OCEANFIRST FINANCIAL: Management report and analysis of the financial situation and operating results (form 10-K)

Overview
OceanFirst Financial Corp. has been the holding company forOceanFirst Bank since it acquired the stock of the Bank upon the Bank's Conversion. The Company conducts business primarily through its ownership of the Bank which, atDecember 31, 2020 , operated its branch office and headquarters inToms River, New Jersey , its administrative office located inRed Bank, New Jersey , an administrative office located inMount Laurel, New Jersey , and 61 additional branch offices and six deposit production facilities located throughout central and southernNew Jersey , and the greater metropolitan area ofNew York City . The Bank also operated commercial loan production offices inNew York City , the greaterPhiladelphia area and inAtlantic andMercer Counties inNew Jersey . The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on the Company's interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, and other fees. The Company's operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees and other general and administrative expenses. The Company's results of operations are also significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies and actions of regulatory agencies. Impact of COVID-19 OnMarch 16, 2020 , the Company announced a series of actions intended to help mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities. The Company offers its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of eitherDecember 31, 2019 or the date of the modification. In addition, in keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security ("CARES") Act, these loans are not considered troubled debt restructured ("TDR") loans atDecember 31, 2020 and will not be reported as past due during the deferral period. OnDecember 27, 2020 , the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which contains provisions that could directly impact financial institutions. The act extends the PPP, which was originally established under the CARES Act, and provides the Company the ability to continue its Borrower Relief Program. In keeping with regulatory guidance under the CARES Act, these loan deferrals are not considered TDR loans atDecember 31, 2020 and will not be reported as past due during the deferral period. The Commercial Borrower Relief Program includes: (1) public accommodation businesses, such as restaurants/caterers, and certain retail establishments, that are forced to close, which are eligible for full deferral of loan payments (principal and interest) for 90 days and immediate working capital facilities up to$200,000 ; (2) public accommodation businesses that are reducing services in response to the pandemic (such as reducing capacity, transitioning to take-out only, etc.), which are eligible to make interest-only payments and defer principal payments for 90 days, and immediate working capital facilities up to$100,000 ; and (3) additional relief programs, including but not limited to extension of initial forbearance periods, may be available to the Bank's commercial borrowers on an individualized basis, depending on the borrower's circumstances. The Consumer Borrower Relief Program includes deferral of residential mortgage or consumer loan payments (principal and interest) for 90 days upon request. To be eligible, the borrower must have experienced a financial hardship related to COVID-19. Borrowers may apply for a second 90-day deferral period for hardships related to COVID-19. Subsequent deferral requests may be available on an individualized basis, depending on the borrower's circumstances. AtDecember 31, 2020 , COVID-19 related loans under full forbearance have been substantially resolved. Further, due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value. As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable. The Company assesses the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal. 41 -------------------------------------------------------------------------------- The Company also accepted and processed applications for loans under the PPP.The Company disbursed$504 million and recorded deferred processing fees of$17.7 million . The Company sold$298.1 million of these loans onOctober 29, 2020 , recognizing a gain of$5.1 million . AtDecember 31, 2020 ,$95.4 million in PPP loans and$2.0 million in deferred fees remained on the balance sheet. In addition, COVID-19 could cause a goodwill impairment test where a triggering event has occurred, and under certain circumstances may result in an impairment charge recorded in that period. Such a charge would not impact the Company's tangible stockholders' equity to tangible assets ratio of 8.79% or regulatory capital. The Company completed its annual goodwill impairment test as ofAugust 31, 2020 . As part of this test, a quantitative assessment was performed to estimate the fair value of the Company by utilizing a weighted discounted cash flow method, guideline public company method and transaction method. The results of the evaluation concluded that the fair value of the Company exceeded the carrying value, and therefore goodwill impairment did not exist as of the test date. AtDecember 31, 2020 , the Company performed a qualitative assessment to ensure no events or circumstances had occurred subsequent toAugust 31, 2020 that would impact goodwill. The Company determined based on theDecember 31, 2020 qualitative evaluation, no triggering events occurred and therefore no impairment existed.
The full impact of COVID-19 is unknown and is evolving rapidly. It affects the business and financial results of the Company, as well as those of the Bank’s clients. For the year ended
For further discussion, refer to Risk Factors - Risk Related to the COVID-19 Pandemic. Acquisitions OnJanuary 1, 2020 , the Company completed its acquisition ofTwo River which added$1.1 billion to assets,$940.1 million to loans, and$941.8 million to deposits. Two River's results of operations are included in the consolidated results for the period beginning onJanuary 1, 2020 . OnJanuary 1, 2020 , the Company completed its acquisition ofCountry Bank which added$793.7 million to assets,$618.4 million to loans,$652.7 million to deposits.Country Bank's results of operations are included in the consolidated results for the period beginning onJanuary 1, 2020 . OnJanuary 31, 2019 , the Company completed its acquisition ofCapital Bank which added$494.4 million to assets,$307.3 million to loans, and$449.0 million to deposits.Capital Bank's results of operations are included in the consolidated results for the period beginning onFebruary 1, 2019 . OnJanuary 31, 2018 , the Company completed its acquisition of Sun which added$2.0 billion to assets,$1.5 billion to loans, and$1.6 billion to deposits. Sun's results of operations are included in the consolidated results for the period beginning onFebruary 1, 2018 . These transactions have enhanced the Bank's position as the premier community banking franchise in central and southernNew Jersey , and metropolitan areas ofPhiladelphia andNew York City and they have grown business lines, expanded the geographic footprint and improved financial performance. The Company will continue to evaluate potential acquisition opportunities to further create stockholder value. Strategy The Company operates as a full-service community bank delivering commercial and consumer financing solutions, deposit services and wealth management products and services throughoutNew Jersey and the metropolitan areas ofPhiladelphia andNew York City . The Bank is the largest and oldest community-based financial institution headquartered inOcean County, New Jersey . The Bank competes with larger, out-of-market financial service providers through its local and digital focus and the delivery of superior service. The Bank also competes with smaller in-market financial service providers by offering a broad array of products and services and by having an ability to extend larger credits. The Company's strategy has been to grow profitability while limiting exposure to credit, interest rate and operational risks. To accomplish these objectives, the Bank has sought to (1) grow commercial loans through the offering of commercial lending services to local businesses; (2) grow core deposits (defined as all deposits other than time deposits) through product offerings appealing to a broadened customer base; and (3) increase non-interest income by expanding the menu of fee-based products and services and investing additional resources in these product lines. The growth in these areas has occurred both organically and through acquisitions. 