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 for OceanFirst 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,
at December 31, 2020, operated its branch office and headquarters in Toms River,
New Jersey, its administrative office located in Red Bank, New Jersey, an
administrative office located in Mount Laurel, New Jersey, and 61 additional
branch offices and six deposit production facilities located throughout central
and southern New Jersey, and the greater metropolitan area of New York City. The
Bank also operated commercial loan production offices in New York City, the
greater Philadelphia area and in Atlantic and Mercer Counties in New 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

On March 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 either December
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 at December 31, 2020 and will not be reported as past due during the
deferral period.

On December 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 at
December 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. At December 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.

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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 on October 29,
2020, recognizing a gain of $5.1 million. At December 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 of August
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. At December 31, 2020, the Company performed a qualitative assessment to
ensure no events or circumstances had occurred subsequent to August 31, 2020
that would impact goodwill. The Company determined based on the December 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 December 31, 2020, the company recorded a high credit loss charge of $ 59.4 million and an increase in operating expenses of $ 4.5 million, each linked to COVID-19.

For further discussion, refer to Risk Factors - Risk Related to the COVID-19
Pandemic.
Acquisitions
On January 1, 2020, the Company completed its acquisition of Two 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 on January 1, 2020.
On January 1, 2020, the Company completed its acquisition of Country 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 on January 1, 2020.
On January 31, 2019, the Company completed its acquisition of Capital 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 on February 1, 2019.
On January 31, 2018, the Company completed its acquisition of Sun which added
$2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits.
Sun's results of operations are included in the consolidated results for the
period beginning on February 1, 2018.
These transactions have enhanced the Bank's position as the premier community
banking franchise in central and southern New Jersey, and metropolitan areas of
Philadelphia and New 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 throughout New Jersey and the metropolitan areas of Philadelphia
and New York City. The Bank is the largest and oldest community-based financial
institution headquartered in Ocean 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.
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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 various New Jersey counties as well as teams in New York City and the
greater Philadelphia area. At December 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% at December 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% at December
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. At December 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.

On January 29, 2021, the Company made a minority, non-controlling equity
investment in Auxilior 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. At December 31, 2020, all of the
branch staff were trained as Certified Digital Bankers to better support
customers use and adoption of digital services.
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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 on December 18, 2019 to repurchase up to an additional 2.5 million
shares. The Company suspended its repurchase activity on February 28, 2020 in
light of the COVID-19 pandemic and subsequently determined to recommence
repurchases under its existing stock repurchase plan in February 2021. For the
year ended December 31, 2020, the Company repurchased 648,851 shares of its
common stock under these repurchase programs. At December 31, 2020, 2,019,145
shares remain available for repurchase.
In May 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 ended December 31,
2020 were as follows:
Total assets increased to $11.45 billion at December 31, 2020, from $8.25
billion at December 31, 2019. Loans receivable, net of allowance for credit
losses, increased by $1.50 billion at December 31, 2020, as compared to December
31, 2019, while deposits increased $3.10 billion over the same period. The
increases were primarily the result of the Two River and Country Bank
acquisitions and $1.51 billion of organic deposit growth.
Net income available to common stockholders for the year ended December 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 ended December 31, 2020 reflects net gain on equity investments, gain on
sale of PPP loans, FHLB advance prepayment fees, branch consolidation expenses,
merger related expenses, and Two River and Country Bank opening credit loss
expense under the CECL model. These items decreased net income, net of tax, for
the year ended December 31, 2020 by $11.0 million. Net income for the year ended
December 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 the New
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 ended
December 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% at December 31, 2020.
Critical Accounting Policies
Note 1 Summary of Significant Accounting Policies, to the Company's Audited
Consolidated Financial Statements for the year ended December 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.

On January 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 at December 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 ended December 31, 2020.
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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 at
December 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.

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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 to January 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 on January 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 to January 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.
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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 ended December 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

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(1)Amounts represent debt and equity securities, including FHLB and Federal
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
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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)

