OCEANFIRST FINANCIAL CORP 10-Q

Item 4. Controls and Procedures (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 19 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) September 30, December 31, 2021 2020 (Unaudited) Assets Cash and due from banks $ 981,126 $ 1,272,134 Debt securities available-for-sale, at estimated fair value 314,620 183,302 Debt securities held-to-maturity, net of allowance for securities credit losses of $ 1,503 at September 30, 2021 and $ 1,715 at December 31, 2020 (estimated fair value of $ 1,143,381 at September 30, 2021 and $ 968,466 at December 31, 2020) 1,125,382 937,253 Equity investments 101,314 107,079 Restricted equity investments, at cost 53,017 51,705 Loans receivable, net of allowance for loan credit losses of $ 50,153 at September 30, 2021 and $ 60,735 at December 31, 2020 8,139,961 7,704,857 Loans held-for-sale 13,428 45,524 Interest and dividends receivable 32,512 35,269 Other real estate owned 106 106 Premises and equipment, net 123,669 107,094 Bank owned life insurance 260,072 265,253 Assets held for sale 4,613 5,782 Goodwill 500,319 500,319 Core deposit intangible 19,558 23,668 Other assets 159,991 208,968 Total assets $ 11,829,688 $ 11,448,313 Liabilities and Stockholders’ Equity Deposits $ 9,774,097 $ 9,427,616 Securities sold under agreements to repurchase with retail customers 143,292 128,454 Other borrowings 228,887 235,471 Advances by borrowers for taxes and insurance 22,214 17,296 Other liabilities 147,949 155,346 Total liabilities 10,316,439 9,964,183 Stockholders’ equity: Preferred stock, $ 0.01 par value, $ 1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both September 30, 2021 and December 31, 2020 1 1 Common stock, $ 0.01 par value, 150,000,000 shares authorized, 61,526,126 and 61,040,894 shares issued at September 30, 2021 and December 31, 2020, respectively; and 59,417,266 and 60,392,043 shares outstanding at September 30, 2021 and December 31, 2020, respectively 611 609 Additional paid-in capital 1,145,448 1,137,715 Retained earnings 430,721 378,268 Accumulated other comprehensive (loss) income ( 734 ) 621 Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") ( 6,519 ) ( 7,433 ) Treasury stock, 2,108,860 and 648,851 shares at September 30, 2021 and December 31, 2020, respectively ( 56,279 ) ( 25,651 ) Total stockholders’ equity 1,513,249 1,484,130 Total liabilities and stockholders’ equity $ 11,829,688 $ 11,448,313 See accompanying Notes to Unaudited Consolidated Financial Statements. 20 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Interest income: Loans $ 78,889 $ 85,933 $ 233,845 $ 264,224 Debt securities 5,040 5,596 16,379 18,577 Equity investments and other 1,491 1,433 3,411 4,245 Total interest income 85,420 92,962 253,635 287,046 Interest expense: Deposits 5,379 11,370 20,200 37,611 Borrowed funds 2,909 4,804 8,683 14,335 Total interest expense 8,288 16,174 28,883 51,946 Net interest income 77,132 76,788 224,752 235,100 Credit loss (benefit) expense ( 3,179 ) 35,714 ( 10,259 ) 55,332 Net interest income after credit loss (benefit) expense 80,311 41,074 235,011 179,768 Other income: Bankcard services revenue 3,409 3,097 10,052 8,319 Trust and asset management revenue 584 490 1,774 1,560 Fees and service charges 2,973 3,732 10,519 11,858 Net (loss) gain on sales of loans ( 15 ) 1,001 3,180 1,930 Net (loss) gain on equity investments ( 466 ) ( 3,576 ) 8,397 ( 3,273 ) Net (loss) gain from other real estate operations ( 3 ) 214 ( 12 ) 12 Income from bank owned life insurance 1,640 1,530 4,771 4,626 Commercial loan swap income 1,588 1,425 2,772 7,964 Other 173 266 1,068 310 Total other income 9,883 8,179 42,521 33,306 Operating expenses: Compensation and employee benefits 30,730 29,012 89,008 86,832 Occupancy 5,005 5,270 15,380 15,814 Equipment 1,124 1,906 4,008 5,831 Marketing 496 963 1,555 2,485 Federal deposit insurance and regulatory assessments 1,459 1,212 4,422 3,012 Data processing 5,363 4,517 13,796 12,843 Check card processing 1,337 1,385 4,012 3,951 Professional fees 3,089 3,354 8,317 8,339 Other operating expense 4,477 3,644 11,315 11,784 Federal Home Loan Bank (“FHLB”) prepayment fees — — — 924 Amortization of core deposit intangible 1,354 1,538 4,110 4,660 Branch consolidation expense 4,014 830 5,051 4,287 Merger related expenses 225 3,156 1,052 14,753 Total operating expenses 58,673 56,787 162,026 175,515 Income (loss) before provision (benefit) for income taxes 31,521 ( 7,534 ) 115,506 37,559 Provision (benefit) for income taxes 7,354 ( 2,608 ) 28,087 7,314 Net income (loss) 24,167 ( 4,926 ) 87,419 30,245 Dividends on preferred shares 1,004 1,093 3,012 1,093 Net income (loss) available to common stockholders $ 23,163 $ ( 6,019 ) $ 84,407 $ 29,152 Basic earnings (loss) per share $ 0.40 $ ( 0.10 ) $ 1.42 $ 0.49 Diluted earnings (loss) per share $ 0.39 $ ( 0.10 ) $ 1.41 $ 0.49 Average basic shares outstanding 59,311 59,935 59,619 59,901 Average diluted shares outstanding 59,515 59,935 59,862 60,076 See accompanying Notes to Unaudited Consolidated Financial Statements. 21 Table of Contents OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) Net income (loss) $ 24,167 $ ( 4,926 ) $ 87,419 $ 30,245 Other comprehensive (loss) income: Unrealized (loss) gain on debt securities (net of tax benefit of $ 232 and $ 446 in 2021 and net of tax benefit of $ 105 and net of tax expense of $ 604 in 2020, respectively) ( 855 ) ( 461 ) ( 1,658 ) 1,644 Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $ 66 and $ 209 in 2021 and $ 75 and $ 235 in 2020, respectively) 95 108 303 336 Reclassification adjustment for gains included in net income (net of tax expense of $ 45 and $ 45 in 2020) — 168 — 168 Total other comprehensive (loss) income ( 760 ) ( 185 ) ( 1,355 ) 2,148 Total comprehensive income (loss) 23,407 ( 5,111 ) 86,064 32,393 Less: Dividends on preferred shares 1,004 1,093 3,012 1,093 Comprehensive income (loss) available to common stockholders $ 22,403 $ ( 6,204 ) $ 83,052 $ 31,300 See accompanying Notes to Unaudited Consolidated Financial Statements. 22 OceanFirst Financial Corp. Consolidated Statements of Changes in Stockholders’ Equity (dollars in thousands, except per share amounts) (Unaudited) For the Three Months Ended September 30, 2021 and 2020 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Total Balance at June 30, 2020 $ 1 $ 609 $ 1,135,839 $ 372,552 $ 1,125 $ ( 8,041 ) $ ( 25,651 ) $ 1,476,434 Net loss — — — ( 4,926 ) — — — ( 4,926 ) Other comprehensive income, net of tax — — — — ( 185 ) — — ( 185 ) Stock compensation — — 1,250 — — — — 1,250 Allocation of ESOP stock — — ( 46 ) — — 304 — 258 Cash dividend $ 0.17 per share — — — ( 10,136 ) — — — ( 10,136 ) Exercise of stock options — — 296 — — — — 296 Issuance of preferred equity, net of costs — — ( 184 ) — — — — ( 184 ) Preferred stock dividend — — — ( 1,093 ) — — — ( 1,093 ) Balance at September 30, 2020 $ 1 $ 609 $ 1,137,155 $ 356,397 $ 940 $ ( 7,737 ) $ ( 25,651 ) $ 1,461,714 Balance at June 30, 2021 $ 1 $ 611 $ 1,143,907 $ 417,658 $ 26 $ ( 6,824 ) $ ( 46,590 ) $ 1,508,789 Net income — — — 24,167 — — — 24,167 Other comprehensive loss, net of tax — — — — ( 760 ) — — ( 760 ) Stock compensation — — 1,505 — — — — 1,505 Allocation of ESOP stock — — 31 — — 305 — 336 Cash dividend $ 0.17 per share — — — ( 10,100 ) — — — ( 10,100 ) Exercise of stock options — — 5 — — — — 5 Repurchase 460,009 shares of common stock — — — — — — ( 9,689 ) ( 9,689 ) Preferred stock dividend — — — ( 1,004 ) — — — ( 1,004 ) Balance at September 30, 2021 $ 1 $ 611 $ 1,145,448 $ 430,721 $ ( 734 ) $ ( 6,519 ) $ ( 56,279 ) $ 1,513,249 See accompanying Notes to Unaudited Consolidated Financial Statements. 