0001004702-18-000144.txt : 20181108 0001004702-18-000144.hdr.sgml : 20181108 20181108164220 ACCESSION NUMBER: 0001004702-18-000144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181108 DATE AS OF CHANGE: 20181108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCEANFIRST FINANCIAL CORP CENTRAL INDEX KEY: 0001004702 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 223412577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11713 FILM NUMBER: 181170250 BUSINESS ADDRESS: STREET 1: 975 HOOPER AVE CITY: TOMS RIVER STATE: NJ ZIP: 08753-8396 BUSINESS PHONE: 7322404500 MAIL ADDRESS: STREET 1: 975 HOOPER AVENUE CITY: TOMS RIVER STATE: NJ ZIP: 08723 FORMER COMPANY: FORMER CONFORMED NAME: OCEAN FINANCIAL CORP DATE OF NAME CHANGE: 19951208 10-Q 1 ocfc-93018x10q.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 September 30, 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 November 5, 2018 there were 48,400,470 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)
September 30, 2018
 
June 30, 2018
 
September 30, 2017
SELECTED FINANCIAL CONDITION DATA(1):
 
 
 
 
 
Total assets
$
7,562,589

 
$
7,736,903

 
$
5,383,800

Loans receivable, net
5,543,959

 
5,553,035

 
3,870,109

Deposits
5,854,250

 
5,819,406

 
4,350,259

Stockholders’ equity
1,029,844

 
1,012,568

 
596,140

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
61,504

 
61,447

 
43,056

Provision for loan losses
907

 
706

 
1,165

Other income
8,285

 
8,883

 
7,359

Operating expenses
39,533

 
50,904

 
30,733

Net income
24,071

 
15,702

 
12,817

Diluted earnings per share
0.50

 
0.32

 
0.39

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share at end of period
21.29

 
20.97

 
18.30

Tangible stockholders’ equity per common share (2)
13.93

 
13.56

 
13.47

Cash dividend per share
0.15

 
0.15

 
0.15

Stockholders’ equity to total assets
13.62
%
 
13.09
%
 
11.07
%
Tangible stockholders’ equity to total tangible assets (2)
9.35

 
8.87

 
8.39

Return on average assets (3) (4)
1.26

 
0.84

 
0.95

Return on average stockholders’ equity (3) (4)
9.36

 
6.23

 
8.60

Return on average tangible stockholders’ equity  (2) (3) (4)
14.39

 
9.64

 
11.74

Net interest rate spread
3.48

 
3.57

 
3.41

Net interest margin
3.64

 
3.70

 
3.50

Operating expenses to average assets (3) (4)
2.07

 
2.71

 
2.29

Efficiency ratio (4) (5)
56.65

 
72.38

 
60.96

Loan to deposit ratio
94.70

 
95.42

 
88.96

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
19,239

 
$
18,106

 
$
15,121

Non-performing assets
25,470

 
25,960

 
24,455

Allowance for loan losses as a percent of total loans receivable
0.30
%
 
0.30
%
 
0.42
%
Allowance for loan losses as a percent of total non-performing loans
87.43

 
92.18

 
109.68

Non-performing loans as a percent of total loans receivable
0.35

 
0.33

 
0.39

Non-performing assets as a percent of total assets
0.34

 
0.34

 
0.45

 
(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 $2.0 million, or $1.6 million, net of tax benefit, for the quarter ended September 30, 2018; and $8.4 million, or $6.7 million, net of tax benefit, for the quarter ended June 30, 2018; and $3.2 million, or $2.1 million, net of tax benefit, for the quarter ended September 30, 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 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., 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.

Over the past two years the Company has grown significantly through the acquisitions of Ocean Shore Holding Co. (“Ocean Shore”), and Sun Bancorp. Inc. (“Sun”). These acquisitions added $3.0 billion in assets and $2.5 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 September 30, 2018 were as follows:
Return on average assets for the three months ended September 30, 2018 of 1.26% and return on average tangible stockholders’ equity of 14.39%.

On October 25, 2018, the Company announced the planned acquisition of Capital Bank of New Jersey (“Capital Bank”). Capital Bank is an in-market opportunity that provides an excellent funding base with a 0.46% average cost of deposits and a 70.0% loan-to-deposit ratio.

Net income for the three months ended September 30, 2018, was $24.1 million, or $0.50 per diluted share, as compared to $12.8 million, or $0.39 per diluted share, for the corresponding prior year period. Net income for the nine months ended September 30, 2018, was $45.2 million, or $0.95 per diluted share, as compared to $32.5 million, or $0.98 per diluted share, for the corresponding prior year period. Net income for the three and nine months ended September 30, 2018, included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $1.6 million and $22.9 million, respectively. Net income for the three and nine months ended September 30, 2017, included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $2.1 million and $8.6 million, respectively. Excluding these items, net income for the three and nine months ended September 30, 2018 increased over the same prior year period, primarily due to the acquisition of Sun and the expense savings from the successful integration during 2017 of Ocean Shore, which was acquired on November 30, 2016.