$ 15,469

(1)Amounts represent debt and equity securities, including FHLB and Federal
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 at December 31, 2020 and December 31, 2019
Total assets increased by $3.20 billion to $11.45 billion at December 31, 2020,
from $8.25 billion at December 31, 2019, primarily as a result of the
acquisitions of Two River and Country Bank, which added $2.03 billion to total
assets. Cash and due from banks increased by $1.15 billion to $1.27 billion at
December 31, 2020, from $120.5 million at December 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 at December 31,
2020, from $6.21 billion at December 31, 2019, primarily due to acquired loans
from Two River and Country Bank of $1.56 billion. As part of the acquisitions of
Two River and Country Bank, the Company's goodwill balance increased to $500.3
million at December 31, 2020, from $374.6 million at December 31, 2019 and core
deposit intangibles increased to
49
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$23.7 million, from $15.6 million. Other assets increased by $39.4 million to
$209.0 million at December 31, 2020, from $169.5 million at December 31, 2019,
primarily due to an increase in swap positions.
Deposits increased by $3.10 billion, to $9.43 billion at December 31, 2020, from
$6.33 billion at December 31, 2019, primarily due to acquired deposits from Two
River and Country Bank of $1.59 billion and organic deposit growth of $1.51
billion. The loan-to-deposit ratio at December 31, 2020 was 82.3%, as compared
to 98.2% at December 31, 2019. The Company utilized the excess liquidity to
prepay all FHLB advances in the fourth quarter of 2020, bringing the balance to
$0 at December 31, 2020 from $519.3 million at December 31, 2019. The increase
in other borrowings of $138.7 million, to $235.5 million at December 31, 2020,
from $96.8 million at December 31, 2019, primarily resulted from the May 2020
issuance of $125.0 million in subordinated notes at an initial rate of 5.25% and
a stated maturity of May 15, 2030. Other liabilities increased by $92.7 million
to $155.3 million at December 31, 2020, from $62.6 million at December 31, 2019,
primarily due to an increase in swap positions.
Stockholders' equity increased to $1.48 billion at December 31, 2020, as
compared to $1.15 billion at December 31, 2019. The acquisitions of Two River
and Country Bank added $261.4 million to stockholders' equity. During the three
months ended June 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 at December 31, 2020. The Company suspended its repurchase activity
on February 28, 2020, due to the COVID-19 pandemic and has subsequently
determined to recommence repurchases under its existing stock repurchase plan in
February 2021. For the year ended December 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 Ended December 31, 2020 and
December 31, 2019
General
Net income available to common stockholders for the year ended December 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 ended December 31, 2020 reflects net gain on equity investments, gain on
sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch
consolidation expenses, and Two River and Country Bank opening credit loss
expense under the CECL model. These items decreased net income, net of tax, for
the year ended December 31, 2020 by $11.0 million. Net income for the year ended
December 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 the New
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 ended December 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 ended December 31,
2020, as compared to the prior year. The average for the year ended December 31,
2020 was favorably impacted by $1.75 billion of interest-earning assets acquired
from Two River and Country Bank. Average loans receivable, net, increased by
$2.15 billion for the year ended December 31, 2020, as compared to the prior
year. The increase attributable to the acquisitions of Two River and Country
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
ended December 31, 2020, as compared to 4.36% for the prior year.
Interest Expense
Interest expense for the year ended December 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 of Two River and Country Bank and organic deposit growth. For the
year ended December 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 ended December
31, 2020, as compared to 0.61% for the prior year.
Net Interest Income
Net interest income for the year ended December 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 ended December
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
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Provision for Credit Losses
For the year ended December 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
ended December 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 ended December 31, 2020, as compared to net loan
charge-offs of $1.4 million in the prior year. The year ended December 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 at December 31, 2020, as compared to $17.8 million at December 31,
2019. At December 31, 2020, the Company's allowance for credit losses for loans
was 0.78% of total loans, as compared to 0.27% at December 31, 2019. These
ratios exclude existing fair value credit marks of $28.0 million at December 31,
2020 and $30.3 million at December 31, 2019 on loans acquired from Two 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% at December 31, 2020, as compared to 94.4% at December 31, 2019.
Other Income
For the year ended December 31, 2020, other income increased to $73.9 million,
as compared to $42.2 million in the prior year. Other income for the year ended
December 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 of Two River and Country 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 ended December 31,
2020, as compared to $189.1 million in the prior year. Operating expenses for
the year ended December 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 of
Two River and Country Bank, which added $29.3 million for the year ended
December 31, 2020. The remaining increase in operating expenses for the year
ended December 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 ended December 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 ended December 31, 2020, as compared to 17.5% for the prior
year. The higher effective tax rate for the year ended December 31, 2020 was due
to the adverse impact of a New Jersey tax code change and a higher allocation of
taxable income to New York due to the acquisition of Country 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 in New Jersey tax code. Excluding the impact of the New
Jersey tax code change, the effective tax rate for the year ended December 31,
2019 was 19.6%.
Comparison of Operating Results for the Years Ended December 31, 2019 and
December 31, 2018
General
Net income for the year ended December 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 ended December 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 the New Jersey tax code, which
decreased net income, net of tax benefit, by $16.3 million. Net income for the
year ended December 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 ended December 31, 2019 increased over the prior
year period.
51
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Interest Income
Interest income for the year ended December 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 ended December 31,
2019, as compared to the prior year. The average for the year ended December 31,
2019 was favorably impacted by $341.9 million of interest-earning assets
acquired from Capital Bank. Average loans receivable, net, increased by $612.5
million for the year ended December 31, 2019, as compared to the prior year. The
increase was primarily due to organic loan growth, as well as the acquisition of