42 -------------------------------------------------------------------------------- The Company will focus on prudent growth to create value for stockholders, which may include opportunistic acquisitions. The Company will also continue to build additional operational infrastructure and invest in key personnel in response to growth and changing business conditions. Growing Commercial Loans With industry consolidation eliminating most locally-headquartered competitors, the Company fills a void for locally-delivered commercial loan and deposit services. The Bank has strategically and steadily added experienced commercial lenders in variousNew Jersey counties as well as teams inNew York City and the greaterPhiladelphia area. AtDecember 31, 2020 , commercial loans (which include multi-family and commercial real estate loans, commercial construction loans and commercial and industrial loans) represented 65.5% of the Bank's total loans, as compared to 48.5% atDecember 31, 2015 . Commercial loan products entail a higher degree of credit risk than is involved in residential real estate lending activity. As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and close management and Board monitoring. See Risk Factors - The Bank's emphasis on commercial lending may expose the Bank to increased lending risks. Increasing Core Deposits The Bank seeks to increase core deposits (all deposits excluding time deposits) in its primary market area by improving market penetration. Core account development has benefited from Bank efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core account products. As a result of these efforts the Bank's core deposits ratio was 85.4% and the loans to deposits ratio was 82.3% atDecember 31, 2020 . Enhancing Non-Interest Income Management continues to diversify the Bank's product lines and expand related resources in order to enhance non-interest income. The Bank is focused on growth opportunities in areas such as derivative contracts, trust and asset management, digital product offerings, and equity investments in non-bank finance companies. The Bank also offers investment products for sale through its retail branch network. In 2018, the Bank replaced its third-party broker/dealer investment sales program with a hybrid robo-advisor product offered by the Bank's partner, Nest Egg, a registered investment adviser. Nest Egg is an investment platform that helps define and reach financial goals by providing access to high quality and cost-effective investments. It includes web-based tools as well as access to personal financial advisors via telephone, chat, or video. AtDecember 31, 2020 , the Company had an ownership interest of less than 20% in NestEgg and a seat on the Board of Directors. The Company's minority interest in Nest Egg does not require separate entity reporting. OnJanuary 29, 2021 , the Company made a minority, non-controlling equity investment inAuxilior Capital Partners ("Auxilior") and received a seat on the Auxilior Board of Directors. Auxilior was formed in 2020 as a nationwide specialty commercial equipment finance company focused on five key business verticals: construction and infrastructure, transportation and logistics, franchise finance, healthcare, and bank outsourcing. In addition to origination, underwriting, asset management, and customer service functions within each industry vertical, Auxilior can syndicate full loans as well as participations to banks, funds, and other third-party buyers of assets. Branch Rationalization and Service Delivery Management continues to evaluate the Bank's branch network for consolidation opportunities. The Bank consolidated 13 branches in 2020, following the consolidation of eight and 17 branches in 2019 and 2018, respectively, bringing the total number of branches consolidated to 57 over the past five years. In addition to branch consolidation, the Bank is adapting to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff handling sales and service transactions, as well as increasing the marketing of products that feature digital and mobile services. In certain locations, routine transactions are handled through Video Teller Machines, an advanced technology with live team members in a remote location performing transactions for multiple Video Teller Machines. The Bank is also investing in multiple digital services to enhance the customer experience and improve security. AtDecember 31, 2020 , all of the branch staff were trained as Certified Digital Bankers to better support customers use and adoption of digital services. 43 -------------------------------------------------------------------------------- Capital Management In addition to the objectives described above, the Company actively manages its capital position to improve return on tangible equity. The Company has, over the past few years, implemented or announced, five stock repurchase programs. The most recent plan to repurchase up to 5% of outstanding common stock was announced onDecember 18, 2019 to repurchase up to an additional 2.5 million shares. The Company suspended its repurchase activity onFebruary 28, 2020 in light of the COVID-19 pandemic and subsequently determined to recommence repurchases under its existing stock repurchase plan inFebruary 2021 . For the year endedDecember 31, 2020 , the Company repurchased 648,851 shares of its common stock under these repurchase programs. AtDecember 31, 2020 , 2,019,145 shares remain available for repurchase. InMay 2020 , the Company raised$55.7 million of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of$0.01 and a liquidation price of$1,000 per share. The proceeds were retained to strengthen capital and balance sheet liquidity entering the economic downturn. Summary Highlights of the Company's financial results for the year endedDecember 31, 2020 were as follows: Total assets increased to$11.45 billion atDecember 31, 2020 , from$8.25 billion atDecember 31, 2019 . Loans receivable, net of allowance for credit losses, increased by$1.50 billion atDecember 31, 2020 , as compared toDecember 31, 2019 , while deposits increased$3.10 billion over the same period. The increases were primarily the result of theTwo River andCountry Bank acquisitions and$1.51 billion of organic deposit growth. Net income available to common stockholders for the year endedDecember 31, 2020 was$61.2 million , or$1.02 per diluted share, as compared to net income of$88.6 million , or$1.75 per diluted share for the prior year. Net income for the year endedDecember 31, 2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, branch consolidation expenses, merger related expenses, andTwo River andCountry Bank opening credit loss expense under the CECL model. These items decreased net income, net of tax, for the year endedDecember 31, 2020 by$11.0 million . Net income for the year endedDecember 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in theNew Jersey tax code, of$16.3 million , net of tax. These items reduced diluted earnings per share by$0.18 and$0.32 , respectively, for the years endedDecember 31, 2020 and 2019. Annual results for 2020 were impacted by the COVID-19 pandemic, through higher credit losses, net interest margin compression and increased operating expenses. The Company remains well-capitalized with a tangible stockholders' equity to tangible assets ratio of 8.79% atDecember 31, 2020 . Critical Accounting Policies Note 1 Summary of Significant Accounting Policies, to the Company's Audited Consolidated Financial Statements for the year endedDecember 31, 2020 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses and judgments regarding securities are the most critical accounting policies because they are important to the presentation of the Company's financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors. OnJanuary 1, 2020 , the Company adopted Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). This ASU significantly changed the Company's allowance for credit losses accounting policy that existed atDecember 31, 2019 . ASU 2016-13 is the most critical accounting policy in the preparation of the consolidated financial statements as of and for the period endedDecember 31, 2020 . 