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, |
| | 2022 | | 2021 | | 2020 | | | | |
| | (dollars in thousands) |
Selected Financial Condition Data: | | | | | | | | | | |
Total assets | | $ | 13,103,896 | | | $ | 11,739,616 | | | $ | 11,448,313 | | | | | |
Debt securities available-for-sale, at estimated fair value | | 457,648 | | | 568,255 | | | 183,302 | | | | | |
Debt securities held-to-maturity, net of allowance for securities credit losses | | 1,221,138 | | | 1,139,193 | | | 937,253 | | | | | |
Equity investments | | 102,037 | | | 101,155 | | | 107,079 | | | | | |
Restricted equity investments, at cost | | 109,278 | | | 53,195 | | | 51,705 | | | | | |
Loans receivable, net of allowance for loan credit losses | | 9,868,718 | | | 8,583,352 | | | 7,704,857 | | | | | |
Deposits | | 9,675,206 | | | 9,732,816 | | | 9,427,616 | | | | | |
Federal Home Loan Bank ("FHLB") advances | | 1,211,166 | | | — | | | — | | | | | |
Securities sold under agreements to repurchase with customers and other borrowings | | 264,500 | | | 347,910 | | | 363,925 | | | | | |
Total stockholders’ equity | | 1,585,464 | | | 1,516,553 | | | 1,484,130 | | | | | |
| | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 | | | | |
| | (dollars in thousands, except per share amounts) |
Selected Operating Data: | | | | | | | | | | |
Interest income | | $ | 431,175 | | | $ | 342,092 | | | $ | 379,608 | | | | | |
Interest expense | | 53,698 | | | 36,754 | | | 66,657 | | | | | |
Net interest income | | 377,477 | | | 305,338 | | | 312,951 | | | | | |
Credit loss expense (benefit) | | 7,768 | | | (11,832) | | | 59,404 | | | | | |
Net interest income after credit loss expense (benefit) | | 369,709 | | | 317,170 | | | 253,547 | | | | | |
Other income (excluding net gain on equity investments and gain on sale of Paycheck Protection Program (“PPP”) loans) | | 49,409 | | | 44,786 | | | 47,611 | | | | | |
Net gain on equity investments | | 9,685 | | | 7,145 | | | 21,214 | | | | | |
Gain on sale of PPP loans | | — | | | — | | | 5,101 | | | | | |
Operating expenses (excluding branch consolidation expense, net, merger related expenses, and FHLB advance prepayment fees) | | 231,433 | | | 213,020 | | | 208,604 | | | | | |
FHLB advance prepayment fees | | — | | | — | | | 14,257 | | | | | |
Branch consolidation expense, net | | 713 | | | 12,337 | | | 7,623 | | | | | |
Merger related expenses | | 2,735 | | | 1,503 | | | 15,947 | | | | | |
Income before provision for income taxes | | 193,922 | | | 142,241 | | | 81,042 | | | | | |
Provision for income taxes | | 46,565 | | | 32,165 | | | 17,733 | | | | | |
Net income | | $ | 147,357 | | | $ | 110,076 | | | $ | 63,309 | | | | | |
Net income attributable to non-controlling interest | | 754 | | | — | | | — | | | | | |
Net income attributable to OceanFirst Financial Corp. | | $ | 146,603 | | | $ | 110,076 | | | $ | 63,309 | | | | | |
Net income available to common stockholders | | $ | 142,587 | | | $ | 106,060 | | | $ | 61,212 | | | | | |
Basic earnings per share | | $ | 2.43 | | | $ | 1.79 | | | $ | 1.02 | | | | | |
Diluted earnings per share | | $ | 2.42 | | | $ | 1.78 | | | $ | 1.02 | | | | | |
| | | | | | | | | | |
(continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | At or for the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 | | | | |
Selected Financial Ratios and Other Data (1): | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | |
Return on average assets (2)(3) | | 1.15 | % | | 0.91 | % | | 0.55 | % | | | | |
| | | | | | | | | | |
Return on average stockholders’ equity (2)(3) | | 9.24 | | | 7.02 | | | 4.20 | | | | | |
| | | | | | | | | | |
Stockholders’ equity to total assets | | 12.10 | | | 12.92 | | | 12.96 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net interest rate spread (4) | | 3.20 | | | 2.80 | | | 2.96 | | | | | |
Net interest margin (5) | | 3.37 | | | 2.93 | | | 3.16 | | | | | |
| | | | | | | | | | |
Operating expenses to average assets (2) | | 1.90 | | | 1.94 | | | 2.20 | | | | | |
Efficiency ratio (2)(6) | | 53.80 | | | 63.50 | | | 63.70 | | | | | |
Loans-to-deposits ratio (7) | | 102.50 | | | 88.60 | | | 82.27 | | | | | |
Asset Quality Ratios: | | | | | | | | | | |
Non-performing loans as a percent of total loans receivable (7)(8) | | 0.23 | | | 0.30 | | | 0.60 | | | | | |
Non-performing assets as a percent of total assets (8) | | 0.18 | | | 0.22 | | | 0.41 | | | | | |
Allowance for loan credit losses as a percent of total loans receivable (7)(9) | | 0.57 | | | 0.57 | | | 0.78 | | | | | |
