UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|
| | | | |
x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017 2020 |
| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-11713
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
DELAWAREDelaware | | 22-3412577 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
|
975 Hooper Avenue, Toms River,110 West Front Street, Red Bank, New Jersey 0875307701
(Address of principal executive offices)
Registrant’s telephone number, including area code: (732) 240-4500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, | | | | | | | | | | | | | | |
| Title of each class | | Trading symbol | | Name of each exchange in which registered |
Common stock, $0.01 par value $0.01 per share | | OCFC | | NASDAQ |
| Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock) | | OCFCP | | NASDAQ |
(Title of class)
The Nasdaq Global Select Market
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” , “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | x | Accelerated filero | ☐ | Non-accelerated filero | ☐ | Smaller reporting companyo | ☐ | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised final accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No x☒.
The aggregate market fair value of the voting and non-voting common equity held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $858,357,000$1,037,577,000 based upon the closing price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares outstanding of the registrant’s Common Stock as of February 23, 201822, 2021 was 47,988,933.59,915,803.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20182021 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2017,2020, are incorporated by reference into Part III of this Form 10-K.
INDEX
|
| | | | | | | |
| | PAGE |
| PART I |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| PART III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| PART IV |
| Item 15. | | |
| Item 16. | | |
| |
| |
PART I
General
OceanFirst Financial Corp. (the “Company”) is incorporated under Delaware law and serves as the holding company for OceanFirst Bank N.A. (the “Bank”). At December 31, 2017,2020, the Company had consolidated total assets of $5.4$11.4 billion and total stockholders’ equity of $601.9 million.$1.5 billion. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”) and the Securities and Exchange Commission (“SEC”(the “SEC”). The Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency (“OCC”(the “OCC”) and the Federal Deposit Insurance Corporation (“(the“FDIC”). Currently, the Company does not transact any material business other than through its subsidiary, the Bank.
The Company has been the holding company for the Bank since it acquired the stock of the Bank upon the Bank’s conversion from a Federally-chartered mutual savings bank to a Federally-chartered capital stock savings bank in 1996 (the “Conversion”). Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company. The conversions on January 31, 2018 dodid not change the entities which regulate and supervise the Bank and Company. The Bank’s principal business has been and continues to beis attracting retail and businesscommercial deposits in the communities surrounding its branch offices and investing those deposits primarily in loans, consisting of commercial real estate and other commercial loans which have become a key focus of the Bank and single-family, owner-occupied residential mortgage loans. The Bank also invests in other types of loans, including residential construction and consumer loans. In addition, the Bank invests in mortgage-backed securities (“MBS”), securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by applicable law and regulations. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest on its investment and mortgage-backed securities. The Bank also receives income from feesbankcard services, trust and service charges on loan and deposit products, Bankcard services, wealthasset management services, deposit account services, gains on sales of loans, bank owned life insurance, derivative fee income and the sale of alternative investment products, e.g., mutual funds, annuities and life insurance.other fees. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, investment security maturities, proceeds from the sale of loans, Federal Home Loan Bank (“FHLB”) advances and other borrowings.
The Company’s website address is www.oceanfirst.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Forward-Looking Statements
In addition to historical information, this Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed under Item 1A. Risk Factors herein and the following: changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, disruption due to pandemic or other public health emergencies; a failure in or breach of the Bank’s operational or security systems or infrastructure, including cyberattacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; demand for financial services in the Company’s market area, accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations.
Further, given its ongoing and dynamic nature, it is difficult to predict what continued effects the COVID-19 pandemic will have on the Company’s business and results of operations. The pandemic and the related local and national economic disruption may result in a decline in demand for the Company’s products and services; increased levels of loan delinquencies, problem assets and foreclosures; an increase in the Bank’s allowance for credit losses; a decline in the value of loan collateral, including real estate; a greater decline in the yield on interest-earning assets than the decline in the cost of interest-bearing liabilities; and increased cybersecurity risks, as employees increasingly work remotely.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Market Area and Competition
The Bank is a community-oriented financial institution,regional bank, offering a wide variety of financial services to meet the needs of the communities it serves. TheAt December 31, 2020, the Bank conductsoperated its business through an administrative/its branch office and headquarters located in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, an administrative office located in Mount Laurel, New Jersey, and 4561 additional branch offices and threesix deposit production facilities located throughout central and southern New Jersey.Jersey, and the greater metropolitan area of New York City. The Bank also operates a wealth management office in Ocean County, New Jersey andoperated commercial loan production offices in New York City, the greater Philadelphia area and in Atlantic Cape May, and Mercer Counties in New Jersey. The Bank’s deposit gathering and lending activities are concentrated in the markets surrounding its branch office network. During 2017, the Company acquired an administrative office
building in Red Bank, New Jersey which it expects to occupy in April 2018 while consolidating 19 non-branch operating facilities into two primary locations throughout 2018.
The Bank is one of the largest and oldest community-based financial institution headquarteredinstitutions in Ocean County, New Jersey, with headquarters approximately midway between New York City and Philadelphia. The economy in the Bank’s primary market area, which represents the broader central and southern New Jersey market, is based upon a mixture of service and retail trade. Other employment is provided by a variety of wholesale trade, manufacturing, Federal, state and local government, hospitals and utilities. The area is also home to commuters working in areas in and around New York City and Philadelphia. The market area includes a significant number of vacation and second homes in the communities along the New Jersey shore. The Bank also operates in the metropolitan areas of New York City and Philadelphia, the first and eighth largest metropolitan areas, respectively, in the United States.
The Bank’s future growth opportunities will be partly influenced by the growth and stabilityof its geographic marketplace and the competitive environment. The Bank faces significant competition both in making loans and in attracting deposits.In addition, rapid technological changes and consumer preferences may result in increased competition for the Company’s other services. services, while a number of well-funded technology-focused companies are innovating in the payments, distributed ledger, and cryptocurrency networks to disintermediate portions of the traditional banking model. The state of New Jersey, including the Bank’s primary market areas of centralNew York City and southern New Jersey, is anPhiladelphia are attractive marketmarkets to many financial institutions. Many of the Bank’s competitors are branches of significantly larger institutions headquartered out-of-market which have greater financial resources than the Bank. The Bank’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, internet-based providers and insurance companies. Its most direct competition for deposits has historicallycome from commercial banks, savings banks, savings and loan associations and credit unions although the Bank also faces competition for deposits from short-term money market funds, other corporate and government securities funds, internet-only providers and from other financial service institutions such as brokerage firms and insurance companies. The Bank distinguishes itself from large banking competitors through its local presence and ability to deliver personalized service.
Community Involvement
The Bank proudly promotes a higher quality of life in the communities it serves through employee volunteer efforts and the work of OceanFirst Foundation (the “Foundation”). Employees are continually encouraged to become leaders in their communities and use the Bank’s support to help others. Through theThe Foundation, established in 1996, OceanFirst has granted over $34$42 million to enrich the lives of local citizens by supporting initiatives in health and human services, education, affordable housing, youth development and the arts.
Acquisitions
On July 31, 2015,January 1, 2020, the Company completed its acquisition of Colonial American BankTwo River Bancorp (“Colonial American”Two River”), which added $142.4 million$1.1 billion to assets, $121.2$940.1 million to loans, and $123.3$941.8 million to deposits. The in-market acquisition strengthened the Bank’s positionTwo River’s results of operations are included in the attractive Monmouth County, New Jersey marketplace by adding offices in Middletown and Shrewsbury, New Jersey.consolidated results for the period beginning on January 1, 2020.
On March 11, 2016, the Bank purchased an existing retail branch located in the Toms River, New Jersey market with total deposits of $17.0 million.
On May 2, 2016,January 1, 2020, the Company completed its acquisition of Cape Bancorp,Country Bank Holding Company, Inc. (“Cape”Country Bank”) which added $1.5 billion$793.7 million to assets, $1.2 billion$618.4 million to loans, and $1.2 billion$652.7 million to deposits. The transaction was a market extension, creating a preeminent New Jersey based community banking franchise operating throughout central and southern New Jersey while also providing a gateway intoCountry Bank’s results of operations are included in the demographically attractive Philadelphia metropolitan area.consolidated results for the period beginning on January 1, 2020.
On November 30, 2016,January 31, 2019, the Company completed its acquisition of Ocean Shore Holding CompanyCapital Bank of New Jersey (“Ocean Shore”Capital Bank”) which added $991.3$494.4 million to assets, $773.3$307.3 million to loans, and $875.1$449.0 million to deposits. The in-market transaction solidifiedCapital Bank’s results of operations are included in the Bank’s position asconsolidated results for the premier banking franchise in central and southern New Jersey with a strong core deposit franchise and enhanced operating scale.period beginning on February 1, 2019.
On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”). Based on the $26.45 per share closing price of the Company’s common stock on January 31, 2018, the total transaction value was $474.9 million. The acquisition which added $2.1$2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. The Sun acquisition was another in-market transaction whichSun’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.
These acquisitionsJersey, and the metropolitan areas of Philadelphia and New York City and they have provided the Company with the opportunity to growgrown business lines, expand itsexpanded the geographic footprint and improveimproved financial performance. The Company will continue to evaluate potential acquisition opportunities for those that can be expected to further create stockholder value.
Lending Activities
Loan Portfolio Composition. At December 31, 2017,2020, the Bank had total loans outstanding of $3.976$7.80 billion, of which $1.757$4.64 billion, or 44.2%59.4% of total loans, were commercial real estate, multi-family and land loans.loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of $1.749$2.35 billion of one-to-four family residential mortgagereal estate loans, or 44.0%30.2% of total loans; $282.4$470.7 million of commercial and industrial loans, or 6.0% of total loans; and $339.5 million of consumer loans, primarily home equity loans and lines of credit, or 7.1% of total loans; and, $187.6 million of commercial loans, or 4.7%4.4% of total loans. Included in total loans are $241,000At December 31, 2020, the Bank had $45.5 million of loans held-for-sale at December 31, 2017.held-for-sale. At that same date, 31.9%38.3% of the Bank’s total loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to Federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the Federal government, including the FRB, and legislative tax policies.
The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total |
| | (dollars in thousands) |
| Real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | $ | 4,636,529 | | | 59.43 | % | | $ | 3,089,063 | | | 49.71 | % | | $ | 2,764,024 | | | 49.46 | % | | $ | 1,757,106 | | | 44.19 | % | | $ | 1,668,872 | | | 43.72 | % |
| Residential real estate | 2,354,983 | | | 30.19 | | | 2,321,157 | | | 37.35 | | | 2,044,523 | | | 36.58 | | | 1,749,166 | | | 43.99 | | | 1,704,405 | | | 44.66 | |
| | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | 470,656 | | | 6.03 | | | 396,434 | | | 6.38 | | | 304,996 | | | 5.46 | | | 187,645 | | | 4.72 | | | 152,810 | | | 4.00 | |
Consumer (1) | 339,462 | | | 4.35 | | | 407,998 | | | 6.56 | | | 475,170 | | | 8.50 | | | 282,438 | | | 7.10 | | | 290,676 | | | 7.62 | |
| Total loans | 7,801,630 | | | 100.00 | % | | 6,214,652 | | | 100.00 | % | | 5,588,713 | | | 100.00 | % | | 3,976,355 | | | 100.00 | % | | 3,816,763 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | |
| Deferred origination costs, net | 9,486 | | | | | 9,880 | | | | | 7,086 | | | | | 5,380 | | | | | 3,414 | | | |
| Allowance for credit losses | (60,735) | | | | | (16,852) | | | | | (16,577) | | | | | (15,721) | | | | | (15,183) | | | |
| Loans receivable, net | 7,750,381 | | | | | 6,207,680 | | | | | 5,579,222 | | | | | 3,966,014 | | | | | 3,804,994 | | | |
| Less: | | | | | | | | | | | | | | | | | | | |
| Loans held for sale | 45,524 | | | | | — | | | | | — | | | | | 241 | | | | | 1,551 | | | |
| Total loans receivable, net | $ | 7,704,857 | | | | | $ | 6,207,680 | | | | | $ | 5,579,222 | | | | | $ | 3,965,773 | | | | | $ | 3,803,443 | | | |
| Total loans: | | | | | | | | | | | | | | | | | | | |
| Adjustable rate | $ | 2,991,321 | | | 38.34 | % | | $ | 2,107,790 | | | 33.92 | % | | $ | 1,974,387 | | | 35.33 | % | | $ | 1,266,817 | | | 31.86 | % | | $ | 1,192,998 | | | 31.26 | % |
| Fixed rate | 4,810,309 | | | 61.66 | | | 4,106,862 | | | 66.08 | | | 3,614,326 | | | 64.67 | | | 2,709,538 | | | 68.14 | | | 2,623,765 | | | 68.74 | |
| $ | 7,801,630 | | | 100.00 | % | | $ | 6,214,652 | | | 100.00 | % | | $ | 5,588,713 | | | 100.00 | % | | $ | 3,976,355 | | | 100.00 | % | | $ | 3,816,763 | | | 100.00 | % |
(1)Consists primarily of home equity loans, home equity lines of credit, student loans and, to a lesser extent, loans on savings accounts and overdraft lines of credit.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total | | Amount | | Percent
of Total |
| | (dollars in thousands) |
| Real estate: | | | | | | | | | | | | | | | |
| Commercial real estate, multi-family and land | $ | 1,757,106 |
| | 44.19 | % | | $ | 1,668,872 |
| | 43.72 | % | | $ | 818,445 |
| | 41.19 | % | | $ | 649,951 |
| | 38.09 | % | | $ | 528,945 |
| | 33.91 | % |
| One-to-four family | 1,749,166 |
| | 43.99 |
| | 1,704,405 |
| | 44.66 |
| | 830,497 |
| | 41.80 |
| | 772,911 |
| | 45.31 |
| | 769,476 |
| | 49.34 |
|
Consumer (1) | 282,438 |
| | 7.10 |
| | 290,676 |
| | 7.62 |
| | 193,160 |
| | 9.72 |
| | 199,349 |
| | 11.68 |
| | 200,683 |
| | 12.87 |
|
| Commercial and industrial | 187,645 |
| | 4.72 |
| | 152,810 |
| | 4.00 |
| | 144,788 |
| | 7.29 |
| | 83,946 |
| | 4.92 |
| | 60,545 |
| | 3.88 |
|
| Total loans | 3,976,355 |
| | 100.00 | % | | 3,816,763 |
| | 100.00 | % | | 1,986,890 |
| | 100.00 | % | | 1,706,157 |
| | 100.00 | % | | 1,559,649 |
| | 100.00 | % |
| Deferred origination costs, net | 5,380 |
| | | | 3,414 |
| | | | 3,232 |
| | | | 3,207 |
| | | | 3,526 |
| | |
| Allowance for loan losses | (15,721 | ) | | | | (15,183 | ) | | | | (16,722 | ) | | | | (16,317 | ) | | | | (20,930 | ) | | |
| Total loans, net | 3,966,014 |
| | | | 3,804,994 |
| | | | 1,973,400 |
| | | | 1,693,047 |
| | | | 1,542,245 |
| | |
| Less: | | | | | | | | | | | | | | | | | | | |
| Loans held for sale | 241 |
| | | | 1,551 |
| | | | 2,697 |
| | | | 4,201 |
| | | | 785 |
| | |
| Loans receivable, net | $ | 3,965,773 |
| | | | $ | 3,803,443 |
| | | | $ | 1,970,703 |
| | | | $ | 1,688,846 |
| | | | $ | 1,541,460 |
| | |
| Total loans: | | | | | | | | | | | | | | | | | | | |
| Adjustable rate | $ | 1,266,817 |
| | 31.86 | % | | $ | 1,192,998 |
| | 31.26 | % | | $ | 750,816 |
| | 37.79 | % | | $ | 634,835 |
| | 37.21 | % | | $ | 590,261 |
| | 37.85 | % |
| Fixed rate | 2,709,538 |
| | 68.14 |
| | 2,623,765 |
| | 68.74 |
| | 1,236,074 |
| | 62.21 |
| | 1,071,322 |
| | 62.79 |
| | 969,388 |
| | 62.15 |
|
| | $ | 3,976,355 |
| | 100.00 | % | | $ | 3,816,763 |
| | 100.00 | % | | $ | 1,986,890 |
| | 100.00 | % | | $ | 1,706,157 |
| | 100.00 | % | | $ | 1,559,649 |
| | 100.00 | % |
| |
(1) | Consists primarily of home equity loans and lines of credit, and to a lesser extent, loans on savings accounts and overdraft lines of credit. |
Loan Maturity. The following table shows the contractual maturity of the Bank’s total loans at December 31, 2017.2020. The table does not include principal prepayments.prepayments:
| | | | | At December 31, 2017 | | | At December 31, 2020 |
| | | Commercial
Real Estate,
Multi-Family
and Land | | One-to-
Four
Family | | Consumer | | Commercial
and
Industrial | | Total
Loans
Receivable | | | Commercial Real Estate | | Residential
Real Estate | | | Commercial
and
Industrial | | Consumer | | Total
Loans
Receivable |
| | | (in thousands) | | | (in thousands) |
| One year or less | | $ | 256,770 |
| | $ | 50,622 |
| | $ | 3,715 |
| | $ | 47,529 |
| | $ | 358,636 |
| One year or less | | $ | 758,029 | | | $ | 95,731 | | | | $ | 129,745 | | | $ | 3,345 | | | $ | 986,850 | |
| After one year: | | | | | | | | | | | After one year: | | | | | | | | | | | |
| More than one year to three years | | 331,610 |
| | 9,129 |
| | 9,402 |
| | 57,283 |
| | 407,424 |
| More than one year to three years | | 660,922 | | | 17,520 | | | | 185,779 | | | 10,683 | | | 874,904 | |
| More than three years to five years | | 339,145 |
| | 16,585 |
| | 13,858 |
| | 25,921 |
| | 395,509 |
| More than three years to five years | | 909,798 | | | 18,617 | | | | 47,599 | | | 26,197 | | | 1,002,211 | |
| More than five years to ten years | | 608,230 |
| | 124,091 |
| | 84,187 |
| | 23,621 |
| | 840,129 |
| More than five years to ten years | | 1,928,968 | | | 111,632 | | | | 74,291 | | | 95,350 | | | 2,210,241 | |
| More than ten years to twenty years | | 152,945 |
| | 432,521 |
| | 163,772 |
| | 13,146 |
| | 762,384 |
| More than ten years to twenty years | | 336,499 | | | 422,162 | | | | 8,156 | | | 202,470 | | | 969,287 | |
| More than twenty years | | 68,406 |
| | 1,116,218 |
| | 7,504 |
| | 20,145 |
| | 1,212,273 |
| More than twenty years | | 42,313 | | | 1,689,321 | | | | 25,086 | | | 1,417 | | | 1,758,137 | |
| Total due after December 31, 2018 | | 1,500,336 |
| | 1,698,544 |
| | 278,723 |
| | 140,116 |
| | 3,617,719 |
| |
| Total due after December 31, 2021 | | Total due after December 31, 2021 | | 3,878,500 | | | 2,259,252 | | | | 340,911 | | | 336,117 | | | 6,814,780 | |
| Total amount due | | $ | 1,757,106 |
| | $ | 1,749,166 |
| | $ | 282,438 |
| | $ | 187,645 |
| | 3,976,355 |
| Total amount due | | $ | 4,636,529 | | | $ | 2,354,983 | | | | $ | 470,656 | | | $ | 339,462 | | | 7,801,630 | |
| | Deferred origination costs, net | | | | | | | | | | 5,380 |
| Deferred origination costs, net | | | | | | | | | | | 9,486 | |
| Allowance for loan losses | | | | | | | | | | (15,721 | ) | |
| Allowance for credit losses | | Allowance for credit losses | | | | (60,735) | |
| Loans receivable, net | | | | | | | | | | 3,966,014 |
| Loans receivable, net | | | | 7,750,381 | |
| Less: Loans held for sale | | | | | | | | | | 241 |
| |
| Total loans, net | | | | | | | | | | $ | 3,965,773 |
| |
| Less: Loans held-for-sale | | Less: Loans held-for-sale | | | | 45,524 | |
| Total loans receivable, net | | Total loans receivable, net | | | | $ | 7,704,857 | |
The following table sets forth at December 31, 2017,2020, the dollar amount of total loans receivable, contractually due after December 31, 2018,2021, and whether such loans have fixed interest rates or adjustable interest rates.rates:
| | | | | | | | | | | | | | | | | | | | |
| | | Due After December 31, 2021 |
| | | Fixed | | Adjustable | | Total |
| | | (in thousands) |
| Real estate loans: | | | | | | |
| Commercial real estate | | $ | 1,939,507 | | | $ | 1,938,993 | | | $ | 3,878,500 | |
| Residential real estate | | 1,965,712 | | | 293,540 | | | 2,259,252 | |
| | | | | | |
| Commercial and industrial | | 228,160 | | | 112,751 | | | 340,911 | |
| Consumer | | 182,293 | | | 153,824 | | | 336,117 | |
| Total loans receivable | | $ | 4,315,672 | | | $ | 2,499,108 | | | $ | 6,814,780 | |
|
| | | | | | | | | | | | |
| | | Due After December 31, 2018 |
| | | Fixed | | Adjustable | | Total |
| | | (in thousands) |
| Real estate loans: | | | | | | |
| Commercial real estate, multi-family and land | | $ | 966,001 |
| | $ | 534,335 |
| | $ | 1,500,336 |
|
| One-to-four family | | 1,322,450 |
| | 376,094 |
| | 1,698,544 |
|
| Consumer | | 152,424 |
| | 126,299 |
| | 278,723 |
|
| Commercial and industrial | | 72,344 |
| | 67,772 |
| | 140,116 |
|
| Total loans receivable | | $ | 2,513,219 |
| | $ | 1,104,500 |
| | $ | 3,617,719 |
|
Origination, Sale and Servicing of Loans. The following table sets forth the Bank’s loan originations, purchases, sales, principal repayments and loan activity, including loans held-for-sale, for the periods indicated.
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| | | (in thousands) |
| Total loans: | | | | | | |
| Beginning balance | | $ | 6,214,652 | | | $ | 5,588,713 | | | $ | 3,976,355 | |
| Loans originated: | | | | | | |
| Commercial real estate | | 752,562 | | | 701,009 | | | 327,513 | |
| Residential real estate | | 832,917 | | | 579,101 | | | 395,387 | |
| | | | | | |
| Commercial and industrial | | 596,761 | | | 175,449 | | | 87,549 | |
| Consumer | | 47,195 | | | 50,787 | | | 68,489 | |
| Total loans originated | | 2,229,435 | | | 1,506,346 | | | 878,938 | |
| Loans purchased | | — | | | 101,674 | | | 199,580 | |
| Net loans acquired in acquisition | | 1,558,480 | | | 307,778 | | | 1,517,345 | |
| Total | | 10,002,567 | | | 7,504,511 | | | 6,572,218 | |
| Less: | | | | | | |
| Principal repayments | | 1,568,299 | | | 1,278,734 | | | 965,520 | |
| Sales of loans | | 612,348 | | | 7,358 | | | 13,152 | |
| Charge-offs (gross) | | 20,184 | | | 2,804 | | | 3,841 | |
| Transfer to other real estate owned | | 106 | | | 963 | | | 992 | |
| Total loans | | $ | 7,801,630 | | | $ | 6,214,652 | | | $ | 5,588,713 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (in thousands) |
| Total loans: | | | | | | |
| Beginning balance | | $ | 3,816,763 |
| | $ | 1,986,890 |
| | $ | 1,722,888 |
|
| Loans originated: | | | | | | |
| Commercial real estate, multi-family and land | | 295,519 |
| | 122,806 |
| | 187,454 |
|
| One-to-four family | | 298,272 |
| | 163,663 |
| | 158,577 |
|
| Consumer | | 68,872 |
| | 43,780 |
| | 48,594 |
|
| Commercial and industrial | | 165,191 |
| | 138,495 |
| | 76,931 |
|
| Total loans originated | | 827,854 |
| | 468,744 |
| | 471,556 |
|
| Loans purchased | | 37,337 |
| | 37,561 |
| | 21,992 |
|
| Net loans acquired in acquisition | | — |
| | 1,930,853 |
| | 121,466 |
|
| Total | | 4,681,954 |
| | 4,424,048 |
| | 2,337,902 |
|
| Less: | | | | | | |
| Principal repayments | | 680,118 |
| | 522,226 |
| | 294,284 |
|
| Sales of loans | | 16,371 |
| | 78,736 |
| | 48,614 |
|
| Charge-offs (gross) | | 5,384 |
| | 4,490 |
| | 1,135 |
|
| Transfer to other real estate owned | | 3,726 |
| | 1,833 |
| | 6,979 |
|
| Total loans | | $ | 3,976,355 |
| | $ | 3,816,763 |
| | $ | 1,986,890 |
|
Commercial Real Estate Multi-Family and Land Lending. The Bank originates commercial real estate loans that are secured by properties, or properties under construction, generally used for business purposes such as office, industrial or retail facilities. A substantial majority of the Bank’s commercial real estate loans are located in its primary market area. The Bank generally originates commercial real estate loans with terms of up to ten years and amortization schedules up to thirty30 years with fixed or adjustable rates. Fixed rate loans typically contain prepayment penalties over the initial term. Additionally, the Bank offers an interest rate swap program that allows commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. In reaching its decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history and profitability among other factors. The Bank has generally required that
At December 31, 2020, the properties securingBank’s total commercial real estate loans have debt service coverage ratios of at least 130%. The Bank generally requires the personal guarantee of the principal borrowers for commercial real estate loans.
At December 31, 2017, the Bank’s total loans outstanding were $3.976 billion, of which $1.757$4.64 billion, or 44.2%59.4% of total loans, were commercial real estate loan portfolioloans, as compared to $1.669$3.09 billion, or 43.7%49.7% of total loans, at December 31, 2016.2019. The Bank continues to grow this market segmentprimarily through the addition of experienced commercial lenders and hasthrough an expansive lending area with commercial lending teams in various New Jersey counties including Atlantic, Cape May, Mercer, Monmouth, and Ocean as wellwell as teams in theNew York City and the greater Philadelphia area. Of the total commercial real estate portfolio, 32.4%24.7% is considered owner-occupied, whereby the underlying business owner occupies a majority of the property.
The commercial real estate portfolio includes loans for the construction of commercial properties. Typically, these loans are underwritten based upon commercial leases in place prior to funding. In many cases, commercial construction loans are extended to owners that intend to occupy the property for business operations, in which case the loan is based upon the financial capacity of the related business and the owner of the business. At December 31, 2017,2020, the Bank had an outstanding balance in commercial construction loans of $108.0 millionapproximately 5% of total loans, as compared to $123.2 millionapproximately 3% at December 31, 2016.2019.
The Bank also originates multi-family mortgage loans and to a lesser extent land loans on a limited basis.loans. The Bank’s multi-family loans and land loans at December 31, 20172020 totaled $90.1$710.2 million and $10.9$8.2 million, respectively, as compared to $34.8$470.0 million and $7.7$3.7 million, respectively, at December 31, 2016.2019.
One-to-Four Family MortgageResidential Real Estate Lending. The Bank offers both fixed-rate and adjustable-rate mortgage (“ARM”) loans secured by one-to-four family residences with maturities up to 30 years. The majority of such loans are secured by property located in the Bank’s primary market area. Loan originations are typically generated by the Bank’s commissioned loan representatives in the exclusive employment of the Bank and are largely derived from contacts within the local real estate industry, members of the local communities and the Bank’s existing or past customers. On occasion the Bank purchases loans originated by other banks.
At December 31, 2017, $1.7492020, $2.35 billion, or 44.0%30.2% of total loans, were one-to-four family residential mortgagereal estate loans, primarily single family and owner occupied. To a lesser extent and included in this activity are residential mortgage loans secured by seasonal second
homes and non-owner occupied investment properties. The average size of the Bank’s one-to-four family mortgageresidential real estate loans was approximately $223,000$273,000 at December 31, 2017.2020.
The Bank currently offers a number ofseveral ARM loan programs with interest rates which adjust every three, five or ten years. The Bank’s ARM loans generally provide for periodic caps of 2% or 3% and an overall cap of 6% on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate on these loans is indexed to the applicable three-, five- or ten-year U.S. Treasury constant maturity yield, with a repricing margin which ranges generally from 2.75% to 3.50% above the index. The Bank also offers three-, five-, seven- and ten-year ARM loans which operate as fixed-rate loans for the first three, five, seven or ten years and then convert to one-year ARM loans for the remainder of the term. The ARM loans are then indexed to a margin of generally 2.75% to 3.50% above the one-year U.S. Treasury constant maturity yield.
Generally, ARM loans pose credit risks different than the risks inherent in fixed-rate loans, primarily because as interest rates rise, the payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of ARM loans with an initial fixed period of five years or less must qualify based on the greater of the note rate plus 2% or the fully-indexed rate. Seven- to ten-year ARMs must qualify based on the note rate. The Bank does not originate ARM loans which provide forthat can result in negative amortization.
The Bank’s fixed-rate mortgage loans are currently made for terms from 10ten to 30 years. Prior to the fourth quarter of 2014, the Bank generally retained the servicing on loans sold. Currently, servicing rights are generally sold as part of the loan sale. Currently, theThe Bank generally holds its residential loans for its portfolio, andbut from time to time may sell a portion of its longer-term, fixed-rate loans after reviewing volume and yield and after evaluating interest rate risk and capital management considerations. Servicing rights are generally sold as part of the loan sale. The retention of fixed-rate mortgage loans may increase the level of interest rate risk exposure of the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to substantial increases in prepayments during periods of falling interest rates. During the past several years, the Bank has generally sold much of its 30-year, fixed-rate, one-to-four family loans into the secondary market primarily to manage interest rate risk. With the rise in market interest rates and the reduction in refinance volume, the Bank retained most of its 30-year fixed-rate loan originations in 2017 to replace repayments on the existing residential mortgage loan portfolio.
The Bank’s policy is to originate one-to-four family residential mortgagereal estate loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained. Appraisals are obtained for loans secured by real estate properties. The weighted average loan-to-value ratio of the Bank’s one-to-four family mortgageresidential real estate loans was 58.0%61% at December 31, 20172020 based on appraisal values at the time of origination. Title insurance is typically required for first mortgage loans. Residential mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed-rate residential mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.
The Bank has made, and may continue to make, residential mortgage loans that will not qualify as Qualified Mortgage Loans under the Dodd-Frank Act and the Consumer Financial Protection Bureau (“CFPB”) regulations. See “Risk Factors – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans such as the Bank.”
Included in the Bank’s one-to-four familyresidential real estate loan balance at December 31, 2017,2020, were residential construction loans which totaled $54.6$133.3 million. The Bank originates residential construction loans primarily on a construction/permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. MostAll of the Bank’s residential construction loans are made to individuals building a residence.
Construction lending, by its nature, entails additional risks compared to one-to-four family mortgageresidential real estate lending, attributable primarily to the fact that funds are advanced based upon a security interest in a project which is not yet complete. The Bank addresses these risks through its underwriting policies and procedures and its experienced staff.
Consumer LoansCommercial and Industrial Lending. At December 31, 2017,2020, commercial and industrial (“C&I”) loans totaled $470.7 million, or 6.0% of the Bank’s total loans outstanding. The Bank originates C&I loans and lines of credit (including for working capital, fixed asset purchases, and acquisition, receivable and inventory financing) primarily in the Bank’s market area. In underwriting commercial and industrial loans and credit lines, the Bank reviews and analyzes financial history and capacity of the borrower, collateral value, strength and character of the principals, and general payment history of the principal borrowers in coming to a credit decision. The Bank generally originates C&I loans secured by the assets of the business including accounts receivable, inventory and fixtures. The Bank generally requires the personal guarantee of the principal borrowers for all commercial and industrial loans. Risk of loss on a commercial and industrial business loan is dependent largely on the borrower’s ability to remain financially able to repay the loan from the ongoing operations of the business. In addition, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer Loans. At December 31, 2020, the Bank’s consumer loans totaled $282.4$339.5 million, or 7.1%4.4% of the Bank’s total loan portfolio. Of the total consumer loan portfolio, home equity loans comprised $147.9$128.6 million; home equity lines of credit comprised $136.8$156.4 million; overdraft line of creditand student loans totaled $709,000; and loans on savings accounts and other consumer loans totaled $524,000.comprised $53.0 million.
The Bank originates home equity loans typically as fixed-rate loans with terms ranging from 5five to 20 years. The Bank also offers variable-rate home equity lines of credit. Home equity loans and lines of credit are originated based on the applicant’s income and their ability to repay and are secured by a mortgage on the underlying real estate, typically owner-occupied, one-to-four family residences. Generally, the loan when combined with the balance of any applicable first mortgage lien, may not exceed 80%70% of the appraised value of the property at the time of the loan commitment. The Bank charges an early termination fee should a home equity loan or line of credit be closed within two or three years of origination. A borrower is required to make monthly payments of principal and interest, at a minimum of $50, based upon a 10-, 15- or 20-year amortization period. Certain home equity lines of credit require the payment of interest-only during the first five years with fully-amortizing payments thereafter. At December 31, 2017,2020, these loans totaled $31.217.8 million, as compared to $41.4$22.7 million at December 31, 2016.2019.
Generally, the adjustable rate of interest charged is based upon the prime rate of interest (as published in the Wall Street Journal), although the range of interest rates charged may vary from 1.0% below prime to 1.5% over prime. The loans have an 18% lifetime cap on interest rate adjustments.
Commercial and Industrial Lending. At December 31, 2017, commercial and industrial (“C&I”)Consumer loans totaled $187.6 million, or 4.7% of the Bank’s totalmay entail greater risk than residential real estate loans, outstanding. The Bank originates commercial and industrial loans and lines of credit (including for working capital; fixed asset purchases; and acquisition, receivable and inventory financing) primarilyparticularly in the Bank’s marketcase of consumer loans that area. In underwriting commercial and industrial loans and credit lines, the Bank reviews and analyzes financial history and capacity, collateral value, strength and character of the principals, and general payment history of the principal borrowers in coming to a credit decision. The Bank generally originates C&I loans unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the assets ofoutstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the business including accounts receivable, inventory, fixtures, etc. The Bank generally requires the personal guarantee of the principal borrowers for all commercial and industrial loans. Risk of loss on a commercial and industrial businessborrower. Consumer loan is dependent largelycollections depend on the borrower’s abilitycontinuing financial stability, and therefore are likely to remain financially able to repaybe adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the loan from ongoing operations.application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Approval Procedures and Authority. The Board of Directors (“Board”) establishes the loan approval policies of the Bank based on total exposure to the individual borrower. The Board has authorized the approval of loans by a minimum of two officers of the Bank or the Management Credit Committee, on a scale which requires approval by personnel with progressively higher levels of credit approval authority as the loan amount increases. Pursuant to applicable regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital.
Due to the recent acquisitions, a Bank’s acquisition activity, significant portionportions of the acquired loan portfolio wasportfolios were underwritten according to the underwriting standards and guidelines of the acquired banks. Acquired loans have beenare evaluated under OceanFirst’s credit risk management policies during pre-closing due diligence and during post-closing risk rating reviews.
In addition to internal credit reviews, the Bank has engaged an independent firm specializing in commercial loan reviews to examine a selection of commercial real estate and commercial and industrial loans, and provide management with objective analysis regarding the quality of these loans throughout the year. The independent firm reviewed 60% of the outstanding loan balances for the Company’sBank’s commercial real estate and commercial and industrial loans during 2017.2020. Their conclusion was that the Bank’s internal credit reviews are consistent with both Bank policy and general industry practice.
Loan Servicing. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent borrowers, supervising foreclosures, and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers, and generally administering the loans. The Bank also services mortgage loans for others. On October 31, 2014, the Bank sold most of the servicing rights on residential mortgage loans serviced for Federal agencies, recognizing a net gain of $408,000. Smaller sales in 2015 resulted in a net gain of $111,000. All of the remaining loans currently being serviced for others are loans which were originated by the Bank. At December 31, 2017,2020, the Bank was servicing $121.7$95.8 million of loans for others. At December 31, 2017, 2016, and 2015, the balance of the Bank’s Mortgage Servicing Rights (“MSR”) totaled $143,000, $228,000, and $589,000, respectively. For the years ended December 31, 2017, 2016, and 2015, loan servicing income totaled $261,000, $250,000, and $268,000, respectively. The Bank evaluates the MSR for impairment on a quarterly basis. No impairment was recognized for the years ended December 31, 2017, 2016, and 2015. The valuation of MSR is determined through a discounted analysis of future cash flows, incorporating numerous assumptions which are subject to significant change in the near term. Generally, a decline in market interest rates will cause expected prepayment speeds to increase resulting in a lower valuation for mortgage servicing rights and ultimately lower future servicing fee income.
Delinquencies and Classified Assets. The steps taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank sends the borrower a written notice of non-payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. The Bank may offer to modify the terms or take other forbearance actions which afford the borrower an opportunity to satisfy the loan terms. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 120 days or more, the Bank will either;either: (i) commence litigation to realize on the collateral, including foreclosure proceedings against any real property that secures the loan; or (ii) sell non-performing loans where foreclosure proceedings may or may not have been initiated. If a foreclosure action is instituted and the loan is not brought current, paid in full, or an acceptable workout accommodation is not agreed upon before
the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Foreclosure timelines in New Jersey are among the longest in the nation and have remained protracted over the past several years.
The Bank’s internal Asset Classification Committee, which is chaired by the Chief Risk Officer, reviews and classifies the Bank’s assets quarterly and reports the results of its review to the Board. As part of this process, the Chief Risk Officer compiles a quarterly list of all criticized and classified loans, and a narrative report of classified commercial and industrial, commercial real estate, multi-family, land and construction loans. The Bank classifies assets in accordance with its Classification of Assets and Allowance for Credit Losses Policy (“Policy”), which considers certain regulatory guidelines and definitions. As part of this Policy, the Deputy Chief Credit Officer reviews and confirms the criticized and classified commercial loans report on a monthly basis. In addition, the Chief Credit Officer reviews and affirms all loan risk rating changes within and into any criticized category. At December 31, 2017,2020, the Bank had $60.7 $194.5 million of assets, including all other real estate owned (“OREO”), classified as “Substandard.” There were no assets classified as “Doubtful” or as “Loss.”Substandard. AtDecember 31, 2016,2019, the Bank had $70.5$73.2 million of assets, classified as
“Substandard,” $111,000including all OREO, classified as “Doubtful” and no assets classified as “Loss.”Substandard. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess potential weaknesses, such as past delinquencies, are designated “SpecialSpecial Mention.” Special Mention assets totaled $25.5$165.8 million at December 31, 2017,2020, as compared to $15.7$34.5 million at December 31, 2016.2019. The increase in Special Mention and Substandard assets were driven by the Bank’s practice to promptly re-risk loans subject to forbearance. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, Impact of COVID-19.
Non-Accrual Loans and OREO. The following table sets forth information regarding non-accrual loans (“non-performing loans”) and OREO, excluding Purchase Credit Impairedloans purchased with credit deterioration (“PCI”)PCD”, or, previously, purchased credit impaired) loans. The Bank obtained PCIpurchased credit impaired loans as part of itsits acquisitions of Colonial American Bank (“Colonial American”), Cape Bancorp, Inc. (“Cape”), Ocean Shore Holding Co. (“Ocean Shore”), Sun and Ocean Shore. PCICapital Bank. These were reclassified as PCD loans as of January 1, 2020. Further, the Bank obtained PCD loans from Two River and Country Bank. PCD loans are accounted for at the purchase price or acquisition date fair value, based upon the present valuewith an estimate of expected future cash flowscredit losses for groups of PCD loans with no related allowance for loan losses. PCIsimilar risk characteristics and individual PCD loans without similar characteristics, to arrive at an initial amortized cost basis. PCD loans totaled $1.7$48.5 million and $7.6$13.3 million at December 31, 20172020 and 2016,2019, respectively. It is the policy of the Bank to cease accruing interest on loans 90 days or more past due or in the process of foreclosure. For the years ended December 31, 2017, 20162019 and 2015,2018, the amount of interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms were $372,000, and $419,000, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | (dollars in thousands) |
| Non-performing loans: | | | | | | | | | | |
| Real estate: | | | | | | | | | | |
| Commercial real estate | | $ | 23,714 | | | $ | 7,728 | | | $ | 5,525 | | | $ | 14,243 | | | $ | 2,935 | |
| Residential real estate | | 8,642 | | | 7,181 | | | 7,389 | | | 4,190 | | | 8,126 | |
| Commercial and industrial | | 1,551 | | | 207 | | | 1,587 | | | 503 | | | 441 | |
| Consumer | | 2,503 | | | 2,733 | | | 2,914 | | | 1,929 | | | 2,064 | |
Total non-performing loans (1) | | 36,410 | | | 17,849 | | | 17,415 | | | 20,865 | | | 13,566 | |
| OREO | | 106 | | | 264 | | | 1,381 | | | 8,186 | | | 9,803 | |
Total non-performing assets (1) | | $ | 36,516 | | | $ | 18,113 | | | $ | 18,796 | | | $ | 29,051 | | | $ | 23,369 | |
Allowance for credit losses on loans as a percent of total loans receivable (2) | | 0.78 | % | | 0.27 | % | | 0.30 | % | | 0.40 | % | | 0.40 | % |
Allowance for credit losses on loans as a percent of total non-performing loans (1) (2) | | 166.81 | | | 94.41 | | | 95.19 | | | 75.35 | | | 111.92 | |
Non-performing loans as a percent of total loans receivable (2) | | 0.47 | | | 0.29 | | | 0.31 | | | 0.52 | | | 0.35 | |
Non-performing assets as a percent of total assets (2) | | 0.32 | | | 0.22 | | | 0.25 | | | 0.54 | | | 0.45 | |
(1)Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure, and do not include PCD loans. Non-performing assets consist of non-performing loans and OREO.
(2)The loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for credit losses, was $639,000, $391,000, and $848,000,$27,951, $30,260, $31,647, $17,531, and $25,973 at December 31, 2020, 2019, 2018, 2017, and 2016 respectively.
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (dollars in thousands) |
| Non-accrual loans: | | | | | | | | | | |
| Real estate: | | | | | | | | | | |
| Commercial real estate, multi-family and land | | $ | 14,243 |
| | $ | 2,935 |
| | $ | 10,796 |
| | $ | 12,758 |
| | $ | 12,304 |
|
| One-to-four family | | 4,190 |
| | 8,126 |
| | 5,779 |
| | 3,115 |
| | 28,213 |
|
| Consumer | | 1,929 |
| | 2,064 |
| | 1,576 |
| | 1,877 |
| | 4,328 |
|
| Commercial and industrial | | 503 |
| | 441 |
| | 123 |
| | 557 |
| | 515 |
|
| Total | | 20,865 |
| | 13,566 |
| | 18,274 |
| | 18,307 |
| | 45,360 |
|
| OREO | | 8,186 |
| | 9,803 |
| | 8,827 |
| | 4,664 |
| | 4,345 |
|
| Total non-performing assets | | $ | 29,051 |
| | $ | 23,369 |
| | $ | 27,101 |
| | $ | 22,971 |
| | $ | 49,705 |
|
Allowance for loan losses as a percent of total loans receivable (1) | | 0.40 | % | | 0.40 | % | | 0.84 | % | | 0.95 | % | | 1.33 | % |
Allowance for loan losses as a percent of total non-performing loans (1)(2) | | 75.35 |
| | 111.92 |
| | 91.51 |
| | 89.13 |
| | 46.14 |
|
Non-performing loans as a percent of total loans receivable (2) | | 0.52 |
| | 0.35 |
| | 0.91 |
| | 1.06 |
| | 2.88 |
|
Non-performing assets as a percent of total assets (2) | | 0.54 |
| | 0.45 |
| | 1.05 |
| | 0.97 |
| | 2.21 |
|
| |
(1) | The loans acquired from Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan losses, was $17,531, $25,973, and $2,202 at December 31, 2017, 2016, and 2015, respectively. There were no net credit marks on loans at December 31, 2014 and 2013. |
| |
(2) | Non-performing assets consist of non-performing loans and OREO. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. |
Non-performing loans totaled $20.9$36.4 million at December 31, 2017,2020, an increase of $7.3$18.6 million, as compared to December 31, 2016. The increase was primarily due to three commercial loan relationships totaling $12.6 million, including one large relationship in the fourth quarter of 2017. An increase in non-performing residential mortgage loans early in the year was offset by bulk sales of non-performing residential mortgage loans totaling $8.5 million.2019. Non-performing loans at December 31, 20172020 and 20162019 do not include $1.7$48.5 million and $7.6$13.3 million, respectively, of PCIPCD loans acquired from Two River, Country Bank, Colonial American, Cape, Ocean Shore, Sun and Ocean Shore.Capital Bank. The Company’s OREO totaled $8.2 million$106,000 at December 31, 2017,2020, a $1.6 million$158,000 decrease from December 31, 2016. The OREO balance at December 31, 2017 and 2016 included $6.5 million and $7.0 million, respectively, relating to a hotel, golf and banquet facility located in New Jersey which the Company acquired in the fourth quarter of 2015.2019.
Allowance for LoanCredit Losses. The allowance for loan losses (“ACL”): Under the Current Expected Credit Loss (“CECL”) model, the ACL on financial assets is a valuation accountallowance estimated at each balance sheet date in accordance with generally accepted accounting principles
(“GAAP”) that reflects probable incurred losses inis 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 loan portfolio. The adequacy ofACL (previously the allowance for loan losses islosses) based on management’s evaluationthe 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 Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged-off. The allowance is reduced by loan charge-offs.ACL. A description of the methodology used in establishing the allowance for loan lossesACL is set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Allowance for Loan Losses.”Credit Losses.
As of December 31, 20172020 and 2016,2019, the Bank’s allowance for loan lossesACL was 0.40%0.78% and 0.27% of total loans.loans, respectively. The net credit mark on all acquired loans, not reflected in the allowance, for loan losses, was $17.5$28.0 million and $26.0$30.3 million at December 31, 20172020 and 2016,2019, respectively. The allowance for loan lossesACL as a percent of total non-performing loans was 75.35%166.81% at December 31, 2017, a decrease2020, an increase from 111.92%94.41% in the prior year. The decrease was due to the addition of one large loan relationship in the fourth quarter of 2017 with no related loss
allocation included in the allowance for loan losses. The Bank had non-accrual loans of $20.9 million at December 31, 2017, an increase from $13.6 million at December 31, 2016. The Bank will continue to monitor its allowance for loancredit losses as conditions dictate.
The following table sets forth activity in the Bank’s loan ACL, or allowance for loan losses, as appropriate, for the periods set forth in the table.table:
| | | | | At or for the Year Ended December 31, | | | At or for the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | (dollars in thousands) | | | (dollars in thousands) |
| Balance at beginning of year | | $ | 15,183 |
| | $ | 16,722 |
| | $ | 16,317 |
| | $ | 20,930 |
| | $ | 20,510 |
| Balance at beginning of year | | $ | 16,852 | | | $ | 16,577 | | | $ | 15,721 | | | $ | 15,183 | | | $ | 16,722 | |
| Charge-offs: | | | | | | | | | | | Charge-offs: | | | | | | | | | | |
| Commercial real estate | | 1,049 |
| | 3,399 |
| | 103 |
| | 323 |
| | — |
| Commercial real estate | | 14,850 | | | 899 | | | 2,253 | | | 1,049 | | | 3,399 | |
| Residential real estate | | 3,820 |
| | 558 |
| | 295 |
| | 6,955 |
| | 2,444 |
| Residential real estate | | 3,200 | | | 1,299 | | | 1,021 | | | 3,820 | | | 558 | |
| Commercial and industrial | | Commercial and industrial | | 890 | | | — | | | 230 | | | 380 | | | 184 | |
| Consumer | | 135 |
| | 349 |
| | 678 |
| | 471 |
| | 842 |
| Consumer | | 1,244 | | | 606 | | | 337 | | | 135 | | | 349 | |
| Commercial and industrial | | 380 |
| | 184 |
| | 59 |
| | 78 |
| | 235 |
| |
| Total | | 5,384 |
| | 4,490 |
| | 1,135 |
| | 7,827 |
| | 3,521 |
| |
| | Total charge-offs | | Total charge-offs | | 20,184 | | | 2,804 | | | 3,841 | | | 5,384 | | | 4,490 | |
| Recoveries | | 1,477 |
| | 328 |
| | 265 |
| | 584 |
| | 1,141 |
| Recoveries | | 1,325 | | | 1,443 | | | 1,207 | | | 1,477 | | | 328 | |
| Net charge-offs | | 3,907 |
| | 4,162 |
| | 870 |
| | 7,243 |
| | 2,380 |
| Net charge-offs | | 18,859 | | | 1,361 | | | 2,634 | | | 3,907 | | | 4,162 | |
| Provision for loan losses | | 4,445 |
| | 2,623 |
| | 1,275 |
| | 2,630 |
| | 2,800 |
| |
| Credit loss expense | | Credit loss expense | | 57,402 | | | 1,636 | | | 3,490 | | | 4,445 | | | 2,623 | |
| Impact of CECL adoption | | Impact of CECL adoption | | 2,701 | | | — | | | — | | | — | | | — | |
| Initial allowance for credit losses on PCD loans | | Initial allowance for credit losses on PCD loans | | 2,639 | | | — | | | — | | | — | | | — | |
| Balance at end of year | | $ | 15,721 |
| | $ | 15,183 |
| | $ | 16,722 |
| | $ | 16,317 |
| | $ | 20,930 |
| Balance at end of year | | $ | 60,735 | | | $ | 16,852 | | | $ | 16,577 | | | $ | 15,721 | | | $ | 15,183 | |
| Ratio of net charge-offs during the year to average net loans outstanding during the year | | 0.10 | % | | 0.15 | % | | 0.05 | % | | 0.45 | % | | 0.16 | % | Ratio of net charge-offs during the year to average net loans outstanding during the year | | 0.23 | % | | 0.02 | % | | 0.05 | % | | 0.10 | % | | 0.15 | % |
The increase in net charge-offs for the year ended December 31, 2016,2020 was primarily due to charge-offs of $2.1$14.6 million on the bulk sales of non-performing and under-performing loans. The elevated charge-offs in 2014 were duerelated to the bulk sale of non-performinghigher risk commercial real estate loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans which resulted in a charge-offloans. The Company executed these loan sales as part of $5.0 millionits strategy to limit exposure to credit risk and has accelerated the resolution of credit losses on these loans.higher risk credit exposures and minimized the operational impact associated with potential litigation and foreclosure proceedings.
The following table sets forth the Bank’s percent of loan ACL by category to the total loan ACL at December 31, 2020, the percent of allowance for loan lossesby category to total allowance at December 31, 2019, 2018, 2017, and 2016, and the percent of loans to total loans in each of the categories listed at the dates indicated (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2020 | 2019 | 2018 | 2017 | 2016 |
| | Amount | Percent of
ACL
to Total
ACL | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans |
| Commercial real estate | $ | 41,757 | | 68.76 | % | 59.43 | % | $ | 12,776 | | 75.81 | % | 49.71 | % | $ | 11,047 | | 66.64 | % | 49.46 | % | $ | 11,127 | | 70.78 | % | 44.19 | % | $ | 9,360 | | 61.65 | % | 43.72 | % |
| Residential real estate | 5,390 | | 8.87 | | 30.19 | | 2,002 | | 11.88 | | 37.35 | | 2,413 | | 14.56 | | 36.58 | | 1,804 | | 11.48 | | 43.99 | | 2,245 | | 14.79 | | 44.66 | |
| Commercial and industrial | 1,770 | | 2.91 | | 6.03 | | 1,458 | | 8.65 | | 6.38 | | 1,609 | | 9.71 | | 5.46 | | 1,801 | | 11.45 | | 4.72 | | 2,037 | | 13.41 | | 4.00 | |
| Consumer | 11,818 | | 19.46 | | 4.35 | | 591 | | 3.51 | | 6.56 | | 486 | | 2.93 | | 8.50 | | 614 | | 3.91 | | 7.10 | | 1,110 | | 7.31 | | 7.62 | |
| Unallocated | — | | — | | — | | 25 | | 0.15 | | — | | 1,022 | | 6.16 | | — | | 375 | | 2.38 | | — | | 431 | | 2.84 | | — | |
| Total | $ | 60,735 | | 100.00 | % | 100.00 | % | $ | 16,852 | | 100.00 | % | 100.00 | % | $ | 16,577 | | 100.00 | % | 100.00 | % | $ | 15,721 | | 100.00 | % | 100.00 | % | $ | 15,183 | | 100.00 | % | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans | Amount | Percent of
Allowance
to Total
Allowance | Percent
of Loans
in Each
Category
to Total
Loans |
| Commercial real estate | $ | 11,127 |
| 70.78 | % | 44.19 | % | $ | 9,360 |
| 61.65 | % | 43.72 | % | $ | 7,165 |
| 42.85 | % | 41.19 | % | $ | 8,935 |
| 54.76 | % | 38.09 | % | $ | 10,371 |
| 49.55 | % | 33.91 | % |
| Residential real estate | 1,804 |
| 11.48 |
| 43.99 |
| 2,245 |
| 14.79 |
| 44.66 |
| 6,590 |
| 39.41 |
| 41.80 |
| 4,291 |
| 26.30 |
| 45.31 |
| 4,859 |
| 23.22 |
| 49.34 |
|
| Consumer | 614 |
| 3.91 |
| 7.10 |
| 1,110 |
| 7.31 |
| 7.62 |
| 1,095 |
| 6.55 |
| 9.72 |
| 1,146 |
| 7.02 |
| 11.68 |
| 1,360 |
| 6.50 |
| 12.87 |
|
| Commercial and industrial | 1,801 |
| 11.45 |
| 4.72 |
| 2,037 |
| 13.41 |
| 4.00 |
| 1,639 |
| 9.80 |
| 7.29 |
| 863 |
| 5.29 |
| 4.92 |
| 1,383 |
| 6.61 |
| 3.88 |
|
| Unallocated | 375 |
| 2.38 |
| — |
| 431 |
| 2.84 |
| — |
| 233 |
| 1.39 |
| — |
| 1,082 |
| 6.63 |
| — |
| 2,957 |
| 14.12 |
| — |
|
| Total | $ | 15,721 |
| 100.00 | % | 100.00 | % | $ | 15,183 |
| 100.00 | % | 100.00 | % | $ | 16,722 |
| 100.00 | % | 100.00 | % | $ | 16,317 |
| 100.00 | % | 100.00 | % | $ | 20,930 |
| 100.00 | % | 100.00 | % |
In recent years, the Bank has refined and enhanced its assessment of the adequacy of the allowance by reviewing the look-back periods, updating the loss emergence periods, and enhancing the analysis of qualitative factors. These refinements have increased the level of precision in the allowance and the unallocated portion has declined substantially. Additionally, the reduction in the unallocated portion of the allowance for loan losses in 2014 was due to the improved risk profile of the loan portfolio and related credit metrics, and the lower level of uncertainty relating to future loan losses due to the bulk sale of non-performing residential and consumer loans.
Reserve for Repurchased Loans and Loss Sharing Obligations. The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to repurchase requests which may be received on residential mortgagereal estate loans previously sold to investors. The reserve also includes an estimate of the Bank’s obligation under a loss sharing arrangement with the FHLB relating to loans sold into their Mortgage Partnership Finance (“MPF”) program. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans and loss sharing obligations at each quarter-end.
At December 31, 20172020 and 2016,2019, the Company maintained a reserve for repurchased loans and loss sharing obligations of $463,000$1.2 million and $846,000,$1.1 million, respectively. Provisions or credits for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. LossesThere were $383,000, $140,000, and $56,000, respectively,no losses for the years ended December 31, 2017, 2016
and 2015. Included2020, 2019, or 2018. The reserve increased by $100,000 during 2020, which was recorded as a decrease in the lossesother income. Losses on loans repurchased arewould include cash settlements in lieu of repurchases. At December 31, 20172020 and 2016,2019, there were no outstanding loan repurchase requests.
Management believes that the Bank has established and maintained the reserve for repurchased loans and loss sharing obligations at adequate levels, however, future adjustments to the reserve may be necessary due to economic, operating or other conditions beyond the Bank’s control.
Investment Activities
The investment policy of the Bank as established by the Board attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank’s lending activities. Specifically, the Bank’s policies generally limit investments to government and Federal agency-backed, securities, municipal, securitiescorporate, and corporate debt obligations. The Bank’s policies provide that all investment purchases must be evaluated internally for creditworthiness and be approved by two officers (any two of the Senior Vice President/Treasurer, the Executive Vice President/Chief Financial Officer, and the President/Chief Executive Officer).mortgage-backed. The Company’s investment policy mirrors that of the Bank except that it allows for the purchase of certain other debt, preferred stock, and equity securities in limited amounts.
Management determines the appropriate classification of securities at the time of purchase. If the Bank has the intent and the ability at the time of purchase to hold debt securities until maturity, they may be classified as held-to-maturity. Investment and mortgage-backed securities identified as held-to-maturity are carried at cost, adjusted for amortization of premium and accretion of discount, which are recognized as adjustments to interest income. SecuritiesDebt securities to be held for indefinite periods of time, but not necessarily to maturity are classified as available-for-sale. Such debt securities are carried at estimated fair value and unrealized gains and losses, net of related tax effect, are excluded from earnings, but are included as a separate component of stockholders’ equity. See “Refer to Note 4 Securities, to the Consolidated Financial Statements.”Statements.
Mortgage-backed Securities. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which, in general, are passed from the mortgage originators, through intermediaries that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such intermediaries may be private issuers, or agencies including the Federal Home Loan Mortgage Company (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), and the Small Business Administration (“SBA”) that guarantee the payment of principal and interest to investors. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with
interest rates that are within a certain range and with varying maturities. The underlying pool of mortgages can be composed of either fixed-rate or ARMadjustable-rate loans.
The actual maturity of a mortgage-backed security varies, depending on when the mortgagors repay or prepay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the security, thereby affecting its yield to maturity and the related estimated fair value of the mortgage-backed security. The prepayments of the underlying mortgages depend on many factors, including the type of mortgages, the coupon rates, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages, the general levels of market interest rates, and general economic conditions. GNMA mortgage-backed securities that are backed by assumable Federal Housing Administration (“FHA”) or Department of Veterans Affairs (“VA”) loans generally have a longer life than conventional non-assumable loans underlying FHLMC and FNMA mortgage-backed securities. During periods of falling mortgage interest rates, prepayments generally increase, as opposed to periods of increasing interest rates when prepayments generally decrease. If the interest rate of underlying mortgages significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.
The Bank has investments in mortgage-backed securities and has utilized such investments to complement its lending activities. The Bank invests in a large variety of mortgage-backed securities, including ARM,adjustable-rate, balloon and fixed-rate securities and all wereare primarily directly insured or guaranteed by either FHLMC, FNMA, GNMA or SBA.
The following table sets forth the Bank’s mortgage-backed securities activities at amortized cost for the periods indicated:
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Beginning balance | $ | 462,883 |
| | $ | 280,872 |
| | $ | 326,117 |
|
| Mortgage-backed securities acquired | — |
| | 203,416 |
| | — |
|
| Mortgage-backed securities purchased | 165,501 |
| | 59,590 |
| | 16,913 |
|
| Less: Principal repayments | (96,383 | ) | | (73,470 | ) | | (60,924 | ) |
| Less: Sales | — |
| | (6,394 | ) | | — |
|
| Amortization of premium | (891 | ) | | (1,131 | ) | | (1,234 | ) |
| Ending balance | $ | 531,110 |
| | $ | 462,883 |
| | $ | 280,872 |
|
The following table sets forth certain information regarding the amortized cost and estimated fair value of the Bank’s mortgage-backed securities at the dates indicated.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2020 | | 2019 | | 2018 |
| | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value |
| | (in thousands) |
| Mortgage-backed securities: | | | | | | | | | | | |
| FHLMC | $ | 232,942 | | | $ | 238,201 | | | $ | 206,985 | | | $ | 208,682 | | | $ | 237,703 | | | $ | 232,752 | |
| FNMA | 293,805 | | | 301,300 | | | 244,923 | | | 247,115 | | | 278,264 | | | 272,982 | |
| GNMA | 67,334 | | | 69,336 | | | 110,661 | | | 111,388 | | | 127,611 | | | 125,449 | |
| SBA | 5,392 | | | 5,332 | | | 1,940 | | | 1,889 | | | 3,527 | | | 3,447 | |
| CMO | 32,321 | | | 33,547 | | | — | | | — | | | — | | | — | |
| Total mortgage-backed securities | $ | 631,794 | | | $ | 647,716 | | | $ | 564,509 | | | $ | 569,074 | | | $ | 647,105 | | | $ | 634,630 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value |
| | (in thousands) |
| Mortgage-backed securities: | | | | | | | | | | | |
| FHLMC | $ | 186,921 |
| | $ | 184,135 |
| | $ | 144,016 |
| | $ | 141,754 |
| | $ | 120,116 |
| | $ | 118,991 |
|
| FNMA | 263,103 |
| | 261,296 |
| | 217,445 |
| | 217,130 |
| | 160,254 |
| | 162,170 |
|
| GNMA | 75,243 |
| | 74,379 |
| | 92,475 |
| | 92,230 |
| | 502 |
| | 597 |
|
| SBA | 5,843 |
| | 5,871 |
| | 8,947 |
| | 8,975 |
| | — |
| | — |
|
| Total mortgage-backed securities | $ | 531,110 |
| | $ | 525,681 |
| | $ | 462,883 |
| | $ | 460,089 |
| | $ | 280,872 |
| | $ | 281,758 |
|
Investment Securities. At December 31, 2017,2020, the amortized cost of the Company’s investment securities totaled $332.3$490.7 million, and consisted of $97.3$173.8 million of U.S. government and agency obligations, $150.0$238.4 million of state and municipal obligations, $76.0$72.3 million of corporate debt securities, and $8.9$6.2 million of other investments.collateralized loan obligations. Each of the U.S. government and agency obligations are rated AA+ by Standard and Poor’s and Aaa by Moody’s. The state and municipal obligations are issued by government entities with current credit ratings by one of the nationally recognized statistical rating organizations that are considered investment grade ranging from a high of AAA to a low of A-. The corporate debt securities include a $1.0 million issue of a local community bank purchased in late 2015 which is not rated by any of the credit rating services. Excluding this item, the remaining corporateBaa2. Corporate debt securities are issued by various corporate entities with an amortized cost of $75.0$72.3 million. Credit ratings range from a high of AA-AA to a low of BB ascategories. The collateralized loan obligations are rated byAAA or AA categories and one oftrust preferred collateralized debt obligation is rated in the internationally-recognized credit rating services.A category. See “Note 4 Securities, to the Consolidated Financial Statements.”