44 -------------------------------------------------------------------------------- Allowance for Credit Losses Under the CECL model, the allowance for credit losses ("ACL") on financial assets is a valuation allowance estimated at each balance sheet date in accordance with generally accepted accounting principles ("GAAP") that is deducted from the financial assets' amortized cost basis to present the net amount expected to be collected on the financial assets. The CECL model also applies to certain off-balance sheet credit exposures. The Company estimates the ACL on loans based on the underlying assets' amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the ACL. For loans under forbearance as a result of COVID-19, the Company made a policy election to include the accrued interest receivable related to such loans in the amortized cost basis and therefore includes it in the measurement of the ACL. Accrued interest receivable atDecember 31, 2020 was$35.3 million , of which$8.0 million related to forbearance loans. Expected credit losses are reflected in the ACL through a charge to credit loss expense. The Company's estimate of the ACL reflects credit losses currently expected over the remaining contractual life of the assets. When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible. When available information confirms that specific financial assets, or portions thereof, are uncollectible, these amounts are charged-off against the ACL. Subsequent recoveries, if any, are credited to the ACL when received. The Company measures the ACL of financial assets on a collective portfolio segment basis when the financial assets share similar risk characteristics. The Company has identified the following portfolio segments of financial assets with similar risk characteristics for measuring expected credit losses: commercial and industrial, commercial real estate - owner occupied, commercial real estate - investor (including commercial real estate - construction and land), residential real estate, consumer (including student loans) and held-to-maturity ("HTM") debt securities. The Company further segments the commercial loan portfolios by risk rating, and the residential and consumer loan portfolios by delinquency. The HTM portfolio is segmented by rating category. The Company's methodology to measure the ACL incorporates both quantitative and qualitative information to assess lifetime expected credit losses at the portfolio segment level. The quantitative component includes the calculation of loss rates using an open pool method. Under this method, the Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The historical loss rate is adjusted for select macroeconomic variables that consider both historical trends as well as forecasted trends for a single economic scenario. The adjusted loss rate is calculated for an eight quarter forecast period then reverts to the historical loss rate on a straight-line basis over four quarters. The adjusted loss rate is then applied to the exposure at default on an undiscounted basis. The Company differentiates its loss-rate method for HTM debt securities by looking to publicly available historical default and recovery statistics based on the attributes of issuer type, rating category and time to maturity. The Company measures expected credit losses of these financial assets by applying loss rates to the amortized cost basis of each asset taking into consideration amortization, prepayment and default assumptions. The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative factor adjustments may increase or decrease management's estimate of expected credit losses. Adjustments will not be made for information that has already been considered and included in the quantitative allowance. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in loan composition, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics. Collateral Dependent Financial Assets For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable and where the borrower is experiencing financial difficulty, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. Fair value is generally calculated based on the value of the underlying collateral less an appraisal discount and the estimated cost to sell. Due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value. As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable. The Company assesses the individual facts and circumstances of COVID-19-related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal. 45 -------------------------------------------------------------------------------- Troubled Debt Restructured Loans A loan that has been modified or renewed is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. So long as they share similar risk characteristics, TDRs may be collectively evaluated and included in the Company's existing portfolio segments to measure the ACL, unless the TDR is collateral dependent. Loans modified in accordance with the CARES Act are not considered TDRs. Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial assets include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to credit loss expense for off-balance sheet credit exposures. The ACL on off-balance sheet credit exposures is estimated by portfolio segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration management's assumption of the likelihood that funding will occur, and is included in other liabilities on the Company's consolidated balance sheets. Acquired Loans Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. Certain acquired loans are grouped together according to similar risk characteristics and are aggregated when applying various valuation techniques. These cash flow evaluations are subjective as they require material estimates, all of which may be susceptible to significant change. Prior toJanuary 1, 2020 , loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired ("PCI"). PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. Beginning onJanuary 1, 2020 , loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that were current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses was made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior toJanuary 1, 2020 were converted to PCD on that date. The transition adjustment for the PCI loans to PCD loans resulted in a reclassification of$3.2 million from the specific credit fair value adjustment to the allowance for credit losses on loans. For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. 46 -------------------------------------------------------------------------------- Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company for each of the years endedDecember 31, 2020 , 2019 and 2018. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields. For the Year Ended December 31, 2020 2019 2018 Average Average Average Average Yield/ Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest
Cost Balance Interest Cost
Assets:
