Interest rate swap liability(45,429)(45,429)
Items measured on a non-recurring basis:
Other real estate owned106 106 
Loans measured for impairment based on the fair value of the underlying collateral35,366 35,366 
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers of assets between Level 1 and Level 2 during the three months ended March 31, 2021 and December 31, 2020.

The following table reconciles, for the three months ended March 31, 2021, the beginning and ending balances for equity investments 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 March 31, 2021
Beginning Balance$2,540 
Total gains (losses) included in earnings398 
Purchases5,000 
Transfers into Level 3
Transfers out of Level 3
Ending Balance$7,938 
There were no changes in Level 3 assets or liabilities in the fair value hierarchy for the three months ended March 31, 2020.

The Company purchased $5.0 million of a minority, non-controlling equity investment in Auxilior Capital Partners classified as Level 3 at March 31, 2021 as the security was carried at cost with no observable price changes noted since purchased.
41

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 2 and, infrequently, Level 3 inputs. Most of the Company’s investment and mortgage-backed securities 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 Bond Anticipation Notes (“BANs”)) as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency.
Restricted Equity Investments
The fair value for Federal Home Loan Bank of New York and Federal Reserve Bank 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 Receivable and Loans Held-for-Sale
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, 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.
42

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 March 31, 2021 and December 31, 2020 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
March 31, 2021
Financial Assets:
Cash and due from banks$1,173,665 $1,173,665 $$
Debt securities held-to-maturity1,082,326 1,081,590 18,155 
Restricted equity investments52,199 52,199 
Loans receivable, net and loans held-for-sale7,863,765 7,822,353 
Financial Liabilities:
Deposits other than time deposits8,392,054 8,392,054 
Time deposits1,110,758 1,118,867 
Other borrowings228,176 241,122 
Securities sold under agreements to repurchase with retail customers134,465 134,465 
December 31, 2020
Financial Assets:
Cash and due from banks$1,272,134 $1,272,134 $$
Debt securities held-to-maturity937,253 952,365 16,101 
Restricted equity investments51,705 51,705 
Loans receivable, net and loans held-for-sale7,750,381 7,806,743 
Financial Liabilities:
Deposits other than time deposits8,054,833 8,054,833 
Time deposits1,372,783 1,383,173 
FHLB advances and other borrowings235,471 251,798 
Securities sold under agreements to repurchase with retail customers128,454 128,454 
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.

43

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. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to Bank customers. 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. For the three months ended March 31, 2021 and March 31, 2020, the Company recognized a gain of $64,000 and $303,000, respectively, in other income resulting from fair value adjustments. The notional amount of derivatives not designated as hedging instruments was $815.3 million and $725.9 million at March 31, 2021 and December 31, 2020, 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 LocationMarch 31, 2021December 31, 2020
Other assets$27,084 $45,289 
Other liabilities27,160 45,429 
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 $16.1 million and $46.5 million at March 31, 2021 and December 31, 2020, 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 $27.2 million and $45.4 million at March 31, 2021 and December 31, 2020, 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, automated teller machine locations and office space with terms extending through 2050. The Company has 1 existing finance lease, which has a lease term through 2029.
44

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table represents the classification of the Company’s right-of-use (“ROU”) assets and lease liabilities on the consolidated statements of financial condition (in thousands):
March 31, 2021December 31, 2020
Lease ROU AssetsClassification
Operating lease ROU assetOther assets$21,616 $22,555 
Finance lease ROU assetPremises and equipment, net1,644 1,694 
Total lease ROU asset$23,260 $24,249 
Lease Liabilities
Operating lease liabilityOther liabilities$22,090 $22,990 
Finance lease liabilityOther borrowings2,052 2,100 
Total lease liability$24,142 $25,090 
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, Leases (Topic 842) requires the Company to use 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.
March 31, 2021December 31, 2020
Weighted-Average Remaining Lease Term
Operating leases7.72 years7.77 years
Finance lease8.35 years8.59 years
Weighted-Average Discount Rate
Operating leases3.00 %3.01 %
Finance lease5.63 %5.63 %
The following table represents lease expenses and other lease information (in thousands):
Three Months Ended
March 31, 2021March 31, 2020
Lease Expense
Operating lease expense$1,490 $1,723 
Finance lease expense:
Amortization of ROU assets50 40 
Interest on lease liabilities(1)
29 27 
Total$1,569 $1,790 
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$1,450 $1,648 
Operating cash flows from finance leases29 27 
Financing cash flows from finance leases48 47 
(1)Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense.
45

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)

Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of March 31, 2021 were as follows (in thousands):
Finance LeaseOperating Leases
For the Twelve Months Ended March 31,
2022$307 $5,836 
2023307 4,292 
2024307 3,190 
2025307 2,739 
2026307 2,154 
Thereafter1,028 7,164 
Total$2,563 $25,375 
Less: Imputed interest(511)(3,285)
Total lease liabilities$2,052 $22,090 

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such other 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
For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2020 Form 10-K. There have been no material changes to risk factors relevant to the Company’s operations since December 31, 2020. Additional risks not presently known to the Company, or that the Company currently deemed immaterial, may also adversely affect the business, financial condition or results of operations.
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. The repurchase plan has no expiration date. The Company repurchased 500,000 shares of its common stock during the three month period ended March 31, 2021. At March 31, 2021, there were 1,519,145 shares available for repurchase under the Company’s stock repurchase program.
PeriodTotal Number of
Shares Purchased
Average Price Paid per ShareTotal 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, 2021 through January 31, 2021— — — 2,019,145 
February 1, 2021 through February 28, 2021500,000 $19.94 500,000 1,519,145 
March 1, 2021 through March 31, 2021— — — 1,519,145 
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 DescriptionReference
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed here within this document
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed here within this document
Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002Filed here within this document
101.0
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, 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
104.0Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)



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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:May 6, 2021/s/ Christopher D. Maher
Christopher D. Maher
Chairman and Chief Executive Officer
DATE:May 6, 2021/s/ Michael J. Fitzpatrick
Michael J. Fitzpatrick
Executive Vice President and Chief Financial Officer

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