23 Table of Contents 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, 2021 and 2020 Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Employee Stock Ownership Plan Treasury Stock Total Balance at December 31, 2019 $ — $ 519 $ 840,691 $ 358,668 $ ( 1,208 ) $ ( 8,648 ) $ ( 36,903 ) $ 1,153,119 Net income — — — 30,245 — — — 30,245 Other comprehensive income, net of tax — — — — 2,148 — — 2,148 Stock compensation — 2 3,727 — — — — 3,729 Effect of adopting Accounting Standards Update(“ASU”) No. 2016-13 — — — ( 4 ) — — — ( 4 ) Allocation of ESOP stock — — ( 45 ) — — 911 — 866 Cash dividend $ 0.51 per share — — — ( 30,630 ) — — — ( 30,630 ) Exercise of stock options — 2 1,961 ( 789 ) — — — 1,174 Repurchase 648,851 shares of common stock — — — — — — ( 14,814 ) ( 14,814 ) Issuance of preferred equity, net of costs 1 — 55,528 — — — — 55,529 Preferred stock dividend — — — ( 1,093 ) — — — ( 1,093 ) Acquisition of Two River Bancorp — 42 122,501 — — — 26,066 148,609 Acquisition of Country Bank Holding Company, Inc. — 44 112,792 — — — — 112,836 Balance at September 30, 2020 $ 1 $ 609 $ 1,137,155 $ 356,397 $ 940 $ ( 7,737 ) $ ( 25,651 ) $ 1,461,714 Balance at December 31, 2020 $ 1 $ 609 $ 1,137,715 $ 378,268 $ 621 $ ( 7,433 ) $ ( 25,651 ) $ 1,484,130 Net income — — — 87,419 — — — 87,419 Other comprehensive loss, net of tax — — — — ( 1,355 ) — — ( 1,355 ) Stock compensation — — 4,231 — — — — 4,231 Allocation of ESOP stock — — 142 — — 914 — 1,056 Cash dividend $ 0.51 per share — — — ( 30,425 ) — — — ( 30,425 ) Exercise of stock options — 2 3,360 ( 1,529 ) — — — 1,833 Repurchase 1,460,009 shares of common stock — — — — — — ( 30,628 ) ( 30,628 ) Preferred stock dividend — — — ( 3,012 ) — — — ( 3,012 ) Balance at September 30, 2021 $ 1 $ 611 $ 1,145,448 $ 430,721 $ ( 734 ) $ ( 6,519 ) $ ( 56,279 ) $ 1,513,249 See accompanying Notes to Unaudited Consolidated Financial Statements. 24 Table of Contents OceanFirst Financial Corp. Consolidated Statements of Cash Flows (dollars in thousands) For the Nine Months Ended September 30, 2021 2020 (Unaudited) Cash flows from operating activities: Net income $ 87,419 $ 30,245 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 6,150 6,291 Allocation of ESOP stock 1,056 866 Stock compensation 4,231 3,729 Net excess tax expense on stock compensation 93 123 Amortization of servicing asset 60 65 Net premium amortization in excess of discount accretion on securities 5,719 2,126 Net amortization of deferred costs on borrowings 688 355 Amortization of core deposit intangible 4,110 4,660 Net accretion of purchase accounting adjustments ( 10,720 ) ( 15,802 ) Net amortization of deferred costs and discounts on loans 606 1,135 (Benefit) provision for credit losses ( 10,259 ) 55,332 Net gain on sale and write-down of other real estate owned — ( 101 ) Net write down of fixed assets held-for-sale to net realizable value 3,114 4,193 Net loss on sale of fixed assets 11 6 Net (gain) loss on equity securities ( 8,397 ) 3,220 Net gain on sales of loans ( 3,180 ) ( 1,930 ) Proceeds from sales of residential loans held for sale 101,992 113,708 Mortgage loans originated for sale ( 53,935 ) ( 134,907 ) Increase in value of bank owned life insurance ( 4,771 ) ( 4,626 ) Net gain on sale of assets held for sale ( 318 ) — Decrease (increase) in interest and dividends receivable 2,757 ( 14,836 ) Deferred tax provision 570 99 Decrease in other assets 29,366 2,301 (Decrease) increase in other liabilities ( 37,311 ) 71,285 Total adjustments 31,632 97,292 Net cash provided by operating activities 119,051 127,537 Cash flows from investing activities: Net increase in loans receivable ( 203,104 ) ( 654,461 ) Proceeds from sale of loans 825 71,604 Purchase of residential loan pool ( 219,745 ) — Premiums paid on purchased loan pool ( 6,318 ) — Purchase of debt securities available-for-sale ( 200,034 ) ( 57,487 ) Purchase of debt securities held-to-maturity ( 381,032 ) ( 79,115 ) Purchase of equity investments ( 85,077 ) ( 53,726 ) Proceeds from sale of equity investments 98,776 891 Proceeds from maturities and calls of debt securities available-for-sale 93,835 41,101 Proceeds from maturities and calls of debt securities held-to-maturity 22,125 41,583 Proceeds from sales of debt securities available-for-sale — 5,869 Principal repayments on debt securities available-for-sale 114 256 Principal repayments on debt securities held-to-maturity 168,059 128,683 Proceeds from bank owned life insurance 9,952 310 Proceeds from the redemption of restricted equity investments 1,110 62,354 Purchases of restricted equity investments ( 2,069 ) ( 59,489 ) Proceeds from sales of other real estate owned — 713 Proceeds from sales of assets held-for-sale 2,601 — Purchases of premises and equipment ( 26,493 ) ( 9,014 ) Net cash consideration received for acquisition — 23,460 Net cash used in investing activities ( 726,475 ) ( 536,468 ) 25 Table of Contents Continued OceanFirst Financial Corp. Consolidated Statements of Cash Flows (Continued) (dollars in thousands) For the Nine Months Ended September 30, 2021 2020 (Unaudited) Cash flows from financing activities: Increase in deposits $ 347,672 $ 1,362,996 Increase (decrease) in short-term borrowings 14,838 ( 211,649 ) Proceeds from FHLB advances — 525,000 Repayments of FHLB advances — ( 496,200 ) Proceeds from Federal Reserve Bank advances — 3,778 Net proceeds from issuance of subordinated notes — 122,180 Repayments of other borrowings ( 7,585 ) ( 80 ) Increase in advances by borrowers for taxes and insurance 4,918 5 Exercise of stock options 1,833 1,174 Payment of employee taxes withheld from stock awards ( 1,176 ) ( 2,084 ) Purchase of treasury stock ( 30,628 ) ( 14,814 ) Net proceeds from the issuance of preferred stock — 55,529 Dividends paid ( 33,437 ) ( 31,723 ) Net cash provided by financing activities 296,435 1,314,112 Net (decrease) increase in cash and due from banks and restricted cash ( 310,989 ) 905,181 Cash and due from banks and restricted cash at beginning of period 1,318,661 133,226 Cash and due from banks and restricted cash at end of period $ 1,007,672 $ 1,038,407 Supplemental Disclosure of Cash Flow Information: Cash and due from banks at beginning of period $ 1,272,134 $ 120,544 Restricted cash at beginning of period 46,527 12,682 Cash and due from banks and restricted cash at beginning of period $ 1,318,661 $ 133,226 Cash and due from banks at end of period $ 981,126 $ 980,870 Restricted cash at end of period 26,546 57,537 