Net interest income for the three and nine months ended September 30, 2018, increased to $61.5 million and $178.7 million, respectively, as compared to $43.1 million and $126.7 million, respectively, for the same prior year periods, reflecting an increase in interest-earning assets and a higher net interest margin, as a result of the acquisition of Sun.

For the three months ended September 30, 2018, other income increased to $8.3 million as compared to $7.4 million for the corresponding prior year period, including an additional $2.3 million relating to Sun. Operating expenses increased to $39.5 million for the three months ended September 30, 2018 as compared to $30.7 million in the same prior year period. Operating expenses for the three months ended September 30, 2018, included $2.0 million of merger related and branch consolidation expenses, as compared to $3.2 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 $8.2 million.

The Company remains well-capitalized with a tangible common equity to tangible assets ratio of 9.35% at September 30, 2018.

The Company declared a quarterly cash dividend of $0.17 per share, an increase of $0.02 per share, or 13%. The dividend, related to the quarter ended September 30, 2018, of $0.17 per share will be paid on November 16, 2018 to stockholders of record on November 5, 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 tables set forth certain information relating to the Company for the three and nine months ended September 30, 2018 and September 30, 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
 
September 30, 2018
 
September 30, 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
$
88,706

 
$
172

 
0.77
%
 
$
183,514

 
$
438

 
0.95
%
Securities (1)
1,080,784

 
6,713

 
2.46

 
817,867

 
4,263

 
2.07

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
3,101,665

 
38,726

 
4.95

 
1,865,970

 
22,423

 
4.77

Residential
2,027,880

 
20,438

 
4.03

 
1,737,739

 
17,588

 
4.05

Home Equity
361,127

 
4,628

 
5.08

 
279,900

 
3,289

 
4.66

Other
52,764

 
705

 
5.30

 
1,112

 
29

 
10.35

Allowance for loan loss net of deferred loan fees
(9,350
)
 

 

 
(12,370
)
 

 

Loans Receivable, net
5,534,086

 
64,497

 
4.62

 
3,872,351

 
43,329

 
4.44

Total interest-earning assets
6,703,576

 
71,382

 
4.22

 
4,873,732

 
48,030

 
3.91

Non-interest-earning assets
865,054

 
 
 
 
 
460,795

 
 
 
 
Total assets
$
7,568,630

 
 
 
 
 
$
5,334,527

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,300,270

 
2,313

 
0.40
%
 
$
1,852,421

 
1,173

 
0.25
%
Money market
578,446

 
680

 
0.47

 
389,035

 
299

 
0.30

Savings
896,682

 
265

 
0.12

 
672,548

 
59

 
0.03

Time deposits
864,264

 
2,541

 
1.17

 
620,308

 
1,595

 
1.02

Total
4,639,662

 
5,799

 
0.50

 
3,534,312

 
3,126

 
0.35

FHLB Advances
475,536

 
2,542

 
2.12

 
264,652

 
1,153

 
1.73

Securities sold under agreements to repurchase
61,336

 
41

 
0.27

 
74,285

 
30

 
0.16

Other borrowings
99,438

 
1,496

 
5.97

 
56,502

 
665

 
4.67

Total interest-bearing liabilities
5,275,972

 
9,878

 
0.74

 
3,929,751

 
4,974

 
0.50

Non-interest-bearing deposits
1,210,650

 
 
 
 
 
781,047

 
 
 
 
Non-interest-bearing liabilities
61,272

 
 
 
 
 
32,360

 
 
 
 
Total liabilities
6,547,894

 
 
 
 
 
4,743,158

 
 
 
 
Stockholders’ equity
1,020,736

 
 
 
 
 
591,369

 
 
 
 
Total liabilities and equity
$
7,568,630

 
 
 
 
 
$
5,334,527

 
 
 
 
Net interest income
 
 
$
61,504

 
 
 
 
 
$
43,056

 
 
Net interest rate spread (3)
 
 
 
 
3.48
%
 
 
 
 
 
3.41
%
Net interest margin (4)
 
 
 
 
3.64
%
 
 
 
 
 
3.50
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.39
%
 
 
 
 
 