The following table sets forth certain information regarding the amortized cost and estimated fair value of the Company’s investment securities at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2020 | | 2019 | | 2018 |
| | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value |
| | (in thousands) |
| Investment securities: | | | | | | | | | | | |
| U.S. government and agency obligations | $ | 173,790 | | | $ | 176,940 | | | $ | 154,104 | | | $ | 155,433 | | | $ | 115,499 | | | $ | 114,569 | |
| State and municipal obligations | 238,405 | | | 249,674 | | | 124,455 | | | 125,784 | | | 123,987 | | | 122,357 | |
| Corporate debt securities | 72,305 | | | 71,268 | | | 79,547 | | | 77,959 | | | 66,834 | | | 61,976 | |
| Collateralized loan obligations | 6,174 | | | 6,170 | | | — | | | — | | | — | | | — | |
| Total investment securities | $ | 490,674 | | | $ | 504,052 | | | $ | 358,106 | | | $ | 359,176 | | | $ | 306,320 | | | $ | 298,902 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value |
| | (in thousands) |
| Investment securities: | | | | | | | | | | | |
| U.S. agency obligations | $ | 97,346 |
| | $ | 96,484 |
| | $ | 32,502 |
| | $ | 32,253 |
| | $ | 85,084 |
| | $ | 85,108 |
|
| State and municipal obligations | 149,958 |
| | 148,702 |
| | 39,155 |
| | 38,309 |
| | 13,311 |
| | 13,326 |
|
| Corporate debt securities | 76,024 |
| | 72,374 |
| | 77,057 |
| | 71,141 |
| | 56,000 |
| | 47,473 |
|
| Other investments | 8,947 |
| | 8,700 |
| | 8,778 |
| | 8,551 |
| | — |
| | — |
|
| Total investment securities | $ | 332,275 |
| | $ | 326,260 |
| | $ | 157,492 |
| | $ | 150,254 |
| | $ | 154,395 |
| | $ | 145,907 |
|
The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities, excluding scheduled principal amortization, of the Bank’s investment and mortgage-backed securities as of December 31, 2017.2020. Other investments consist of mutual funds that do not have a contractual maturity date and are excluded from the table. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. See “Investment Activities – Mortgage-backed Securities.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| | | | | | | | | | Total |
| | One Year
or Less Amortized Cost | | More than One Year to Five Years Amortized Cost | | More than Five Years to Ten Years Amortized Cost | | More than Ten Years Amortized Cost | | Amortized
Cost | | Estimated
Fair
Value |
| | (dollars in thousands) |
| Investment securities: | | | | | | | | | | | |
| U.S. government and agency obligations | $ | 73,432 | | | $ | 100,358 | | | $ | — | | | $ | — | | | $ | 173,790 | | | $ | 176,940 | |
| State and municipal obligations | 21,877 | | | 85,613 | | | 38,465 | | | 92,450 | | | 238,405 | | | 249,674 | |
Corporate debt securities (1) | 2,513 | | | 9,978 | | | 48,958 | | | 10,856 | | | 72,305 | | | 71,268 | |
Collateralized loan obligations (2) | — | | | — | | | 6,174 | | | — | | | 6,174 | | | 6,170 | |
| Total investment securities | $ | 97,822 | | | $ | 195,949 | | | $ | 93,597 | | | $ | 103,306 | | | $ | 490,674 | | | $ | 504,052 | |
| Weighted average yield | 1.40 | % | | 1.74 | % | | 2.35 | % | | 2.57 | % | | 1.96 | % | | |
| Mortgage-backed securities: | | | | | | | | | | | |
| FHLMC | $ | 51 | | | $ | 1,841 | | | $ | 43,866 | | | $ | 187,184 | | | $ | 232,942 | | | $ | 238,201 | |
| FNMA | 3 | | | 11,404 | | | 63,439 | | | 218,959 | | | 293,805 | | | 301,300 | |
| GNMA | — | | | 32 | | | 1,636 | | | 65,666 | | | 67,334 | | | 69,336 | |
| SBA | — | | | — | | | 2,884 | | | 2,508 | | | 5,392 | | | 5,332 | |
| CMO | — | | | 20,352 | | | — | | | 11,969 | | | 32,321 | | | 33,547 | |
| Total mortgage-backed securities | $ | 54 | | | $ | 33,629 | | | $ | 111,825 | | | $ | 486,286 | | | $ | 631,794 | | | $ | 647,716 | |
| Weighted average yield | 1.98 | % | | 2.98 | % | | 2.17 | % | | 2.13 | % | | 2.18 | % | | |
(1)$54.0 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over London Inter-Bank Offered Rate (“LIBOR”) on a quarterly basis.
(2)$6.2 million of the Bank’s collateralized loan obligations carry interest rates which adjust to a spread over LIBOR on a quarterly basis.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2017 |
| | | | | | | | | | Total |
| | One Year or Less Amortized Cost | | More than One Year to Five Years Amortized Cost | | More than Five Years to Ten Years Amortized Cost | | More than Ten Years Amortized Cost | | Amortized
Cost | | Estimated
Fair
Value |
| | (dollars in thousands) |
| Investment securities: | | | | | | | | | | | |
| U.S. agency obligations | $ | 15,024 |
| | $ | 82,322 |
| | $ | — |
| | $ | — |
| | $ | 97,346 |
| | $ | 96,484 |
|
| State and municipal obligations | 25,908 |
| | 64,996 |
| | 59,054 |
| | — |
| | 149,958 |
| | 148,702 |
|
Corporate debt securities (1) | 5,012 |
| | 11,079 |
| | 29,932 |
| | 30,001 |
| | 76,024 |
| | 72,374 |
|
| Total investment securities | $ | 45,944 |
| | $ | 158,397 |
| | $ | 88,986 |
| | $ | 30,001 |
| | $ | 323,328 |
| | $ | 317,560 |
|
| Weighted average yield | 1.57 | % | | 1.79 | % | | 2.57 | % | | 2.09 | % | | 2.00 | % | | |
| Mortgage-backed securities: | | | | | | | | | | | |
| FHLMC | $ | 46 |
| | $ | 1,121 |
| | $ | 39,478 |
| | $ | 146,276 |
| | $ | 186,921 |
| | $ | 184,135 |
|
| FNMA | 95 |
| | 333 |
| | 41,969 |
| | 220,706 |
| | 263,103 |
| | 261,296 |
|
| GNMA | — |
| | — |
| | 376 |
| | 74,867 |
| | 75,243 |
| | 74,379 |
|
| SBA | — |
| | — |
| | — |
| | 5,843 |
| | 5,843 |
| | 5,871 |
|
| Total mortgage-backed securities | $ | 141 |
| | $ | 1,454 |
| | $ | 81,823 |
| | $ | 447,692 |
| | $ | 531,110 |
| | $ | 525,681 |
|
| Weighted average yield | 1.61 | % | | 1.92 | % | | 2.41 | % | | 2.21 | % | | 2.24 | % | | |
| |
(1) | $61.0 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over LIBOR on a quarterly basis. |
Sources of Funds
General. Deposits, repaymentsRepayments and prepayments of loans and mortgage-backed securities, proceeds from sales of loans, investment maturities, cash flows generated from operations, borrowings, proceeds from maturities of debt securities, and FHLB advances and other borrowingsdeposits are the primary sources of the Bank’s funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms to retail, government and business customers. The Bank’s deposits consist of money market accounts, savings accounts, interest-bearing checking accounts, non-interest-bearing accounts and time deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank’s deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies on its community-banking focus, stressing customer service and long-standing relationships with its customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions could significantly affect the Bank’s ability to attract and retain deposits.
At December 31, 2017,2020, the Bank had $270.6$409.5 million in time deposits in amounts of $100,000$250,000 or more maturing as follows:
| | | Maturity Period | | Amount | | Weighted
Average
Rate | Maturity Period | | Amount | | Weighted
Average
Rate |
| | | (dollars in thousands) | | | (dollars in thousands) |
| Three months or less | | $ | 43,613 |
| | 0.95 | % | Three months or less | | $ | 149,897 | | | 1.46 | % |
| Over three through six months | | 23,839 |
| | 0.72 |
| Over three through six months | | 109,502 | | | 1.29 | |
| Over six through twelve months | | 54,372 |
| | 0.94 |
| Over six through twelve months | | 60,038 | | | 1.41 | |
| Over twelve months | | 148,815 |
| | 1.73 |
| Over twelve months | | 90,065 | | | 2.30 | |
| Total | | $ | 270,639 |
| | 1.36 | % | Total | | $ | 409,502 | | | 1.59 | % |
The following table sets forth the distribution of the Bank’s average deposit accounts and the average rate paid on those deposits for the periods indicated.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid |
| | | (dollars in thousands) |
| Interest-bearing checking accounts | | $ | 3,168,889 | | | 35.76 | % | | 0.61 | % | | $ | 2,517,068 | | | 40.05 | % | | 0.67 | % | | $ | 2,336,917 | | | 40.43 | % | | 0.39 | % |
| Non-interest-bearing accounts | | 2,031,100 | | | 22.93 | | | — | | | 1,325,836 | | | 21.10 | | | — | | | 1,135,602 | | | 19.64 | | | — | |
| Money market deposit accounts | | 677,554 | | | 7.65 | | | 0.43 | | | 605,607 | | | 9.64 | | | 0.81 | | | 571,997 | | | 9.90 | | | 0.49 | |
| Savings accounts | | 1,449,982 | | | 16.37 | | | 0.17 | | | 906,086 | | | 14.42 | | | 0.13 | | | 877,179 | | | 15.17 | | | 0.11 | |
| Time deposits | | 1,531,857 | | | 17.29 | | | 1.53 | | | 929,488 | | | 14.79 | | | 1.67 | | | 858,978 | | | 14.86 | | | 1.11 | |
| Total average deposits | | $ | 8,859,382 | | | 100.00 | % | | 0.55 | % | | $ | 6,284,085 | | | 100.00 | % | | 0.61 | % | | $ | 5,780,673 | | | 100.00 | % | | 0.39 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid | | Average
Balance | | Percent
of Total
Average
Deposits | | Average
Rate
Paid |
| | | (dollars in thousands) |
| Interest-bearing checking accounts | | $ | 1,796,370 |
| | 41.96 | % | | 0.25 | % | | $ | 1,266,135 |
| | 42.92 | % | | 0.17 | % | | $ | 875,326 |
| | 46.85 | % | | 0.11 | % |
| Money market deposit accounts | | 410,373 |
| | 9.59 |
| | 0.30 |
| | 316,977 |
| | 10.75 |
| | 0.27 |
| | 129,775 |
| | 6.95 |
| | 0.14 |
|
| Savings accounts | | 672,315 |
| | 15.70 |
| | 0.05 |
| | 447,484 |
| | 15.17 |
| | 0.04 |
| | 306,151 |
| | 16.39 |
| | 0.03 |
|
| Non-interest-bearing accounts | | 776,344 |
| | 18.13 |
| | — |
| | 497,166 |
| | 16.85 |
| | — |
| | 327,216 |
| | 17.51 |
| | — |
|
| Time deposits | | 625,847 |
| | 14.62 |
| | 1.00 |
| | 422,026 |
| | 14.31 |
| | 1.03 |
| | 229,785 |
| | 12.30 |
| | 1.33 |
|
| Total average deposits | | $ | 4,281,249 |
| | 100.00 | % | | 0.29 | % | | $ | 2,949,788 |
| | 100.00 | % | | 0.25 | % | | $ | 1,868,253 |
| | 100.00 | % | | 0.23 | % |
Borrowings. TheFrom time to time, the Bank has obtainedobtains advances from the FHLB for cash management and interest rate risk management purposes or as an alternative to deposit funds and may do so in the future as part of its operating strategy.deposits. FHLB term advances are also used to acquire certain other assets as may be deemed appropriate for investment purposes. Advances are collateralized primarily by certain of the Bank’s mortgage loans and investment and mortgage-backed securities and secondarily by the Bank’s investment in capital stock of the FHLB. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time-to-time in
accordance with the policies of the FHLB. At December 31, 2017,2020, the Bank had $288.7 million inno outstanding advances from the FHLB. The Bank also has outstanding municipal letters of credit issued by the FHLB used to secure government deposits. At December 31, 2017,2020, these municipal letters of credit totaled $665.0 million.$1.78 billion.
The Bank also borrows funds using securities sold under agreements to repurchase. Under this form of borrowing specific U.S. Government agency and/or mortgage-backed securities are pledged as collateral to secure the borrowing. These pledged securities are held by a third-party custodian. At December 31, 2017,2020, the Bank had borrowed $79.7$128.5 million through securities sold under agreements to repurchase.
The Bank can also borrow from the Federal Reserve Bank of Philadelphia (“Reserve Bank”) under theits primary credit program. Primary credit is available on a short-term basis, typically overnight, at a rate above the Federal Open Market Committee’s Federal funds target rate. All extensions of credit by the Reserve Bank must be secured. At December 31, 2017,2020, the Bank had no borrowings outstanding with the Reserve Bank.
Subsidiary Activities
At December 31, 2017,2020, the Bank owned 7five direct subsidiaries:
•OceanFirst REIT Holdings, Inc. was established in 2007 as a wholly-owned subsidiary of the Bank and now acts as the holding company for OceanFirst Management Corp, which was organized in 2016 for the purpose of holding and managing investment securities, including the stock of OceanFirst Realty Corp. OceanFirst Realty Corp. was established in 1997 and invests in qualifying mortgage loans and is intended to qualify as a real estate investment trust, which may, among other things, be utilized by the Company to raise capital in the future.
975 Holdings, LLC, Hooper Holdings, LLC, and TRREO Holdings, LLC were established in 2010, 2015, and 2016, respectively, as wholly-owned subsidiaries of the Bank. •Casaba Real Estate Holding Corporation and Cohensey Bridge, L.L.C. werewas acquired by the Bank as a wholly-owned subsidiariessubsidiary as part of its acquisition of Cape in 2016. All of these subsidiaries areThis subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties.
OceanFirst Services, LLC•CBNJ Investment Corp was acquired by the Bank as a wholly owned subsidiary as part of its acquisition of Capital Bank in 2019. This subsidiary held certain investments of Capital Bank and is currently inactive.
•Country Property Holdings Inc. was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Country Bank in 2020. This subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties.
•TRCB Investment Corp was acquired by the Bank thatas a wholly owned subsidiary as part of its acquisition of Two River in 2020. This subsidiary held certain investments of Two River and is now the holding company for OFB Reinsurance, Ltd., which was established in 2002 to reinsure a percentage of the private mortgage insurance (“PMI”) risks on one-to-four family residential mortgages originated by the Bank. There are no current reinsurance contracts in force by OFB Reinsurance, Ltd.currently inactive.
In addition to the Bank, the Company hasholds OceanFirst Risk Management, Inc. as a direct subsidiary. OceanFirst Risk Management Inc. is a captive insurance company that insures certain risks relating to the business of the Bank and the Company.
Furthermore, the Company holds the following statutory business trusts: OceanFirst Capital Trust I, OceanFirst Capital Trust II, OceanFirst Capital Trust III, Sun Statutory Trust VII, Sun Capital Trust VII, Sun Capital Trust VIII, and Country Bank Statutory Trust I, collectively known as the “Trusts”. All of the Trusts are incorporated in Delaware and are formed for the issuance of trust preferred securities.
Human Capital
Employee profile
As of December 31, 2017,2020, the Bank had 598928 full-time employees, 59 part-time employees, and 86 part-time21 commissioned employees, for a total of 6841,008 employees. In addition, approximately 72% of the Bank’s employee base is female and 28% male, and the average tenure was eight years as of December 31, 2020.
Total rewards
As part of the Bank’s compensation philosophy, market competitive total rewards programs are maintained for employees in order to attract and retain superior talent. In addition to competitive base wages, additional programs include annual bonus opportunities, a Company Employee Stock Ownership Plan (“ESOP”), a Company matched 401(k) Plan, health and welfare benefits, flexible spending accounts, paid time off, family leave and employee assistance programs.
Health and safety
The safety, health and wellness of Bank employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of the Bank’s management and staff, over a short period of time, a significant majority of employees were transitioned to effectively work from remote locations and ensure a safely-distanced working environment for employees with customer facing responsibilities, at branches and operations centers.
Proactively, the Bank partnered with an external vendor, Eden Health (“Eden”), to monitor the daily workday health status of employees working in an OceanFirst facility. Eden features a team of medical professionals and clinicians who are qualified to assist in maintaining a safe and healthy workplace. Through a smartphone application, Eden monitors employees’ daily health condition and any recent potential exposure to COVID-19. Employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and are provided additional paid time off to cover compensation during such absences.
On an ongoing basis, the Bank further promotes the health and wellness by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.
Talent
A core tenet of the Bank’s talent system is to both develop talent from within and supplement with external hires. Whenever possible, the Bank seeks to fill positions by promotion and transfer from within the organization. The Bank’s talent acquisition team uses internal and external resources to recruit highly skilled and talented candidates, and employee referrals for open positions is encouraged.
Following a multi-pronged recruiting strategy, which includes sourcing diverse candidate pools, new hires participate in an onboarding program that includes an introduction to the Bank’s culture, policies and procedures. New employees are not represented byassigned an ambassador, who extend the integration process beyond the typical orientation experience. Retention strategies include espousing a collective bargaining unitculture that inspires loyalty and trust through ongoing communication of strategic initiatives and executive roundtable conversations, in addition to the benefits mentioned above in Total rewards. The Bank’s leadership development programs and opportunities offered through OceanFirst Bank University help ensure that motivated individuals have the opportunity for continuous improvement. Employees each maintain a Professional Development Action Plan and participate in regular evaluation and growth opportunities. The Bank’s peer recognition program provides the space for ongoing recognition and celebration of accomplishments.
This approach has yielded loyalty and commitment from employees which in turn grows the business, products, and customers. This approach has also added new employees and ideas, which support a continuous improvement mindset and the goals of a diverse and inclusive workforce. The average tenure of eight yearsreflects employee engagement in this core talent system tenet.
The Bank considers its relationship with its employeesstrives to be good. From time to timepromote inclusion through stated Company values and behaviors. With the support from the Board of Directors, the Bank may operate subsidiaries which may includecontinues to explore additional diversity, equity, inclusion and belonging efforts through multiple approaches to inclusion: candidates, employees, not directly employed in banking activities. As of December 31, 2017, subsidiaries of and the Bank had 38 full-timemarketplace. The ongoing diversity and 27 part-time employees to manageinclusion initiatives support a repossessed commercial property.
On January 31, 2018,goal that everyone throughout the Company completed its acquisition of Sun, which added 291 full-timeis engaged in creating an inclusive workplace. The Bank is focused on sourcing and 35 part timehiring with fairness and equitable approaches, creating an environment where all employees for a total of 326 employees.can develop and thrive.
REGULATION AND SUPERVISION
General
Prior to January 2018, the Bank was a Federally-chartered savings bank, and the Company was registered as a savings and loan holding company. Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and is subject to the requirements of the BHC Act, including required approvals for investments in or acquisitions of banking organizations, or entities involved in activities that are deemed closely related to banking, capital adequacy standards and limitations on nonbanking activities. The Company is registered with the FRB and is required by Federal law to file reports with, and comply with the rules and regulations of the FRB. The Bank is a member of the Federal Home Loan BankFHLB System and, with respect to deposit insurance, of the Deposit Insurance Fund (“DIF”) managed by the FDIC. The Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary Federal regulator, and the FDIC, as the deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to consummating certain transactions such as mergers with, or acquisitions of, other insured depository institutions. The OCC conducts periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors and to ensure the safe and sound operation of the Bank. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
In addition, the Company elected to become a financial holding company under the Gramm-Leach Bliley Act (the “GLBA”) amendments to the BHC Act (the “GLBA”).Act. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities and, if the FRB determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general, activities that are considered complementary to financial activities.
The banking industry is highly regulated. Statutory and regulatory controls increase a BHC’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions.
The description of statutory provisions and regulations applicable to national bank chartered institutionsbanks and BHCs set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company, is subject to change and is qualified in its entirety by reference to the actual laws and regulations involved.
The Dodd-Frank Act. The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, compliance and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various Federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The Federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and the full impact of the Dodd-Frank Act are still not yet known. In addition, as a result of the 2016 election, there is some chance that certain provisions of the Dodd-Frank Act may be repealed or amended.
The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. Institutions such as the Bank with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators (theregulator. The Bank is currently examined by the OCC infor compliance with consumer protection laws. At December 31, 2020, the case of the Bank), althoughBank’s total assets were $11.45 billion and is therefore subject to authority enforcement by the CFPB, will have back-up authority over such institutions.subject to a phase in period. The Dodd-Frank Act also weakens the Federal preemption rules that have been applicable for national banks and Federal savings associations, and gives state attorney generals the ability to enforce Federal consumer protection laws.
Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments. The Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the burden is on the lender to demonstrate the appropriateness of its policies and the strength of its controls. The Dodd-Frank Act contains an exception from this Ability-To-Repay rule for “Qualified Mortgages.” The rule sets forth specific underwriting criteria for a loan to qualify as a Qualified Mortgage. The criteria generally exclude loans that (1) are interest-only, (2) have excessive upfront points or fees, or (3) have negative amortization features, balloon payments, or terms in excess of 30 years. To be defined as an Ability-To-Repay Qualified Mortgage, the underwriting criteria also impose a maximum debt to income ratio of 43%, based upon documented and verifiable information. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting the failure of the originator to establish the consumer’s Ability-To-Repay. Additionally, conforming fixed-rate loans with a debt-to-income ratio
greater than 43% would also qualify as an Ability-To-Repay Qualified Mortgage based upon an automated loan approval from one of the government sponsored mortgage entities. However, a consumer may assert the lender’s failure to comply with the Ability-To-Repay rule for all residential mortgage loans other than Qualified Mortgages, and may challenge a lender’s determination that a loan was in fact a Qualified Mortgage. The qualified mortgage rule has yet to be fully addressed by the foreclosure courts and depending on the interpretation of these rules, collectability of non-qualifying mortgages could be subject to future action by the courts. See “Risk Factors – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans such as the Bank.”
The Dodd-Frank Act also directed the FRB to issue rules to limit debit card interchange fees (the fees that issuing banks charge merchants each time a consumer uses a debit card) collected by banks with assets of $10 billion or more. The FRB issued a final rule which caps an issuer’s debit card interchange base fee at twenty-one cents ($0.21) per transaction and allows an additional 5 basis point charge per transaction to cover fraud losses. The FRB also issued an interim final rule that allows a fraud-prevention adjustment of one cent ($0.01) per transaction conditioned upon an issuer adopting effective fraud prevention policies and procedures. The Bank’s average interchange fee per transaction is thirty-nineforty one cents ($0.39)0.41). The Dodd-Frank Act exempts fromAt December 31, 2020, the FRB’s rule banks withBank’s total assets less than $10were $11.45 billion such as the Bank. Although exempt from the rule,and will therefore be subject to reduced interchange fees beginning in July 2021 of approximately $2.5 million for 2021, or $5.0 million annualized. In addition, market forces in future periods may result in reduced fees charged by all issuers, regardless of asset size, which may result in reduced revenues for the Bank. For the year ended December 31, 2017,2020, the Bank’s revenues from interchange fees was $6.3$10.9 million, an increase of $2.0$1.4 million from 2016.2019. The Bank is currently seeking transition relief from this rule and, if approved, the Bank may be exempt until 2022.
The Dodd-Frank Act mandates that institutions with more than $10 billion in assets clear all eligible dealer swaps through a futures commission merchant to a central counterparty clearing house. The Bank has entered into relationships with a futures commission merchant and two central counterparty clearing houses in advance of the timeframe required. In addition, initial margin requirements for non-centrally cleared swaps and security-based swaps may be effective for the Bank’s swap counterparties that are swap dealers on September 1, 2021, at which time such counterparties will be required to collect initial margin from the Bank. The initial margin requirements were issued for the purpose of ensuring safety and soundness of swap trading in light of the risk to the financial system associated with non-cleared swaps activity. The Bank is prepared to meet compliance with the initial margin requirements. Further, the additional expense associated with complying will increase along with transaction volume but is not expected to materially impact the Bank’s results.
The Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and allowallows greater access by stockholders to the company’s proxy material by authorizing the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal banking agencies to promulgate rules prohibiting excessive compensation paid to bank executives, regardlessregardless of whether the company is publicly traded. The SEC has not yet implemented rules giving stockholders access to company proxy statements, and the banking agency rules primarily address incentive compensation. The rules prohibit incentive-based compensation that would encourage inappropriate risks by providing excessive compensation or that would expose the bank to inappropriate risks by providing compensation that could lead to a material financial loss.
It is still uncertain to what extent and how full implementation of and promulgation of rules under the Dodd-Frank Act, will occur and affect the Bank.
Economic Growth, Regulatory Relief and Consumer Protection Act. The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), adopted in 2018, was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions will provide regulatory relief to those institutions with $10 billion or more in assets. Among other things, the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion, exempted institutions with less than $10 billion in consolidated assets from the “Volker Rule,” and raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets. In addition, the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to High Volatility Commercial Real Estate. Many of the regulations needed to implement the EGRRCPA have yet to be promulgated by the federal banking agencies, and so it is still uncertain how full implementation of the EGRRCPA will affect the Company and the Bank.
Bank Holding Company Regulation
The Company is a BHC and is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.
The BHC Act prohibits the companies which do not elect to become financial holding companies, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that a BHC may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The BHC Act requires prior approval by the FRB of the acquisition by bank holding companies of more than 5% of the voting stock of any other entity, including another bank. Satisfactory capital ratios and Community Reinvestment Act (“CRA”) ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB providesregulations provide that a BHC is expected to act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy.those regulations.
Holding Company Capital Requirements. The Dodd-Frank Act requires capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. The Dodd-Frank Act also requires banking regulators to seek
to make capital standards countercyclical, so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. The Federal Reserve Board has issued regulations requiring that all bank holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
At December 31, 2017,2020, the Company exceeded all regulatory capital requirements currently applicable. The following table presents the Company’s capital position at December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Capital | |
| As of December 31, 2020 | Actual Capital | | Required Capital | | Excess Amount | | Actual Percent | | Required Percent | |
| OceanFirst Financial Corp: | (dollars in thousands) | | | | | |
| Tier 1 capital (to average assets) | $ | 998,273 | | | $ | 423,028 | | | $ | 575,245 | | | 9.44 | % | | 4.00 | % | |
| Common equity Tier 1 (to risk-weighted assets) | 871,385 | | | 552,075 | | | 319,310 | | | 11.05 | | | 7.00 | | (1) |
| Tier 1 capital (to risk-weighted assets) | 998,273 | | | 670,377 | | | 327,896 | | | 12.66 | | | 8.50 | | (1) |
| Total capital (to risk-weighted assets) | 1,230,370 | | | 828,113 | | | 402,257 | | | 15.60 | | | 10.50 | | (1) |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Capital | |
| As of December 31, 2017 | Actual Capital | | Required Capital | | Excess Amount | | Actual Percent | | Required Percent | |
| OceanFirst Financial Corp: | (dollars in thousands) | | | | | |
| Tier 1 capital (to average assets) | $ | 465,554 |
| | $ | 209,943 |
| | $ | 255,611 |
| | 8.87 | % | | 4.00 | % | |
| Common equity Tier 1 (to risk-weighted assets) | 449,991 |
| | 212,907 |
| | 237,084 |
| | 12.15 |
| | 5.75 |
| (1) |
| Tier 1 capital (to risk-weighted assets) | 465,554 |
| | 268,448 |
| | 197,106 |
| | 12.57 |
| | 7.25 |
| (1) |
| Total capital (to risk-weighted assets) | 516,902 |
| | 342,502 |
| | 174,400 |
| | 13.96 |
| | 9.25 |
| (1) |
| |
(1) | Includes the Capital Conservation Buffer of 1.25% |
Dividends. The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory pressures to reclassify and charge off loans and to establish additional loancredit loss reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to pay dividends. Further, regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of dividends previously paid over that period is insufficient to fully fund the dividend or the Company’s overall rate of earnings retention is inconsistent with the Company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction in the amount of such instruments outstanding from the beginning of the quarter in which the redemption or repurchase occurred compared with the end of such quarter. These regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition of the Company. Under the Federal Change in Bank Control Act (“CBCA”) and applicable regulations, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s outstanding voting stock, unless the FRB has found that the acquisition will not result in a change of control of the Company. Under CBCA, the FRB has 60 days from the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a BHC.
Financial Holding Company Status
When the Bank converted to a national bank charter and the Company became a BHC, the Company elected to become a financial holding company. Financial holding companies may engage in a broader scope of activities than a BHC. In addition, financial holding companies may undertake certain activities without prior FRB approval.
A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "FinancialFinancial in nature"nature activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and insurance agency activities; merchant banking; and activities that the FRB determines to be financial in nature or incidental to a financial activity or which isare complementary to a financial activity and doesdo not pose a safety and soundness risk.
A financial holding company that engages in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.
A financial holding company generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the
voting shares or substantially all of the assets of a BHC, bank or savings association. In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.
If any subsidiary bank of a financial holding company ceases to be “well-capitalized” or “well-managed” and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the CRA of less than “satisfactory,” then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to “satisfactory” or better.
Regulation of Bank Subsidiary
Business Activities. The operations of the Bank are subject to requirements and restrictions under federalFederal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. Approval of the OCC is required for branching, bank mergers in which the continuing bank is a national bank and in connection with certain fundamental corporate changes affecting the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, as implemented by Regulation W which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries.
Capital Requirements. FDICFederal regulations require banks to maintain minimum levels of capital including: a common equity Tier 1 capital to risk-basedrisk-weighted assets ratio of 4.0%4.5%, a Tier 1 capital to risk-basedrisk-weighted assets ratio of 6.0%, a total capital to risk-basedrisk-weighted assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the resultratio of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.4.0%.
As noted, the risk-based capital standards for banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6%, and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include
cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and leasecredit losses limited to a maximum of 1.25% of risk-weighted assets. Unrealized gains and losses on certain “available-for-sale”available-for-sale securities are included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Bank has exercised the opt-out. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the FDIC takesfederal regulators take into consideration, not only these numeric factors, but qualitative factors as well, and hashave the authority to establish higher capital requirements for individual banks where necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”“Capital Conservation Buffer” consisting of 2.5%2.50% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in over four years beginningOn January 1, 2016. The capital conservation buffer requirement is being phased in incrementally, which started at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, and increasing to 1.875% on January 1, 2018, and 2.50% on January 1, 2019, when the full capital conservation buffer requirement, will beof 2.50%, became effective. Both the Bank and the Company are in compliance with the capital conservation buffer requirements applicable to them.
The Federal banking agencies, including the FDIC,OCC, have also adopted regulations to require an assessment of an institution’s exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital adequacy. Under such a risk assessment, examiners evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold additional capital.
According to the Federal banking agencies, applicable considerations include: quality of the bank’s interest rate risk management process; the overall financial condition of the bank; and the level of other risks at the bank for which capital is needed.
At December 31, 2017,2020, the Bank exceeded all regulatory capital requirements currently applicable.The following table presents the Bank’s capital position at December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Capital | |
| As of December 31, 2020 | | Actual
Capital | | Required
Capital | | Excess
Amount | | Actual
Percent | | Required
Percent | |
| Bank: | | (dollars in thousands) | | | | | |
| Tier 1 capital (to average assets) | | $ | 942,122 | | | $ | 444,648 | | | $ | 497,474 | | | 8.48 | % | | 4.00 | % | |
| Common equity Tier 1 (to risk-weighted assets) | | 942,122 | | | 544,625 | | | 397,497 | | | 12.11 | | | 7.00 | | (1) |
| Tier 1 capital (to risk-weighted assets) | | 942,122 | | | 661,331 | | | 280,791 | | | 12.11 | | | 8.50 | | (1) |
| Total capital (to risk-weighted assets) | | 1,004,480 | | | 816,938 | | | 187,542 | | | 12.91 | | | 10.50 | | (1) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Capital | |
| As of December 31, 2017 | | Actual Capital | | Required Capital | | Excess Amount | | Actual Percent | | Required Percent | |
| Bank: | | (dollars in thousands) | | | | | |
| Tier 1 capital (to average assets) | | $ | 459,031 |
| | $ | 209,760 |
| | $ | 249,271 |
| | 8.75 | % | | 4.00 | % | |
| Common equity Tier 1 (to risk-weighted assets) | | 459,031 |
| | 212,705 |
| | 246,326 |
| | 12.41 |
| | 5.75 |
| (1) |
| Tier 1 capital (to risk-weighted assets) | | 459,031 |
| | 268,194 |
| | 190,837 |
| | 12.41 |
| | 7.25 |
| (1) |
| Total capital (to risk-weighted assets) | | 475,379 |
| | 342,178 |
| | 133,201 |
| | 12.85 |
| | 9.25 |
| (1) |
| |
(1) | Includes the Capital Conservation Buffer of 1.25% |
Prompt Corrective Action. Federal law requires, among other things, that the Federal bank regulatory authorities take “promptprompt corrective action”action with respect to insured depository institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC’s regulations define the five categories as follows:
An institution is classified as “well capitalized”well capitalized if:
•its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level; and
•its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and
•its ratio to Tier 1 capital to risk-weighted assets is at least 8%; and
•its ratio of total capital to risk-weighted assets is at least 10%.
An institution is classified as “adequately capitalized”adequately capitalized if:
•its ratio of Tier 1 capital to total assets is at least 4%; and
•its ratio of common equity tier 1 capital to risk-weighted assets is at least 5.75%4.5%; and
•its ratio to Tier 1 capital to risk-weighted assets is at least 7.25%6%; and
•its ratio of total capital to risk-weighted assets is at least 9.25%8%.
An institution is classified as “undercapitalized”undercapitalized if:
•its leverage ratio is less than 4%; and
•its ratio of common equity tier 1 capital to risk-weighted assets is less than 5.75%4.5%; and
•its ratio to Tier 1 risk based capital is at less than 7.25%6%; and
•its ratio of total capital to risk-weighted assets is at least 9.25%8%.
An institution is classified as “significantly undercapitalized”significantly undercapitalized if:
•its leverage ratio is less than 3%; or
•its ratio of common equity tier 1 capital to risk-weighted assets is less than 4.25%3%; or
•its ratio to Tier 1 risk based capital is at less than 5.25%4%; or
•its total risk-based capital is less than 7.25%6%.
An institution that has a tangible capital to total assets ratio equal to or less than 2% is deemed to be “criticallycritically undercapitalized.”
The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured bank if that bank is “criticallycritically undercapitalized.” The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:
•insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
•substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
•existence of an unsafe or unsound condition to transact business;
•likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and
•insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without Federal assistance.
Based on the regulatory guidelines, the Bank satisfies the criteria to be “well-capitalized.”well-capitalized.
Insurance of Deposit Accounts. Deposit accounts at the Bank are insured by the DIF of the FDIC. The Bank is therefore subject to FDIC deposit insurance assessments which are determined using a risk-based system. The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the Company’s operating expenses and results of operations. The Company cannot predict what assessment rates will be in the future.
In 2011, the FDIC approved a final rule required by the Dodd-Frank Act, that changed the assessment base from domestic deposits to average assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a target size for the DIF. The rule finalized a target size for the DIF at 2% of insured deposits. It also implemented a lower assessment rate schedule when the fund reaches 1.15% (so that the average rate over time should be about 8.5 basis points) and, in lieu of dividends, provided for a lower rate schedule when the reserve ratio reaches 2% and 2.5%. In addition, the FDIC set a targeted reserve ratio of 1.35% by September 30, 2018, and provided that the FDIC would award assessment credits to banks with consolidated assets less than $10 billion, for the portion of the assessment that contributed to the growth in the reserve ratio, if the target was met. The rule lowered overall assessment rates in order to generate the same approximate amount of revenue under the new larger base as was raised under the old base. The assessment rates in total are between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. Deposit accounts are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor.
The FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
In additionOn September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36%. Because the reserve ratio has exceeded 1.35% threshold, the FDIC awarded assessment credits to banks with consolidated assets less than $10 billion, for the portion of the assessment that contributed to the FDIC assessments, the Financing Corporation (“FICO”), formedgrowth in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation, is authorized to impose and collect, throughreserve ratio. The Company received the FDIC assessments for anticipated payments, issuance costsassessment credits during the second half of 2019 and custodial fees on bonds issued byinto the FICO. The bonds issued by the FICO are due to mature in 2017 through 2019.first half of 2020.
The total expense incurred in 20172020 and 20162019 for the deposit insurance assessment and the FICO payments were $1.6$3.8 million and $2.2$1.1 million, respectively. The total expense incurred in 2019 also included FICO payments.
Loans to One Borrower. Subject to certain exceptions, a banking institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.
Limitation on Capital Distributions. Applicable regulations impose limitations upon all capital distributions by a banking institution, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the approval of the OCC, is required prior to any capital distribution if the total capital distributions for the calendar year exceeds net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution
would otherwise be contrary to a statute, regulation or agreement with the OCC. In the event the Bank’s capital fell below its regulatory requirements or the FRB or OCC notified it that it was in need of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the FRB or OCC could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the FRB or OCC determine that such distribution would constitute an unsafe or unsound practice. If the Bank is unable for any reason to pay a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future, pay a dividend at the same rate as historically paid, be able to repurchase stock, or to meet current debt obligations. In addition, capital requirements made applicable to the Company as a result of the Dodd-Frank Act and Basel III may limit the Company’s ability to pay dividends or repurchase stock in the future. The Company may also be required to receive non-objection letters prior to performing any actions that may impact the Company’s capital.
Assessments. Banking institutions are required to pay assessments to fund regulatory operations. The assessments, paid on a semi-annual basis, are based upon the institution’s total assets, including consolidated subsidiaries as reported in the Bank’s latest quarterly regulatory report, as well as the institution’s regulatory rating and complexity component. The assessments paid by the Bank for the years ended December 31, 20172020 and 20162019 totaled $923,000$1.1 million and $623,000,$1.2 million, respectively.
Transactions with Related Parties. The Bank’s authority to engage in transactions with “affiliates”affiliates (e.g.e.g., any company that controls or is under common control with an institution, including the Company and its non-bank subsidiaries) is limited by Federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the bank. The aggregate amount of covered transactions with all affiliates is limited to 20% of the bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, banks are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no bank may purchase the securities of any affiliate other than a subsidiary.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional FHLBs. Each FHLB provides member institutions with a central credit facility. The Bank, as a member of the FHLB-NY is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 0.20%0.125% of mortgage-related assets and 4.5% of the specified value of certain transactions with the FHLB. The Bank was in compliance with this requirement with an investment in FHLB-NY stock at December 31, 20172020 and 2019 of $19.7 million.$12.6 million and $31.9 million, respectively.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts (primarily interest-bearing checking and regular checking accounts). The regulations are adjusted annually and generally provide that reserves be maintained against aggregate transaction accountsaccounts. At December 31, 2020, the reserve requirements were as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $115.1$127.5 million; a 10% reserve ratio is applied above $115.1$127.5 million. The first $15.5$16.9 million of otherwise reservable balances (subject to adjustments by the FRB) are exempt from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements. For 2018,2021, the FRB has set the 3% reserve limit at $122.3$182.9 million and the exemption at $16.0$21.1 million.
In addition, as a national bank, the Bank is required to hold capital stock of the Federal Reserve Bank of Philadelphia. The required shares may be adjusted up or down based on changes to the Bank's common stock and paid-in surplus. The Bank is in compliance with these requirements, with a total investment in Federal Reserve Bank of Philadelphia stock of $26.5$39.1 million and $30.4 million at February 1, 2018.December 31, 2020 and 2019, respectively.
The Federal Reserve Bank of Philadelphia pays dividends on the common stock held by the Bank. However, the level of dividends is reduced for financial institutions that exceed a certain asset size. For 2021, the asset level is $10.79 billion, and financial institutions whose assets exceed that level receive dividends generally equal to the rate of the 10-year Treasury note, as opposed to 6% for smaller financial institutions. Such reduction will significantly decrease the dividends received from the Federal Reserve Bank of Philadelphia, which totaled $2.1 million for the year ended December 31, 2020. FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar year basis using the accrual method of accounting, and are subject to Federal income taxation in the same manner as other corporations with some exceptions, including particularly
the Bank’s reserve for bad debts. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. For its 2017 taxable year, the Bank is subject to a maximum Federal income tax rate of 35% which declines to a maximum rate of 21% in 2018.
Corporate Alternative Minimum Tax. TheFor tax years before December 31, 2017, the Internal Revenue Code of 1986, as amended (the “Code”) imposesimposed a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank’s adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). The Bank does not expectOn December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted resulting in significant modifications to be subject toexisting laws, including elimination of the AMTI.corporate alternative tax.
Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70%50% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then 80%65% of any dividends received may be deducted.
Tax Reform. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”)Reform was enacted resulting in significant modifications to existing law.law, including a reduction in the statutory rate from 35% in 2017, to 21% in 2018. As a result of the Tax Reform, the Company recorded additionalwas required to revalue its deferred tax asset, resulting in no impact for the year ended December 31, 2019, a tax benefit of $1.9 million, for the year ended December 31, 2018, and a tax expense of $3.6 million for the year ended December 31, 2017, due to the remeasurement of deferred tax assets and liabilities relating to the reduction in the corporate tax rate from 35% to 21%.2017.
State and Local Taxation
New Jersey Taxation. The Bank files New Jersey income tax returns. For New Jersey income tax purposes, the Bank is subject to a tax rate of 9% of taxable income. For this purpose, “taxable income”taxable income generally means Federal taxable income, subject to certain adjustments (including addition of interest income on state and municipal obligations).
The Company is required to file a New Jersey income tax return because it does business in New Jersey. For New Jersey tax purposes, regular corporations are presently taxed at a rate equal to 9% of taxable income. However, ifNew Jersey also imposes a temporary surtax of 2.5% for 2018 and 2019, and 1.5% for 2020 and 2021. On September 29, 2020, the New Jersey surcharge for 2020 was increased to 2.5% and was retroactively applied to periods beginning on or after January 1, 2020. The surcharge of 2.5% will be extended through December 31, 2023. If the Company meets certain requirements, it may beis eligible to elect to be taxed as a New Jersey Investment Company at a tax rate presently equal to 3.60%4.60% (40% of 9%11.5%) of taxable income. The Company isdid not expected toqualify as a New Jersey Investment Company. For 2019 and prospectively, New Jersey law requires combined filing for members of an affiliated group but excludes companies that qualify as a New Jersey Investment Company.
New Jersey also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received. These changes are not temporary. As a result of the change in New Jersey tax code, the Company revalued its deferred tax asset resulting in a reduction of state income tax expense of $2.2 million for the year ended December 31, 2019.
OceanFirst REIT Holdings, Inc. files a separate New Jersey income tax return andsince it qualifies as a New Jersey Investment Company whichCompany. It is taxed at a rate presently equal to 3.60% of taxable income.
New York Taxation. Due to an increase in loan activity both organically and through acquisition, the Bank is required to file aNew York State, MTA, and New York City tax returns. The New York State and MTA tax return. The New York return requiresCity returns require consolidation of all entities, including OceanFirst Realty, and New
York taxable income, consistent with other states, generally means Federal taxable income subject to certain adjustments. The allocation and apportionment of taxable income to New York stateState and New York City may positively affect the overall tax rate.
Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
An investment in the Company’s common stock or the Series A Preferred Stock involves risks. Stockholders should carefully consider the risks described below, together with other information contained in this Annual Report on Form 10-K, before making any purchase or sale decisions regarding the Company’s common stock.stock or Series A Preferred Stock. If any of the following risks actually occur, the Company’s financial condition or operating results may be harmed. In that case, the trading price of the Company’s common stock may decline, and stockholders may lose part or all of their investment in the Company’s common stock.stock or Series A Preferred Stock.
A downturn in
Risks Related to the local economy or in local real estate values could adversely impact profits. Most of the Bank’s loans are secured by real estateCOVID-19 Pandemic
The ongoing COVID-19 pandemic and are mademeasures intended to borrowers in central and southern New Jersey and the surrounding areas. A downturn in the local economy or a decline in real estate values could increase the amount of non-performing loans and cause residential and commercial mortgage loans to become inadequately collateralized, which could expose the Bank to a greater risk of loss.
Hurricanes and other natural disasters, climate change or increases to flood insurance premiumsprevent its spread could adversely affect asset qualitybusiness activities, financial condition, and earnings. The Bank’s trade area includes countiesresults of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, both nationally and in the New Jersey and New York market area, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The COVID-19 outbreak has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including: the declaration of a federal National Emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely; travel restrictions, quarantines and shelter in place orders. Such measures have significantly contributed to the increase in unemployment and changes in consumer and business spending, borrowing needs and saving habits. In addition, federal and state governments, and various federal agencies, have taken measures to address the economic and social consequences of the pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and the Main Street Lending Program. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including financing, loan forgiveness and automatic forbearance. Beginning in early April 2020, the Bank began processing loan applications under the Paycheck Protection Program (“PPP”) created under the CARES Act. There can be no assurance that the steps taken by the U.S. government will be effective or achieve their desired results in a timely fashion. Additionally, there can be no assurance that federal and state agencies will not pass further measures that provide accommodations that could impact the financial results.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve Bank actions. Market interest rates have declined significantly. In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. The Company expects that these reductions in interest rates, especially if prolonged, could further adversely affect net interest income, margins and profitability. The Federal Reserve also proposed the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses, while prohibiting certain capital distributions and certain compensation practices by borrowers. The full impact of the COVID-19 pandemic on the Company’s business activities as a result of new government and regulatory policies, programs and guidelines, as well as market reactions to such activities, remains uncertain.
The economic effects of the COVID-19 outbreak have had a destabilizing effect on financial markets, key market indices and overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption has caused increased market volatility and may further depress economic activity and/or consumer confidence and business generally. The continuation of these conditions caused by the outbreak, including the impacts of the CARES Act and other, federal and state measures, specifically with extensive coastal regions. These areasrespect to loan forbearances, can be expected to adversely impact the Company’s businesses and results of operations and the operations of borrowers, customers and business partners. In particular, these events may be vulnerableexpected to, floodingamong other things, (i) adversely affect customer deposits and the stability of the Company’s deposit base, or otherwise impair liquidity, (ii) impair the ability of borrowers to repay outstanding loans or other damage from future stormsobligations, resulting in increases in delinquencies, (iii) reduce the demand for loans, wealth management revenues or hurricanes. This damage may be as bad as, or worse than, that suffered during Superstorm Sandy in 2012. Further storms like this, although rare, couldthe demand for other products and services, (iv) impact the creditworthiness of potential and current borrowers, (v) negatively impact the productivity and availability of key personnel and other employees necessary to conduct business, and of third-party service providers who perform critical services, or otherwise cause operational failures due to changes in normal business practices necessitated by the outbreak and related governmental actions, (vi) impair the ability of loan guarantors to honor commitments, (vii) impair the value of the collateral securing loans (particularly with respect to real estate), (viii) impair the value of the securities portfolio, (ix) require an increase in the allowance for credit losses, (x) negatively impact regulatory capital ratios, (xi) increase cyber and payment fraud risk, given increased online and remote activity, (xii) create stress on operations and systems associated with participation in the PPP as a result of high demand and volume of applications, (xiii) result in increased compliance risk as the Company becomes subject to new regulatory and other requirements associated with the PPP and other new programs in which the Company participates, and (xiv) broadly result in lost revenue and income.
Additionally, in response to the COVID-19 pandemic, the Bank offered payment relief to borrowers affected by COVID-19, and has periodically closed certain branch locations on a temporary basis while directing branch customers to drive-thru windows and online banking services. It is not yet known what impact these operational changes may have on the Company’s financial performance. Prolonged measures by public health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices would further harm the Bank’s business and that of its customers, in particular small to medium-sized business customers. Although the Company has business continuity plans and other safeguards in place, there is no assurance that they will be effective. The ultimate impact of these factors is highly uncertain at this time and the Company does not yet know the full extent of the impact on business, operations or the global economy as a whole. However, the decline in economic conditions generally and a prolonged negative impact on small to medium-sized businesses, in particular, due to the COVID-19 pandemic could result in a material adverse effect on the Company’s business, financial condition and results of operations by disrupting operations, adversely impacting the abilityand may heighten many of the Company’s borrowersknown risks described herein and in other filings with the SEC.
Risks Related to repay their loans, damaging collateral or reducing the value of real estate used as collateral.Lending Activities
IncreasedThe Bank’s emphasis on commercial lending may expose the Bank to increased lending risks. At December 31, 2017, $1.92020, $5.11 billion, or 48.9%65.5%, of the Bank’s total loans consisted of commercial real estate, multi-family and land loans, and commercial and industrial loans. This portfolio hasThese portfolios have grown in recent years and the Bank intends to continue to emphasize these types of lending. These types of loans may expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgagereal estate loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgagereal estate loans. In addition, many of these loans were acquired through the Company’s acquisitions, and were not underwritten by the Bank and were made to borrowers with whom the Company and the Bank do not have longstanding relationships.
The long foreclosure timelinelevel of the commercial real estate loan portfolio may subject the Bank to additional regulatory scrutiny. The OCC and the other Federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in New Jersey continuescommercial real estate lending. Under the guidance, a financial institution that, like the Bank, is actively involved in commercial real estate lending should perform a risk assessment to adversely impactidentify concentrations. A financial institution may be subject to this guidance if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these factors, the Bank has a concentration in multi-family and commercial real estate lending, as such loans represent 321% of total bank capital as of December 31, 2020. The guidance focuses on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or in an abundance of caution). The guidance assists banks in developing risk management practices and determining capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While it is management’s belief that policies and procedures with respect to the Bank’s recoveries on non-performing loans. The Judicial foreclosure process in New Jersey is protracted, which delays the Company’s ability to resolve non-performing loans through the salecommercial real estate loan portfolio have been implemented consistent with this guidance, bank regulators could require that additional policies and procedures be implemented consistent with their interpretation of the underlying collateral. The longer timelines were the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders, whichguidance that may result in a material adverse effect on collateral values and the Bank’s ability to minimize its losses.
The Company has grown and may continue to grow through acquisitions. To be successful as a larger institution, the Company must successfully integrate the operations and retain the customers of acquired institutions, attract and retain the management required to successfully manage larger operations, and controladditional costs. Since July 31, 2015, the Company has acquired Colonial American, Cape and Ocean Shore. On January 31, 2018, the Company acquired Sun Bancorp, Inc.
Future results of operations will depend in large part on the Company’s ability to successfully integrate the operations of the acquired institutions and retain the customers of those institutions. If the Company is unable to successfully manage the integration of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, the Company’s results of operations may be adversely affected.
In addition, to successfully manage substantial growth, the Company may need to increase non-interest expenses through additional personnel, leasehold and data processing costs, among others. In order to successfully manage growth, the Company may need to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee the Company’s operations. No assurance can be given that the Company will be successful in this strategy.
The Company may be challenged to successfully manage its business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on its ability to continue to attract, hire and retain skilled employees.
Success will also depend on the ability of officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage employees.
Finally, substantial growth may stress regulatory capital levels, and may require the Company to raise additional capital. No assurance can be given that the Company will be able to raise any required capital, or that it will be able to raise capital on terms that are beneficial to stockholders.
Future acquisition activity could dilute tangible book value. Both nationally and locally, the banking industry is undergoing consolidation marked by numerous mergers and acquisitions. From time-to-time the Company may be presented with opportunities to acquire institutions and/or bank branches which result in discussions and negotiations. Acquisitions typically involve the payment of a premium over book and trading values, and therefore, may result in the dilutioncurtailment of tangible book value per share.commercial real estate and multi-family lending that would adversely affect the Bank’s loan originations and profitability.
The Dodd-Frank Act imposes obligations on originators of residential mortgage loans such as the Bank. Among other things, the Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the burden is on the lender to demonstrate the appropriateness of its policies and the strength of its controls. The Dodd-Frank Act contains an exception from this Ability-To-Repay rule for “Qualified Mortgages.” The rule sets forth specific underwriting criteria for a loan to qualify as a Qualified Mortgage. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting the failure of the originator to establish the consumer’s Ability-To-Repay. Additionally, conforming fixed-rate loans with a debt-to-income ratio greater than 43% would also qualify as an Ability-To-Repay Qualified Mortgage based upon an automated loan approval from one of the government sponsored mortgage entities. However, a consumer may assert the lender’s failure to comply with the Ability-To-Repay rule for all residential mortgage loans other than Qualified Mortgages, and may challenge whether a loan actually met the criteria to be deemed an Ability-to-Pay Qualified Mortgage. These challenges have yet to be addressed by the courts.
Although the majority of residential mortgages historically originated by the Bank would be considered Qualified Mortgages, the Bank currently originates residential mortgage loans that do not qualify. As a result of the Ability-to-Repay rules, the Bank may experience loan losses, litigation relatedlitigation-related expenses and delays in taking title to real estate collateral in a foreclosure proceeding if these loans do not perform and borrowers challenge whether the Bank satisfied the Ability-To-Repay rule upon originating the loan.
The Bank’s allowance for loancredit losses may be inadequate, which could hurt the Company’s earnings. The Bank’s allowance for loancredit losses may prove to be inadequate to cover actual loan losses and ifcredit losses. If the Bank is required to increase its allowance, current earnings may be reduced. The Bank provides for losses by reserving what it believes to be an adequate amount to absorb any probable incurredestimated lifetime expected credit losses. A “charge-off”charge-off reduces the Bank’s reserve for possible loancredit losses. If the Bank’s reserves were insufficient, it would be required to record a larger reserve, which would reduce earnings for that period. Changes to the economic forecasts within the model could positively or negatively impact the actual results. Any increase in the allowance for credit losses, or expenses incurred to determine the appropriate level of the allowance for credit losses, may have a material adverse effect on the Company’s financial condition and results of operations.
The Company is subject to regulatory enforcement risk, reputation risk and litigation risk regarding participation in the PPP and is subject to the risk that the SBA may not fund some or all PPP loan guarantees.The CARES Act included the PPP as a loan program administered through the SBA.Under the PPP, small businesses and other entities and individuals can apply for loans from SBA lenders and other approved regulated lenders, subject to detailed qualifications and eligibility criteria.
Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP.Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications, and several banks have been subject to litigation regarding the payment of fees to agents that assisted borrowers in obtaining PPP loans. In addition, some banks and borrowers have received negative media attention associated with PPP loans. Although management believes the Company has administered the PPP in accordance with all applicable laws, regulations and guidance, the Company could be exposed to litigation risk and negative media attention related to its participation in the PPP.If any such litigation is not resolved in the Company’s favor, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on the Company’s reputation, business, financial condition, and results of operations.
The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and U.S. Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Company to rely on borrower certifications, and take more aggressive action against the Company for alleged violations of the provisions governing the PPP. Federal and state regulators can impose or request that the Bank consents to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect the Company’s reputation, business, reputation, financial condition, and results of operations.
The Company also has credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which the Company originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the Bank originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
The foreclosure process may adversely impact the Bank’s recoveries on non-performing loans. The judicial foreclosure process is protracted, which delays the Company’s ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines were the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and the Bank’s ability to minimize its losses.
Risks Related to Economic Matters
A downturn in the local economy or in local real estate values could adversely impact profits. Most of the Bank’s loans are secured by real estate and are made to borrowers throughout New Jersey and the metropolitan areas of Philadelphia and New York City, as well as their surrounding areas. A downturn in the local economy or a decline in real estate values could increase the amount of non-performing loans and cause residential and commercial real estate loans to become inadequately collateralized, which could expose the Bank to a greater risk of loss.
Risks Related to Acquisitions
The Company must successfully integrate the operations and retain the customers of its acquired institutions and manage its growth, larger operations, and control costs. Since July 31, 2015, the Company has acquired seven financial institutions and continues to explore acquisition opportunities as part of its strategic plan. Future results of operations will depend in large part on the Company’s ability to successfully integrate the operations of the institutions it acquires and retain the employees and customers of those institutions. If the Company is unable to successfully manage the integration of the separate cultures, employee and customer bases and operating systems of the institutions it acquires, the Company’s results of operations may be adversely affected.
The Company may be challenged to successfully manage its business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on its ability to continue to attract, hire and retain skilled employees. Success will also depend on the ability of officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage employees.
In addition, to successfully manage substantial growth, the Company may need to increase non-interest expenses through additional leasehold and data processing costs, and other infrastructure costs. In order to successfully manage growth, the Company may need to adopt and effectively implement new or revise existing policies, procedures and controls to maintain credit quality, control costs and oversee the Company’s operations. No assurance can be given that the Company will be successful in these efforts.
Finally, substantial growth may stress regulatory capital levels, and may require the Company to raise additional capital. No assurance can be given that the Company will be able to raise any required capital, or that it will be able to raise capital on terms that are beneficial to stockholders.
A significant portion of the Company’s loan portfolio has grown through acquisition, and therefore may not have been underwritten to meet the Company’s credit standards. Loans that were acquired as part of the Company’s acquisitions of other depository institutions, were not underwritten or originated in accordance with the Company’s credit standards, and the Company did not have long-standing relationships with many of these borrowers at the time of acquisition. The acquired loans are re-risked at the date of acquisition based on the Company’s credit standards, which can temporarily increase loans classified as special mention and substandard for a period of time until these loans are integrated and conform to the Company’s credit standards. Although the Company reviewed the loan portfolios of each institution acquired as part of the diligence process, and has established reasonable credit marks with regard to all loans acquired, no assurance can be given that the Company will not incur losses in excess of the credit marks with regard to these acquired loans, or that any such losses, if they occur, will not have a material adverse effect on the Company’s business, financial condition and results of operations.
Future acquisition activity could dilute tangible book value. The Company continues to evaluate opportunities to acquire institutions and/or bank branches. Acquisitions typically involve the payment of a premium over book and trading values, and therefore, may result in the dilution of tangible book value per share.
Risks Related to Interest Rates
A continuation of the historically low interest rate environment and the possibility that the Company may access higher-cost funds to support loan growth and operations may adversely affect net interest income and profitability. In recent years, the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed, U.S government and agency securities. The Company’s ability to reduce interest expense may be limited at current interest rate levels while the average yield on interest-earning assets may continue to decrease, and interest expense may increase as it may be necessary to access non-core funding sources or increase deposit rates to fund operations. A continuation of a low interest rate environment or an increase in cost of funds may adversely affect net interest income, which would have an adverse effect on profitability.
Changes in interest rates could adversely affect results of operations and financial condition. The Bank’s ability to make a profit largely depends on net interest income, which could be negatively affected by changes in interest rates. The interest income
earned on interest-earning assets and the interest expense paid on interest-bearing liabilities are generally fixed for a contractual period of time. Interest-bearing liabilities generally have shorter contractual maturities than interest-earning assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on interest-earning assets may not increase as rapidly as the interest paid on interest-bearing liabilities. Additionally, a flat or an inverted yield curve, where short-term rates are close to, or below, long-term rates, could adversely affect the Company’s financial condition and results of operations.
In addition, changes in interest rates can affect the average life of loans and mortgage-backedinvestment securities. A reduction in interest rates causes increased prepayments of loans and mortgage-backed securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that the Bank may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates earned on the prepaid loans or mortgage-backed securities. Conversely, an increase in interest rates generally reduces prepayments. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
Changes in interest rates also affect the current estimated fair value of the interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. Unrealized net losses on securities available-for-sale are reported as a separate component of equity. To the extent interest rates increase and the value of the available-for-sale portfolio decreases, stockholders’ equity will be adversely affected.
Changes in the estimated fair value of debt securities may reduce stockholders’ equity and net income. At December 31, 2017,2020, the Company maintained a debt securities portfolio of $854.3 million,$1.12 billion, of which $90.3$183.3 million was classified as available-for-sale. The estimated fair value of the available-for-sale debt securities portfolio may increase or decrease depending on the credit quality of the underlying issuer, market liquidity, changes in interest rates and other factors. Stockholders’ equity is increased or decreased by the amount of the change in the unrealized gain or loss (difference between the estimated fair value and the amortized cost) of the available-for-sale debt securities portfolio, net of the related tax expense or benefit, under the category of accumulated other comprehensive income (loss).
Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share. The decrease will occur even though the securities are not sold.
The Company conducts a periodic review and evaluation of the completedebt securities portfolio to determine if theany decline in the estimated fair value of any security below its cost basis is other-than-temporary.considered impaired. Factors which are considered in the analysis include, but are not limited to, the severity and duration ofextent to which the decline in estimated fair value ofis less than the security,amortized cost basis, the financial condition, credit rating and near-termfuture prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions,debtor is current on contractually obligated interest and principal payments and the intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood of any near-term fair value recovery. If such decline is deemed to be other-than-temporary,uncollectible, the security is written down to a new cost basis and the resulting loss is charged to earningswill be recognized as a component of non-interest income.credit loss expense through an allowance for credit losses.
At December 31, 2017 the securities portfolio included corporate debt securities issued by national and regional banks in an unrealized loss position for greater than one year. The portfolio consisted of ten $5.0 million issues, two $2.5 million issues, two $1.5 million issues, and two $1.0 million issues spread among twelve issuers. At December 31, 2017, the securities in a loss position had a book value of $60.0 million and an estimated fair value of $56.1 million. At December 31, 2017, the Company determined that no other-than-temporary charge was required. However, the Company may be requiredRisks Related to recognize an other-than-temporary impairment charge related to these securities if circumstances change.Loan Sales
The Bank may be required to repurchase mortgage loans for a breach of representations and warranties, which could harm the Company’s earnings. The Company has enteredenters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the repurchase of certain loans previously sold in the event of a violation of various representations and warranties customary toin the mortgage banking industry. FNMA, FHLMC and investors carefully examine loan documentation on delinquent loans for a possible reason to request a repurchase by the loan originator. A subsequent sale of thea repurchased mortgage loan or underlying collateral could typically be at a significant discount to the unpaid principal balance. The Company maintains a reserve for repurchased loans. However, if repurchase activity or the amount of loss on the sale of a repurchased loan is greater than anticipated, the reserve may need to be increased to cover actual losses which could harm future earnings.
