10-Q 1 ocfc-33118x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________ 
FORM 10-Q
 ________________________________________________  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-11713
________________________________________________  
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
 ________________________________________________ 
Delaware
22-3412577
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
110 West Front Street, Red Bank, NJ
07701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732) 240-4500
________________________________________________  
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   ý    NO   o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    YES  ý    NO  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
ý
Accelerated Filer
 
o
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
o
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o
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  o    NO  ý.
As of May 4, 2018 there were 48,136,830 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.



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



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL SUMMARY
At or for the Quarters Ended
(dollars in thousands, except per share amounts)
March 31, 2018
 
December 31, 2017
 
March 31, 2017
SELECTED FINANCIAL CONDITION DATA(1):
 
 
 
 
 
Total assets
$
7,494,899

 
$
5,416,006

 
$
5,196,203

Loans receivable, net
5,413,780

 
3,965,773

 
3,825,600

Deposits
5,907,336

 
4,342,798

 
4,198,663

Stockholders’ equity
1,007,460

 
601,941

 
582,543

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
55,711

 
42,505

 
41,483

Provision for loan losses
1,371

 
1,415

 
700

Other income
8,910

 
6,745

 
5,995

Operating expenses
56,818

 
27,693

 
30,961

Net income
5,427

 
9,956

 
12,018

Diluted earnings per share
0.12

 
0.30

 
0.36

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share at end of period
20.94

 
18.47

 
17.94

Tangible stockholders’ equity per common share (2)
13.51

 
13.58

 
13.07

Cash dividend per share
0.15

 
0.15

 
0.15

Stockholders’ equity to total assets
13.44
%
 
11.11
%
 
11.21
%
Tangible stockholders’ equity to total tangible assets (2)
9.11

 
8.42

 
8.42

Return on average assets (3) (4)
0.32

 
0.73

 
0.94

Return on average stockholders’ equity (3) (4)
2.54

 
6.56

 
8.42

Return on average tangible stockholders’ equity  (2) (3) (4)
3.80

 
8.89

 
11.50

Net interest rate spread
3.58

 
3.32

 
3.47

Net interest margin
3.70

 
3.42

 
3.56

Operating expenses to average assets (3) (4)
3.37

 
2.03

 
2.41

Efficiency ratio (4) (5)
87.92

 
56.23

 
65.21

Loan to deposit ratio
91.65

 
91.32

 
91.11

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
18,251

 
$
20,865

 
$
21,679

Non-performing assets
26,516

 
29,051

 
30,453

Allowance for loan losses as a percent of total loans receivable
0.31
%
 
0.40
%
 
0.42
%
Allowance for loan losses as a percent of total non-performing loans
92.14

 
75.35

 
74.50

Non-performing loans as a percent of total loans receivable
0.34

 
0.52

 
0.56

Non-performing assets as a percent of total assets
0.35

 
0.54

 
0.59

 
(1)
With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2)
Tangible stockholders’ equity and tangible assets exclude intangible assets relating to goodwill and core deposit intangible.
(3)
Ratios are annualized.
(4)
Performance ratios include the net adverse impact of merger related and branch consolidation expenses of $18.3 million, or $14.6 million, net of tax benefit, for the quarter ended March 31, 2018. Performance ratios include merger related expenses, branch consolidation expenses, and additional income tax expense related to the Tax Cuts and Jobs Act of $4.9 million, net of tax benefit, for the quarter ended December 31, 2017. Performance ratios include the adverse impact of merger related expenses, branch consolidation expenses, and acceleration of stock award expense due to the retirement of a director of $1.7 million, or $1.1 million, net of tax benefit, for the quarter ended March 31, 2017.
(5)
Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.


3


Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a community bank serving business and retail customers in New Jersey, and the metropolitan areas of New York and Philadelphia. The term “Company” refers to OceanFirst Financial Corp., OceanFirst Bank N.A. and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, wealth management, deposit accounts, the sale of investment products, loan originations, loan sales, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance, data processing and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and the actions of regulatory agencies.

Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are generally priced against shorter-term indices. The Company has attempted to mitigate the adverse impact of relatively low absolute levels of interest rates by focusing on commercial loan and core deposit growth.

Over the past two years the Company has grown significantly through acquisitions, acquiring Cape Bancorp, Inc. (“Cape”), Ocean Shore Holding Co. (“Ocean Shore”), and Sun Bancorp. Inc. (“Sun”) (the “Acquisition Transactions”). The Acquisition Transactions added $4.6 billion in assets and $3.7 billion in deposits. Additionally, effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company.
Highlights of the Company’s financial results and corporate activities for the three months ended March 31, 2018 were as follows:

On January 31, 2018, the Company completed its acquisition of Sun, which added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. The Company anticipates full integration of Sun’s branches and core operating systems in June 2018.

The Company’s net interest margin increased to 3.70%, as compared to 3.42% in the prior linked quarter, and 3.56% in the comparable prior year period.

The cost of deposits increased only one basis point from the prior linked quarter, to 0.33% and the loan to deposit ratio at March 31, 2018 was 91.7%.

Asset quality improved as non-performing loans decreased $2.6 million, to $18.3 million, from the prior linked quarter and non-performing loans as a percentage of total loans receivable decreased to 0.34%, from 0.52%.