0.29
%

5


 
For the Nine Months Ended
 
September 30, 2018
 
September 30, 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
$
101,513

 
$
660

 
0.87
%
 
$
180,821

 
$
1,058

 
0.78
%
Securities (1)
1,085,725

 
19,407

 
2.39

 
769,932

 
12,186

 
2.12

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
2,995,847

 
110,920

 
4.95

 
1,849,246

 
65,619

 
4.74

Residential
1,941,594

 
59,117

 
4.06

 
1,720,185

 
52,231

 
4.05

Home Equity
357,490

 
13,335

 
4.99

 
283,419

 
9,760

 
4.60

Other
20,796

 
857

 
5.51

 
1,180

 
69

 
7.82

Allowance for loan loss net of deferred loan fees
(10,233
)
 

 

 
(12,338
)
 

 

Loans Receivable, net
5,305,494

 
184,229

 
4.64

 
3,841,692

 
127,679

 
4.44

Total interest-earning assets
6,492,732

 
204,296

 
4.21

 
4,792,445

 
140,923

 
3.93

Non-interest-earning assets
824,691

 
 
 
 
 
461,752

 
 
 
 
Total assets
$
7,317,423

 
 
 
 
 
$
5,254,197

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
2,313,012

 
6,099

 
0.35
%
 
$
1,746,601

 
3,086

 
0.24
%
Money market
567,575

 
1,924

 
0.45

 
418,681

 
891

 
0.28

Savings
876,695

 
727

 
0.11

 
675,684

 
285

 
0.06

Time deposits
862,555

 
6,760

 
1.05

 
628,126

 
4,559

 
0.97

Total
4,619,837

 
15,510

 
0.45

 
3,469,092

 
8,821

 
0.34

FHLB Advances
391,956

 
5,954

 
2.03

 
258,147

 
3,340

 
1.73

Securities sold under agreements to repurchase
68,173

 
125

 
0.25

 
74,729

 
82

 
0.15

Other borrowings
93,046

 
4,046

 
5.81

 
56,450

 
1,967

 
4.66

Total interest-bearing liabilities
5,173,012

 
25,635

 
0.66

 
3,858,418

 
14,210

 
0.49

Non-interest-bearing deposits
1,121,695

 
 
 
 
 
781,608

 
 
 
 
Non-interest-bearing liabilities
55,881

 
 
 
 
 
28,351

 
 
 
 
Total liabilities
6,350,588

 
 
 
 
 
4,668,377

 
 
 
 
Stockholders equity
966,835

 
 
 
 
 
585,820

 
 
 
 
Total liabilities and equity
$
7,317,423

 
 
 
 
 
$
5,254,197

 
 
 
 
Net interest income
 
 
$
178,661

 
 
 
 
 
$
126,713

 
 
Net interest rate spread (3)
 
 
 
 
3.55
%
 
 
 
 
 
3.44
%
Net interest margin (4)
 
 
 
 
3.68
%
 
 
 
 
 
3.54
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.36
%
 
 
 
 
 
0.28
%
(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.

6


Comparison of Financial Condition at September 30, 2018 and December 31, 2017

Total assets increased by $2.147 billion, to $7.563 billion at September 30, 2018, from $5.416 billion at December 31, 2017, primarily as a result of the acquisition of Sun, which added $2.043 billion to total assets. Restricted equity investments increased by $37.4 million, to $57.1 million at September 30, 2018, from $19.7 million at December 31, 2017, primarily due to the addition of Federal Reserve Bank stock as a result of converting to a national bank charter. Loans receivable, net, increased by $1.578 billion, to $5.544 billion at September 30, 2018, from $3.966 billion at December 31, 2017, primarily due to acquired loans of $1.517 billion as well as purchased loans totaling $146.7 million. As part of the acquisition of Sun, the Company’s goodwill balance increased to $338.1 million at September 30, 2018, from $150.5 million at December 31, 2017, and the core deposit intangible increased to $18.0 million, from $8.9 million at December 31, 2017.

Deposits increased by $1.511 billion, to $5.854 billion at September 30, 2018, from $4.343 billion at December 31, 2017, due to acquired deposits of $1.616 billion. The loan-to-deposit ratio at September 30, 2018 was 94.7%, as compared to 91.3% at December 31, 2017. Federal Home Loan Bank advances increased by $168.1 million, to $456.8 million at September 30, 2018, from $288.7 million at December 31, 2017 due to the acquisition of Sun and to fund loan growth.