Cash and due from banks and restricted cash at end of period $ 1,007,672 $ 1,038,407 Cash paid during the period for: Interest $ 28,009 $ 51,494 Income taxes 38,707 5,232 Non-cash activities: Accretion of unrealized loss on securities reclassified to held-to-maturity 512 570 Net loan (recoveries) charge-offs ( 442 ) 15,917 Transfer of loans receivable to loans held-for-sale 12,781 365,634 Transfer of premises and equipment to assets held-for-sale 1,476 4,043 Transfer of loans receivable to other real estate owned — 106 Acquisition: Non-cash assets acquired: Securities $ — $ 208,880 Restricted equity investments — 5,334 Loans — 1,558,480 Premises and equipment — 9,744 Accrued interest receivable — 4,161 Bank owned life insurance — 22,440 Deferred tax assets, net — ( 509 ) Other assets — 10,073 Goodwill and other intangible assets, net — 140,031 Total non-cash assets acquired $ — $ 1,958,634 Liabilities assumed: Deposits $ — $ 1,594,403 Borrowings — 92,618 Other liabilities — 33,628 Total liabilities assumed $ — $ 1,720,649 See accompanying Notes to Unaudited Consolidated Financial Statements. 26 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements Note 1. Basis of Presentation The consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp. Casaba Real Estate Holdings Corporation, CBNJ Investments Corp., Country Property Holdings, Inc., and TRCB Investment Corp. Certain other subsidiaries were dissolved in 2020 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts previously reported have been reclassified to conform to the current year’s presentation. The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results of operations that may be expected for the full year 2021 or any other period. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 27 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 2. Business Combinations Two River Bancorp Acquisition On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which after purchase accounting adjustments added $ 1.11 billion of assets, $ 940.1 million of loans, and $ 941.8 million of deposits. Total consideration paid for Two River was $ 197.1 million, including cash consideration of $ 48.4 million. Two River was merged with and into the Company on the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of total consideration paid (in thousands): At January 1, 2020 Estimated Fair Value Total purchase price: $ 197,050 Assets acquired: Cash and cash equivalents $ 51,102 Securities 64,381 Loans 940,072 Accrued interest receivable 2,382 Bank owned life insurance 22,440 Deferred tax assets, net 3,158 Other assets 15,956 Core deposit intangible 12,130 Total assets acquired 1,111,621 Liabilities assumed: Deposits ( 941,750 ) Other liabilities ( 59,026 ) Total liabilities assumed ( 1,000,776 ) Net assets acquired $ 110,845 Goodwill recorded in the merger $ 86,205 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value. 28 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Country Bank Holding Company, Inc. Acquisition On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $ 793.7 million of assets, $ 618.4 million of loans, and $ 652.7 million of deposits. Total consideration paid for Country Bank was $ 112.8 million. Country Bank was merged with and into the Company on the date of acquisition. The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands): At January 1, 2020 Estimated Fair Value Total purchase price: $ 112,836 Assets acquired: Cash and cash equivalents $ 20,799 Securities 144,499 Loans 618,408 Accrued interest receivable 1,779 Deferred tax assets, net ( 3,117 ) Other assets 9,195 Core deposit intangible 2,117 Total assets acquired 793,680 Liabilities assumed: Deposits ( 652,653 ) Other liabilities ( 67,240 ) Total liabilities assumed ( 719,893 ) Net assets acquired $ 73,787 Goodwill recorded in the merger $ 39,049 The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value. Fair Value Measurement of Assets Assumed and Liabilities Assumed The methods used to determine the fair value of the assets acquired and liabilities assumed in the Two River and Country Bank acquisitions were as follows. Refer to Note 7, Fair Value Measurements, for a discussion of the fair value hierarchy. Securities The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities. Loans The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment. 29 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment. The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank or historical loss experiences of peer groups where deemed appropriate. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process. To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company identified loans that have experienced more-than-insignificant deterioration in credit quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield. Premises and Equipment Fair values are based upon appraisals from independent third parties. In addition to owned properties, Two River operated 14 properties and Country Bank operated five properties, subject to lease agreements. Deposits and Core Deposit Premium Core deposit premium represents the value assigned to non-interest-bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of an acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs. The core deposit premium totaled $ 12.1 million and $ 2.1 million, for the acquisitions of Two River and Country Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs. Borrowings Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. 30 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 3. Earnings (Loss) per Share The following reconciles shares outstanding for basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Weighted average shares outstanding 59,722 60,363 60,050 60,349 Less: Unallocated ESOP shares ( 353 ) ( 418 ) ( 369 ) ( 435 ) Unallocated incentive award shares ( 58 ) ( 10 ) ( 62 ) ( 13 ) Average basic shares outstanding 59,311 59,935 59,619 59,901 Add: Effect of dilutive securities: Incentive awards 204 — 243 175 Average diluted shares outstanding 59,515 59,935 59,862 60,076 For the three and nine months ended September 30, 2021, antidilutive stock options of 1,573,000 and 1,566,000 , respectively, were excluded from the earnings (loss) per share calculations. For the three and nine months ended September 30, 2020, antidilutive stock options of 2,251,000 and 2,067,000 , respectively, were excluded from the earnings (loss) per share calculations. For the three months ended September 30, 2020, 87,000 shares related to incentive awards were excluded from the diluted earnings (loss) per share calculation as they were antidilutive. 