Net income for the quarter ended March 31, 2018, was $5.4 million, or $0.12 per diluted share, as compared to $12.0 million, or $0.36 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2018, included merger related and branch consolidation expenses which decreased net income, net of tax benefit, by $14.6 million. Net income for the quarter ended March 31, 2017 included merger related and branch consolidation expenses, and an accelerated stock award expense from a director retirement, of $1.1 million, net of tax benefit. Excluding these items, net income for the quarter ended March 31, 2018 increased over the same prior year period, primarily due to the acquisition of Sun and the successful integration during 2017 of Ocean Shore which was acquired on November 30, 2016.

Net interest income for the quarter ended March 31, 2018, increased to $55.7 million, as compared to $41.5 million for the same prior year period, reflecting an increase in interest-earning assets and a higher net interest margin, as a result of the acquisition of Sun.

For the quarter ended March 31, 2018, other income increased to $8.9 million, as compared to $6.0 million for the corresponding prior year period, including an additional $1.4 million relating to Sun. Operating expenses increased to $56.8 million for the quarter ended March 31, 2018, as compared to $31.0 million in the same prior year period. Operating expenses for the quarter ended March 31, 2018, included $18.3 million of merger related and branch consolidation expenses, as compared to $1.5 million in the same prior year period. Excluding the impact of merger and branch consolidation expenses, the increase in operating expenses over the prior year was primarily due to the Sun acquisition, which added $8.0 million for the quarter ended March 31, 2018.

The Company remains well-capitalized with a tangible common equity ratio of 9.11% at March 31, 2018.

The Company declared a quarterly cash dividend on common stock. The dividend for the quarter ended March 31, 2018 of $0.15 per share will be paid on May 18, 2018 to stockholders of record on May 7, 2018.

4


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 table sets forth certain information relating to the Company for the three months ended March 31, 2018 and March 31, 2017. The yields and costs are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.
 
For the Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
Average Balance
 
Interest
 
Average
Yield/
Cost
 
Average Balance
 
Interest
 
Average
Yield/
Cost
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
100,236

 
$
209

 
0.84
%
 
$
214,165

 
$
409

 
0.77
%
Securities (1)
1,056,774

 
6,030

 
2.31

 
703,712

 
3,863

 
2.23

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
2,772,952

 
33,391

 
4.88

 
1,830,641

 
21,140

 
4.68

Residential
1,843,804

 
19,037

 
4.19

 
1,704,035

 
17,339

 
4.13

Home Equity
342,078

 
4,143

 
4.91

 
287,335

 
3,245

 
4.58

Other
1,458

 
27

 
7.51

 
1,248

 
18

 
5.85

Allowance for loan loss net of deferred loan fees
(10,285
)
 

 

 
(12,123
)
 

 

Loans Receivable, net
4,950,007

 
56,598

 
4.64

 
3,811,136

 
41,742

 
4.44

Total interest-earning assets
6,107,017

 
62,837

 
4.17

 
4,729,013

 
46,014

 
3.95

Non-interest-earning assets
735,676

 
 
 
 
 
482,058

 
 
 
 
Total assets
$
6,842,693

 
 
 
 
 
$
5,211,071

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,263,318

 
1,758

 
0.32
%
 
$
1,668,545

 
876

 
0.21
%
Money market
525,933

 
550

 
0.42

 
445,186

 
311

 
0.28

Savings
825,044

 
195

 
0.10

 
674,721

 
130

 
0.08

Time deposits
820,834

 
1,961

 
0.97

 
640,269

 
1,464

 
0.93

Total
4,435,129

 
4,464

 
0.41

 
3,428,721

 
2,781

 
0.33

Securities sold under agreements to repurchase
78,931

 
40

 
0.21

 
76,351

 
27

 
0.14

FHLB Advances
322,120

 
1,513

 
1.90

 
250,339

 
1,070

 
1.73

Other borrowings
80,112

 
1,109

 
5.61

 
56,392

 
653

 
4.70

Total interest-bearing liabilities
4,916,292

 
7,126

 
0.59

 
3,811,803

 
4,531

 
0.48

Non-interest-bearing deposits
1,004,673

 
 
 
 
 
791,036

 
 
 
 
Non-interest-bearing liabilities
55,031

 
 
 
 
 
29,399

 
 
 
 
Total liabilities
5,975,996

 
 
 
 
 
4,632,238

 
 
 
 
Stockholders’ equity
866,697

 
 
 
 
 
578,833

 
 
 
 
Total liabilities and equity
$
6,842,693

 
 
 
 
 
$
5,211,071

 
 
 
 
Net interest income
 
 
$
55,711

 
 
 
 
 
$
41,483

 
 
Net interest rate spread (3)
 
 
 
 
3.58
%
 
 
 
 
 
3.47
%
Net interest margin (4)
 
 
 
 
3.70
%
 
 
 
 
 
3.56
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.33
%
 
 
 
 
 
0.27
%
 
(1)
Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost.
(2)
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loss allowances and includes loans held for sale and non-performing loans.
(3)
Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.