Stockholders’ equity increased to $1.030 billion at September 30, 2018, as compared to $601.9 million at December 31, 2017. The acquisition of Sun added $402.6 million to stockholders’ equity. At September 30, 2018, there were 1.8 million shares available for repurchase under the Company’s stock repurchase programs. For the nine months ended September 30, 2018, the Company did not repurchase any shares under these repurchase programs. During 2018, the Company contributed an additional $8.4 million to the existing Employee Stock Ownership Plan. The purchased shares will be allocated to employees over the next nine years. Tangible stockholders’ equity per common share increased to $13.93 at September 30, 2018, as compared to $13.58 at December 31, 2017.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2018 and September 30, 2017
General
On January 31, 2018, the Company completed its acquisition of Sun and its results of operations from February 1, 2018 through September 30, 2018 are included in the consolidated results for the three and nine months ended September 30, 2018, but are not included in the results of operations for the corresponding prior year periods.

Net income for the three months ended September 30, 2018, was $24.1 million, or $0.50 per diluted share, as compared to $12.8 million, or $0.39 per diluted share, for the corresponding prior year period. Net income for the nine months ended September 30, 2018, was $45.2 million, or $0.95 per diluted share, as compared to $32.5 million, or $0.98 per diluted share, for the corresponding prior year period. Net income for the three and nine months ended September 30, 2018, included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $1.6 million and $22.9 million, respectively. Net income for the three and nine months ended September 30, 2017, included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $2.1 million and $8.6 million, respectively. Excluding these items, net income for the three and nine months ended September 30, 2018, increased over the same prior year period, primarily due to the acquisition of Sun and the expense savings from the successful integration during 2017 of Ocean Shore, which was acquired on November 30, 2016.

Interest Income
Interest income for the three and nine months ended September 30, 2018 increased to $71.4 million and $204.3 million, respectively, as compared to $48.0 million and $140.9 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased by $1.830 billion and $1.700 billion for the three and nine months ended September 30, 2018, respectively, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2018, were favorably impacted by $1.636 billion and $1.509 billion, respectively, of interest-earning assets acquired from Sun. Average loans receivable, net, increased by $1.662 billion and $1.464 billion for the three and nine months ended September 30, 2018, respectively, as compared to the same prior year periods. The increases attributable to the acquisition of Sun were $1.398 billion and $1.279 billion, respectively. For the three and nine months ended September 30, 2018, the yield on average interest-earning assets increased to 4.22% and 4.21%, respectively, from 3.91% and 3.93% in the corresponding prior periods. The yields on average interest-earning assets benefited from the accretion of purchase accounting adjustments on the Sun acquisition, and to a lesser extent, the impact of Federal Reserve rate increases.
Interest Expense
Interest expense for the three and nine months ended September 30, 2018 was $9.9 million and $25.6 million, respectively, as compared to $5.0 million and $14.2 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $1.346 billion and $1.315 billion for the three and nine months ended September 30, 2018, respectively, as compared

7


to the same prior year periods. For the three and nine months ended September 30, 2018, the cost of average interest-bearing liabilities increased to 0.74% and 0.66%, respectively, from 0.50% and 0.49%, respectively, in the corresponding prior year periods. The total cost of deposits (including non-interest bearing deposits) was 0.39% and 0.36% for the three and nine months ended September 30, 2018, respectively, as compared to 0.29% and 0.28%, respectively, in the same prior year periods.
Net Interest Income

Net interest income for the three and nine months ended September 30, 2018, increased to $61.5 million and $178.7 million, respectively, as compared to $43.1 million and $126.7 million, respectively, for the same prior year periods, reflecting an increase in interest-earning assets and a higher net interest margin. The net interest margin for the three and nine months ended September 30, 2018, increased to 3.64% and 3.68%, from 3.50% and 3.54%, respectively, for the same prior year periods. The net interest margin benefited from the accretion of purchase accounting adjustments on the Sun acquisition of $2.8 million and $8.2 million for the three and nine months ended September 30, 2018, respectively.
Provision for Loan Losses

For the three and nine months ended September 30, 2018, the provision for loan losses was $907,000 and $3.0 million, respectively, as compared to $1.2 million and $3.0 million, respectively, for the corresponding prior year periods. Net loan charge-offs were $777,000 and $1.9 million for the three and nine months ended September 30, 2018, respectively, as compared to net loan charge-offs of $1.1 million and $1.6 million, respectively, in the corresponding prior year periods. Non-performing loans totaled $19.2 million at September 30, 2018, as compared to $15.1 million at September 30, 2017.
Other Income