Allowance for loan credit losses as a percent of total non-performing loans (8)(9) | | 244.25 | | | 191.61 | | | 129.60 | | | | | |
Wealth Management (dollars in thousands): | | | | | | | | | | |
Wealth assets under administration and management (“AUA/M”) | | $ | 324,066 | | | $ | 287,404 | | | $ | 245,175 | | | | | |
Nest Egg AUA/M | | 403,538 | | | 428,558 | | | 398,174 | | | | | |
Per Share Data: | | | | | | | | | | |
Cash dividends per common share | | $ | 0.74 | | | $ | 0.68 | | | $ | 0.68 | | | | | |
Dividend payout ratio per common share | | 30.58 | % | | 38.20 | % | | 66.73 | % | | | | |
Stockholders’ equity per common share at end of period | | $ | 26.81 | | | $ | 25.63 | | | $ | 24.57 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Number of full-service customer facilities: | | 38 | | | 47 | | | 62 | | | | | |
(1)With the exception of end of year ratios, all ratios are based on average daily balances.
(2)Performance ratios for 2022 included a net benefit related to merger related expenses, net branch consolidation expense, and gain on equity investments of $6.2 million, or $4.6 million, net of tax expense. Performance ratios for 2021 included a net expense related to merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $6.7 million, or $5.1 million, net of tax benefit. Performance ratios for 2020 included a net expense related to a net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, net branch consolidation expenses, and Two River Bancorp (“Two River”) and Country bank Holding Company, Inc. (“Country Bank”) opening credit loss expense under the CECL model of $14.3 million, or $11.0 million, net of tax benefit.
(3)Ratios for each period are based on net income available to common stockholders.
(4)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)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 generally 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. Amounts and ratios reported in the prior periods have been revised to conform with the current year’s presentation.
(9)The loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $11.4 million, $18.9 million, and $28.0 million at December 31, 2022, 2021, and 2020, respectively.
Summary
Highlights of the Company’s financial results for the year ended December 31, 2022 were as follows:
Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, $171.6 million of residential loan pool purchases.
Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021. FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion.
Net income available to common stockholders for the year ended December 31, 2022 was $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share for the prior year. Net income available to common stockholders for the year ended December 31, 2022 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $2.7 million, $713,000, and $9.7 million, respectively. These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax. These items increased diluted earnings per share by $0.08 for the year ended December 31, 2022. Net income for the year ended December 31, 2021 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax. These items reduced diluted earnings per share by $0.08 for the year ended December 31, 2021.
The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.10% at December 31, 2022.
Critical Accounting Policies and Estimates
Note 1 Summary of Significant Accounting Policies to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires 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. The critical accounting policy and its application is 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). Allowance for credit losses in accordance with ASU 2016-13 is a critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended December 31, 2022.
Allowance for Credit Losses (“ACL”)
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 of the ACL involves assumptions that require a significant level of estimation; these include historical losses as a predictor of future performance, and the accuracy of macro-economic forecasts over a reasonable and supportable forecast period. The Company has elected to use an open pool method and extends its look back period each quarter to capture as many data points as possible in its historical loss rate calculation. A historical data set is expected to provide the best indication of future credit performance. Alternative loss calculation methods, such as vintage and migration methodologies, limit observable data to closed pools of loans, which excludes performance data from the historical loss rate calculation.