Capital 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
ended December 31, 2019, as compared to 4.27% for the prior year.
Interest Expense
Interest expense for the year ended December 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 of Capital Bank. For the year ended December 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 ended December 31, 2019, as compared to 0.39% in the prior
year.
Net Interest Income
Net interest income for the year ended December 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 ended December 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 ended December 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 ended December 31, 2019, as compared to net loan
charge-offs of $2.6 million in the prior year. Non-performing loans totaled
$17.8 million at December 31, 2019, as compared to $17.4 million at December 31,
2018. At December 31, 2019, the Company's allowance for loan losses was 0.27% of
total loans, as compared to 0.30% at December 31, 2018. These ratios exclude
existing fair value credit marks of $30.3 million at December 31, 2019 and $31.6
million at December 31, 2018 on loans acquired from Capital 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% at December 31, 2019, as compared to
95.2% at December 31, 2018.
Other Income
For the year ended December 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 the Capital Bank
acquisition, which added $1.5 million to other income for the year ended
December 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 and February 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 ended December 31,
2019, as compared to $186.3 million in the prior year. Operating expenses for
the year ended December 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 the Capital Bank acquisition,
which added $6.3 million in expenses for the year ended December 31, 2019. The
remaining increase in operating expenses, for the year ended December 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 in FDIC expense of $1.6 million, and occupancy of
$1.1 million.
Provision for Income Taxes
The provision for income taxes for the year ended December 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 ended December 31, 2019, as compared to 15.9% for the prior
year. The
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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 the New
Jersey tax code. Excluding the impact of the New Jersey tax code change, the
effective tax rate for the year ended December 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 ended December 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.
At December 31, 2020, the Bank had no outstanding overnight borrowings from the
FHLB, compared to $270.0 million of outstanding overnight borrowings at December
31, 2019. The Bank utilizes overnight borrowings from time-to-time to fund
short-term liquidity needs. FHLB advances, including overnight borrowings,
totaled $0 at December 31, 2020, a decrease from $519.3 million at December 31,
2019.
The Company's cash needs for the year ended December 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 ended December 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 from Capital Bank. The cash was
principally utilized for loan originations, the purchase of loans receivable,
the purchase of debt securities, and cash to fund the Two 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. At December 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 at
December 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, the Federal Reserve and
existing correspondent bank relationships. In addition, in May 2020, the Company
issued $125.0 million of subordinated notes at an initial rate of 5.25% and a
stated maturity of May 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 of OceanFirst 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 on February
28, 2020 in light of the COVID-19 pandemic, and subsequently determined to
recommence repurchases under its existing stock repurchase plan in February
2021. For the year ended December 31, 2020, the Company repurchased 648,851
shares of common stock at a total cost of $14.8 million. For the year ended
December 31, 2019, the Company repurchased 1.1 million shares of common stock at
a total cost of $26.1 million. At December 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 ended December
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
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River and Country Bank. On January 28, 2021, the Company's Board of Directors
declared a quarterly cash dividend of $0.17 per common share. The dividend was
payable on February 19, 2021 to common stockholders of record at the close of
business on February 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 on February 15, 2021 to preferred stockholders
of record on January 29, 2021.
The primary sources of liquidity specifically available to OceanFirst Financial
Corp., the holding company of OceanFirst Bank, are capital distributions from
the bank subsidiary, the issuance of preferred and common stock, and debt. For
the year ended December 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. At December 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.
At December 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. At December 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 of December 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

$ 425 $ 476 $ 234,375
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
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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: In June 2016, the Financial 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 after January 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
of January 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. At December 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. At December 31, 2020, the Company utilized the December 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: In January 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 after December 15, 2019. The
adoption of this update did not have an impact on the Company's consolidated
financial statements.
55
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ASU 2018-13: In August 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 after December 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 with U.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
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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 at December 31, 2020, which were
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. At December 31, 2020, the Company's
one-year gap was positive 18.05%, as compared to positive 4.31% at December 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 at December 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.
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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 $ 2,219 $ – $ –

    $ 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 $ 3,353,972 $ 3,813,410 $ 2,450,385

        $ 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.
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The following table presents the projections of the Company’s EVE and net interest income at December 31, 2020 and 2019 (dollars in thousands). For the purposes of this table, the company has used prepayment and average life assumptions similar to those used to calculate the company’s spread.

                                                                                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 at December 31, 2020, as compared to
December 31, 2019, was primarily due to the addition of Two River and Country
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.

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