For the three and nine months ended September 30, 2018, other income increased to $8.3 million and $26.1 million, respectively, as compared to $7.4 million and $20.3 million, respectively, for the corresponding prior year periods. The increases were primarily due to the impact of the Sun acquisition, which added $2.3 million and $6.1 million to other income for the three and nine months ended September 30, 2018, respectively, as compared to the same prior year periods. Excluding the Sun acquisition, the decrease in other income for the three months ended September 30, 2018, was primarily due to an increase in the loss from real estate operations of $2.0 million, of which $900,000 related to a write-down attributable to a hotel, golf, and banquet facility, partially offset by increases in fees and service charges of $449,000. Excluding the Sun acquisition, the decrease in other income for the nine months ended September 30, 2018, was primarily due to an increase in the loss from real estate operations of $2.8 million, of which $1.4 million related to the year-to-date write-down on the property noted above, partially offset by increases in fees and service charges of $763,000, an increase in the gain on sales of loans of $580,000, mostly related to the sale of one non-performing commercial loan relationship during the first quarter of 2018, rental income of $491,000 received primarily for January and February 2018 on the Company’s acquired administrative office, and increased bankcard services revenue of $443,000.
Operating Expenses
Operating expenses increased to $39.5 million and $147.3 million for the three and nine months ended September 30, 2018, respectively, as compared to $30.7 million and $98.8 million, respectively, in the same prior year periods. Operating expenses for the three and nine months ended September 30, 2018, included $2.0 million and $28.8 million, respectively, of merger related and branch consolidation expenses, as compared to $3.2 million and $13.2 million, respectively, in the same prior year periods. 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 $8.2 million and $27.5 million for the three and nine months ended September 30, 2018, respectively. Excluding the Sun acquisition, the remaining increase in operating expenses for the three months ended September 30, 2018 over the prior year period was primarily due to increases in compensation and employee benefits expense of $852,000 as a result of higher incentive and stock plan expenses, occupancy expense of $402,000, equipment expense of $296,000, and marketing expenses of $208,000. Excluding the Sun acquisition, the remaining increase in operating expenses for the nine months ended September 30, 2018 over the prior year period was primarily due to increases in compensation and employee benefits expense of $3.2 million as a result of higher incentive and stock plan expenses, occupancy expenses of $1.2 million, and service bureau expense of $838,000.
Provision for Income Taxes

The provision for income taxes was $5.3 million and $9.3 million for the three and nine months ended September 30, 2018, respectively, as compared to $5.7 million and $12.7 million, respectively, for the same prior year periods. The effective tax rate was 18.0% and 17.1% for the three and nine months ended September 30, 2018, respectively, as compared to 30.8% and 28.0%, respectively, for the same prior year periods. The lower effective tax rate for the three and nine months ended September 30, 2018

8


primarily resulted from the Tax Cuts and Jobs Act (“Tax Reform”), enacted during the fourth quarter of 2017. In addition, the State of New Jersey enacted new legislation on July 1, 2018, creating a temporary surtax effective for tax years 2018 through 2021, and requiring companies to file combined tax returns beginning 2019. The new legislation did not impact the Company’s deferred tax asset or state income tax expense for the three and nine months ended September 30, 2018. The Company will continue to evaluate the effect of this legislation on tax expense in future periods.
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 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 September 30, 2018, the Company had $171.0 million of 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 $456.8 million and $288.7 million, respectively, at September 30, 2018 and December 31, 2017.
The Company’s cash needs for the nine months ended September 30, 2018 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of investment securities, and increased borrowings. The cash was principally utilized for the purchase of loans receivable, loan originations, the purchase of securities, and to fund deposit outflows. The Company’s cash needs for the nine months ended September 30, 2017 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.
In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At September 30, 2018, outstanding undrawn lines of credit totaled $835.2 million and outstanding commitments to originate loans totaled $213.4 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 $452.4 million at September 30, 2018. Based upon historical experience, management is opportunistic about renewing time deposits on an as needed basis.
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 nine months ended September 30, 2018 and 2017, the Company did not repurchase any shares of common stock. At September 30, 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 nine months of 2018 were $21.4 million, as compared to $14.4 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 October 25, 2018, the Company’s Board of Directors declared a quarterly cash dividend of seventeen cents ($0.17) per common share. The dividend is payable on November 16, 2018 to stockholders of record at the close of business on November 5, 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 nine months ended September 30, 2018, the Company received a dividend payment of $24.0 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

9


future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. At September 30, 2018, OceanFirst Financial Corp. held $26.0 million in cash.
As of September 30, 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 September 30, 2018
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Bank:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
687,155

 
9.58
%
 
$
286,867

 
4.000
%
 
$
358,584

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
687,155

 
13.17

 
332,614

 
6.375

(1) 
339,136

 
6.50

Tier 1 capital (to risk-weighted assets)
 
687,155

 
13.17

 
410,876

 
7.875

(1) 
417,398

 
8.00

Total capital (to risk-weighted assets)
 
704,983

 
13.51

 
515,225

 
9.875

(1) 
521,747

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
696,209

 
9.69
%
 
$
287,298

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
634,120

 
12.14

 
332,920

 
6.375

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
696,209

 
13.33

 
411,255

 
7.875

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
749,037

 
14.34

 
515,700

 
9.875

(1) 
N/A

 
N/A

 
 