Risks Related to Laws and Regulations
The Company and the Bank operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. The Company is subject to examination, supervision and regulation by the FRB. The Bank is subject to extensive regulation, supervision and examination by the OCC, its primary Federal regulator, and by the FDIC, as insurer of deposits.deposits, and by the CFPB with respect to consumer protection laws. Such regulation and supervision governs the activities in which an institution and its holding company may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of the allowance for loancredit losses. The laws and regulations that govern the CompanyCompany’s and the Bank’s operations are designed for the protection of depositors and the public, but not the Company’s stockholders. These provisions, as well as any other aspects of current or future regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of the Company’s business activities and may change certain business practices, including the ability to offer new products, obtain
financing, attract deposits, make loans and achieve satisfactory interest spreads, and could expose the Company to additional costs, including increased compliance costs. These changes also may require the Company to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect the Company’s business, financial condition and results of 2010, the Dodd-Frank Act was enacted. operations.
The Dodd-Frank Act is a broad legislative initiative that is significantly changing the bank regulatory structure and affecting the operating activities of financial institutions and their holding companies. In addition, the Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.
The Dodd-Frank Act also directed the FRB to issue rules to limit debit-card interchange fees, (the fees that issuing banks charge merchants each time a consumer uses a debit card) collected by banks with assets of $10 billion or more. AlthoughAt December 31, 2020, the Bank iswas exempt from this rule but will be subject to reduced interchange fees beginning in July 2021. In addition, market forces in future periods may result in reduced fees charged by all issuers, regardless of asset size, which may result in reduced revenues for the Bank. For the year ended December 31, 2017,2020, the Bank’s revenues from interchange fees were $6.3$10.9 million, an increase of $2.0$1.4 million from 2016.2019. See “Regulation and Supervision, General, The Dodd-Frank Act.”
In July 2013As part of its lending activity, the FDICCompany may enter into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. Offering these products can subject the Company to additional regulatory oversight and cost, as well as additional risk. Title VII of the other Federal bank regulatory agenciesDodd-Frank Act contains a comprehensive framework for over-the-counter (“OTC”) derivatives transactions. Even though many of the requirements do not impact the Company directly, since the Bank does not meet the definition of swap dealer or “major swap participant,” the Company continues to review and evaluate the extent to which such requirements impact its business indirectly. The Commodity Futures Trading Commission (“CFTC”) has issued a final rule that revised their leverage and risk-based capital requirements andsets the methodpermanent aggregate gross notional amount threshold for calculating risk-weighted assets to make them consistent with agreements that were reachedthe de minimis exception from the definition of swap dealer at $8.0 billion in swap dealing activity entered into by a person over the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. See “Regulation and Supervision, General,preceding 12 months. The Dodd-Frank Act.”Bank’s swap dealing activities are currently below this threshold.
The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering, terrorist financing and other illicit activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions.wide variety of sanctions, including payment of damages and civil money penalties, injunctive relief, and restrictions on mergers and acquisitions activity and expansion. Although the Bank has developed policies and procedures designated to comply with these laws and regulations, these policies and procedures may not be totally effective in preventing violations of these laws and regulations.
These provisions, as well as any other aspects of currentThe Company is subject to stringent capital requirements, which may adversely impact return on equity, require additional capital raises, or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of the Company’s business activities and may change certain business practices, includinglimit the ability to offer new products, obtain financing, attract deposits, make loanspay dividends or repurchase shares. Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and achieve satisfactory interest spreads,leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, which if complied will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount.
The application of these capital requirements could, expose the Company to additional costs, including increased compliance costs. These changes also mayamong other things, require the Company to invest significant management attentionmaintain higher capital resulting in lower returns on equity, and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect the Company’s business, financial condition and results of operations.
There is no guaranty that the Company will be able to continue to pay a dividend or, if continued, will be able to pay a dividend at the current rate. The Board of Directors of the Company determines at its discretion if, when and the amount of dividends that may be paid on the common stock. In making such determination under the Company’s capital management plan, the Board of Directors takes into account various factors including economic conditions, earnings, liquidity needs, the financial condition of the Company, applicable state law, regulatory requirements and other factors deemed relevant by the Board of Directors. Although the Company has a history of paying a quarterly dividend on its common stock, there is no guaranty that such dividends will continue to be paid in the future or at what rate.
Competition from other banks, financial institutions, government-sponsored entities and emerging technological providers in originating loans, attracting deposits and providing various financial services may adversely affect profitability and liquidity. The Company has substantial competition in originating loans, both commercial and consumer, in its market area. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of these competitors enjoy advantages, including greater financial resources and access to capital, stronger regulatory ratios and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. In addition, rapid technological changes and consumer preferences may result in increased competition for the Bank’s services. Increased competition could reduce the Company’s net income by decreasing the number and size of loans that the Bank originates and the interest rates charged on these loans.
In attracting consumer, business and public fund deposits, the Company faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of its competitors enjoy advantages, including greater financial resources and access to capital, stronger regulatory ratios, stronger asset quality and performance, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than the Company, which could decrease the deposits that the Company attracts or require the Company to increase its ratesobtain additional capital to retain existing deposits or attract new deposits.
In addition, rapid technological changes and consumer preferences may result in increased competition for the Company’s other services. A number of well-funded technology focused companies are innovating the payments, distributed ledger, and cryptocurrency networks and are attempting to disintermediate portions of the traditional banking model. A shift in the mix of payment forms away from the Company’s products and services could have a material adverse effect on the Company’s financial position and results of operations.
The Company has also been active in competing for New Jersey governmental and municipal deposits. At December 31, 2017, governmental and municipal deposits accounted for approximately 30% of the Company’s total deposits. The newly elected governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal entities may deposit their excess funds, with the state owned bank then financing small businesses and municipal projects in New Jersey. Although this proposal is in the very early stages, should this proposal be adopted and a state owned bank formed, it could impede the Company’s ability to attract and retain governmental and municipal deposits and financing opportunities.
Increased deposit competition could adversely affect the Company’s ability to generate the funds necessary for lending operations. As a result, the Company may need to seek other sources of funds that may be more expensive to obtain which could increase the cost of funds. Public fund deposits from local government entities such as counties, townships, school districts and other municipalities generally have higher average balances and the Bank’s inability to retain such funds could adversely affect liquiditycomply or result in the use of higher-cost funding sources.
Over the past few years, the FRB has been a consistently large purchaser of U.S. Treasury and GSE-backed mortgage-backed securities. The Bank has also faced increased competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage market as a result of the economic crisis. Theregulatory actions of the FRB and the GSEs have caused the interest rate for 30-year fixed-rate mortgage loans that conform to GSE guidelines to remain artificially low. As a result of these factors, it may be difficult for the Bank to originate mortgage loans and grow the residential mortgage loan portfolio, which could have a materially adverse impact on the Bank’s earnings.
The Company’s inability to tailor its retail delivery model to respond to consumer preferences in banking may negatively affect earnings. The Bank has expanded its market presence through de novo branching and acquisitions. The branch continues to be a very
significant source of new business generation, however, consumers continue to migrate much of their routine banking to self-service channels. In recognition of this shift in consumer patterns, the Bank has undertaken a comprehensive review of its branch network, resulting in branch consolidation accompanied by the enhancement of the Bank’s capabilities to serve its customers through channels other than branches. The benefits of this strategy are dependent on the Bank’s ability to realize expected expense reductions without experiencing significant customer attrition.
The Company must continue to attract and retain qualified personnel and maintain cost controls and asset quality. The Company’s ability to manage growth successfully will depend on its ability to continue to attract and retain management and loan officers experienced in banking and financial services and familiar with the communities in its market area. The unexpected loss of service of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could adversely affect the Company. Ifif the Company grows too quicklyis unable to comply with such requirements. See Regulation and is not able to attract qualified personnel and maintain cost controls and asset quality, this continued growth could adversely affect the Company.Supervision, Bank Holding Company Regulation.
Risks associated with system failures, interruptions, or breaches of security could disrupt businesses, result in the disclosure of confidential information, damage the reputation of, and create significant financial and legal exposure for the Company. Information technology systems are critical to the Company’s business. Various systems are used to manage customer relationships, including deposits and loans, general ledger and securities investments.
Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Company’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Company and its customers, there is no assurance that all of the Company’s security measures will provide absolute security. This risk is evidenced by recent events where financial institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, often through the introduction of computer viruses or malware, cyberattacks, ransomware and other means. Additionally, there is the risk of distributed denial-of-service or other similar attacks from technically sophisticated and well-resourced third parties which are intended to disrupt online services, as well as data breaches due to cyberattacks which result in unauthorized access to customer data. Despite the Company’s efforts to ensure the integrity of its systems, it is possible that the Company may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyberattacks can originate from a wide variety of sources, including third parties outside the Company such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments, often with seemingly limitless resources. Those parties may also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to the Company’s data or that of its customers or clients. These risks may increase in the future as the Company continues to increase its mobile and other internet-based product offerings and systems.
In addition, a majority of data processing is outsourced to certain third-party providers. If these third-party providers encounter difficulties, or if there is difficulty communicating with them, the ability to adequately process and account for transactions could be affected, and business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various vendors and their personnel. Breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to the Company’s confidential or other information or the confidential or other information of the Company’s customers, clients or counterparties. While management regularly reviews security assessments that were conducted on the Company’s third party service providers that have access to sensitive and confidential information, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
The occurrence of any system failures, interruption, or breach of security of the Company’s or its vendors’ systems could cause serious negative consequences for the Company, including significant disruption of the Company’s operations, misappropriation of confidential information of the Company or that of its customers, or damage to computers or systems of the Company and those of its customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to the Company or to its customers, loss of confidence in the Company’s security measures, customer dissatisfaction, significant litigation exposure, and harm to the Company’s reputation, all of which could have a material adverse effect on the Company.
The Company may incur impairments to goodwill. At December 31, 2017, the Bank had $150.5 million in goodwill which is evaluated for impairment, at least annually. Significant negative industry or economic trends, including declines in the market price the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill. The valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. The Company operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If the analysis results in impairment
to goodwill, an impairment charge to earnings would be recorded in the financial statements during the period in which such impairment is determined to exist. Any such charge could have an adverse effect on the results of operations.
The Company may be adversely affected by recent changes in U.S. tax laws. Changes in tax laws contained in the Tax Cuts and Jobs Act, enacted in December 2017, include a number of provisions that have had and will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.
The recent changes in the tax laws have had and may continue to have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans, in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state
and local taxes, such as New Jersey. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in the provision for loancredit losses, which would reduce profitability and could have a material adverse effect on the Company’s business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve Board could adversely affect the Company’s business, financial condition and results of operations. In addition to being affected by general economic conditions, the Company’s earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bankcertain transaction account deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon the Company’s business, financial condition and results of operations cannot be predicted.
The Company is subject to the Community Reinvestment Act (“CRA”)CRA and fair lending laws, and failure to comply with these laws could lead to material penalties. The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition ofand restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, recent amendments to CRA regulations may make compliance more difficult or costly.
The Federal Reserve Board may require the Company to commit capital resources to support the Bank. Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may require the holding company to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on the Company’s business, financial condition and results of operations.
The Company is subject to heightened regulatory requirements as a result of total assets exceeding $10 billion. The Company’s total assets were $11.4 billion at December 31, 2020 and $10.2 billion at January 1, 2020, after closing on the Two River and Country Bank acquisitions. Banks with assets in excess of $10 billion are subject to requirements imposed by the Dodd-Frank Act and its implementing regulations, including: the examination authority of the Consumer Financial Protection Bureau to assess compliance with Federal consumer financial laws, imposition of higher FDIC premiums, reduced debit card interchange fees, and enhanced risk management frameworks, all of which increase operating costs and reduce earnings.
Additional costs have been and will be incurred to implement processes, procedures, and monitoring of compliance with these imposed requirements, including investing significant management attention and resources to make necessary changes to comply with the new statutory and regulatory requirements under the Dodd-Frank Act. The Company faces the risk of failing to meet these requirements, which may negatively impact results of operations and financial condition. While the effect of any presently contemplated or future changes in the laws or regulations or their interpretations would have is unpredictable, these changes could be materially adverse to the Company’s investors.
Furthermore, the level of dividends the Bank receives from the Federal Reserve Bank of Philadelphia is reduced for financial institutions that exceed a certain asset size. The asset size was originally established at $10 billion, but has been increased for inflation such that, for 2021, the asset level is $10.785 billion. Financial institutions whose assets exceed that level receive dividends generally equal to the rate of the 10-year Treasury note, as opposed to 6% for smaller financial institutions. Such
reduction will significantly decrease the dividends received from the Federal Reserve Bank of Philadelphia, which totaled $2.1 million for the year ended December 31, 2020.
Risks Related to Dividend Payments
There is no guaranty that the Company will be able to continue to pay a dividend on its common stock or, if continued, will be able to pay a dividend at the current rate. The Board of Directors of the Company determines at its discretion if, when and the amount of dividends that may be paid on the common stock. In making such determination under the Company’s capital management plan, the Board of Directors takes into account various factors including economic conditions, earnings, liquidity needs, the financial condition of the Company, applicable state law, regulatory requirements and other factors deemed relevant by the Board of Directors. Although the Company has a history of paying a quarterly dividend on its common stock, there is no guaranty that such dividends will continue to be paid in the future or at what rate.
Dividends on the Series A Preferred Stock are discretionary and non-cumulative. Dividends on the Series A Preferred Stock are discretionary and will not be cumulative. If the Board of Directors does not declare a dividend on the Series A Preferred Stock in respect of a dividend period, then no dividend will be payable on the applicable dividend payment date, no dividend will be deemed to have accumulated for such dividend period, and the Company will have no obligation to pay any dividend for that dividend period at any time, whether or not the Board of Directors declares a dividend on the Series A Preferred Stock or any other class or series of the Company’s capital stock for any future dividend period. Any declaration and payment of dividends on the Series A Preferred Stock will depend upon, among other factors, the Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the ability to service any equity or debt obligations senior to the Series A Preferred Stock, any credit agreements to which the Company is a party, and other factors deemed relevant by the Board of Directors. In addition, under the Federal Reserve’s capital rules, dividends on the Series A Preferred Stock may only be paid out of net income, retained earnings, or surplus related to other additional Tier 1 capital instruments.
Risks Related to Competition
Competition may adversely affect profitability and liquidity. The Company has substantial competition in originating commercial and consumer loans in its market area. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of these competitors enjoy advantages, including greater financial resources and access to capital, stronger regulatory ratios and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. In addition, rapid technological changes and consumer preferences may result in increased competition for the Bank’s services. Increased competition could reduce the Company’s net income by decreasing the number and size of loans that the Bank originates and the interest rates charged on these loans.
In attracting deposits, the Company faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many competitors enjoy advantages, including greater financial resources and access to capital, stronger regulatory ratios, stronger asset quality and performance, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than the Company, which could decrease the deposits that the Company attracts or require the Company to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect the Company’s ability to generate the funds necessary for lending operations. As a result, the Company may need to seek other sources of funds that may be more expensive to obtain which could increase the cost of funds.
In addition, rapid technological changes and consumer preferences may result in increased competition for the Company’s other services. A number of well-funded technology focused companies are innovating the payments, distributed ledger, and cryptocurrency networks and are attempting to disintermediate portions of the traditional banking model. A shift in the mix of payment forms away from the Company’s products and services could have a material adverse effect on the Company’s financial position and results of operations.
The Company has also been active in competing for New Jersey governmental and municipal deposits. At December 31, 2020, these relationships included public school districts, local municipal governments, and cooperative health insurance funds, and such deposits accounted for approximately 25.5% of the Company’s total deposits. The governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal entities may deposit their excess funds, with the state owned bank then financing small businesses and municipal projects in New Jersey. Should this proposal be adopted and a state owned bank formed, it could impede the Company’s ability to attract and retain governmental and municipal deposits and
financing opportunities. Public fund deposits from local government entities such as counties, townships, school districts and other municipalities generally have higher average balances and the Bank’s inability to retain such funds could adversely affect liquidity or result in the use of higher-cost funding sources.
Risks Related to Strategic Matters
New lines of business or new products and services may subject the Company to additional risks. The Company may implement new lines of business or offer new products and services within existing lines of business. In developing and marketing new lines of business and/or new products and services significant time and resources may be invested. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive new offerings as providing significant value, they may fail to accept the new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s inability to tailor its retail delivery model to respond to consumer preferences in banking may negatively affect earnings. The Bank has expanded its market presence through de novo branching and acquisitions. The branch continues to be a very significant source of new business generation, however, consumers continue to migrate much of their routine banking to self-service channels. In recognition of this shift in consumer patterns, the Bank has undertaken a comprehensive review of its branch network, resulting in branch consolidation accompanied by the enhancement of the Bank’s capabilities to serve its customers through alternate delivery channels. The benefits of this strategy are dependent on the Bank’s ability to realize expected expense reductions without experiencing significant customer attrition.
Risks Related to Operational Matters
Risks associated with system failures, interruptions, or breaches of security could disrupt businesses, result in the disclosure of confidential information, damage the reputation of, and create significant financial and legal exposure for the Company. Information technology systems are critical to the Company’s business. Various systems are used to manage customer relationships, deposits and loans, general ledger and securities investments.
Financial institutions and companies have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, often through the introduction of computer viruses or malware, cyberattacks, ransomware and other means. Additionally, there is the risk of distributed denial-of-service or other similar attacks from technically sophisticated and well-resourced third parties, which are intended to disrupt online services, as well as data breaches due to cyberattacks, which result in unauthorized access to customer data. Despite the Company’s efforts to ensure the integrity of its systems, the Company may not be able to implement effective preventive measures against all security breaches, especially because the techniques used change frequently or are not recognized until launched, and because cyberattacks can originate from a wide variety of sources, including third parties such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments, often with seemingly limitless resources. Those parties may also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to the Company’s data or that of its customers or clients. These risks may increase in the future as the Company continues to increase its mobile and other internet-based product offerings and systems.
In addition, a majority of data processing is outsourced to certain third-party providers. If these third-party providers encounter difficulties, or if there is difficulty communicating with them, the ability to adequately process and account for transactions could be affected, and business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various vendors and their personnel. Breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to the confidential or other information of the Company and its customers, clients or counterparties. While management regularly reviews security assessments that were conducted on the Company’s third party service providers that have access to sensitive and confidential information, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
The occurrence of any system failures, interruption, or breach of security of the Company’s or its vendors’ systems could cause serious negative consequences for the Company, including significant disruption of the Company’s operations,
misappropriation of confidential information of the Company or that of its customers, or damage to computers or systems of the Company and those of its customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to the Company or to its customers, loss of confidence in the Company’s security measures, customer dissatisfaction, significant litigation exposure, and harm to the Company’s reputation, all of which could have a material adverse effect on the Company.
An inability to attract and retain qualified personnel and maintain cost controls could have a negative impact on financial condition and results of operations. The Company’s ability to maximize profitability and manage growth successfully will depend on its ability to continue to attract and retain management and loan officers experienced in banking and financial services and familiar with the communities in its market area. The unexpected loss of service of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could adversely affect the Company. If the Company is not able to attract qualified personnel it could negatively impact the Company’s profitability and growth.
Risks Related to Accounting and Internal Controls Matters
The Company may incur impairments to goodwill. At December 31, 2020, the Company had $500.3 million in goodwill which is evaluated for impairment, at least annually. Significant negative industry or economic trends, including declines in the market price of the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill. The valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. The Company operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If the analysis results in impairment to goodwill, an impairment charge to earnings would be recorded in the financial statements during the period in which such impairment is determined to exist. Any such charge could have an adverse effect on the results of operations.
Controls and procedures may fail or be circumvented, which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact the Company’s stock price. Management routinely reviews and updates internal controls. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company, the results of operations and financial condition, investor confidence, and stock price.
Changes in management’s estimates and assumptions may have a material impact on the Company’s consolidated financial statements and the financial condition or operating results. In preparing this annual report, as well as other periodic reports, the Company will be required to file under the Securities Exchange Act of 1934, including the consolidated financial statements, management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known, including the evaluation of the adequacy of the allowance for credit losses.
Changes in accounting standards could affect reported earnings. The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (“SEC”) and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of the Company’s financial statements. These changes can be hard to predict and can materially impact how the financial condition and results of operations are reported. In some cases, the Company could be required to apply new or revised guidance retroactively.
Risks Related to Environmental and Other Global Matters
Hurricanes and other natural disasters, climate change or increases to flood insurance premiums could adversely affect asset quality and earnings. The Bank’s trade area includes counties in New Jersey with extensive coastal regions. These areas may be vulnerable to flooding or other damage from future storms or hurricanes, which could negatively impact the Company’s results of operations by disrupting operations, adversely impacting the ability of the Company’s borrowers to repay their loans, damaging collateral or reducing the value of real estate used as collateral.
The Company’s business, financial condition and result of operations could be adversely affected by natural disasters, health epidemics, and other catastrophic events. The Company could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a pandemic disease, natural disaster, war, act of terrorism, accident, or other reason. Any of these events could result in the temporary reduction of operations, employees, and customers which could limit the Company’s ability to provide services.
Further, given the inter-connectivity of the global economy, pandemic disease and health events have the potential to negatively impact economic activities in many countries, including the United States, including the business of the Bank’s borrowers.Additionally, global markets may be adversely affected by the emergence of widespread health emergencies or pandemics.
Risks Related to Card Networks
Changes in card network fees could impact the Company’s operations. From time to time, the card networks increase the fees (known as interchange fees) that they charge to acquirers and that the Bank charges its merchants. It is possible that competitive pressures will result in the Bank absorbing a portion of such increases in the future, which would increase costs, reduce profit margin and adversely affect the Company’s business and financial condition. In addition, the card networks require certain capital requirements. An increase in the required capital level would further limit the Company’s use of capital for other purposes.
Changes in card network rules or standards could adversely affect the Company’s business. In order to provide debit card and cash management solutions, the Company is a member of the Visa network. Subsequent to the acquisition of Sun on January 31, 2018, the Company also became a member of the MasterCard network. As such, the Company is subject to card network rules resulting in a variety of fines or penalties that may be assessed on the Company. The termination of membership or any changes in card network rules or standards, including interpretation and implementation of existing rules or standards, could increase the cost of operating merchant servicer business or limit the ability to provide debit card and cash management solutions to or through customers, and could have a material adverse effect on the Company’s business, financial condition and results of operations.
Other Risks Related to the Business
Elimination of LIBOR and uncertainty of its replacement may adversely affect the Company. In 2017, the Alternative Reference Rates Committee (“ARRC”) was created to identify an alternative reference interest rate to replace LIBOR. The Company will be subjectARRC announced Secured Overnight Financing Rate (“SOFR”) a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to heightened regulatory requirements if total assets exceed $10 billion.LIBOR. The Company’s total assets were $5.4 billionChief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after June 2023. Subsequently, the Federal Reserve Bank announced final plans for the production of SOFR, which resulted in the commencement of its published rates by the Federal Reserve Bank of New York in 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at December 31, 2017this time is uncertain. The discontinuance of LIBOR may adversely affect the value of and $7.5 billion at January 31, 2018 after closingreturn on the Sun acquisition. Banks withCompany’s financial assets in excess of $10 billionand liabilities that are subjectbased on or are linked to requirements imposed byLIBOR, the Dodd-Frank Act and its implementing regulations, including: the examination authority of the Consumer Financial Protection Bureau to assess compliance with Federal consumer financial laws, imposition of higher FDIC premiums, reduced debit card interchange fees, enhanced risk management frameworks and stress testing, all of which increase operating costs and reduce earnings.
As the Company approaches $10 billion in total consolidated assets, additional costs have been incurred to prepare for the implementation of these imposed requirements. The Company may be required to invest more significant management attention and resources to evaluate and continue to make any changes necessary to comply with the new statutory and regulatory requirements under the Dodd-Frank Act. Further, Federal financial regulators may require accelerated actions and investments to prepare for compliance before $10 billion in total consolidated assets is exceeded, and may suspend or delay certain regulatory actions, such as approving a merger agreement, if preparations are deemed inadequate. Upon reaching this threshold, the Company faces the risk of failing to meet these requirements, which may negatively impactCompany’s results of operations andor financial condition. While the effect of any presently contemplated or futureIn addition, these reforms may also require extensive changes in the laws or regulations or their interpretations would have is unpredictable, these changes could be materially adverse to the contracts that govern these LIBOR based products, as well as the Company’s investors.systems and processes.
|
| | | | |
| Item 1B. | Unresolved Staff Comments |
None.
TheAt December 31, 2020, the Bank conductsconducted its business through its branch office and headquarters located in Toms River, New Jersey, its administrative office which includes a branchlocated in Red Bank, New Jersey, an administrative office 45located in Mount Laurel, New Jersey, and 61 additional branch offices and threesix deposit production facilities. The branch offices arefacilities located throughout central and southern New Jersey.Jersey, and the greater metropolitan area of New York City. The Bank also operates a wealth management office in Ocean County, andoperated commercial loan production offices in New York City, the greater Philadelphia area and in Atlantic Cape May, and Mercer Counties in New Jersey.
On January 31, 2018, the Bank acquired an additional 30 branches, three loan offices and two administrative offices as part of the Sun acquisition. The Company expects to consolidate 17 branches in the second quarter of 2018, primarily as a result of the merger.
The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such other routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.
|
| | | | |
| Item 4. | Mine Safety Disclosures |
Not Applicable.
PART II
|
| | | | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information for Common Stock
OceanFirst Financial Corp.’s common stock is traded on the Nasdaq Global Select Market under the symbol OCFC. The table below shows the reported high and low daily closing prices of the common stock during the periods indicated in 2017 and 2016.
|
| | | | | | | | | | | | | | | | |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| 2017 | | | | | | | | |
| High | | $ | 30.54 |
| | $ | 28.51 |
| | $ | 27.65 |
| | $ | 29.12 |
|
| Low | | 27.49 |
| | 26.05 |
| | 24.25 |
| | 25.70 |
|
| 2016 | | | | | | | | |
| High | | $ | 19.95 |
| | $ | 19.48 |
| | $ | 19.95 |
| | $ | 30.07 |
|
| Low | | 16.30 |
| | 16.96 |
| | 18.12 |
| | 19.05 |
|
As of December 31, 2017, the Company had approximately 6,000February 22, 2021, there were 2,810 common stockholders including the number of persons or entities holding stock in nominee or street name through various brokers and banks.record.
Stock Performance Graph
The following graph shows a comparison of total stockholder return on OceanFirst Financial Corp.’s common stock, based on the market price of the Company’s common stock with the cumulative total return of companies in the Nasdaq Composite Index, the SNL Thrift Index and the SNL ThriftBank Index for the period December 31, 20122015 through December 31, 2017.2020. The graph may not be indicative of possible future performance of the Company’s common stock. Cumulative return assumes the reinvestment of dividends and is expressed in dollars based on an initial investment of $100.
| | | | | Period Ending | | Period Ending |
| Index | | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 | Index | | 12/31/15 | | 12/31/16 | | 12/31/17 | | 12/31/18 | | 12/31/19 | | 12/31/20 |
| OceanFirst Financial Corp. | | 100.00 | | 128.42 | | 132.33 | | 159.31 | | 245.78 | | 219.54 | OceanFirst Financial Corp. | | $100.00 | | $154.28 | | $137.81 | | $120.93 | | $141.10 | | $107.22 |
| Nasdaq Composite Index | | 100.00 | | 140.12 | | 160.78 | | 171.97 | | 187.22 | | 242.71 | Nasdaq Composite Index | | 100.00 | | 108.87 | | 141.13 | | 137.12 | | 187.44 | | 271.64 |
| SNL Thrift Index | | 100.00 | | 128.33 | | 138.02 | | 155.20 | | 190.11 | | 188.72 | SNL Thrift Index | | 100.00 | | 122.49 | | 121.60 | | 102.42 | | 126.10 | | 116.21 |
| SNL Bank Index | | SNL Bank Index | | 100.00 | | 126.35 | | 149.21 | | 124.00 | | 167.93 | | 145.49 |
For the years ended December 31, 20172020 and 2016,2019, the Company paid an annual cash dividend of $0.60 and $0.54$0.68 per share, respectively.share.
On July 24, 2014, the Company announced authorization by the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares, of which 154,804 remain available for repurchase. On April 27, 2017,December 18, 2019, the Company announced the authorization by the Board of Directors to repurchase up to an additional 5% of the Company’s outstanding common stock, or 1.62.5 million shares, allshares. On February 28, 2020, the Company suspended its repurchase activity in light of which remain available forthe COVID-19 pandemic, and has subsequently determined to recommence repurchases under its existing stock repurchase atplan in February 2021. At December 31, 2017. There2020, there were 1,754,8042,019,145 shares available for repurchase at December 31, 2017 under these twothe Company’s stock repurchase programs.program. The Company did not repurchase shares of its common stock during the yearquarter ended December 31, 2017.
|
| | | | |
| Item 6. | Selected Financial Data |
The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | (dollars in thousands) |
| Selected Financial Condition Data: | | | | | | | | | | |
| Total assets | | $ | 11,448,313 | | | $ | 8,246,145 | | | $ | 7,516,154 | | | $ | 5,416,006 | | | $ | 5,166,917 | |
| Debt securities available-for-sale, at estimated fair value | | 183,302 | | | 150,960 | | | 100,717 | | | 81,581 | | | 20,775 | |
| Debt securities held-to-maturity, net of allowance for credit losses | | 937,253 | | | 768,873 | | | 846,810 | | | 764,062 | | | 589,912 | |
| Equity investments, at estimated fair value | | 107,079 | | | 10,136 | | | 9,655 | | | 8,700 | | | — | |
| Restricted equity investments, at cost | | 51,705 | | | 62,356 | | | 56,784 | | | 19,724 | | | 19,313 | |
| Loans receivable, net of allowance for credit losses | | 7,704,857 | | | 6,207,680 | | | 5,579,222 | | | 3,965,773 | | | 3,803,443 | |
| Deposits | | 9,427,616 | | | 6,328,777 | | | 5,814,569 | | | 4,342,798 | | | 4,187,750 | |
| FHLB advances | | — | | | 519,260 | | | 449,383 | | | 288,691 | | | 250,498 | |
| Securities sold under agreements to repurchase and other borrowings | | 363,925 | | | 168,540 | | | 161,290 | | | 136,187 | | | 126,494 | |
| Stockholders’ equity | | 1,484,130 | | | 1,153,119 | | | 1,039,358 | | | 601,941 | | | 571,903 | |
| | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | (dollars in thousands; except per share amounts) |
| Selected Operating Data: | | | | | | | | | | |
| Interest income | | $ | 379,608 | | | $ | 308,794 | | | $ | 276,654 | | | $ | 188,829 | | | $ | 133,425 | |
| Interest expense | | 66,657 | | | 52,823 | | | 36,152 | | | 19,611 | | | 13,163 | |
| Net interest income | | 312,951 | | | 255,971 | | | 240,502 | | | 169,218 | | | 120,262 | |
| Credit loss expense | | 59,404 | | | 1,636 | | | 3,490 | | | 4,445 | | | 2,623 | |
| Net interest income after credit loss expense | | 253,547 | | | 254,335 | | | 237,012 | | | 164,773 | | | 117,639 | |
| Other income (excluding net gain (loss) on equity investments and gain on sale of Paycheck Protection Program (“PPP”) loans) | | 47,611 | | | 41,898 | | | 35,026 | | | 27,072 | | | 20,412 | |
| Net gain (loss) on equity investments | | 21,214 | | | 267 | | | (199) | | | — | | | — | |
| Gain on sale of PPP loans | | 5,101 | | | — | | | — | | | — | | | — | |
| Operating expenses | | 208,604 | | | 169,589 | | | 156,275 | | | 112,022 | | | 86,182 | |
| FHLB advance prepayment fees | | 14,257 | | | — | | | — | | | — | | | 136 | |
| Branch consolidation expense | | 7,623 | | | 9,050 | | | 3,151 | | | 6,205 | | | — | |
| Merger related expenses | | 15,947 | | | 10,503 | | | 26,911 | | | 8,293 | | | 16,534 | |
| Income before provision for income taxes | | 81,042 | | | 107,358 | | | 85,502 | | | 65,325 | | | 35,199 | |
| Provision for income taxes | | 17,733 | | | 18,784 | | | 13,570 | | | 22,855 | | | 12,153 | |
| Net income | | $ | 63,309 | | | $ | 88,574 | | | $ | 71,932 | | | $ | 42,470 | | | $ | 23,046 | |
| Net income available to common stockholders | | $ | 61,212 | | | $ | 88,574 | | | $ | 71,932 | | | $ | 42,470 | | | $ | 23,046 | |
| Basic earnings per share | | $ | 1.02 | | | $ | 1.77 | | | $ | 1.54 | | | $ | 1.32 | | | $ | 1.00 | |
| Diluted earnings per share | | $ | 1.02 | | | $ | 1.75 | | | $ | 1.51 | | | $ | 1.28 | | | $ | 0.98 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (dollars in thousands) |
| Selected Financial Condition Data: | | | | | | | | | | |
| Total assets | | $ | 5,416,006 |
| | $ | 5,166,917 |
| | $ | 2,593,068 |
| | $ | 2,356,714 |
| | $ | 2,249,711 |
|
| Securities available-for-sale, at estimated fair value | | 90,281 |
| | 20,775 |
| | 29,902 |
| | 19,804 |
| | 43,836 |
|
| Securities held-to-maturity, net | | 764,062 |
| | 589,912 |
| | 394,813 |
| | 469,417 |
| | 495,599 |
|
| Federal Home Loan Bank of New York stock | | 19,724 |
| | 19,313 |
| | 19,978 |
| | 19,170 |
| | 14,518 |
|
| Loans receivable, net | | 3,965,773 |
| | 3,803,443 |
| | 1,970,703 |
| | 1,688,846 |
| | 1,541,460 |
|
| Deposits | | 4,342,798 |
| | 4,187,750 |
| | 1,916,678 |
| | 1,720,135 |
| | 1,746,763 |
|
| Federal Home Loan Bank advances | | 288,691 |
| | 250,498 |
| | 324,385 |
| | 305,238 |
| | 175,000 |
|
| Securities sold under agreements to repurchase and other borrowings | | 136,187 |
| | 126,494 |
| | 98,372 |
| | 95,312 |
| | 95,804 |
|
| Stockholders’ equity | | 601,941 |
| | 571,903 |
| | 238,446 |
| | 218,259 |
| | 214,350 |
|
| | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (dollars in thousands; except per share amounts) |
| Selected Operating Data: | | | | | | | | | | |
| Interest income | | $ | 188,829 |
| | $ | 133,425 |
| | $ | 85,863 |
| | $ | 79,853 |
| | $ | 80,157 |
|
| Interest expense | | 19,611 |
| | 13,163 |
| | 9,034 |
| | 7,505 |
| | 9,628 |
|
| Net interest income | | 169,218 |
| | 120,262 |
| | 76,829 |
| | 72,348 |
| | 70,529 |
|
| Provision for loan losses | | 4,445 |
| | 2,623 |
| | 1,275 |
| | 2,630 |
| | 2,800 |
|
| Net interest income after provision for loan losses | | 164,773 |
| | 117,639 |
| | 75,554 |
| | 69,718 |
| | 67,729 |
|
| Other income | | 27,072 |
| | 20,412 |
| | 16,426 |
| | 18,577 |
| | 16,458 |
|
| Operating expenses | | 112,022 |
| | 86,182 |
| | 58,897 |
| | 57,764 |
| | 54,400 |
|
| Federal Home Loan Bank advance prepayment fee | | — |
| | 136 |
| | — |
| | — |
| | 4,265 |
|
| Branch consolidation expense | | 6,205 |
| | — |
| | — |
| | — |
| | 579 |
|
| Merger related expenses | | 8,293 |
| | 16,534 |
| | 1,878 |
| | — |
| | — |
|
| Income before provision for income taxes | | 65,325 |
| | 35,199 |
| | 31,205 |
| | 30,531 |
| | 24,943 |
|
| Provision for income taxes | | 22,855 |
| | 12,153 |
| | 10,883 |
| | 10,611 |
| | 8,613 |
|
| Net income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
| | $ | 19,920 |
| | $ | 16,330 |
|
| Basic earnings per share | | $ | 1.32 |
| | $ | 1.00 |
| | $ | 1.22 |
| | $ | 1.19 |
| | $ | 0.96 |
|
| Diluted earnings per share | | $ | 1.28 |
| | $ | 0.98 |
| | $ | 1.21 |
| | $ | 1.19 |
| | $ | 0.95 |
|
(continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | At or For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Selected Financial Ratios and Other Data (1): | | | | | | | | | | |
| Performance Ratios: | | | | | | | | | | |
Return on average assets (2) | | 0.80 | % | | 0.62 | % | | 0.82 | % | | 0.86 | % | | 0.71 | % |
Return on average stockholders’ equity (2) | | 7.20 |
| | 6.08 |
| | 8.92 |
| | 9.18 |
| | 7.51 |
|
Return on average tangible stockholders’ equity (2)(3) | | 9.82 |
| | 7.13 |
| | 8.96 |
| | 9.18 |
| | 7.51 |
|
| Stockholders’ equity to total assets | | 11.11 |
| | 11.07 |
| | 9.19 |
| | 9.26 |
| | 9.53 |
|
Tangible stockholders’ equity to tangible assets (3) | | 8.42 |
| | 8.30 |
| | 9.12 |
| | 9.26 |
| | 9.53 |
|
Net interest rate spread (4) | | 3.41 |
| | 3.38 |
| | 3.18 |
| | 3.23 |
| | 3.16 |
|
Net interest margin (5) | | 3.50 |
| | 3.47 |
| | 3.28 |
| | 3.31 |
| | 3.24 |
|
| Average interest-earning assets to average interest-bearing liabilities | | 124.06 |
| | 122.46 |
| | 123.80 |
| | 121.21 |
| | 117.19 |
|
Operating expenses to average assets (2) | | 2.39 |
| | 2.76 |
| | 2.47 |
| | 2.50 |
| | 2.58 |
|
Efficiency ratio (2)(6) | | 64.46 |
| | 73.11 |
| | 65.17 |
| | 63.53 |
| | 68.11 |
|
| Loan to deposit ratio | | 91.32 |
| | 90.82 |
| | 102.82 |
| | 98.18 |
| | 88.25 |
|
| Asset Quality Ratios: | | | | | | | | | | |
Non-performing loans as a percent of total loans receivable (7)(8) | | 0.52 |
| | 0.35 |
| | 0.91 |
| | 1.06 |
| | 2.88 |
|
Non-performing assets as a percent of total assets (8) | | 0.54 |
| | 0.45 |
| | 1.05 |
| | 0.97 |
| | 2.21 |
|
Allowance for loan losses as a percent of total loans receivable (8)(9) | | 0.40 |
| | 0.40 |
| | 0.84 |
| | 0.95 |
| | 1.33 |
|
Allowance for loan losses as a percent of total non-performing loans (8) | | 75.35 |
| | 111.92 |
| | 91.51 |
| | 89.13 |
| | 46.14 |
|
| Wealth Management: | | | | | | | | | | |
| Assets under administration (000’s) | | $ | 233,185 |
| | $ | 218,336 |
| | $ | 229,039 |
| | $ | 225,234 |
| | $ | 216,144 |
|
| Per Share Data: | | | | | | | | | | |
| Cash dividends per common share | | $ | 0.60 |
| | $ | 0.54 |
| | $ | 0.52 |
| | $ | 0.49 |
| | $ | 0.48 |
|
| Stockholders’ equity per common share at end of period | | 18.47 |
| | 17.80 |
| | 13.79 |
| | 12.91 |
| | 12.33 |
|
Tangible stockholders’ equity per common share at end of period (3) | | 13.58 |
| | 12.94 |
| | 13.67 |
| | 12.91 |
| | 12.33 |
|
| Number of full-service customer facilities: | | 46 |
| | 61 |
| | 27 |
| | 23 |
| | 23 |
|
38
| |
(1) | With the exception of end of year ratios, all ratios are based on average daily balances. |
| |
(2) | Performance ratios for 2017 include merger related expenses, branch consolidation expenses, acceleration of stock award expense due to the retirement of a director, and additional income tax expense related to the recently enacted Tax Reform of $18.4 million with an after tax cost of $13.7 million. Performance ratios for 2016 include merger related expenses and the Federal Home Loan Bank advance prepayment fee totaling $16.7 million with an after tax cost of $11.9 million. Performance ratios for 2015 include merger related expenses of $1.9 million with an after tax cost of $1.3 million. Performance ratios for 2013 include expenses relating to the Federal Home Loan Bank advance prepayment fee of $4.3 million and the consolidation of two branches into newer, in-market facilities, at a cost of $579,000. The total after tax cost was $3.1 million. |
| |
(3) | Tangible stockholders’ equity excludes intangible assets relating to goodwill and core deposit intangible. |
| |
(4) | The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. |
| |
(5) | The net interest margin represents net interest income as a percentage of average interest-earning assets. |
| |
(6) | Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income. |
| |
(7) | Total loans receivable includes loans receivable and loans held-for-sale. |
| |
(8) | Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest. |
| |
(9) | The loans acquired from Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan losses, was $17.5 million, $26.0 million, and $2.2 million at December 31, 2017, 2016, and 2015, respectively. There were no loans acquired and therefore no corresponding credit marks at December 31, 2014 and 2013. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At or For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Selected Financial Ratios and Other Data (1): | | | | | | | | | | |
| Performance Ratios: | | | | | | | | | | |
Return on average assets (2) | | 0.56 | % | | 1.10 | % | | 0.98 | % | | 0.80 | % | | 0.62 | % |
Return on average tangible assets (2)(3) | | 0.59 | | | 1.16 | | | 1.02 | | | 0.83 | | | 0.63 | |
Return on average stockholders’ equity (2) | | 4.35 | | | 7.84 | | | 7.31 | | | 7.20 | | | 6.08 | |
Return on average tangible stockholders’ equity (2)(3) | | 6.81 | | | 11.96 | | | 11.16 | | | 9.82 | | | 7.13 | |
| Stockholders’ equity to total assets | | 12.96 | | | 13.98 | | | 13.83 | | | 11.11 | | | 11.07 | |
Tangible stockholders’ equity to tangible assets (3) | | 8.79 | | | 9.71 | | | 9.55 | | | 8.42 | | | 8.30 | |
Tangible common equity to tangible assets (3) | | 8.28 | | | 9.71 | | | 9.55 | | | 8.42 | | | 8.30 | |
Net interest rate spread (4) | | 2.96 | | | 3.40 | | | 3.57 | | | 3.44 | | | 3.38 | |
Net interest margin (5) | | 3.16 | | | 3.62 | | | 3.71 | | | 3.53 | | | 3.47 | |
| Average interest-earning assets to average interest-bearing liabilities | | 130.65 | | | 128.51 | | | 124.96 | | | 122.99 | | | 122.46 | |
Operating expenses to average assets (2) | | 2.20 | | | 2.35 | | | 2.53 | | | 2.39 | | | 2.76 | |
Efficiency ratio (2)(6) | | 63.70 | | | 63.44 | | | 67.68 | | | 64.46 | | | 73.11 | |
Loans to deposits ratio (7) | | 82.27 | | | 98.20 | | | 96.12 | | | 91.56 | | | 90.92 | |
| Asset Quality Ratios: | | | | | | | | | | |
Non-performing loans as a percent of total loans receivable (7)(8) | | 0.47 | | | 0.29 | | | 0.31 | | | 0.52 | | | 0.35 | |
Non-performing assets as a percent of total assets (8) | | 0.32 | | | 0.22 | | | 0.25 | | | 0.54 | | | 0.45 | |
Allowance for credit losses as a percent of total loans receivable (7)(9) | | 0.78 | | | 0.27 | | | 0.30 | | | 0.40 | | | 0.40 | |
Allowance for credit losses as a percent of total non-performing loans (8)(9) | | 166.81 | | | 94.41 | | | 95.19 | | | 75.35 | | | 111.92 | |
| Wealth Management: | | | | | | | | | | |
| Assets under administration (000’s) | | $ | 245,175 | | | $ | 195,415 | | | $ | 184,476 | | | $ | 233,185 | | | $ | 218,336 | |
| Nest Egg (000’s) | | 93,237 | | | 34,865 | | | — | | — | | — |
| Per Share Data: | | | | | | | | | | |
| Cash dividends per common share | | $ | 0.68 | | | $ | 0.68 | | | $ | 0.62 | | | $ | 0.60 | | | $ | 0.54 | |
| Dividend payout ratio per common share | | 66.73 | % | | 38.96 | % | | 41.08 | % | | 46.80 | % | | 55.14 | % |
| Stockholders’ equity per common share at end of period | | $ | 24.57 | | | $ | 22.88 | | | $ | 21.68 | | | $ | 18.47 | | | $ | 17.80 | |
Tangible stockholders’ equity per common share at end of period (3) | | 15.90 | | | 15.13 | | | 14.26 | | | 13.58 | | | 12.94 | |
Tangible common stockholders’ equity per common share at end of period (3) | | 14.98 | | | 15.13 | | | 14.26 | | | 13.58 | | | 12.94 | |
| Number of full-service customer facilities: | | 62 | | | 56 | | | 59 | | | 46 | | | 61 | |
(1)With the exception of end of year ratios, all ratios are based on average daily balances.
(2)Performance ratios for 2020 includes 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 of $14.3 million with an after tax cost of $11.0 million. Performance ratios for 2019 include merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and the 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 $20.6 million with an after tax cost of $16.3 million. Performance ratios for 2018 include merger related expenses, branch consolidation expenses, and an income tax benefit related to Tax Reform of $28.2 million with an after tax cost of $22.2 million. Performance ratios for 2017 include merger related expenses, branch consolidation expenses, and additional income tax expense related to Tax Reform of $18.1 million with an after tax cost of $13.5 million. Performance ratios for 2016 include merger related expenses and the Federal Home Loan Bank advance prepayment fee totaling $16.7 million with an after tax cost of $11.9 million.
(3)Tangible stockholders’ equity and tangible assets exclude intangible assets relating to goodwill and core deposit intangible. Tangible common equity excludes goodwill, core deposit intangible and preferred equity.
(4)The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(5)The net interest margin represents net interest income as a percentage of average interest-earning assets.
(6)Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.
(7)Total loans receivable excludes loans held-for-sale.
(8)Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.
(9)The loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for credit losses, was $28.0 million, $30.3 million, $31.6 million, $17.5 million and $26.0 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
|
| | | | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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, 2017,2020, operated its administrative/branch office and headquarters in Toms River, New Jersey, its administrative office located in Toms River, 45Red Bank, New Jersey, an administrative office located in Mount Laurel, New Jersey, and 61 additional branch offices and threesix deposit production facilities located throughout central and southern New Jersey.Jersey, and the greater metropolitan area of New York City. The Bank also operated a wealth management office in Manchester, New Jersey and commercial loan production offices in New York City, the greater Philadelphia area and in Atlantic Cape May, and Mercer Counties in New Jersey. During 2017, the Company acquired an administrative office building in Red Bank, New Jersey which it expects to occupy in April 2018 while consolidating 19 operating facilities into two locations.
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 Bankcardbankcard services, wealthtrust and asset management products and services, deposit account services, the sale of alternative investments,bank owned life insurance, commercial loan originations, loan sales, Bank Owned Life Insuranceswap 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.
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 rapidly evolving. It is impacting the Company’s operations and financial results, as well as those of the Bank’s customers. For the year ended December 31, 2020, the Company recognized an elevated credit loss expense of $59.4 million and an increase in operating expense of $4.5 million, each related to COVID-19.
For further discussion, refer to Risk Factors - Risk Related to the COVID-19 Pandemic.
Acquisitions
On July 31, 2015,January 1, 2020, the Company completed its acquisition of Colonial American Bank (“Colonial American”),Two River which added $142.4 million$1.1 billion to assets, $121.2$940.1 million to loans, and $123.3$941.8 million to deposits. Colonial American’sTwo River’s results of operations are included in the consolidated results for the years ended December 31, 2017, and December 31, 2016, but are only included in the results of operations for the period from Augustbeginning on January 1, 2015 through December 31, 2015.2020.
On March 11, 2016, the Bank purchased an existing retail branch in the Toms River, New Jersey market with total deposits of $17.0 million.
On May 2, 2016,January 1, 2020, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”),Country Bank which added $1.5 billion$793.7 million to assets, $1.2 billion$618.4 million to loans, and $1.2 billion$652.7 million to deposits. Cape’sCountry Bank’s results of operations are included in the consolidated results for the year ended December 31, 2017, but are only included in the results of operations for the period from May 2, 2016 to December 31, 2016.beginning on January 1, 2020.
On November 30, 2016,January 31, 2019, the Company completed its acquisition of Ocean Shore Holding Company (“Ocean Shore”),Capital Bank which added $991.3$494.4 million to assets, $773.3$307.3 million to loans, and $875.1$449.0 million to deposits. Ocean Shore’sCapital Bank’s results of operations are included in the consolidated results for the year ended December 31, 2017 but are only included in the results of operations for the period from Decemberbeginning on February 1, 2016 to December 31, 2016.2019.
On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”). Based on the $26.45 per share closing price of the Company’s common stock on January 31, 2018, the total transaction value was $474.9 million. The acquisitionwhich added $2.1$2.0 billion to assets, $1.5 billion to loans, and $1.6 billion million to deposits. Sun’s results of operations are not included in any of the periods presented herein.consolidated results for the period beginning on February 1, 2018.
These acquisitionstransactions have providedenhanced the Company withBank’s position as the opportunity to growpremier community banking franchise in central and southern New Jersey, and metropolitan areas of Philadelphia and New York City and they have grown business lines, expandexpanded the geographic footprint and improveimproved financial performance. The Company will continue to evaluate potential acquisition opportunities for those that are expected to further create stockholder value.
Strategy
The Company operates as a full-service community bank delivering commercial and residentialconsumer financing solutions, deposit services and wealth management throughout the centralproducts and southernservices throughout New Jersey region.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 ofsuperior 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 receivable 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.
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. In addition, as a result of the reduction in the corporate tax from 35% to 21% effective in 2018, associated with the recently enacted Tax Reform, the Company will reinvest part of the anticipated benefit in its workforce by raising the minimum hourly pay rate to $15.00, increasing the number of shares available in the employee stock ownership program by 300,000 shares, and supplementing other stock-based compensation.
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 continues to grow this market segment primarily through the addition ofhas strategically and steadily added experienced commercial lenders. Additionally, a loan production office was openedlenders in Mercer County in the first quarter of 2015 to better serve the broader centralvarious New Jersey marketcounties as well as teams in New York City and the greater Philadelphia area. An additional loan production office in the Philadelphia area was acquired in the Cape transaction. As a result of these initiatives, At December 31, 2020, commercial loans (which include multi-family and commercial real estate loans, commercial construction loans and commercial and industrial loans) represented 48.9%65.5% of the Bank’s total loans, as compared to 48.5% at December 31, 2017, as compared to 34.4% at December 31, 2012 and only 3.6% at December 31, 1997. Commercial loan balances increased by $123.1 million, or 6.8%, in 2017.2015. Commercial loan products entail a higher degree of credit risk than is involved in one-to-four family residential mortgagereal 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 – IncreasedThe Bank’s emphasis on commercial lending may expose the Bank to increased lending risks.”
Increasing Core Deposits
The Bank seeks to increase core deposit market sharedeposits (all deposits excluding time deposits) in its primary market area by improving market penetration. Deposits increased by $155.0 million, to $4.343 billion at December 31, 2017, from $4.188 billion at December 31, 2016. Core deposits (all deposits excluding time deposits) increased by $195.0 million. The loan to deposit ratio was 91.3% at December 31, 2017. 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 depositdeposits ratio was 86.0%85.4% and the loans to deposits ratio was 82.3% at December 31, 2017.2020.
Enhancing Non-Interest Income
Management continues to diversify the Bank’s product linelines and expand related resources in order to enhance non-interest income. The Bank is focused on growth opportunitiesopportunities in areas such as wealthderivative contracts, trust and asset management, servicesdigital product offerings, and equity investments in Bankcard services, which includes interchange revenue, merchant services and ATM fees. non-bank finance companies.
The Bank also offers investment products (annuities, mutual funds and life insurance) for sale through its retail branch network. Income from feesnetwork. 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 service charges increased $6.3 million,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 34.9%, to $24.2 million, for the year endedvideo. At December 31, 2017,2020, 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 compareda 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 the prior year.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
In light of the recent acquisition activity, management performed a comprehensive review ofManagement continues to evaluate the Bank’s branch network which resultedfor consolidation opportunities. The Bank consolidated 13 branches in the January 2018 announcement of2020, following the consolidation of eight and 17 branches in 2019 and 2018, respectively, bringing the second quartertotal number of 2018, primarily as a result ofbranches consolidated to 57 over the Sun merger. The anticipated 2018 branch consolidations are in addition to the 15 branch consolidations in the legacy Cape, Ocean Shore, and central New Jersey market areas completed in 2017.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.transactions, as well as increasing the marketing of products that feature digital and mobile services. In certain locations, routine transactions are handled through “VideoVideo 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 its multiple electronic channelsdigital services to enhance the customer experience and bolster cyber securityimprove security. At December 31, 2020, all of the branch staff were trained as Certified Digital Bankers to better support customers use and fraud protection.adoption of digital services.
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, fourfive stock repurchase programs. The most recent plan to repurchase up to 5% of outstanding common stock was announced on April 27, 2017December 18, 2019 to repurchase up to an additional 1.62.5 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, 2017,2020, the Company did not repurchase anyrepurchased 648,851 shares of its common stock under these repurchase programs. At December 31, 2017, there were 1.8 million2020, 2,019,145 shares remain available for repurchase under the Company’s stock repurchase programs.
Summary
Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are generally priced against shorter-term indices. The Company has attempted to mitigate the adverse impact of low interest rates by focusing on commercial loan and core deposit growth, as noted above. Based upon current economic conditions, and expectations of slowly rising inflation, several increases in the Federal funds rate are anticipated in 2018.repurchase.
In additionMay 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 interest rate environment, the Company’s results are affected by economic conditions. Recent economic indicators point to continued improvement in the U.S. economy, with growth accelerating in 2017.downturn.
Summary
Highlights of the Company’s financial results for the year ended December 31, 20172020 were as follows:
Total assets increased to $5.416$11.45 billion at December 31, 2017,2020, from $5.167$8.25 billion at December 31, 2016.2019. Loans receivable, net of allowance for credit losses, increased by $162.3 million$1.50 billion at December 31, 2017,2020, as compared to December 31, 2016,2019, while deposits increased $155.0 million$3.10 billion over the same period. The loan toincreases were primarily the result of the Two River and Country Bank acquisitions and $1.51 billion of organic deposit ratio was 91.3% at December 31, 2017, while the cost of deposits increased only 4 basis points year over year.growth.
Net income available to common stockholders for the year ended December 31, 20172020 was $42.5$61.2 million, or $1.28$1.02 per diluted share, as compared to net income of $23.0$88.6 million, or $0.98$1.75 per diluted share for the prior year. Net income for the year ended December 31, 2017 includes2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, branch consolidation expenses, merger related expenses, branch consolidation expenses,and Two River and Country Bank opening credit loss expense under the acceleration of stock award expense due to the retirement of a director, and additional income tax expense from the revaluation of deferred tax assets related to the recently enacted Tax Cuts and Jobs Act (“Tax Reform”).CECL model. These items decreased net income, net of tax, benefit, for the year ended December 31, 20172020 by $13.7$11.0 million. Net income for the year ended December 31, 20162019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of $11.8an 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 benefit.tax. These items reduced diluted earnings per share by $0.42$0.18 and $0.50,$0.32, respectively, for the years ended December 31, 20172020 and 2016.2019. 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 commonstockholders’ equity to tangible assets ratio of 8.42%8.79% at December 31, 2017.2020.
Critical Accounting Policies
Note 1 Summary of Significant Accounting Policies, to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 20172020 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for loancredit 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,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.
Allowance for LoanCredit Losses
TheUnder the CECL model, the allowance for loancredit losses (“ACL”) on financial assets is a valuation accountallowance estimated at each balance sheet date in accordance with generally accepted accounting principles (“GAAP”) that reflects probable incurred lossesis 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 loan portfolio. The adequacyamortized cost basis and therefore includes it in the measurement of the allowanceACL. 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 isat 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 management’s evaluation of the Bank’s pasthistorical loan level loss experience known and inherent risks in thefor portfolio adverse situationssegments with similar risk characteristics. The historical loss rate is adjusted for select macroeconomic variables that may affect the borrower’s ability to repay, estimated value of any underlying collateral, current economic and regulatory conditions,consider both historical trends as well as organizational changes. Additionsforecasted trends for a single economic scenario. The adjusted loss rate is calculated for an eight quarter forecast period then reverts to the allowance arise from chargeshistorical loss rate on a straight-line basis over four quarters. The adjusted loss rate is then applied to operations through the provisionexposure at default on an undiscounted basis. The Company differentiates its loss-rate method for loan losses or from theHTM debt securities by looking to publicly available historical default and recovery of amounts previously charged-off. The allowance is reduced by loan charge-offs. The allowance for loan losses is maintained at an amount management considers sufficient to provide for probable losses.
Acquired loans are marked to fair valuestatistics based on the dateattributes of acquisitionissuer type, rating category and are evaluated on a quarterlytime 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 ensureexpected credit loss estimates for information not already captured in the necessary purchase accounting updates areloss estimation process. Qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments will not be made in parallel with the allowance for loan loss calculation. Acquired loansinformation that havehas already been renewed since acquisition areconsidered and included in the allowance forquantitative allowance. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in loan loss calculation since these loans have been underwritten to the Bank’s guidelines. Acquired loans that have not been renewed since acquisition, or that have a PCI mark, are excluded from the allowance for loan loss calculation. The Bank calculates a general valuation allowance for these excluded acquired loanscomposition, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and compares that to the remaining general credit and interest rate marks. To the extent the remaining general credit and interest rate marks exceed the calculated general valuation allowance, no additional reserve is required. If the calculated general valuation allowance exceeds the remaining general credit and interest rate marks, the Bank would record an adjustment to the extent necessary.other asset specific risk characteristics.
The Bank’s allowance for loan losses includes specific allowances and a general allowance, each updated on a quarterly basis. A specific allowance is determined for all impaired loans (excluding PCI loans). The Bank defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings.
Collateral Dependent Financial Assets
For collateral dependent loans,financial assets where the specific allowance representsCompany 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 Bank’s recorded investment in the loan, net of any interim charge-offs, and the estimated fair value of the collateral less estimated selling costs. Impairment for all other impaired loansand the amortized cost basis of the asset as of the measurement date. Fair value is generally calculated usingbased on the present value of the expected future cash flows.
If a loan becomes 90 days delinquent,underlying collateral less an appraisal discount and the Bank obtains an updated collateral appraisal. For residential real estate loans, the appraisal is updated annually if the loan remains delinquent for an extended period. For non-accrual commercial real estate loans, the Bank assesses whether there has likely been an adverse changeestimated cost to sell. Due to conditions caused by COVID-19, appraisals ordered in the collateral value supporting the loan. The Bank utilizes information based on its knowledge of changes in real estate conditions in its lending area to identify whether a possible deterioration of collateral value has occurred. Based on the severitycurrent environment may not be indicative of the changes in market conditions, management determinesunderlying 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 an updated commercial real estate appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal is not necessary, an estimateadditional discount may be applied to an existing appraisal.
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 downward adjustments tolikelihood that funding will occur, and is included in other liabilities on the existing appraisedCompany’s consolidated balance sheets.
Acquired Loans
Acquired loans are recorded at fair value is used in assessing if additional specific reserves are necessary untilat the updated appraisal is received.
A general allowance is determined for all loans that are not individually evaluated for impairment (excluding acquired loans that have not been renewed under the Bank’s underwriting criteria). In determining the leveldate of the general allowance, the Bank segments the loan portfolio into the following loan segments: residential real estate; consumer; investor-owned commercial real estate; owner-occupied commercial real estate; and commercial and industrial.
The portfolio segments are further segmented by delinquency status and risk rating (Pass, Special Mention, Substandard and Doubtful). An estimated loss factor is then applied to each delinquency status and risk rating category. To determine the loss factor, the Bank utilizes historical loss experience as a percent of the outstanding loan principal balance adjusted for certain qualitative factors and the loss emergence period.
The Bank’s historical loss experience isacquisition based on a rolling 24-month look-back perioddiscounted 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 each portfolio segment. The look-back periodwhich it was selectedprobable, 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 (1) management’s judgmenta discounted cash flow methodology that this period captures sufficient loss events (in both dollar termsconsidered various factors including the type of loan and numberrelated collateral, classification status, fixed or variable interest rate, term of individual events) to be relevant;loan and (2)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 the Bank’s underwriting criteria and risk characteristics have remained relatively stable throughout this period.
experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The historical loss experience is adjustedCompany evaluated acquired loans for certain qualitative factors including,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 trends, (2) net charge-off trends, (3) naturestatus, 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 volumeindividual 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 loan portfolio, (4) loan policiesPCD 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 underwriting standards, (5) experiencethe amortized cost basis is considered to relate to noncredit factors and abilityresults in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of lending personnel, (6) concentrationsthe 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 (7) loan review system, and external factors such as (8) changes in current economic conditions, (9) local competition and (10) regulation. Economic factors that the Bank considered in its estimate offair value adjustment to the allowance for loancredit losses include: local and regional trends in economic growth, unemployment and real estate values. The Bank considerson loans.
For acquired loans not deemed PCD at acquisition, the applicability of each of these qualitative factors in estimatingdifferences between the general allowance for each portfolio segment. Each quarter, the Bank considers the current conditions for each of the qualitative factors, as well as a forward looking view on trends and events, to support an assessment unique to each portfolio segment.