5


Comparison of Financial Condition at March 31, 2018 and December 31, 2017

Total assets increased by $2.079 billion, to $7.495 billion at March 31, 2018, from $5.416 billion at December 31, 2017, primarily as a result of the acquisition of Sun, which added $2.045 billion to total assets. Loans receivable, net, increased by $1.448 billion, to $5.414 billion at March 31, 2018 from $3.966 billion at December 31, 2017, due to acquired loans of $1.518 billion from the acquisition of Sun. As part of the acquisition of Sun, the Company’s goodwill balance increased to $337.5 million at March 31, 2018, from $150.5 million at December 31, 2017, and the core deposit intangible increased to $20.0 million, from $8.9 million at December 31, 2017.

Deposits increased by $1.565 billion, to $5.907 billion at March 31, 2018, from $4.343 billion at December 31, 2017, due to acquired deposits of $1.616 billion. The loan-to-deposit ratio at March 31, 2018 was 91.7%, as compared to 91.3% at December 31, 2017.

Stockholders’ equity increased to $1.007 billion at March 31, 2018, as compared to $601.9 million at December 31, 2017. The acquisition of Sun added $402.6 million to stockholders’ equity. At March 31, 2018, there were 1.8 million shares available for repurchase under the Company’s stock repurchase programs. For the quarter ended March 31, 2018, the Company did not repurchase any shares under these repurchase programs. Tangible stockholders’ equity per common share decreased to $13.51 at March 31, 2018, as compared to $13.58 at December 31, 2017.
Comparison of Operating Results for the Quarter Ended March 31, 2018 and March 31, 2017
General
On January 31, 2018, the Company completed its acquisition of Sun and its results of operations from February 1, 2018 to March 31, 2018 are included in the consolidated results for the quarter ended March 31, 2018, but are not included in the results of operations for the corresponding prior year periods.    

Net income for the quarter ended March 31, 2018, was $5.4 million, or $0.12 per diluted share, as compared to $12.0 million, or $0.36 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2018, included merger related and branch consolidation expenses which decreased net income, net of tax benefit, by $14.6 million. Net income for the quarter ended March 31, 2017 included merger related and branch consolidation expenses, and an accelerated stock award expense from a director retirement, of $1.1 million, net of tax benefit. Excluding these items, net income for the quarter ended March 31, 2018 increased over the same prior year period, primarily due to the acquisition of Sun and the successful integration during 2017 of Ocean Shore which was acquired on November 30, 2016.

Interest Income
Interest income for the quarter ended March 31, 2018 increased to $62.8 million, as compared to $46.0 million in the corresponding prior year period. Average interest-earning assets increased by $1.378 billion for the quarter ended March 31, 2018, as compared to the same prior year period. The average for the quarter ended March 31, 2018, was favorably impacted by $1.174 billion of interest-earning assets acquired from Sun. Average loans receivable, net, increased by $1.139 billion for the quarter ended March 31, 2018, as compared to the same prior year period. The increase attributable to the acquisition of Sun was $989.5 million. The yield on average interest-earning assets increased to 4.17% for the quarter ended March 31, 2018, from 3.95% in the same prior year period. The yields on average interest-earning assets benefited from the accretion of purchase accounting adjustments on the Sun acquisition of $2.3 million, representing 15 basis points, and, to a lesser extent, higher-yielding interest-earning assets acquired from Sun and the impact of Federal Reserve rate increases.
Interest Expense
Interest expense for the quarter ended March 31, 2018 was $7.1 million, as compared to $4.5 million in the corresponding prior year period. Average interest-bearing liabilities increased $1.104 billion for the quarter ended March 31, 2018, as compared to the same prior year period. For the quarter ended March 31, 2018, the cost of average interest-bearing liabilities increased to 0.59% from 0.48% in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.33% for the quarter ended March 31, 2018, as compared to 0.27% for the quarter ended March 31, 2017.
Net Interest Income

Net interest income for the quarter ended March 31, 2018, increased to $55.7 million, as compared to $41.5 million for the same prior year period, reflecting an increase in interest-earning assets and a higher net interest margin. The net interest margin for the quarter ended March 31, 2018 increased to 3.70%, from 3.56%, for the same prior year period.

6


Provision for Loan Losses
For the quarter ended March 31, 2018, the provision for loan losses was $1.4 million, as compared to $700,000 for the corresponding prior year period. Net loan charge-offs were $275,000 for the quarter ended March 31, 2018, as compared to net loan recoveries of $268,000 in the corresponding prior year period. Non-performing loans totaled $18.3 million at March 31, 2018, as compared to $20.9 million at December 31, 2017. The decrease in non-performing loans from the prior linked quarter was primarily due to the sale of one commercial loan relationship.
Other Income
For the quarter ended March 31, 2018, other income increased to $8.9 million as compared to $6.0 million for the corresponding prior year period. The increase was partly due to the impact of the Sun acquisition, which added $1.4 million to other income for the quarter ended March 31, 2018, as compared to the same prior year period. Excluding the Sun acquisition, the remaining increase in other income for the quarter ended March 31, 2018, was primarily due to the gain on sale of loans of $613,000, mostly related to the sale of one non-performing commercial loan relationship, rental income of $460,000 received for January and February 2018 on the Company’s recently acquired administrative office building (the building was occupied by the former owner through February 2018), and the decrease in the net loss from other real estate operations of $321,000, as compared to the same prior year period.
Operating Expenses
Operating expenses increased to $56.8 million for the quarter ended March 31, 2018, as compared to $31.0 million in the same prior year period. Operating expenses for the quarter ended March 31, 2018, included $18.3 million of merger related and branch consolidation expenses, as compared to $1.5 million in the same prior year period. Excluding the impact of merger and branch consolidation expenses, the increase in operating expenses over the prior year was primarily due to the Sun acquisition, which added $8.0 million for the quarter ended March 31, 2018. Excluding the Sun acquisition, the remaining increase in operating expenses over the prior year period was primarily due to increases in compensation and employee benefits expense as a result of higher incentive plan expense, and occupancy expense, partly due to the cost of snow removal.
Provision for Income Taxes
The provision for income taxes was $1.0 million for the quarter ended March 31, 2018, as compared to $3.8 million for the same prior year period. The effective tax rate was 15.6% for the quarter ended March 31, 2018, as compared to 24.0% for the same prior year period. The lower effective tax rate for the quarter ended March 31, 2018 resulted from the Tax Cuts and Jobs Act (“Tax Reform”) enacted during the fourth quarter of 2017 and the larger impact of tax-exempt income on the lower income before taxes.

Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (FHLB) advances and other borrowings and, to a lesser extent, investment maturities and proceeds from the sale of loans. While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are 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 March 31, 2018, the Company had no outstanding overnight borrowings from the FHLB, compared to $30.0 million of outstanding overnight borrowings at December 31, 2017. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB advances, including overnight borrowings totaled $341.6 million and $288.7 million, respectively, at March 31, 2018 and December 31, 2017.
The Company’s cash needs for the three months ended March 31, 2018 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of investment securities, deposit growth, and increased borrowings. The cash was principally utilized for loan originations, the purchase of loans receivable and the purchase of securities. The Company’s cash needs for the three months ended March 31, 2017 were primarily satisfied by principal payments on loans and mortgage-backed securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable and the purchase of securities.

7


In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At March 31, 2018, outstanding undrawn lines of credit totaled $807.3 million and outstanding commitments to originate loans totaled $156.8 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $555.4 million at March 31, 2018. Based upon historical experience, management estimates that a significant portion of such time deposits will remain with the Company.
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.
Under the Company’s common stock repurchase programs, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held in treasury for general corporate purposes. For the three months ended March 31, 2018 and 2017, the Company did not repurchase any shares of common stock. At March 31, 2018, there were 1,754,804 shares available to be repurchased under the stock repurchase programs authorized in July of 2014 and April of 2017.
Cash dividends on common stock declared and paid during the first three months of 2018 were $7.1 million, as compared to $4.8 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the acquisition of Sun. On April 26, 2018, the Company’s Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15) per common share. The dividend is payable on May 18, 2018 to stockholders of record at the close of business on May 7, 2018.
The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank N.A., are capital distributions from the bank subsidiary and the issuance of preferred and common stock and debt. For the three months ended March 31, 2018, the Company received a dividend payment of $8.0 million from the Bank. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At March 31, 2018, OceanFirst Financial Corp. held $37.0 million in cash.
As of March 31, 2018 and December 31, 2017, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (in thousands):
 
 
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
As of March 31, 2018
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
712,729

 
10.98
%
(1) 
$
259,558

 
4.000
%
 
$
324,448

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
712,729

 
13.50

 
336,627

 
6.375

(2) 
343,228

 
6.50

Tier 1 capital (to risk-weighted assets)
 
712,729

 
13.50

 
415,833

 
7.875

(2) 
422,434

 
8.00

Total capital (to risk-weighted assets)
 
730,553

 
13.84

 
521,442

 
9.875

(2) 
528,042

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
716,099

 
11.03
%
(1) 
$
259,627

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
658,387

 
12.47

 
336,627

 
6.375

(2) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
716,099

 
13.56

 
415,833

 
7.875

(2) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
768,923

 
14.56

 
521,442

 
9.875

(2) 
N/A

 
N/A


8


 
 
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
As of December 31, 2017
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
459,031

 
8.75
%
 
$
209,760

 
4.000
%
 
$
262,200

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
459,031

 
12.41

 
212,705

 
5.750

(3) 
240,450

 
6.50

Tier 1 capital (to risk-weighted assets)
 
459,031

 
12.41

 
268,194

 
7.250

(3) 
295,938

 
8.00

Total capital (to risk-weighted assets)
 
475,379

 
12.85

 
342,178

 
9.250

(3) 
369,923

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
465,554

 
8.87
%
 
$
209,943

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
449,991

 
12.15

 
212,907

 
5.750

(3) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
465,554

 
12.57

 
268,448

 
7.250

(3) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
516,902

 
13.96

 
342,502

 
9.250

(3) 
N/A

 
N/A

(1)
Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The March 31, 2018 Tier 1 capital ratios for the Bank and the Company based on total assets as of the end of the period are 9.98% and 10.03%, respectively.
(2)
Includes the Capital Conservation Buffer of 1.875%.
(3)
Includes the Capital Conservation Buffer of 1.25%.
The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At March 31, 2018, the Company maintained tangible common equity of $650.0 million, for a tangible common equity to assets ratio of 9.11%. At December 31, 2017, the Company maintained tangible common equity of $442.6 million, for a tangible common equity to assets ratio of 8.42%.