31 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 4. Securities The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at September 30, 2021 and December 31, 2020 are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses At September 30, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 133,088 $ 1,653 $ ( 136 ) $ 134,605 $ — Corporate debt securities 5,000 52 ( 3 ) 5,049 — Collateralized loan obligations (“CLOs”) 145,792 8 ( 380 ) 145,420 — Mortgage-backed securities - FNMA 12,648 1 — 12,649 — Mortgage-backed securities - agency commercial 17,047 — ( 150 ) 16,897 — Total debt securities available-for-sale $ 313,575 $ 1,714 $ ( 669 ) $ 314,620 $ — Debt securities held-to-maturity: State, municipal and sovereign debt obligations $ 292,226 $ 8,379 $ ( 630 ) $ 299,975 $ ( 86 ) Corporate debt securities 70,343 1,828 ( 1,273 ) 70,898 ( 1,309 ) Mortgage-backed securities: FHLMC 359,449 3,568 ( 2,881 ) 360,136 — FNMA 326,877 4,887 ( 1,964 ) 329,800 — GNMA 44,010 1,056 ( 34 ) 45,032 — SBA 4,654 12 ( 43 ) 4,623 — Other 32,160 760 ( 3 ) 32,917 ( 108 ) Total mortgage-backed securities 767,150 10,283 ( 4,925 ) 772,508 ( 108 ) Total debt securities held-to-maturity $ 1,129,719 $ 20,490 $ ( 6,828 ) $ 1,143,381 $ ( 1,503 ) Total debt securities $ 1,443,294 $ 22,204 $ ( 7,497 ) $ 1,458,001 $ ( 1,503 ) At December 31, 2020 Debt securities available-for-sale: U.S. government and agency obligations $ 173,790 $ 3,152 $ ( 2 ) $ 176,940 $ — CLOs 6,174 — ( 4 ) 6,170 — Mortgage-backed securities - FNMA 190 2 — 192 — Total debt securities available-for-sale $ 180,154 $ 3,154 $ ( 6 ) $ 183,302 $ — Debt securities held-to-maturity: State and municipal obligations $ 238,405 $ 11,500 $ ( 231 ) $ 249,674 $ ( 48 ) Corporate debt securities 72,305 1,615 ( 2,652 ) 71,268 ( 1,550 ) Mortgage-backed securities: FHLMC 232,942 5,383 ( 124 ) 238,201 — FNMA 293,615 7,640 ( 147 ) 301,108 — GNMA 67,334 2,014 ( 12 ) 69,336 — SBA 5,392 — ( 60 ) 5,332 — Other 32,321 1,226 — 33,547 ( 117 ) Total mortgage-backed securities 631,604 16,263 ( 343 ) 647,524 ( 117 ) Total debt securities held-to-maturity $ 942,314 $ 29,378 $ ( 3,226 ) $ 968,466 $ ( 1,715 ) Total debt securities $ 1,122,468 $ 32,532 $ ( 3,232 ) $ 1,151,768 $ ( 1,715 ) 32 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) There was no allowance for securities credit losses on debt securities available-for-sale at September 30, 2021 or December 31, 2020. The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Allowance for credit losses Beginning balance $ ( 1,609 ) $ ( 2,446 ) $ ( 1,715 ) $ — Impact of current expected credit loss (“CECL”) adoption — — — ( 1,268 ) Provision for credit loss expense 106 53 212 ( 1,125 ) Total ending allowance balance $ ( 1,503 ) $ ( 2,393 ) $ ( 1,503 ) $ ( 2,393 ) During 2013, the Bank transferred $ 536.0 million of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $ 13.3 million at the time of transfer, which continues to be reflected in accumulated other comprehensive income on the consolidated statement of financial condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at September 30, 2021 and December 31, 2020 is as follows (in thousands): September 30, December 31, 2021 2020 Amortized cost $ 1,129,719 $ 942,314 Net loss on date of transfer from available-for-sale ( 13,347 ) ( 13,347 ) Allowance for securities credit loss ( 1,503 ) ( 1,715 ) Accretion of net unrealized loss on securities reclassified as held-to-maturity 10,513 10,001 Carrying value $ 1,125,382 $ 937,253 There were no realized gains or losses on debt securities for the three and nine months ended September 30, 2021, as compared to $ 244,000 of realized gains on debt securities for the corresponding prior year periods. The amortized cost and estimated fair value of debt securities at September 30, 2021 by contractual maturity are shown below (in thousands). Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2021, corporate debt securities with an amortized cost of $ 29.4 million, and estimated fair value of $ 31.0 million, and CLOs with an amortized cost of $ 145.8 million and estimated fair value of $ 145.4 million were callable prior to the maturity date. September 30, 2021 Amortized Cost Estimated Fair Value Less than one year $ 90,596 $ 91,346 Due after one year through five years 154,228 157,403 Due after five years through ten years 222,930 222,072 Due after ten years 178,695 185,126 $ 646,449 $ 655,947 Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments. The estimated fair value of securities pledged as required security for deposits and for other purposes required by law amounted to $ 993.0 million and $ 435.9 million at September 30, 2021 and December 31, 2020, respectively, which includes $ 150.7 million and $ 152.7 million at September 30, 2021 and December 31, 2020, respectively, pledged as collateral for securities sold under agreements to repurchase. At September 30, 2021, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies and government-sponsored enterprises, in an amount greater than 10% of stockholders’ equity. 33 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The estimated fair value and unrealized losses for debt securities available-for-sale and held-to-maturity at September 30, 2021 and December 31, 2020, segregated by the duration of the unrealized losses, are as follows (in thousands): Less than 12 months 12 months or longer Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses At September 30, 2021 Debt securities available-for-sale: U.S. government and agency obligations $ 25,911 $ ( 136 ) $ — $ — $ 25,911 $ ( 136 ) Corporate debt securities 997 ( 3 ) — — 997 ( 3 ) Mortgage-backed securities 11,555 ( 150 ) — — 11,555 ( 150 ) CLOs 117,477 ( 380 ) — — 117,477 ( 380 ) Total debt securities available-for-sale 155,940 ( 669 ) — — 155,940 ( 669 ) Debt securities held-to-maturity: State, municipal and sovereign debt obligations 64,303 ( 608 ) 911 ( 22 ) 65,214 ( 630 ) Corporate debt securities 39,573 ( 1,273 ) — — 39,573 ( 1,273 ) Mortgage-backed securities: FHLMC 242,215 ( 2,823 ) 4,102 ( 58 ) 246,317 ( 2,881 ) FNMA 171,450 ( 1,776 ) 8,647 ( 188 ) 180,097 ( 1,964 ) GNMA 458 ( 3 ) 4,867 ( 31 ) 5,325 ( 34 ) SBA 1,602 ( 41 ) 969 ( 2 ) 2,571 ( 43 ) Other 4,484 ( 3 ) — — 4,484 ( 3 ) Total mortgage-backed securities 420,209 ( 4,646 ) 18,585 ( 279 ) 438,794 ( 4,925 ) Total debt securities held-to-maturity 524,085 ( 6,527 ) 19,496 ( 301 ) 543,581 ( 6,828 ) Total debt securities $ 680,025 $ ( 7,196 ) $ 19,496 $ ( 301 ) $ 699,521 $ ( 7,497 ) At December 31, 2020 Debt securities available-for-sale: U.S. government and agency obligations $ 17,029 $ ( 2 ) $ — $ — $ 17,029 $ ( 2 ) CLOs 4,766 ( 4 ) — — 4,766 ( 4 ) Total debt securities available-for-sale 21,795 ( 6 ) — — 21,795 ( 6 ) Debt securities held-to-maturity: State and municipal obligations 2,823 ( 23 ) 7,509 ( 208 ) 10,332 ( 231 ) Corporate debt securities 10,192 ( 255 ) 35,935 ( 2,397 ) 46,127 ( 2,652 ) Mortgage-backed securities: FHLMC 24,661 ( 117 ) 669 ( 7 ) 25,330 ( 124 ) FNMA 39,365 ( 128 ) 939 ( 19 ) 40,304 ( 147 ) GNMA 5,856 ( 11 ) 207 ( 1 ) 6,063 ( 12 ) SBA 3,626 ( 12 ) 1,706 ( 48 ) 5,332 ( 60 ) Total mortgage-backed securities 73,508 ( 268 ) 3,521 ( 75 ) 77,029 ( 343 ) Total debt securities held-to-maturity 86,523 ( 546 ) 46,965 ( 2,680 ) 133,488 ( 3,226 ) Total debt securities $ 108,318 $ ( 552 ) $ 46,965 $ ( 2,680 ) $ 155,283 $ ( 3,232 ) The Company concluded that the corporate debt securities were not impaired a t September 30, 2021 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not intend to sell these corporate debt securities and it is more likely than not that the Company will not be required to sell the securities. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio. The mortgage-backed securities are issued and guaranteed by either FHLMC, FNMA, GNMA or the SBA, corporations which are chartered by the United States Government and whose debt obligations are rated AA+/Aaa by S&P and Moody’s, 34 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) respectively. Additionally, there are private label commercial mortgage-backed securities with credit ratings ranging between Aaa and Aa3. The Company considers the unrealized losses to be the result of changes in interest rates, and not credit quality, which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were not impaired at September 30, 2021. State, municipal, and sovereign debt obligations are securities issued by state, local and national governments for various purposes. The Company is not aware of any information subsequent to the purchase of any state, municipal, and sovereign debt obligations that indicates an inability on the part of an issuer to meet all of its financial commitments. The credit rating of these securities is between Aaa/AAA and Baa2/BBB. The Company has the ability and stated intention to hold these securities to maturity at which time the Company expects to receive full repayment. Current unrealized losses are considered to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the securities. As a result, the Company concluded that these securities were not impaired as of September 30, 2021. The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. The following table summarized the amortized cost of debt securities held-to-maturity at September 30, 2021, aggregated by credit quality indicator (in thousands): AAA AA A BBB BB Total As of September 30, 2021 State, municipal and sovereign debt obligations $ 31,053 $ 145,704 $ 85,435 $ 30,034 $ — $ 292,226 Corporate debt securities — 7,534 4,748 47,538 10,523 70,343 Mortgage-backed securities - other 11,093 21,067 — — — 32,160 Total debt securities held-to-maturity $ 42,146 $ 174,305 $ 90,183 $ 77,572 $ 10,523 $ 394,729 Equity Investments At September 30, 2021 and December 31, 2020, the Company held equity investments of $ 101.3 million and $ 107.1 million, respectively. The equity investments primarily comprised of select financial services institutions’ common and preferred stocks paying attractive dividends. The realized and unrealized gains or losses on equity securities for the three and nine months ended September 30, 2021 and September 30, 2020 are shown in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net (loss) gain on equity investments $ ( 466 ) $ ( 3,576 ) $ 8,397 $ ( 3,273 ) Less: Net gains (losses) recognized on equity securities sold — — 8,123 ( 53 ) Unrealized (loss) gain recognized on equity securities still held $ ( 466 ) $ ( 3,576 ) $ 274 $ ( 3,220 ) 35 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 5. Loans Receivable, Net Loans receivable, net at September 30, 2021 and December 31, 2020 consisted of the following (in thousands): September 30, December 31, 2021 2020 Commercial: Commercial and industrial (1) $ 457,674 $ 470,656 Commercial real estate – owner occupied 1,123,973 1,145,065 Commercial real estate – investor 3,922,983 3,491,464 Total commercial 5,504,630 5,107,185 Consumer: Residential real estate 2,401,240 2,309,459 Home equity loans and lines and other consumer 275,962 339,462 Total consumer 2,677,202 2,648,921 Total loans receivable 8,181,832 7,756,106 Deferred origination costs, net 8,282 9,486 Allowance for loan credit losses ( 50,153 ) ( 60,735 ) Total loans receivable, net $ 8,139,961 $ 7,704,857 (1) The commercial and industrial loans balance at September 30, 2021 and December 31, 2020 includes Paycheck Protection Program (“PPP”) loans of $ 52.5 million and $ 95.4 million, respectively. The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. Generally, risk ratings for loans on forbearance pursuant to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, extended by the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021, are not re-evaluated until the initial 90-day forbearance period ends. At that time, risk ratings are updated with an emphasis on industries that were heavily impacted by the pandemic, as well as individual borrower liquidity, and other measures of resiliency as described below. The Company evaluates risk ratings on an ongoing basis and as such, adversely rated loans will be re-evaluated as government restrictions end and businesses resume normal operations. The Company uses the following definitions for risk ratings: Pass : Loans classified as Pass are well protected by the paying capacity and net worth of the borrower. Special Mention : Loans classified as Special Mention have a potential weakness that deserves management’s close attention. This includes borrowers that have been negatively affected by the pandemic but demonstrate some degree of liquidity. This liquidity may or may not be adequate to resume operations. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard : Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in the assessment, do not have adequate liquidity available to resume operations at levels sufficient to service their current debt levels. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful : Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 36 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following tables summarize total loans by year of origination, internally assigned credit grades and risk characteristics (in thousands): 2021 2020 2019 2018 2017 2016 and prior Revolving lines of credit Total September 30, 2021 Commercial and industrial Pass $ 67,130 $ 25,950 $ 27,728 $ 17,799 $ 10,361 $ 74,014 $ 220,570 $ 443,552 Special Mention — 72 240 438 96 601 2,797 4,244 Substandard — 603 2,542 838 52 978 4,865 9,878 Total commercial and industrial 67,130 26,625 30,510 19,075 10,509 75,593 228,232 457,674 Commercial real estate - owner occupied Pass 84,621 74,192 126,131 124,268 112,848 496,831 13,056 1,031,947 Special Mention — — 2,958 4,010 696 15,761 203 23,628 Substandard — 3,446 12,600 8,416 5,707 37,174 1,055 68,398 Total commercial real estate - owner occupied 84,621 77,638 141,689 136,694 119,251 549,766 14,314 1,123,973 Commercial real estate - investor Pass 878,697 624,794 535,828 274,668 382,965 844,970 237,610 3,779,532 Special Mention — — 23,822 9,409 5,223 29,565 — 68,019 Substandard — 4,289 29,124 685 8,656 29,510 3,168 75,432 Total commercial real estate - investor 878,697 629,083 588,774 284,762 396,844 904,045 240,778 3,922,983 Residential real estate (1) Pass 648,364 509,408 317,460 145,652 119,991 655,803 — 2,396,678 Special Mention — 801 145 — — 1,481 — 2,427 Substandard — — — — 221 1,914 — 2,135 Total residential real estate 648,364 510,209 317,605 145,652 120,212 659,198 — 2,401,240 Consumer (1) Pass 20,208 21,016 18,985 58,392 18,930 135,436 — 272,967 Special Mention — — — — — 369 — 369 Substandard — — — 18 — 2,608 — 2,626 Total consumer 20,208 21,016 18,985 58,410 18,930 138,413 — 275,962 Total loans $ 1,699,020 $ 1,264,571 $ 1,097,563 $ 644,593 $ 665,746 $ 2,327,015 $ 483,324 $ 8,181,832 (1) For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 37 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) 2020 2019 2018 2017 2016 2015 and prior Revolving lines of credit Total December 31, 2020 Commercial and industrial Pass $ 137,262 $ 40,737 $ 27,967 $ 18,845 $ 33,568 $ 59,339 $ 134,140 $ 451,858 Special Mention 150 583 826 1,422 907 118 1,429 5,435 Substandard 581 1,284 1,243 809 439 1,706 7,301 13,363 Total commercial and industrial 137,993 42,604 30,036 21,076 34,914 61,163 142,870 470,656 Commercial real estate - owner occupied Pass 96,888 114,506 122,962 124,050 104,264 428,423 18,932 1,010,025 Special Mention — 3,512 8,240 1,023 17,115 17,811 439 48,140 Substandard — 34,670 9,001 3,404 3,677 35,509 639 86,900 Total commercial real estate - owner occupied 96,888 152,688 140,203 128,477 125,056 481,743 20,010 1,145,065 Commercial real estate - investor Pass 635,930 628,435 317,104 426,268 281,876 812,062 194,913 3,296,588 Special Mention — 15,979 17,113 15,225 4,234 55,872 149 108,572 Substandard 4,311 9,217 1,931 17,222 11,474 36,326 5,823 86,304 Total commercial real estate - investor 640,241 653,631 336,148 458,715 297,584 904,260 200,885 3,491,464 Residential real estate (1) Pass 595,982 437,593 226,435 166,773 146,237 729,037 — 2,302,057 Special Mention — 532 — — 446 2,186 — 3,164 Substandard 570 — 1,489 221 — 1,958 — 4,238 Total residential real estate 596,552 438,125 227,924 166,994 146,683 733,181 — 2,309,459 Consumer (1) Pass 24,954 26,659 83,296 25,469 16,565 156,276 2,145 335,364 Special Mention — — — — 150 382 — 532 Substandard — — — — — 3,566 — 3,566 Total consumer 24,954 26,659 83,296 25,469 16,715 160,224 2,145 339,462 Total loans $ 1,496,628 $ 1,313,707 $ 817,607 $ 800,731 $ 620,952 $ 2,340,571 $ 365,910 $ 7,756,106 (1) For residential real estate and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. 38 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) An analysis of the allowance for credit losses on loans for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands): Commercial and Industrial Commercial Real Estate – Owner Occupied Commercial Real Estate – Investor Residential Real Estate Consumer Unallocated Total For the three months ended September 30, 2021 Allowance for credit losses on loans Balance at beginning of period $ 4,404 $ 6,350 $ 33,037 $ 8,818 $ 1,267 $ — $ 53,876 Credit loss expense (benefit) 1,962 515 ( 9,902 ) 3,081 235 — ( 4,109 ) Charge-offs ( 50 ) ( 64 ) — ( 12 ) ( 37 ) — ( 163 ) Recoveries 50 26 5 292 176 — 549 Balance at end of period $ 6,366 $ 6,827 $ 23,140 $ 12,179 $ 1,641 $ — $ 50,153 For the three months ended September 30, 2020 Allowance for credit losses on loans Balance at beginning of period $ 4,979 $ 2,765 $ 8,860 $ 17,685 $ 4,220 $ — $ 38,509 Credit loss (benefit) expense ( 106 ) 5,166 30,131 ( 1,891 ) ( 464 ) — 32,836 Charge-offs ( 575 ) ( 2,252 ) ( 12,037 ) ( 6 ) ( 541 ) — ( 15,411 ) Recoveries 29 2 32 320 33 — 416 Balance at end of period $ 4,327 $ 5,681 $ 26,986 $ 16,108 $ 3,248 $ — $ 56,350 For the nine months ended September 30, 2021 Allowance for credit losses on loans Balance at beginning of period $ 5,390 $ 15,054 $ 26,703 $ 11,818 $ 1,770 $ — $ 60,735 Credit loss expense (benefit) 958 ( 8,225 ) ( 3,336 ) 284 ( 705 ) — ( 11,024 ) Charge-offs ( 83 ) ( 64 ) ( 345 ) ( 254 ) ( 193 ) — ( 939 ) Recoveries 101 62 118 331 769 — 1,381 Balance at end of period $ 6,366 $ 6,827 $ 23,140 $ 12,179 $ 1,641 $ — $ 50,153 For the nine months ended September 30, 2020 Allowance for credit losses on loans Balance at beginning of period $ 1,458 $ 2,893 $ 9,883 $ 2,002 $ 591 $ 25 $ 16,852 Impact of CECL adoption 2,416 ( 1,109 ) ( 5,395 ) 3,833 2,981 ( 25 ) 2,701 Credit loss (benefit) expense ( 275 ) 6,120 34,208 10,749 ( 727 ) — 50,075 Initial allowance for credit losses on purchased with credit deterioration (“PCD”) loans 1,221 26 260 109 1,023 — 2,639 Charge-offs ( 575 ) ( 2,253 ) ( 12,062 ) ( 1,351 ) ( 723 ) — ( 16,964 ) Recoveries 82 4 92 766 103 — 1,047 Balance at end of period $ 4,327 $ 5,681 $ 26,986 $ 16,108 $ 3,248 $ — $ 56,350 A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At September 30, 2021 and December 31, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $ 416,000 and $ 1.9 million, respectively, commercial real estate - owner occupied of $ 12.5 million and $ 13.8 million, respectively, and commercial real estate - investor of $ 8.5 million and $ 18.3 million, respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $ 669,000 and $ 1.4 million at September 30, 2021 and December 31, 2020, respectively. At both September 30, 2021 and December 31, 2020, the amount of foreclosed residential real estate property held by the Company was $ 106,000 . 39 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of September 30, 2021 and December 31, 2020 (in thousands): September 30, December 31, 2021 2020 Commercial and industrial $ 418 $ 1,908 Commercial real estate – owner occupied 12,524 13,751 Commercial real estate – investor 8,506 18,287 Residential real estate 5,505 8,671 Consumer 3,351 4,246 $ 30,304 $ 46,863 At September 30, 2021, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At September 30, 2021 and December 31, 2020, there were no loans that were 90 days or greater past due and still accruing interest. The following table presents the aging of the recorded investment in past due loans as of September 30, 2021 and December 31, 2020 by loan portfolio segment (in thousands): 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total September 30, 2021 Commercial and industrial $ 1,797 $ — $ 354 $ 2,151 $ 455,523 $ 457,674 Commercial real estate – owner occupied 515 — 6,992 7,507 1,116,466 1,123,973 Commercial real estate – investor 1,074 95 1,663 2,832 3,920,151 3,922,983 Residential real estate 308 2,427 2,136 4,871 2,396,369 2,401,240 Consumer 1,255 369 2,626 4,250 271,712 275,962 $ 4,949 $ 2,891 $ 13,771 $ 21,611 $ 8,160,221 $ 8,181,832 December 31, 2020 Commercial and industrial $ 3,050 $ 628 $ 327 $ 4,005 $ 466,651 $ 470,656 Commercial real estate – owner occupied 1,015 — 7,871 8,886 1,136,179 1,145,065 Commercial real estate – investor 8,897 3,233 11,122 23,252 3,468,212 3,491,464 Residential real estate 15,156 3,164 4,238 22,558 2,286,901 2,309,459 Consumer 978 533 3,568 5,079 334,383 339,462 $ 29,096 $ 7,558 $ 27,126 $ 63,780 $ 7,692,326 $ 7,756,106 The Company classifies certain loans as troubled debt restructured (“TDR”) loans when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Bank retains its security interest in the real estate collateral. At September 30, 2021 and December 31, 2020, TDR loans totaled $ 19.6 million and $ 17.5 million, respectively. Included in the non-accrual loan total at September 30, 2021 and December 31, 2020 were $ 10.0 million and $ 5.5 million, respectively, of TDR loans. At September 30, 2021 and December 31, 2020, the Company had no specific reserves allocated to loans that are classified as TDR loans. Non-accrual loans which become TDR loans are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has loans classified as accruing loans which totaled $ 9.6 million and $ 12.0 million at September 30, 2021 and December 31, 2020, respectively. 