The Bank calculates and analyzes the loss emergence period on an annual basis or more frequently if conditions warrant. The Bank’s methodology is to use loss events in the past eight quarters to determine the loss emergence period for each loan segment. The loss emergence period is specific to each loan segment. It represents the amount of time that has elapsed between (1) the occurrence of a loss event, which resulted in a potential loss and (2) the confirmation of the potential loss, when the Bank records an initial charge-off or downgrades the risk-rating of the loan to substandard.
The Bank also maintains an unallocated portion of the allowance for loan losses. The primary purpose of the unallocated component is to account for the inherent factors that cannot be practically assigned to individual loss categories, including the periodic update of appraisals, subjectivity of the Bank’s credit review and risk rating process, and continued economic uncertainty that may not be fully captured in the Bank’s loss history or the qualitative factors.
Upon completion of the aforementioned procedures, an overall management review is performed including ratio analyses to identify divergent trends compared with the Bank’s own historical loss experience, the historical loss experience of the Bank’s peer group, and management’s understanding of general regulatory expectations. Based on that review, management may identify issues or factors that previously had not been considered in the estimation process, which may warrant further analysis or adjustments to estimated loss factors or the allowance for loan losses.
Of the Bank’s loan portfolio, 95.2% is secured by real estate, whether residential or commercial. Additionally, most of the Bank’s borrowers are located in central and southern New Jersey and the surrounding area. These concentrations may adversely affect the Bank’s loan loss experience should local real estate values decline or should the markets served experience difficult economic conditions including increased unemployment or should the area be affected by a natural disaster such as a hurricane or flooding.
Management believes the primary risk characteristics for each portfolio segment are a decline in the general economy, including elevated levels of unemployment, a decline in real estate market values and rising interest rates. Any one or a combination of these events may adversely affect the borrowers’ ability to repay the loans, resulting in increased delinquencies, loan charge-offs and future levels of provisions.
Although management believes that the Bank has established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. In addition, various regulatory agencies, as part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available to them at the time of their examination. Although management uses what it believes to be the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Bank’s control.
Impairment of Securities
On a quarterly basis, the Company evaluates whether any securities are other-than-temporarily impaired. In making this determination, the Company considers the extent and duration of the impairment, the nature and financial health of the issuer, the ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in estimated fair value and other factors relevant to specific securities, suchthe 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 risk of the issuer and whether a guarantee or insurance applies to the security. If a security is determined to be other-than-temporarily impaired, the credit related component is charged to income with the non-credit related component recognized in other comprehensive income, during the period the impairment is found to exist.losses for originated loans.
As of December 31, 2017, the Company concluded that any remaining unrealized losses in the securities portfolio were temporary in nature because they were primarily related to market interest rates, market illiquidity and wider credit spreads for these types of securities. Additionally, the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. Future events that could materially change this conclusion and require an impairment loss to be charged to operations include a change in the credit quality of the issuers or a determination that a market recovery in the foreseeable future is unlikely.
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 also 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, 2017, 20162020, 2019 and 2015.2018. 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 |
| (dollars in thousands) | Average
Balance | | Interest | | Average
Yield/
Cost | | Average
Balance | | Interest | | Average
Yield/
Cost | | Average
Balance | | Interest | | Average
Yield/
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 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (dollars in thousands) | Average
Balance | | Interest | | Average
Yield/
Cost | | Average
Balance | | Interest | | Average
Yield/
Cost | | Average
Balance | | Interest | | Average
Yield/
Cost |
| Assets: | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Interest-earning deposits and short-term investments | $ | 179,960 |
| | $ | 1,449 |
| | 0.81 | % | | $ | 154,830 |
| | $ | 693 |
| | 0.45 | % | | $ | 38,371 |
| | $ | 44 |
| | 0.11 | % |
Securities (1) and FHLB stock | 796,392 |
| | 16,792 |
| | 2.11 |
| | 524,152 |
| | 9,770 |
| | 1.86 |
| | 481,306 |
| | 8,125 |
| | 1.69 |
|
Loans receivable, net (2) | | | | | | | | | | | | | | | | | |
| Commercial | 1,858,842 |
| | 87,706 |
| | 4.72 |
| | 1,472,421 |
| | 70,768 |
| | 4.81 |
| | 840,531 |
| | 38,186 |
| | 4.54 |
|
| Residential | 1,726,020 |
| | 69,784 |
| | 4.04 |
| | 1,085,991 |
| | 41,996 |
| | 3.87 |
| | 804,404 |
| | 31,423 |
| | 3.91 |
|
| Home Equity | 282,128 |
| | 13,003 |
| | 4.61 |
| | 236,769 |
| | 10,139 |
| | 4.28 |
| | 194,383 |
| | 8,054 |
| | 4.14 |
|
| Other | 1,156 |
| | 95 |
| | 8.22 |
| | 957 |
| | 59 |
| | 6.17 |
| | 482 |
| | 31 |
| | 6.43 |
|
| Allowance for loan loss net of deferred loan fees | (12,251 | ) | | — |
| | — |
| | (13,280 | ) | | — |
| | — |
| | (13,639 | ) | | — |
| | — |
|
Loans receivable, net (2) | 3,855,895 |
| | 170,588 |
| | 4.42 |
| | 2,782,858 |
| | 122,962 |
| | 4.42 |
| | 1,826,161 |
| | 77,694 |
| | 4.25 |
|
| Total interest-earning assets | 4,832,247 |
| | 188,829 |
| | 3.91 |
| | 3,461,840 |
| | 133,425 |
| | 3.85 |
| | 2,345,838 |
| | 85,863 |
| | 3.66 |
|
| Non-interest-earning assets | 459,926 |
| | | | | | 269,622 |
| | | | | | 119,035 |
| | | | |
| Total assets | $ | 5,292,173 |
| | | | | | $ | 3,731,462 |
| | | | | | $ | 2,464,873 |
| | | | |
| Liabilities and Equity: | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Interest-bearing checking | $ | 1,796,370 |
| | 4,533 |
| | 0.25 | % | | $ | 1,266,135 |
| | 2,114 |
| | 0.17 | % | | $ | 875,326 |
| | 952 |
| | 0.11 | % |
| Money market | 410,373 |
| | 1,213 |
| | 0.30 |
| | 316,977 |
| | 858 |
| | 0.27 |
| | 129,775 |
| | 187 |
| | 0.14 |
|
| Savings | 672,315 |
| | 345 |
| | 0.05 |
| | 447,484 |
| | 191 |
| | 0.04 |
| | 306,151 |
| | 102 |
| | 0.03 |
|
| Time deposits | 625,847 |
| | 6,245 |
| | 1.00 |
| | 422,026 |
| | 4,354 |
| | 1.03 |
| | 229,785 |
| | 3,060 |
| | 1.33 |
|
| Total | 3,504,905 |
| | 12,336 |
| | 0.35 |
| | 2,452,622 |
| | 7,517 |
| | 0.31 |
| | 1,541,037 |
| | 4,301 |
| | 0.28 |
|
| Securities sold under agreements to repurchase | 74,712 |
| | 121 |
| | 0.16 |
| | 75,227 |
| | 102 |
| | 0.14 |
| | 73,029 |
| | 103 |
| | 0.14 |
|
| FHLB advances | 258,870 |
| | 4,486 |
| | 1.73 |
| | 266,981 |
| | 4,471 |
| | 1.67 |
| | 253,864 |
| | 3,849 |
| | 1.52 |
|
| Other borrowings | 56,457 |
| | 2,668 |
| | 4.73 |
| | 32,029 |
| | 1,073 |
| | 3.35 |
| | 26,967 |
| | 781 |
| | 2.90 |
|
| Total interest-bearing liabilities | 3,894,944 |
| | 19,611 |
| | 0.50 |
| | 2,826,859 |
| | 13,163 |
| | 0.47 |
| | 1,894,897 |
| | 9,034 |
| | 0.48 |
|
| Non-interest-bearing deposits | 776,344 |
| | | | | | 497,166 |
| | | | | | 327,216 |
| | | | |
| Non-interest-bearing liabilities | 31,004 |
| | | | | | 28,454 |
| | | | | | 14,851 |
| | | | |
| Total liabilities | 4,702,292 |
| | | | | | 3,352,479 |
| | | | | | 2,236,964 |
| | | | |
| Stockholders’ equity | 589,881 |
| | | | | | 378,983 |
| | | | | | 227,909 |
| | | | |
| Total liabilities and equity | $ | 5,292,173 |
| | | | | | $ | 3,731,462 |
| | | | | | $ | 2,464,873 |
| | | | |
| Net interest income | | | $ | 169,218 |
| | | | | | $ | 120,262 |
| | | | | | $ | 76,829 |
| | |
Net interest rate spread (3) | | | | | 3.41 | % | | | | | | 3.38 | % | | | | | | 3.18 | % |
Net interest margin (4) | | | | | 3.50 | % | | | | | | 3.47 | % | | | | | | 3.28 | % |
| Total cost of deposits (including non-interest-bearing deposits) | | | | | 0.29 | % | | | | | | 0.25 | % | | | | | | 0.23 | % |
| Ratio of interest-earning assets to interest-bearing liabilities | 124.06 | % | | | | | | 122.46 | % | | | | | | 123.80 | % | | | | |
| |
(1) | Amounts are recorded at average amortized cost. |
| |
(2) | Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loan 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. |
(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.
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.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | | Compared to | | Compared to |
| | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | | 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 | | $ | 128 |
| | $ | 628 |
| | $ | 756 |
| | $ | 322 |
| | $ | 327 |
| | $ | 649 |
|
| Securities and FHLB stock | | 5,578 |
| | 1,444 |
| | 7,022 |
| | 772 |
| | 873 |
| | 1,645 |
|
| Loans receivable, net | | | | | | | | | | | | |
| Commercial | | 18,285 |
| | (1,347 | ) | | 16,938 |
| | 30,193 |
| | 2,389 |
| | 32,582 |
|
| Residential | | 25,860 |
| | 1,928 |
| | 27,788 |
| | 10,898 |
| | (325 | ) | | 10,573 |
|
| Home Equity | | 2,042 |
| | 822 |
| | 2,864 |
| | 1,805 |
| | 280 |
| | 2,085 |
|
| Other | | 14 |
| | 22 |
| | 36 |
| | 29 |
| | (1 | ) | | 28 |
|
| Loans receivable, net | | 46,201 |
| | 1,425 |
| | 47,626 |
| | 42,925 |
| | 2,343 |
| | 45,268 |
|
| Total interest-earning assets | | 51,907 |
| | 3,497 |
| | 55,404 |
| | 44,019 |
| | 3,543 |
| | 47,562 |
|
| Interest-bearing liabilities: | | | | | | | | | | | | |
| Interest-bearing checking | | 1,139 |
| | 1,280 |
| | 2,419 |
| | 523 |
| | 639 |
| | 1,162 |
|
| Money market | | 258 |
| | 97 |
| | 355 |
| | 408 |
| | 263 |
| | 671 |
|
| Savings | | 103 |
| | 51 |
| | 154 |
| | 52 |
| | 37 |
| | 89 |
|
| Time deposits | | 2,022 |
| | (131 | ) | | 1,891 |
| | 2,105 |
| | (811 | ) | | 1,294 |
|
| Total | | 3,522 |
| | 1,297 |
| | 4,819 |
| | 3,088 |
| | 128 |
| | 3,216 |
|
| Securities sold under agreements to repurchase | | (1 | ) | | 20 |
| | 19 |
| | (1 | ) | | — |
| | (1 | ) |
| FHLB Advances | | (140 | ) | | 155 |
| | 15 |
| | 214 |
| | 407 |
| | 621 |
|
| Other borrowings | | 1,036 |
| | 559 |
| | 1,595 |
| | 158 |
| | 135 |
| | 293 |
|
| Total interest-bearing liabilities | | 4,417 |
| | 2,031 |
| | 6,448 |
| | 3,459 |
| | 670 |
| | 4,129 |
|
| Net change in net interest income | | $ | 47,490 |
| | $ | 1,466 |
| | $ | 48,956 |
| | $ | 40,560 |
| | $ | 2,873 |
| | $ | 43,433 |
|
Comparison of Financial Condition at December 31, 20172020 and December 31, 20162019
Total assets increased by $249.1 million$3.20 billion to $5.416$11.45 billion at December 31, 2017,2020, from $5.167$8.25 billion at December 31, 2016.2019, 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 decreasedincreased by $191.8 million,$1.15 billion to $109.6$1.27 billion at December 31, 2020, from $120.5 million at December 31, 2017,2019, due to increased deposits, the Company’s decision to build liquidity during the economic downturn, the cash received from $301.4the 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 balanceincreased to $500.3 million at December 31, 2016, as these funds were deployed into higher-yielding securities2020, from $374.6 million at December 31, 2019 and core deposit intangibles increased to fund loan growth. Loans receivable, net,
$23.7 million, from $15.6 million. Other assets increased by $162.3$39.4 million to $3.966$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, 2017,2020, from $3.803$6.33 billion at December 31, 2016. Premises and equipment, net, increased by $30.4 million at December 31, 2017, as compared to December 31, 2016,2019, primarily due to the acquisitionacquired deposits from Two River and Country Bank of an office building in Red Bank, New Jersey for $42.5 million, partially offset by the consolidation$1.59 billion and organic deposit growth of 15 branches during the year ended December 31, 2017. The premises and equipment at these locations were written down to their net realizable value and the remaining balance was reclassified to assets held for sale. Deferred tax assets decreased by $37.0 million to $1.9 million at December 31, 2017, from $38.9 million at December 31, 2016, and other assets increased by $31.9 million to $41.9 million at December 31, 2017, from $10.0 million at December 31, 2016. In response to Tax Reform, the Company implemented certain tax strategies prior to year end which reduced the deferred tax asset and increased income taxes receivable.
Deposits increased by $155.0 million, to $4.343 billion at December 31, 2017, from $4.188 billion at December 31, 2016.$1.51 billion. The loan-to-deposit ratio at December 31, 20172020 was 91.3%82.3%, as compared to 90.8%98.2% at December 31, 2016. Deposits per branch averaged $94.42019. 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, 2017, as compared2019. The increase in other borrowings of $138.7 million, to $68.7$235.5 million at December 31, 2016.
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 $601.9 million$1.48 billion at December 31, 2017,2020, as compared to $571.9 million$1.15 billion at December 31, 2016. At December 31, 2017,2019. 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 1.8 million2,019,145 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 the Company’sits existing stock repurchase programs. Duringplan in February 2021. For the year ended December 31, 2017,2020, the Company did not repurchase anyrepurchased 648,851 shares under thesethe repurchase programs. Tangible stockholders’ equity per common share increased to $13.58program at December 31, 2017, as compared to $12.94 at December 31, 2016.a weighted average cost of $22.83.
Comparison of Operating Results for the Years Ended December 31, 20172020 and December 31, 20162019
General
Net income available to common stockholders for the year ended December 31, 20172020 was $42.5$61.2 million, or $1.28$1.02 per diluted share, as compared to net income of $23.0$88.6 million, or $0.98$1.75 per diluted share for the prior year. Net income for the year ended December 31, 2017 included2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch consolidation expenses, acceleration of stock awardand Two River and Country Bank opening credit loss expense due tounder the retirement of a director, and additional income tax expense related to the recently enacted Tax Reform.CECL model. These items decreased net income, net of tax, benefit, for the year ended December 31, 2017,2020 by $13.7$11.0 million. Net income for the year ended December 31, 20162019 included merger related expenses, of $11.8 million, net of tax benefit. Excluding these items, net income for the year ended December 31, 2017 increased over the prior year period primarilybranch consolidation expenses, non-recurring professional fees, compensation expense due to the acquisitionsretirement of Capean executive officer, and Ocean Shore (“Acquisition Transactions”). In addition, in the first quarter of 2017 the Company adopted Accounting Standards Update (“ASU”) 2016-09 “Compensation - Stock Compensation” which resulted in a decreasereduction in income tax expense forfrom the year ended December 31, 2017,revaluation of $1.8 million.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, 2017,2020, increased to $188.8$379.6 million, as compared to $133.4$308.8 million in the prior year. Average interest-earning assets increased $1.370$2.82 billion for the year ended December 31, 2017,2020, as compared to the prior year. The average for the year benefiting from theended 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 Acquisition Transactions.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 increaseddecreased to 3.91%3.84% for the year ended December 31, 2017,2020, as compared to 3.85%4.36% for the prior year. The asset yield benefited from the accretion of purchase accounting adjustments on the Acquisition Transactions (an additional 5 basis points of yield), and the higher interest rate environment at the end of 2017.
Interest Expense
Interest expense for the year ended December 31, 2017,2020, was $19.6$66.7 million, as compared to $13.2$52.8 million in the prior year, due to an increase in average-interest bearing liabilities of $1.068$2.07 billion, primarily related to the acquisitions of Two River and an increase in the average cost of interest-bearing liabilities of 3 basis points, to 0.50% forCountry Bank and organic deposit growth. For the year ended December 31, 2017, as compared2020, the cost of average interest-bearing liabilities decreased to 0.47%0.88% from 0.96% in the prior year. The total cost of deposits (including non-interest bearing deposits) was 0.29%0.55% for the year ended December 31, 2017,2020, as compared to 0.25%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.
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.
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, 20172019 increased to $169.2$256.0 million, as compared to $120.3$240.5 million infor the prior year, reflecting an increase in interest-earning assets and a higherassets. The net interest margin. Average interest-earning assets increased $1.370 billionmargin decreased to 3.62% for the year ended December 31, 2017, as compared to the prior year, and was favorably impacted by the interest-earning assets acquired in the Acquisition Transactions. The net interest margin increased to 3.50% for the year ended December 31, 2017,2019, from 3.47%3.71% for the prior year. NetThe decrease in net interest income benefited frommargin was primarily due to the accretion of purchase accounting adjustments of $8.3 million for the year ended December 31, 2017, as compared to $4.5 millionincrease in the prior year.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, 2017,2019, the provision for loan losses was $4.4$1.6 million, as compared to $2.6$3.5 million for the prior year. Net loan charge-offs were $3.9$1.4 million for the year ended December 31, 2017,2019, as compared to net loan charge-offs of $4.2$2.6 million in the prior year. Non-performing loans totaled $20.9$17.8 million at December 31, 2017,2019, as compared to $13.6$17.4 million at December 31, 2016. The increase is primarily attributable to one commercial loan relationship, which entered non-performing status in the fourth quarter of 2017. Subsequent to2018. At December 31, 2017, the Bank received a significant payment from this borrower. At both December 31, 2017 and 2016,2019, the Company’s allowance for loan losses was 0.40%0.27% of total loans.loans, as compared to 0.30% at December 31, 2018. These ratios exclude existing fair value credit marks of $17.5$30.3 million at December 31, 20172019 and $26.0$31.6 million at December 31, 20162018 on theloans acquired from Capital Bank, Sun, Ocean Shore, Cape, and Colonial American loans.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 75.35%94.4% at December 31, 2017,2019, as compared to 111.92%95.2% at December 31, 2016. The decrease was due to the addition of the one large loan relationship noted above with no related loss allocation included in the allowance for loan losses.2018.
Other Income
For the year ended December 31, 2017,2019, other income increased to $27.1$42.2 million, as comparedcompared to $20.4$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 Acquisition Transactions,Capital Bank acquisition, which added $6.1$1.5 million to other income for the year ended December 31, 2017. Excluding the impact of the Acquisition Transactions, the increase2019. These increases to other income were partially offset by decreases in other
income was primarily due to higher deposit fees and service charges of $1.3 million, and rental income of $460,000$810,000 received primarily for NovemberJanuary and December 2017February 2018 on the Company’s newly acquired corporate headquarters, partially offset by aexecutive office, and decrease of $912,000 in the net gain on sales of loans of $653,000, mostly related to the sale of loans available for sale (included in other income), as compared toone non-performing commercial loan relationship during the prior year.first quarter of 2018.
Operating Expenses
Operating expenses increased to $126.5$189.1 million for the year ended December 31, 2017,2019, as compared to $102.9$186.3 million in the prior year. Operating expenses for the year ended December 31, 2017 include $14.52019 included $22.8 million inof 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 as compared to $16.5 million in the prior year. Excluding the impact of merger andrelated expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the increaseretirement of an executive officer, the change in operating expenses over the prior year was primarily due to the Acquisition Transactions,Capital Bank acquisition, which added $16.0$6.3 million in expenses for the year ended December 31, 2017. Excluding the Acquisition Transactions, the2019. The remaining increase in operating expenseexpenses, 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 equipment expense, marketing expense,of $1.3 million, and data processing of $1.0 million, partially offset by decreases in FDIC expense of $1.6 million, and professional fees.occupancy of $1.1 million.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 20172019 was $22.9$18.8 million, as compared to $12.2$13.6 million for the prior year. The effective tax was 35.0%17.5% for the year ended December 31, 2017,2019, as compared to 34.5%15.9% for the prior year. DuringThe
2019 period included the fourth quarter of 2017, Tax Reform was enacted which reduced the statutory tax rate for corporations from 35% to 21% effectivereduction in 2018. Excluding non-deductible merger related expenses, the Company anticipates its effective tax rate to be approximately 19% in 2018. Authoritative accounting guidance required the Company to revalue its deferred tax assets and liabilities at December 31, 2017, resulting in additional income tax expense of $3.6$2.2 million which increasedfrom the effectiverevaluation of state deferred tax rate by 5.6% for the year ended December 31, 2017. Effective January 1, 2017, the Company adopted Accounting Standard Update (“ASU”) 2016-09 “Compensation - Stock Compensation,” which decreased income tax expense by $1.8 million for the year ended December 31, 2017, as compared to the prior year. Under the ASU, the tax benefits of exercised stock options and vested stock awards are recognizedassets as a benefit to income tax expenseresult of a change in the reporting period in which they occur. TheNew Jersey tax benefit relating to the Company’s stock plans was $62,000 for the year ended December 31, 2016, which was recorded directly into stockholders equity. The elevated tax benefit for the year ended December 31, 2017, was related to the exercise of options assumed in the Acquisition Transactions and the increase in the Company’s stock price.code. Excluding the impact of Tax Reform and ASU 2016-09, the effectiveNew Jersey tax rate was 32.2% forcode change, the year ended December 31, 2017. The lower effective tax rate for the year ended December 31, 2017, as compared to2019 was 19.6%. The lower effective tax rate in the same prior year period was primarily due to Tax Reform which required the deductibility of merger related expenses and an increaseCompany to revalue its deferred tax asset, resulting in tax exempt income.
Comparison of Operating Results for the Years Ended December 31, 2016 and December 31, 2015
General
Net income for the year ended December 31, 2016 was $23.0 million, or $0.98 per diluted share, as compared to net income of $20.3 million, or $1.21 per diluted share for the prior year. Net income for the years ended December 31, 2016 and 2015 includes merger related expenses, net ofa tax benefit of $11.8 million and $1.3 million, respectively. Additionally, net income for the year ended December 31, 2016, includes an FHLB Advance prepayment fee of $136,000 and a loss on the sale of investment securities available-for-sale of $12,000. Excluding these items, diluted earnings per share increased over the prior year due to higher net interest income and other income partially offset by increases in operating expenses, provision for loan losses, and average diluted shares outstanding.
Interest Income
Interest income for the year ended December 31, 2016, increased to $133.4 million, as compared to $85.9 million, in the prior year. Average interest-earning assets increased $1.116 billion for the year ended December 31, 2016, as compared to the prior year, benefiting from the interest-earning assets from the Acquisition Transactions of $900.7 million. The yield on average interest-earning assets increased to 3.85% for the year ended December 31, 2016, as compared to 3.66% for the prior year. The asset yield benefited from the accretion of purchase accounting adjustments on the Acquisition Transactions (an additional 10 basis points of yield), the higher-yielding interest-earning assets acquired from Cape, and the higher interest rate environment at the end of 2016.
Interest Expense
Interest expense for the year ended December 31, 2016, was $13.2 million, as compared to $9.0 million in the prior year, due to an increase in average-interest bearing liabilities of $932.0 million. The cost of average interest-bearing liabilities decreased to 0.47% for the year ended December 31, 2016, as compared to 0.48% in the prior year. The total cost of deposits (including non-interest bearing deposits) was 0.25% for the year ended December 31, 2016, as compared to 0.23% in the prior year.
Net Interest Income
Net interest income for the year ended December 31, 2016 increased to $120.3 million, as compared to $76.8 million in the prior year, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased $1.116 billion for the year ended December 31, 2016, as compared to the prior year. The net interest margin increased to 3.47% for the year ended December 31, 2016, from 3.28%, for the prior year. Net interest income benefited from the accretion of purchase accounting adjustments on the Acquisition Transactions of $4.5$1.9 million, for the year ended December 31, 2016, as compared to $317,000 in the prior year.
Provision for Loan Losses
For the year ended December 31, 2016, the provision for loan losses2018. The remaining variance was $2.6 million as compared to $1.3 million for the prior year. Net charge-offs increased to $4.2 million for the year ended December 31, 2016, as compared to net charge-offs of $870,000 in the prior year. The increase in net charge-offs for the year ended December 31, 2016, was primarily due to charge-offs of $2.1 million on the sale of under-performing loans , and to a lesser extent, charge-offs of $886,000 on two non-performing commercial loans. Excluding charge-offs attributable to the loan sales, net charge-offs for the year totaled $2.0 million. Non-performing loans totaled $13.6 million at December 31, 2016, as compared to $18.3 million at December 31, 2015. At December 31, 2016, the Company’s allowance for loan losses was 0.40% of total loans, a decreaselarger tax benefits from 0.84% at December 31, 2015. These ratios exclude existing fair value credit marks of $26.0 million at December 31, 2016 on the Colonial American, Cape and Ocean Shore loans and $2.2 million at December 31, 2015 on the Colonial American loans. 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 111.92% at December 31, 2016, as compared to 91.51% at December 31, 2015.
Other Income
For the year ended December 31, 2016, other income increased to $20.4 million, as compared to $16.4 millionemployee stock option exercises in the prior year an increase of $4.0 million. The increase from the prior year was primarily due to the impact of the Acquisition Transactions, which added $3.8 million to total other income for the year ended December 31, 2016. Excluding the impact of the Acquisition Transactions, other income increased by approximately $202,000 for the year ended December 31, 2016. For the year ended December 31, 2016, other income included losses of $342,000 attributable to the operations of a hotel, golf and banquet facility acquired as Other Real Estate Owned in the fourth quarter of 2015.period.
Operating Expenses
Operating expenses increased to $102.9 million for the year ended December 31, 2016, as compared to $60.8 million in the prior year. Operating expenses for the year ended December 31, 2016 include $16.5 million in merger related expenses, as compared to merger related expenses of $1.9 million in the prior year. Excluding merger related expenses, the increase in operating expenses over the prior year was primarily due to the Acquisition Transactions, which added operating expenses of $21.3 million; the investment in commercial lending which added expenses of $816,000; the addition of new branches (excluding those acquired in the Acquisition Transactions) which added expenses of $1.2 million; the amortization of the core deposit intangible which added expenses of $602,000; expenses associated with the Bank's re-branding effort of $363,000; and the FHLB advance prepayment fee of $136,000.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 2016 was $12.2 million, as compared to $10.9 million for the prior year. The effective tax was 34.5% for the year ended December 31, 2016, as compared to 34.9% for the prior year. The effective tax rate was impacted in both periods by non-deductible merger related expenses.
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.credit at multiple banks.
At December 31, 2017,2020, the Bank had $30.0 million ofno outstanding overnight borrowings from the FHLB, compared to no$270.0 million of outstanding overnight borrowings at December 31, 2016.2019. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB advances, including overnight borrowings, totaled $288.7$0 at December 31, 2020, a decrease from $519.3 million at December 31, 2017, an increase from $250.5 million at December 31, 2016.2019.
The Company’s cash needs for the year ended December 31, 20172020were 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 investmentdebt securities, deposit growth,increased deposits, increased borrowings and increased borrowings. 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 purchase of a new administrative office building. The Company’s cash needs for the year ended December 31, 2016 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and the sale of under-performing loans, proceeds from maturities and calls of investment securities, proceeds from sale of available-for-sale securities, deposit growth and the issuance of subordinated notes. The cash was primarily utilized for loan originations, the purchase of loans receivable, the purchase of securities and to reduce borrowings.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, 2017,2020, outstanding commitments to originate loans totaled $88.9 million;$367.8 million and outstanding unused lines of credit totaled $522.4 million,$1.04 billion, of which $315.4$668.1 million were commitments to commercial borrowers and $207.0$372.2 million were commitments to consumer/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 $308.2$973.4 million at December 31, 2017.2020. Based upon historical experience, management estimates thatis optimistic about its ability to retain a significant portion of such deposits will remain with the Bank.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 isare 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 program,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, 2017,2020, the Company did not repurchase shares of common stock, compared to the repurchase of 90,000repurchased 648,851 shares of common stock at a total cost of $1.9 million for$14.8 million. For the year ended December 31, 2016.2019, the Company repurchased 1.1 million shares of common stock at a total cost of $26.1 million. At December 31, 2017,2020, there were 1,754,8042.0 million shares available to be repurchased under the stock repurchase programs authorized in July of 2014 and April of 2017.programs.
Cash dividends on common stock declared and paid during the year ended December 31, 20172020 were $19.3$40.8 million, as compared to $12.6$34.2 million for the prior year. The increase in dividends was a result of the additional shares issued in the Acquisition Transactions.acquisitions of Two
River and Country Bank. On January 24, 2018,28, 2021, the Company’s Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15)$0.17 per common share. The dividend was payable on February 16, 201819, 2021 to common stockholders of record at the close of business on February 5, 2018.8, 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 the OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary, and the issuance of preferred and common stock, and debt. In September 2016, the Company issued $35.0 million in subordinated notes at an initial all-in cost of 5.45% and a stated maturity of September 30, 2026. For the year ended December 31, 2017,2020, the Company received dividend payments of $32.0$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, 2017,2020, OceanFirst Financial Corp. held $33.8$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, 2017,2020, the Company maintained tangible commonstockholders’ equity of $442.6$960.1 million for a tangible commonstockholders’ equity to tangible assets ratio of 8.42%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 toin 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, 20172020 and 2016,2019, the reserve for repurchased loans and loss sharing obligations amounted to $463,000$1.2 million and $846,000,$1.1 million, respectively.
The following table shows the contractual obligations of the Company by expected payment period as of December 31, 20172020 (in thousands). Refer to Note 17 Leases, to the Consolidated Financial Statements for lease obligations. Further discussion of these commitments is included in NotesNote 9 Borrowed Funds, and Note 13 Commitments, Contingencies, and Concentrations of Credit Risk, to the Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | |
| Contractual Obligation | | Total | | Less than
one year | | 1-3 years | | 3-5 years | | More than
5 years |
| Debt Obligations | | $ | 424,878 |
| | $ | 176,626 |
| | $ | 156,733 |
| | $ | 35,000 |
| | $ | 56,519 |
|
| Commitments to Originate Loans | | 88,938 |
| | 88,938 |
| | — |
| | — |
| | — |
|
| Commitments to Fund Unused Lines of Credit: | | | | | | | | | | |
| Commercial | | 315,400 |
| | 315,400 |
| | — |
| | — |
| | — |
|
| Consumer/Construction | | 207,006 |
| | 207,006 |
| | — |
| | — |
| | — |
|
| Operating Lease Obligations | | 16,236 |
| | 2,009 |
| | 3,958 |
| | 3,410 |
| | 6,859 |
|
| Purchase Obligations | | 15,414 |
| | 3,717 |
| | 7,316 |
| | 4,381 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual Obligation | | Total | | Less than
one year | | 1-3 years | | 3-5 years | | More than
5 years |
| Debt obligations | | $ | 363,925 | | | $ | 128,649 | | | $ | 425 | | | $ | 476 | | | $ | 234,375 | |
| Commitments to originate 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
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.
Operating leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes.
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 May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and subsequent related Updates modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The updates also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The Company will adopt the guidance in first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other United States Generally Accepted Accounting Principles (“U.S. GAAP”), the new revenue recognition standard does not have a material impact on the Company’s consolidated financial statements. The Company’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts. No material changes related to the timing or amount of revenue recognition have been identified.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective in developing this new ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more useful information. The update requires equity investments to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a quantitative assessment to identify impairment. The amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Financial assets and financial liabilities are to be presented separately by measurement category and the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with other deferred tax
assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements. The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Company has identified its leased real estate as within the scope of the guidance. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact of adoption on the Company’s consolidated financial statements, although total assets and total liabilities will increase by similar amounts. Further, to date, no guidance has been issued by either the Company’s or the Bank’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718).” The objective of the Update is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in this Update were effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2017 resulting in an equity reclassification of $11.1 million and an income statement benefit through a $1.8 million decrease in income tax expense.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”2016-13. This ASU significantly changeschanged how entities will measure credit losses for most financial assets and certain other instruments that aren’tare measured at fair value through net income.amortized cost. The standard will replace today’sreplaced the “incurred loss” approach with an “expected loss” model.model, which necessitates a forecast of lifetime losses. The new model, referred to as the current expected credit loss (“CECL”)CECL model, will applyapplies 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. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will needThe standard’s provisions are to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisionsbe 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 has begun its evaluationadopted 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 amended guidance includingcumulative effect of adopting ASC 326. The transition adjustment included a decrease in the potential impact on its consolidated financial statements. As a result of the required change in approach toward determining estimatedallowance for credit losses from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “lifeloans of loan” model), the Company expects that the new guidance will result in$475,000, an increase in the allowance for loancredit losses particularly for longer duration loan portfolios. The Company also expects thaton held to maturity debt securities of $1.3 million, and a decrease in the new guidance may result in an 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 securities. In both cases, the extentrestructured loans as of the change is not yet determined at this timedate of adoption. Upon adoption, the Company’s PCI loans were converted to PCD loans as it will be dependent upondefined 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 composition and credit quality at the adoption date,mix, delinquency level, or term as well as economicchanges in environmental conditions, andsuch 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 at that time. Further, to date, no guidance has been issued by eitherfor select variables.
Expected credit losses are estimated over the Company’s or the Bank’s primary regulator with respect to how the impactcontractual term of the amended standard is to be treatedloans, adjusted for regulatory purposes.expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” This ASU is intended to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. A retrospective transition method should be applied to each period presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for those issues would be applied prospectively as of the earliest date practicable. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” This ASU narrows the definition of a business and clarifies that, to be considered a business, the fair value of the gross assets acquired (or disposed of) may not be substantially all concentrated in a single identifiable asset or group of similar assets. In addition, in order to be considered a business, a set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for fiscal years beginning after December 15, 2017; early adoption is permitted on a limited basis. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
2017-04: In January 2017, the FASB issued ASU 2017-04, “IntangiblesIntangibles - 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; early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017.2019. The adoption of this update willdid not have a materialan impact on the Company’s consolidated financial statements.
ASU 2018-13: In March 2017,August 2018, the FASB issued ASU 2017-08, “Receivables2018-13, Fair Value Measurement (Topic 820) - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.”Changes to the Disclosure Requirements for Fair Value Measurement. This ASU requiresupdates the amortizationdisclosure requirements on Fair Value measurements by (1) removing: the disclosures for transfers between Level 1 and Level 2 of premiumsthe 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 the earliest call date on debt securities with call features that are explicit, noncontingent and callable at fixed prices and on preset dates. Thisdevelop Level 3 fair value measurements. ASU does not impact securities held as a discount, as the discount continues to be amortized to the contractual maturity. The guidance2018-13 is effective for fiscal years beginning after December 15, 2018,2019, with early adoption permitted includingto any removed or modified disclosures and delay adoption in an interim period. The amendments in this ASUof additional disclosures until the effective date. With the exception of the following, which should be applied on a modified retrospective basis through a cumulative-effect adjustment directlyprospectively, disclosures relating to retained earnings aschanges in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the beginning ofdisclosures for uncertainty measurement, all other changes should be applied retrospectively to all periods presented upon the period of adoption. effective date. The adoption of this update isdid not expected to have a materialan impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU was issued to address a narrow-scope financial reporting issue that arose as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”) on December 22, 2017. The objective of ASU 2018-02 is to address the tax effects of items within accumulated other comprehensive income (referred to as “stranded tax effects”) that do not reflect the appropriate tax rate enacted in the Tax Reform. As a result, the ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the newly enacted corporate income tax rate of 21 percent. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. The amendments in this ASU may be applied retrospectively to each period in which the effect of the change in the U.S. Federal corporate income tax rate in the Tax Reform is recognized. The Company has early adopted ASU 2018-02 for the year ended December 31, 2017, and has elected not to reclassify the income tax effects of the Tax Reform from accumulated other comprehensive loss to retained earnings. Refer to Note 10 Income Taxes15, Fair Value Measurements, for further details.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 mortgage-backed securities,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 periodically retainsmay retain fixed-rate mortgage loan production or purchasespurchase 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. For the past few years,During 2018 and 2019, the Bank has generally soldretained 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 mortgageresidential real estate loan originations in the secondary market. With the rise in market interest rates and the reduction in refinance volume, the Bank retained most of its 30 year fixed-rate loan originations in 2017 to replace anticipated repayments of the existing residential loan portfolio. 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.
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, 2017,2020, 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, 2017,2020, the Company’s one-year gap was positive 4.62%18.05%, as compared to negative 3.47%positive 4.31% at December 31, 2016.2019. 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, 2017,2020 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 10%6% and 20%26% annually. Mortgage-backed securities were projected to prepay at rates between 9%14% and 15%25% annually. Money market deposit accounts, savings accounts and interest-bearing checking
accounts are assumed to have average lives of 7.77.3 years, 6.16.3 years and 7.18.3 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.
| | | At December 31, 2017 | | 3 Months
or Less | | More than
3 Months
to 1 Year | | More than
1 Year to
3 Years | | More than
3 Years to
5 Years | | More than
5 Years | | Total | |
| At December 31, 2020 | | At December 31, 2020 | | 3 Months
or Less | | More than
3 Months
to 1 Year | | More than
1 Year to
3 Years | | More than
3 Years to
5 Years | | More than
5 Years | | Total |
| (dollars in thousands) | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | | | | |
Interest-earning assets (1): | | | | | | | | | | | | | Interest-earning assets (1): | |
| Interest-earning deposits and short-term investments | | $ | 75,239 |
| | $ | 1,714 |
| | $ | 1,724 |
| | $ | — |
| | $ | — |
| | $ | 78,677 |
| Interest-earning deposits and short-term investments | | $ | 1,022,405 | | | $ | 1,225 | | | $ | 2,219 | | | $ | — | | | $ | — | | | $ | 1,025,849 | |
| Investment securities | | 64,207 |
| | 40,696 |
| | 102,706 |
| | 53,696 |
| | 70,970 |
| | 332,275 |
| Investment securities | | 78,233 | | | 78,334 | | | 132,972 | | | 62,977 | | | 138,158 | | | 490,674 | |
| Mortgage-backed securities | | 38,856 |
| | 65,261 |
| | 146,960 |
| | 122,655 |
| | 157,378 |
| | 531,110 |
| Mortgage-backed securities | | 90,759 | | | 136,520 | | | 241,877 | | | 127,622 | | | 35,016 | | | 631,794 | |
| FHLB stock | | — |
| | — |
| | — |
| | — |
| | 19,724 |
| | 19,724 |
| |
Loans receivable (2) | | 588,281 |
| | 838,317 |
| | 1,245,770 |
| | 708,878 |
| | 595,109 |
| | 3,976,355 |
| |
| Equity investments | | Equity investments | | — | | | — | | | — | | | — | | | 107,079 | | | 107,079 | |
| Restricted equity investments | | Restricted equity investments | | — | | | — | | | — | | | — | | | 51,705 | | | 51,705 | |
Loans receivable, net (2) | | 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 | | 766,583 |
| | 945,988 |
| | 1,497,160 |
| | 885,229 |
| | 843,181 |
| | 4,938,141 |
| 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 liabilities: | | | | | | | | | | | | |
| Interest-bearing checking accounts | | 738,728 |
| | 102,476 |
| | 229,037 |
| | 178,246 |
| | 705,871 |
| | 1,954,358 |
| Interest-bearing checking accounts | | 1,446,820 | | | 154,681 | | | 399,057 | | | 331,147 | | | 1,315,161 | | | 3,646,866 | |
| Money market deposit accounts | | 11,247 |
| | 25,838 |
| | 59,988 |
| | 48,939 |
| | 217,644 |
| | 363,656 |
| Money market deposit accounts | | 73,252 | | | 53,129 | | | 124,264 | | | 101,738 | | | 431,138 | | | 783,521 | |
| Savings accounts | | 40,883 |
| | 57,694 |
| | 121,955 |
| | 95,518 |
| | 345,117 |
| | 661,167 |
| Savings accounts | | 157,779 | | | 106,840 | | | 278,829 | | | 227,246 | | | 720,557 | | | 1,491,251 | |
| Time deposits | | 107,238 |
| | 200,999 |
| | 177,557 |
| | 117,680 |
| | 3,630 |
| | 607,104 |
| Time deposits | | 406,053 | | | 567,373 | | | 328,800 | | | 61,459 | | | 9,098 | | | 1,372,783 | |
| FHLB advances | | 30,486 |
| | 66,472 |
| | 156,733 |
| | 35,000 |
| | — |
| | 288,691 |
| |
| | Securities sold under agreements to repurchase and other borrowings | | 102,168 |
| | — |
| | — |
| | 34,019 |
| | — |
| | 136,187 |
| Securities sold under agreements to repurchase and other borrowings | | 231,840 | | | 195 | | | 425 | | | 130,461 | | | 1,004 | | | 363,925 | |
| Total interest-bearing liabilities | | 1,030,750 |
| | 453,479 |
| | 745,270 |
| | 509,402 |
| | 1,272,262 |
| | 4,011,163 |
| Total interest-bearing liabilities | | 2,315,744 | | | 882,218 | | | 1,131,375 | | | 852,051 | | | 2,476,958 | | | 7,658,346 | |
Interest sensitivity gap (3) | | $ | (264,167 | ) | | $ | 492,509 |
| | $ | 751,890 |
| | $ | 375,827 |
| | $ | (429,081 | ) | | $ | 926,978 |
| Interest sensitivity gap (3) | | $ | 959,481 | | | $ | 865,249 | | | $ | 1,529,242 | | | $ | 459,438 | | | $ | (1,363,025) | | | $ | 2,450,385 | |
| Cumulative interest sensitivity gap | | $ | (264,167 | ) | | $ | 228,342 |
| | $ | 980,232 |
| | $ | 1,356,059 |
| | $ | 926,978 |
| | $ | 926,978 |
| 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 | | (5.35 | )% | | 4.62 | % | | 19.85 | % | | 27.46 | % | | 18.77 | % | | 18.77 | % | 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 loan losses, unamortized discounts and deferred loan fees. |
| |
(3) | Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities. |
(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.
The following table sets forth the Company’s EVE and net interest income projections as of December 31, 20172020 and 20162019 (dollars in thousands). For purposes of this table, the Company used prepayment and average life assumptions similar to those used in calculating the Company’s gap.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| (Rate Shock) | | Amount | | %
Change | | EVE
Ratio | | Amount | | %
Change | | Amount | | %
Change | | EVE
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) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
Change in
Interest Rates
in Basis Points | | Economic Value of Equity | | Net Interest Income | | Economic Value of Equity | | Net Interest Income |
| (Rate Shock) | | Amount | | %
Change | | EVE
Ratio | | Amount | | %
Change | | Amount | | %
Change | | EVE
Ratio | | Amount | | %
Change |
| 300 | | $ | 844,117 |
| | 5.0 | % | | 16.8 | % | | $ | 169,653 |
| | (2.3 | )% | | $ | 664,767 |
| | (1.1 | )% | | 14.1 | % | | $ | 156,689 |
| | (1.0 | )% |
| 200 | | 850,511 |
| | 5.8 |
| | 16.5 |
| | 171,758 |
| | (1.1 | ) | | 678,347 |
| | 1.0 |
| | 14.0 |
| | 158,078 |
| | (0.1 | ) |
| 100 | | 838,066 |
| | 4.3 |
| | 15.9 |
| | 173,119 |
| | (0.3 | ) | | 683,492 |
| | 1.7 |
| | 13.7 |
| | 158,840 |
| | 0.3 |
|
| Static | | 803,722 |
| | — |
| | 14.9 |
| | 173,590 |
| | — |
| | 671,878 |
| | — |
| | 13.2 |
| | 158,309 |
| | — |
|
| (100) | | 737,232 |
| | (8.3 | ) | | 13.3 |
| | 170,383 |
| | (1.8 | ) | | 620,675 |
| | (7.6 | ) | | 11.9 |
| | 152,007 |
| | (4.0 | ) |
Static case economic value of equity and net interest income increased over the prior year primarily due to the increased benefit of non-maturity deposits in a higher interest rate environment. ChangesThe change in interest rate sensitivity in a rising interest rate scenario at December 31, 2017,2020, as compared to December 31, 2016, are2019, was primarily due to the resultaddition of a reductionTwo River and Country Bank, the significant decline in interest rates during the interest rate sensitivity for non-maturity deposits partly offset by a decrease in interest-earning depositsperiod and anthe increase in fixed rate assets.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.
|
| | | | |
| Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders
OceanFirst Financial Corp.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiaries (the “Company”)Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017,2020, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that is material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans evaluated on a collective portfolio segment basis
As discussed in Note 1 in the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (ASC Topic 326), as of January 1, 2020. The total allowance for credit losses as of January 1, 2020 was $19.5 million, which included an allowance for credit losses on loans evaluated on a collective portfolio segment basis (January 1, 2020 collective ACL). As discussed in Note 5 to the consolidated financial statements, the Company’s total allowance for credit losses as of December 31, 2020 was $60.7 million, which included an allowance for credit losses on loans evaluated on a collective portfolio segment basis (December 31, 2020 collective ACL). The Company’s methodology to measure the collective ACL incorporates both quantitative and qualitative information to assess lifetime expected credit losses at the portfolio segment level. The quantitative component of the loss estimation process utilizes a model, which includes the calculation of loss rates using an open pool method. Under this quantitative model, the Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics. The Company segments the commercial loan portfolios by risk rating and the residential and consumer loan portfolios by delinquency. The historical loss rate is adjusted for the economic forecast of 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 a reasonable and supportable forecast period and then reverts to the historical loss rate on a straight-line basis. The adjusted loss rate is then applied to the exposure at default on an undiscounted basis. The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the quantitative component of the loss estimation process. Qualitative loss factor adjustments may increase or decrease the estimate of the expected credit losses. Qualitative loss factors are based on judgments of Company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, performance trends, regulatory changes, uncertainty in economic forecasts and other asset specific risk characteristics.
We identified the assessment of the January 1, 2020 and the December 31, 2020 collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the January 1, 2020 and December 31, 2020 collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the January 1, 2020 and December 31, 2020 collective ACL methodology, including the quantitative model used to estimate the (1) historical loss rates and the related significant assumptions, including portfolio segmentation, historical loan level loss experience, the reasonable and supportable forecast period, economic forecast of select macroeconomic variables, the reversion period and risk ratings for the commercial loan portfolios and (2) the qualitative loss factors, including the significant assumptions consisting of the adjustments made to account for the Company specific data, changes in underlying loan composition of specific portfolios, uncertainty of economic forecasts and other asset specific risk characteristics. The assessment also included an evaluation of the conceptual soundness and performance of the quantitative model utilized to produce the expected credit loss estimate. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimates, including controls over the:
•development of the collective ACL methodology, including the selection of the open pool loss-rate method
•identification and determination of the significant assumptions used in the quantitative model
•evaluation of risk ratings for commercial loans
•validation of the quantitative model to determine if it is fit for use and appropriate to estimate expected credit losses
•development of the qualitative loss factors, including the significant assumptions used in the measurement of the qualitative loss factors
•analysis of the allowance for credit losses results, trends and ratios.
We evaluated the Company’s process to develop the January 1, 2020 and the December 31, 2020 collective ACL estimates by testing certain sources of data, factors, and assumptions that Company used, and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating the judgments made by the Company relative to the development of the quantitative model by comparing it to relevant Company-specific metrics and the applicable industry and regulatory practices
•assessing the conceptual soundness and design of the quantitative model by inspecting the Company’s model validation documentation to determine whether the model is suitable for its intended use
•assessing the selected economic forecast of macroeconomic variables through comparison to publicly available forecasts
•evaluating the historical loan level loss experience, and the lengths of the reasonable and supportable forecast period and reversion period by comparing them to specific portfolio risk characteristics and trends, the Company’s business environment, and relevant industry practices
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
•testing individual credit risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment and any relevant guarantees or underlying collateral
•evaluating the methodology used to develop the qualitative loss factors and the effect those factors and their significant assumptions have on the collective ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the quantitative model.
We also assessed the sufficiency of the audit evidence obtained related to the January 1, 2020 and the December 31, 2020 collective ACL estimates by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices and potential bias in developing the accounting estimates.
We have served as the Company’s auditor since 1989.