Macro-economic forecasts used in the quantitative analysis are provided by a leader in global forecasting. The Company uses the base case macro-economic forecast to reflect the consensus view of future economic conditions. Electing scenarios that are stronger or weaker than the base case would reduce or increase, respectively, the ACL measurement. The Company measures the accuracy of the macro-economic forecasts quarterly to identify any material deviations that would be considered for a
qualitative adjustment. The Company assumes a reasonable and supportable forecast period of 8 quarters and a reversion period of 4 quarters based on the analysis of historical U.S. business cycles.
Prepayment and forward interest rate projections are also assumptions used in the quantitative model subject to estimation. These assumptions are consistent with the assumptions employed by the Company’s Interest Rate Risk (“IRR”) model. Changes in these assumptions have varying implications to the ACL measurement. For example, faster prepayment rates would shorten the life of loans and reduce the lifetime expected credit loss, whereas slower prepayment rates would have the inverse effect.
The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Qualitative loss factors are grounded in the Company’s long-term credit losses and reflect an assumption that past behavior is a reasonable predictor of future performance. The Company considers the peak two-year net charge off rate to capture maximum potential volatility over the reasonable and supportable forecast period. Historical losses that inform the guardrails for the qualitative adjustments are anchored to 2005 and extended annually. This period is intended to represent the credit profile of the current portfolio and capture prior performance in a severe economic recession. These guardrails are updated annually to capture recent behavior that is indicative of the credit profile of the current portfolio.
Management considers subjective, objective, and unique qualitative factors at each estimation date. Subjective factors incorporate external factors, personnel, and controls, as well as portfolio composition and performances. Subjective factors include local competition; portfolio nature, volume and concentration; credit trends; lending policy, procedure and loan review; lending management and staff; regulatory changes and forecast uncertainty. Objective factors address gaps in the quantitative model, such as the limited loss history and the inherent risk of Special Mention commercial real estate loans. Unique factors will capture one-time events, such as environmental threats and model updates that are expected to impact performance over the forecast period. Unique factors are identified, assessed, and documented in the quarter they are applied. The Company incorporated unique factors in 2022 to address macro-economic uncertainty and alternative economic forecast projections.
Although management believes that it uses the best information available to establish the ACL in conformity with GAAP, future adjustments to the ACL may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. For example, at December 31, 2022, if the Company had elected a contemporaneous downside scenario where it was assumed that commercial borrowers are more adversely impacted by the velocity of interest rate change, the ACL measurement would have been approximately $2.3 million higher. Alternatively, if the Company had elected a severely adverse economic scenario consistent with the Federal Reserve’s severe recession scenario, the ACL measurement would have been approximately $11.3 million higher. These sensitivity scenarios do not represent a change in the Company’s expectations of credit performance or the economic environment but provide hypothetical results to access the sensitivity of the ACL to changes in key inputs.
Given the level of uncertainty and the material impact on the ACL measurement, all assumptions are reviewed and updated as necessary at each estimation date. Other than discussed above, there were no changes in the estimation methodology for these assumptions in 2022.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the years ended December 31, 2022, 2021, and 2020, interest income included net loan fees of $3.0 million, $2.5 million, and $6.0 million, respectively.
The following table sets forth certain information relating to the Company for each of the years ended December 31, 2022, 2021 and 2020. 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 certain fees and costs which are considered adjustments to yields.