40 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table presents information about TDR loans which occurred during the three and nine months ended September 30, 2021 and 2020 (dollars in thousands): Number of Loans Pre-modification Recorded Investment Post-modification Recorded Investment Three months ended September 30, 2021 Troubled debt restructurings: Commercial real estate - owner occupied 1 $ 93 $ 110 Three months ended September 30, 2020 Troubled debt restructurings: Commercial real estate – investor 1 $ 928 $ 993 Residential real estate 1 418 418 Consumer 1 16 16 Nine months ended September 30, 2021 Troubled debt restructurings: Commercial real estate - owner occupied 1 $ 93 $ 110 Commercial real estate – investor 1 4,903 4,903 Residential real estate 3 244 336 Consumer 2 26 33 Nine months ended September 30, 2020 Troubled debt restructurings: Commercial real estate - owner occupied 1 $ 1,112 $ 1,143 Commercial real estate – investor 1 928 993 Residential real estate 5 849 865 Consumer 5 175 193 There were no TDR loans that defaulted during the three months ended September 30, 2021 which were modified within the preceding year. There was one TDR commercial real estate - investor loan for $ 923,000 that defaulted during the nine months ended September 30, 2021 which was modified within the preceding year and the loan is now current. There were no TDR loans that defaulted during the three and nine months ended September 30, 2020 which were modified within the preceding year. In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act, extended by the CRRSA Act, were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. All payments received will first be applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, then to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either December 31, 2019 or the date of the modification, these loans are not considered TDR loans at September 30, 2021 and will not be reported as past due during the deferral period. 41 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 6. Deposits The major types of deposits at September 30, 2021 and December 31, 2020 were as follows (in thousands): Type of Account September 30, December 31, 2021 2020 Non-interest-bearing $ 2,467,952 $ 2,133,195 Interest-bearing checking 4,013,565 3,646,866 Money market deposit 816,691 783,521 Savings 1,620,447 1,491,251 Time deposits 855,442 1,372,783 Total deposits $ 9,774,097 $ 9,427,616 Included in time deposits at September 30, 2021 and December 31, 2020 was $ 137.7 million and $ 409.5 million, respectively, in deposits of $250,000 or more. 42 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 7. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means. Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. Assets and Liabilities Measured at Fair Value A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Debt Securities Available-for-Sale Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities. Equity Investments Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity securities without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. 43 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Interest Rate Derivatives The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty. Other Real Estate Owned and Loans Individually Measured for Impairment Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3). The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2021 and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands): Fair Value Measurements at Reporting Date Using: Total Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs September 30, 2021 Items measured on a recurring basis: Debt securities available-for-sale $ 314,620 $ — $ 314,620 $ — Equity investments 91,191 13,658 75,177 2,356 Interest rate derivative asset 27,503 — 27,503 — Interest rate derivative liability ( 27,589 ) — ( 27,589 ) — Items measured on a non-recurring basis: Equity investments 10,123 — — 10,123 Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 22,114 — — 22,114 December 31, 2020 Items measured on a recurring basis: Debt securities available-for-sale $ 183,302 $ — $ 183,302 $ — Equity investments 107,079 104,539 — 2,540 Interest rate derivative asset 45,289 — 45,289 — Interest rate derivative liability ( 45,429 ) — ( 45,429 ) — Items measured on a non-recurring basis: Other real estate owned 106 — — 106 Loans measured for impairment based on the fair value of the underlying collateral 35,366 — — 35,366 44 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table reconciles, for the three and nine months ended September 30, 2021 and 2020, the beginning and ending balances for equity investments and debt securities available-for-sale that are recognized at fair value on a recurring basis, in the consolidated statements of financial condition, using significant unobservable inputs (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Equity Investments Debt Securities Equity Investments Debt Securities Beginning balance $ 2,978 $ 2,402 $ 2,540 $ 25 Total losses included in earnings ( 622 ) — ( 184 ) — Purchases — — — 2,377 Ending balance $ 2,356 $ 2,402 $ 2,356 $ 2,402 There were no debt securities in Level 3 for the three and nine months ended September 30, 2021. There were no equity securities in Level 3 for the three and nine months ended September 30, 2020. The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers into or out of Level 3 assets or liabilities in the fair value hierarchy for the three and nine months ended September 30, 2021 and 2020. Assets and Liabilities Disclosed at Fair Value A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below. Cash and Due from Banks For cash and due from banks, the carrying amount approximates fair value. Debt Securities Held-to-Maturity Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s investment and mortgage-backed securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations, known as Bond Anticipation Notes (“BANs”), as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency. Restricted Equity Investments The fair value for Federal Home Loan Bank of New York and Federal Reserve Bank stock is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective agencies. Loans Receivable and Loans Held-for-Sale Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms. Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. The fair value of loans was measured using the exit price notion. 