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

(2) 
240,450

 
6.50

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

 
12.41

 
268,194

 
7.250

(2) 
295,938

 
8.00

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

 
12.85

 
342,178

 
9.250

(2) 
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

(2) 
N/A

 
N/A

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

 
12.57

 
268,448

 
7.250

(2) 
N/A

 
N/A

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

 
13.96

 
342,502

 
9.250

(2) 
N/A

 
N/A

(1)
Includes the Capital Conservation Buffer of 1.875%.
(2)
Includes the Capital Conservation Buffer of 1.25%.
The Bank satisfies the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At September 30, 2018, the Company maintained tangible common equity of $673.8 million, for a tangible common equity to assets ratio of 9.35%. 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%.

10


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 September 30, 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 September 30, 2018 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
617,323

 
$
318,696

 
$
144,664

 
$
55,063

 
$
98,900

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
506,457

 
506,457

 

 

 

Consumer/Construction
328,770

 
328,770

 

 

 

Commitments to Originate Loans
213,390

 
213,390

 

 

 

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.

11


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.
 
September 30, 2018
 
December 31, 2017
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
1,727

 
$
503

Commercial real estate – owner occupied
511

 
5,962

Commercial real estate – investor
8,082

 
8,281

Residential mortgage
6,390

 
4,190

Home equity loans and lines
2,529

 
1,929

Total non-performing loans
19,239

 
20,865

Other real estate owned
6,231

 
8,186

Total non-performing assets
$
25,470

 
$
29,051

Purchased credit impaired loans (“PCI”)
$
9,700

 
$
1,712

Delinquent loans 30-89 days
$
26,691

 
$
20,796

Allowance for loan losses as a percent of total loans receivable
0.30
%
 
0.40
%
Allowance for loan losses as a percent of total non-performing loans
87.43

 
75.35

Non-performing loans as a percent of total loans receivable
0.35

 
0.52

Non-performing assets as a percent of total assets
0.34

 
0.54


The Company’s non-performing loans totaled $19.2 million at September 30, 2018, as compared to $20.9 million at December 31, 2017. Included in the non-performing loans total was $3.6 million and $8.8 million of troubled debt restructured (“TDR”) loans at September 30, 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 $9.7 million and $1.7 million of acquired PCI loans at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, the allowance for loan losses totaled $16.8 million, or 0.30% 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 $34.4 million and $17.5 million at September 30, 2018 and December 31, 2017, respectively. These loans were acquired at fair value with no related allowances for loan losses. Other real estate owned includes $5.1 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 has executed a letter of intent with a qualified buyer for this facility at the current carrying value with the closing expected prior to year-end.

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Special Mention
$
33,612

 
$
25,489

Substandard
78,978

 
60,661

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.

12


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 Company’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s 2017 Form 10-K 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, as amended by its subsequent SEC filings.


13


Item 3.    Quantitative and Qualitative Disclosures About Market Risk
The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2018, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At September 30, 2018, the Company’s one-year gap was positive 5.32% as compared to positive 4.62% at December 31, 2017. These results were within the approved policy guidelines.
 
At September 30, 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
$
107,012

 
$
1,233

 
$
2,695

 
$

 
$

 
$
110,940

Debt investment securities
68,524

 
39,023

 
113,281

 
43,598

 
50,805

 
315,231

Debt mortgage-backed securities
64,959

 
80,784

 
201,216

 
139,595

 
188,666

 
675,220

Equity investments

 

 

 

 
9,519

 
9,519

Restricted equity investments

 

 

 

 
57,143

 
57,143

Loans receivable (2)
1,092,223

 
859,120

 
1,576,920

 
946,494

 
1,078,048

 
5,552,805

Total interest-earning assets
1,332,718

 
980,160

 
1,894,112

 
1,129,687

 
1,384,181

 
6,720,858

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking accounts
804,190

 
126,943

 
285,606

 
224,098

 
891,378

 
2,332,215

Money market deposit accounts
14,584

 
41,605

 
96,696

 
79,008

 
352,357

 
584,250

Savings accounts
48,706

 
73,543

 
166,145

 
130,129

 
469,276

 
887,799

Time deposits
127,479

 
326,793

 
276,535

 
119,137

 
3,167

 
853,111

FHLB advances
181,547

 
76,064

 
144,468

 
54,727

 

 
456,806

Securities sold under agreements to repurchase and other borrowings
61,044

 
72,541

 
196

 
336

 
26,400

 
160,517

Total interest-bearing liabilities
1,237,550

 
717,489

 
969,646

 
607,435

 
1,742,578

 
5,274,698

Interest sensitivity gap (3)
$
95,168

 
$
262,671

 
$
924,466

 
$
522,252

 
$
(358,397
)
 
$
1,446,160

Cumulative interest sensitivity gap
$
95,168

 
$
357,839

 
$
1,282,305

 
$
1,804,557

 
$
1,446,160

 
$
1,446,160

Cumulative interest sensitivity gap as a percent of total interest-earning assets
1.42
%
 
5.32
%
 
19.08
%
 
26.85
%
 
21.52
%
 
21.52
%
 
(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.