/s/ KPMG LLP
Short Hills, New Jersey
February 28, 2018March 1, 2021
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders
OceanFirst Financial Corp.:
Opinion on Internal Control Over Financial Reporting
We have audited OceanFirst Financial Corp. and subsidiaries’ (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2020, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 28, 2018March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Short Hills, New Jersey
February 28, 2018March 1, 2021
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Financial Condition
(dollars in thousands, except per share amounts)
| | | | | December 31, 2017 | | December 31, 2016 | | December 31, 2020 | | December 31, 2019 |
| Assets | | | | | Assets | | | | |
| Cash and due from banks | | $ | 109,613 |
| | $ | 301,373 |
| Cash and due from banks | | $ | 1,272,134 | | | $ | 120,544 | |
| Securities available-for-sale (encumbered $22,086 at December 31, 2017 and $12,192 at December 31, 2016) | | 90,281 |
| | 20,775 |
| |
| Securities held-to-maturity, net (estimated fair value of $761,660 at December 31, 2017 and $589,568 at December 31, 2016) (encumbered $447,276 at December 31, 2017 and $492,147 at December 31, 2016) | | 764,062 |
| | 589,912 |
| |
| Federal Home Loan Bank of New York stock, at cost | | 19,724 |
| | 19,313 |
| |
| Loans receivable, net | | 3,965,773 |
| | 3,803,443 |
| |
| Mortgage loans held-for-sale | | 241 |
| | 1,551 |
| |
| Debt securities available-for-sale, at estimated fair value (encumbered $5,339 at December 31, 2020 and $21,646 at December 31, 2019) | | Debt securities available-for-sale, at estimated fair value (encumbered $5,339 at December 31, 2020 and $21,646 at December 31, 2019) | | 183,302 | | | 150,960 | |
| Debt securities held-to-maturity, net of allowance for credit losses of $1,715 at December 31, 2020 (estimated fair value of $968,466 at December 31, 2020 and $777,290 at December 31, 2019) (encumbered $418,719 at December 31, 2020 and $452,212 at December 31, 2019) | | Debt securities held-to-maturity, net of allowance for credit losses of $1,715 at December 31, 2020 (estimated fair value of $968,466 at December 31, 2020 and $777,290 at December 31, 2019) (encumbered $418,719 at December 31, 2020 and $452,212 at December 31, 2019) | | 937,253 | | | 768,873 | |
| Equity investments, at estimated fair value | | Equity investments, at estimated fair value | | 107,079 | | | 10,136 | |
| Restricted equity investments, at cost | | Restricted equity investments, at cost | | 51,705 | | | 62,356 | |
| Loans receivable, net of allowance for credit losses of $60,735 at December 31, 2020 and $16,852 at December 31, 2019 | | Loans receivable, net of allowance for credit losses of $60,735 at December 31, 2020 and $16,852 at December 31, 2019 | | 7,704,857 | | | 6,207,680 | |
| Loans held-for-sale | | Loans held-for-sale | | 45,524 | | | 0 | |
| Interest and dividends receivable | | 14,254 |
| | 11,989 |
| Interest and dividends receivable | | 35,269 | | | 21,674 | |
| Other real estate owned | | 8,186 |
| | 9,803 |
| Other real estate owned | | 106 | | | 264 | |
| Premises and equipment, net | | 101,776 |
| | 71,385 |
| Premises and equipment, net | | 107,094 | | | 102,691 | |
| Bank Owned Life Insurance | | 134,847 |
| | 132,172 |
| |
| Deferred tax asset | | 1,922 |
| | 38,880 |
| |
| | Bank owned life insurance | | Bank owned life insurance | | 265,253 | | | 237,411 | |
| | Assets held for sale | | 4,046 |
| | 360 |
| Assets held for sale | | 5,782 | | | 3,785 | |
| Goodwill | | Goodwill | | 500,319 | | | 374,632 | |
| Core deposit intangible | | Core deposit intangible | | 23,668 | | | 15,607 | |
| Other assets | | 41,895 |
| | 9,973 |
| Other assets | | 208,968 | | | 169,532 | |
| Core deposit intangible | | 8,885 |
| | 10,924 |
| |
| Goodwill | | 150,501 |
| | 145,064 |
| |
| Total assets | | $ | 5,416,006 |
| | $ | 5,166,917 |
| Total assets | | $ | 11,448,313 | | | $ | 8,246,145 | |
| Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | | | | |
| Deposits | | $ | 4,342,798 |
| | $ | 4,187,750 |
| Deposits | | $ | 9,427,616 | | | $ | 6,328,777 | |
| Federal Home Loan Bank advances | | 288,691 |
| | 250,498 |
| |
| Federal Home Loan Bank ("FHLB") advances | | Federal Home Loan Bank ("FHLB") advances | | 0 | | | 519,260 | |
| Securities sold under agreements to repurchase with retail customers | | 79,668 |
| | 69,935 |
| Securities sold under agreements to repurchase with retail customers | | 128,454 | | | 71,739 | |
| Other borrowings | | 56,519 |
| | 56,559 |
| Other borrowings | | 235,471 | | | 96,801 | |
| Advances by borrowers for taxes and insurance | | 11,156 |
| | 14,030 |
| Advances by borrowers for taxes and insurance | | 17,296 | | | 13,884 | |
| Other liabilities | | 35,233 |
| | 16,242 |
| Other liabilities | | 155,346 | | | 62,565 | |
| Total liabilities | | 4,814,065 |
| | 4,595,014 |
| Total liabilities | | 9,964,183 | | | 7,093,026 | |
| Stockholders’ equity: | | | | | Stockholders’ equity: | | | | |
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000
shares authorized, no shares issued | | — |
| | — |
| |
| Common stock, $.01 par value, 55,000,000 shares authorized, 33,566,772 shares issued and 32,596,893 and 32,136,892 shares outstanding at December 31, 2017 and December 31, 2016, respectively | | 336 |
| | 336 |
| |
Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, 57,370 shares issued at December 31, 2020 and 0 shares issued at December 31, 2019 | | Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, 57,370 shares issued at December 31, 2020 and 0 shares issued at December 31, 2019 | | 1 | | | 0 | |
| Common stock, $0.01 par value, 150,000,000 shares authorized, 61,040,894 shares issued and 60,392,043 and 50,405,048 shares outstanding at December 31, 2020 and December 31, 2019, respectively | | Common stock, $0.01 par value, 150,000,000 shares authorized, 61,040,894 shares issued and 60,392,043 and 50,405,048 shares outstanding at December 31, 2020 and December 31, 2019, respectively | | 609 | | | 519 | |
| Additional paid-in capital | | 354,377 |
| | 364,433 |
| Additional paid-in capital | | 1,137,715 | | | 840,691 | |
| Retained earnings | | 271,023 |
| | 238,192 |
| Retained earnings | | 378,268 | | | 358,668 | |
| Accumulated other comprehensive loss | | (5,349 | ) | | (5,749 | ) | |
| Less: Unallocated common stock held by Employee Stock Ownership Plan | | (2,479 | ) | | (2,761 | ) | |
| Treasury stock, 969,879 and 1,429,880 shares at December 31, 2017 and December 31, 2016, respectively | | (15,967 | ) | | (22,548 | ) | |
| Common stock acquired by Deferred Compensation Plan | | (84 | ) | | (313 | ) | |
| Deferred Compensation Plan Liability | | 84 |
| | 313 |
| |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | | 621 | | | (1,208) | |
| Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") | | Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") | | (7,433) | | | (8,648) | |
| Treasury stock, 648,851 and 1,586,808 shares at December 31, 2020 and December 31, 2019, respectively | | Treasury stock, 648,851 and 1,586,808 shares at December 31, 2020 and December 31, 2019, respectively | | (25,651) | | | (36,903) | |
| | Total stockholders’ equity | | 601,941 |
| | 571,903 |
| Total stockholders’ equity | | 1,484,130 | | | 1,153,119 | |
| Total liabilities and stockholders’ equity | | $ | 5,416,006 |
| | $ | 5,166,917 |
| Total liabilities and stockholders’ equity | | $ | 11,448,313 | | | $ | 8,246,145 | |
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Income
(in thousands, except per share amount)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Interest income: | | | | | | |
| Loans | | $ | 349,221 | | | $ | 279,931 | | | $ | 249,549 | |
| Mortgage-backed securities | | 14,037 | | | 15,300 | | | 16,034 | |
| Debt securities, equity investments and other | | 16,350 | | | 13,563 | | | 11,071 | |
| Total interest income | | 379,608 | | | 308,794 | | | 276,654 | |
| Interest expense: | | | | | | |
| Deposits | | 48,290 | | | 38,432 | | | 22,578 | |
| Borrowed funds | | 18,367 | | | 14,391 | | | 13,574 | |
| Total interest expense | | 66,657 | | | 52,823 | | | 36,152 | |
| Net interest income | | 312,951 | | | 255,971 | | | 240,502 | |
| Credit loss expense | | 59,404 | | | 1,636 | | | 3,490 | |
| Net interest income after credit loss expense | | 253,547 | | | 254,335 | | | 237,012 | |
| Other income: | | | | | | |
| Bankcard services revenue | | 11,417 | | | 10,263 | | | 9,228 | |
| Trust and asset management revenue | | 2,052 | | | 2,102 | | | 2,245 | |
| Fees and service charges | | 15,808 | | | 18,500 | | | 19,461 | |
| | | | | | |
| | | | | | |
| Net gain on sales of loans | | 8,278 | | | 16 | | | 668 | |
| Net gain (loss) on equity investments | | 21,214 | | | 267 | | | (199) | |
| Net gain (loss) from other real estate operations | | 35 | | | (330) | | | (3,812) | |
| Income from bank owned life insurance | | 6,424 | | | 5,420 | | | 5,105 | |
| Commercial loan swap income | | 8,080 | | | 5,285 | | | 669 | |
| Other | | 618 | | | 642 | | | 1,462 | |
| Total other income | | 73,926 | | | 42,165 | | | 34,827 | |
| Operating expenses: | | | | | | |
| Compensation and employee benefits | | 114,155 | | | 89,912 | | | 83,135 | |
| Occupancy | | 20,782 | | | 17,159 | | | 17,915 | |
| Equipment | | 7,769 | | | 7,719 | | | 8,319 | |
| Marketing | | 3,117 | | | 3,469 | | | 3,415 | |
| Federal deposit insurance and regulatory assessments | | 4,871 | | | 2,227 | | | 3,713 | |
| Data processing | | 17,467 | | | 14,814 | | | 13,286 | |
| Check card processing | | 5,458 | | | 5,956 | | | 4,209 | |
| Professional fees | | 12,247 | | | 9,338 | | | 4,963 | |
| Other operating expense | | 16,552 | | | 14,968 | | | 13,509 | |
| Amortization of core deposit intangible | | 6,186 | | | 4,027 | | | 3,811 | |
| FHLB advance prepayment fees | | 14,257 | | | — | | | 0 | |
| Branch consolidation expenses | | 7,623 | | | 9,050 | | | 3,151 | |
| Merger related expenses | | 15,947 | | | 10,503 | | | 26,911 | |
| Total operating expenses | | 246,431 | | | 189,142 | | | 186,337 | |
| Income before provision for income taxes | | 81,042 | | | 107,358 | | | 85,502 | |
| Provision for income taxes | | 17,733 | | | 18,784 | | | 13,570 | |
| Net income | | 63,309 | | | 88,574 | | | 71,932 | |
| Dividends on preferred shares | | 2,097 | | | 0 | | | 0 | |
| Net income available to common stockholders | | $ | 61,212 | | | $ | 88,574 | | | $ | 71,932 | |
| Basic earnings per share | | $ | 1.02 | | | $ | 1.77 | | | $ | 1.54 | |
| Diluted earnings per share | | $ | 1.02 | | | $ | 1.75 | | | $ | 1.51 | |
| Average basic shares outstanding | | 59,919 | | | 50,166 | | | 46,773 | |
| Average diluted shares outstanding | | 60,072 | | | 50,746 | | | 47,657 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Interest income: | | | | | | |
| Loans | | $ | 170,588 |
| | $ | 122,962 |
| | $ | 77,694 |
|
| Mortgage-backed securities | | 11,108 |
| | 6,697 |
| | 6,051 |
|
| Investment securities and other | | 7,133 |
| | 3,766 |
| | 2,118 |
|
| Total interest income | | 188,829 |
| | 133,425 |
| | 85,863 |
|
| Interest expense: | | | | | | |
| Deposits | | 12,336 |
| | 7,517 |
| | 4,301 |
|
| Borrowed funds | | 7,275 |
| | 5,646 |
| | 4,733 |
|
| Total interest expense | | 19,611 |
| | 13,163 |
| | 9,034 |
|
| Net interest income | | 169,218 |
| | 120,262 |
| | 76,829 |
|
| Provision for loan losses | | 4,445 |
| | 2,623 |
| | 1,275 |
|
| Net interest income after provision for loan losses | | 164,773 |
| | 117,639 |
| | 75,554 |
|
| Other income: | | | | | | |
| Bankcard services revenue | | 6,965 |
| | 4,833 |
| | 3,537 |
|
| Wealth management revenue | | 2,150 |
| | 2,324 |
| | 2,187 |
|
| Fees and service charges | | 15,058 |
| | 10,758 |
| | 8,392 |
|
| Net loss from other real estate operations | | (874 | ) | | (856 | ) | | (149 | ) |
| Income from Bank Owned Life Insurance | | 3,299 |
| | 2,230 |
| | 1,501 |
|
| Other | | 474 |
| | 1,123 |
| | 958 |
|
| Total other income | | 27,072 |
| | 20,412 |
| | 16,426 |
|
| Operating expenses: | | | | | | |
| Compensation and employee benefits | | 60,100 |
| | 47,105 |
| | 31,946 |
|
| Occupancy | | 10,657 |
| | 8,332 |
| | 5,722 |
|
| Equipment | | 6,769 |
| | 5,104 |
| | 3,725 |
|
| Marketing | | 2,678 |
| | 1,882 |
| | 1,516 |
|
| Federal deposit insurance | | 2,564 |
| | 2,825 |
| | 2,072 |
|
| Data processing | | 8,849 |
| | 7,577 |
| | 4,731 |
|
| Check card processing | | 3,561 |
| | 2,210 |
| | 1,815 |
|
| Professional fees | | 3,995 |
| | 2,848 |
| | 1,865 |
|
| Other operating expense | | 10,810 |
| | 7,676 |
| | 5,484 |
|
| Amortization of core deposit intangible | | 2,039 |
| | 623 |
| | 21 |
|
| Federal Home Loan Bank advance prepayment fee | | — |
| | 136 |
| | — |
|
| Branch consolidation expenses | | 6,205 |
| | — |
| | — |
|
| Merger related expenses | | 8,293 |
| | 16,534 |
| | 1,878 |
|
| Total operating expenses | | 126,520 |
| | 102,852 |
| | 60,775 |
|
| Income before provision for income taxes | | 65,325 |
| | 35,199 |
| | 31,205 |
|
| Provision for income taxes | | 22,855 |
| | 12,153 |
| | 10,883 |
|
| Net income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
|
| Basic earnings per share | | $ | 1.32 |
| | $ | 1.00 |
| | $ | 1.22 |
|
| Diluted earnings per share | | $ | 1.28 |
| | $ | 0.98 |
| | $ | 1.21 |
|
| Average basic shares outstanding | | 32,113 |
| | 23,093 |
| | 16,600 |
|
| Average diluted shares outstanding | | 33,125 |
| | 23,526 |
| | 16,811 |
|
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Net income | | $ | 63,309 | | | $ | 88,574 | | | $ | 71,932 | |
| Other comprehensive income: | | | | | | |
| Unrealized gain (loss) on debt securities (net of tax expense of $411 and $470 in 2020 and 2019, respectively, and net of tax benefit of $33 in 2018) | | 1,039 | | | 1,655 | | | (162) | |
| Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $310, $404 and $1,186 in 2020, 2019, and 2018, respectively) | | 446 | | | 587 | | | 1,719 | |
| Reclassification adjustment for gains included in net income (net of tax expense of $101 and $53 in 2020 and 2018, respectively) | | 344 | | | 0 | | | 195 | |
| Total other comprehensive income | | 1,829 | | | 2,242 | | | 1,752 | |
| Total comprehensive income | | 65,138 | | | 90,816 | | | 73,684 | |
| Less: Dividends on preferred shares | | 2,097 | | | 0 | | | 0 | |
| Total comprehensive income available to common stockholders | | $ | 63,041 | | | $ | 90,816 | | | $ | 73,684 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
|
| Other comprehensive income: | | | | | | |
| Unrealized (loss) gain on securities (net of tax benefit of $204 in 2017, tax benefit of $221 in 2016, and tax expense of $38 in 2015) | | (295 | ) | | (321 | ) | | 55 |
|
| Reclassification adjustment for losses included in net income (net of tax benefit of $5 in 2016) | | — |
| | 7 |
| | — |
|
| Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $480, $556 and $562 in 2017, 2016 and 2015, respectively) | | 695 |
| | 806 |
| | 813 |
|
| Total other comprehensive income | | 400 |
| | 492 |
| | 868 |
|
| Total comprehensive income | | $ | 42,870 |
| | $ | 23,538 |
| | $ | 21,190 |
|
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands, except per share amounts)
For the Year Ended December 31, 2017, 20162020, 2019 and 20152018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred
Stock | Common
Stock | Additional
Paid-In
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
(Loss) Gain | Employee
Stock
Ownership
Plan | Treasury
Stock | | | Total |
| Balance at December 31, 2017 | $ | 0 | | $ | 336 | | $ | 354,377 | | $ | 271,023 | | $ | (5,349) | | $ | (2,479) | | $ | (15,967) | | | | $ | 601,941 | |
| Net income | — | | — | | — | | 71,932 | | — | | — | | — | | | | 71,932 | |
Other comprehensive income, net
of tax | — | | — | | — | | — | | 1,752 | | — | | — | | | | 1,752 | |
| Stock awards | — | | 2 | | 3,036 | | — | | — | | — | | — | | | | 3,038 | |
Effect of adopting Accounting
Standards Update (“ASU”)
No. 2016-01 | — | | — | | — | | (147) | | 147 | | — | | — | | | | 0 | |
Acquisition of common
stock by ESOP | — | | — | | — | | — | | — | | (8,400) | | | | | (8,400) | |
| | | | | | | | | | |
| Allocation of ESOP stock | — | | — | | 596 | | — | | — | | 1,022 | | — | | | | 1,618 | |
| Cash dividend – $0.62 per share | — | | — | | — | | (29,564) | | — | | — | | — | | | | (29,564) | |
| Exercise of stock options | — | | 4 | | 13,306 | | (8,188) | | — | | — | | 202 | | | | 5,324 | |
| Acquisition of Sun Bancorp Inc. | — | | 141 | | 386,648 | | — | | — | | — | | 15,765 | | | | 402,554 | |
| | | | | | | | | | |
Purchase 459,251 shares of common stock | — | | — | | — | | — | | — | | — | | (10,837) | | | | (10,837) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Balance at December 31, 2018 | 0 | | 483 | | 757,963 | | 305,056 | | (3,450) | | (9,857) | | (10,837) | | | | 1,039,358 | |
| Net income | — | | — | | — | | 88,574 | | — | | — | | — | | | | 88,574 | |
Other comprehensive income, net
of tax | — | | — | | — | | — | | 2,242 | | — | | — | | | | 2,242 | |
| Stock awards | — | | 2 | | 3,859 | | — | | — | | — | | — | | | | 3,861 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Allocation of ESOP stock | — | | — | | 366 | | — | | — | | 1,209 | | — | | | | 1,575 | |
| Cash dividend – $0.68 per share | — | | — | | — | | (34,241) | | — | | — | | — | | | | (34,241) | |
| Exercise of stock options | — | | 2 | | 2,054 | | (721) | | — | | — | | 0 | | | | 1,335 | |
| Acquisition of Capital Bank of New Jersey | — | | 32 | | 76,449 | | — | | — | | — | | 0 | | | | 76,481 | |
| | | | | | | | | | |
Purchase 1,127,557 shares of common stock | — | | — | | — | | — | | — | | — | | (26,066) | | | | (26,066) | |
| Balance at December 31, 2019 | 0 | | 519 | | 840,691 | | 358,668 | | (1,208) | | (8,648) | | (36,903) | | | | 1,153,119 | |
| Net income | — | | — | | — | | 63,309 | | — | | — | | — | | | | 63,309 | |
Other comprehensive income, net
of tax | — | | — | | — | | — | | 1,829 | | — | | — | | | | 1,829 | |
| Stock awards | — | | 2 | | 4,256 | | — | | — | | — | | — | | | | 4,258 | |
Effect of adopting ASU
No. 2016-13 | — | | — | | — | | (4) | | — | | — | | — | | | | (4) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Allocation of ESOP stock | — | | — | | (80) | | — | | — | | 1,215 | | — | | | | 1,135 | |
| Cash dividend – $0.68 per share | — | | — | | — | | (40,820) | | — | | — | | — | | | | (40,820) | |
| Exercise of stock options | — | | 2 | | 2,027 | | (788) | | — | | — | | 0 | | | | 1,241 | |
| | | | | | | | | | |
| | | | | | | | | | |
Purchase 648,851 shares of common stock | — | | — | | — | | — | | — | | — | | (14,814) | | | | (14,814) | |
| Proceeds from preferred stock issuance, net of costs | 1 | | — | | 55,528 | | | — | | — | | — | | | | 55,529 | |
| Preferred stock dividend | — | | — | | — | | (2,097) | | — | | — | | — | | | | (2,097) | |
| Acquisition of Two River Bancorp | — | | 42 | | 122,501 | | — | | — | | — | | 26,066 | | | | 148,609 | |
| Acquisition of Country Bank Holding Company | — | | 44 | | 112,792 | | — | | — | | — | | | | | 112,836 | |
| Balance at December 31, 2020 | $ | 1 | | $ | 609 | | $ | 1,137,715 | | $ | 378,268 | | $ | 621 | | $ | (7,433) | | $ | (25,651) | | | | $ | 1,484,130 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Stock | Common
Stock | Additional
Paid-In
Capital | Retained
Earnings | Accumulated
Other
Comprehensive
(Loss) Gain | Employee
Stock
Ownership
Plan | Treasury
Stock | Common Stock
Acquired by
Deferred
Compensation
Plan | Deferred
Compensation
Plan Liability | Total |
| Balance at December 31, 2014 | $ | — |
| $ | 336 |
| $ | 265,260 |
| $ | 217,714 |
| $ | (7,109 | ) | $ | (3,330 | ) | $ | (254,612 | ) | $ | (304 | ) | $ | 304 |
| $ | 218,259 |
|
| Net income | — |
| — |
| — |
| 20,322 |
| — |
| — |
| — |
| — |
| — |
| 20,322 |
|
Other comprehensive income, net
of tax | — |
| — |
| — |
| — |
| 868 |
| — |
| — |
| — |
| — |
| 868 |
|
| Stock awards | — |
| — |
| 1,300 |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,300 |
|
| Tax benefit of stock plans | — |
| — |
| 32 |
| — |
| — |
| — |
| — |
| — |
| — |
| 32 |
|
Treasury stock allocated to
restricted stock plan | — |
| — |
| 1,214 |
| (144 | ) | — |
| — |
| (1,070 | ) | — |
| — |
| — |
|
Issued 660,098 treasury shares to
finance acquisition | — |
| — |
| 1,633 |
| — |
| — |
| — |
| 10,185 |
| — |
| — |
| 11,818 |
|
Purchased 373,594 shares of
common stock | — |
| — |
| — |
| — |
| — |
| — |
| (6,459 | ) | — |
| — |
| (6,459 | ) |
| Allocation of ESOP stock | — |
| — |
| 318 |
| — |
| — |
| 285 |
| — |
| — |
| — |
| 603 |
|
| Cash dividend – $0.52 per share | — |
| — |
| — |
| (8,693 | ) | — |
| — |
| — |
| — |
| — |
| (8,693 | ) |
| Exercise of stock options | — |
| — |
| — |
| (59 | ) | — |
| — |
| 455 |
| — |
| — |
| 396 |
|
Purchase of stock for the deferred
compensation plan, net | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (10 | ) | 10 |
| — |
|
| Balance at December 31, 2015 | — |
| 336 |
| 269,757 |
| 229,140 |
| (6,241 | ) | (3,045 | ) | (251,501 | ) | (314 | ) | 314 |
| 238,446 |
|
| Net income | — |
| — |
| — |
| 23,046 |
| — |
| — |
| — |
| — |
| — |
| 23,046 |
|
Other comprehensive income, net
of tax | — |
| — |
| — |
| — |
| 492 |
| — |
| — |
| — |
| — |
| 492 |
|
| Stock awards | — |
| — |
| 1,505 |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,505 |
|
| Tax benefit of stock plans | — |
| — |
| 62 |
| — |
| — |
| — |
| — |
| — |
| — |
| 62 |
|
Treasury stock allocated
to restricted stock plan | — |
| — |
| 1,046 |
| (101 | ) | — |
| — |
| (945 | ) | — |
| — |
| — |
|
Purchase 90,000 shares of
common stock | — |
| — |
| — |
| — |
| — |
| — |
| (1,878 | ) | — |
| — |
| (1,878 | ) |
| Allocation of ESOP stock | — |
| — |
| 373 |
| — |
| — |
| 284 |
| — |
| — |
| — |
| 657 |
|
| Cash dividend – $0.54 per share | — |
| — |
| — |
| (12,616 | ) | — |
| — |
| — |
| — |
| — |
| (12,616 | ) |
| Exercise of stock options | — |
| — |
| — |
| (1,277 | ) | — |
| — |
| 5,266 |
| — |
| — |
| 3,989 |
|
Sale of stock for the deferred
compensation plan, net | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
| (1 | ) | — |
|
Issued 14,547,452 treasury shares to finance acquisitions | — |
| — |
| 91,690 |
| — |
| — |
| — |
| 226,510 |
| — |
| — |
| 318,200 |
|
| Balance at December 31, 2016 | — |
| 336 |
| 364,433 |
| 238,192 |
| (5,749 | ) | (2,761 | ) | (22,548 | ) | (313 | ) | 313 |
| 571,903 |
|
| Net income | — |
| — |
| — |
| 42,470 |
| — |
| — |
| — |
| — |
| — |
| 42,470 |
|
Other comprehensive income, net
of tax | — |
| — |
| — |
| — |
| 400 |
| — |
| — |
| — |
| — |
| 400 |
|
| Stock awards | — |
| — |
| 2,181 |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,181 |
|
Effect of adopting Accounting Standards Update (“ASU”) No. 2016-09 | — |
| — |
| (11,129 | ) | 11,129 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Treasury stock allocated
to restricted stock plan | — |
| — |
| (1,745 | ) | 822 |
| — |
| — |
| 923 |
| — |
| — |
| — |
|
| Allocation of ESOP stock | — |
| — |
| 637 |
| — |
| — |
| 282 |
| — |
| — |
| — |
| 919 |
|
| Cash dividend – $0.60 per share | — |
| — |
| — |
| (19,286 | ) | — |
| — |
| — |
| — |
| — |
| (19,286 | ) |
| Exercise of stock options | — |
| — |
| — |
| (2,304 | ) | — |
| — |
| 5,658 |
| — |
| — |
| 3,354 |
|
Sale of stock for the deferred
compensation plan, net | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 229 |
| (229 | ) | — |
|
| Balance at December 31, 2017 | $ | — |
| $ | 336 |
| $ | 354,377 |
| $ | 271,023 |
| $ | (5,349 | ) | $ | (2,479 | ) | $ | (15,967 | ) | $ | (84 | ) | $ | 84 |
| $ | 601,941 |
|
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 63,309 | | | $ | 88,574 | | | $ | 71,932 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization of premises and equipment | | 8,453 | | | 8,363 | | | 8,706 | |
| Allocation of ESOP stock | | 1,135 | | | 1,575 | | | 1,618 | |
| Stock awards | | 4,258 | | | 3,861 | | | 3,038 | |
| | | | | | |
| Net excess tax expense (benefit) on stock compensation | | 123 | | | (357) | | | (722) | |
| Amortization of core deposit intangible | | 6,186 | | | 4,027 | | | 3,811 | |
| Net accretion of purchase accounting adjustments | | (21,557) | | | (14,094) | | | (16,733) | |
| Amortization of servicing asset | | 93 | | | 42 | | | 98 | |
| Net premium amortization in excess of discount accretion on securities | | 2,997 | | | 3,232 | | | 3,893 | |
| Net amortization of deferred costs on borrowings | | 553 | | | 216 | | | 262 | |
| Net amortization of deferred costs and discounts on loans | | 4,872 | | | 1,584 | | | 669 | |
| Credit loss expense | | 59,404 | | | 1,636 | | | 3,490 | |
| Deferred tax (benefit) provision | | (4,615) | | | 16,053 | | | (4,568) | |
| Net loss on sale and write-down of other real estate owned | | (390) | | | 20 | | | 2,359 | |
| Net write-down of fixed assets held-for-sale to net realizable value | | 3,853 | | | 7,532 | | | 4,024 | |
| Net gain on sale of fixed assets | | (6) | | | (27) | | | (26) | |
| Net (gain) loss on equity securities | | (21,214) | | | (267) | | | 199 | |
| Net gain on sales of loans | | (8,278) | | | (16) | | | (668) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Proceeds from sales of mortgage loans held for sale | | 171,263 | | | 1,023 | | | 2,794 | |
| Mortgage loans originated for sale | | (213,428) | | | (1,007) | | | (2,498) | |
| Increase in value of bank owned life insurance | | (6,424) | | | (5,420) | | | (5,105) | |
| Net (gain) loss on sale of assets held for sale | | (21) | | | 17 | | | (1,245) | |
| (Increase) decrease in interest and dividends receivable | | (9,434) | | | (397) | | | 186 | |
| Decrease (increase) in other assets | | 17,030 | | | (32,871) | | | 27,301 | |
| Increase (decrease) in other liabilities | | 74,494 | | | 16,948 | | | (10,264) | |
| Total adjustments | | 69,347 | | | 11,673 | | | 20,619 | |
| Net cash provided by operating activities | | 132,656 | | | 100,247 | | | 92,551 | |
| Cash flows from investing activities: | | | | | | |
| Net (increase) decrease in loans receivable | | (428,444) | | | (215,881) | | | 103,889 | |
| Purchases of loans receivable | | 0 | | | (101,674) | | | (199,580) | |
| Proceeds from sale of loans | | 449,462 | | | 5,901 | | | 10,412 | |
| Purchase of debt investment securities available-for-sale | | (77,519) | | | (60,158) | | | (33,040) | |
| Purchase of debt investment securities held-to-maturity | | (28,796) | | | (4,381) | | | (6,486) | |
| Purchase of debt mortgage-backed securities held-to-maturity | | (195,277) | | | 0 | | | — | |
| Purchase of equity investments | | (96,519) | | | (214) | | | (191) | |
| Proceeds from sale of equity investments | | 16,978 | | | 0 | | | 0 | |
| Proceeds from maturities and calls of debt investment securities available-for-sale | | 43,503 | | | 29,299 | | | 18,501 | |
| Proceeds from maturities and calls of debt investment securities held-to-maturity | | 53,959 | | | 43,256 | | | 52,543 | |
| Proceeds from sales of debt mortgage backed securities held-to-maturity | | 12,450 | | | 0 | | | 0 | |
| Proceeds from sales of debt investment securities available-for-sale | | 10,598 | | | 0 | | | 0 | |
| Principal repayments on debt mortgage-backed securities available-for-sale | | 306 | | | 503 | | | 655 | |
| Principal repayments on debt investment securities held-to-maturity | | 857 | | | 0 | | | 0 | |
| Principal repayments on debt mortgage-backed securities held-to-maturity | | 185,830 | | | 123,833 | | | 119,125 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization of premises and equipment | | 6,303 |
| | 4,786 |
| | 3,335 |
|
| Allocation of ESOP stock | | 919 |
| | 657 |
| | 603 |
|
| Stock awards | | 2,181 |
| | 1,505 |
| | 1,300 |
|
| Tax benefit of stock plans | | — |
| | 62 |
| | 32 |
|
| Net excess tax benefit on stock compensation | | (1,823 | ) | | — |
| | — |
|
| Amortization of core deposit intangible | | 2,039 |
| | 623 |
| | 21 |
|
| Net accretion of purchase accounting adjustments | | (8,216 | ) | | (4,505 | ) | | (317 | ) |
| Amortization of servicing asset | | 85 |
| | 157 |
| | 245 |
|
| Net premium amortization in excess of discount accretion on securities | | 3,216 |
| | 1,656 |
| | 1,991 |
|
| Net amortization of deferred costs and discounts on borrowings | | 74 |
| | — |
| | — |
|
| Net amortization (accretion) of deferred fees and discounts on loans | | 509 |
| | (274 | ) | | 55 |
|
| Provision for loan losses | | 4,445 |
| | 2,623 |
| | 1,275 |
|
| Deferred tax provision | | 35,440 |
| | 5,798 |
| | 1,441 |
|
| Net loss (gain) on sales of other real estate owned | | 1,119 |
| | 138 |
| | (269 | ) |
| Write down of fixed assets held for sale to net realizable value | | 6,084 |
| | — |
| | — |
|
| Net loss on sales of fixed assets | | 150 |
| | 38 |
| | — |
|
| Net gain on sales of loans | | (100 | ) | | (986 | ) | | (822 | ) |
| Net loss on sales of investment securities available for sale | | — |
| | 12 |
| | — |
|
| Proceeds from sale of mortgage servicing rights | | — |
| | — |
| | 192 |
|
| Net gain on sale of loan servicing | | — |
| | — |
| | (111 | ) |
| Proceeds from sales of mortgage loans held-for-sale | | 5,282 |
| | 50,075 |
| | 49,436 |
|
| Mortgage loans originated for sale | | (3,872 | ) | | (47,943 | ) | | (47,110 | ) |
| Increase in value of Bank Owned Life Insurance | | (3,299 | ) | | (2,230 | ) | | (1,501 | ) |
| (Increase) decrease in interest and dividends receivable | | (2,265 | ) | | (200 | ) | | 68 |
|
| (Increase) decrease in other assets | | (5,375 | ) | | 18,612 |
| | 1,670 |
|
| Decrease in other liabilities | | (5,235 | ) | | (20,226 | ) | | (3,525 | ) |
| Total adjustments | | 37,661 |
| | 10,378 |
| | 8,009 |
|
| Net cash provided by operating activities | | 80,131 |
| | 33,424 |
| | 28,331 |
|
| Cash flows from investing activities: | | | | | | |
| Net (increase) decrease in loans receivable | | (138,271 | ) | | 106,371 |
| | (146,416 | ) |
| Purchases of loans receivable | | (37,337 | ) | | (37,561 | ) | | (22,054 | ) |
| Proceeds from sale of under-performing loans | | 11,186 |
| | 29,647 |
| | — |
|
| Proceeds from sales of investment securities available-for-sale | | — |
| | 41,853 |
| | — |
|
| Purchases of investment securities available-for-sale | | (69,987 | ) | | (10,021 | ) | | (9,972 | ) |
| Purchases of investment securities held-to-maturity | | (125,324 | ) | | (6,006 | ) | | (16,349 | ) |
| Purchases of mortgage-backed securities held-to-maturity | | (165,501 | ) | | (59,590 | ) | | (10,312 | ) |
| Proceeds from maturities and calls of investment securities available-for-sale | | — |
| | 18,506 |
| | — |
|
| Proceeds from maturities and calls of investment securities held-to-maturity | | 18,233 |
| | 53,964 |
| | 46,292 |
|
| Proceeds from maturities and calls of mortgage backed securities held-to-maturity | | — |
| | 6,394 |
| | — |
|
| Principal repayments on mortgage-backed securities held-to-maturity | | 96,383 |
| | 73,470 |
| | 61,081 |
|
| Proceeds from Bank Owned Life Insurance | | 624 |
| | 310 |
| | — |
|
| Proceeds from the redemption of Federal Home Loan Bank of New York stock | | 19,738 |
| | 32,168 |
| | 38,663 |
|
| Purchases of Federal Home Loan Bank of New York stock | | (20,149 | ) | | (23,571 | ) | | (39,157 | ) |
| Net proceeds from sales of other real estate owned | | 3,880 |
| | 3,744 |
| | 3,342 |
|
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Cash flows from investing activities (continued): | | | | | | |
| Proceeds from bank owned life insurance | | 1,022 | | | 870 | | | 2,708 | |
| Proceeds from the redemption of restricted equity investments | | 78,190 | | | 122,535 | | | 106,807 | |
| Purchases of restricted equity investments | | (59,525) | | | (127,794) | | | (127,048) | |
| Proceeds from sales of other real estate owned | | 855 | | | 2,060 | | | 5,438 | |
| Proceeds from sales of assets held for sale | | 1,169 | | | 2,353 | | | 10,050 | |
| Purchases of premises and equipment | | (14,728) | | | (5,075) | | | (11,487) | |
| Cash held in escrow for acquisitions | | 0 | | | (46,950) | | | — | |
| Cash consideration received (paid) for acquisition, net of cash received | | 23,460 | | | 59,395 | | | (3,743) | |
| Net cash (used in) provided by investing activities | | (22,169) | | | (172,122) | | | 48,553 | |
| Cash flows from financing activities: | | | | | | |
| Increase (decrease) in deposits | | 1,507,943 | | | 65,687 | | | (143,025) | |
| (Decrease) increase in short-term borrowings | | (226,018) | | | 105,979 | | | 126,092 | |
| Proceeds from Federal Home Loan Bank advances | | 525,000 | | | 80,000 | | | 0 | |
| Repayments of Federal Home Loan Bank advances | | (840,200) | | | (106,618) | | | (67,155) | |
| Net proceeds from issuance of subordinated notes | | 122,180 | | | 0 | | | 0 | |
| Proceeds from Federal Reserve Bank Term advances | | 53,778 | | | 0 | | | 0 | |
| Repayments from Federal Reserve Bank Term advances | | (53,778) | | | 0 | | | 0 | |
| Repayments of other borrowings | | (8,109) | | | (263) | | | (439) | |
| (Decrease) increase in advances by borrowers for taxes and insurance | | (2,803) | | | (182) | | | 2,910 | |
| Exercise of stock options | | 1,241 | | | 1,335 | | | 5,324 | |
| Payment of employee taxes withheld from stock awards | | (2,084) | | | (2,858) | | | (3,295) | |
| Purchase of treasury stock | | (14,814) | | | (26,066) | | | (10,837) | |
| Net proceeds from the issuance of preferred stock | | 55,529 | | | 0 | | | 0 | |
| Acquisition of common stock by ESOP | | 0 | | | 0 | | | (8,400) | |
| Dividends paid | | (42,917) | | | (34,241) | | | (29,564) | |
| Net cash provided by (used in) financing activities | | 1,074,948 | | | 82,773 | | | (128,389) | |
| Net increase in cash and due from banks and restricted cash | | 1,185,435 | | | 10,898 | | | 12,715 | |
| Cash and due from banks and restricted cash at beginning of year | | 133,226 | | | 122,328 | | | 109,613 | |
| Cash and due from banks and restricted cash at end of year | | $ | 1,318,661 | | | $ | 133,226 | | | $ | 122,328 | |
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash and due from banks at beginning of year | | $ | 120,544 | | | $ | 120,792 | | | $ | 109,613 | |
| Restricted cash at beginning of year | | 12,682 | | | 1,536 | | | 0 | |
| Cash and due from banks and restricted cash at beginning of year | | $ | 133,226 | | | $ | 122,328 | | | $ | 109,613 | |
| Cash and due from banks at end of year | | $ | 1,272,134 | | | $ | 120,544 | | | $ | 120,792 | |
| Restricted cash at end of year | | 46,527 | | | 12,682 | | | 1,536 | |
| Cash and due from banks and restricted cash at end of year | | $ | 1,318,661 | | | $ | 133,226 | | | $ | 122,328 | |
| Cash paid during the year for: | | | | | | |
| Interest | | $ | 66,454 | | | $ | 52,315 | | | $ | 36,447 | |
| Income taxes | | 5,742 | | | 20,006 | | | 2,317 | |
| Non-cash activities: | | | | | | |
| Accretion of unrealized loss on securities reclassified to held-to-maturity | | 756 | | | 991 | | | 2,905 | |
| Net loan charge-offs | | 18,859 | | | 1,361 | | | 2,634 | |
| Transfer of premises and equipment to assets held-for-sale | | 3,953 | | | 2,189 | | | 11,092 | |
| Transfer of loans receivable to other real estate owned | | 106 | | | 963 | | | 992 | |
| Transfer of loans receivable to loans held for sale | | 444,543 | | | 0 | | | 0 | |
| Unsettled trades of debt investment securities available-for-sale | | (1,404) | | | 0 | | | 0 | |
| Unsettled trades of debt investment securities held-to-maturity | | (3,000) | | | 0 | | | 0 | |
| Unsettled trades of equity securities | | 8,142 | | | 0 | | | 0 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash flows from investing activities (continued): | | | | | | |
| Purchases of premises and equipment | | (48,698 | ) | | (6,670 | ) | | (3,891 | ) |
| Cash acquired, net of cash paid for branch acquisition | | — |
| | 16,727 |
| | — |
|
| Cash acquired, net of cash consideration paid for acquisitions | | — |
| | 31,965 |
| | 3,703 |
|
| Net cash (used in) provided by investing activities | | (455,223 | ) | | 271,700 |
| | (95,070 | ) |
| Cash flows from financing activities: | | | | | | |
| Increase in deposits | | 155,849 |
| | 131,308 |
| | 73,284 |
|
| Increase (decrease) in short-term borrowings | | 39,733 |
| | (175,137 | ) | | (27,740 | ) |
| Proceeds from Federal Home Loan Bank advances | | 10,000 |
| | 55,161 |
| | 55,000 |
|
| Repayments of Federal Home Loan Bank advances | | (1,922 | ) | | (74,153 | ) | | (6,853 | ) |
| Net proceeds from issuance of subordinated notes | | — |
| | 33,898 |
| | — |
|
| Repayments of other borrowings | | — |
| | (10,000 | ) | | (5,000 | ) |
| (Decrease) increase in advances by borrowers for taxes and insurance | | (2,874 | ) | | 2,286 |
| | 798 |
|
| Exercise of stock options | | 3,354 |
| | 3,989 |
| | 396 |
|
| Payment of employee taxes withheld from stock awards | | (1,522 | ) | | (555 | ) | | (165 | ) |
| Purchase of treasury stock | | — |
| | (1,878 | ) | | (6,459 | ) |
| Dividends paid | | (19,286 | ) | | (12,616 | ) | | (8,693 | ) |
| Net cash provided by (used in) financing activities | | 183,332 |
| | (47,697 | ) | | 74,568 |
|
| Net (decrease) increase in cash and due from banks | | (191,760 | ) | | 257,427 |
| | 7,829 |
|
| Cash and due from banks at beginning of year | | 301,373 |
| | 43,946 |
| | 36,117 |
|
| Cash and due from banks at end of year | | $ | 109,613 |
| | $ | 301,373 |
| | $ | 43,946 |
|
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid during the year for: | | | | | | |
| Interest | | $ | 20,219 |
| | $ | 13,201 |
| | $ | 8,928 |
|
| Income taxes | | 6,008 |
| | 10,912 |
| | 10,562 |
|
| Non-cash investing activities: | | | | | | |
| Accretion of unrealized loss on securities reclassified to held-to-maturity | | 1,145 |
| | 1,406 |
| | 1,375 |
|
| Loans charged-off, net | | 3,907 |
| | 4,162 |
| | 870 |
|
| Transfer of premises and equipment to assets held-for-sale | | 5,729 |
| | — |
| | — |
|
| Transfer of loans receivable to other real estate owned | | 3,726 |
| | 1,833 |
| | 6,979 |
|
| Acquisition: | | | | | | |
| Non-cash assets acquired: | | | | | | |
| Securities | | $ | — |
| | $ | 305,139 |
| | $ | 6,758 |
|
| Federal Home Loan Bank of New York stock | | — |
| | 7,932 |
| | 314 |
|
| Loans | | — |
| | 1,929,986 |
| | 121,466 |
|
| Premises & equipment | | — |
| | 41,067 |
| | — |
|
| Other real estate owned | | — |
| | 2,727 |
| | 257 |
|
| Deferred tax asset | | — |
| | 21,878 |
| | 3,227 |
|
| Other assets | | — |
| | 97,140 |
| | 8,279 |
|
| Goodwill and other intangible assets, net | | — |
| | 159,649 |
| | 2,099 |
|
| Total non-cash assets acquired | | $ | — |
| | $ | 2,565,518 |
| | $ | 142,400 |
|
| Liabilities assumed: | | | | | | |
| Deposits | | $ | — |
| | $ | 2,123,440 |
| | $ | 123,346 |
|
| Federal Home Loan Bank advances | | — |
| | 128,160 |
| | 6,800 |
|
| Other liabilities | | — |
| | 27,679 |
| | 309 |
|
| Total liabilities assumed | | $ | — |
| | $ | 2,279,279 |
| | $ | 130,455 |
|
| Total consideration for acquisition | | $ | — |
| | $ | 286,239 |
| | $ | 11,945 |
|
Consolidated Statements of Cash Flows (Continued)
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Supplemental disclosure of cash flow information (continued): | | | | | | |
| Acquisition: | | | | | | |
| Non-cash assets acquired: | | | | | | |
| Securities | | $ | 208,880 | | | $ | 103,775 | | | $ | 254,522 | |
| Restricted equity investments | | 5,334 | | | 313 | | | 16,967 | |
| Loans | | 1,558,480 | | | 307,778 | | | 1,517,345 | |
| Premises and equipment | | 9,744 | | | 3,389 | | | 19,892 | |
| | | | | | |
| Accrued interest receivable | | 4,161 | | | 1,390 | | | 5,621 | |
| Bank owned life insurance | | 22,440 | | | 10,460 | | | 85,238 | |
| Deferred tax asset | | 41 | | | 3,967 | | | 57,574 | |
| Other assets | | 10,073 | | | 1,278 | | | 6,343 | |
| Goodwill and other intangible assets, net | | 139,501 | | | 38,875 | | | 199,838 | |
| Total non-cash assets acquired | | $ | 1,958,654 | | | $ | 471,225 | | | $ | 2,163,340 | |
| Liabilities assumed: | | | | | | |
| Deposits | | $ | 1,594,403 | | | $ | 449,018 | | | $ | 1,616,073 | |
| Borrowings | | 92,618 | | | 0 | | | 127,727 | |
| Other liabilities | | 33,648 | | | 5,121 | | | 13,242 | |
| Total liabilities assumed | | $ | 1,720,669 | | | $ | 454,139 | | | $ | 1,757,042 | |
| | | | | | |
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1:1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiaries, OceanFirst Bank N.A. (the “Bank”) and OceanFirst Risk Management, Inc., and the Bank’s wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., and its wholly-owned subsidiary OceanFirst Management Corp., and its wholly-owned subsidiary OceanFirst Realty Corp., OceanFirst Services, LLC and its wholly-owned subsidiary OFB Reinsurance, Ltd., 975 Holdings, LLC, Hooper Holdings, LLC., TRREO Holdings LLC, Casaba Real Estate Holdings Corporation, CBNJ Investments Corp., Country Property Holdings, Inc., and Cohensey Bridge, L.L.C..TRCB Investment Corp. Certain other subsidiaries were dissolved in 2020 and are included in the consolidated financial statements for previous periods. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts previously reported have been reclassified to conform to the current year’s presentation.
Business
The Bank provides a range of community banking services to customers through a network of branches and offices in centralthroughout New Jersey and southernthe metropolitan areas of Philadelphia and New Jersey.York City. The Bank is subject to competition from other financial institutions; itinstitutions and certain technology companies. It is also subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.principles (“GAAP”). The preparation of the accompanying consolidated financial statements, in conformity with these accounting principles, requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the evaluation of securities and goodwill for other-than-temporary impairment.credit losses. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes, including in the economic environment, will be reflected in the financial statements in future periods.
Immaterial Correction of an Error
During the fourth quarter of 2017, management identified an immaterial correction of an error related to the classification of a mutual fund with no stated maturity that was acquired in a previous business combinationCash and was inappropriately classified as held to maturity in the 2016 consolidated financial statements. In order to correct this immaterial error, management has revised the 2016 consolidated financial statements and footnotes to report these securities as available-for-sale.
Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash items in the process of collection and interest-bearing deposits in other financial institutions and loans of Federal funds.institutions. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Securities
Securities include debt securities held-to-maturity (“HTM”), and debt and equity securities available-for-sale. available-for-sale (“AFS”). Debt securities include U.S. government and agency obligations, state and municipal obligations, corporate debt securities, collateralized loan obligations, and mortgage-backed securities which are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”), or Small Business Administration (“SBA”) and collateralized mortgage obligations (“CMOs”).
Management determines the appropriate classification at the time of purchase. If management has the positive intent not to sell and the Company would not be required to sell prior to maturity, the securities are classified as held-to-maturityHTM debt securities. Such securities are stated at amortized cost. During 2013, the Company transferred $536.0 million of previously designated available-for-sale securities to held-to-maturity designation at estimated fair value. The Company has the ability and intent to hold these securities as an investment until maturity or call. The securities transferred had an unrealized loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive income, net of subsequent amortization, which is being recognized over the remaining life of the securities. Securities in the available-for-saleAFS category are securities which the Company may sell prior to maturity as part of its asset/liability management strategy. Such securities are carried at estimated fair value and unrealized gains and losses, net of related tax effect, are excluded from earnings, but are included as a separate component of stockholders’ equity and as part of comprehensive income. Discounts and premiums on securities are accreted or amortized using the level-yield method over the estimated lives of the
securities, including the effect of prepayments. Gains or losses on the sale of such securities are included in other income using the specific identification method.
Other-Than-Temporary Impairment on
During 2013, the Company transferred $536.0 million of previously designated AFS debt securities to HTM designation at estimated fair value. The Company has the ability and intent to hold these securities as an investment until maturity or call. The securities transferred had an unrealized loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive income, net of subsequent amortization, which is being recognized over the remaining life of the securities.
Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
Credit Losses for Available-for-Sale Debt Securities
OneAs of January 1, 2020, the Company adopted ASC 326-30, Available-for-Sale Debt Securities. The adoption retained the fundamental nature of other-than-temporary impairment (“OTTI”) – that entities recognize credit losses only once securities become impaired. An AFS debt security is considered impaired when amounts are deemed uncollectible or when the company intends, or more likely than not will be required to sell, the AFS debt security before recovery of the significant estimates related to securities is the evaluation for other-than-temporary impairment. amortized cost basis.
If a determination is made that aan AFS debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will be recognized as a credit loss expense through an other-than-temporary impairment chargeallowance for credit losses. The credit loss expense will be limited to the difference between the security’s amortized cost basis and fair value and any future changes may be reversed, limited to the amount previously expensed, in non-interest income as a component of gain (loss) on securities, net.the period they occur. The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
The evaluation of securities for impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the estimated fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.
On a quarterly basis the Company evaluates the AFS debt securities portfolio for other-than-temporary impairment. Securities that are in an unrealized loss position are reviewed to determine if an other-than-temporary impairment is presenta credit loss exists based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether a decline in value is other-than-temporaryan impairment exists include: (a) the length of time and extent to which the estimated fair value has beenis less than cost orthe amortized cost and the expected recovery period of the security,basis, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments and (d) whether the Company intends to sell the security and whether it is more likely than not that the Company will not be required to sell the security.
Loans Receivable
Loans receivable, other than loans held-for-sale, are stated at unpaid principal balance, plus unamortized premiums less unearned discounts, net of deferred loan origination and commitment fees and costs, and the associated allowance for loancredit losses.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the specifically identified loans, adjusted for actual prepayments. For each loan class, a loan is considered past due when a payment has not been received in accordance with the contractual terms. Loans which are more than 90 days past due, including impaired loans, and other loans in the process of foreclosure are placed on non-accrual status. Interest income previously accrued on these loans, but not yet received, is reversed in the current period. Any interest subsequently collected is credited to income in the period of recovery only after the full principal balance has been brought current.current and has returned to accrual status. A loan is returned to accrual status when all amounts due have been received, payments remain current for a period of six months and the remaining principal balance isand interest are deemed collectible.
Loans are charged-off in the period the loans, or portion thereof, are deemed uncollectible. The Company will record a loan charge-off to reduce a loan to the estimated fair value of the underlying collateral, less cost to sell, if it is determined that it is probable that recovery will come primarily from the sale of the collateral.
Prior to the adoption of ASU 2016-13, the Company defined an impaired loan as non-accrual commercial real estate, multi-family, land, construction and commercial and industrial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. A loan is considered impaired when it is deemed probable that the Company will not collect all amounts due according to the contractual terms of the loan agreement. The Company has defined the population of impaired loans to be all non-accrual commercial real estate, multi-family, land, construction and commercial and industrial loans in excess of $250,000. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio, except when they are modified in a troubletroubled debt restructuring.
Loan losses are charged-off in the period the loans, or portion, thereof are deemed uncollectible, generally after the loan becomes 120 days delinquent. The Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less cost to sell, if it is determined that it is probable that recovery will come primarily from the sale of the collateral.
Purchased credit-impaired (“PCI”) loans are acquired at a discount that is due, in part, to credit quality. PCI loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Interest income on loans acquired at a discount is based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow.
The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield”, is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).
The Bank periodically evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. For the pools with better than expected cash flows, the forecasted increase is recorded as an additional accretable yield that is recognized as a prospective increase to interest income on loans.
Loans Held for Sale
The Company may sell part of its mortgage loan originations in order to manage interest rate risk and liquidity. Prior to 2017, the Bank had generally sold fixed-rate mortgage loans with final maturities in excess of 15 years. However, with few exceptions, since the beginning of 2017, the Bank generally retains newly originated mortgage loans in its portfolio.
In determining whether to retain mortgages, management considers the Company’s overall interest rate risk position, the volume of such loans, the loan yield and the types and amount of funding sources. The Company may also retain mortgage loan production in order to improve yields and increase balance sheet leverage.
In addition, management periodically considers the sale of commercial and other loans as part of its management of credit risk.
Loans held for sale are carried at the lower of unpaid principal balance, net, or estimated fair value on an aggregate basis. Estimated fair value is generally determined based on bid quotations from securities dealers.
Allowance for Credit Losses (“ACL”)
Under the Current Expected Credit Loss (“CECL”) model, the allowance for credit losses on financial assets is a valuation allowance estimated at each balance sheet date in accordance with 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 Coronavirus Disease 2019 (“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 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 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 will assess 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.
Troubled Debt Restructured (“TDR”) 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 Coronavirus Aid, Relief, and Economic Security (“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 purchased with credit deterioration (“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.
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.
Allowance for Loan Losses (Prior to January 1, 2020)
The allowance for loan losses is(currently referred to as ACL on loans) represented a valuation account that reflectsreflected probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses iswas based on management’s evaluation of the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, current economic and regulatory conditions, as well as organizational changes. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged-off. The allowance is reduced by loan charge-offs. The allowance for loan losses iswas maintained at an amount management considersconsidered sufficient to provide for probable losses.
Acquired loans are marked to fair value on the date of acquisition and are evaluated on a quarterly basis to ensure the necessary purchase accounting updates are made in parallel with the allowance for loan loss calculation. Acquired loans that have been renewed since acquisition are included in the allowance for loan loss calculation since these loans have been underwritten to the Bank’s guidelines.
Acquired loans that have not been renewed since acquisition, or that havehad a PCI mark, arewere excluded from the allowance for loan loss calculation. The Bank calculatescalculated a general valuation allowance for these excluded acquired loans without a PCI mark and comparescompared that to the remaining general credit and interest rate marks. To the extent the remaining general credit and interest rate marks exceedexceeded the calculated general valuation allowance, no additional reserve iswas required. If the calculated general valuation allowance exceedsexceeded the remaining general credit and interest rate marks, the Bank would recordrecorded an adjustment to the extent necessary.
The Bank’s allowance for loan losses includesincluded specific allowances and a general allowance, each updated on a quarterly basis. A specific allowance iswas determined for all impaired loans (excluding PCI loans). The Bank definesdefined an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans (currently segmented as commercial real estate and commercial and industrial loans) in excess of $250,000.$250,000 for which it was probable, based on current information, that the Company would not collect all amounts due under the contractual terms of the loan agreement. Impaired loans also includeincluded all loans modified as troubled debt restructurings.TDRs. For collateral dependent loans, the specific allowance representsrepresented the difference between the Bank’s recorded investment in the loan, net of any interim charge-offs, and the estimated fair value of the collateral, less estimated selling costs. Impairment for all other impaired loans iswas calculated usingbased on a combination of the estimated fair value of non-real estate collateral, personal guarantees, or the present value of the expected future cash flows.
If a loan becomes 90 days delinquent, the Bank obtains an updated collateral appraisal. For residential real estate loans, the appraisal is updated annually if the loan remains delinquent for an extended period. For non-accrual commercial real estate loans, the Bank assesses whether there has likely been an adverse change in the collateral value supporting the loan. The Bank utilizes information based on its knowledge of changes in real estate conditions in its lending area to identify whether a possible deterioration of collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated
commercial real estate appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received.
A general allowance iswas determined for all loans that arewere not individually evaluated for impairment (excluding acquired loans that have not been renewed under the Bank’s underwriting criteria). In determining the level of the general allowance, the Bank segmentssegmented the loan portfolio into the following loan segments: residential real estate; consumer; investor-owned commercial real estate; owner-occupied commercial real estate; and commercial and industrial.
portfolio segments. The portfolio segments arewere further segmented by delinquency status andor risk rating (Pass, Special Mention, Substandard and Doubtful).rating. An estimated loss factor iswas then applied to eachthe outstanding principal loan balance of the delinquency status andor risk rating category.category for each portfolio segment. To determine the loss factor, the Bank utilizesutilized historical loss experience as a percent of the outstanding loan principal balance adjusted for certain qualitative factors and the loss emergence period.
The Bank’s historical loss experience iswas based on a rolling 24-month36-month look-back period for each portfolio segment. The look-back period was selected based on (1) management’s judgment that this period capturescaptured sufficient loss events (in both dollar terms and number of individual events) to be relevant; and (2) that the Bank’s underwriting criteria and risk characteristics have remained relatively stable throughout this period.
The historical loss experience iswas adjusted for certain qualitative factors including, but not limited to, (1) delinquency trends, (2) net charge-off trends, (3) nature and volume of the loan portfolio, (4) loan policies and underwriting standards, (5) experience and ability of lending personnel, (6) concentrations of credit, (7) loan review system, and external factors such as (8) changes in current economic conditions, (9) local competition and (10) regulation. Economic factors that the Bank considered in its estimate of the allowance for loan losses include:included: local and regional trends in economic growth, unemployment and real estate values. The Bank considersconsidered the applicability of each of these qualitative factors in estimating the general allowance for each portfolio segment. Each quarter, the Bank considersconsidered the current conditions for each of the qualitative factors, as well as a forward lookingforward-looking view on trends and events, to support an assessment unique to each portfolio segment.
The Bank calculatescalculated and analyzesanalyzed the loss emergence period on an annual basis or more frequently if conditions warrant.warranted. The Bank’s methodology iswas to use loss events in the past eight12 quarters to determine the loss emergence period for each loan segment. The loss emergence period iswas specific to each loan segment. It representsportfolio segment and represented the amount of time that has elapsed between (1) the occurrence of a loss event, which resulted in a potential loss and (2) the confirmation of the potential loss, when the Bank recordsrecorded an initial charge-off or downgrades the risk-rating of the loan to substandard.
The Bank also maintainsmaintained an unallocated portion of the allowance for loan losses. The primary purpose of the unallocated component iswas to account for the inherent factors that cannotcould not be practically assigned to individual loss categories, including the periodic update of appraisals, subjectivity of the Bank’s credit review and risk rating process, and continued economic uncertaintyconditions that may not behave been fully captured in the Bank’s loss history or the qualitative factors.
Upon completion of the aforementioned procedures, an overall management review is performed including ratio analyses to identify divergent trends compared with the Bank’s own historical loss experience, the historical loss experience of the Bank’s peer group and management’s understanding of general regulatory expectations. Based on that review, management may identify issues or factors that previously had not been considered in the estimation process, which may warrant further analysis or adjustments to estimated loss factors or the allowance for loan losses.
Reserve for Repurchased Loans and Loss Sharing Obligations
The reserve for repurchased loans and loss sharing obligations relates to potential losses on loans sold which may have to be repurchased due to a violation of representations and warranties, and an estimate of the Bank’s obligation under a loss sharing arrangement for loans sold to the Federal Home Loan Bank (“FHLB”).FHLB as well as the potential repair requests for guaranteed loans sold to the SBA. Provisions for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. The reserve represents the Company’s estimate of the total losses expected to occur and is considered to be adequate by management based upon the Company’s evaluation of the potential exposure related to the loan sale agreements and loss sharing obligations over the period of repurchase risk. The reserve for repurchased loans and loss sharing obligations, as well as SBA repair requests, is included in other liabilities on the Company’s consolidated statement of financial condition.
Other Real Estate Owned (“OREO”)
Other real estate owned (“OREO”) is carried at the lower of cost or estimated fair value, less estimated costs to sell. When a property is acquired, the excess of the loan balance over estimated fair value is charged to the allowance for loan losses.credit losses for loans. Operating
results from other real estate owned, including rental income, operating expenses, gains and losses realized from the sales of other real estate owned and subsequent write-downs are recorded as incurred.
Premises and Equipment
Land is carried at cost and premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization or, in the case of acquired premises, the estimated fair value on the acquisition date. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or leases. Generally, depreciable lives are as follows: computer equipment: 3 years; furniture, fixtures and other electronic equipment: 5 years; building improvements: 10 years; and buildings: 30 years. Repair and maintenance items are expensed and improvements are capitalized. Gains and losses on dispositions are reflected in current operations.
Leases
The Company recognizes operating lease agreements on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The ROU asset and lease liability are calculated as the present value of the minimum lease payments over the lease term, discounted for the rate implicit in the lease, provided the rate is readily determinable. Refer to Note 17 Leases for a further discussion on leases.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Any interest and penalties on taxes payable are included as part of the provision for income taxes.
Bank Owned Life Insurance (“BOLI”)
Bank owned life insurance is accounted for using the cash surrender value method and is recorded at its realizable value. Part of the Company’s BOLI is invested in a separate account insurance product which is invested in a fixed income portfolio. The separate account includes stable value protection which maintains realizable value at book value with investment gains and losses amortized over future periods. Increases in cash surrender value are included in other non-interest income, while proceeds from death benefits are generally recorded as a reduction to the carrying value.
Intangible Assets
Intangible assets resulting from acquisitions, under the acquisition method of accounting, consists of goodwill and core deposit intangibles. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired through purchase acquisitions. Goodwill with an indefinite useful life is not amortized, but is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company prepares a qualitative assessment, and if necessary, a quantitative assessment, in determining whether goodwill may be impaired. The factors considered in the qualitative assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the Company, among others. Under a quantitative assessment, the Company will estimate the fair value of the Company by utilizing a weighted discounted cash flow method, guideline public company method and transaction method. The Company completes its annual goodwill impairment test as of August 31 and evaluates triggering events during interim periods, as applicable.
Segment Reporting
The Company’s operations are solely in the financial services industry and include providing traditional banking and other financial services to its customers. The Company operates throughout New Jersey and the metropolitan areas of Philadelphia and New York City. Management makes operating decisions and assesses performance based on an ongoing review of the Company’s consolidated financial results. Therefore, the Company has a single operating segment for financial reporting purposes.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding and potential common stock, utilizing the treasury stock method. All share amounts exclude unallocated shares of stock held by the ESOP and by the Incentive Plans. Refer to Note 12 Incentive Plan, for a discussion of the incentive plans.
Impact of New Accounting Pronouncements
Accounting Pronouncements Adopted in 2020
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and subsequent related Updates modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other guidance. The updates also requires new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The Company will adopt the guidance in first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other United States Generally Accepted Accounting Principles (“U.S. GAAP”), the new revenue recognition standard does not have a material impact on the Company’s consolidated financial statements. The Company’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts. No material changes related to the timing or amount of revenue recognition have been identified.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.” The main objective in developing this new ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more useful information. The update requires equity investments to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a quantitative assessment to identify impairment. The amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Financial assets and financial liabilities are to be presented separately by measurement category and the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements. The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Company has identified its leased real estate as within the scope of the guidance. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact of adoption on the Company’s consolidated financial statements, although total assets and total liabilities will increase by similar amounts. Further,
to date, no guidance has been issued by either the Company’s or the Bank’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718).” The objective of the Update is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in this Update were effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2017, resulting in an equity reclassification of $11.1 million and an income statement benefit through a $1.8 million decrease in income tax expense.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.Instruments (Topic 326).” This ASU significantly changeschanged how entities will measure credit losses for most financial assets and certain other instruments that aren’tare measured at fair value through net income.amortized cost. The standard will replace today’sreplaced the “incurred loss” approach with an “expected loss” model.model, which necessitates a forecast of lifetime losses. The new model, referred to as the current expected credit loss (“CECL”)CECL model, will applyapplies 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”)AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will needThe standard’s provisions are to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisionsbe 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 has begun its evaluationadopted 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 amended guidance includingcumulative effect of adopting ASC 326. The transition adjustment included a decrease in the potential impact on its consolidated financial statements. As a result of the required change in approach toward determining estimatedallowance for credit losses from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “lifeloans of loan” model), the Company expects that the new guidance will result in$475,000, an increase in the allowance for loancredit losses particularly for longer duration loan portfolios. The Company also expects thaton held to maturity debt securities of $1.3 million, and a decrease in the new guidance may result in an 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 individually acquired financial assets accounted for in pools were troubled debt securities. In both cases, the extentrestructured loans as of the change is indeterminable at this timedate of adoption. Upon adoption, the Company’s PCI loans were converted to PCD loans as it will be dependent upondefined 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 composition and credit quality at the adoption date,mix, delinquency level, or term as well as economicchanges in environmental conditions, andsuch 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 at that time. Further, to date, no guidance has been issued by eitherfor select variables.
Expected credit losses are estimated over the Company’s or the Bank’s primary regulator with respect to how the impactcontractual term of the amended standard is to be treatedloans, adjusted for regulatory purposes.expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” This ASU is intended to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. A retrospective transition method should be applied to each period presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for those issues would be applied prospectively as of the earliest date practicable. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” This ASU narrows the definition of a business and clarifies that, to be considered a business, the fair value of the gross assets acquired (or disposed of) may not be substantially all concentrated in a single identifiable asset or group of similar assets. In addition, in order to be considered a business, a set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for fiscal years beginning after December 15, 2017; early adoption is permitted on a limited basis. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
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; early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017.2019. The adoption of this update willdid not have a materialan impact on the Company’s consolidated financial statements.
In March 2017,August 2018, the FASB issued ASU 2017-08, “Receivables2018-13, “Fair Value Measurement (Topic 820) - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU requiresupdates the amortizationdisclosure requirements on Fair Value measurements by: (1) removing: the disclosures for transfers between Level 1 and Level 2 of premiumsthe 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 the earliest call date on debt securities with call features that are explicit, noncontingent and callable at fixed prices and on preset dates. Thisdevelop Level 3 fair value measurements. ASU does not impact securities held as a discount, as the discount continues to be amortized to the contractual maturity. The guidance2018-13 is effective for fiscal years beginning after December 15, 2018,2019, with early adoption permitted includingto any removed or modified disclosures and delay adoption in an interim period. The amendments in this ASUof additional disclosures until the effective date. With the exception of the following, which should be applied on a modified retrospective basis through a cumulative-effect adjustment directlyprospectively, disclosures relating to retained earnings aschanges in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the beginning ofdisclosures for uncertainty measurement, all other changes should be applied retrospectively to all periods presented upon the period of adoption.effective date. The adoption of this update isdid not expected to have a materialan impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU was issued to address a narrow-scope financial reporting issue that arose as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”) on December 22, 2017. The objective of ASU 2018-02 is to address the tax effects of items within accumulated other comprehensive income (referred to as “stranded tax effects”) that do not reflect the appropriate tax rate enacted in the Tax Reform. As a result, the ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the newly enacted corporate income tax rate of 21 percent. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. The amendments in this ASU may be applied retrospectively to each period in which the effect of the change in the U.S. Federal corporate income tax rate in the Tax Reform is recognized. The Company has early adopted ASU 2018-02 for the year ended December 31, 2017, and has elected not to reclassify the income tax effects of the Tax Reform from accumulated other comprehensive loss to retained earnings. Refer to Note 10 Income Taxes15 Fair Value Measurements, for further details.additional information.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly in equity, such as unrealized gains or losses on securities available-for-sale and accretion of unrealized loss on securities reclassified to held-to-maturity.
Bank Owned Life Insurance
Bank Owned Life Insurance (“BOLI”) is accounted for using the cash surrender value method and is recorded at its realizable value. Part of the Company’s BOLI is invested in a separate account insurance product which is invested in a fixed income portfolio. The separate account includes stable value protection which maintains realizable value at book value with investment gains and losses amortized over future periods. Increases in cash surrender value are included in other non-interest income, while proceeds from death benefits are generally recorded as a reduction to the carrying value.
Defined Benefit Plan
As part of the Cape Bancorp, Inc. acquisition, the Bank acquired a tax-qualified defined benefit pension plan, also now known as the Cape Bank Defined Benefit Plan. The Plan previously froze benefits as of December 31, 2008 for employees eligible to participate prior to January 1, 2008. The Bank is in the process of terminating the Plan and distributing accrued benefits and recorded a $3.7 million liability as part of the acquisition date purchase accounting adjustment.
Intangible Assets
Intangible assets resulting from acquisitions under the acquisition method of accounting consist of goodwill and core deposit intangible. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired through purchase acquisitions. Goodwill with an indefinite useful life is not amortized, but is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. The Company prepares a qualitative assessment in determining whether goodwill may be impaired. The factors considered in the assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the Company, among others. The Company completed its annual goodwill impairment test as of August 31, 2017. Based upon its qualitative assessment of goodwill, the Company concluded that goodwill was not impaired and no further quantitative analysis was warranted.
Segment Reporting
The Company’s operations are solely in the financial services industry and include providing traditional banking and other financial services to its customers. The Company operates primarily in the geographical regions of central and southern New Jersey. Management makes operating decisions and assesses performance based on an ongoing review of the Bank’s consolidated financial results. Therefore, the Company has a single operating segment for financial reporting purposes.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding plus potential common stock, utilizing the treasury stock method. All share amounts exclude unallocated shares of stock held by the Employee Stock Ownership Plan (“ESOP”) and the Incentive Plan.
Note 2:2. Regulatory Matters
Applicable regulations require the Bank to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2017,2020, the Bank was required to maintain a minimum ratio of Tier 1 capital to total adjustedaverage assets of 4.0%; a minimum ratio of common equity Tier 1 capitalto risk-weighted assets of 5.75%7.0%; a minimum ratio of Tier 1 capital to risk weightedrisk-weighted assets of 7.25%8.5%; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 9.25%10.5%. These ratios include the impact of the required 2.50% capital conservation buffer. With its conversion to a bank holding company on January 31, 2018, the Company became subject to substantially similar consolidated capital requirements imposed by FRB regulation.Federal Reserve Board (“FRB”) regulations.
Under the regulatory framework for prompt corrective action, Federal regulators are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations establish a framework for the classification of banking institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a Tier 1 capital ratio of 5.0%; a common equity Tier1Tier 1 risk-based ratio of at least 6.5%; a Tier 1 risk-based ratio of at least 8.0%; and a total risk-based capital ratio of at least 10.0%. At December 31, 20172020 and 2016,2019, theCompany and the Bank exceeded all regulatory capital requirements currently applicable.