45 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Deposits Other than Time Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. Time Deposits The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase with Retail Customers Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly. Borrowed Funds Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities. The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of September 30, 2021 and December 31, 2020 are presented in the following tables (in thousands): Fair Value Measurements at Reporting Date Using: Book Value Level 1 Inputs Level 2 Inputs Level 3 Inputs September 30, 2021 Financial Assets: Cash and due from banks $ 981,126 $ 981,126 $ — $ — Debt securities held-to-maturity 1,125,382 — 1,125,486 17,895 Restricted equity investments 53,017 — — 53,017 Loans receivable, net and loans held-for-sale 8,153,389 — — 8,140,267 Financial Liabilities: Deposits other than time deposits 8,918,655 — 8,918,655 — Time deposits 855,442 — 857,767 — Other borrowings 228,887 — 256,577 — Securities sold under agreements to repurchase with retail customers 143,292 143,292 — — December 31, 2020 Financial Assets: Cash and due from banks $ 1,272,134 $ 1,272,134 $ — $ — Debt securities held-to-maturity 937,253 — 952,365 16,101 Restricted equity investments 51,705 — — 51,705 Loans receivable, net and loans held-for-sale 7,750,381 — — 7,806,743 Financial Liabilities: Deposits other than time deposits 8,054,833 — 8,054,833 — Time deposits 1,372,783 — 1,383,173 — FHLB advances and other borrowings 235,471 — 251,798 — Securities sold under agreements to repurchase with retail customers 128,454 128,454 — — Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 46 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 47 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 8. Derivatives, Hedging Activities and Other Financial Instruments The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to Bank customers. The Company does not use derivative financial instruments for trading purposes. Customer Derivatives – Interest Rate Swaps and Cap Contracts The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. The Company recognized gains of $ 14,000 and $ 55,000 in other income resulting from fair value adjustments for the three and nine months ended September 30, 2021, respectively, as compared to gains of $ 15,000 and $ 364,000 in other income resulting from fair value adjustments for the three and nine months ended September 30, 2020, respectively. The notional amount of derivatives not designated as hedging instruments was $ 925.4 million and $ 725.9 million at September 30, 2021 and December 31, 2020, respectively. The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands): Fair Value Balance Sheet Location September 30, December 31, 2021 2020 Other assets $ 27,503 $ 45,289 Other liabilities 27,589 45,429 Credit Risk-Related Contingent Features The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $ 26.5 million and $ 46.5 million at September 30, 2021 and December 31, 2020, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $ 27.6 million and $ 45.4 million at September 30, 2021 and December 31, 2020, respectively. 48 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 9. Leases A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, automated teller machine locations and office space with terms extending through 2050. The Company has one existing finance lease, which has a lease term through 2029. The following table represents the classification of the Company’s right-of-use (“ROU”) assets and lease liabilities on the consolidated statements of financial condition (in thousands): September 30, December 31, 2021 2020 Lease ROU Assets Classification Operating lease ROU assets Other assets $ 21,117 $ 22,555 Finance lease ROU asset Premises and equipment, net 1,545 1,694 Total lease ROU assets $ 22,662 $ 24,249 Lease Liabilities Operating lease liabilities (1) Other liabilities $ 21,713 $ 22,990 Finance lease liability Other borrowings 1,954 2,100 Total lease liabilities $ 23,667 $ 25,090 (1) Operating lease liabilities excludes liabilities for future rent and lease termination payments related to closed branches of $ 5.3 million and $ 7.4 million as of September 30, 2021 and December 31, 2020, respectively. The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Leases (Topic 842) requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception. September 30, December 31, 2021 2020 Weighted-Average Remaining Lease Term Operating leases 7.98 years 7.77 years Finance lease 7.85 years 8.59 years Weighted-Average Discount Rate Operating leases 2.94 % 3.01 % Finance lease 5.63 5.63 49 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) The following table represents lease expenses and other lease information (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Lease Expense Operating lease expense $ 1,498 $ 1,585 $ 4,459 $ 4,898 Finance lease expense: Amortization of ROU assets 50 43 149 124 Interest on lease liabilities (1) 28 27 85 80 Total $ 1,576 $ 1,655 $ 4,693 $ 5,102 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,322 $ 1,756 $ 4,119 $ 4,808 Operating cash flows from finance leases 28 27 85 80 Financing cash flows from finance leases 50 47 146 141 (1) Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense. The Company previously announced plans to sell two branches, including owned premises and equipment, all deposits associated with the branches and selected performing loans to First Bank which is expected to take place in early December 2021. The Company also announced plans to consolidate 20 deposit gathering locations in late 2021 and early 2022. These plans have resulted in a shortened estimated useful life for premises and equipment and accelerated recognition of lease expenses associated with these branches. The effect on income for the three and nine months ended September 30, 2021 is included in branch consolidation expenses and totaled $ 3.8 million, which are excluded above. Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of September 30, 2021 were as follows (in thousands): Finance Lease Operating Leases For the Twelve Months Ending September 30, 2022 $ 307 $ 5,382 2023 307 3,782 2024 307 3,231 2025 307 2,927 2026 307 2,162 Thereafter 875 7,423 Total 2,410 24,907 Less: Imputed interest ( 456 ) ( 3,194 ) Total lease liabilities $ 1,954 $ 21,713 50 Table of Contents OceanFirst Financial Corp. Notes to Unaudited Consolidated Financial Statements (Continued) Note 10. Subsequent Event On November 4, 2021, the Company announced the execution of a definitive agreement and plan of merger (the merger agreement) with Partners Bancorp. (“Partners”), a multi-bank holding company operating under the brands of Virginia Partners Bank, Maryland Partners Bank, The Bank of Delmarva, and Liberty Bell Bank. The transaction is subject to receipt of the approval of Partners’ stockholders and required regulatory approval. Subject to receipt of those approvals and fulfillment of other customary closing conditions, the Company expects to close the transaction in the first half of 2022. 51 Table of Contents PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.