Interest-earning assets: Interest-earning deposits and short-term investments$ 613,971 $ 1,034 0.17 %$ 57,742 $ 1,299 2.25 %$ 49,683 $ 896 1.80 % Securities (1) 1,159,764 29,353 2.53 1,048,779 27,564 2.63 1,073,454 26,209 2.44 Loans receivable, net (2) Commercial real estate 5,299,813 236,749 4.47 3,329,396 168,507 5.06 3,012,521 149,965 4.98 Residential real estate 2,465,740 93,120 3.78 2,204,931 87,729 3.98 1,965,395 79,805 4.06 Home equity loans and lines 318,090 15,183 4.77 339,896 18,284 5.38 357,137 17,991 5.04 Other consumer 72,331 4,169 5.76 107,672 5,411 5.03 35,424 1,788 5.05 Allowance for credit losses, net of deferred loan costs and fees (33,343) - - (8,880) - - (9,972) - - Loans receivable, net (2) 8,122,631 349,221 4.30 5,973,015 279,931 4.69 5,360,505 249,549 4.66 Total interest-earning assets 9,896,366 379,608 3.84 7,079,536 308,794 4.36 6,483,642 276,654 4.27 Non-interest-earning assets 1,310,474 964,920 880,836 Total assets$ 11,206,840 $ 8,044,456 $ 7,364,478 Liabilities and Stockholders' Equity: Interest-bearing liabilities: Interest-bearing checking accounts$ 3,168,889 19,395 0.61 %$ 2,517,068 16,820 0.67 %$ 2,336,917 9,219 0.39 % Money market deposit accounts 677,554 2,902 0.43 605,607 4,919 0.81 571,997 2,818 0.49 Savings accounts 1,449,982 2,505 0.17 906,086 1,195 0.13 877,179 990 0.11 Time deposits 1,531,857 23,488 1.53 929,488 15,498 1.67 858,978 9,551 1.11 Total 6,828,282 48,290 0.71 4,958,249 38,432 0.78 4,645,071 22,578 0.49 FHLB advances 413,290 7,018 1.70 387,925 8,441 2.18 382,464 7,885 2.06 Securities sold under agreements to repurchase 125,500 562 0.45 64,525 276 0.43 66,340 168 0.25 Other borrowings 207,386 10,787 5.20 98,095 5,674 5.78 94,644 5,521 5.83 Total interest-bearing liabilities 7,574,458 66,657 0.88 5,508,794 52,823 0.96 5,188,519 36,152 0.70 Non-interest-bearing deposits 2,031,100 1,325,836 1,135,602 Non-interest-bearing liabilities 144,571 80,028 56,098 Total liabilities 9,750,129 6,914,658 6,380,219 Stockholders' equity 1,456,711 1,129,798 984,259 Total liabilities and equity$ 11,206,840 $ 8,044,456 $ 7,364,478 Net interest income$ 312,951 $ 255,971 $ 240,502 Net interest rate spread (3) 2.96 % 3.40 % 3.57 % Net interest margin (4) 3.16 % 3.62 % 3.71 % Total cost of deposits (including non-interest-bearing deposits) 0.55 % 0.61 % 0.39 % Ratio of interest-earning assets to interest-bearing liabilities 130.65 % 128.51 % 124.96 % 47
-------------------------------------------------------------------------------- (1)Amounts represent debt and equity securities, includingFHLB andFederal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for credit losses. (2)Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and estimated loss allowances, and includes loans held-for-sale and non-performing loans. (3)Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (4)Net interest margin represents net interest income divided by average interest-earning assets. 48 -------------------------------------------------------------------------------- Rate Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Year Ended December 31, 2020 Year Ended December 31, 2019 Compared to Compared to Year Ended December 31, 2019 Year Ended December 31, 2018 Increase (Decrease) Due to Increase (Decrease) Due to (in thousands) Volume Rate Net Volume Rate Net Interest-earning assets: Interest-earning deposits and short-term investments$ 1,950 $ (2,215) $ (265) $ 159 $ 244 $ 403 Securities (1) 2,859 (1,070) 1,789 (621) 1,976 1,355 Loans receivable, net (2) Commercial real estate 89,831 (21,589) 68,242 16,085 2,457 18,542 Residential real estate 9,974 (4,583) 5,391 9,528 (1,604) 7,924 Home equity loans and lines (1,121) (1,980) (3,101) (891) 1,184 293 Other consumer (1,951) 709 (1,242) 3,630 (7) 3,623 Loans receivable, net (2) 96,733 (27,443) 69,290 28,352 2,030 30,382 Total interest-earning assets 101,542 (30,728) 70,814 27,890 4,250
32 140
Interest-bearing liabilities: Interest-bearing checking accounts 4,158 (1,583) 2,575 737 6,864 7,601 Money market deposit accounts 522 (2,539) (2,017) 173 1,928 2,101 Savings accounts 866 444 1,310 31 174 205 Time deposits 9,379 (1,389) 7,990 832 5,115 5,947 Total 14,925 (5,067) 9,858 1,773 14,081 15,854 FHLB advances 527 (1,950) (1,423) 109 447 556 Securities sold under agreements to repurchase 273 13 286 (5) 113 108 Other borrowings 5,734 (621) 5,113 200 (47) 153 Total interest-bearing liabilities 21,459 (7,625) 13,834 2,077 14,594
16,671
Net change in net interest income$ 80,083 $ (23,103) $ 56,980 $ 25,813 $ (10,344)
(1)Amounts represent debt and equity securities, includingFHLB andFederal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for credit losses. (2)Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and estimated loss allowances, and includes loans held-for-sale and non-performing loans. Comparison of Financial Condition atDecember 31, 2020 andDecember 31, 2019 Total assets increased by$3.20 billion to$11.45 billion atDecember 31, 2020 , from$8.25 billion atDecember 31, 2019 , primarily as a result of the acquisitions ofTwo River andCountry Bank , which added$2.03 billion to total assets. Cash and due from banks increased by$1.15 billion to$1.27 billion atDecember 31, 2020 , from$120.5 million atDecember 31, 2019 , due to increased deposits, the Company's decision to build liquidity during the economic downturn, the cash received from the issuance of subordinated notes and non-cumulative perpetual preferred stock as described below, and the cash received from loan sales throughout the year. Loans receivable, net of allowance for credit losses, increased by$1.50 billion , to$7.70 billion atDecember 31, 2020 , from$6.21 billion atDecember 31, 2019 , primarily due to acquired loans fromTwo River andCountry Bank of$1.56 billion . As part of the acquisitions ofTwo River andCountry Bank , the Company's goodwill balance increased to$500.3 million atDecember 31, 2020 , from$374.6 million atDecember 31, 2019 and core deposit intangibles increased to 49 --------------------------------------------------------------------------------$23.7 million , from$15.6 million . Other assets increased by$39.4 million to$209.0 million atDecember 31, 2020 , from$169.5 million atDecember 31, 2019 , primarily due to an increase in swap positions. Deposits increased by$3.10 billion , to$9.43 billion atDecember 31, 2020 , from$6.33 billion atDecember 31, 2019 , primarily due to acquired deposits fromTwo River andCountry Bank of$1.59 billion and organic deposit growth of$1.51 billion . The loan-to-deposit ratio atDecember 31, 2020 was 82.3%, as compared to 98.2% atDecember 31, 2019 . The Company utilized the excess liquidity to prepay all FHLB advances in the fourth quarter of 2020, bringing the balance to$0 atDecember 31, 2020 from$519.3 million atDecember 31, 2019 . The increase in other borrowings of$138.7 million , to$235.5 million atDecember 31, 2020 , from$96.8 million atDecember 31, 2019 , primarily resulted from theMay 2020 issuance of$125.0 million in subordinated notes at an initial rate of 5.25% and a stated maturity ofMay 15, 2030 . Other liabilities increased by$92.7 million to$155.3 million atDecember 31, 2020 , from$62.6 million atDecember 31, 2019 , primarily due to an increase in swap positions. Stockholders' equity increased to$1.48 billion atDecember 31, 2020 , as compared to$1.15 billion atDecember 31, 2019 . The acquisitions ofTwo River andCountry Bank added$261.4 million to stockholders' equity. During the three months endedJune 30, 2020 , the Company raised$55.7 million from the issuance of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of$0.01 and a liquidation price of$1,000 per share. Under the Company's stock repurchase program, there were 2,019,145 shares available for repurchase atDecember 31, 2020 . The Company suspended its repurchase activity onFebruary 28, 2020 , due to the COVID-19 pandemic and has subsequently determined to recommence repurchases under its existing stock repurchase plan inFebruary 2021 . For the year endedDecember 31, 2020 , the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of$22.83 . Comparison of Operating Results for the Years EndedDecember 31, 2020 andDecember 31, 2019 General Net income available to common stockholders for the year endedDecember 31, 2020 was$61.2 million , or$1.02 per diluted share, as compared to net income of$88.6 million , or$1.75 per diluted share for the prior year. Net income for the year endedDecember 31, 2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch consolidation expenses, andTwo River andCountry Bank opening credit loss expense under the CECL model. These items decreased net income, net of tax, for the year endedDecember 31, 2020 by$11.0 million . Net income for the year endedDecember 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in theNew Jersey tax code, of$16.3 million , net of tax. The annual results were impacted by the COVID-19 pandemic, through higher credit losses, net interest margin compression and increased operating expenses. Interest Income Interest income for the year endedDecember 31, 2020 , increased to$379.6 million , as compared to$308.8 million in the prior year. Average interest-earning assets increased$2.82 billion for the year endedDecember 31, 2020 , as compared to the prior year. The average for the year endedDecember 31, 2020 was favorably impacted by$1.75 billion of interest-earning assets acquired fromTwo River andCountry