The following is a summary of the BankBank’s and the Company’s regulatory capital amounts and ratios as of December 31, 20172020 and 20162019 compared to the regulatory minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized institution then in effect (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | Actual | | For capital adequacy
purposes | | To be well-capitalized
under prompt
corrective action |
| Bank: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Tier 1 capital (to average assets) | $ | 942,122 | | | 8.48 | % | | $ | 444,648 | | | 4.00 | % | | $ | 555,810 | | | 5.00 | % |
| Common equity Tier 1 (to risk-weighted assets) | 942,122 | | | 12.11 | | | 544,625 | | | 7.00 | | (1) | 505,724 | | | 6.50 | |
| Tier 1 capital (to risk-weighted assets) | 942,122 | | | 12.11 | | | 661,331 | | | 8.50 | | (1) | 622,429 | | | 8.00 | |
| Total capital (to risk-weighted assets) | 1,004,480 | | | 12.91 | | | 816,938 | | | 10.50 | | (1) | 778,036 | | | 10.00 | |
| Company: | | | | | | | | | | | |
| Tier 1 capital (to average assets) | $ | 998,273 | | | 9.44 | % | | $ | 423,028 | | | 4.00 | % | | N/A | | N/A |
| Common equity Tier 1 (to risk-weighted assets) | 871,385 | | | 11.05 | | | 552,075 | | | 7.00 | | (1) | N/A | | N/A |
| Tier 1 capital (to risk-weighted assets) | 998,273 | | | 12.66 | | | 670,377 | | | 8.50 | | (1) | N/A | | N/A |
| Total capital (to risk-weighted assets) | 1,230,370 | | | 15.60 | | | 828,113 | | | 10.50 | | (1) | N/A | | N/A |
| | | As of December 31, 2017 | Actual | | For capital adequacy
purposes | | To be well-capitalized
under prompt
corrective action | |
| As of December 31, 2019 | | As of December 31, 2019 | Actual | | For capital adequacy
purposes | | To be well-capitalized
under prompt
corrective action |
| Bank: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | Bank: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Tier 1 capital (to average assets) | $ | 459,031 |
| | 8.75 | % | | $ | 209,760 |
| | 4.000 | % | | $ | 262,200 |
| | 5.00 | % | Tier 1 capital (to average assets) | $ | 779,108 | | | 10.03 | % | | $ | 310,798 | | | 4.00 | % | | $ | 388,498 | | | 5.00 | % |
| Common equity Tier 1 (to risk-weighted assets) | 459,031 |
| | 12.41 |
| | 212,705 |
| | 5.750 |
| (1) | 240,450 |
| | 6.50 |
| Common equity Tier 1 (to risk-weighted assets) | 779,108 | | | 12.98 | | | 420,106 | | | 7.00 | | (1) | 390,099 | | | 6.50 | |
| Tier 1 capital (to risk-weighted assets) | 459,031 |
| | 12.41 |
| | 268,194 |
| | 7.250 |
| (1) | 295,938 |
| | 8.00 |
| Tier 1 capital (to risk-weighted assets) | 779,108 | | | 12.98 | | | 510,129 | | | 8.50 | | (1) | 480,121 | | | 8.00 | |
| Total capital (to risk-weighted assets) | 475,379 |
| | 12.85 |
| | 342,178 |
| | 9.250 |
| (1) | 369,923 |
| | 10.00 |
| Total capital (to risk-weighted assets) | 797,339 | | | 13.29 | | | 630,159 | | | 10.50 | | (1) | 600,152 | | | 10.00 | |
| OceanFirst Financial Corp: | | | | | | | | | | | | |
| Company: | | Company: | |
| Tier 1 capital (to average assets) | $ | 465,554 |
| | 8.87 | % | | $ | 209,943 |
| | 4.000 | % | | N/A |
| | N/A |
| Tier 1 capital (to average assets) | $ | 791,746 | | | 10.17 | % | | $ | 311,289 | | | 4.00 | % | | N/A | | N/A |
| Common equity Tier 1 (to risk-weighted assets) | 449,991 |
| | 12.15 |
| | 212,907 |
| | 5.750 |
| (1) | N/A |
| | N/A |
| Common equity Tier 1 (to risk-weighted assets) | 729,095 | | | 12.14 | | | 420,273 | | | 7.00 | | (1) | N/A | | N/A |
| Tier 1 capital (to risk-weighted assets) | 465,554 |
| | 12.57 |
| | 268,448 |
| | 7.250 |
| (1) | N/A |
| | N/A |
| Tier 1 capital (to risk-weighted assets) | 791,746 | | | 13.19 | | | 510,331 | | | 8.50 | | (1) | N/A | | N/A |
| Total capital (to risk-weighted assets) | 516,902 |
| | 13.96 |
| | 342,502 |
| | 9.250 |
| (1) | N/A |
| | N/A |
| Total capital (to risk-weighted assets) | 844,977 | | | 14.07 | | | 630,409 | | | 10.50 | | (1) | N/A | | N/A |
(1) Includes the Capital Conservation Buffer of 2.50%.
|
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016 | Actual | | For capital adequacy
purposes | | To be well-capitalized
under prompt
corrective action |
| Bank: | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Tier 1 capital (to average assets) | $ | 450,414 |
| | 10.19 | % | (2) | $ | 176,856 |
| | 4.000 | % | | $ | 221,071 |
| | 5.00 | % |
| Common equity Tier 1 (to risk-weighted assets) | 450,414 |
| | 12.81 |
| | 180,178 |
| | 5.125 |
| (3) | 228,519 |
| | 6.50 |
|
| Tier 1 capital (to risk-weighted assets) | 450,414 |
| | 12.81 |
| | 232,913 |
| | 6.625 |
| (3) | 281,254 |
| | 8.00 |
|
| Total capital (to risk-weighted assets) | 466,224 |
| | 13.26 |
| | 303,227 |
| | 8.625 |
| (3) | 351,567 |
| | 10.00 |
|
| OceanFirst Financial Corp: | | | | | | | | | | | |
| Tier 1 capital (to average assets) | $ | 440,552 |
| | 9.96 | % | (2) | $ | 176,897 |
| | 4.000 | % | | N/A |
| | N/A |
|
| Common equity Tier 1 (to risk-weighted assets) | 426,855 |
| | 12.12 |
| | 180,512 |
| | 5.125 |
| (3) | N/A |
| | N/A |
|
| Tier 1 capital (to risk-weighted assets) | 440,552 |
| | 12.51 |
| | 233,345 |
| | 6.625 |
| (3) | N/A |
| | N/A |
|
| Total capital (to risk-weighted assets) | 491,362 |
| | 13.95 |
| | 303,788 |
| | 8.625 |
| (3) | N/A |
| | N/A |
|
| |
(1) | Includes the Capital Conservation Buffer of 1.25%. |
| |
(2) | Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The December 31, 2016 Tier 1 capital ratios for the Bank and the Company based on total assets as of the end of the period are 8.85% and 8.75%, respectively.
|
| |
(3) | Includes the Capital Conservation Buffer of 0.625%. |
The Bank satisfies the criteria to be “well-capitalized”well-capitalized under the Prompt Corrective Action Regulations.
The capital conservation buffer requirement is being phased in over four years beginningOn January 1, 2016. The capital conservation buffer requirement is being phased in incrementally, and started at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, and increases to 1.875% on January 1, 2018, and 2.50% on January 1, 2019, when the full capital conservation buffer requirement, will beof 2.50%, became effective. Capital distributions and certain discretionary bonus payments are limited if the capital conservation buffer is not maintained. Applicable regulations also impose limitations upon capital distributions by the Company, such as dividends and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital minimum requirements or if such declaration and payment would otherwise violate regulatory requirements.
Note 3. Business CombinationCombinations
As a result of the following acquisitions and the June 30, 2017 definitive agreement and plan of merger with Sun Bancorp, Inc. (“Sun”), which closed on January 31, 2018, theThe Company incurred merger related expenses of $8.3$15.9 million, $16.5$10.5 million, and $1.9$26.9 million for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Refer to Note 17 Subsequent Events, for additional information related to the Sun acquisition. The following table summarizes the merger related expenses for the years ended December 31, 2017, 20162020, 2019 and 2015 is2018 was as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
| Data processing fees | $ | 3,758 | | | $ | 2,514 | | | $ | 6,017 | |
| Professional fees | 3,638 | | | 4,239 | | | 4,414 | |
| Employee severance payments | 7,727 | | | 2,942 | | | 15,660 | |
| Other/miscellaneous fees | 824 | | | 808 | | | 820 | |
| Merger related expenses | $ | 15,947 | | | $ | 10,503 | | | $ | 26,911 | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Data processing fees | $ | 3,956 |
| | $ | 4,844 |
| | $ | 371 |
|
| Professional fees | 2,771 |
| | 5,982 |
| | 524 |
|
| Employee severance payments | 1,177 |
| | 5,457 |
| | 763 |
|
| Other/miscellaneous fees | 389 |
| | 251 |
| | 220 |
|
| Merger related expenses | $ | 8,293 |
| | $ | 16,534 |
| | $ | 1,878 |
|
BranchTwo River Bancorp Acquisition
On March 11, 2016,January 1, 2020, the Company completed its acquisition of an existing retail branch in the TomsTwo River marketBancorp (“Toms River Retail Branch”). Under the terms of the Purchase and Assumption Agreement dated July 31, 2015, the Company paid a deposit premium of $340,000, equal to 2.50% of core deposits; i.e., all deposits other than time deposits, government deposits, and fiduciary accounts. Up to 1.00% of the deposit premium was contingent on the core deposit balance seventy-five days after closing.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table presents the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
|
| | | | | | | | | | | | |
| | | At March 11, 2016 |
| | | Book Value | | Fair Value
Adjustment | | Fair Value |
| Assets Acquired | | | | | | |
| Cash and cash equivalents | | $ | 16,727 |
| | $ | — |
| | $ | 16,727 |
|
| Loans | | 9 |
| | — |
| | 9 |
|
| Other assets | | 15 |
| | — |
| | 15 |
|
| Core deposit intangible | | — |
| | 66 |
| | 66 |
|
| Total assets acquired | | $ | 16,751 |
| | $ | 66 |
| | $ | 16,817 |
|
| Liabilities Assumed | | | | | | |
| Deposits | | $ | 16,953 |
| | $ | 4 |
| | $ | 16,957 |
|
| Other liabilities assumed | | 138 |
| | — |
| | 138 |
|
| Total liabilities assumed | | $ | 17,091 |
| | $ | 4 |
| | $ | 17,095 |
|
| Goodwill | | | | | | $ | 278 |
|
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. On March 11, 2017, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Cape Bancorp Inc. Acquisition
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”Two River”), which after purchase accounting adjustments added $1.5$1.11 billion to assets, $1.2 billion to loans, and $1.2 billion to deposits. Total consideration paid for Cape was $196.4 million, including cash consideration of $30.5 million. Cape was merged with and into the Company as of the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Cape, net of total consideration paid (in thousands):
|
| | | | | | | | | | | | |
| | | At May 2, 2016 |
| | | Cape
Book Value | | Purchase
Accounting
Adjustments | | Fair Value |
| Total Purchase Price: | | | | | | $ | 196,403 |
|
| Assets acquired: | | | | | | |
| Cash and cash equivalents | | $ | 30,025 |
| | $ | — |
| | $ | 30,025 |
|
| Securities and Federal Home Loan Bank Stock | | 218,577 |
| | 361 |
| | 218,938 |
|
| Loans | | 1,169,568 |
| | (12,849 | ) | | 1,156,719 |
|
| Premises and equipment | | 27,972 |
| | (1,973 | ) | | 25,999 |
|
| Other real estate owned | | 2,343 |
| | (660 | ) | | 1,683 |
|
| Deferred tax asset | | 9,407 |
| | 8,419 |
| | 17,826 |
|
| Other assets | | 61,793 |
| | — |
| | 61,793 |
|
| Core deposit intangible | | 831 |
| | 2,887 |
| | 3,718 |
|
| Total assets acquired | | 1,520,516 |
| | (3,815 | ) | | 1,516,701 |
|
| Liabilities assumed: | | | | | | |
| Deposits | | (1,247,688 | ) | | (679 | ) | | (1,248,367 | ) |
| Borrowings | | (123,587 | ) | | (879 | ) | | (124,466 | ) |
| Other liabilities | | (7,611 | ) | | (5,156 | ) | | (12,767 | ) |
| Total liabilities assumed | | (1,378,886 | ) | | (6,714 | ) | | (1,385,600 | ) |
| Net assets acquired | | $ | 141,630 |
| | $ | (10,529 | ) | | 131,101 |
|
| Goodwill recorded in the merger | | | | | | $ | 65,302 |
|
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. On May 2, 2017, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Ocean Shore Holding Co. Acquisition
On November 30, 2016, the Company completed its acquisition of Ocean Shore Holding Co. (“Ocean Shore”), which after purchase accounting adjustments added $991.3 million to assets, $773.3$940.1 million to loans, and $875.1$941.8 million to deposits. Total consideration paid for Ocean ShoreTwo River was $180.7$197.1 million, including cash consideration of $28.4$48.4 million. Ocean ShoreTwo River was merged with and into the Company on the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Ocean Shore,Two River, net of total consideration paid (in thousands):
|
| | | | | | | | | | | | |
| | | At November 30, 2016 |
| | | Ocean Shore
Book Value | | Purchase
Accounting
Adjustments | | Fair Value |
| Total Purchase Price: | | | | | | $ | 180,732 |
|
| Assets acquired: | | | | | | |
| Cash and cash equivalents | | $ | 60,871 |
| | $ | — |
| | $ | 60,871 |
|
| Securities and Federal Home Loan Bank Stock | | 94,109 |
| | 24 |
| | 94,133 |
|
| Loans | | 790,396 |
| | (17,129 | ) | | 773,267 |
|
| Premises and equipment | | 11,696 |
| | 3,372 |
| | 15,068 |
|
| Other real estate owned | | 1,090 |
| | (46 | ) | | 1,044 |
|
| Deferred tax asset | | 5,587 |
| | (1,535 | ) | | 4,052 |
|
| Other assets | | 35,369 |
| | (22 | ) | | 35,347 |
|
| Core deposit intangible | | 348 |
| | 7,158 |
| | 7,506 |
|
| Total assets acquired | | 999,466 |
| | (8,178 | ) | | 991,288 |
|
| Liabilities assumed: | | | | | | |
| Deposits | | (874,301 | ) | | (772 | ) | | (875,073 | ) |
| Borrowings | | (3,694 | ) | | — |
| | (3,694 | ) |
| Other liabilities | | (17,629 | ) | | 2,717 |
| | (14,912 | ) |
| Total liabilities assumed | | (895,624 | ) | | 1,945 |
| | (893,679 | ) |
| Net assets acquired | | $ | 103,842 |
| | $ | (6,233 | ) | | 97,609 |
|
| Goodwill recorded in the merger | | | | | | $ | 83,123 |
|
| | | | | | | | | | | |
| | | | At January 1, 2020 |
| | | | | Estimated
Fair Value |
| Total purchase price: | | | | | $ | 197,050 | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | | | | | $ | 51,102 | |
| Securities | | | | | 64,381 | |
| Loans | | | | | 940,072 | |
| Accrued interest receivable | | | | | 2,382 | |
| Bank owned life insurance | | | | | 22,440 | |
| Deferred tax assets, net | | | | | 3,158 | |
| Other assets | | | | | 15,956 | |
| Core deposit intangible | | | | | 12,130 | |
| Total assets acquired | | | | | 1,111,621 | |
| Liabilities assumed: | | | | | |
| Deposits | | | | | (941,750) | |
| | | | | |
| Other liabilities | | | | | (59,026) | |
| Total liabilities assumed | | | | | (1,000,776) | |
| Net assets acquired | | | | | $ | 110,845 | |
| Goodwill recorded in the merger | | | | | $ | 86,205 | |
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Country Bank Holding Company, Inc. Acquisition
On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits. Total consideration paid for Country Bank was $112.8 million. Country Bank was merged with and into the Company on the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands):
| | | | | | | | | | | |
| | | | At January 1, 2020 |
| | | | | Estimated
Fair Value |
| Total purchase price: | | | | | $ | 112,836 | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | | | | | $ | 20,799 | |
| Securities | | | | | 144,499 | |
| Loans | | | | | 618,408 | |
| Accrued interest receivable | | | | | 1,779 | |
| | | | | |
| Deferred tax assets, net | | | | | (3,117) | |
| Other assets | | | | | 9,195 | |
| Core deposit intangible | | | | | 2,117 | |
| Total assets acquired | | | | | 793,680 | |
| Liabilities assumed: | | | | | |
| Deposits | | | | | (652,653) | |
| | | | | |
| Other liabilities | | | | | (67,240) | |
| Total liabilities assumed | | | | | (719,893) | |
| Net assets acquired | | | | | $ | 73,787 | |
| Goodwill recorded in the merger | | | | | $ | 39,049 | |
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Capital Bank of New Jersey Acquisition
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”), which after purchase accounting adjustments added $494.4 million to assets, $307.3 million to loans, and $449.0 million to deposits. Total consideration paid for Capital Bank was $76.8 million, including cash consideration of $353,000. Capital Bank was merged with and into the Company on the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Capital Bank, net of total consideration paid (in thousands):
| | | | | | | | | | | |
| | | | At January 31, 2019 |
| | | | | Estimated Fair Value |
| Total Purchase Price: | | | | | $ | 76,834 | |
| Assets acquired: | | | | | |
| Cash and cash equivalents | | | | | $ | 59,748 | |
| Securities | | | | | 103,775 | |
| Loans | | | | | 307,300 | |
| Accrued interest receivable | | | | | 1,390 | |
| Bank owned life insurance | | | | | 10,460 | |
| Deferred tax assets, net | | | | | 4,101 | |
| Other assets | | | | | 4,980 | |
| Core deposit intangible | | | | | 2,662 | |
| Total assets acquired | | | | | 494,416 | |
| Liabilities assumed: | | | | | |
| Deposits | | | | | (449,018) | |
| | | | | |
| Other liabilities | | | | | (5,210) | |
| Total liabilities assumed | | | | | (454,228) | |
| Net assets acquired | | | | | $ | 40,188 | |
| Goodwill recorded in the merger | | | | | $ | 36,646 | |
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. On November 30, 2017,January 31, 2020, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Sun Bancorp. Inc Acquisition
On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”), which after purchase accounting adjustments, added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. Total consideration paid for Sun was $474.9 million, including cash consideration of $72.4 million. Sun was merged with and into the Company on the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the
acquisition for Sun, net of the total consideration paid (in thousands):
| | | | | | | | | | |
| | | | | | At January 31, 2018 |
| | | | | | Estimated Fair Value |
| Total Purchase Price: | | | | | | $ | 474,930 | |
| Assets acquired: | | | | | | |
| Cash and cash equivalents | | | | | | $ | 68,632 | |
| Securities | | | | | | 254,522 | |
| Loans | | | | | | 1,517,345 | |
| Accrued interest receivable | | | | | | 5,621 | |
| Bank owned life insurance | | | | | | 85,238 | |
| Deferred tax assets, net | | | | | | 57,597 | |
| Other assets | | | | | | 43,202 | |
| Core deposit intangible | | | | | | 11,897 | |
| Total assets acquired | | | | | | 2,044,054 | |
| Liabilities assumed: | | | | | | |
| Deposits | | | | | | (1,616,073) | |
| Borrowings | | | | | | (127,727) | |
| Other liabilities | | | | | | (13,242) | |
| Total liabilities assumed | | | | | | (1,757,042) | |
| Net assets acquired | | | | | | $ | 287,012 | |
| Goodwill recorded in the merger | | | | | | $ | 187,918 | |
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative
to the estimates and uncertainties used to determine fair value as of the closing date become available. On January 31, 2019, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Supplemental Pro Forma Financial Information
The following table presents financialinformation regarding the former Cape Sunoperations included in the Consolidated Statements of Income from the date of the acquisition (May 2, 2016)(January 31, 2018) through December 31, 2016 and2018; regarding the former Ocean Shore Capital Bankoperations included in the Consolidated Statements of Income from the date of the acquisition (December 1, 2016) (January 31, 2019) through December 31, 2016.2019; and regarding Two River and Country Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 1, 2020) through December 31, 2020. In addition, the table provides condensed pro forma financial information assuming the CapeTwo River, Country Bank, Sun and Ocean ShoreCapital Bank acquisitions had been completed as of January 1, 2016,2018, for the year ended December 31, 2016,2018, and as of January 1, 2015,2019 for the year ended December 31, 2015.2019. The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of Cape’sTwo River’s, Country Bank’s, Sun’s and Ocean Shore’sCapital Bank’s operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments;adjustments, amortization of core deposit and other intangibles;intangibles, and related income tax effects.
| | | | Cape Actual from May 2, 2016 to December 31, 2016 | | Ocean Shore
Actual from
December 1, 2016 to
December 31, 2016 | | Pro forma
Year ended
December 31, 2016 | | Pro forma
Year ended
December 31, 2015 | | Two River Actual from January 1, 2020 to December 31, 2020 | | Country Bank Actual from January 1, 2020 to December 31, 2020 | | Capital Bank Actual from January 31, 2019 to December 31, 2019 | | Sun Actual from January 31, 2018 to December 31, 2018 | | | Pro forma
Year ended
December 31, 2019 | | Pro forma
Year ended
December 31, 2018 |
| (in thousands, except per share amounts) | (Unaudited) | (in thousands, except per share amounts) | (unaudited) |
| Net interest income | $ | 34,565 |
| | $ | 3,109 |
| | $ | 166,462 |
| | $ | 159,351 |
| Net interest income | $ | 41,978 | | | $ | 27,411 | | | $ | 17,090 | | | $ | 63,889 | | | | $ | 329,327 | | | $ | 337,118 | |
| Provision for loan losses | 498 |
| | — |
| | 4,400 |
| | 4,639 |
| |
| Credit loss expense | | Credit loss expense | 6,117 | | | 4,481 | | | 385 | | | 1,215 | | | | 2,686 | | | 4,545 | |
| Non-interest income | 3,503 |
| | 349 |
| | 25,761 |
| | 33,292 |
| Non-interest income | 2,688 | | | 45 | | | 1,456 | | | 7,961 | | | | 47,484 | | | 43,677 | |
| Non-interest expense | 19,258 |
| | 1,337 |
| | 161,090 |
| | 123,762 |
| Non-interest expense | 27,431 | | | 17,993 | | | 12,482 | | | 35,184 | | | | 240,913 | | | 258,072 | |
| Provision for income taxes | | Provision for income taxes | 2,686 | | | 1,204 | | | 1,193 | | | 7,090 | | | | 23,870 | | | 21,098 | |
| Net income | $ | 12,311 |
| | $ | 1,397 |
| | $ | 16,772 |
| | $ | 43,471 |
| Net income | $ | 8,432 | | | $ | 3,778 | | | $ | 4,486 | | | $ | 28,361 | | | | $ | 109,342 | | | $ | 97,080 | |
| Fully diluted earnings per share | | | | | $ | 0.52 |
| | $ | 1.39 |
| Fully diluted earnings per share | | | | | | | | | | $ | 1.79 | | | $ | 1.56 | |
Core Deposit Intangible
The estimated future amortization expense for the core deposit intangible over the next five years and thereafter is as follows (in thousands):
| | | For the Year Ended December 31, | | Amortization Expense | For the Year Ended December 31, | | Amortization Expense |
| 2018 | | $ | 1,828 |
| |
| 2019 | | 1,618 |
| |
| 2020 | | 1,408 |
| |
| 2021 | | 1,197 |
| 2021 | | $ | 5,452 | |
| 2022 | | 987 |
| 2022 | | 4,718 | |
| 2023 | | 2023 | | 3,984 | |
| 2024 | | 2024 | | 3,250 | |
| 2025 | | 2025 | | 2,516 | |
| Thereafter | | 1,847 |
| Thereafter | | 3,748 | |
| Total | | $ | 8,885 |
| Total | | $ | 23,668 | |
Fair Value Measurement of Assets Acquired and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the TomsTwo River, Retail Branch, CapeCountry Bank, Sun and Ocean ShoreCapital Bank acquisitions are described below.were as follows. Refer to Note 15 Fair Value Measurements, for a discussion of the fair value hierarchy.
Securities
The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.
Loans
The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: (1) interest rate loan fair value analysis; (2) general credit fair value adjustment; and (3) specific credit fair value adjustment.
To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Companythe Company’s management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.
The general credit fair value adjustment was calculated using a two part general credit fair valuetwo-step analysis: (1) expected lifetime losses and (2) estimated fair value adjustmentadjustments for qualitative factors. The expected lifetime losses were calculated after considerationusing an average of historical losses of the Company, the acquired bank andor historical loss experiences of peer banks.groups where deemed appropriate. The adjustment related to
qualitative factors, if any, was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.
To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company reviewed the acquired loan portfolio foridentified loans meeting the definition of an impaired loan with deterioratedthat experienced more-than-insignificant deterioration in credit quality.quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value
resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
Premises and Equipment
Fair values arevalue estimates were based upon appraisals from independent third parties. In addition to owned properties, CapeTwo River operated eight14 properties, subject to lease agreements,Country Bank operated 5 properties, Sun operated 21 properties, and Ocean ShoreCapital Bank operated two properties1 property, subject to lease agreements.
Deposits and Core Deposit Premium
Core deposit premium represents the value assigneddeposits were considered to be non-interest-bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition.acquisitions. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and iswas valued utilizing Level 2 inputs. At the acquisition dates, theThe core deposit premiumpremiums totaled $66,000, $3.7$12.1 million, $2.1 million, $2.7 million and $7.5$11.9 million, for the Tomsacquisitions of Two River, Retail Branch, Cape,Country Bank, Sun and Ocean Shore acquisitions,Capital Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years usingunder an accelerated method.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits representswere determined by calculating the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.
Borrowings
Fair value estimates arewere based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.
Note 4:4. Securities
The amortized cost, and estimated fair value and allowance for credit losses of debt securities available-for-sale and held-to-maturity at December 31, 20172020 and 20162019 are as follows (in thousands): | | | | | | | | | | | | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Allowance for Credit Losses |
| At December 31, 2020 | | At December 31, 2020 | | | | | | | | | | |
| Debt securities available-for-sale: | | Debt securities available-for-sale: | |
| Investment securities: | | Investment securities: | |
| U.S. government and agency obligations | | U.S. government and agency obligations | | $ | 173,790 | | | $ | 3,152 | | | $ | (2) | | | $ | 176,940 | | | $ | 0 | |
| Collateralized loan obligations | | Collateralized loan obligations | | 6,174 | | | 0 | | | (4) | | | 6,170 | | | 0 | |
| Total investment securities | | Total investment securities | | 179,964 | | | 3,152 | | | (6) | | | 183,110 | | | 0 | |
| Mortgage-backed securities - FNMA | | Mortgage-backed securities - FNMA | | 190 | | | 2 | | | 0 | | | 192 | | | 0 | |
| Total debt securities available-for-sale | | Total debt securities available-for-sale | | $ | 180,154 | | | $ | 3,154 | | | $ | (6) | | | $ | 183,302 | | | $ | 0 | |
| Debt securities held-to-maturity: | | Debt securities held-to-maturity: | | | | | | | | | | |
| Investment securities: | | Investment securities: | |
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value | |
| At December 31, 2017 | | | | | | | | | |
| Available-for-sale: | | | | | | | | | |
| Investment securities: | | | | | | | | | |
| U.S. agency obligations | | $ | 82,378 |
| | $ | — |
| | $ | (797 | ) | | $ | 81,581 |
| |
| Other investments | | 8,947 |
| | — |
| | (247 | ) | | 8,700 |
| |
| Total available-for-sale | | $ | 91,325 |
| | $ | — |
| | $ | (1,044 | ) | | $ | 90,281 |
| |
| Held-to-maturity: | | | | | | | | | |
| Investment securities: | | | | | | | | | |
| U.S. agency obligations | | $ | 14,968 |
| | $ | — |
| | $ | (65 | ) | | $ | 14,903 |
| |
| State and municipal obligations | | 149,958 |
| | 219 |
| | (1,475 | ) | | 148,702 |
| State and municipal obligations | | $ | 238,405 | | | $ | 11,500 | | | $ | (231) | | | $ | 249,674 | | | $ | (48) | |
| Corporate debt securities | | 76,024 |
| | 312 |
| | (3,962 | ) | | 72,374 |
| Corporate debt securities | | 72,305 | | | 1,615 | | | (2,652) | | | 71,268 | | | (1,550) | |
| Total investment securities | | 240,950 |
| | 531 |
| | (5,502 | ) | | 235,979 |
| Total investment securities | | 310,710 | | | 13,115 | | | (2,883) | | | 320,942 | | | (1,598) | |
| Mortgage-backed securities: | | | | | | | | | Mortgage-backed securities: | | | | | | | | | | |
| FHLMC | | 186,921 |
| | 151 |
| | (2,937 | ) | | 184,135 |
| FHLMC | | 232,942 | | | 5,383 | | | (124) | | | 238,201 | | | 0 | |
| FNMA | | 263,103 |
| | 1,193 |
| | (3,000 | ) | | 261,296 |
| FNMA | | 293,615 | | | 7,640 | | | (147) | | | 301,108 | | | 0 | |
| GNMA | | 75,243 |
| | 64 |
| | (928 | ) | | 74,379 |
| GNMA | | 67,334 | | | 2,014 | | | (12) | | | 69,336 | | | 0 | |
| SBA | | 5,843 |
| | 28 |
| | — |
| | 5,871 |
| SBA | | 5,392 | | | 0 | | | (60) | | | 5,332 | | | 0 | |
| CMO | | CMO | | 32,321 | | | 1,226 | | | 0 | | | 33,547 | | | (117) | |
| Total mortgage-backed securities | | 531,110 |
| | 1,436 |
| | (6,865 | ) | | 525,681 |
| Total mortgage-backed securities | | 631,604 | | | 16,263 | | | (343) | | | 647,524 | | | (117) | |
| Total held-to-maturity | | $ | 772,060 |
| | $ | 1,967 |
| | $ | (12,367 | ) | | $ | 761,660 |
| |
| Total securities | | $ | 863,385 |
| | $ | 1,967 |
| | $ | (13,411 | ) | | $ | 851,941 |
| |
| At December 31, 2016 | | | | | | | | | |
| Available-for-sale: | | | | | | | | | |
| Investment securities: | | | | | | | | | |
| U.S. agency obligations | | $ | 12,542 |
| | $ | — |
| | $ | (318 | ) | | $ | 12,224 |
| |
| Other investments | | 8,778 |
| | — |
| | (227 | ) | | 8,551 |
| |
| Total available-for-sale | | $ | 21,320 |
| | $ | — |
| | $ | (545 | ) | | $ | 20,775 |
| |
| Held-to-maturity: | | | | | | | | | |
| Investment securities: | | | | | | | | | |
| U.S. agency obligations | | $ | 19,960 |
| | $ | 69 |
| | $ | — |
| | $ | 20,029 |
| |
| State and municipal obligations | | 39,155 |
| | 10 |
| | (856 | ) | | 38,309 |
| |
| Corporate debt securities | | 77,057 |
| | 85 |
| | (6,001 | ) | | 71,141 |
| |
| Total investment securities | | 136,172 |
| | 164 |
| | (6,857 | ) | | 129,479 |
| |
| Mortgage-backed securities: | | | | | | | | | |
| FHLMC | | 144,016 |
| | 195 |
| | (2,457 | ) | | 141,754 |
| |
| FNMA | | 217,445 |
| | 2,209 |
| | (2,524 | ) | | 217,130 |
| |
| GNMA | | 92,475 |
| | 119 |
| | (364 | ) | | 92,230 |
| |
| SBA | | 8,947 |
| | 28 |
| | — |
| | 8,975 |
| |
| Total mortgage-backed securities | | 462,883 |
| | 2,551 |
| | (5,345 | ) | | 460,089 |
| |
| Total held-to-maturity | | $ | 599,055 |
| | $ | 2,715 |
| | $ | (12,202 | ) | | $ | 589,568 |
| |
| Total securities | | $ | 620,375 |
| | $ | 2,715 |
| | $ | (12,747 | ) | | $ | 610,343 |
| |
| Total debt securities held-to-maturity | | Total debt securities held-to-maturity | | $ | 942,314 | | | $ | 29,378 | | | $ | (3,226) | | | $ | 968,466 | | | $ | (1,715) | |
| Total debt securities | | Total debt securities | | $ | 1,122,468 | | | $ | 32,532 | | | $ | (3,232) | | | $ | 1,151,768 | | | $ | (1,715) | |
|
There was 0 allowance for credit losses on debt securities available-for-sale at December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| At December 31, 2019 | | | | | | | | |
| Debt securities available-for-sale: | | | | | | | | |
| Investment securities: | | | | | | | | |
| U.S. government and agency obligations | | $ | 149,120 | | | $ | 1,408 | | | $ | (93) | | | $ | 150,435 | |
| State and municipal obligations | | 25 | | | 0 | | | 0 | | | 25 | |
| Total investment securities | | 149,145 | | | 1,408 | | | (93) | | | 150,460 | |
| Mortgage-backed securities - FNMA | | 495 | | | 5 | | | 0 | | | 500 | |
| Total debt securities available-for-sale | | $ | 149,640 | | | $ | 1,413 | | | $ | (93) | | | $ | 150,960 | |
| Debt securities held-to-maturity: | | | | | | | | |
| Investment securities: | | | | | | | | |
| U.S. government and agency obligations | | $ | 4,984 | | | $ | 14 | | | $ | 0 | | | $ | 4,998 | |
| State and municipal obligations | | 124,430 | | | 1,537 | | | (208) | | | 125,759 | |
| Corporate debt securities | | 79,547 | | | 833 | | | (2,421) | | | 77,959 | |
| Total investment securities | | 208,961 | | | 2,384 | | | (2,629) | | | 208,716 | |
| Mortgage-backed securities: | | | | | | | | |
| FHLMC | | 206,985 | | | 2,221 | | | (524) | | | 208,682 | |
| FNMA | | 244,428 | | | 2,680 | | | (493) | | | 246,615 | |
| GNMA | | 110,661 | | | 939 | | | (212) | | | 111,388 | |
| SBA | | 1,940 | | | 0 | | | (51) | | | 1,889 | |
| Total mortgage-backed securities | | 564,014 | | | 5,840 | | | (1,280) | | | 568,574 | |
| Total debt securities held-to-maturity | | $ | 772,975 | | | $ | 8,224 | | | $ | (3,909) | | | $ | 777,290 | |
| Total debt securities | | $ | 922,615 | | | $ | 9,637 | | | $ | (4,002) | | | $ | 928,250 | |
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity by major security type for the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | |
| Investment Securities | | Mortgage-backed Securities |
| Allowance for credit losses | | | |
| Beginning balance | $ | 0 | | | $ | 0 | |
| Impact of CECL adoption | (1,268) | | | 0 | |
| Provision for credit loss expense | (330) | | | (117) | |
| Total ending allowance balance | $ | (1,598) | | | $ | (117) | |
During the third quarter 2013, the Bank transferred $536.0 million of previously designated available-for-sale debt securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet,statement of financial condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity securities at December 31, 20172020 and 20162019 are as follows (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Amortized cost | | $ | 942,314 | | | $ | 772,975 | |
| Net loss on date of transfer from available-for-sale | | (13,347) | | | (13,347) | |
| Allowance for credit loss | | (1,715) | | | 0 | |
| Accretion of net unrealized loss on securities reclassified as held-to-maturity | | 10,001 | | | 9,245 | |
| Carrying value | | $ | 937,253 | | | $ | 768,873 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Amortized cost | | $ | 772,060 |
| | $ | 599,055 |
|
| Net loss on date of transfer from available-for-sale | | (13,347 | ) | | (13,347 | ) |
| Accretion of unrealized loss on securities reclassified to held-to-maturity | | 5,349 |
| | 4,204 |
|
| Carrying value | | $ | 764,062 |
| | $ | 589,912 |
|
During the year ended December 31, 2020 there were $476,000 of realized gains on debt securities. There were no0 realized gains or losses on the sale ofdebt securities for the year ended December 31, 2017. Realized gains on the sale of securities were $75,000 for the year ended December 31, 2016 and realized losses were $87,000. There were no realized gains or losses on the sale of securities for the year ended December 31, 2015.2019.
The0The amortized cost and estimated fair value of investment securities at December 31, 20172020 by contractual maturity, are shown below (in thousands). Actual maturities willmay differ from contractual maturities becausein instances where issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2017,2020, corporate debt securities with an amortized cost and estimated fair value of $59.9$53.8 million and $56.3$52.9 million, respectively, were callable prior to the maturity date.
| | | | | | | | | | | | | | |
| December 31, 2020 | | Amortized
Cost | | Estimated
Fair Value |
| Less than one year | | $ | 97,822 | | | $ | 98,394 | |
| Due after one year through five years | | 195,949 | | | 201,798 | |
| Due after five years through ten years | | 93,596 | | | 92,120 | |
| Due after ten years | | 103,307 | | | 111,740 | |
| Total investment securities | | $ | 490,674 | | | $ | 504,052 | |
|
| | | | | | | | |
| December 31, 2017 | | Amortized
Cost | | Estimated
Fair Value |
| Less than one year | | $ | 45,944 |
| | $ | 45,867 |
|
| Due after one year through five years | | 158,397 |
| | 156,862 |
|
| Due after five years through ten years | | 88,986 |
| | 87,180 |
|
| Due after ten years | | 30,001 |
| | 27,651 |
|
| | | $ | 323,328 |
| | $ | 317,560 |
|
Other investments consist of mutual funds that do not have a contractual maturity date and are excluded from the table above. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.
The estimated fair value of securities pledged as required security for deposits and for other purposes required by law amounted to $466.4$435.9 million and $506.0$475.6 million at December 31, 20172020 and 2016, respectively. The estimated fair value of securities2019, respectively, including $152.7 million and $81.4 million at December 31, 2020 and 2019, respectively, pledged as collateral for reverse repurchasesecurities sold under agreements amounted to $58.0 million and $67.5 million atrepurchase.
At December 31, 20172020, there were no holdings of any one issuer, other than the U.S. government and 2016, respectively.its agencies, in an amount greater than 10% of stockholders’ equity.
The estimated fair value and unrealized losslosses for debt securities available-for-sale and held-to-maturity at December 31, 20172020 and December 31, 2016,2019, segregated by the duration of the unrealized loss,losses, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2020 |
| | | Less than 12 months | | 12 months or longer | | Total |
| | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| Debt securities available-for-sale: | | | | | | | | | | | | |
| Investment securities - U.S. government and agency obligations | | $ | 17,029 | | | $ | (2) | | | $ | 0 | | | $ | 0 | | | $ | 17,029 | | | $ | (2) | |
| | | | | | | | | | | | |
| Collateralized loan obligations | | 4,766 | | | (4) | | | 0 | | | 0 | | | 4,766 | | | (4) | |
| | | | | | | | | | | | |
| Total debt securities available-for-sale | | 21,795 | | | (6) | | | 0 | | | 0 | | | 21,795 | | | (6) | |
| Debt securities held-to-maturity: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| State and municipal obligations | | 2,823 | | | (23) | | | 7,509 | | | (208) | | | 10,332 | | | (231) | |
| Corporate debt securities | | 10,192 | | | (255) | | | 35,935 | | | (2,397) | | | 46,127 | | | (2,652) | |
| Total investment securities | | 13,015 | | | (278) | | | 43,444 | | | (2,605) | | | 56,459 | | | (2,883) | |
| Mortgage-backed securities: | | | | | | | | | | | | |
| FHLMC | | 24,661 | | | (117) | | | 669 | | | (7) | | | 25,330 | | | (124) | |
| FNMA | | 39,365 | | | (128) | | | 939 | | | (19) | | | 40,304 | | | (147) | |
| GNMA | | 5,856 | | | (11) | | | 207 | | | (1) | | | 6,063 | | | (12) | |
| SBA | | 3,626 | | | (12) | | | 1,706 | | | (48) | | | 5,332 | | | (60) | |
| Total mortgage-backed securities | | 73,508 | | | (268) | | | 3,521 | | | (75) | | | 77,029 | | | (343) | |
| Total debt securities held-to-maturity | | 86,523 | | | (546) | | | 46,965 | | | (2,680) | | | 133,488 | | | (3,226) | |
| Total debt securities | | $ | 108,318 | | | $ | (552) | | | $ | 46,965 | | | $ | (2,680) | | | $ | 155,283 | | | $ | (3,232) | |
| | | | | | | | | | | | |
| | | As of December 31, 2019 |
| | | Less than 12 months | | 12 months or longer | | Total |
| | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| Debt securities available-for-sale: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Investment securities - U.S. government and agency obligations | | $ | 25,021 | | | $ | (54) | | | $ | 22,451 | | | $ | (39) | | | $ | 47,472 | | | $ | (93) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total debt securities available-for-sale | | 25,021 | | | (54) | | | 22,451 | | | (39) | | | 47,472 | | | (93) | |
| Debt securities held-to-maturity: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| State and municipal obligations | | 7,308 | | | (58) | | | 14,531 | | | (150) | | | 21,839 | | | (208) | |
| Corporate debt securities | | 9,727 | | | (213) | | | 37,628 | | | (2,208) | | | 47,355 | | | (2,421) | |
| Total investment securities | | 17,035 | | | (271) | | | 52,159 | | | (2,358) | | | 69,194 | | | (2,629) | |
| Mortgage-backed securities: | | | | | | | | | | | | |
| FHLMC | | 6,329 | | | (29) | | | 38,641 | | | (495) | | | 44,970 | | | (524) | |
| FNMA | | 13,682 | | | (59) | | | 38,568 | | | (434) | | | 52,250 | | | (493) | |
| GNMA | | 30,268 | | | (93) | | | 19,828 | | | (119) | | | 50,096 | | | (212) | |
| SBA | | 0 | | | 0 | | | 1,889 | | | (51) | | | 1,889 | | | (51) | |
| Total mortgage-backed securities | | 50,279 | | | (181) | | | 98,926 | | | (1,099) | | | 149,205 | | | (1,280) | |
| Total debt securities held-to-maturity | | 67,314 | | | (452) | | | 151,085 | | | (3,457) | | | 218,399 | | | (3,909) | |
| Total debt securities | | $ | 92,335 | | | $ | (506) | | | $ | 173,536 | | | $ | (3,496) | | | $ | 265,871 | | | $ | (4,002) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2017 |
| | | Less than 12 months | | 12 months or longer | | Total |
| | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| Available-for-sale: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| U.S. agency obligations | | $ | 69,375 |
| | $ | (496 | ) | | $ | 12,206 |
| | $ | (301 | ) | | $ | 81,581 |
| | $ | (797 | ) |
| Other investments | | — |
| | — |
| | 8,700 |
| | (247 | ) | | 8,700 |
| | (247 | ) |
| Total available-for-sale | | 69,375 |
| | (496 | ) | | 20,906 |
| | (548 | ) | | 90,281 |
| | (1,044 | ) |
| Held-to-maturity: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| U.S. agency obligations | | 14,903 |
| | (65 | ) | | — |
| | — |
| | 14,903 |
| | (65 | ) |
| State and municipal obligations | | 104,883 |
| | (1,153 | ) | | 14,363 |
| | (322 | ) | | 119,246 |
| | (1,475 | ) |
| Corporate debt securities | | 4,035 |
| | (30 | ) | | 56,106 |
| | (3,932 | ) | | 60,141 |
| | (3,962 | ) |
| Total investment securities | | 123,821 |
| | (1,248 | ) | | 70,469 |
| | (4,254 | ) | | 194,290 |
| | (5,502 | ) |
| Mortgage-backed securities: | | | | | | | | | | | | |
| FHLMC | | 98,138 |
| | (781 | ) | | 68,238 |
| | (2,156 | ) | | 166,376 |
| | (2,937 | ) |
| FNMA | | 132,982 |
| | (1,058 | ) | | 65,060 |
| | (1,942 | ) | | 198,042 |
| | (3,000 | ) |
| GNMA | | 26,105 |
| | (223 | ) | | 45,281 |
| | (705 | ) | | 71,386 |
| | (928 | ) |
| Total mortgage-backed securities | | 257,225 |
| | (2,062 | ) | | 178,579 |
| | (4,803 | ) | | 435,804 |
| | (6,865 | ) |
| Total held-to-maturity | | 381,046 |
| | (3,310 | ) | | 249,048 |
| | (9,057 | ) | | 630,094 |
| | (12,367 | ) |
| Total securities | | $ | 450,421 |
| | $ | (3,806 | ) | | $ | 269,954 |
| | $ | (9,605 | ) | | $ | 720,375 |
| | $ | (13,411 | ) |
| | | | | | | | | | | | | |
| | | As of December 31, 2016 |
| | | Less than 12 months | | 12 months or longer | | Total |
| | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses | | Estimated
Fair Value | | Unrealized
Losses |
| Available-for-sale: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| U.S. agency obligations | | $ | 12,224 |
| | $ | (318 | ) | | $ | — |
| | $ | — |
| | $ | 12,224 |
| | $ | (318 | ) |
| Other investments | | 8,551 |
| | (227 | ) | | — |
| | — |
| | 8,551 |
| | (227 | ) |
| Total available-for-sale | | 20,775 |
| | (545 | ) | | — |
| | — |
| | 20,775 |
| | (545 | ) |
| Held-to-maturity: | | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | | |
| State and municipal obligations | | 32,995 |
| | (856 | ) | | — |
| | — |
| | 32,995 |
| | (856 | ) |
| Corporate debt securities | | 12,450 |
| | (120 | ) | | 49,119 |
| | (5,881 | ) | | 61,569 |
| | (6,001 | ) |
| Total investment securities | | 45,445 |
| | (976 | ) | | 49,119 |
| | (5,881 | ) | | 94,564 |
| | (6,857 | ) |
| Mortgage-backed securities: | | | | | | | | | | | | |
| FHLMC | | 102,461 |
| | (1,665 | ) | | 26,898 |
| | (792 | ) | | 129,359 |
| | (2,457 | ) |
| FNMA | | 124,403 |
| | (2,185 | ) | | 8,925 |
| | (339 | ) | | 133,328 |
| | (2,524 | ) |
| GNMA | | 79,116 |
| | (364 | ) | | — |
| | — |
| | 79,116 |
| | (364 | ) |
| Total mortgage-backed securities | | 305,980 |
| | (4,214 | ) | | 35,823 |
| | (1,131 | ) | | 341,803 |
| | (5,345 | ) |
| Total held-to-maturity | | 351,425 |
| | (5,190 | ) | | 84,942 |
| | (7,012 | ) | | 436,367 |
| | (12,202 | ) |
| Total securities | | $ | 372,200 |
| | $ | (5,735 | ) | | $ | 84,942 |
| | $ | (7,012 | ) | | $ | 457,142 |
| | $ | (12,747 | ) |
At December 31, 2017,2020, the amortized cost, estimated fair value and credit rating of the individual corporate debt securities in an unrealized loss position for greater than one year are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| Security Description | | Amortized
Cost | | Estimated
Fair Value | | Credit Rating
Moody’s/S&P |
| Chase Capital | | $ | 10,000 | | | $ | 9,479 | | | Baa1/BBB- |
| Wells Fargo Capital | | 5,000 | | | 4,702 | | | A1/BBB- |
| Huntington Capital | | 5,000 | | | 4,546 | | | Baa2/BB+ |
| Keycorp Capital | | 5,000 | | | 4,647 | | | Baa2/BB+ |
| PNC Capital | | 5,000 | | | 4,743 | | | Baa1/BBB- |
| State Street Capital | | 3,332 | | | 3,147 | | | A3/BBB |
| SunTrust Capital | | 5,000 | | | 4,671 | | | Not Rated/BBB- |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total | | $ | 38,332 | | | $ | 35,935 | | | |
|
| | | | | | | | | | |
| | | As of December 31, 2017 |
| Security Description | | Amortized Cost | | Estimated
Fair Value | | Credit Rating
Moody’s/S&P |
| BankAmerica Capital | | $ | 15,000 |
| | $ | 14,038 |
| | Baa3/BBB- |
| Chase Capital | | 10,000 |
| | 9,350 |
| | Baa2/BBB- |
| Wells Fargo Capital | | 5,000 |
| | 4,713 |
| | A1/BBB+ |
| Huntington Capital | | 5,000 |
| | 4,450 |
| | Baa2/BB |
| Keycorp Capital | | 5,000 |
| | 4,675 |
| | Baa2/BB+ |
| PNC Capital | | 5,000 |
| | 4,675 |
| | Baa1/BBB- |
| State Street Capital | | 5,000 |
| | 4,625 |
| | A3/BBB |
| SunTrust Capital | | 5,000 |
| | 4,575 |
| | Not Rated/BB+ |
| Southern Company | | 1,524 |
| | 1,509 |
| | Baa2/BBB+ |
| AT&T Inc. | | 1,514 |
| | 1,498 |
| | Baa1/BBB+ |
| MetLife Global Funding | | 1,000 |
| | 999 |
| | Aa3/AA- |
| State Street Corporation | | 1,000 |
| | 999 |
| | A1/A |
| | | $ | 60,038 |
| | $ | 56,106 |
| | |
At December 31, 2017,2020, the estimated fair value of each of the above corporate debt securities was below cost. The Company concluded that these corporate debt securities were only temporarily impaired at December 31, 2017.2020. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not have the intentintend to sell these corporate debt securities and it is more likely than not that the Company will not be required to sell the securities. Historically, the Company has not utilized securities sales as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.
The mortgage-backed securities are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”),FHLMC, FNMA, GNMA, or the Small Business Administration (“SBA”)SBA, corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally-recognized credit rating services. Additionally, there are private label commercial mortgage-backed securities with credit ratings from multiple credit rating services ranging between Aaa and Aa2. The Company considers the unrealized losses to be the result of changes in interest rates, and not credit quality, which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were only temporarily impaired at December 31, 2017.2020.
State and municipal obligations are securities issued by state and local governments for various purposes. The Company is not aware of any information subsequent to the purchase of any state and municipal obligation that indicates an inability on the part of an issuer to meet all of its financial commitments. The weighted average credit rating of these securities is Aa/AA with no credit rating below Baa2/BBB. The Company has the ability and stated intention to hold these securities to maturity at which time the Company expects to receive full repayment. Current unrealized losses are considered to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the securities. As a result, the Company concluded that these securities were not impaired as of December 31, 2020.
The Company monitors the credit quality of debt securities held-to-maturity on a quarterly basis through the use of internal credit analysis supplemented by external credit ratings. The following table summarized the amortized cost of debt securities held-to-maturity at December 31, 2020 aggregated by credit quality indicator (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AAA | | AA | | A | | BBB | | BB | | Total |
| As of December 31, 2020 | | | | | | | | | | | |
| Investment securities: | | | | | | | | | | | |
| | | | | | | | | | | |
| State and municipal obligations | $ | 34,091 | | | $ | 130,218 | | | $ | 59,272 | | | $ | 14,824 | | | $ | 0 | | | $ | 238,405 | |
| Corporate debt securities | 0 | | | 496 | | | 11,978 | | | 48,498 | | | 11,333 | | | 72,305 | |
| Total investment securities | 34,091 | | | 130,714 | | | 71,250 | | | 63,322 | | | 11,333 | | | 310,710 | |
| Mortgage-backed securities: | | | | | | | | | | | |
| CMO | 11,118 | | | 21,203 | | | 0 | | | 0 | | | 0 | | | 32,321 | |
| Total mortgage-backed securities | 11,118 | | | 21,203 | | | 0 | | | 0 | | | 0 | | | 32,321 | |
| Total debt securities held-to-maturity | $ | 45,209 | | | $ | 151,917 | | | $ | 71,250 | | | $ | 63,322 | | | $ | 11,333 | | | $ | 343,031 | |
At December 31, 2020, and 2019, the Company held equity investments at an estimated fair value of $107.1 million and $10.1 million, respectively. The equity investments primarily comprised of select financial services institutions’ common stocks paying attractive dividends.
During the year ended December 31, 2020, there were $5.4 million of realized gains on equity securities. There were 0 realized gains or losses on equity securities for the year ended December 31, 2019. The realized and unrealized gains on equity securities for the year ended December 31, 2020 are shown in the table below (in thousands).
| | | | | | | |
| For the year ended |
| December 31, 2020 | | |
| Net gain on equity investments | $ | 21,214 | | | |
| Less: Net gains recognized on equity securities sold | 5,401 | | | |
| Unrealized gain recognized on equity securities still held | $ | 15,813 | | | |
Note 5:5. Loans Receivable, Net
A summary of loansLoans receivable, net, at December 31, 20172020 and 2016 are as follows2019 consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Commercial: | | | | |
Commercial and industrial (1) | | $ | 470,656 | | | $ | 396,434 | |
| Commercial real estate - owner occupied | | 1,145,065 | | | 792,653 | |
| Commercial real estate - investor | | 3,491,464 | | | 2,296,410 | |
| Total commercial | | 5,107,185 | | | 3,485,497 | |
| Consumer: | | | | |
| Residential real estate | | 2,309,459 | | | 2,321,157 | |
| | | | |
| Home equity loans and lines | | 285,016 | | | 318,576 | |
| Other consumer | | 54,446 | | | 89,422 | |
| Total consumer | | 2,648,921 | | | 2,729,155 | |
| | | | |
| | | | |
| Total loans receivable | | 7,756,106 | | | 6,214,652 | |
| | | | |
| Deferred origination costs, net of fees | | 9,486 | | | 9,880 | |
| Allowance for credit losses | | (60,735) | | | (16,852) | |
| Total loans receivable, net | | $ | 7,704,857 | | | $ | 6,207,680 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Commercial: | | | | |
| Commercial and industrial | | $ | 187,645 |
| | $ | 152,569 |
|
| Commercial real estate - owner occupied | | 569,497 |
| | 534,214 |
|
| Commercial real estate - investor | | 1,186,302 |
| | 1,132,075 |
|
| Total commercial | | 1,943,444 |
| | 1,818,858 |
|
| Consumer: | | | | |
| Residential mortgage | | 1,694,042 |
| | 1,647,154 |
|
| Residential construction | | 54,548 |
| | 51,070 |
|
| Home equity loans and lines | | 281,143 |
| | 288,991 |
|
| Other consumer | | 1,225 |
| | 1,564 |
|
| Total consumer | | 2,030,958 |
| | 1,988,779 |
|
| | | 3,974,402 |
| | 3,807,637 |
|
| Purchased credit impaired loans | | 1,712 |
| | 7,575 |
|
| Total loans | | 3,976,114 |
| | 3,815,212 |
|
| Deferred origination costs, net | | 5,380 |
| | 3,414 |
|
| Allowance for loan losses | | (15,721 | ) | | (15,183 | ) |
| Loans receivable, net | | $ | 3,965,773 |
| | $ | 3,803,443 |
|
(1)The Bank’s eligible mortgagecommercial and industrial loans are pledged to secure FHLB advances.
At December 31, 2017, 2016 and 2015, loans in the amount of $20.9 million, $13.6 million, and $18.3 million, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans that were ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of foreclosure amounted to $1.1 million at December 31, 2017. The amount of foreclosed residential real estate property held by the Company was $1.1 million at December 31, 2017.
The Company defines an impaired loan as a non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At December 31, 2017, the impaired loan portfolio totaled $47.0 million, for which there was no specific allocation in the allowance for loan losses. At December 31, 2016, the impaired loan portfolio totaled $31.0 million, for which there was a specific allocation in the allowance for loan losses of $510,000. The average balance of impaired loans for the years ended December 31, 2017, 2016 and 2015 was $39.8 million, $38.4 million, and $41.5 million, respectively. If interest income on non-accrual loans and impaired loans had been current in accordance with their original terms, approximately $639,000, $391,000, and $848,000 of interest income for the years ended December 31, 2017, 2016 and 2015, respectively, would have been recorded.
At December 31, 2017, there were no commitments to lend additional funds to borrowers whose loans are in non-accrual status.
An analysis of the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | At or For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 15,183 |
| | $ | 16,722 |
| | $ | 16,317 |
|
| Provision charged to operations | | 4,445 |
| | 2,623 |
| | 1,275 |
|
| Charge-offs | | (5,384 | ) | | (4,490 | ) | | (1,135 | ) |
| Recoveries | | 1,477 |
| | 328 |
| | 265 |
|
| Balance at end of year | | $ | 15,721 |
| | $ | 15,183 |
| | $ | 16,722 |
|
The following table presents an analysis of the allowance for loan losses for the years ended December 31, 2017 and 2016, the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017 and 2016 excluding PCI loans (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Residential
Real Estate | | Commercial Real Estate - Owner Occupied | | Commercial Real Estate - Investor | | Consumer | | Commercial
and
Industrial | | Unallocated | | Total |
| For the year ended December 31, 2017 | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 2,245 |
| | $ | 2,999 |
| | $ | 6,361 |
| | $ | 1,110 |
| | $ | 2,037 |
| | $ | 431 |
| | $ | 15,183 |
|
| Provision (benefit) charged to operations | | 2,742 |
| | 203 |
| | 2,444 |
| | (509 | ) | | (379 | ) | | (56 | ) | | 4,445 |
|
| Charge-offs | | (3,820 | ) | | (150 | ) | | (899 | ) | | (135 | ) | | (380 | ) | | — |
| | (5,384 | ) |
| Recoveries | | 637 |
| | 123 |
| | 46 |
| | 148 |
| | 523 |
| | — |
| | 1,477 |
|
| Balance at end of year | | $ | 1,804 |
| | $ | 3,175 |
| | $ | 7,952 |
| | $ | 614 |
| | $ | 1,801 |
| | $ | 375 |
| | $ | 15,721 |
|
| For the year ended December 31, 2016 | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 6,590 |
| | $ | 2,292 |
| | $ | 4,873 |
| | $ | 1,095 |
| | $ | 1,639 |
| | $ | 233 |
| | $ | 16,722 |
|
| Provision (benefit) charged to operations | | (3,858 | ) | | 2,210 |
| | 3,200 |
| | 310 |
| | 563 |
| | 198 |
| | 2,623 |
|
| Charge-offs | | (558 | ) | | (1,509 | ) | | (1,890 | ) | | (349 | ) | | (184 | ) | | — |
| | (4,490 | ) |
| Recoveries | | 71 |
| | 6 |
| | 178 |
| | 54 |
| | 19 |
| | — |
| | 328 |
|
| Balance at end of year | | $ | 2,245 |
| | $ | 2,999 |
| | $ | 6,361 |
| | $ | 1,110 |
| | $ | 2,037 |
| | $ | 431 |
| | $ | 15,183 |
|
| December 31, 2017 | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | |
| Ending allowance balance attributed to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Collectively evaluated for impairment | | 1,804 |
| | 3,175 |
| | 7,952 |
| | 614 |
| | 1,801 |
| | 375 |
| | 15,721 |
|
| Total ending allowance balance | | $ | 1,804 |
| | $ | 3,175 |
| | $ | 7,952 |
| | $ | 614 |
| | $ | 1,801 |
| | $ | 375 |
| | $ | 15,721 |
|
| Loans: | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 10,605 |
| | $ | 15,132 |
| | $ | 17,923 |
| | $ | 2,464 |
| | $ | 864 |
| | $ | — |
| | $ | 46,988 |
|
| Loans collectively evaluated for impairment | | 1,737,985 |
| | 554,365 |
| | 1,168,379 |
| | 279,904 |
| | 186,781 |
| | — |
| | 3,927,414 |
|
| Total ending loan balance | | $ | 1,748,590 |
| | $ | 569,497 |
| | $ | 1,186,302 |
| | $ | 282,368 |
| | $ | 187,645 |
| | $ | — |
| | $ | 3,974,402 |
|
| December 31, 2016 | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | |
| Ending allowance balance attributed to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 266 |
| | $ | — |
| | $ | 119 |
| | $ | 125 |
| | $ | — |
| | $ | — |
| | $ | 510 |
|
| Collectively evaluated for impairment | | 1,979 |
| | 2,999 |
| | 6,242 |
| | 985 |
| | 2,037 |
| | 431 |
| | 14,673 |
|
| Total ending allowance balance | | $ | 2,245 |
| | $ | 2,999 |
| | $ | 6,361 |
| | $ | 1,110 |
| | $ | 2,037 |
| | $ | 431 |
| | $ | 15,183 |
|
| Loans: | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 13,306 |
| | $ | 11,123 |
| | $ | 3,789 |
| | $ | 2,556 |
| | $ | 268 |
| | $ | — |
| | $ | 31,042 |
|
| Loans collectively evaluated for impairment | | 1,684,918 |
| | 523,091 |
| | 1,128,286 |
| | 287,999 |
| | 152,301 |
| | — |
| | 3,776,595 |
|
| Total ending loan balance | | $ | 1,698,224 |
| | $ | 534,214 |
| | $ | 1,132,075 |
| | $ | 290,555 |
| | $ | 152,569 |
| | $ | — |
| | $ | 3,807,637 |
|
A summary of impaired loans at December 31, 2017 and 2016 is as follows, excluding PCI loans (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Impaired loans with no allocated allowance for loan losses | | $ | 46,988 |
| | $ | 25,228 |
|
| Impaired loans with allocated allowance for loan losses | | — |
| | 5,814 |
|
| | | $ | 46,988 |
| | $ | 31,042 |
|
| Amount of the allowance for loan losses allocated | | $ | — |
| | $ | 510 |
|
At December 31, 2017, impaired loans include troubled debt restructured2020 includes Paycheck Protection Program (“PPP”) loans of $42.1 million, of which $33.3 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2016 impaired loans include troubled debt restructured loans of $30.5 million, of which $27.0 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest.
The summary of loans individually evaluated for impairment by loan portfolio segment as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016 is as follows, excluding PCI loans (in thousands):
|
| | | | | | | | | | | | |
| | | Unpaid
Principal
Balance | | Recorded
Investment | | Allowance for
Loan Losses
Allocated |
| At December 31, 2017 | | | | | | |
| With no related allowance recorded: | | | | | | |
| Residential real estate | | $ | 10,951 |
| | $ | 10,605 |
| | $ | — |
|
| Commercial real estate – owner occupied | | 15,832 |
| | 15,132 |
| | — |
|
| Commercial real estate – investor | | 19,457 |
| | 17,923 |
| | — |
|
| Consumer | | 2,941 |
| | 2,464 |
| | — |
|
| Commercial and industrial | | 895 |
| | 864 |
| | — |
|
| | | $ | 50,076 |
| | $ | 46,988 |
| | $ | — |
|
| With an allowance recorded: | | | | | | |
| Residential real estate | | $ | — |
| | $ | — |
| | $ | — |
|
| Commercial real estate – owner occupied | | — |
| | — |
| | — |
|
| Commercial real estate – investor | | — |
| | — |
| | — |
|
| Consumer | | — |
| | — |
| | — |
|
| Commercial and industrial | | — |
| | — |
| | — |
|
| | | $ | — |
| | $ | — |
| | $ | — |
|
| At December 31, 2016 | | | | | | |
| With no related allowance recorded: | | | | | | |
| Residential real estate | | $ | 9,848 |
| | $ | 9,694 |
| | $ | — |
|
| Commercial real estate – owner occupied | | 11,886 |
| | 11,123 |
| | — |
|
| Commercial real estate – investor | | 2,239 |
| | 1,897 |
| | — |
|
| Consumer | | 2,559 |
| | 2,246 |
| | — |
|
| Commercial and industrial | | 300 |
| | 268 |
| | — |
|
| | | $ | 26,832 |
| | $ | 25,228 |
| | $ | — |
|
| With an allowance recorded: | | | | | | |
| Residential real estate | | $ | 3,998 |
| | $ | 3,612 |
| | $ | 266 |
|
| Commercial real estate – owner occupied | | — |
| | — |
| | — |
|
| Commercial real estate – investor | | 2,011 |
| | 1,892 |
| | 119 |
|
| Consumer | | 581 |
| | 310 |
| | 125 |
|
| Commercial and industrial | | — |
| | — |
| | — |
|
| | | $ | 6,590 |
| | $ | 5,814 |
| | $ | 510 |
|
|
| | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 |
| | | Average
Recorded
Investment | | Interest
Income
Recognized | | Average
Recorded
Investment | | Interest
Income
Recognized |
| With no related allowance recorded: | | | | | | |
| Residential real estate | | $ | 10,928 |
| | $ | 481 |
| | $ | 14,497 |
| | $ | 394 |
|
| Commercial real estate – owner occupied | | 11,890 |
| | 797 |
| | 18,095 |
| | 467 |
|
| Commercial real estate – investor | | 8,825 |
| | 768 |
| | 535 |
| | 98 |
|
| Consumer | | 2,388 |
| | 144 |
| | 2,549 |
| | 122 |
|
| Commercial and industrial | | 643 |
| | 60 |
| | 411 |
| | 13 |
|
| | | $ | 34,674 |
| | $ | 2,250 |
| | $ | 36,087 |
| | $ | 1,094 |
|
| With an allowance recorded: | | | | | | |
| Residential real estate | | $ | 1,585 |
| | $ | 62 |
| | $ | 786 |
| | $ | 163 |
|
| Commercial real estate – owner occupied | | — |
| | — |
| | 466 |
| | — |
|
| Commercial real estate – investor | | 3,386 |
| | 81 |
| | 1,027 |
| | 79 |
|
| Consumer | | 119 |
| | 6 |
| | 67 |
| | 29 |
|
| Commercial and industrial | | — |
| | — |
| | — |
| | — |
|
| | | $ | 5,090 |
| | $ | 149 |
| | $ | 2,346 |
| | $ | 271 |
|
The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of December 31, 2017 and 2016, excluding PCI loans (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Residential real estate | | $ | 4,190 |
| | $ | 8,126 |
|
| Commercial real estate – owner occupied | | 5,962 |
| | 2,414 |
|
| Commercial real estate – investor | | 8,281 |
| | 521 |
|
| Consumer | | 1,929 |
| | 2,064 |
|
| Commercial and industrial | | 503 |
| | 441 |
|
| | | $ | 20,865 |
| | $ | 13,566 |
|
The following table presents the aging of the recorded investment in past due loans as of December 31, 2017 and 2016 by loan portfolio segment, excluding PCI loans (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | Greater
than
90 Days
Past Due | | Total
Past Due | | Loans Not
Past Due | | Total |
| December 31, 2017 | | | | | | | | | | | | |
| Residential real estate | | $ | 13,197 |
| | $ | 2,351 |
| | $ | 3,372 |
| | $ | 18,920 |
| | $ | 1,729,670 |
| | $ | 1,748,590 |
|
| Commercial real estate – owner occupied | | 222 |
| | — |
| | 5,402 |
| | 5,624 |
| | 563,873 |
| | 569,497 |
|
| Commercial real estate – investor | | 135 |
| | 1,426 |
| | 4,507 |
| | 6,068 |
| | 1,180,234 |
| | 1,186,302 |
|
| Consumer | | 1,067 |
| | 310 |
| | 1,687 |
| | 3,064 |
| | 279,304 |
| | 282,368 |
|
| Commercial and industrial | | 2,694 |
| | 36 |
| | 503 |
| | 3,233 |
| | 184,412 |
| | 187,645 |
|
| | | $ | 17,315 |
| | $ | 4,123 |
| | $ | 15,471 |
| | $ | 36,909 |
| | $ | 3,937,493 |
| | $ | 3,974,402 |
|
| December 31, 2016 | | | | | | | | | | | | |
| Residential real estate | | $ | 9,532 |
| | $ | 3,038 |
| | $ | 7,159 |
| | $ | 19,729 |
| | $ | 1,678,495 |
| | $ | 1,698,224 |
|
| Commercial real estate – owner occupied | | 3,962 |
| | 1,032 |
| | 890 |
| | 5,884 |
| | 528,330 |
| | 534,214 |
|
| Commercial real estate – investor | | — |
| | — |
| | 521 |
| | 521 |
| | 1,131,554 |
| | 1,132,075 |
|
| Consumer | | 1,519 |
| | 436 |
| | 1,963 |
| | 3,918 |
| | 286,637 |
| | 290,555 |
|
| Commercial and industrial | | 5,548 |
| | 181 |
| | 384 |
| | 6,113 |
| | 146,456 |
| | 152,569 |
|
| | | $ | 20,561 |
| | $ | 4,687 |
| | $ | 10,917 |
| | $ | 36,165 |
| | $ | 3,771,472 |
| | $ | 3,807,637 |
|
$95.4 million.
