Business Combination

9 Months Ended

Sep. 30, 2015

Business Combinations [Abstract]

Business Combination

Note 3. Business Combination

On July 31, 2015, the Company completed its acquisition of Colonial American Bank (“Colonial”), which after purchase accounting adjustments added $142.4 million to assets, $121.2 million to loans, and $123.3 million to deposits. Total consideration paid for Colonial was $11.9 million, including cash consideration of $127,000 for outstanding warrants and for fractional shares. Colonial was merged with and into the Company’s subsidiary, OceanFirst Bank, as of the close of business 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 fair value of the net assets acquired has been recorded as goodwill.

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

	At July 31, 2015
	Colonial Book Value			Purchase Accounting Adjustments			Estimated Fair Value
Assets acquired:
Securities	$	6,758		$	—		$	6,758
Loans		125,063			(3,867	)(1)		121,196
Allowance for loan losses		(1,578	)		1,578			—
Other real estate owned		405			(148	)		257
Deferred tax asset – recognition of net operating loss carryforward		—			2,292			2,292
– relating to purchase accounting adjustments		—			952			952
Other assets		8,823			—			8,823
Core deposit intangible		—			277			277
Goodwill		—			1,845			1,845
Total assets acquired		139,471			2,929			142,400
Liabilities assumed:
Deposits		123,103			243			123,346
Federal Home Loan Bank advances		6,800			—			6,800
Other liabilities		309			—			309
Total liabilities assumed		130,212			243			130,455
Net assets acquired	$	9,259		$	2,686		$	11,945

(1) Includes a general credit fair value deduction of $1,722,000; a fair value deduction on credit-impaired loans of $1,475,000; an interest rate fair value benefit of $980,000; and further credited by the write-off of Colonial’s capitalized loan origination costs of $1,650,000.

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

Fair Value Measurement of Assets Assumed and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Colonial acquisition were as follow. Refer to Note 8, Fair Value Measurements, for a discussion of the fair value hierarchy.

Securities

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

Loans

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

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

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

To calculate the specific credit fair value adjustment the Company reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Deposits and Core Deposit Premium

Core deposit premium represents the value assigned to non-interest bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs.

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

Federal Home Loan Bank advances

These borrowings were short term in nature and no fair value adjustments were necessary.