9


Off-Balance-Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. 
The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At March 31, 2018 and December 31, 2017, the reserve for repurchased loans and loss sharing obligations amounted to $1.5 million and $463,000, respectively.
The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2018 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
523,468

 
$
157,106

 
$
192,576

 
$
74,914

 
$
98,872

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
431,108

 
431,108

 

 

 

Consumer/Construction
376,221

 
376,221

 

 

 

Commitments to Originate Loans
156,833

 
156,833

 

 

 

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

10


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, 2018
 
December 31, 2017
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
1,717

 
$
503

Commercial real estate – owner occupied
862

 
5,962

Commercial real estate – investor
7,994

 
8,281

Residential mortgage
5,686

 
4,190

Home equity loans and lines
1,992

 
1,929

Total non-performing loans
18,251

 
20,865

Other real estate owned
8,265

 
8,186

Total non-performing assets
$
26,516

 
$
29,051

Purchased credit impaired loans (“PCI”)
$
14,352

 
$
1,712

Delinquent loans 30-89 days (1)
$
35,431

 
$
20,796

Allowance for loan losses as a percent of total loans receivable (2)
0.31
%
 
0.40
%
Allowance for loan losses as a percent of total non-performing loans (2)
92.14

 
75.35

Non-performing loans as a percent of total loans receivable
0.34

 
0.52

Non-performing assets as a percent of total assets
0.35

 
0.54

(1)
One commercial loan relationship, for $15.0 million, was in the process of renewal at March 31, 2018. Subsequent to quarter-end, the renewal process was completed and the loan returned to current status.
(2)
The loans acquired from Sun, Ocean Shore, Cape, and Colonial American Bank were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan losses, was $40,717 and $17,531 at March 31, 2018 and December 31, 2017, respectively.

The Company’s non-performing loans totaled $18.3 million at March 31, 2018, as compared to $20.9 million at December 31, 2017. Included in the non-performing loans total was $4.3 million and $8.8 million of troubled debt restructured (“TDR”) loans at March 31, 2018 and December 31, 2017, respectively. The decrease in non-performing loans was primarily due to the sale of one commercial loan relationship. Non-performing loans do not include $14.4 million of PCI loans acquired in the Acquisition Transactions and the Colonial American Bank (“Colonial American”) acquisition. At March 31, 2018, the allowance for loan losses totaled $16.8 million, or 0.31% of total loans, as compared to $15.7 million, or 0.40% of total loans at December 31, 2017. These ratios exclude existing fair value credit marks on acquired loans of $40.7 million and $17.5 million, respectively, at March 31, 2018 and December 31, 2017. These loans were acquired at fair value with no related allowances for loan losses. Other real estate owned includes $6.5 million relating to the hotel, golf and banquet facility located in New Jersey which the Company acquired in the fourth quarter of 2015.

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Special Mention
$
28,080

 
$
25,489

Substandard
54,220

 
60,661


11


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, 2017 (the “2017 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for loan losses and judgments regarding securities are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.
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 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 future 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, changes in interest rates, general economic conditions, 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, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, 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 and accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and 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. Further description of the risks and uncertainties to the business are included in Item 1, Business, and Item 1A, Risk Factors, of the Company’s 2017 Form 10-K.


12


Item 3.    Quantitative and Qualitative Disclosures About Market Risk
The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2018, 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, 2018, the Company’s one-year gap was positive 6.05% as compared to positive 4.62% at December 31, 2017. These results were within the approved policy guidelines.
 
At March 31, 2018
3 Months
or Less
 
More than
3 Months to
1 Year
 
More than
1 Year to
3 Years
 
More than
3 Years to
5 Years
 
More than
5 Years
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
68,034

 
$
3,189

 
$
495

 
$

 
$

 
$
71,718

Debt investment securities
66,377

 
56,691

 
101,250

 
48,763

 
62,572

 
335,653

Debt mortgage-backed securities
73,316

 
89,788

 
186,973

 
159,357

 
232,873

 
742,307

Equity investments

 

 

 

 
9,565

 
9,565

Restricted equity investments

 

 

 

 
50,418

 
50,418

Loans receivable (2)
1,130,410

 
902,975

 
1,527,484

 
904,644

 
959,499

 
5,425,012

Total interest-earning assets
1,338,137

 
1,052,643

 
1,816,202

 
1,112,764

 
1,314,927

 
6,634,673

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking accounts
773,268

 
206,119

 
346,074

 
219,177

 
786,044

 
2,330,682

Money market deposit accounts
105,522

 
83,477

 
108,493

 
74,554

 
241,137

 
613,183

Savings accounts
72,190

 
128,049

 
184,390

 
125,718

 
406,941

 
917,288

Time deposits
124,624

 
279,502

 
284,390

 
173,592

 
66,975

 
929,083

FHLB advances
40,000

 
34,618

 
192,429

 
74,599

 

 
341,646

Securities sold under agreements to repurchase and other borrowings
141,992

 

 

 
39,830

 

 
181,822

Total interest-bearing liabilities
1,257,596

 
731,765

 
1,115,776

 
707,470

 
1,501,097

 
5,313,704

Interest sensitivity gap (3)
$
80,541

 
$
320,878

 
$
700,426

 
$
405,294

 
$
(186,170
)
 
$
1,320,969

Cumulative interest sensitivity gap
$
80,541

 
$
401,419

 
$
1,101,845

 
$
1,507,139

 
$
1,320,969

 
$
1,320,969

Cumulative interest sensitivity gap as a percent of total interest-earning assets
1.21
%
 
6.05
%
 
16.61
%
 
22.72
%
 
19.91
%
 
19.91
%
 
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2)
For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3)
Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

13


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, 2018 and December 31, 2017. 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 2017 Form 10-K.
 