The Company categorizes all commercial and commercial real estate loans, except for small business loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. Generally, risk ratings for loans on forbearance pursuant to the CARES Act are not re-evaluated until the initial 90-day forbearance period ends. At that time, risk ratings are updated with an emphasis on industries that were heavily impacted by the pandemic, as well as individual borrower liquidity, and other measures of resiliency as described below. The Company evaluates risk ratings on an ongoing basis and as such, adversely rated loans will be re-evaluated as government restrictions end and businesses resume normal operations. The Company uses the following definitions for risk ratings:
Pass: Loans classified as Pass are well protected by the paying capacity and net worth of the borrower.
Special Mention: Loans classified as Special Mention have a potential weakness that deserves management’s close attention. This includes borrowers that have been negatively affected by the pandemic but demonstrate some degree of liquidity. This liquidity may or may not be adequate to resume operations. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.
Substandard: Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. This includes borrowers whose operations were negatively affected by the pandemic and whom, in the Bank’s assessment, do not have adequate liquidity available to resume operations at levels sufficient to service their current debt levels. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
As of December 31, 2017 and 2016, and based on the most recent analysis performed, the risk category of
The following table summarizes total loans by loan portfolio segment is as follows, excluding PCI loansyear of origination, internally assigned credit grades and risk characteristics (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and prior | | Revolving lines of credit | | Total |
| December 31, 2020 | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | | | | | | | | | | | | | | |
| Pass | | $ | 137,262 | | | $ | 40,737 | | | $ | 27,967 | | | $ | 18,845 | | | $ | 33,568 | | | $ | 59,339 | | | $ | 134,140 | | | $ | 451,858 | |
| Special Mention | | 150 | | | 583 | | | 826 | | | 1,422 | | | 907 | | | 118 | | | 1,429 | | | 5,435 | |
| Substandard | | 581 | | | 1,284 | | | 1,243 | | | 809 | | | 439 | | | 1,706 | | | 7,301 | | | 13,363 | |
| Total commercial and industrial | | 137,993 | | | 42,604 | | | 30,036 | | | 21,076 | | | 34,914 | | | 61,163 | | | 142,870 | | | 470,656 | |
| Commercial real estate - owner occupied | | | | | | | | | | | | | | | | |
| Pass | | 96,888 | | | 114,506 | | | 122,962 | | | 124,050 | | | 104,264 | | | 428,423 | | | 18,932 | | | 1,010,025 | |
| Special Mention | | 0 | | | 3,512 | | | 8,240 | | | 1,023 | | | 17,115 | | | 17,811 | | | 439 | | | 48,140 | |
| Substandard | | 0 | | | 34,670 | | | 9,001 | | | 3,404 | | | 3,677 | | | 35,509 | | | 639 | | | 86,900 | |
| Total commercial real estate - owner occupied | | 96,888 | | | 152,688 | | | 140,203 | | | 128,477 | | | 125,056 | | | 481,743 | | | 20,010 | | | 1,145,065 | |
| Commercial real estate - investor | | | | | | | | | | | | | | | | |
| Pass | | $ | 635,930 | | | $ | 628,435 | | | $ | 317,104 | | | $ | 426,268 | | | $ | 281,876 | | | $ | 812,062 | | | $ | 194,913 | | | $ | 3,296,588 | |
| Special Mention | | 0 | | | 15,979 | | | 17,113 | | | 15,225 | | | 4,234 | | | 55,872 | | | 149 | | | 108,572 | |
| Substandard | | 4,311 | | | 9,217 | | | 1,931 | | | 17,222 | | | 11,474 | | | 36,326 | | | 5,823 | | | 86,304 | |
| Total commercial real estate - investor | | 640,241 | | | 653,631 | | | 336,148 | | | 458,715 | | | 297,584 | | | 904,260 | | | 200,885 | | | 3,491,464 | |
| | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | |
Residential real estate (1) | | | | | | | | | | | | | | | | |
| Pass | | $ | 595,982 | | | $ | 437,593 | | | $ | 226,435 | | | $ | 166,773 | | | $ | 146,237 | | | $ | 729,037 | | | $ | 0 | | | $ | 2,302,057 | |
| Special Mention | | 0 | | | 532 | | | 0 | | | 0 | | | 446 | | | 2,186 | | | 0 | | | 3,164 | |
| Substandard | | 570 | | | 0 | | | 1,489 | | | 221 | | | 0 | | | 1,958 | | | 0 | | | 4,238 | |
| Total residential real estate | | 596,552 | | | 438,125 | | | 227,924 | | | 166,994 | | | 146,683 | | | 733,181 | | | 0 | | | 2,309,459 | |
Consumer (1) | | | | | | | | | | | | | | | | |
| Pass | | 24,954 | | | 26,659 | | | 83,296 | | | 25,469 | | | 16,565 | | | 156,276 | | | 2,145 | | | 335,364 | |
| Special Mention | | 0 | | | 0 | | | 0 | | | 0 | | | 150 | | | 382 | | | 0 | | | 532 | |
| Substandard | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3,566 | | | 0 | | | 3,566 | |
| Total consumer | | 24,954 | | | 26,659 | | | 83,296 | | | 25,469 | | | 16,715 | | | 160,224 | | | 2,145 | | | 339,462 | |
| | | | | | | | | | | | | | | | |
| Total loans receivable | | $ | 1,496,628 | | | $ | 1,313,707 | | | $ | 817,607 | | | $ | 800,731 | | | $ | 620,952 | | | $ | 2,340,571 | | | $ | 365,910 | | | $ | 7,756,106 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Pass | | Special
Mention | | Substandard | | Doubtful | | Total |
| December 31, 2017 | | | | | | | | | | |
| Commercial real estate – owner occupied | | $ | 546,569 |
| | $ | 4,337 |
| | $ | 18,591 |
| | $ | — |
| | $ | 569,497 |
|
| Commercial real estate – investor | | 1,146,630 |
| | 14,644 |
| | 25,028 |
| | — |
| | 1,186,302 |
|
| Commercial and industrial | | 181,438 |
| | 3,153 |
| | 3,054 |
| | — |
| | 187,645 |
|
| | | $ | 1,874,637 |
| | $ | 22,134 |
| | $ | 46,673 |
| | $ | — |
| | $ | 1,943,444 |
|
| December 31, 2016 | | | | | | | | | | |
| Commercial real estate – owner occupied | | $ | 501,652 |
| | $ | 7,680 |
| | $ | 24,882 |
| | $ | — |
| | $ | 534,214 |
|
| Commercial real estate – investor | | 1,106,747 |
| | 713 |
| | 24,615 |
| | — |
| | 1,132,075 |
|
| Commercial and industrial | | 150,474 |
| | 757 |
| | 1,338 |
| | — |
| | 152,569 |
|
| | | $ | 1,758,873 |
| | $ | 9,150 |
| | $ | 50,835 |
| | $ | — |
| | $ | 1,818,858 |
|
(1)For residential real estate and consumer loan classes,loans, the Company evaluates credit quality based on the aging status of the loan which was previously presented, and by payment activity.
An analysis of the allowance for credit losses on loans for the years ended December 31, 2020 and 2019 is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
and
Industrial | | Commercial Real Estate - Owner Occupied | | Commercial Real Estate - Investor | | Residential
Real Estate | | Consumer | | Unallocated | | Total |
| For the Year Ended December 31, 2020 | | | | | | | | | | | | | | |
| Allowance for credit losses on loans | | | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 1,458 | | | $ | 2,893 | | | $ | 9,883 | | | $ | 2,002 | | | $ | 591 | | | $ | 25 | | | $ | 16,852 | |
| Impact of CECL adoption | | 2,416 | | | (1,109) | | | (5,395) | | | 3,833 | | | 2,981 | | | (25) | | | 2,701 | |
| Initial allowance for credit losses on PCD loans | | 1,221 | | | 26 | | | 260 | | | 109 | | | 1,023 | | | 0 | | | 2,639 | |
Credit loss expense (benefit) (1) | | 1,039 | | | 15,007 | | | 34,935 | | | 8,191 | | | (1,770) | | | 0 | | | 57,402 | |
Charge-offs (1) | | (890) | | | (1,769) | | | (13,081) | | | (3,200) | | | (1,244) | | | 0 | | | (20,184) | |
| Recoveries | | 146 | | | 6 | | | 101 | | | 883 | | | 189 | | | 0 | | | 1,325 | |
| Balance at end of year | | $ | 5,390 | | | $ | 15,054 | | | $ | 26,703 | | | $ | 11,818 | | | $ | 1,770 | | | $ | 0 | | | $ | 60,735 | |
| For the Year Ended December 31, 2019 | | | | | | | | | | | | | | |
| Allowance for credit losses on loans | | | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 1,609 | | | $ | 2,277 | | | $ | 8,770 | | | $ | 2,413 | | | $ | 486 | | | $ | 1,022 | | | $ | 16,577 | |
| Credit loss (benefit) expense | | (311) | | | 947 | | | 638 | | | 792 | | | 567 | | | (997) | | | 1,636 | |
| Charge-offs | | 0 | | | (663) | | | (236) | | | (1,299) | | | (606) | | | 0 | | | (2,804) | |
| Recoveries | | 160 | | | 332 | | | 711 | | | 96 | | | 144 | | | 0 | | | 1,443 | |
| Balance at end of year | | $ | 1,458 | | | $ | 2,893 | | | $ | 9,883 | | | $ | 2,002 | | | $ | 591 | | | $ | 25 | | | $ | 16,852 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(1) The year ended December 31, 2020 was impacted by the shift in current and forward-looking economic conditions, credit migration and borrower vulnerability related to COVID-19. The Company recorded $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. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. At December 31, 2020, the Company had collateral dependent loans with an amortized cost balance as follows: commercial and industrial of $1.9 million, commercial real estate - owner occupied of $13.8 million, and commercial real estate - investor of $18.3 million. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $1.4 million and $1.8 million at December 31, 2020 and December 31, 2019, respectively. The amount of foreclosed residential real estate property held by the Company was $106,000 and $51,000 at December 31, 2020 and December 31, 2019, respectively.
In accordance with ASC 310, prior to the adoption of ASU 2016-13, the following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019, excluding PCI loans (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
and
Industrial | | Commercial Real Estate - Owner Occupied | | Commercial Real Estate - Investor | | Residential Real Estate | | Consumer | | Unallocated | | Total |
| At December 31, 2019 | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | |
| Ending allowance balance attributed to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 0 | | | $ | 474 | | | $ | 0 | | | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 476 | |
| Collectively evaluated for impairment | | 1,458 | | | 2,419 | | | 9,883 | | | 2,002 | | | 589 | | | 25 | | | 16,376 | |
| Total ending allowance balance | | $ | 1,458 | | | $ | 2,893 | | | $ | 9,883 | | | $ | 2,002 | | | $ | 591 | | | $ | 25 | | | $ | 16,852 | |
| Loans: | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 243 | | | $ | 6,163 | | | $ | 5,584 | | | $ | 11,009 | | | $ | 3,511 | | | $ | 0 | | | $ | 26,510 | |
| Loans collectively evaluated for impairment | | 395,848 | | | 785,778 | | | 2,279,114 | | | 2,309,812 | | | 404,325 | | | 0 | | | 6,174,877 | |
| Total ending loan balance | | $ | 396,091 | | | $ | 791,941 | | | $ | 2,284,698 | | | $ | 2,320,821 | | | $ | 407,836 | | | $ | 0 | | | $ | 6,201,387 | |
As of December 31, 2019, the Company defined an impaired loan as non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also included all loans modified as troubled debt restructurings. At December 31, 2019, the impaired loan portfolio totaled $26.5 million for which there was a $476,000 specific allocation in the allowance for loan losses. The average balance of impaired loans for the year ended December 31, 2019 was $29.4 million. If interest income on non-accrual loans and impaired loans had been current in accordance with their original terms, approximately $372,000 and $419,000 of interest income for the years ended December 31, 2019 and 2018, respectively, would have been recorded.
At December 31, 2019, impaired loans include TDR loans of $24.6 million, of which $18.0 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest.
The summary of loans individually evaluated for impairment by loan portfolio segment as of December 31, 2019 was as follows, excluding PCI loans (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Unpaid
Principal
Balance | | Recorded
Investment | | Allowance for
Loan Losses
Allocated |
| At December 31, 2019 | | | | | | |
| With no related allowance recorded: | | | | | | |
| Commercial and industrial | | $ | 265 | | | $ | 243 | | | $ | 0 | |
| Commercial real estate – owner occupied | | 4,062 | | | 3,968 | | | 0 | |
| Commercial real estate – investor | | 6,665 | | | 5,584 | | | 0 | |
| Residential real estate | | 11,009 | | | 11,009 | | | 0 | |
| Consumer | | 3,734 | | | 3,509 | | | 0 | |
| Total with no related allowance recorded | | $ | 25,735 | | | $ | 24,313 | | | $ | 0 | |
| With an allowance recorded: | | | | | | |
| Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Commercial real estate – owner occupied | | 2,376 | | | 2,195 | | | 474 | |
| Commercial real estate – investor | | 0 | | | 0 | | | 0 | |
| Residential real estate | | 0 | | | 0 | | | 0 | |
| Consumer | | 2 | | | 2 | | | 2 | |
| Total with an allowance recorded | | $ | 2,378 | | | $ | 2,197 | | | $ | 476 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | For the Year Ended December 31, 2019 |
| | | | | | | Average
Recorded
Investment | | Interest
Income
Recognized |
| With no related allowance recorded: | | | | | | |
| Commercial and industrial | | | | | | $ | 523 | | | $ | 5 | |
| Commercial real estate – owner occupied | | | | | | 4,171 | | | 179 | |
| Commercial real estate – investor | | | | | | 9,012 | | | 222 | |
| Residential real estate | | | | | | 10,275 | | | 548 | |
| Consumer | | | | | | 3,275 | | | 178 | |
| Total with no related allowance recorded | | | | | | $ | 27,256 | | | $ | 1,132 | |
| With an allowance recorded: | | | | | | |
| Commercial and industrial | | | | | | $ | 0 | | | $ | 0 | |
| Commercial real estate – owner occupied | | | | | | 2,173 | | | 138 | |
| Commercial real estate – investor | | | | | | 0 | | | 0 | |
| Residential real estate | | | | | | 0 | | | 0 | |
| Consumer | | | | | | 0 | | | 0 | |
| Total with an allowance recorded | | | | | | $ | 2,173 | | | $ | 138 | |
The following table presents the recorded investment in residential and consumernon-accrual loans based on payment activityby loan portfolio segment as of December 31, 20172020 and 2016, excluding2019 (in thousands). The December 31, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Commercial and industrial | | $ | 1,908 | | | $ | 207 | |
| Commercial real estate – owner occupied | | 13,751 | | | 4,811 | |
| Commercial real estate – investor | | 18,287 | | | 2,917 | |
| Residential real estate | | 8,671 | | | 7,181 | |
| Consumer | | 4,246 | | | 2,733 | |
| Total non-accrual loans | | $ | 46,863 | | | $ | 17,849 | |
At December 31, 2020, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At December 31, 2020 and December 31, 2019, there were 0 loans that were 90 days or greater past due and still accruing interest.
The following table presents the aging of the recorded investment in past due loans as of December 31, 2020 and 2019 by loan portfolio segment (in thousands):. The December 31, 2020 balances include PCD loans while the December 31, 2019 balances exclude PCI loans (in accordance with ASC 310, prior to the adoption of ASU 2016-13 on January 1, 2020).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90 Days or Greater
Past Due | | Total
Past Due | | Loans Not
Past Due | | Total |
| December 31, 2020 | | | | | | | | | | | | |
| Commercial and industrial | | $ | 3,050 | | | $ | 628 | | | $ | 327 | | | $ | 4,005 | | | $ | 466,651 | | | $ | 470,656 | |
| Commercial real estate – owner occupied | | 1,015 | | | 0 | | | 7,871 | | | 8,886 | | | 1,136,179 | | | 1,145,065 | |
| Commercial real estate – investor | | 8,897 | | | 3,233 | | | 11,122 | | | 23,252 | | | 3,468,212 | | | 3,491,464 | |
| Residential real estate | | 15,156 | | | 3,164 | | | 4,238 | | | 22,558 | | | 2,286,901 | | | 2,309,459 | |
| Consumer | | 978 | | | 533 | | | 3,568 | | | 5,079 | | | 334,383 | | | 339,462 | |
| Total loans receivable | | $ | 29,096 | | | $ | 7,558 | | | $ | 27,126 | | | $ | 63,780 | | | $ | 7,692,326 | | | $ | 7,756,106 | |
| December 31, 2019 | | | | | | | | | | | | |
| Commercial and industrial | | $ | 100 | | | $ | 0 | | | $ | 207 | | | $ | 307 | | | $ | 395,784 | | | $ | 396,091 | |
| Commercial real estate – owner occupied | | 1,541 | | | 1,203 | | | 1,040 | | | 3,784 | | | 788,157 | | | 791,941 | |
| Commercial real estate – investor | | 381 | | | 938 | | | 2,792 | | | 4,111 | | | 2,280,587 | | | 2,284,698 | |
| Residential real estate | | 8,161 | | | 3,487 | | | 2,859 | | | 14,507 | | | 2,306,314 | | | 2,320,821 | |
| Consumer | | 1,048 | | | 491 | | | 2,388 | | | 3,927 | | | 403,909 | | | 407,836 | |
| Total loans receivable | | $ | 11,231 | | | $ | 6,119 | | | $ | 9,286 | | | $ | 26,636 | | | $ | 6,174,751 | | | $ | 6,201,387 | |
|
| | | | | | | | |
| | | Residential Real Estate |
| | | Residential | | Consumer |
| December 31, 2017 | | | | |
| Performing | | $ | 1,744,400 |
| | $ | 280,439 |
|
| Non-performing | | 4,190 |
| | 1,929 |
|
| | | $ | 1,748,590 |
| | $ | 282,368 |
|
| December 31, 2016 | | | | |
| Performing | | $ | 1,690,098 |
| | $ | 288,491 |
|
| Non-performing | | 8,126 |
| | 2,064 |
|
| | | $ | 1,698,224 |
| | $ | 290,555 |
|
The Company classifies certain loans as troubled debt restructuringsTDRs when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. One-to-four familyResidential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered troubled debt restructurings.TDRs. For these loans, the Bank retains its security interest in the real estate collateral. At December 31, 2020 and 2019, TDR loans totaled $17.5 million and $24.6 million, respectively. Included in the non-accrual loan total at December 31, 2017, 20162020 and 20152019 were $8.8 million, $3.5$5.5 million and $4.9$6.6 million, respectively, of troubled debt restructurings.TDRs. At December 31, 2017, there were no2020 and 2019, the Company had $0 and $476,000, respectively, of specific reserves allocated to loans which were classified as troubled debt restructurings. At December 31, 2016 and 2015 the Company had allocated $510,000, and $262,000, respectively, of specific reserves to loans whichthat are classified as troubled debt restructurings.TDRs. Non-accrual loans
which become troubled debt restructuringsTDRs are generally returned to accrual status after six months of performance. In addition to the troubled debt restructuringsTDRs included in non-accrual loans, the Company also has loans classified as troubled debt restructuring which are accruing TDRs at December 31, 2017, 20162020 and 20152019 which totaled $33.3 million, $27.0$12.0 million and $26.3$18.0 million, respectively. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.
The following table presents information about troubled debt restructuringsTDRs which occurred during the years ended December 31, 20172020 and 2016,2019, and troubled debt restructuringsTDRs modified within the previous year and which defaulted during the years ended December 31, 20172020 and 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Number
of Loans | | Pre-modification
Recorded Investment | | Post-modification
Recorded Investment |
| For the Year Ended December 31, 2020 | | | | | | |
| Troubled debt restructurings: | | | | | | |
| Commercial real estate – owner occupied | | 1 | | $ | 1,112 | | | $ | 1,143 | |
| Commercial real estate – investor | | 2 | | 1,035 | | | 1,116 | |
| Residential real estate | | 6 | | 1,018 | | | 1,065 | |
| Consumer | | 6 | | 1,035 | | | 668 | |
| | | | | Number of Loans | | Recorded Investment |
| Troubled debt restructurings | | | | | | |
| Which subsequently defaulted: | | | | None | | None |
| | | | | | |
| | | | | | |
| | | Number
of Loans | | Pre-modification
Recorded Investment | | Post-modification
Recorded Investment |
| For the Year Ended December 31, 2019 | | | | | | |
| Troubled debt restructurings: | | | | | | |
| Commercial real estate – owner occupied | | 1 | | $ | 154 | | | $ | 198 | |
| Commercial real estate – investor | | 1 | | 272 | | | 393 | |
| Residential real estate | | 6 | | 1,036 | | | 1,091 | |
| Consumer | | 7 | | 663 | | | 683 | |
| | | | | Number of Loans | | Recorded Investment |
| Troubled debt restructurings | | | | | | |
| Which subsequently defaulted: | | | | | | |
| Consumer | | | | 1 | | $ | 115 | |
In response to the COVID-19 pandemic and its economic impact on customers, short-term modification programs that comply with the CARES Act were implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The Commercial Borrower Relief Program allowed for the deferral of principal and interest or principal only. For principal and interest deferrals as well as principal only deferrals, all payments received are first applied to all accrued and unpaid interest and the balance, if any, on account of unpaid principal, is then applied to fees, expenses and other amounts due to the Bank. Monthly payments will continue until the maturity date when all then unpaid principal, interest, fees, and all other charges are due and payable to the Bank. The Consumer Borrower Relief Program allowed for the deferral of principal and interest. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Provided these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans at December 31, 2020 and will not be reported as past due during the deferral period.
|
| | | | | | | | | | |
| | | Number
of Loans | | Pre-modification
Recorded Investment | | Post-modification
Recorded Investment |
| For the year ended December 31, 2017 | | | | | | |
| Troubled Debt Restructurings: | | | | | | |
| Residential real estate | | 8 | | $ | 1,637 |
| | $ | 1,600 |
|
| Commercial real estate – owner occupied | | 7 | | 6,977 |
| | 6,977 |
|
| Commercial real estate – investor | | 7 | | 10,904 |
| | 11,026 |
|
| Commercial and industrial | | 1 | | 665 |
| | 665 |
|
| | | | | Number of Loans | | Recorded Investment |
| Troubled Debt Restructurings | | | | | | |
| Which Subsequently Defaulted: | | | | None | | None |
| | | | | | | |
| | | Number
of Loans | | Pre-modification
Recorded Investment | | Post-modification
Recorded Investment |
| For the year ended December 31, 2016 | | | | | | |
| Troubled Debt Restructurings: | | | | | | |
| Residential real estate | | 7 | | $ | 1,574 |
| | $ | 1,523 |
|
| Commercial real estate – investor | | 1 | | 1,592 |
| | 1,592 |
|
| Consumer | | 8 | | 852 |
| | 846 |
|
| | | | | Number of Loans | | Recorded Investment |
| Troubled Debt Restructurings | | | | | | |
| Which Subsequently Defaulted: | | | | None | | None |
As part of the Ocean ShoreTwo River and CapeCountry Bank acquisitions, PCIthe Company purchased loans, were acquiredfor which there was, at a discount primarily due to deterioratedacquisition, evidence of more than insignificant deterioration of credit quality. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.
quality since origination. The following table presents information regarding the estimatescarrying amount of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCIPCD loans acquired from Ocean Shore at December 1, 2016 and Cape at May 2, 2016is as follows (in thousands):
|
| | | | | | | |
| | Ocean Shore | | Cape |
| | December 1, 2016 | | May 2, 2016 |
| Contractually required principal and interest | $ | 7,385 |
| | $ | 21,345 |
|
| Contractual cash flows not expected to be collected (non-accretable discount) | (4,666 | ) | | (12,387 | ) |
| Expected cash flows to be collected at acquisition | 2,719 |
| | 8,958 |
|
| Interest component of expected cash flows (accretable yield) | (401 | ) | | (576 | ) |
| Fair value of acquired loans | $ | 2,318 |
| | $ | 8,382 |
|
| | | | | | | | | | | | | | | |
| Two River | | Country Bank | | | | |
| | January 1, 2020 | | January 1, 2020 | | | | |
| Purchase price of loans at acquisition | $ | 26,354 | | | $ | 24,667 | | | | | |
| Allowance for credit losses at acquisition | 1,343 | | | 1,296 | | | | | |
| Non-credit discount at acquisition | 3,589 | | | 5,334 | | | | | |
| Par value of acquired loans at acquisition | $ | 31,286 | | | $ | 31,297 | | | | | |
The following table summarizes the changes in accretable yield for PCI loans during the yearsyear ended December 31, 2017 and 20162019 (in thousands):
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 |
| Beginning balance | | $ | 3,630 | |
| Acquisition | | 691 | |
| Accretion | | (2,613) | |
| Reclassification from non-accretable difference | | 1,317 | |
| Ending balance | | $ | 3,025 | |
|
| | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 |
| Beginning balance | | $ | 749 |
| | $ | 75 |
|
| Acquisition | | — |
| | 977 |
|
| Accretion | | (921 | ) | | (459 | ) |
| Reclassification from non-accretable difference | | 333 |
| | 156 |
|
| Ending balance | | $ | 161 |
| | $ | 749 |
|
Note 6:6. Interest and Dividends Receivable
Interest and dividends receivable at December 31, 20172020 and 20162019 are summarized as follows (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Loans receivable | | $ | 30,893 | | | $ | 17,664 | |
| Debt securities, equity investments and other | | 3,169 | | | 2,827 | |
| Mortgage-backed securities | | 1,207 | | | 1,183 | |
| Total interest and dividends receivable | | $ | 35,269 | | | $ | 21,674 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Loans | | $ | 10,750 |
| | $ | 10,499 |
|
| Investment securities | | 2,430 |
| | 582 |
|
| Mortgage-backed securities | | 1,074 |
| | 908 |
|
| | | $ | 14,254 |
| | $ | 11,989 |
|
Note 7:7. Premises and Equipment, Net
Premises and equipment, net of accumulated depreciation and amortization expense at December 31, 20172020 and 20162019 are summarized as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Land | | $ | 24,876 |
| | $ | 19,080 |
|
| Buildings and improvements | | 97,463 |
| | 63,955 |
|
| Leasehold improvements | | 6,613 |
| | 6,598 |
|
| Furniture and equipment | | 30,545 |
| | 33,375 |
|
| Other | | 1,450 |
| | 3,240 |
|
| Total | | 160,947 |
| | 126,248 |
|
| Accumulated depreciation and amortization | | (59,171 | ) | | (54,863 | ) |
| | | $ | 101,776 |
| | $ | 71,385 |
|
During 2017, the Company acquired an administrative office building in Red Bank, New Jersey for $42.5 million, which it expects to occupy in April 2018 while consolidating multiple operating facilities into two locations. | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Land | | $ | 23,109 | | | $ | 24,446 | |
| Buildings and improvements | | 99,350 | | | 97,653 | |
| Leasehold improvements | | 8,640 | | | 9,274 | |
| Furniture and equipment | | 31,639 | | | 25,558 | |
| Finance lease | | 1,845 | | | 2,572 | |
| Other | | 10,270 | | | 2,764 | |
| Total | | 174,853 | | | 162,267 | |
| Accumulated depreciation and amortization | | (67,759) | | | (59,576) | |
| Total premises and equipment, net | | $ | 107,094 | | | $ | 102,691 | |
Depreciation and amortization expense for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 amounted to $6.3$8.5 million, $4.8$8.2 million and $3.3$8.7 million, respectively.
Note 8:8. Deposits
Deposits, including accrued interest payable of $22,000$367,000 at December 31, 20172020 and $31,000$238,000 at December 31, 2016,2019, are summarized as follows (in thousands):
| | | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2020 | | 2019 |
| | | Amount | | Weighted Average Cost | | Amount | | Weighted Average Cost | | Amount | | Weighted
Average
Cost | | Amount | | Weighted
Average
Cost |
| Non-interest-bearing accounts | | $ | 756,513 |
| | — | % | | $ | 782,504 |
| | — | % | Non-interest-bearing accounts | | $ | 2,133,195 | | | 0 | % | | $ | 1,377,396 | | | 0 | % |
| Interest-bearing checking accounts | | 1,954,358 |
| | 0.32 |
| | 1,626,713 |
| | 0.19 |
| Interest-bearing checking accounts | | 3,646,866 | | | 0.49 | | | 2,539,428 | | | 0.68 | |
| Money market deposit accounts | | 363,656 |
| | 0.33 |
| | 458,911 |
| | 0.30 |
| Money market deposit accounts | | 783,521 | | | 0.19 | | | 578,147 | | | 0.68 | |
| Savings accounts | | 661,167 |
| | 0.04 |
| | 672,519 |
| | 0.08 |
| Savings accounts | | 1,491,251 | | | 0.05 | | | 898,174 | | | 0.13 | |
| Time deposits | | 607,104 |
| | 1.18 |
| | 647,103 |
| | 1.14 |
| Time deposits | | 1,372,783 | | | 1.51 | | | 935,632 | | | 1.82 | |
| Total deposits | | $ | 4,342,798 |
| | 0.34 | % | | $ | 4,187,750 |
| | 0.30 | % | Total deposits | | $ | 9,427,616 | | | 0.43 | % | | $ | 6,328,777 | | | 0.62 | % |
Included in time deposits at December 31, 20172020 and 2016, is $270.62019 were $409.5 million and $269.0$150.6 million, respectively, in deposits of $100,000$250,000 and over.
Time deposits at December 31, 20172020 mature as follows (in thousands):
| | | For the Year Ended December 31, | Time Deposit Maturities | For the Year Ended December 31, | Time Deposit Maturities |
| 2018 | $ | 308,237 |
| |
| 2019 | 110,598 |
| |
| 2020 | 66,959 |
| |
| 2021 | 42,060 |
| 2021 | $ | 973,426 | |
| 2022 | 75,620 |
| 2022 | 265,668 | |
| 2023 | | 2023 | 63,132 | |
| 2024 | | 2024 | 46,321 | |
| 2025 | | 2025 | 15,138 | |
| Thereafter | 3,630 |
| Thereafter | 9,098 | |
| Total | $ | 607,104 |
| Total | $ | 1,372,783 | |
Interest expense on deposits for the years ended December 31, 2017, 20162020, 2019 and 2015 is2018 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Interest-bearing checking accounts | | $ | 19,395 | | | $ | 16,820 | | | $ | 9,219 | |
| Money market deposit accounts | | 2,902 | | | 4,919 | | | 2,818 | |
| Savings accounts | | 2,505 | | | 1,195 | | | 990 | |
| Time deposits | | 23,488 | | | 15,498 | | | 9,551 | |
| Total interest expense on deposits | | $ | 48,290 | | | $ | 38,432 | | | $ | 22,578 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Interest-bearing checking accounts | | $ | 4,533 |
| | $ | 2,114 |
| | $ | 952 |
|
| Money market deposit accounts | | 1,213 |
| | 858 |
| | 187 |
|
| Savings accounts | | 345 |
| | 191 |
| | 102 |
|
| Time deposits | | 6,245 |
| | 4,354 |
| | 3,060 |
|
| Total interest expense on deposits | | $ | 12,336 |
| | $ | 7,517 |
| | $ | 4,301 |
|
Note 9:9. Borrowed Funds
Borrowed funds are summarized as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | Amount | | Weighted
Average
Rate | | Amount | | Weighted
Average
Rate |
| FHLB advances | | $ | 0 | | | 0 | % | | $ | 519,260 | | | 1.84 | % |
| Securities sold under agreements to repurchase with retail customers | | 128,454 | | | 0.33 | | | 71,739 | | | 0.42 | |
| Other borrowings | | 235,471 | | | 4.58 | | | 96,801 | | | 4.64 | |
| Total borrowed funds | | $ | 363,925 | | | 3.08 | % | | $ | 687,800 | | | 2.09 | % |
|
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| Federal Home Loan Bank advances | | $ | 288,691 |
| | 1.74 | % | | $ | 250,498 |
| | 1.75 | % |
| Securities sold under agreements to repurchase | | 79,668 |
| | 0.21 |
| | 69,935 |
| | 0.13 |
|
| Other borrowings | | 56,519 |
| | 4.48 |
| | 56,559 |
| | 4.21 |
|
| | | $ | 424,878 |
| | 1.82 | % | | $ | 376,992 |
| | 1.81 | % |
The Company prepaid all of its FHLB advances, in addition to the advances that matured, in 2020. The total FHLB prepayment fees incurred for the year ended December 31, 2020 was $14.3 million. Information concerning FHLB advances and securities sold under agreements to repurchase with retail customers (“reverse repurchase agreements”) is summarized as follows (in thousands):
| | | | | FHLB Advances | | Reverse Repurchase Agreements | | FHLB
Advances | | Reverse Repurchase
Agreements |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Average balance | | $ | 258,870 |
| | $ | 266,981 |
| | $ | 74,712 |
| | $ | 75,227 |
| Average balance | | $ | 413,290 | | | $ | 387,925 | | | $ | 125,500 | | | $ | 64,525 | |
| Maximum amount outstanding at any month end | | 291,615 |
| | 252,229 |
| | 80,945 |
| | 81,738 |
| Maximum amount outstanding at any month end | | 825,824 | | | 519,260 | | | 153,810 | | | 71,739 | |
| Average interest rate for the year | | 1.73 | % | | 1.67 | % | | 0.16 | % | | 0.14 | % | Average interest rate for the year | | 1.70 | % | | 2.18 | % | | 0.45 | % | | 0.43 | % |
| Amortized cost of collateral: | | | | | | | | | Amortized cost of collateral: | |
| Mortgage-backed securities | | — |
| | — |
| | $ | 58,020 |
| | $ | 67,224 |
| Mortgage-backed securities | | $ | — | | | $ | — | | | $ | 147,445 | | | $ | 80,436 | |
| Estimated fair value of collateral: | | | | | | | | | Estimated fair value of collateral: | |
| Mortgage-backed securities | | — |
| | — |
| | 58,007 |
| | 67,452 |
| Mortgage-backed securities | | — | | | — | | | 152,679 | | | 81,365 | |
The securities collateralizing the reverse repurchase agreements are delivered to the lender with whom each transaction is executed or to a third-party custodian. The lender, who may sell, loan or otherwise dispose of such securities to other parties in
the normal course of their operations, agrees to resell to the Company substantially the same securities at the maturity of the reverse repurchase agreements. (ReferRefer to Note 4 Securities)Securities.
FHLB advances and reverseReverse repurchase agreements have contractual maturities at December 31, 20172020 as follows (in thousands): | | | | | | | | | | |
| | | | Reverse
Repurchase
Agreements |
| For the Year Ended December 31, | | | | |
| 2021 | | | | $ | 128,454 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total | | | | $ | 128,454 | |
The other borrowings at December 31, 2020 include the following (in thousands): |
| | | | | | | | |
| | | FHLB Advances | | Reverse Repurchase Agreements |
| For the Year Ended December 31, | | | | |
| 2018 | | $ | 96,958 |
| | $ | 79,668 |
|
| 2019 | | 81,618 |
| | — |
|
| 2020 | | 75,115 |
| | — |
|
| 2021 | | 25,000 |
| | — |
|
| 2022 | | 10,000 |
| | — |
|
| Total | | $ | 288,691 |
| | $ | 79,668 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Debt | | Stated Value | | Carrying Value | | Interest Rate | | Maturity |
| Subordinated debt | | $ | 35,000 | | | $ | 34,804 | | | 5.125 | % | (1) | September 30, 2026 |
| Subordinated debt | | 125,000 | | | 122,446 | | | 5.250 | % | (2) | May 15, 2030 |
| Subordinated debt | | 7,500 | | | 7,539 | | | 7.210 | % | (3) | October 1, 2025 |
| Trust preferred | | 5,000 | | | 5,000 | | | 3 month LIBOR plus 165 basis points | | August 1, 2036 |
| Trust preferred | | 30,000 | | | 22,944 | | | 3 month LIBOR plus 135 basis points | | March 15, 2036 |
| Trust preferred | | 7,500 | | | 7,500 | | | 3 month LIBOR plus 166 basis points | | November 1, 2036 |
| Trust preferred | | 10,000 | | | 7,737 | | | 3 month LIBOR plus 153 basis points | | April 19, 2037 |
| Trust preferred | | 10,000 | | | 10,000 | | | 3 month LIBOR plus 175 basis points | | September 1, 2037 |
| Trust preferred | | 10,000 | | | 7,601 | | | 3 month LIBOR plus 139 basis points | | October 1, 2037 |
| Trust preferred | | 10,000 | | | 7,800 | | | 3 month LIBOR plus 225 basis points | | December 15, 2034 |
| Finance lease | | 2,100 | | | 2,100 | | | 5.625 | % | | June 30, 2029 |
| Total | | $ | 252,100 | | | $ | 235,471 | | | | | |
During September 2016, the Company issued $35.0 million of subordinated notes, which carry a fixed rate of 5.125% for the first five years and(1)Adjusts to a floating rate of 392 basis points over 3-month LIBOR for the subsequent five years. Accrued interest is payable semi-annually during the fixed rate period and quarterly thereafter and principal is due at maturity3 month London Inter-bank Offered Rate (“LIBOR”) on September 30, 2026. During 2007, the Company issued $10.0 million of trust preferred securities which carry2021.
(2)Adjusts to a floating rate of 175509.5 basis points over 3-month LIBOR adjusted quarterly. Accrued interest is due quarterly with principal due at the maturity date of September 1, 2037. During 2006,3 month Secured Overnight Financing Rate on May 15, 2025.
(3)In January 2021, the Company issued $12.5 millionprepaid the subordinated debt in its entirety.
All of the trust preferred securities. The trust preferred securities carry a floating rate of 166 basis points over 3-month LIBOR adjusted quarterly. Accrued interestdebt is due quarterly with principal due at the maturity date in 2036.currently callable.
Interest expense on borrowings for the years ended December 31, 2017, 2016,2020, 2019, and 2015 is2018 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| FHLB advances | | $ | 7,018 | | | $ | 8,441 | | | $ | 7,885 | |
| Reverse repurchase agreements | | 562 | | | 276 | | | 168 | |
| Other borrowings | | 10,787 | | | 5,674 | | | 5,521 | |
| Total interest expense on borrowings | | $ | 18,367 | | | $ | 14,391 | | | $ | 13,574 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Federal Home Loan Bank advances | | $ | 4,486 |
| | $ | 4,471 |
| | $ | 3,850 |
|
| Securities sold under agreements to repurchase | | 121 |
| | 102 |
| | 103 |
|
| Other borrowings | | 2,668 |
| | 1,073 |
| | 780 |
|
| | | $ | 7,275 |
| | $ | 5,646 |
| | $ | 4,733 |
|
All FHLB advances are secured by the Bank’s mortgage loans and FHLB stock. As a member of the FHLB of New York, the Bank is required to maintain a minimum investment in the capital stock of the FHLB, at cost, in an amount equal to 0.20%0.125% of the Bank’s mortgage-related assets, plus 4.5% of the specified value of certain transactions between the Bank and the FHLB.
Note 10:10. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2017, 20162020, 2019 and 20152018 consists of the following (in thousands):
| | | | | For the Year Ended December 31, | | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 |
| Current | | | | | | | Current | | | | | | |
| Federal | | $ | (12,754 | ) | | $ | 6,259 |
| | $ | 8,378 |
| Federal | | $ | 15,731 | | | $ | 1,991 | | | $ | 18,030 | |
| State | | 169 |
| | 96 |
| | 1,064 |
| State | | 6,617 | | | 740 | | | 108 | |
| Total current | | (12,585 | ) | | 6,355 |
| | 9,442 |
| Total current | | 22,348 | | | 2,731 | | | 18,138 | |
| Deferred | | | | | | | Deferred | | | | | | |
| Federal | | 35,440 |
| | 5,798 |
| | 1,349 |
| Federal | | (2,746) | | | 18,846 | | | (4,568) | |
| State | | — |
| | — |
| | 92 |
| State | | (1,869) | | | (2,793) | | | 0 | |
| Total deferred | | 35,440 |
| | 5,798 |
| | 1,441 |
| Total deferred | | (4,615) | | | 16,053 | | | (4,568) | |
| | | $ | 22,855 |
| | $ | 12,153 |
| | $ | 10,883 |
| |
| Total provision for income taxes | | Total provision for income taxes | | $ | 17,733 | | | $ | 18,784 | | | $ | 13,570 | |
Included in other comprehensive income iswas income tax expense attributable to the net accretion of unrealized losses on debt securities available-for-sale arising during the year in the amount of $276,000, $330,000,$721,000, $874,000, and $600,000$1.1 million for the years ended December 31, 2017, 20162020, 2019 and 2015, respectively. Effective January 1, 2017, the Company adopted ASU 2016-09 “Compensation - Stock Compensation,” which decreased income tax expense by $1.8 million for the year ended December 31, 2017. Under the ASU, the tax benefits of exercised stock options and vested stock awards are recognized as a benefit to income tax expense in the reporting period which they occur. Prior to the adoption of the ASU, included in stockholders’ equity is income tax benefit attributable to stock plans in the amount of $62,000, and $32,000 for the years ended December 31, 2016, and 2015,2018, respectively.
A reconciliation between the provision for income taxes and the expected amount computed by multiplying income before the provision for income taxes times the applicable statutory Federal income tax rate for the years ended December 31, 2017, 20162020, 2019 and 2015 is2018 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Income before provision for income taxes | | $ | 81,042 | | | $ | 107,358 | | | $ | 85,502 | |
| Applicable statutory Federal income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Computed “expected” Federal income tax expense | | $ | 17,019 | | | $ | 22,545 | | | $ | 17,955 | |
| Increase (decrease) in Federal income tax expense resulting from | | | | | | |
| State income taxes, net of Federal benefit | | 3,751 | | | 583 | | | 85 | |
| Earnings on BOLI | | (1,349) | | | (1,138) | | | (1,072) | |
| Tax exempt interest | | (1,161) | | | (665) | | | (615) | |
| Merger related expenses | | 138 | | | 297 | | | 322 | |
| Stock compensation | | (136) | | | (386) | | | (758) | |
| Revaluation of state deferred tax asset | | 0 | | | (2,205) | | | 0 | |
| Impact of Tax Cuts and Jobs Act (“Tax Reform”) | | 0 | | | 0 | | | (1,854) | |
| Reclassification of certain tax effect from accumulated other comprehensive income | | (204) | | | (221) | | | (586) | |
| Other items, net | | (325) | | | (26) | | | 93 | |
| Total provision for income taxes | | $ | 17,733 | | | $ | 18,784 | | | $ | 13,570 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Income before provision for income taxes | | $ | 65,325 |
| | $ | 35,199 |
| | $ | 31,205 |
|
| Applicable statutory Federal income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Computed “expected” Federal income tax expense | | $ | 22,864 |
| | $ | 12,320 |
| | $ | 10,922 |
|
| (Decrease) increase in Federal income tax expense resulting from | | | | | | |
| Tax exempt interest | | (839 | ) | | (390 | ) | | (291 | ) |
| ESOP fair market value adjustment | | 223 |
| | 131 |
| | 111 |
|
| ESOP dividends | | (230 | ) | | (223 | ) | | (234 | ) |
| Earnings on BOLI | | (1,155 | ) | | (781 | ) | | (525 | ) |
| Merger related expenses | | 478 |
| | 1,005 |
| | 132 |
|
| State income taxes net of Federal benefit | | 110 |
| | 62 |
| | 751 |
|
| Stock compensation | | (1,823 | ) | | — |
| | — |
|
| Impact of Tax Cuts and Jobs Act (“Tax Reform”) | | 3,643 |
| | — |
| | — |
|
| Other items, net | | (416 | ) | | 29 |
| | 17 |
|
| | | $ | 22,855 |
| | $ | 12,153 |
| | $ | 10,883 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 20172020 and 20162019 are presented in the following table (in thousands):
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Deferred tax assets: | | | | |
| Allowance for credit losses on loans and debt securities HTM | | $ | 16,168 | | | $ | 4,107 | |
| Other reserves | | 2,485 | | | 3,061 | |
| Incentive compensation | | 2,919 | | | 1,397 | |
| Deferred compensation | | 533 | | | 591 | |
| Stock plans | | 2,214 | | | 1,270 | |
| Unrealized loss on properties available-for-sale | | 2,435 | | | 1,438 | |
| Unrealized loss on securities | | 272 | | | 826 | |
| Net operating loss carryforwards related to acquisition | | 33,014 | | | 39,519 | |
| Deferred fees on PPP loans | | 517 | | | 0 | |
| Other, net | | 195 | | | 178 | |
| | | | |
| Federal and state alternative minimum tax | | 3,705 | | | 4,746 | |
| | | | |
| | | | |
| Total gross deferred tax assets | | 64,457 | | | 57,133 | |
| Deferred tax liabilities: | | | | |
| | | | |
| Unrealized gain on equity securities | | (4,154) | | | 0 | |
| Premises and equipment | | (5,871) | | | (7,340) | |
| Deferred loan and commitment costs, net | | (2,968) | | | (2,379) | |
| Purchase accounting adjustments | | (602) | | | 8,475 | |
| Investments, discount accretion | | (452) | | | (380) | |
| Undistributed REIT income | | 0 | | | (4,735) | |
| Other, net | | (783) | | | (707) | |
| Total gross deferred tax liabilities | | (14,830) | | | (7,066) | |
| Net deferred tax assets | | $ | 49,627 | | | $ | 50,067 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Allowance for loan losses | | $ | 3,311 |
| | $ | 6,269 |
|
| Reserve for repurchased loans | | 97 |
| | 346 |
|
| Reserve for uncollected interest | | 49 |
| | 70 |
|
| Incentive compensation | | — |
| | 1,695 |
|
| Deferred compensation | | 519 |
| | 1,549 |
|
| Other reserves | | 115 |
| | 375 |
|
| Stock plans | | 864 |
| | 2,151 |
|
| ESOP | | 126 |
| | 224 |
|
| Purchase accounting adjustments | | 3,436 |
| | 16,905 |
|
| Net operating loss carryforward related to acquisition | | 3,741 |
| | 5,829 |
|
| Other real estate owned | | 170 |
| | 26 |
|
| Unrealized loss on securities | | 1,898 |
| | 5,211 |
|
| Federal and state alternative minimum tax | | 2,451 |
| | 2,220 |
|
| Total gross deferred tax assets | | 16,777 |
| | 42,870 |
|
| Deferred tax liabilities: | | | | |
| Incentive compensation | | (127 | ) | | — |
|
| Excess servicing on sale of mortgage loans | | (28 | ) | | (76 | ) |
| Investments, discount accretion | | (244 | ) | | (434 | ) |
| Deferred loan and commitment costs, net | | (1,119 | ) | | (1,261 | ) |
| Premises and equipment, differences in depreciation | | (373 | ) | | (52 | ) |
| Undistributed REIT income | | (12,322 | ) | | (2,167 | ) |
| Other | | (642 | ) | | — |
|
| Total gross deferred tax liabilities | | (14,855 | ) | | (3,990 | ) |
| Net deferred tax assets | | $ | 1,922 |
| | $ | 38,880 |
|
The 2020 deferred tax expense does not equal the change in net deferred tax assets as a result of net deferred liabilities recorded in connection with the Two River and Country Bank acquisitions of approximately $4.5 million.
The Company has Federal net operating losses from the acquisitions of Colonial American Bank (“Colonial American”) and Cape.Sun. At both December 31, 20172020 and 2016,2019, the net operating losses from Colonial American were $5.9 million. These net operating losses are subject to annual limitation under Code Section 382 in the amount of approximately $330,000$4.6 million and will expire between 2029 and 2034. At both December 31, 2017 and 2016, the net operating losses from Cape were $10.5 million.$4.9 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $4.5 million,$330,000, and will expire between 2020-2023.2029 and 2034. At December 31, 2020 and 2019, the net operating losses from Sun were $152.6 million and $175.9 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $23.3 million, which will expire in 2022 and $9.3 million, which will expire between 2029 and 2036.
As of December 31, 20172020 and 2016,2019, the Company had $1.8 million of New Jersey AMAAlternative Minimum Assessment Tax (“AMT”) Credits. These credits do not expire. As of December 31, 20172020 and 2016,2019, the Company had $0 and $1.0 million, respectively, of AMT Tax Credits that were part of the Cape Bancorp, Inc. (“Cape”) acquisition and $2.3 million of AMT Tax Credits that were part of the CapeSun acquisition. These credits are subject to the same Code Section 382 limitation as indicated above but do not expire.
At December 31, 2017, 20162020, 2019 and 2015,2018, the Company determined that it is not required to establish a valuation reserve for the remaining net deferred tax assets since it is “more likely than not” that the net deferred tax assets will be realized through future reversals of existing taxable temporary differences, future taxable income and tax planning strategies. The conclusion that it is “more likely than not” that the remaining net deferred tax assets will be realized is based on the history of earnings and the prospects for continued growth. Management will continue to review the tax criteria related to the recognition of deferred tax assets.
Retained earnings at December 31, 2017 includes2020 included approximately $10.8 million for which no provision for income tax has been made. This amount representsrepresented an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation,
stock redemptions and excess distributions to stockholders. At December 31, 2017,2020, the Company had an unrecognized deferred tax liability of $2.3$2.8 million with respect to this reserve.
There were no0 unrecognized tax benefits for the years ended December 31, 2017, 20162020, 2019 and 2015.2018. The tax years that remain subject to examination by the Federal government and the state of New York include the years ended December 31, 20142017 and forward.
The tax years that remain subject to examination by the state of New Jersey include the years ended December 31, 20132016 and forward.
On July 1, 2018, New Jersey enacted changes to the corporate business tax laws. This legislation required a combined group to file combined returns for tax years beginning in 2019. However, due to technical issues and inconsistencies with existing tax law, it was initially determined that the tax law change did not have an impact on deferred taxes. In December 2019, the State of New Jersey issued a clarifying technical bulletin related to the impact of the new tax legislation enacted in July 2018. This technical bulletin provided clarification to the combined income tax reporting for certain members of a unitary business group. Accordingly, this required a revaluation of some of the Company’s deferred tax assets. As a result of the revaluation of the state deferred tax assets, the Company recognized an additional income tax benefit of $2.2 million for the year ended December 31, 2019.
With the enactment of the Tax Reform on December 22, 2017, the federal corporate income tax rate was reduced from 35% to 21% effective January 1, 2018. Accounting guidance requiresrequired that the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations, but also to items initially recognized in other comprehensive income. As a result of the reduction in the U. S.U.S. federal statutory income tax rate, the Company recognized an additional income tax benefit of $1.9 million for the year ended December 31, 2018 and additional income tax expense of $3.6 million for the year ended December 31, 2017. Because accounting guidance requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations, this additional income tax expense included $1.8 million related to items recognized in other comprehensive income. These amounts will continue to be reported as separate components of accumulated other comprehensive income until such time as the underlying transactions from which such amounts arose are settled through continuing operations. At such time, the reclassification from accumulated other comprehensive income will be recognized as a net tax benefit. The amount included in accumulated other comprehensive income at December 31, 2020, subject to reclassification, was $786,000.
Note 11:11. Employee Stock Ownership Plan
As part of its mutual to stock conversion, theThe Bank establishedmaintains an Employee Stock Ownership Plan and in 2006 the Bank established a Matching Contribution Employee Stock Ownership Plan (collectively the “ESOP”(“ESOP”) to provide retirement benefits for eligible employees. Effective December 31, 2015, the Matching Contribution Employee Stock Ownership Plan was terminated and merged into the Employee Stock Ownership Plan.. All full-time employees are eligible to participate in the ESOP after they attain age 21 and complete one year of service during which they work at least 1000 hours. ESOP shares are allocated among participants on the basis of compensation earned during the year. Employees are fully vested in their ESOP account after the completion of five years of credited service or completely if service was terminated due to death, retirement, disability or change in control of the Company. ESOP participants are entitled to receive distributions from the ESOP account only upon termination of service, which includes retirement and death except that a participant may elect to have dividends distributed as a cash payment on a quarterly basis.
The ESOP originally borrowed $13.4 million from the Company to purchase 2,013,137 shares of common stock issued in the conversion.stock. On May 12, 1998, the initial loan agreement was amended to allow the ESOP to borrow an additional $8.2 million in order to fund the purchase of 633,750 shares of common stock. At the same time, the term of the loan was extended from the initial twelve years to thirty years. As partOn May 1, 2018, the loan agreement was amended to allow the ESOP to borrow an additional $8.4 million in order to fund the purchase of 292,592 shares of common stock. At the establishment ofsame time, the Matching Contribution Employee Stock Ownership Plan the termfixed interest rate of the loan was reduced by one year and now expires in 2026.from 8.25% to 3.25%. The amended loan is to be repaid from contributions by the Bank to the ESOP trust. The Bank is required to make contributions to the ESOP in amounts at least equal to the principal and interest requirement of the debt, assuming a fixed interest rate of 8.25%.debt.
The Bank’s obligation to make such contributions is reduced to the extent of any dividends paid by the Company on unallocated shares and any investment earnings realized on such dividends. As of December 31, 20172020 and 2016,2019, contributions to the ESOP, which were used to fund principal and interest payments on the ESOP debt, totaled $505,000$1.5 million. During 2020 and $507,000, respectively. During 20172019, $313,000 and 2016, $195,000 and $194,000,$357,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 20172020 and 2016,2019, the loan had an outstanding balance of $3.1$8.1 million and $3.3$9.3 million, respectively, and the ESOP had unallocated shares of 293,860394,080 and 327,362,459,711, respectively. At December 31, 2017,2020, the unallocated shares had a fair value of $7.7$7.3 million. The unamortized balance of the ESOP is shown as unallocated common stock held by the ESOP and is reflected as a reduction of stockholders’ equity.
For the yearsyear ended December 31, 2017, 2016 and 2015,2020, the Bank recorded compensation expense related to the ESOP of $919,000, $657,000,$1.1 million including $80,000 representing a decrease in compensation expense to reflect the decrease in the average fair value of shares committed to be released and $603,000,allocated shares below the Bank’s cost. For the years ended December 31, 2019 and 2018, the Bank recorded compensation expense related to the ESOP of $1.6 million, and $1.6 million, respectively, including $637,000, $373,000,$366,000, and $318,000, $596,000,
respectively, representing additional compensation expense to reflect the increase in the average fair value of shares committed to be released and allocated shares in excess of the Bank’s cost. As of December 31, 2017, 2,319,5252020, 2,477,663 shares had been allocated to participants and 33,50265,631 shares were committed to be released.
Note 12:12. Incentive Plan
On April 20, 2006, the OceanFirst Financial Corp. 2006 Stock Incentive Plan, which authorizes the granting of stock options or awards of common stock, was approved by stockholders. On May 5, 2011, the OceanFirst Financial Corp. 2011 Stock Incentive Plan, which also authorizes the granting of stock options or awards of common stock, was approved by stockholders. This plan was subsequently amended on June 2, 2017. In January 2018, the Company implemented a performance-based stock plan for select senior management executives. On May 20, 2020, the OceanFirst Financial Corp. 2020 Stock Incentive Plan, which also authorizes the granting of stock options or awards of common stock, was approved by stockholders. The purpose of these plans is to attract and retain qualified personnel in key positions, provide officers, employees and non-employee directors (“Outside Directors”) with a proprietary interest in the Company as an incentive to contribute to the success of the Company, align the interests of management with those of other stockholders and reward employees for outstanding performance. All officers, other employees and Outside Directors of the Company and its affiliates are eligible to receive awards under the plans.
Under the 2020 Stock Incentive Plan, the Company is authorized to issue up to 2,000,000 shares subject to option or, in lieu of options, up to 800,000 shares in the form of stock awards. At December 31, 2020, 969,294 options or 387,718 awards remain available for issuance. Under the amended 2011 Stock Incentive Plan, the Company is authorized to issue up to an additional 4,000,000 shares subject to option or, in lieu of options, up to 1,600,000 shares in the form of stock awards. At December 31, 2017, 1,799,0472020, 47,690 options or 719,61919,076 awards remain to be issued. Under the 2006 Stock Incentive Plan, the Company was authorized to issue up to an additional 1,000,000 shares subject to options, or in lieu of options, up to 333,333 shares in the form of stock awards. At December 31, 2017, no options or awards remain to be issued.available for issuance.
As part of the Colonial AmericanSun acquisition, 370,000491,248 options were granted in 20152018 for the conversion of Colonial American outstanding Sun options. These options had a weighted average exercise price of $26.11 and were fully vested upon acquisition. As part of the Cape acquisition, 599,373 options were granted in 2016 for the conversion of outstanding Cape options. These options had a weighted average exercise price of $10.34 per option and were fully vested upon acquisition. As part of the Ocean Shore acquisition, 287,595 options were granted in 2016 for the conversion of outstanding Ocean Shore options. These options had a weighted average exercise price of $9.37$21.92 per option and were fully vested upon acquisition. The Company will not recognize compensation expense in the future on these options as they have beenwere accounted for as part of the acquisition.
All optionsStock awards generally vest at the rate of 20% per year. The Company granted to senior executives performance-based awards in 2020, 2019 and 2018, which vest in equal amounts over a five-year period (for 2020 and 2019 awards) or a three-year period (for 2018 awards) when a specific performance metric has been attained or exceeded. Tiered performance goals for each metric are aligned with corresponding tiered vesting values and have been set using financial data from the applicable strategic plan as approved by the Board. The Company accrues expense for the performance-based awards based on the estimated probability of achievement of the defined performance goals.
Options expire 10 years from the date of grant and generally vest at the rate of 20% per year. The exercise price of each option equals the closing market price of the Company’s stock on the date of grant. The Company typically issues Treasurytreasury shares or authorized but unissued shares to satisfy stock option exercises.
The Company recognizes the grant-date fair value of stock options and other stock-based compensation issued to employees in the income statement. The modified prospective transition method was adopted and, as a result, the income statement includes $1.2$1.5 million, $829,000,$973,000, and $783,000,$1.0 million, of expense for stock option grants and $1.0$2.8 million, $684,000,$2.9 million, and $517,000,$2.0 million, of expense for stock award grants, for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. At December 31, 2017,2020, the Company had $5.4$12.5 million in compensation cost related to non-vested options and stock awards not yet recognized. This cost will be recognized over the remaining vesting period of 3.43.25 years.
The fair value of stock options granted by the Company was estimated through the use of the Black-Scholes option pricing model applying the following assumptions:
| | | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | | 2.31 | % | | 1.69 | % | | 1.72 | % | Risk-free interest rate | | 1.03 | % | | 2.63 | % | | 2.65 | % |
| Expected option life | | 7 years |
| | 7 years |
| | 7 years |
| Expected option life | | 7 years | | 7 years | | 7 years |
| Expected volatility | | 21 | % | | 21 | % | | 28 | % | Expected volatility | | 23 | % | | 21 | % | | 21 | % |
| Expected dividend yield | | 2.07 | % | | 3.01 | % | | 2.99 | % | Expected dividend yield | | 3.33 | % | | 2.70 | % | | 2.19 | % |
| | | | | | | | |
| Weighted average fair value of an option share granted during the year | | $ | 5.62 |
| | $ | 2.64 |
| | $ | 3.58 |
| Weighted average fair value of an option share granted during the year | | $ | 2.93 | | | $ | 4.47 | | | $ | 5.44 | |
| Intrinsic value of options exercised during the year (in thousands) | | 7,882 |
| | 3,412 |
| | 136 |
| Intrinsic value of options exercised during the year (in thousands) | | 2,499 | | | 2,994 | | | 8,513 | |
The risk-free interest rate is based on the U.S. Treasury rate with a term equal to the expected option life. The expected option life conforms to the Company’s actual experience. Expected volatility is based on actual historical results. Compensation cost is recognized on a straight line basis over the vesting period.