14


Additionally, the table below sets forth the Company’s exposure to IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of September 30, 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.
 
 
September 30, 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
$
1,356,051

 
(0.7
)%
 
19.7
%
 
$
260,994

 
0.7
 %
 
$
844,117

 
5.0
 %
 
16.8
%
 
$
169,653

 
(2.3
)%
200
1,386,005

 
1.5

 
19.6

 
261,230

 
0.8

 
850,511

 
5.8

 
16.5

 
171,758

 
(1.1
)
100
1,390,317

 
1.8

 
19.1

 
260,702

 
0.6

 
838,066

 
4.3

 
15.9

 
173,119

 
(0.3
)
Static
1,365,705

 

 
18.3

 
259,236

 

 
803,722

 

 
14.9

 
173,590

 

(100)
1,303,544

 
(4.6
)
 
17.1

 
255,449

 
(1.5
)
 
737,232

 
(8.3
)
 
13.3

 
170,383

 
(1.8
)
The change in interest rate sensitivity at September 30, 2018, as compared to December 31, 2017, is primarily due to the full integration of Sun into the Bank’s operations.

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 September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


15



OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
148,362

 
$
109,613

Debt securities available-for-sale, at estimated fair value
100,015

 
81,581

Debt securities held-to-maturity, net (estimated fair value of $864,173 at September 30, 2018 and $761,660 at December 31, 2017)
883,540

 
764,062

Equity investments, at estimated fair value
9,519

 
8,700

Restricted equity investments, at cost
57,143

 
19,724

Loans receivable, net
5,543,959

 
3,965,773

Loans held-for-sale
732

 
241

Interest and dividends receivable
20,822

 
14,254

Other real estate owned
6,231

 
8,186

Premises and equipment, net
112,320

 
101,776

Bank Owned Life Insurance
221,190

 
134,847

Deferred tax asset
59,052

 
1,922

Assets held for sale
7,552

 
4,046

Other assets
36,094

 
41,895

Core deposit intangible
17,954

 
8,885

Goodwill
338,104

 
150,501

Total assets
$
7,562,589

 
$
5,416,006

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
5,854,250

 
$
4,342,798

Federal Home Loan Bank advances
456,806

 
288,691

Securities sold under agreements to repurchase with retail customers
61,044

 
79,668

Other borrowings
99,473

 
56,519

Advances by borrowers for taxes and insurance
16,654

 
11,156

Other liabilities
44,518

 
35,233

Total liabilities
6,532,745

 
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, 150,000,000 shares authorized, 48,382,370 shares issued and 48,382,370 and 32,596,893 shares outstanding at September 30, 2018 and December 31, 2017, respectively
483

 
336

Additional paid-in capital
756,954

 
354,377

Retained earnings
286,462

 
271,023

Accumulated other comprehensive loss
(3,943
)
 
(5,349
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(10,112
)
 
(2,479
)
  Treasury stock, 0 and 969,879 shares at September 30, 2018 and December 31, 2017, respectively

 
(15,967
)
Common stock acquired by Deferred Compensation Plan
(87
)
 
(84
)
Deferred Compensation Plan Liability
87

 
84

Total stockholders’ equity
1,029,844

 
601,941

Total liabilities and stockholders’ equity
$
7,562,589

 
$
5,416,006


See accompanying Notes to Unaudited Consolidated Financial Statements.

16


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Unaudited)
Interest income:
 
 
 
 
 
 
 
Loans
$
64,497

 
$
43,329

 
$
184,229

 
$
127,679

Mortgage-backed securities
4,105

 
2,738

 
12,087

 
8,189

Debt securities, equity investments and other
2,780

 
1,963

 
7,980

 
5,055

Total interest income
71,382

 
48,030

 
204,296

 
140,923

Interest expense:
 
 
 
 
 
 
 
Deposits
5,799

 
3,126

 
15,510

 
8,821

Borrowed funds
4,079

 
1,848

 
10,125

 
5,389

Total interest expense
9,878

 
4,974

 
25,635

 
14,210

Net interest income
61,504

 
43,056

 
178,661

 
126,713

Provision for loan losses
907

 
1,165

 
2,984

 
3,030

Net interest income after provision for loan losses
60,597

 
41,891

 
175,677

 
123,683

Other income:
 