 
March 31, 2018
 
December 31, 2017
Change in Interest Rates in Basis Points (Rate Shock)
Economic Value of Equity
 
Net Interest Income
 
Economic Value of Equity
 
Net Interest Income
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
 
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
300
$
1,115,918

 
(2.0
)%
 
16.7
%
 
$
238,677

 
(0.5
)%
 
$
844,117

 
5.0
 %
 
16.8
%
 
$
169,653

 
(2.3
)%
200
1,142,360

 
0.3

 
16.6

 
239,922

 

 
850,511

 
5.8

 
16.5

 
171,758

 
(1.1
)
100
1,151,572

 
1.1

 
16.3

 
240,389

 
0.2

 
838,066

 
4.3

 
15.9

 
173,119

 
(0.3
)
Static
1,139,129

 

 
15.8

 
239,922

 

 
803,722

 

 
14.9

 
173,590

 

(100)
1,098,821

 
(3.5
)
 
14.9

 
236,396

 
(1.5
)
 
737,232

 
(8.3
)
 
13.3

 
170,383

 
(1.8
)
The change in interest rate sensitivity at March 31, 2018, as compared to December 31, 2017, is primarily due to the addition of Sun.

Item 4.    Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


14



OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
119,364

 
$
109,613

Debt securities available-for-sale, at estimated fair value
86,114

 
81,581

Debt securities held-to-maturity, net (estimated fair value of $971,399 at March 31, 2018 and $761,660 at December 31, 2017)
982,857

 
764,062

Equity investments, at estimated fair value
9,565

 
8,700

Restricted equity investments, at cost
50,418

 
19,724

Loans receivable, net
5,413,780

 
3,965,773

Loans held-for-sale
167

 
241

Interest and dividends receivable
19,422

 
14,254

Other real estate owned
8,265

 
8,186

Premises and equipment, net
121,835

 
101,776

Bank Owned Life Insurance
218,673

 
134,847

Deferred tax asset
60,136

 
1,922

Assets held for sale
3,147

 
4,046

Other assets
43,687

 
41,895

Core deposit intangible
19,950

 
8,885

Goodwill
337,519

 
150,501

Total assets
$
7,494,899

 
$
5,416,006

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
5,907,336

 
$
4,342,798

Federal Home Loan Bank advances
341,646

 
288,691

Securities sold under agreements to repurchase with retail customers
82,463

 
79,668

Other borrowings
99,359

 
56,519

Advances by borrowers for taxes and insurance
11,974

 
11,156

Other liabilities
44,661

 
35,233

Total liabilities
6,487,439

 
4,814,065

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

 

Common stock, $.01 par value, 55,000,000 shares authorized, 48,105,623 shares issued and 48,105,623 and 32,596,893 shares outstanding at March 31, 2018 and December 31, 2017, respectively
481

 
336

Additional paid-in capital
745,480

 
354,377

Retained earnings
268,994

 
271,023

Accumulated other comprehensive loss
(5,306
)
 
(5,349
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(2,189
)
 
(2,479
)
  Treasury stock, 0 and 969,879 shares at March 31, 2018 and December 31, 2017, respectively

 
(15,967
)
Common stock acquired by Deferred Compensation Plan
(84
)
 
(84
)
Deferred Compensation Plan Liability
84

 
84

Total stockholders’ equity
1,007,460

 
601,941

Total liabilities and stockholders’ equity
$
7,494,899

 
$
5,416,006


See accompanying Notes to Unaudited Consolidated Financial Statements.

15


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(Unaudited)
Interest income:
 
 
 
Loans
$
56,598

 
$
41,742

Mortgage-backed securities
3,685

 
2,660

Debt securities, equity investments and other
2,554

 
1,612

Total interest income
62,837

 
46,014

Interest expense:
 
 
 
Deposits
4,464

 
2,781

Borrowed funds
2,662

 
1,750

Total interest expense
7,126

 
4,531

Net interest income
55,711

 
41,483

Provision for loan losses
1,371

 
700

Net interest income after provision for loan losses
54,340

 
40,783

Other income:
 
 
 
Bankcard services revenue
1,919

 
1,579

Wealth management revenue
553

 
516

Fees and service charges
4,674

 
3,807

Net gain on sales of loans
617

 
42

Net unrealized loss on equity investments
(138
)
 

Net loss from other real estate operations
(412
)
 
(733
)
Income from Bank Owned Life Insurance
1,141

 
772

Other
556

 
12

Total other income
8,910

 
5,995

Operating expenses:
 
 
 
Compensation and employee benefits
21,251

 
16,138

Occupancy
4,567

 
2,767

Equipment
1,903

 
1,698

Marketing
561

 
740

Federal deposit insurance
930

 
661

Data processing
3,176

 
2,396

Check card processing
989

 
953

Professional fees
1,283

 
960

Other operating expense
3,016

 
2,644

Amortization of core deposit intangible
832

 
524

Branch consolidation (income) expense
(176
)
 
33

Merger related expenses
18,486

 
1,447

Total operating expenses
56,818

 
30,961

Income before provision for income taxes
6,432

 
15,817

Provision for income taxes
1,005

 
3,799

Net income
$
5,427

 
$
12,018

Basic earnings per share
$
0.12

 
$
0.38

Diluted earnings per share
$
0.12

 
$
0.36

Average basic shares outstanding
43,880

 
31,901

Average diluted shares outstanding
44,846

 
33,090


See accompanying Notes to Unaudited Consolidated Financial Statements.