A summary of option activity for the years ended December 31, 2017, 20162020, 2019 and 2015 are2018 is as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | Number of Shares | | Weighted Average Exercise Price | | Number Of Shares | | Weighted Average Exercise Price | | Number Of Shares | | Weighted Average Exercise Price |
| Outstanding at beginning of year | | 2,758,833 |
| | $ | 14.94 |
| | 2,281,931 |
| | $ | 17.62 |
| | 1,751,270 |
| | $ | 15.94 |
|
| Granted | | 335,150 |
| | 29.01 |
| | 317,460 |
| | 17.27 |
| | 238,305 |
| | 17.39 |
|
| Assumed in acquisition | | — |
| | — |
| | 886,968 |
| | 10.30 |
| | 370,000 |
| | 26.11 |
|
| Exercised | | (567,153 | ) | | 14.39 |
| | (375,576 | ) | | 13.20 |
| | (29,480 | ) | | 13.43 |
|
| Forfeited | | (35,099 | ) | | 18.42 |
| | (11,625 | ) | | 16.37 |
| | (8,900 | ) | | 14.56 |
|
| Expired | | (2,417 | ) | | 11.70 |
| | (340,325 | ) | | 25.02 |
| | (39,264 | ) | | 25.31 |
|
| Outstanding at end of year | | 2,489,314 |
| | $ | 16.91 |
| | 2,758,833 |
| | $ | 14.94 |
| | 2,281,931 |
| | $ | 17.62 |
|
| Options exercisable | | 1,608,762 |
| | | | 1,912,630 |
| | | | 1,497,960 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| | | Number
of
Shares | | Weighted
Average
Exercise
Price | | Number
of
Shares | | Weighted
Average
Exercise
Price | | Number
of
Shares | | Weighted
Average
Exercise
Price |
| Outstanding at beginning of year | | 2,424,032 | | | $ | 19.80 | | | 2,340,842 | | | $ | 18.25 | | | 2,489,314 | | | $ | 16.91 | |
| Granted | | 699,651 | | | 20.44 | | | 461,407 | | | 25.20 | | | 135,107 | | | 27.39 | |
| Assumed in acquisition | | 0 | | | 0 | | | 0 | | | 0 | | | 491,248 | | | 21.92 | |
| Exercised | | (213,506) | | | 9.50 | | | (227,189) | | | 11.24 | | | (765,624) | | | 17.69 | |
| Forfeited | | (6,357) | | | 21.26 | | | (149,158) | | | 24.71 | | | (9,203) | | | 28.42 | |
| Expired | | (64,953) | | | 22.51 | | | (1,870) | | | 29.59 | | | 0 | | | 0 | |
| Outstanding at end of year | | 2,838,867 | | | $ | 20.67 | | | 2,424,032 | | | $ | 19.80 | | | 2,340,842 | | | $ | 18.25 | |
| Options exercisable | | 1,596,927 | | | | | 1,612,946 | | | | | 1,604,576 | | | |
The following table summarizes information about stock options outstanding at December 31, 2017:2020:
|
| | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Exercise Prices | | Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number Of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price |
| $ 8.44 to 9.98 | | 283,707 |
| | 2.6 years | | $ | 8.97 |
| | 283,707 |
| | 2.6 years | | $ | 8.97 |
|
| 9.99 to 12.28 | | 293,557 |
| | 2.8 | | 10.74 |
| | 293,557 |
| | 2.8 | | 10.74 |
|
| 12.40 to 14.62 | | 648,568 |
| | 4.3 | | 14.07 |
| | 588,243 |
| | 4.2 | | 14.05 |
|
| 16.06 to 18.45 | | 787,082 |
| | 7.0 | | 17.40 |
| | 304,505 |
| | 6.2 | | 17.42 |
|
| 23.00 to 29.01 | | 476,400 |
| | 7.7 | | 28.50 |
| | 138,750 |
| | 4.1 | | 27.34 |
|
| | | 2,489,314 |
| | 5.4 years | | $ | 16.91 |
| | 1,608,762 |
| | 4.0 years | | $ | 14.34 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Exercise Prices | | Number
of
Options | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
of
Options | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price |
| 9.54 to 14.41 | | 397,734 | | | 1.0 years | | $ | 13.41 | | | 397,734 | | | 1.0 years | | $ | 13.41 | |
| 14.42 to 19.28 | | 743,519 | | | 3.7 | | 16.72 | | | 696,051 | | | 3.6 | | 16.68 | |
| 19.29 to 24.15 | | 753,703 | | | 8.8 | | 20.56 | | | 48,771 | | | 4.5 | | 22.07 | |
| 24.16 to 29.01 | | 943,911 | | | 6.5 | | 26.93 | | | 454,371 | | | 5.4 | | 27.62 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2,838,867 | | | 5.6 years | | $ | 20.67 | | | 1,596,927 | | | 3.5 years | | $ | 19.14 | |
The aggregate intrinsic value for stock options outstanding and stock options exercisable at December 31, 2017 is $24.32020 was $3.5 million and $19.3$3.4 million, respectively.
A summary of the granted but unvested stock award activity for the years ended December 31, 2017, 20162020, 2019 and 2015 are2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| | | Number
of
Shares | | Weighted
Average
Grant Date
Fair Value | | Number
of
Shares | | Weighted
Average
Grant Date
Fair Value | | Number
of
Shares | | Weighted
Average
Grant Date
Fair Value |
| Outstanding at beginning of year: | | 451,443 | | | $ | 25.61 | | | 330,598 | | | $ | 25.92 | | | 169,703 | | | $ | 21.79 | |
| Granted | | 256,649 | | | 20.38 | | | 249,651 | | | 24.80 | | | 272,668 | | | 27.52 | |
| Vested | | (96,564) | | | 24.41 | | | (105,307) | | | 24.49 | | | (58,754) | | | 20.81 | |
| Forfeited | | (35,532) | | | 26.56 | | | (23,499) | | | 26.38 | | | (53,019) | | | 26.60 | |
| Outstanding at end of year | | 575,996 | | | $ | 23.42 | | | 451,443 | | | $ | 25.61 | | | 330,598 | | | $ | 25.92 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number Of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Outstanding at beginning of year: | | 156,945 |
| | $ | 17.25 |
| | 126,960 |
| | $ | 16.90 |
| | 81,775 |
| | $ | 15.85 |
|
| Granted | | 69,175 |
| | 28.70 |
| | 66,770 |
| | 17.66 |
| | 70,890 |
| | 17.39 |
|
| Vested | | (47,379 | ) | | 17.32 |
| | (33,651 | ) | | 16.31 |
| | (23,587 | ) | | 14.86 |
|
| Forfeited | | (9,038 | ) | | 19.14 |
| | (3,134 | ) | | 16.54 |
| | (2,118 | ) | | 15.16 |
|
| Outstanding at end of year | | 169,703 |
| | $ | 21.79 |
| | 156,945 |
| | $ | 17.25 |
| | 126,960 |
| | $ | 16.90 |
|
Note 13:13. Commitments, Contingencies and Concentrations of Credit Risk
The Company, in the normal course of business, is party to financial instruments and commitments which involve, to varying degrees, elements of risk in excess of the amounts recognized in the consolidated financial statements. These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit.
At December 31, 2017,2020, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands):
|
| | | |
| | December 31, 2017 |
| Unused consumer and construction loan lines of credit (primarily floating-rate) | $ | 207,006 |
|
| Unused commercial loan lines of credit (primarily floating-rate) | 315,400 |
|
| Other commitments to extend credit: | |
| Fixed-Rate | 63,819 |
|
| Adjustable-Rate | 2,379 |
|
| Floating-Rate | 22,740 |
|
| | | | | |
| December 31, 2020 |
| Unused consumer and construction loan lines of credit (primarily floating-rate) | $ | 372,159 | |
| Unused commercial loan lines of credit (primarily floating-rate) | 668,114 | |
| Other commitments to extend credit: | |
| Fixed-rate | 234,608 | |
| Adjustable-rate | 2,750 | |
| Floating-rate | 130,448 | |
The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 2.25%2.50% to 5.99%6.38% at December 31, 2017.2020.
The Company’s maximum exposure to credit losses in the event of nonperformance by the other party to these financial instruments and commitments is represented by the contractual amounts. The Company uses the same credit policies in granting commitments and conditional obligations as it does for financial instruments recorded in the consolidated statements of financial condition.
These commitments and obligations do not necessarily represent future cash flow requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s assessment of risk. Substantially all of the unused consumer and construction loan lines of credit are collateralized by mortgages on real estate.
At December 31, 2017,2020, the Company is obligated under noncancelable operating leases for premises and equipment. Rental and lease expense under these leases aggregated approximately $3.2$7.9 million, $3.1$5.0 million, and $2.3$5.2 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
TheRefer to Note 17 Leases, for the projected minimum rentallease commitments as of December 31, 2017 are as follows (in thousands):
|
| | | |
| For the Year Ended December 31, | |
| 2018 | $ | 2,009 |
|
| 2019 | 1,990 |
|
| 2020 | 1,968 |
|
| 2021 | 1,798 |
|
| 2022 | 1,612 |
|
| Thereafter | 6,859 |
|
| Total | $ | 16,236 |
|
The Company grants one-to-four familyresidential real estate and commercial first mortgage commercial real estate loans to borrowers primarily located in centralthroughout New Jersey and southernthe metropolitan areas of Philadelphia and New Jersey.York City. The ability of borrowers to repay their obligations is dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority of the Company’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Company’s control; thecontrol. The Company is, therefore, subject to risk of loss. A decline in real estate values could cause some residential and commercial mortgagereal estate loans to become inadequately collateralized, which would expose the Bank to a greater risk of loss.
The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks. Collateral and/or guarantees are required for all loans.
The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management and its legal counsel are of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
Note 14:14. Earnings Per Share
The following reconciles average shares outstanding for basic and diluted earnings per share for the years ended December 31, 2017, 20162020, 2019 and 20152018 (in thousands):
| | | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Weighted average shares outstanding | | 32,490 |
| | 23,481 |
| | 17,037 |
| Weighted average shares outstanding | | 60,358 | | | 50,701 | | | 47,266 | |
| Less: Unallocated ESOP shares | | (311 | ) | | (344 | ) | | (378 | ) | Less: Unallocated ESOP shares | | (426) | | | (493) | | | (435) | |
| Unallocated incentive award shares and shares held by deferred compensation plan | | (66 | ) | | (44 | ) | | (59 | ) | Unallocated incentive award shares and shares held by deferred compensation plan | | (13) | | | (42) | | | (58) | |
| Average basic shares outstanding | | 32,113 |
| | 23,093 |
| | 16,600 |
| Average basic shares outstanding | | 59,919 | | | 50,166 | | | 46,773 | |
| Add: Effect of dilutive securities: | | | | | | | Add: Effect of dilutive securities: | |
| Incentive awards and shares held by deferred compensation plan | | 1,012 |
| | 433 |
| | 211 |
| Incentive awards and shares held by deferred compensation plan | | 153 | | | 580 | | | 884 | |
| Average diluted shares outstanding | | 33,125 |
| | 23,526 |
| | 16,811 |
| Average diluted shares outstanding | | 60,072 | | | 50,746 | | | 47,657 | |
For the years ended December 31, 2017, 20162020, 2019 and 2015, 331,000, 882,000, and 926,000, respectively, of2018, antidilutive stock options of 2,242,000, 993,000, and 504,000, respectively, were excluded from the earnings per share calculations.
Note 15:15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair market value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or the most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the years ended December 31, 2017, 2016 and 2015. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.
Assets and Liabilities Measured at Fair Value
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Debt Securities Available-for-Sale
SecuritiesDebt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using a quoted price in an active market or exchange (Level 1) or estimated by using inputs other than quoted prices that are based on market observable information (Level 2) and Level 3 inputs which were utilized for certain state and municipal obligations known as bond anticipation notes (“BANs”). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities.
Equity Investments
Equity investments are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1). Equity securities without readily determinable fair values are carried at cost less impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Equity securities include convertible preferred stock for which fair value was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3).
Interest Rate Swaps
The Company’s interest rate swaps are reported at fair value utilizing models provided by an independent, third-party and observable market data. When entering into an interest rate swap agreement, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of our contract counterparty.
Other Real Estate Owned and Impaired Loans Individually Measured for Impairment
Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals.
The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 20172020 and 2016,2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using: |
| | Total Fair
Value | | Level 1
Inputs | | Level 2
Inputs | | Level 3
Inputs |
| December 31, 2020 | | | | | | | | |
| Items measured on a recurring basis: | | | | | | | | |
| Debt securities available-for-sale | | $ | 183,302 | | | $ | 0 | | | $ | 183,302 | | | $ | 0 | |
| Equity investments | | 107,079 | | | 104,539 | | | 0 | | | 2,540 | |
| Interest rate swaps asset | | 45,289 | | | 0 | | | 45,289 | | | 0 | |
| Interest rate swaps liability | | (45,429) | | | 0 | | | (45,429) | | | 0 | |
| Items measured on a non-recurring basis: | | | | | | | | |
| Other real estate owned | | 106 | | | 0 | | | 0 | | | 106 | |
| Loans measured for impairment based on the fair value of the underlying collateral | | 35,366 | | | 0 | | | 0 | | | 35,366 | |
| | | | | | | | |
| December 31, 2019 | | | | | | | | |
| Items measured on a recurring basis: | | | | | | | | |
| Debt securities available-for-sale | | $ | 150,960 | | | $ | 0 | | | $ | 150,935 | | | $ | 25 | |
| Equity investments | | 10,136 | | | 10,136 | | | 0 | | | 0 | |
| Interest rate swaps asset | | 10,141 | | | 0 | | | 10,141 | | | 0 | |
| Interest rate swaps liability | | (10,708) | | | 0 | | | (10,708) | | | 0 | |
| Items measured on a non-recurring basis: | | | | | | | | |
| Other real estate owned | | 264 | | | 0 | | | 0 | | | 264 | |
| Loans measured for impairment based on the fair value of the underlying collateral | | 8,794 | | | 0 | | | 0 | | | 8,794 | |
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers of assets between Level 1 and Level 2 during the years ended December 31, 2020 and 2019.
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using: |
| | | Total Fair Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
| December 31, 2017 | | | | | | | | |
| Items measured on a recurring basis: | | | | | | | | |
| Investment securities available-for-sale: | | | | | | | | |
| U.S. agency obligations | | $ | 81,581 |
| | $ | — |
| | $ | 81,581 |
| | $ | — |
|
| Other investments | | 8,700 |
| | 8,700 |
| | — |
| | — |
|
| Items measured on a non-recurring basis: | | | | | | | | |
| Other real estate owned | | 8,186 |
| | — |
| | — |
| | 8,186 |
|
| Loans measured for impairment based on the fair value of the underlying collateral | | 16,496 |
| | — |
| | — |
| | 16,496 |
|
| December 31, 2016 | | | | | | | | |
| Items measured on a recurring basis: | | | | | | | | |
| Investment securities available-for-sale: | | | | | | | | |
| U.S. agency obligations | | $ | 12,224 |
| | $ | — |
| | $ | 12,224 |
| | $ | — |
|
| Other investments | | 8,551 |
| | 8,551 |
| | — |
| | — |
|
| Items measured on a non-recurring basis: | | | | | | | | |
| Other real estate owned | | 9,803 |
| | — |
| | — |
| | 9,803 |
|
| Loans measured for impairment based on the fair value of the underlying collateral | | 2,419 |
| | — |
| | — |
| | 2,419 |
|
| | | | | | | | |
| | For the Year Ended |
| | December 31, 2020 |
| Beginning balance | | $ | 25 | |
| Total gains (losses) included in earnings | | 0 | |
| Purchases | | 2,377 | |
| Transfers into Level 3 | | 0 | |
| Transfers out of Level 3 | | 0 | |
| Maturities | | (2,402) | |
| Ending balance | | $ | 0 | |
The Company purchased $2.4 million (fair value) of equity investments, consisting of convertible preferred stock, classified as Level 3 at December 31, 2020 as the fair value was determined using broker or dealer quotes with limited levels of activity and price transparency.
Assets and Liabilities Disclosed at Fair Value
A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Cash and Due from Banks
For cash and due from banks, the carrying amount approximates fair value.
Debt Securities Held-to-Maturity
SecuritiesDebt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 1, Level 2 and, infrequently, Level 3 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and
mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities.
Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the security. Fair value estimates for securities for which limited observable market data is available are based on judgments regarding current economic conditions, liquidity discounts, credit and interest rate risks, and other factors. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the security.
The Company utilizes third-party pricing services to obtain fair values for most of its securities held-to-maturity. Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and makes a determinationdecides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain investments classified as Level 1, which are derived from quoted market prices in active markets and certain state and municipal obligations known as bond anticipation notes (“BANs”)BANs as well as certain debt securities where management utilized Level 3 inputs. In the case of the Level 2 securities, the significant observable inputs, include benchmark yields, reported trades, broker/such as broker or dealer quotes issuer spreads, two-sided markets, benchmark securities, bids, offers, other market informationwith limited levels of activity and observations of equity and credit default swap curves related to the issuer. Management based its fair value estimate of the BANs on the local nature of the issuing entities, the short-term life of the security and current economic conditions.price transparency.
Federal Home Loan Bank of New York StockRestricted Equity Investments
The fair value for Federal Home Loan Bank of New York and Federal Reserve Bank stock is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment based uponas stipulated by the outstanding balance of mortgage related assetsrespective agencies.
Loans Receivable and outstanding borrowings.
Loans Held-for-Sale
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage,real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.
Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. Fair values estimated in this manner do not fully incorporate an
In accordance with the prospective adoption of ASU 2016-01, the fair value of loans was measured using the exit price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.notion.
Deposits Other than Time Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts are,is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported.
Time Deposits
The fair value of time deposits areis based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase with Retail Customers
Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.
Borrowed Funds
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.
The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of December 31, 20172020 and December 31, 20162019 are presented in the following tables (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using: |
| | Book
Value | | Level 1
Inputs | | Level 2
Inputs | | Level 3
Inputs |
| December 31, 2020 | | | | | | | | |
| Financial assets: | | | | | | | | |
| Cash and due from banks | | $ | 1,272,134 | | | $ | 1,272,134 | | | $ | 0 | | | $ | 0 | |
| Debt securities held-to-maturity | | 937,253 | | | 0 | | | 952,365 | | | 16,101 | |
| Restricted equity investments | | 51,705 | | | 0 | | | 0 | | | 51,705 | |
| Loans receivable, net and loans held-for-sale | | 7,750,381 | | | 0 | | | 0 | | | 7,806,743 | |
| Financial liabilities: | | | | | | | | |
| Deposits other than time deposits | | 8,054,833 | | | 0 | | | 8,054,833 | | | 0 | |
| Time deposits | | 1,372,783 | | | 0 | | | 1,383,173 | | | 0 | |
| FHLB advances and other borrowings | | 235,471 | | | 0 | | | 251,798 | | | 0 | |
| Securities sold under agreements to repurchase with retail customers | | 128,454 | | | 128,454 | | | 0 | | | 0 | |
| December 31, 2019 | | | | | | | | |
| Financial assets: | | | | | | | | |
| Cash and due from banks | | $ | 120,544 | | | $ | 120,544 | | | $ | 0 | | | $ | 0 | |
| Debt securities held-to-maturity | | 768,873 | | | 0 | | | 774,805 | | | 2,485 | |
| Restricted equity investments | | 62,356 | | | 0 | | | 0 | | | 62,356 | |
| Loans receivable, net and loans held-for-sale | | 6,207,680 | | | 0 | | | 0 | | | 6,173,237 | |
| Financial liabilities: | | | | | | | | |
| Deposits other than time deposits | | 5,393,145 | | | 0 | | | 5,393,145 | | | 0 | |
| Time deposits | | 935,632 | | | 0 | | | 936,318 | | | 0 | |
| FHLB advances and other borrowings | | 616,061 | | | 0 | | | 626,225 | | | 0 | |
| Securities sold under agreements to repurchase with retail customers | | 71,739 | | | 71,139 | | | 0 | | | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using: |
| | | Book Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
| December 31, 2017 | | | | | | | | |
| Financial Assets: | | | | | | | | |
| Cash and due from banks | | $ | 109,613 |
| | $ | 109,613 |
| | $ | — |
| | $ | — |
|
| Securities held-to-maturity | | 764,062 |
| | — |
| | 751,182 |
| | 10,478 |
|
| Federal Home Loan Bank of New York stock | | 19,724 |
| | — |
| | — |
| | 19,724 |
|
| Loans receivable and mortgage loans held-for-sale | | 3,966,014 |
| | — |
| | — |
| | 3,962,689 |
|
| Financial Liabilities: | | | | | | | | |
| Deposits other than time deposits | | 3,735,694 |
| | — |
| | 3,735,694 |
| | — |
|
| Time deposits | | 607,104 |
| | — |
| | 599,677 |
| | — |
|
| Securities sold under agreements to repurchase with retail customers | | 79,668 |
| | 79,668 |
| | — |
| | — |
|
| Federal Home Loan Bank advances and other borrowings | | 345,210 |
| | — |
| | 341,820 |
| | — |
|
| December 31, 2016 | | | | | | | | |
| Financial Assets: | | | | | | | | |
| Cash and due from banks | | $ | 301,373 |
| | $ | 301,373 |
| | $ | — |
| | $ | — |
|
| Securities held-to-maturity | | 589,912 |
| | — |
| | 586,504 |
| | 3,030 |
|
| Federal Home Loan Bank of New York stock | | 19,313 |
| | — |
| | — |
| | 19,313 |
|
| Loans receivable and mortgage loans held-for-sale | | 3,804,994 |
| | — |
| | — |
| | 3,834,677 |
|
| Financial Liabilities: | | | | | | | | |
| Deposits other than time deposits | | 3,540,647 |
| | — |
| | 3,540,647 |
| | — |
|
| Time deposits | | 647,103 |
| | — |
| | 644,354 |
| | — |
|
| Securities sold under agreements to repurchase with retail customers | | 69,935 |
| | 69,935 |
| | — |
| | — |
|
| Federal Home Loan Bank advances and other borrowings | | 307,057 |
| | — |
| | 304,901 |
| | — |
|
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, Bank Owned Life Insurance,bank owned life insurance, deferred tax assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Note 16. Derivatives, Hedging Activities and Other Financial Instruments
The Company enters into derivative financial instruments which involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures, seeking to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative financial instruments entered into by the Company are an economic hedge of a derivative offering to Bank customers. The Company does not use derivative financial instruments for trading purposes.
Customer Derivatives – Interest Rate Swaps
The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC Topic 820, Fair Value Measurements. For the period ended December 31, 2020, the Company recognized a gain of $428,000, and for the period ended December 31, 2019 the Company recognized a loss of $478,000, in other income resulting from a fair value adjustment. The notional amount of derivatives not designated as hedging instruments was $725.9 million and $337.6 million at December 31, 2020 and 2019, respectively.
The table below presents the fair value of derivatives not designated as hedging instruments as well as their location on the consolidated statements of financial condition (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Fair Value | | | | |
| | December 31, | | | | |
| Balance Sheet Location | | 2020 | | 2019 | | |
| Other assets | | $ | 45,289 | | | $ | 10,141 | | | | | |
| Other liabilities | | 45,429 | | | 10,708 | | | | | |
Credit Risk-Related Contingent Features
The Company is a party to International Swaps and Derivatives Association agreements with third party broker-dealers that require a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties was $46.5 million and $13.7 million at December 31, 2020 and 2019, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $45.4 million and $10.7 million at December 31, 2020 and 2019, respectively.
Note 17. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s leases are comprised of real estate property for branches, ATM locations and office space with terms extending through 2050. The Company has 1 existing finance lease, which was acquired in the Sun acquisition and has a lease term through 2029.
The following table represents the classification of the Company’s ROU assets and lease liabilities on the consolidated statements of financial condition (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 | | December 31, 2019 |
| Lease ROU Assets | | Classification | | | | |
| Operating lease ROU asset | | Other assets | | $ | 22,555 | | | $ | 18,682 | |
| Finance lease ROU asset | | Premises and equipment, net | | 1,694 | | | 1,534 | |
| Total lease ROU asset | | | | $ | 24,249 | | | $ | 20,216 | |
| | | | | | |
| Lease Liabilities | | | | | | |
| Operating lease liability | | Other liabilities | | $ | 22,990 | | | $ | 18,893 | |
| Finance lease liability | | Other borrowings | | 2,100 | | | 1,953 | |
| Total lease liability | | | | $ | 25,090 | | | $ | 20,846 | |
The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Leases (Topic 842) requires the Company to use the rate implicit in the lease, provided the rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate, at lease inception, over a similar term. For operating leases existing prior to January 1, 2019, the Company used the incremental borrowing rate for the remaining lease term as of January 1, 2019. For the finance lease, the Company utilized its incremental borrowing rate at lease inception.
| | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| Weighted-Average Remaining Lease Term | | | | |
| Operating leases | | 7.77 years | | 9.69 years |
| Finance lease | | 8.59 years | | 9.60 years |
| Weighted-Average Discount Rate | | | | |
| Operating leases | | 3.01 | % | | 3.45 | % |
| Finance lease | | 5.63 | % | | 5.63 | % |
The following table represents lease expenses and other lease information (in thousands):
| | | | | | | | | | | | | | | | |
| | | | For Year Ended December 31, 2020 | | For Year Ended December 31, 2019 |
| Lease Expense | | | | | | |
| Operating lease expense | | | | $ | 6,438 | | | $ | 3,904 | |
| Finance lease expense: | | | | | | |
| Amortization of ROU assets | | | | 174 | | | 274 | |
Interest on lease liabilities(1) | | | | 110 | | | 174 | |
| Total | | | | $ | 6,722 | | | $ | 4,352 | |
| | | | | | |
| Other Information | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | | | | $ | 6,298 | | | $ | 3,625 | |
| Operating cash flows from finance leases | | | | 110 | | | 174 | |
| Financing cash flows from finance leases | | | | 187 | | | 263 | |
(1)Included in borrowed funds interest expense on the consolidated statements of income. All other costs are included in occupancy expense.
Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Finance Lease | | Operating Leases |
| For the Twelve Months Ended December 31, | | | | |
| 2021 | | $ | 307 | | | $ | 5,725 | |
| 2022 | | 307 | | | 4,713 | |
| 2023 | | 307 | | | 3,285 | |
| 2024 | | 307 | | | 2,723 | |
| 2025 | | 307 | | | 2,281 | |
| Thereafter | | 1,105 | | | 7,592 | |
| Total | | 2,640 | | | 26,319 | |
| Less: Imputed interest | | (540) | | | (3,329) | |
| Total lease liabilities | | $ | 2,100 | | | $ | 22,990 | |
Note 16:18. Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 20172020 and 20162019 and condensed statements of operations and cash flows for the years ended December 31, 2017, 20162020, 2019 and 20152018 for OceanFirst Financial Corp. (parent company only) reflectsreflect the Company’s investment in its wholly-owned subsidiaries, the Bank and OceanFirst Risk Management, Inc., using the equity method of accounting.
Condensed Statement of Financial Condition
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Assets: | | | | |
| Cash and due from banks | | $ | 16 |
| | $ | 9,100 |
|
| Advances to subsidiary Bank | | 33,749 |
| | 12,358 |
|
| Investment securities | | 1,000 |
| | 1,000 |
|
| ESOP loan receivable | | 3,051 |
| | 3,285 |
|
| Investment in subsidiary Bank | | 617,866 |
| | 602,274 |
|
| Other assets | | 3,343 |
| | 3,522 |
|
| Total assets | | $ | 659,025 |
| | $ | 631,539 |
|
| Liabilities and Stockholders’ Equity: | | | | |
| Borrowings | | $ | 56,519 |
| | $ | 56,398 |
|
| Other liabilities | | 565 |
| | 3,238 |
|
| Stockholders’ equity | | 601,941 |
| | 571,903 |
|
| Total liabilities and stockholders’ equity | | $ | 659,025 |
| | $ | 631,539 |
|
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| Assets: | | | | |
| Cash and due from banks | | $ | 7,187 | | | $ | 5,442 | |
| Advances to Bank | | 101,304 | | | 27,878 | |
| Investment securities | | 93,207 | | | 1,000 | |
| ESOP loan receivable | | 8,071 | | | 9,271 | |
| Investment in subsidiaries | | 1,502,867 | | | 1,206,479 | |
| Other assets | | 10,180 | | | 327 | |
| Total assets | | $ | 1,722,816 | | | $ | 1,250,397 | |
| Liabilities and Stockholders’ Equity: | | | | |
| Borrowings | | $ | 233,371 | | | $ | 94,848 | |
| Other liabilities | | 5,315 | | | 2,430 | |
| Stockholders’ equity | | 1,484,130 | | | 1,153,119 | |
| Total liabilities and stockholders’ equity | | $ | 1,722,816 | | | $ | 1,250,397 | |
Condensed Statements of Operations
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Dividend income – subsidiary Bank | | $ | 54,000 | | | $ | 79,000 | | | $ | 32,000 | |
| Interest and dividend income – investment securities | | 949 | | | 63 | | | 63 | |
| | | | | | |
| Interest income – advances to subsidiary Bank | | 403 | | | 426 | | | 525 | |
| Interest income – ESOP loan receivable | | 301 | | | 321 | | | 321 | |
| | | | | | |
| Net gain on equity investments | | 20,460 | | | 0 | | | 0 | |
| Other income | | 0 | | | 0 | | | 15 | |
| Total income | | 76,113 | | | 79,810 | | | 32,924 | |
| Interest expense – borrowings | | 10,592 | | | 5,402 | | | 4,997 | |
| | | | | | |
| Operating expenses | | 3,382 | | | 2,686 | | | 2,397 | |
| Income before income taxes and undistributed earnings of subsidiary Bank | | 62,139 | | | 71,722 | | | 25,530 | |
| (Provision) benefit for income taxes | | (2,901) | | | 924 | | | 846 | |
| Income before undistributed earnings of subsidiary Bank | | 59,238 | | | 72,646 | | | 26,376 | |
| Undistributed earnings of subsidiary Bank | | 4,071 | | | 15,928 | | | 45,556 | |
| Net income | | $ | 63,309 | | | $ | 88,574 | | | $ | 71,932 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Dividend income – subsidiary Bank | | $ | 32,000 |
| | $ | 4,000 |
| | $ | 16,000 |
|
| Interest and dividend income – investment securities | | 63 |
| | 62 |
| | 3 |
|
| Interest income – advances to subsidiary Bank | | 280 |
| | 118 |
| | 51 |
|
| Interest income – ESOP loan receivable | | 321 |
| | 322 |
| | 306 |
|
| Total income | | 32,664 |
| | 4,502 |
| | 16,360 |
|
| Interest expense – borrowings | | 2,592 |
| | 1,049 |
| | 736 |
|
| Operating expenses | | 1,788 |
| | 1,697 |
| | 1,452 |
|
| Income before income taxes and undistributed earnings of subsidiary Bank | | 28,284 |
| | 1,756 |
| | 14,172 |
|
| Benefit for income taxes | | 973 |
| | 780 |
| | 634 |
|
| Income before undistributed earnings of subsidiary Bank | | 29,257 |
| | 2,536 |
| | 14,806 |
|
| Undistributed earnings of subsidiary Bank | | 13,213 |
| | 20,510 |
| | 5,516 |
|
| Net Income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
|
Condensed Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 63,309 | | | $ | 88,574 | | | $ | 71,932 | |
| (Increase) decrease in advances to subsidiary Bank | | (73,426) | | | (13,852) | | | 15,262 | |
| Undistributed earnings of subsidiary Bank | | (4,071) | | | (15,928) | | | (45,556) | |
| Net gain on sales of investment securities | | (20,460) | | | 0 | | | 0 | |
| Amortization of deferred costs on borrowings | | 576 | | | 261 | | | 262 | |
| Net amortization of purchase accounting adjustments | | 638 | | | 453 | | | 395 | |
| Change in other assets and other liabilities | | 648 | | | (184) | | | 4,076 | |
| Net cash (used in) provided by operating activities | | (32,786) | | | 59,324 | | | 46,371 | |
| Cash flows from investing activities: | | | | | | |
| Proceeds from sale of investment securities | | 15,339 | | | 0 | | | 0 | |
| Purchase of investment securities | | (95,228) | | | 0 | | | 0 | |
| Increase in ESOP loan receivable | | 0 | | | 0 | | | (8,400) | |
| Repayments on ESOP loan receivable | | 1,200 | | | 1,160 | | | 1,020 | |
| | | | | | |
| Net cash (used in) provided by investing activities | | (78,689) | | | 1,160 | | | (7,380) | |
| Cash flows from financing activities: | | | | | | |
| Net proceeds from issuance of subordinated notes | | 122,180 | | | 0 | | | 0 | |
| Repayment of borrowings | | (7,999) | | | 0 | | | 0 | |
| Dividends paid | | (42,917) | | | (34,241) | | | (29,564) | |
| Purchase of treasury stock | | (14,814) | | | (26,066) | | | (10,837) | |
| Net proceeds from the issuance of preferred stock | | 55,529 | | | 0 | | | 0 | |
| Exercise of stock options | | 1,241 | | | 1,335 | | | 5,324 | |
| Net cash provided by (used in) financing activities | | 113,220 | | | (58,972) | | | (35,077) | |
| Net increase in cash and due from banks | | 1,745 | | | 1,512 | | | 3,914 | |
| Cash and due from banks at beginning of year | | 5,442 | | | 3,930 | | | 16 | |
| Cash and due from banks at end of year | | $ | 7,187 | | | $ | 5,442 | | | $ | 3,930 | |
| | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | |
| Non-cash activities: | | | | | | |
| Unsettled trades of equity securities | | $ | 8,142 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 42,470 |
| | $ | 23,046 |
| | $ | 20,322 |
|
| (Increase) decrease in advances to subsidiary Bank | | (23,371 | ) | | 3,838 |
| | 6,580 |
|
| Undistributed earnings of subsidiary Bank | | (13,213 | ) | | (20,510 | ) | | (5,516 | ) |
| Amortization of deferred costs on borrowings | | 121 |
| | — |
| | — |
|
| Change in other assets and other liabilities | | 607 |
| | (1,619 | ) | | (707 | ) |
| Net cash provided by operating activities | | 6,614 |
| | 4,755 |
| | 20,679 |
|
| Cash flows from investing activities: | | | | | | |
| Purchase of investment securities | | — |
| | — |
| | (1,000 | ) |
| Repayments on ESOP loan receivable | | 234 |
| | 218 |
| | 204 |
|
| Cash consideration for acquisition, net of cash received | | — |
| | (19,274 | ) | | (127 | ) |
| Net cash provided by (used in) investing activities | | 234 |
| | (19,056 | ) | | (923 | ) |
| Cash flows from financing activities: | | | | | | |
| Net proceeds from issuance of subordinated notes | | — |
| | 33,899 |
| | — |
|
| Repayment of borrowings | | — |
| | — |
| | (5,000 | ) |
| Dividends paid | | (19,286 | ) | | (12,616 | ) | | (8,693 | ) |
| Purchase of treasury stock | | — |
| | (1,878 | ) | | (6,459 | ) |
| Exercise of stock options | | 3,354 |
| | 3,989 |
| | 396 |
|
| Net cash (used in) provided by financing activities | | (15,932 | ) | | 23,394 |
| | (19,756 | ) |
| Net (decrease) increase in cash and due from banks | | (9,084 | ) | | 9,093 |
| | — |
|
| Cash and due from banks at beginning of year | | 9,100 |
| | 7 |
| | 7 |
|
| Cash and due from banks at end of year | | $ | 16 |
| | $ | 9,100 |
| | $ | 7 |
|
Note 17: Subsequent Events
On June 30, 2017, the Company announced a definitive agreement and plan of merger with Sun, headquartered in Mount Laurel, New Jersey. The transaction closed on January 31, 2018 and based on the $26.45 per share closing price of the Company’s common stock on January 31, 2018, the total transaction value was $474.9 million. The total number of shares issued in the transaction was approximately 15,093,000. Sun operated 30 full-service banking offices, three loan offices and two administrative offices. The acquisition added $2.1 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits.
Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company. The conversions on January 31, 2018 do not change the entities which regulate and supervise the Bank and Company.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | December 31 | | September 30 | | June 30 | | March 31 |
| 2020 | | | | | | | | |
| Interest income | | $ | 92,562 | | | $ | 92,962 | | | $ | 95,877 | | | $ | 98,207 | |
| Interest expense | | 14,711 | | | 16,174 | | | 17,210 | | | 18,562 | |
| Net interest income | | 77,851 | | | 76,788 | | | 78,667 | | | 79,645 | |
| Credit loss expense | | 4,072 | | | 35,714 | | | 9,649 | | | 9,969 | |
| Net interest income after credit loss expense | | 73,779 | | | 41,074 | | | 69,018 | | | 69,676 | |
| Other income (excluding net gain (loss) on equity investments and gain on sale of PPP loans) | | 11,032 | | | 11,755 | | | 11,282 | | | 13,542 | |
| Net gain (loss) on equity investments | | 24,487 | | | (3,576) | | | 148 | | | 155 | |
| Gain on sale of PPP loans | | 5,101 | | | 0 | | | 0 | | | 0 | |
| Operating expenses (excluding FHLB advance prepayment fees, branch consolidation and merger related expenses) | | 53,053 | | | 52,801 | | | 51,075 | | | 51,675 | |
| FHLB advance prepayment fees | | 13,333 | | | 0 | | | 924 | | | 0 | |
| Branch consolidation expense | | 3,336 | | | 830 | | | 863 | | | 2,594 | |
| Merger related expenses | | 1,194 | | | 3,156 | | | 3,070 | | | 8,527 | |
| Income (loss) before provision (benefit) for income taxes | | 43,483 | | | (7,534) | | | 24,516 | | | 20,577 | |
| Provision (benefit) for income taxes | | 10,419 | | | (2,608) | | | 5,878 | | | 4,044 | |
| Net income (loss) | | $ | 33,064 | | | $ | (4,926) | | | $ | 18,638 | | | $ | 16,533 | |
| Net income (loss) available to common stockholders | | $ | 32,060 | | | $ | (6,019) | | | $ | 18,638 | | | $ | 16,533 | |
| Basic earnings (loss) per share | | $ | 0.53 | | | $ | (0.10) | | | $ | 0.31 | | | $ | 0.28 | |
| Diluted earnings (loss) per share | | $ | 0.54 | | | $ | (0.10) | | | $ | 0.31 | | | $ | 0.27 | |
| 2019 | | | | | | | | |
| Interest income | | $ | 77,075 | | | $ | 76,887 | | | $ | 78,410 | | | $ | 76,422 | |
| Interest expense | | 13,721 | | | 13,495 | | | 13,573 | | | 12,034 | |
| Net interest income | | 63,354 | | | 63,392 | | | 64,837 | | | 64,388 | |
| Credit loss expense | | 355 | | | 305 | | | 356 | | | 620 | |
| Net interest income after credit loss expense | | 62,999 | | | 63,087 | | | 64,481 | | | 63,768 | |
| Other income | | 11,231 | | | 11,543 | | | 9,879 | | | 9,512 | |
| Operating expenses (excluding merger related expenses and branch consolidation expenses) | | 43,589 | | | 40,884 | | | 43,289 | | | 41,827 | |
| Merger related and branch consolidation expenses | | 4,010 | | | 2,473 | | | 7,626 | | | 5,444 | |
| Income before provision for income taxes | | 26,631 | | | 31,273 | | | 23,445 | | | 26,009 | |
| Provision for income taxes | | 3,181 | | | 6,302 | | | 4,465 | | | 4,836 | |
| Net income | | $ | 23,450 | | | $ | 24,971 | | | $ | 18,980 | | | $ | 21,173 | |
| Basic earnings per share | | $ | 0.47 | | | $ | 0.50 | | | $ | 0.37 | | | $ | 0.43 | |
| Diluted earnings per share | | $ | 0.47 | | | $ | 0.49 | | | $ | 0.37 | | | $ | 0.42 | |
|
| | | | | | | | | | | | | | | | |
| | | For the Quarter Ended |
| | | December 31 | | September 30 | | June 30 | | March 31 |
| 2017 | | | | | | | | |
| Interest income | | $ | 47,906 |
| | $ | 48,030 |
| | $ | 46,879 |
| | $ | 46,014 |
|
| Interest expense | | 5,401 |
| | 4,974 |
| | 4,705 |
| | 4,531 |
|
| Net interest income | | 42,505 |
| | 43,056 |
| | 42,174 |
| | 41,483 |
|
| Provision for loans losses | | 1,415 |
| | 1,165 |
| | 1,165 |
| | 700 |
|
| Net interest income after provision for loan losses | | 41,090 |
| | 41,891 |
| | 41,009 |
| | 40,783 |
|
| Other income | | 6,745 |
| | 7,359 |
| | 6,973 |
| | 5,995 |
|
| Operating expenses (excluding merger related and branch consolidation expenses) | | 26,434 |
| | 27,580 |
| | 28,527 |
| | 29,481 |
|
| Merger related and branch consolidation expenses | | 1,259 |
| | 3,153 |
| | 8,606 |
| | 1,480 |
|
| Income before provision for income taxes | | 20,142 |
| | 18,517 |
| | 10,849 |
| | 15,817 |
|
| Provision for income taxes | | 10,186 |
| | 5,700 |
| | 3,170 |
| | 3,799 |
|
| Net income | | $ | 9,956 |
| | $ | 12,817 |
| | $ | 7,679 |
| | $ | 12,018 |
|
| Basic earnings per share | | $ | 0.31 |
| | $ | 0.40 |
| | $ | 0.24 |
| | $ | 0.38 |
|
| Diluted earnings per share | | $ | 0.30 |
| | $ | 0.39 |
| | $ | 0.23 |
| | $ | 0.36 |
|
| 2016 | | | | | | | | |
| Interest income | | $ | 39,904 |
| | $ | 37,307 |
| | $ | 33,141 |
| | $ | 23,073 |
|
| Interest expense | | 4,150 |
| | 3,372 |
| | 3,127 |
| | 2,514 |
|
| Net interest income | | 35,754 |
| | 33,935 |
| | 30,014 |
| | 20,559 |
|
| Provision for loans losses | | 510 |
| | 888 |
| | 662 |
| | 563 |
|
| Net interest income after provision for loan losses | | 35,244 |
| | 33,047 |
| | 29,352 |
| | 19,996 |
|
| Other income | | 6,257 |
| | 5,896 |
| | 4,883 |
| | 3,376 |
|
| Operating expenses (excluding merger related expenses) | | 25,833 |
| | 23,715 |
| | 21,457 |
| | 15,313 |
|
| Merger related expenses | | 6,632 |
| | 1,311 |
| | 7,189 |
| | 1,402 |
|
| Income before provision for income taxes | | 9,036 |
| | 13,917 |
| | 5,589 |
| | 6,657 |
|
| Provision for income taxes | | 2,984 |
| | 4,789 |
| | 1,928 |
| | 2,452 |
|
| Net income | | $ | 6,052 |
| | $ | 9,128 |
| | $ | 3,661 |
| | $ | 4,205 |
|
| Basic earnings per share | | $ | 0.22 |
| | $ | 0.36 |
| | $ | 0.16 |
| | $ | 0.25 |
|
| Diluted earnings per share | | $ | 0.22 |
| | $ | 0.35 |
| | $ | 0.16 |
| | $ | 0.25 |
|
|
| | | | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
| | | | |
| Item 9A. | Controls and Procedures |
| |
(a) | Evaluation of Disclosure Controls and Procedures |
(a)Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting for the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.(b)Management Report on Internal Control Over Financial Reporting
| |
(b) | Management Report on Internal Control Over Financial Reporting |
Management of OceanFirst Financial Corp. and its subsidiaries are responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internalInternal control over financial reporting wasis a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and fair presentationincludes those policies and procedures that: (1) Pertain to the maintenance of publishedrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, assessedunder the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, and oversight of the Board of Directors, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. This assessment was based on2020 using the criteria established in Internal Control-Integrated Framework (2013) issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission. Commission in Internal Control - Integrated Framework (2013) (“COSO 2013 Framework”).
Based on this assessment, management believesdetermined that, as of December 31, 2017,2020, the Company maintained effectiveCompany’s internal control over financial reporting based on those criteria.was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 52.64.
(c)Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
| | | | |
| Item 9B. | Other Information |
None.
PART III
|
| | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information relating to directors, executive officers and corporate governance and the Registrant’s compliance with Section 16(a) of the Exchange Act required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 201819, 2021 under the captions “Corporate Governance”,Governance,” “Proposal 1. Election of Directors” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”.Reports.”
|
| | | | |
| Item 11. | Executive Compensation |
The information relating to executive compensation required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 201819, 2021 under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Report,” and “Compensation Committee Interlocks and Insider Participation.”
|
| | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information relating to security ownership of certain beneficial owners and management and related stockholder matters required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 201819, 2021 under the caption “Stock Ownership.”
Information regarding the Company’s equity compensation plans existing as of December 31, 20172020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities
to be Issued Upon
Exercise of Outstanding
Options,
Warrants and Rights (A) | | Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights | | Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (A)) |
| Equity compensation plans approved by stockholders | | 2,838,867 | | | $ | 20.67 | | | 1,016,984 | |
| Equity compensation plans not approved by stockholders | | — | | | — | | | — | |
| Total | | 2,838,867 | | | $ | 20.67 | | | 1,016,984 | |
|
| | | | | | | | | | |
| Plan category | | Number of securities
to be issued upon
exercise of outstanding
options,
warrants and rights (a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
| Equity compensation plans approved by stockholders | | 2,489,314 |
| | $ | 16.91 |
| | 1,799,047 |
|
| Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
|
| Total | | 2,489,314 |
| | $ | 16.91 |
| | 1,799,047 |
|
|
| | | | |
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
The information relating to certain relationships and related transactions and director independence required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 201819, 2021 under the caption “Transactions with Management.”
|
| | | | |
| Item 14. | Principal Accountant Fees and Services |
The information relating to the principal accounting fees and services is incorporated by reference to the Registrant’s Proxy Statement for the Annual Meeting to be held on May 31, 201819, 2021 under the caption “Proposal 3. Ratification of Appointment of the Independent Registered Public Accounting Firm.”
PART IV
| |
Item 15. | Exhibits and Financial Statement Schedules |
| |
(a) | (1) Financial StatementsItem 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements |
The following documents are filed as a part of this report:
| |
(a) | (2) Financial Statement Schedules(a)(2) Financial Statement Schedules |
All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(a)(3) Exhibits
|
| | | | | | | | | |
| Exhibit No: | | Exhibit Description | | Reference |
| | Agreement and Plan of Merger, dated as of August 9, 2019, by and among OceanFirst Financial Corp., Midtown Merger Sub Corp. and Country Bank Holding Company, Inc. | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed by OceanFirst Financial Corp. on August 13, 2019. |
| | Agreement and Plan of Merger, dated as of August 9, 2019, by and among OceanFirst Financial Corp., Hammerhead Merger Sub Corp. and Two River Bancorp. | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed by OceanFirst Financial Corp. on August 13, 2019. |
| | Certificate of Incorporation of OceanFirst Financial Corp.(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | Certificate of Amendment to the Certificate of Incorporation of OceanFirst Financial Corp. | | Incorporated herein by reference from Exhibit to Form 8-K filed on June 4, 2018. |
| | Bylaws of OceanFirst Financial Corp.(19) | | Incorporated herein by reference from Exhibit to Form 8-K filed on December 21, 2017.
|
| | Certificate of Designation of 7.00% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, of the Company, filed with the Secretary of State of the State of Delaware and effective May 6, 2020. | | Incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A, filed on May 7, 2020. |
| | Stock Certificate of OceanFirst Financial Corp.(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 | | Filed herewith. |
| | Form of OceanFirst Bank Employee Stock Ownership Plan(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | Specimen of the Company’s 7.00% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A Certificate | | Incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed on May 7, 2020. |
| | Deposit Agreement, dated as of May 7, 2020, among the Company, Broadridge Corporate Issuer Solutions, Inc., as depositary, and the holders from time to time of the depositary receipts described therein | | Incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A, filed on May 7, 2020. |
| | Form of Depositary Receipt | | Incorporated herein by reference to Exhibit A to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A, filed on May 7, 2020. |
| | Indenture, dated May 1, 2020, between OceanFirst Financial Corp. and Wilmington Trust, National Association, as Trustee | | Incorporated herein by reference from Exhibit to Form 8-K filed on May 1, 2020. |
| | First Supplemental Indenture, dated May 1, 2020, between OceanFirst Financial Corp. and Wilmington Trust, National Association, as Trustee | | Incorporated herein by reference from Exhibit to Form 8-K filed on May 1, 2020. |
| | Form of 5.25% Fixed-to-Floating Rate Subordinated Note due 2030 | | Incorporated herein by reference from Exhibit 4.2 to Form 8-K filed on May 1, 2020. |
| | | | |
| | | | | | | | | | | | | | |
| Exhibit No: | | Exhibit Description | | Reference |
| | Form of OceanFirst Bank Employee Stock Ownership Plan | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123. |
| | Amendment to OceanFirst Bank Employee Stock Ownership Plan(2) | | Incorporated herein by reference from the Exhibits to Form 10-K filed on March 25, 1997.
|
| | AmendedAmendment to OceanFirst Bank Employee Stock Ownership Plan(9)
| | Incorporated herein by reference from Exhibit to Form 10-K filed on March 17, 2008.
|
| | OceanFirst Bank 1995 Supplemental Executive Retirement Plan(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | OceanFirst Bank Executive Supplemental Retirement Income Agreement(10) | | Incorporated herein by reference from Exhibit to Form 8-K filed on September 23, 2008.
|
| | OceanFirst Bank Deferred Compensation Plan for Directors(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | OceanFirst Bank New Executive Deferred Compensation Master Agreement(10) | | Incorporated herein by reference from Exhibit to Form 8-K filed on September 23, 2008.
|
| | OceanFirst Bank Deferred Compensation Plan for Officers(1) | | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.
|
| | OceanFirst Bank New Director Deferred Compensation Master Agreement(10) | | Incorporated herein by reference from Exhibit to Form 8-K filed on September 23, 2008.
|
| | Amendment of the OceanFirst Financial Corp. 2000 Stock Option Plan (3)
|
| | Form of OceanFirst Financial Corp. 2000 Stock Option Plan Non-Statutory Option Award Agreement (5)
|
| | Amendment and form of OceanFirst Bank Employee Severance Compensation Plan(6) | | Incorporated herein by reference from Exhibits to Form 10-Q filed on August 9, 2005.
|
| | | | | | | | | | | | | | |
| | Form of OceanFirst Financial Corp. Deferred Incentive Compensation Award Program(7) | | Incorporated herein by reference from Exhibits to Form 10-K filed on March 14, 2006.
|
| | 2006 Stock Incentive Plan (8)
|
|
| | |
| | Form of Change in Control Agreement between OceanFirst Financial Corp. and Angela K. Ho(15) | | Incorporated herein by reference from Exhibit to Form 8-K filed on March 7, 2017. |
| | Form of Change in Control Agreement between OceanFirst Bank and Angela K. Ho(15) | | Incorporated herein by reference from Exhibit to Form 8-K filed on March 7, 2017. |
| | Form of OceanFirst Financial Corp. 2011 Stock Incentive Plan Award Agreement for Stock Options(12) | | Incorporated by reference from Exhibit to Form 8-K filed May 10, 2011. |
| | Form of OceanFirst Financial Corp. 2011 Cash Incentive Compensation Plan Award Agreement(12) | | Incorporated by reference from Exhibit to Form 8-K filed May 10, 2011. |
| | 2011 Stock Incentive Plan(11) | | Incorporated herein by reference from Schedule 14-A Revised Definitive Proxy Statement filed on March 31, 2011. |
| | Amendment No. 1 to 2011 Stock Incentive Plan(17) | | Incorporated herein by reference from Schedule 14-A Definitive Proxy Statement filed on April 26, 2017. |
| | 2011 Cash Incentive Compensation Plan(11) | | Incorporated herein by reference from Schedule 14-A Revised Definitive Proxy Statement filed on March 31, 2011. |
| | Form of Employment Agreement between OceanFirst Financial Corp. and certain executive officers, including Christopher D. Maher, Michael J. Fitzpatrick, and Steven J. Tsimbinos(16) | | Incorporated herein by reference from Exhibit to Form 8-K filed on April 10, 2017. |
| | Supplemental Executive Retirement Account Agreement between Christopher D. Maher and OceanFirst Bank dated June 18, 2013(13) | | Incorporated herein by reference from Exhibit to Form 8-K filed June 20, 2013. |
| | Form of OceanFirst Financial Corp 2011 Stock Incentive Plan Award Agreement for Stock Awards(14) | | Incorporated herein by reference from Exhibit to Form 8-K filed January 17, 2014. |
| | Form of Employment Agreement between OceanFirst Financial Corp. and certain executive officers, including Joseph R. Iantosca and Joseph J. Lebel(16) | | Incorporated herein by reference from Exhibit to Form 8-K filed on April 10, 2017. |
| | | | | | | | | | | | | | |
| Exhibit No: | | Exhibit Description | | Reference |
| | Form of First Amendment to Confidentiality and Executive Restriction Agreement Employment between OceanFirst Financial Corp. and certain executive officers, including Christopher D. Maher, Michael J. Fitzpatrick, Joseph R. Iantosca, Joseph J. Lebel III, and Steven J. Tsimbinos(18) | | Incorporated herein by reference from Exhibit to Form 8-K filed on June 27, 2017. |
| | Separation, Non-Competition and Consulting Agreement, dated as of August 9, 2019, by and among OceanFirst Financial Corp., OceanFirst Bank, National Association, and Joseph M. Murphy, Jr. | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on December 19, 2019. |
| | Consulting Agreement, dated as of December 31, 2019, by and among OceanFirst Financial Corp., OceanFirst Bank, National Association, and William D. Moss | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K/A filed on January 2, 2020. |
| | OceanFirst Financial Corp. 2020 Stock Incentive Plan | | Incorporated hereto by reference to Appendix A to the Proxy Statement on Form DEF 14A filed on April 22, 2020. |
| | Form of OceanFirst Financial Corp. 2020 Stock Incentive Plan Award Agreement for Stock Options | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on May 26, 2020. |
| | Form of OceanFirst Financial Corp. 2020 Stock Incentive Plan Award Agreement for Time-Vested Stock Awards | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on May 26, 2020. |
| | Form of OceanFirst Financial Corp. 2020 Stock Incentive Plan Performance Based Stock Award Agreement | | Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K filed on May 26, 2020. |
| | OceanFirst Financial Corp. Code of Ethics and Standards of Personal Conduct(4) | | Incorporated herein by reference from the Exhibits to Form 10-K filed on March 15, 2004. |
| | Subsidiary information is incorporated herein by reference to “Part I – Subsidiary Activities” | | Filed herewith. |
| | Consent of KPMG LLP (filed herewith) | | Filed herewith. |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | | Filed herewith. |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | | Filed herewith. |
| | Certifications pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith) | | Filed herewith. |
| | | | | | | | | | | | | | |
101.0Exhibit No: | | Exhibit Description | | Reference |
| 101.0 | | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements. | | Filed herewith. |
| 101.INS | | XBRL Instance Document | | Filed herewith. |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
| 101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document | | Filed herewith. |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) | | Filed herewith. |
| | | | |
| |
(1) | Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123. |
| |
(2) | Incorporated herein by reference from the Exhibits to Form 10-K filed on March 25, 1997. |
| |
(3) | Incorporated herein by reference from the Schedule 14-A Definitive Proxy Statement filed on March 21, 2003. |
| |
(4) | Incorporated herein by reference from the Exhibits to Form 10-K filed on March 15, 2004. |
| |
(5) | Incorporated by reference from Exhibit to Form 10-K filed on March 15, 2005. |
| |
(6) | Incorporated herein by reference from Exhibits to Form 10-Q filed on August 9, 2005. |
| |
(7) | Incorporated herein by reference from Exhibits to Form 10-K filed on March 14, 2006. |
| |
(8) | Incorporated herein by reference from Schedule 14-A Definitive Proxy Statement filed on March 15, 2006. |
| |
(9) | Incorporated by reference from Exhibit to Form 10-K filed on March 17, 2008. |
| |
(10) | Incorporated by reference from Exhibit to Form 8-K filed on September 23, 2008. |
| |
(11) | Incorporated herein by reference from Schedule 14-A Revised Definitive Proxy Statement filed on March 31, 2011. |
| |
(12) | Incorporated by reference from Exhibit to Form 8-K filed May 10, 2011. |
| |
(13) | Incorporated herein by reference from Exhibit to Form 8-K filed June 20, 2013. |
| |
(14) | Incorporated herein by reference from Exhibit to Form 8-K filed January 17, 2014. |
| |
(15) | Incorporated herein by reference from Exhibit to Form 8-K filed on March 7, 2017. |
| |
(16) | Incorporated herein by reference from Exhibit to Form 8-K filed on April 10, 2017. |
| |
(17) | Incorporated herein by reference from Schedule 14-A Definitive Proxy Statement filed on April 26, 2017. |
| |
(18) | Incorporated herein by reference from Exhibit to Form 8-K filed on June 27, 2017. |
| |
(19) | Incorporated herein by reference from Exhibit to Form 8-K filed on December 21, 2017. |
| |
Item 16. | Form 10-K Summary |
Item 16. Form 10-K Summary
Not applicable.
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
OCEANFIRST FINANCIAL CORP. |
| |
OCEANFIRST FINANCIAL CORP.
|
| By: | |
By: | /s/ Christopher D. Maher |
| Christopher D. Maher |
| Chairman of the Board |
| President and Chief Executive Officer |
| |
| Date: | February 27, 2018March 1, 2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | | | Date |
| | |
| /s/ Christopher D. Maher | | | | March 1, 2021 |
| Christopher D. Maher | | | | |
| Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | | | | |
| | |
| /s/ Michael J. Fitzpatrick | | | | March 1, 2021 |
| Michael J. Fitzpatrick | | | | |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | | | |
| | |
| /s/ Angela K. Ho | | | | March 1, 2021 |
| Angela K. Ho | | | | |
| (Principal Accounting Officer) | | | | |
| | |
| /s/ Angelo J. Catania | | | | March 1, 2021 |
| Angelo J. Catania | | | | |
| Director | | | | |
| | |
| /s/ Anthony R. Coscia | | | | March 1, 2021 |
| Anthony R. Coscia | | | | |
| Director | | | | |
| | | | |
Name | | | | Date |
| | |
/s/ Christopher D. Maher | | | | February 27, 2018 |
Christopher D. Maher | | | | |
Chairman of the Board, President, and Chief Executive Officer (principal executive officer) | | | | |
| | |
/s/ Michael J. FitzpatrickD. Devlin | | | | February 27, 2018March 1, 2021 |
Michael J. FitzpatrickD. Devlin | | | | |
Executive Vice President and Chief Financial Officer (principal financial officer)Director | | | | |
| | |
/s/ Angela K. Ho | | | | February 27, 2018 |
Angela K. Ho | | | | |
(principal accounting officer) | | | | |
| | |
/s/ Steven E. Brady | | | | February 27, 2018 |
Steven E. Brady | | | | |
Director | | | | |
| | |
/s/ Joseph J. Burke | | | | February 27, 2018 |
Joseph J. Burke | | | | |
Director | | | | |
| | |
/s/ Angelo Catania | | | | February 27, 2018 |
Angelo Catania | | | | |
Director | | | | |
| | |
/s/ Anthony R. Coscia | | | | February 27, 2018 |
Anthony R. Coscia | | | | |
Director | | | | |
| | | | | | | | | | | | | | |
| Name | | | | Date |
| | | | |
| /s/ Jack M. Farris | | | | March 1, 2021 |
| Jack M. Farris | | | | |
| Director | | | | |
| | | | |
Name/s/ Kimberly M. Guadagno | | | | DateMarch 1, 2021 |
/s/ Michael D. DevlinKimberly M. Guadagno | | | | February 27, 2018 |
Michael D. DevlinDirector | | | | |
Director | | | | |
| /s/ Nicos Katsoulis | | | | March 1, 2021 |
/s/ Jack M. FarrisNicos Katsoulis | | | | February 27, 2018 |
Jack M. FarrisDirector | | | | |
Director | | | | |
| | | | |
| /s/ John K. Lloyd | | | | February 27, 2018March 1, 2021 |
| John K. Lloyd | | | | |
| Director | | |
| | | | |
/s/ Dorothy F. McCrossonWilliam D. Moss | | | | February 27, 2018March 1, 2021 |
Dorothy F. McCrossonWilliam D. Moss | | | | |
| Director | | | | |
| | | | |
/s/ Donald E. McLaughlinJoseph M. Murphy, Jr. | | | | February 27, 2018March 1, 2021 |
Donald E. McLaughlinJoseph M. Murphy, Jr. | | | | |
| Director | | | | |
| | | | |
/s/ Diane F. RhineSteven M. Scopellite | | | | February 27, 2018March 1, 2021 |
Diane F. RhineSteven M. Scopellite | | | | |
| Director | | | | |
| | | | |
/s/ Mark G. Solow | | | | February 27, 2018 |
Mark G. Solow | | | | |
Director | | | | |
| | | | |
| /s/ Grace C. Torres | | | | February 27, 2018March 1, 2021 |
| Grace C. Torres | | | | |
| Director | | | | |
| | | | |
| /s/ Patricia L. Turner | | | | March 1, 2021 |
| Patricia L. Turner | | | | |
| Director | | | | |
| | | | |
| /s/ Grace M. Vallacchi | | | | March 1, 2021 |
| Grace M. Vallacchi | | | | |
| Director | | | | |
| | | | |
| /s/ John E. Walsh | | | | February 27, 2018March 1, 2021 |
| John E. Walsh | | | | |
| Director | | | | |
| | | | |
/s/ Samuel R. Young | | | | February 27, 2018 |
Samuel R. Young | | | | |
Director | | | | |