Bank . Average loans receivable, net, increased by$2.15 billion for the year endedDecember 31, 2020 , as compared to the prior year. The increase attributable to the acquisitions ofTwo River andCountry Bank was$1.55 billion and the increase related to PPP loans was$227.5 million . The yield on average interest-earning assets decreased to 3.84% for the year endedDecember 31, 2020 , as compared to 4.36% for the prior year. Interest Expense Interest expense for the year endedDecember 31, 2020 , was$66.7 million , as compared to$52.8 million in the prior year, due to an increase in average-interest bearing liabilities of$2.07 billion , primarily related to the acquisitions ofTwo River andCountry Bank and organic deposit growth. For the year endedDecember 31, 2020 , the cost of average interest-bearing liabilities decreased to 0.88% from 0.96% in the prior year. The total cost of deposits (including non-interest bearing deposits) was 0.55% for the year endedDecember 31, 2020 , as compared to 0.61% for the prior year. Net Interest Income Net interest income for the year endedDecember 31, 2020 increased to$313.0 million , as compared to$256.0 million for the prior year, reflecting an increase in interest-earning assets partly offset by a reduction in net interest margin. The net interest margin decreased to 3.16% for the year endedDecember 31, 2020 , from 3.62% for the prior year. The compression in net interest margin was primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn. 50 -------------------------------------------------------------------------------- Provision for Credit Losses For the year endedDecember 31, 2020 , credit loss expense was$59.4 million , as compared to$1.6 million for the prior year. Credit loss expense for the year endedDecember 31, 2020 was significantly influenced by economic conditions related to the COVID-19 pandemic, as well as estimates of how those conditions may impact the Company's borrowers, and the decision to sell higher risk commercial loans in the third quarter of 2020. Net loan charge-offs were$18.9 million for the year endedDecember 31, 2020 , as compared to net loan charge-offs of$1.4 million in the prior year. The year endedDecember 31, 2020 included$14.6 million of charge-offs related to the sale of higher risk commercial loans and$3.3 million of charge-offs related to the sale of under-performing residential and consumer loans. Non-performing loans totaled$36.4 million atDecember 31, 2020 , as compared to$17.8 million atDecember 31, 2019 . AtDecember 31, 2020 , the Company's allowance for credit losses for loans was 0.78% of total loans, as compared to 0.27% atDecember 31, 2019 . These ratios exclude existing fair value credit marks of$28.0 million atDecember 31, 2020 and$30.3 million atDecember 31, 2019 on loans acquired fromTwo River ,Country Bank ,Capital Bank , Sun,Ocean Shore , Cape, and Colonial American. The allowance for credit losses for loans as a percent of total non-performing loans was 166.8% atDecember 31, 2020 , as compared to 94.4% atDecember 31, 2019 . Other Income For the year endedDecember 31, 2020 , other income increased to$73.9 million , as compared to$42.2 million in the prior year. Other income for the year endedDecember 31, 2020 included$21.2 million of net gain on equity investments,$5.1 million of net gain on sale of PPP loans, and$2.8 million due to the acquisitions ofTwo River andCountry Bank . The remaining increase in other income was due to increases in commercial loan swap income of$2.8 million , net gain on sales of loans of$2.5 million , net gain on real estate operations of$981,000 , and bankcard services of$577,000 , partly offset by a decrease in fees and service charges of$4.4 million . The waiver of certain fees during the COVID-19 pandemic may continue to suppress deposit fees income for the remainder of the public health crisis. Operating Expenses Operating expenses increased to$246.4 million for the year endedDecember 31, 2020 , as compared to$189.1 million in the prior year. Operating expenses for the year endedDecember 31, 2020 included$37.8 million of merger related expenses, branch consolidation expenses, and FHLB advance prepayment fee as compared to$22.8 million of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer in the prior year. The remaining change in operating expenses over the prior year was primarily due to the acquisitions ofTwo River andCountry Bank , which added$29.3 million for the year endedDecember 31, 2020 . The remaining increase in operating expenses for the year endedDecember 31, 2020 was primarily due to increases in compensation and benefits expense of$7.6 million , operating expenses attributable to the COVID-19 pandemic of$4.5 million , professional fees of$3.6 million , and federal deposit insurance expense of$2.0 million , partly offset by decreases in equipment expense of$1.8 million , occupancy expense of$1.6 million , and check card processing of$680,000 . Provision for Income Taxes The provision for income taxes for the year endedDecember 31, 2020 was$17.7 million , as compared to$18.8 million for the prior year. The effective tax was 21.9% for the year endedDecember 31, 2020 , as compared to 17.5% for the prior year. The higher effective tax rate for the year endedDecember 31, 2020 was due to the adverse impact of aNew Jersey tax code change and a higher allocation of taxable income toNew York due to the acquisition ofCountry Bank . The lower tax rate in the prior year period was also due to the reduction in income tax expense of$2.2 million from the revaluation of state deferred tax assets as a result of the change inNew Jersey tax code. Excluding the impact of theNew Jersey tax code change, the effective tax rate for the year endedDecember 31, 2019 was 19.6%. Comparison of Operating Results for the Years EndedDecember 31, 2019 andDecember 31, 2018 General Net income for the year endedDecember 31, 2019 was$88.6 million , or$1.75 per diluted share, as compared to$71.9 million , or$1.51 per diluted share, for the corresponding prior year period. Net income for the year endedDecember 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in theNew Jersey tax code, which decreased net income, net of tax benefit, by$16.3 million . Net income for the year endedDecember 31, 2018 included merger related expenses, branch consolidation expenses, and reduction of income tax expense from the revaluation of deferred tax assets as a result of the Tax Reform, which decreased net income, net of tax benefit, by$22.2 million for the year. Excluding these items, net income for the year endedDecember 31, 2019 increased over the prior year period. 51 -------------------------------------------------------------------------------- Interest Income Interest income for the year endedDecember 31, 2019 increased to$308.8 million , as compared to$276.7 million , in the prior year. Average interest-earning assets increased$595.9 million for the year endedDecember 31, 2019 , as compared to the prior year. The average for the year endedDecember 31, 2019 was favorably impacted by$341.9 million of interest-earning assets acquired fromCapital Bank . Average loans receivable, net, increased by$612.5 million for the year endedDecember 31, 2019 , as compared to the prior year. The increase was primarily due to organic loan growth, as well as the acquisition ofCapital Bank , which contributed$250.3 million to average loans receivable, net. The yield on average interest-earning assets increased to 4.36% for the year endedDecember 31, 2019 , as compared to 4.27% for the prior year. Interest Expense Interest expense for the year endedDecember 31, 2019 was$52.8 million , as compared to$36.2 million in the prior year, due to an increase in average-interest bearing liabilities of$320.3 million , primarily related to the acquisition ofCapital Bank . For the year endedDecember 31, 2019 , the cost of average interest-bearing liabilities increased to 0.96% from 0.70% in the prior year. The total cost of deposits (including non-interest bearing deposits) was 0.61% for the year endedDecember 31, 2019 , as compared to 0.39% in the prior year. Net Interest Income Net interest income for the year endedDecember 31, 2019 increased to$256.0 million , as compared to$240.5 million for the prior year, reflecting an increase