16


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(Unaudited)
Net income
$
5,427

 
$
12,018

Other comprehensive income:
 
 
 
Unrealized (loss) gain on debt securities (net of tax benefit of $85 and tax expense of $43 in 2018 and 2017, respectively)
(321
)
 
62

Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $57 and $116 in 2018 and 2017, respectively)
216

 
168

Reclassification adjustment for gains included in net income (net of tax expense of $1 in 2018)
1

 

Total comprehensive income
$
5,323

 
$
12,248

See accompanying Notes to Unaudited Consolidated Financial Statements.

17


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, 2018 and 2017
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Employee
Stock
Ownership
Plan
 
Treasury
Stock
 
Common
Stock
Acquired by
Deferred
Compensation
Plan
 
Deferred
Compensation
Plan Liability
 
Total
Balance at December 31, 2016
$

 
$
336

 
$
364,433

 
$
238,192

 
$
(5,749
)
 
$
(2,761
)
 
$
(22,548
)
 
$
(313
)
 
$
313

 
$
571,903

Net income

 

 

 
12,018

 

 

 

 

 

 
12,018

Other comprehensive income, net of tax

 

 

 

 
230

 

 

 

 

 
230

Stock awards

 

 
730

 

 

 

 

 

 

 
730

Effect of adopting Accounting Standards Update ("ASU") No. 2016-09

 

 
(11,129
)
 
11,129

 

 

 

 

 

 

Treasury stock allocated to restricted stock plan

 

 
(1,892
)
 
892

 

 

 
1,000

 

 

 

Allocation of ESOP stock

 

 
174

 

 

 
71

 

 

 

 
245

Cash dividend $0.15 per share

 

 

 
(4,787
)
 

 

 

 

 

 
(4,787
)
Exercise of stock options

 

 

 
(1,399
)
 

 

 
3,603

 

 

 
2,204

Sale of stock for the deferred compensation plan

 

 

 

 

 

 

 
(3
)
 
3

 

Balance at March 31, 2017
$

 
$
336

 
$
352,316

 
$
256,045

 
$
(5,519
)
 
$
(2,690
)
 
$
(17,945
)
 
$
(316
)
 
$
316

 
$
582,543

Balance at December 31, 2017
$

 
$
336

 
$
354,377

 
$
271,023

 
$
(5,349
)
 
$
(2,479
)
 
$
(15,967
)
 
$
(84
)
 
$
84

 
$
601,941

Net income

 

 

 
5,427

 

 

 

 

 

 
5,427

Other comprehensive income, net of tax

 

 

 

 
(104
)
 

 

 

 

 
(104
)
Stock awards

 
2

 
806

 

 

 

 

 

 

 
808

Effect of adopting Accounting Standards Update ("ASU") No. 2016-01

 

 

 
(147
)
 
147

 

 

 

 

 

Allocation of ESOP stock

 

 
193

 

 

 
290

 

 

 

 
483

Cash dividend $0.15 per share

 

 

 
(7,105
)
 

 

 

 

 

 
(7,105
)
Exercise of stock options

 
2

 
3,456

 
(204
)
 

 

 
202

 

 

 
3,456

Acquisition of Sun Bancorp Inc.

 
141

 
386,648

 

 

 

 
15,765

 

 

 
402,554

Balance at March 31, 2018
$

 
$
481

 
$
745,480

 
$
268,994

 
$
(5,306
)
 
$
(2,189
)
 
$

 
$
(84
)
 
$
84

 
$
1,007,460

See accompanying Notes to Unaudited Consolidated Financial Statements.

18


OceanFirst Financial Corp.
Consolidated Statements of Cash Flows
(dollars in thousands)
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
5,427

 
$
12,018

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of premises and equipment
2,267

 
1,527

Allocation of ESOP stock
483

 
245

Stock awards
808

 
730

Net excess tax benefit on stock compensation
(125
)
 
(3,916
)
Amortization of servicing asset
57

 
25

Net premium amortization in excess of discount accretion on securities
1,101

 
468

Net amortization of deferred costs and discounts on borrowings
65

 
32

Amortization of core deposit intangible
832

 
524

Net accretion of purchase accounting adjustments
(3,865
)
 
(2,169
)
Net amortization of deferred costs and discounts on loans
31

 
30

Provision for loan losses
1,371

 
700

Net loss on sale of other real estate owned
56

 
366

Write down of fixed assets held for sale to net realizable value
4

 

Net (gain) loss on sale of fixed assets
(27
)
 
7

Net unrealized loss on equity securities
138

 

Net gain on sales of loans
(617
)
 
(42
)
Proceeds from sales of mortgage loans held for sale
247

 
1,949

Mortgage loans originated for sale
(170
)
 
(639
)
Increase in value of Bank Owned Life Insurance
(1,141
)
 