 
 
 
 
 
 
Bankcard services revenue
2,425

 
1,785

 
6,717

 
5,202

Wealth management revenue
573

 
541

 
1,721

 
1,622

Fees and service charges
4,735

 
3,702

 
14,551

 
11,163

Net gain on sales of loans
31

 
17

 
654

 
74

Net unrealized loss on equity investments
(70
)
 

 
(282
)
 

Net (loss) income from other real estate operations
(1,582
)
 
432

 
(2,975
)
 
(196
)
Income from Bank Owned Life Insurance
1,337

 
881

 
3,813

 
2,436

Other
836

 
1

 
1,880

 
23

Total other income
8,285

 
7,359

 
26,079

 
20,324

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee benefits
19,694

 
14,673

 
64,189

 
46,138

Occupancy
4,443

 
2,556

 
13,582

 
7,965

Equipment
2,067

 
1,605

 
6,004

 
5,006

Marketing
1,021

 
775

 
2,475

 
2,245

Federal deposit insurance
927

 
713

 
2,857

 
2,079

Data processing
3,125

 
2,367

 
9,968

 
6,809

Check card processing
799

 
871

 
2,904

 
2,640

Professional fees
1,066

 
846

 
3,746

 
2,901

Other operating expense
3,366

 
2,667

 
9,928

 
8,258

Amortization of core deposit intangible
995

 
507

 
2,828

 
1,544

Branch consolidation expense
1,368

 
1,455

 
2,911

 
6,939

Merger related expenses
662

 
1,698

 
25,863

 
6,300

Total operating expenses
39,533

 
30,733

 
147,255

 
98,824

Income before provision for income taxes
29,349

 
18,517

 
54,501

 
45,183

Provision for income taxes
5,278

 
5,700

 
9,301

 
12,669

Net income
$
24,071

 
$
12,817

 
$
45,200

 
$
32,514

Basic earnings per share
$
0.50

 
$
0.40

 
$
0.97

 
$
1.01

Diluted earnings per share
$
0.50

 
$
0.39

 
$
0.95

 
$
0.98

Average basic shares outstanding
47,685

 
32,184

 
46,451

 
32,073

Average diluted shares outstanding
48,572

 
33,106

 
47,403

 
33,110

See accompanying Notes to Unaudited Consolidated Financial Statements.

17


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Unaudited)
Net income
$
24,071

 
$
12,817

 
$
45,200

 
$
32,514

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (loss) gain on debt securities (net of tax benefit of $46 and $207 in 2018, and net of tax benefit of $8 and net of tax expense of $50 in 2017, respectively)
(179
)
 
(12
)
 
(772
)
 
72

Accretion of unrealized (gain) loss on debt securities reclassified to held-to-maturity (net of tax expense of $336 and $854 in 2018, and net of tax expense of $122 and $365 in 2017, respectively)
(110
)
 
176

 
1,836

 
528

Reclassification adjustment for gains included in net income (net of tax expense of $0 and $53 in 2018)

 

 
195

 

Total comprehensive income
$
23,782

 
$
12,981

 
$
46,459

 
$
33,114

See accompanying Notes to Unaudited Consolidated Financial Statements.

18


OceanFirst Financial Corp.
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands, except per share amounts)
(Unaudited)
For the Nine Months Ended September 30, 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

 

 

 
32,514

 

 

 

 

 

 
32,514

Other comprehensive income, net of tax

 

 

 

 
600

 

 

 

 

 
600

Stock awards

 

 
1,678

 

 

 

 

 

 

 
1,678

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

 

 
(11,129
)
 
11,129

 

 

 

 

 

 

Treasury stock allocated to restricted stock plan

 

 
(1,645
)
 
782

 

 

 
863

 

 

 

Allocation of ESOP stock

 

 
480

 

 

 
212

 

 

 

 
692

Cash dividend $0.45 per share

 

 

 
(14,439
)
 

 

 

 

 

 
(14,439
)
Exercise of stock options

 

 

 
(2,125
)
 

 

 
5,317

 

 

 
3,192

Sale of stock for the deferred compensation plan

 

 

 

 

 

 

 
230

 
(230
)
 

Balance at September 30, 2017
$

 
$
336

 
$
353,817

 
$
266,053

 
$
(5,149
)
 
$
(2,549
)
 
$
(16,368
)
 
$
(83
)
 
$
83

 
$
596,140

Balance at December 31, 2017
$

 
$
336

 
$
354,377

 
$
271,023

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

 
$
601,941

Net income

 

 

 
45,200