in interest-earning assets. The net interest margin decreased to 3.62% for the year endedDecember 31, 2019 , from 3.71% for the prior year. The decrease in net interest margin was primarily due to the increase in the cost of average interest bearing liabilities, partially offset by the increase in the yield on interest-earning assets. Provision for Loan Losses For the year endedDecember 31, 2019 , the provision for loan losses was$1.6 million , as compared to$3.5 million for the prior year. Net loan charge-offs were$1.4 million for the year endedDecember 31, 2019 , as compared to net loan charge-offs of$2.6 million in the prior year. Non-performing loans totaled$17.8 million atDecember 31, 2019 , as compared to$17.4 million atDecember 31, 2018 . AtDecember 31, 2019 , the Company's allowance for loan losses was 0.27% of total loans, as compared to 0.30% atDecember 31, 2018 . These ratios exclude existing fair value credit marks of$30.3 million atDecember 31, 2019 and$31.6 million atDecember 31, 2018 on loans acquired fromCapital Bank , Sun,Ocean Shore , Cape, and Colonial American. These loans were acquired at fair value with no related allowance for loan losses. The allowance for loan losses as a percent of total non-performing loans was 94.4% atDecember 31, 2019 , as compared to 95.2% atDecember 31, 2018 . Other Income For the year endedDecember 31, 2019 , other income increased to$42.2 million , as compared to$34.8 million in the prior year. The increase from the prior year was primarily due to an increase in derivative fee income of$4.6 million , a decrease in the loss from real estate operations of$3.5 million and the impact of theCapital Bank acquisition, which added$1.5 million to other income for the year endedDecember 31, 2019 . These increases to other income were partially offset by decreases in fees and service charges of$1.3 million , rental income of$810,000 received primarily for January andFebruary 2018 on the Company's executive office, and decrease in the gain on sales of loans of$653,000 , mostly related to the sale of one non-performing commercial loan relationship during the first quarter of 2018. Operating Expenses Operating expenses increased to$189.1 million for the year endedDecember 31, 2019 , as compared to$186.3 million in the prior year. Operating expenses for the year endedDecember 31, 2019 included$22.8 million of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer as compared to$30.1 million of merger related and branch consolidation expenses in the prior year. Excluding the impact of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year was primarily due to theCapital Bank acquisition, which added$6.3 million in expenses for the year endedDecember 31, 2019 . The remaining increase in operating expenses, for the year endedDecember 31, 2019 from the prior year period was primarily due to increases in professional fees of$2.3 million , check card processing of$1.6 million , compensation and employee benefits expense of$1.3 million , and data processing of$1.0 million , partially offset by decreases inFDIC expense of$1.6 million , and occupancy of$1.1 million . Provision for Income Taxes The provision for income taxes for the year endedDecember 31, 2019 was$18.8 million , as compared to$13.6 million for the prior year. The effective tax was 17.5% for the year endedDecember 31, 2019 , as compared to 15.9% for the prior year. The 52 -------------------------------------------------------------------------------- 2019 period included the reduction in income tax expense of$2.2 million from the revaluation of state deferred tax assets as a result of a change in theNew Jersey tax code. Excluding the impact of theNew Jersey tax code change, the effective tax rate for the year endedDecember 31, 2019 was 19.6%. The lower effective tax rate in the prior year period was primarily due to Tax Reform which required the Company to revalue its deferred tax asset, resulting in a tax benefit of$1.9 million , for the year endedDecember 31, 2018 . The remaining variance was due to larger tax benefits from employee stock option exercises in the prior year period. Liquidity and Capital Resources The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances and other borrowings, including subordinated debt, and, to a lesser extent, investment maturities and proceeds from the sale of loans. While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple banks. AtDecember 31, 2020 , the Bank had no outstanding overnight borrowings from the FHLB, compared to$270.0 million of outstanding overnight borrowings atDecember 31, 2019 . The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB advances, including overnight borrowings, totaled$0 atDecember 31, 2020 , a decrease from$519.3 million atDecember 31, 2019 . The Company's cash needs for the year endedDecember 31, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, proceeds from sales of loans, and acquired cash from acquisitions. The cash was principally utilized for repayment of FHLB advances, loan originations, the repayment of short-term borrowings, and the purchase of debt and equity securities. The Company's cash needs for the year endedDecember 31, 2019 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of debt securities, increased deposits, increased borrowings and acquired cash fromCapital Bank . The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of debt securities, and cash to fund theTwo River acquisition. In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. AtDecember 31, 2020 , outstanding commitments to originate loans totaled$367.8 million and outstanding unused lines of credit totaled$1.04 billion , of which$668.1 million were commitments to commercial borrowers and$372.2 million were commitments to consumer borrowers and residential construction borrowers. The Bank expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled$973.4 million atDecember 31, 2020 . Based upon historical experience, management is optimistic about its ability to retain a significant portion of its renewing time deposits. The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios. In response to COVID-19, management identified additional sources of contingent liquidity, including expanded borrowing capacity with the FHLB, theFederal Reserve and existing correspondent bank relationships. In addition, inMay 2020 , the Company issued$125.0 million of subordinated notes at an initial rate of 5.25% and a stated maturity ofMay 15, 2030 . The Company also issued$55.9 million of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock. The proceeds were retained to strengthen balance sheet liquidity entering the economic downturn. Under the Company's stock repurchase programs, shares ofOceanFirst Financial Corp. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. The Company suspended its repurchase activity onFebruary 28, 2020 in light of the COVID-19 pandemic, and subsequently determined to recommence repurchases under its existing stock repurchase plan inFebruary 2021 . For the year endedDecember 31, 2020 , the Company repurchased 648,851 shares of common stock at a total cost of$14.8 million . For the year endedDecember 31, 2019 , the Company repurchased 1.1 million shares of common stock at a total cost of$26.1 million . AtDecember 31, 2020 , there were 2.0 million shares available to be repurchased under the stock repurchase programs. Cash dividends on common stock declared and paid during the year endedDecember 31, 2020 were$40.8 million , as compared to$34.2 million for the prior year. The increase in dividends was a result of additional shares issued in the acquisitions of Two 53 -------------------------------------------------------------------------------- River andCountry Bank . OnJanuary 28, 2021 , the Company's Board of Directors declared a quarterly cash dividend of$0.17 per common share. The dividend was payable onFebruary 19, 2021 to common stockholders of record at the close of business onFebruary 8, 2021 . The Company also declared a quarterly cash dividend of$0.4375 per depository share, representing 1/40th interest in the Series A Preferred Stock, payable onFebruary 15, 2021 to preferred stockholders of record onJanuary 29, 2021 . The primary sources of liquidity specifically available toOceanFirst Financial Corp. , the