(772
)
Decrease (increase) in interest and dividends receivable
453

 
(269
)
Decrease in other assets
3,758

 
2,691

Decrease in other liabilities
(3,454
)
 
(1,552
)
Total adjustments
2,272

 
(65
)
Net cash provided by operating activities
7,699

 
11,953

Cash flows from investing activities:
 
 
 
Net decrease (increase) in loans receivable
67,880

 
(16,292
)
Proceeds from sale of under performing loans
4,294

 

Purchase of loans receivable

 
(5,029
)
Purchase of debt securities available-for-sale
(980
)
 
(34,770
)
Purchase of debt investment securities held-to-maturity
(2,667
)
 
(42,497
)
Purchase of equity investments
(42
)
 

Purchase of mortgage-backed debt securities held-to-maturity

 
(79,984
)
Proceeds from maturities and calls of investment debt securities held-to-maturity
3,715

 
1,375

Proceeds from sales of debt securities available-for-sale
1,137

 

Principal repayments on mortgage-backed debt securities held-to-maturity
25,797

 
23,696

Principal repayments on investment debt securities held-to-maturity
1,835

 

Proceeds from Bank Owned Life Insurance
2,553

 
155

Proceeds from the redemption of restricted equity investments
23,092

 
60

Purchases of restricted equity investments
(36,968
)
 

Proceeds from sales of other real estate owned
238

 
868

Purchases of premises and equipment
(1,926
)
 
(961
)
Cash consideration paid for acquisition, net of cash received
(3,743
)
 

Net cash provided by (used in) investing activities
84,215

 
(153,379
)


19


Continued
OceanFirst Financial Corp.
Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(Unaudited)
Cash flows from financing activities:
 
 
 
(Decrease) increase in deposits
$
(51,139
)
 
$
11,204

(Decrease) increase in short-term borrowings
(27,205
)
 
7,271

Repayments of Federal Home Loan Bank advances
(521
)
 
(477
)
Increase in advances by borrowers for taxes and insurance
818

 
846

Exercise of stock options
3,456

 
2,204

Payment of employee taxes withheld from stock awards
(467
)
 
(956
)
Dividends paid
(7,105
)
 
(4,787
)
Net cash (used in) provided by financing activities
(82,163
)
 
15,305

Net increase (decrease) in cash and due from banks
9,751

 
(126,121
)
Cash and due from banks at beginning of period
109,613

 
301,373

Cash and due from banks at end of period
$
119,364

 
$
175,252

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
6,920

 
$
5,266

Income taxes

 
2

Non-cash activities:
 
 
 
Accretion of unrealized loss on securities reclassified to held-to-maturity
273

 
293

Net loan charge-offs
(275
)
 
268

Transfer of loans receivable to other real estate owned
373

 
318

Acquisition:
 
 
 
Non-cash assets acquired:
 
 
 
Securities
$
254,522

 
$

Restricted equity investments
16,967

 

Loans
1,517,947

 

Premises and equipment
20,301

 

Accrued interest receivable
5,621

 

Bank Owned Life Insurance
85,238

 

Deferred tax asset
58,352

 

Other assets
5,262

 

Goodwill and other intangible assets, net
198,915

 

Total non-cash assets acquired
$
2,163,125

 
$

Liabilities assumed:
 
 
 
Deposits
$
1,616,073

 
$

Borrowings
127,747

 

Other liabilities
13,007

 

Total liabilities assumed
$
1,756,827

 
$


See accompanying Notes to Unaudited Consolidated Financial Statements.

20

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements



Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., and its wholly-owned subsidiary OceanFirst Management Corp., and its wholly-owned subsidiary OceanFirst Realty Corp., OceanFirst Services, LLC and its wholly-owned subsidiary OFB Reinsurance, Ltd., 975 Holdings, LLC, Hooper Holdings, LLC., TRREO Holdings LLC, Casaba Real Estate Holdings Corporation, Cohensey Bridge, L.L.C., and Prosperis Financial, LLC. 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, 2018 are not necessarily indicative of the results of operations that may be expected for all of 2018. 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, 2017.
Note 2. Business Combinations
On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”), which after purchase accounting adjustments added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. Total consideration paid for Sun was $474.9 million, including cash consideration of $72.4 million. Sun 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.

21

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


The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Sun, net of total consideration paid (in thousands):
 
At January 31, 2018
 
Sun Book Value
 
Purchase
Accounting
Adjustments
 
Estimated
Fair  Value
Total Purchase Price:
 
 
 
 
$
474,930

Assets acquired:
 
 
 
 
 
Cash and cash equivalents
$
68,632

 
$

 
$
68,632

Securities
254,522

 

 
254,522

Loans
1,541,868

 
(23,921
)
 
1,517,947

Accrued interest receivable
5,621

 

 
5,621

Bank Owned Life Insurance
85,238

 

 
85,238

Deferred tax asset
55,710

 
2,642

 
58,352

Other assets
49,561

 
(7,031
)
 
42,530

Core deposit intangible

 
11,897

 
11,897

Total assets acquired
2,061,152

 
(16,413
)
 
2,044,739

Liabilities assumed:
 
 
 
 
 
Deposits
(1,614,910
)
 
(1,163
)
 
(1,616,073
)
Borrowings
(142,567
)
 
14,820

 
(127,747
)
Other liabilities
(14,372
)
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