holding company ofOceanFirst Bank , are capital distributions from the bank subsidiary, the issuance of preferred and common stock, and debt. For the year endedDecember 31, 2020 , the Company received dividend payments of$54.0 million from the Bank. The Company's ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. AtDecember 31, 2020 ,OceanFirst Financial Corp. held$108.5 million in cash. The Company and the Bank satisfy the criteria to be "well-capitalized" under the Prompt Corrective Action Regulations. See Regulation and Supervision-Bank Regulation - Capital Requirements. AtDecember 31, 2020 , the Company maintained tangible stockholders' equity of$960.1 million for a tangible stockholders' equity to tangible assets ratio of 8.79%. Off-Balance-Sheet Arrangements and Contractual Obligations In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding. These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit and are discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements. The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary in the mortgage banking industry. The Company is also obligated to repurchase under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. As a result of the COVID-19 pandemic, some of these loans were placed on forbearance and the Company may be required to repurchase them in future periods. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. AtDecember 31, 2020 and 2019, the reserve for repurchased loans and loss sharing obligations amounted to$1.2 million and$1.1 million , respectively. The following table shows the contractual obligations of the Company by expected payment period as ofDecember 31, 2020 (in thousands). Refer to Note 17 Leases, to the Consolidated Financial Statements for lease obligations. Further discussion of these commitments is included in Note 9 Borrowed Funds, and Note 13 Commitments, Contingencies, and Concentrations of Credit Risk, to the Consolidated Financial Statements. Less than More than Contractual Obligation Total one year 1-3 years 3-5 years 5 years Debt obligations$ 363,925 $ 128,649
Commitments to grant loans
367,806 367,806 - - - Commitments to fund unused lines of credit: Commercial real estate 668,114 668,114 - - - Consumer and residential construction 372,159 372,159 - - - Purchase obligations 54,088 11,307 22,287 20,494 - Debt obligations include advances from the FHLB and other borrowings and have defined terms. Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being 54 -------------------------------------------------------------------------------- drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company's exposure to credit risk is represented by the contractual amount of the instruments. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users and other factors. Impact of New Accounting Pronouncements Accounting Pronouncements Adopted in 2020 ASU 2016-13: InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued ASU 2016-13. This ASU significantly changed how entities measure credit losses for financial assets and certain other instruments that are measured at amortized cost. The standard replaced the "incurred loss" approach with an "expected loss" model, which necessitates a forecast of lifetime losses. The new model, referred to as the CECL model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale ("AFS") debt securities. The ASU simplifies the accounting model for purchased credit-impaired debt securities and loans. The standard's provisions are to be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning afterJanuary 1, 2020 are presented in accordance with ASU 2016-13, or Accounting Standards Codification ("ASC") 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of$4,000 , net of tax, as ofJanuary 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment included a decrease in the allowance for credit losses on loans of$475,000 , an increase in the allowance for credit losses on held to maturity debt securities of$1.3 million , and a decrease in the allowance for credit losses on off-balance sheet credit exposures of$788,000 . As allowed by ASC 326, the Company elected not to maintain pools of loans accounted for under ASC 310-30. AtDecember 31, 2019 , purchase credit impaired ("PCI") loans totaled$13.3 million . In accordance with the standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were troubled debt restructured loans as of the date of adoption. Upon adoption, the Company's PCI loans were converted to PCD loans as defined by ASC 326. The transition adjustment for the PCI loans to PCD loans resulted in a reclassification of$3.2 million from the specific credit fair value adjustment to the allowance for credit losses on loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. AtDecember 31, 2020 , the Company utilized theDecember 15, 2020 forecast, from Oxford Economics, the most recent forecast available as of quarter end, to provide the macroeconomic forecasts for select variables.
Expected credit losses are estimated over the contractual term of the loans, adjusted for anticipated prepayments, if applicable. The contractual term excludes expected extensions, renewals and modifications.
ASU 2017-04: InJanuary 2017 , the FASB issued ASU 2017-04, Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU intends to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge by which the carrying amount exceeds the reporting unit's fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ASU No. 2017-04 is effective for fiscal years beginning afterDecember 15, 2019 . The adoption of this update did not have an impact on the Company's consolidated financial statements. 55 -------------------------------------------------------------------------------- ASU 2018-13: InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU updates the disclosure requirements on Fair Value measurements by (1) removing: the disclosures for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements; (2) modifying: disclosures for timing of liquidation of an investee's assets and disclosures for uncertainty in measurement as of reporting date; and (3) adding: disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring level 3 fair value measurements and disclosures for the range and weighted average of the significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning afterDecember 15, 2019 , with early adoption permitted to any removed or modified disclosures and delay adoption of additional disclosures until the effective date. With the exception of the following, which should be applied prospectively, disclosures relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the disclosures for uncertainty measurement, all other changes should be applied retrospectively to all periods presented upon the effective date. The adoption of this update did not have an impact on the Company's consolidated financial statements. Refer to Note 15, Fair Value Measurements, for additional information. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance withU.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Management of Interest Rate Risk ("IRR") Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from the IRR inherent in its lending, investment and deposit-taking activities. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that end, management actively monitors and manages IRR. The principal objectives of the Company's IRR management function are to evaluate the IRR inherent in certain balance sheet accounts; determine the level of risk appropriate given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives; and manage the risk consistent with Board approved guidelines. Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Company monitors its IRR as such risk relates to its operating strategies. The Bank's Board has established an Asset Liability Committee ("ALCO") consisting of members of the Bank's management, responsible for reviewing the Bank's asset liability policies and the Bank's IRR position. ALCO meets monthly and reports trends and the Company's IRR position to the Board on a quarterly basis. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings of the Company. The Bank utilizes the following strategies to manage IRR: (1) emphasizing the origination for portfolio of fixed-rate consumer mortgage loans generally having terms to maturity of not more than fifteen years, adjustable-rate loans, floating-rate and balloon maturity commercial loans, and consumer loans consisting primarily of home equity loans and lines of credit; (2) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits; and (3) managing the maturities of wholesale borrowings. The Bank may also sell fixed-rate mortgage loans into the secondary market. In determining whether to retain fixed-rate mortgages or to purchase fixed-rate MBS, management considers the Bank's overall IRR position, the volume of such loans originated or the amount of MBS to be purchased, the loan or MBS yield and the types and amount of funding sources. The Bank may retain fixed-rate mortgage loan production or purchase fixed-rate MBS in order to improve yields and increase balance sheet leverage. During periods when fixed-rate mortgage loan production is retained, the Bank generally attempts to extend the maturity on part of its wholesale borrowings. During 2018 and 2019, the Bank generally retained newly originated mortgage loans in its portfolio. However, given the decline in the interest rate environment, in late 2019 and early 2020, the Bank determined to sell most of its 30 year fixed-rate residential real estate loan originations in the secondary market. The Company currently does not participate in financial futures contracts, interest rate swaps or other activities involving the use of off-balance-sheet derivative financial instruments, but may do so in the future to manage IRR. 56 -------------------------------------------------------------------------------- The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a negative gap position theoretically would not be in as favorable a position, compared to an institution with a positive gap, to invest in higher-yielding assets. This may result in the yield on the institution's assets increasing at a slower rate than the increase in its cost of interest-bearing liabilities. Conversely, during a period of falling interest rates, an institution with a negative gap might experience a repricing of its assets at a slower rate than its interest-bearing liabilities, which, consequently, may result in its net interest income growing at a faster rate than an institution with a positive gap position. The Company's interest rate sensitivity is monitored through the use of an IRR model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding atDecember 31, 2020 , which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. AtDecember 31, 2020 , the Company's one-year gap was positive 18.05%, as compared to positive 4.31% atDecember 31, 2019 . The increase was primarily due to the increase in cash liquidity. Except as stated below, the amount of assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities atDecember 31, 2020 on the basis of contractual maturities, anticipated prepayments, scheduled rate adjustments and the rate sensitivity of non-maturity deposits within a three month period and subsequent selected time intervals. Loans receivable reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Loans were projected to prepay at rates between 6% and 26% annually. Mortgage-backed securities were projected to prepay at rates between 14% and 25% annually. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have average lives of 7.3 years, 6.3 years and 8.3 years, respectively. Prepayment and average life assumptions can have a significant impact on the Company's estimated gap. There can be no assurance that projected prepayment rates for loans and mortgage-backed securities will be achieved or that projected average lives for deposits will be realized. 57 -------------------------------------------------------------------------------- More than More than More than 3 Months 3 Months 1 Year to 3 Years to More than At December 31, 2020 or Less to 1 Year 3 Years 5 Years 5 Years
Total
(dollars in thousands) Interest-earning assets (1): Interest-earning deposits and short-term investments$ 1,022,405 $
1225
$ 1,025,849 Investment securities 78,233 78,334 132,972 62,977 138,158
490 674
Mortgage-backed securities 90,759 136,520 241,877 127,622 35,016 631,794 Equity investments - - - - 107,079 107,079 Restricted equity investments - - - - 51,705
51 705
Loans receivable, net (2) 2,083,828 1,531,388 2,283,549 1,120,890 781,975
7,801,630
Total interest-earning assets 3,275,225 1,747,467 2,660,617 1,311,489 1,113,933
10 108 731
Interest-bearing liabilities: Interest-bearing checking accounts 1,446,820 154,681 399,057 331,147 1,315,161 3,646,866 Money market deposit accounts 73,252 53,129 124,264 101,738 431,138 783,521 Savings accounts 157,779 106,840 278,829 227,246 720,557 1,491,251 Time deposits 406,053 567,373 328,800 61,459 9,098 1,372,783 Securities sold under agreements to repurchase and other borrowings 231,840 195 425 130,461 1,004
363 925
Total interest-bearing liabilities 2,315,744 882,218 1,131,375 852,051 2,476,958 7,658,346 Interest sensitivity gap (3)$ 959,481 $ 865,249 $ 1,529,242 $ 459,438 $ (1,363,025) $ 2,450,385 Cumulative interest sensitivity gap$ 959,481 $
1,824,730
$ 2,450,385 Cumulative interest sensitivity gap as a percent of total interest-earning assets 9.49 % 18.05 % 33.18 % 37.72 % 24.24 %
24.24%
(1)Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities. (2)For purposes of the gap analysis, loans receivable includes loans held-for-sale and non-performing loans gross of the allowance for credit losses for loans, unamortized discounts and deferred loan fees. (3)Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, loan prepayment rates and average lives of deposits would likely deviate significantly from those assumed in the calculation. Finally, the ability of many borrowers to service their adjustable-rate loans may be impaired in the event of an interest rate increase. Another method of analyzing an institution's exposure to IRR is by measuring the change in the institution's economic value of equity ("EVE") and net interest income under various interest rate scenarios. EVE is the difference between the net present value of assets, liabilities and off-balance-sheet contracts. The EVE ratio, in any interest rate scenario, is defined as the EVE in that scenario divided by the fair value of assets in the same scenario. The Company's interest rate sensitivity is monitored by management through the use of an IRR model which measures IRR by modeling the change in EVE and net interest income over a range of interest rate scenarios. 58 --------------------------------------------------------------------------------
The following table presents the projections of the Company’s EVE and net interest income at
December 31, 2020 December 31, 2019 Change in Interest Rates in Basis Points Economic Value of Equity Net Interest Income Economic Value of Equity Net Interest Income % EVE % % EVE % (Rate Shock) Amount Change Ratio Amount Change Amount Change Ratio Amount Change 300$ 1,890,335 38.5 % 17.3 % $ 340,098 16.2 %$ 1,242,674 5.1 % 16.4 % $ 253,184 (0.6) % 200 1,752,255 28.4 15.7 325,436 11.2 1,246,011 5.4 16.0 254,424 (0.1) 100 1,578,917 15.7 13.9 309,644 5.8 1,227,428 3.8 15.3 254,996 0.1 Static 1,365,119 - 11.8 292,572 - 1,182,696 - 14.4 254,721 - (100) 1,074,346 (21.3) 9.2 284,763 (2.7) 1,090,184 (7.8) 12.9 252,662 (0.8) The change in interest rate sensitivity atDecember 31, 2020 , as compared toDecember 31, 2019 , was primarily due to the addition ofTwo River andCountry Bank , the significant decline in interest rates during the period and the increase in cash liquidity. As is the case with the gap calculation, certain shortcomings are inherent in the methodology used in the EVE and net interest income IRR measurements. The model requires the making of certain assumptions which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the model assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the model assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Company's business or strategic plans. Accordingly, although the above measurements do provide an indication of the Company's IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Company's EVE and net interest income and can be expected to differ from actual results. 59
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