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| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
(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 | $ | 72,913 | | $ | 1,106 | | | 1.52 | % | | $ | 969,982 | | $ | 1,258 | | | 0.13 | % | | $ | 613,971 | | $ | 1,034 | | | 0.17 | % |
Securities (1) | 1,792,598 | | 39,683 | | | 2.21 | | | 1,517,649 | | 25,597 | | | 1.69 | | | 1,159,764 | | 29,353 | | | 2.53 | |
Loans receivable, net (2) | | | | | | | | | | | | | | | | | |
Commercial | 6,386,755 | | 287,044 | | | 4.49 | | | 5,362,265 | | 221,144 | | | 4.12 | | | 5,299,813 | | 236,749 | | | 4.47 | |
Residential real estate | 2,724,398 | | 91,432 | | | 3.36 | | | 2,309,790 | | 79,696 | | | 3.45 | | | 2,465,740 | | 93,120 | | | 3.78 | |
Home equity loans and line and other consumer (“other consumer”) | 256,912 | | 11,910 | | | 4.64 | | | 298,193 | | 14,397 | | | 4.83 | | | 390,421 | | 19,352 | | | 4.96 | |
| | | | | | | | | | | | | | | | | |
Allowance for loan credit losses, net of deferred loan costs and fees | (44,446) | | — | | | — | | | (48,637) | | — | | | — | | | (33,343) | | — | | | — | |
Loans receivable, net (2) | 9,323,619 | | 390,386 | | | 4.19 | | | 7,921,611 | | 315,237 | | | 3.98 | | | 8,122,631 | | 349,221 | | | 4.30 | |
Total interest-earning assets | 11,189,130 | | 431,175 | | | 3.85 | | | 10,409,242 | | 342,092 | | | 3.29 | | | 9,896,366 | | 379,608 | | | 3.84 | |
Non-interest-earning assets | 1,200,725 | | | | | | 1,260,079 | | | | | | 1,310,474 | | | | |
Total assets | $ | 12,389,855 | | | | | | $ | 11,669,321 | | | | | | | $ | 11,206,840 | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest-bearing checking | $ | 4,063,716 | | 11,344 | | | 0.28 | % | | $ | 3,878,465 | | 13,400 | | | 0.35 | % | | $ | 3,168,889 | | 19,395 | | | 0.61 | % |
Money market | 764,837 | | 2,234 | | | 0.29 | | | 769,157 | | 1,105 | | | 0.14 | | | 677,554 | | 2,902 | | | 0.43 | |
Savings | 1,597,648 | | 758 | | | 0.05 | | | 1,581,472 | | 631 | | | 0.04 | | | 1,449,982 | | 2,505 | | | 0.17 | |
Time deposits | 1,167,499 | | 16,685 | | | 1.43 | | | 985,328 | | 10,074 | | | 1.02 | | | 1,531,857 | | 23,488 | | | 1.53 | |
Total | 7,593,700 | | 31,021 | | | 0.41 | | | 7,214,422 | | 25,210 | | | 0.35 | | | 6,828,282 | | 48,290 | | | 0.71 | |
FHLB advances | 389,750 | | 10,365 | | | 2.66 | | | — | | — | | | — | | | 413,290 | | 7,018 | | | 1.70 | |
Securities sold under agreements to repurchase with customers | 101,377 | | 159 | | | 0.16 | | | 134,939 | | 253 | | | 0.19 | | | 125,500 | | 562 | | | 0.45 | |
Other borrowings | 203,117 | | 12,153 | | | 5.98 | | | 228,600 | | 11,291 | | | 4.94 | | | 207,386 | | 10,787 | | | 5.20 | |
Total borrowings | 694,244 | | 22,677 | | | 3.27 | | | 363,539 | | 11,544 | | | 3.18 | | | 746,176 | | 18,367 | | | 2.46 | |
Total interest-bearing liabilities | 8,287,944 | | 53,698 | | | 0.65 | | | 7,577,961 | | 36,754 | | | 0.49 | | | 7,574,458 | | 66,657 | | | 0.88 | |
Non-interest-bearing deposits | 2,319,657 | | | | | | 2,429,547 | | | | | | 2,031,100 | | | | |
Non-interest-bearing liabilities | 239,861 | | | | | | 151,950 | | | | | | 144,571 | | | | |
Total liabilities | 10,847,462 | | | | | | 10,159,458 | | | | | | 9,750,129 | | | | |
Stockholders’ equity | 1,542,393 | | | | | | 1,509,863 | | | | | | 1,456,711 | | | | |
Total liabilities and equity | $ | 12,389,855 | | | | | | | $ | 11,669,321 | | | | | | $ | 11,206,840 | | | | |
Net interest income | | | $ | 377,477 | | | | | | | $ | 305,338 | | | | | | | $ | 312,951 | | | |
Net interest rate spread (3) | | | | | 3.20 | % | | | | | | 2.80 | % | | | | | | 2.96 | % |
Net interest margin (4) | | | | | 3.37 | % | | | | | | 2.93 | % | | | | | | 3.16 | % |
Total cost of deposits (including non-interest-bearing deposits) | | | | | 0.31 | % | | | | | | 0.26 | % | | | | | | 0.55 | % |
Ratio of interest-earning assets to interest-bearing liabilities | 135.00 | % | | | | | | 137.36 | % | | | | | | 130.65 | % | | | | |
(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 securities credit losses.
(2)Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, 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. There were no out-of-period amounts excluded from the following table. 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.
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| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | Compared to | | Compared to |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | 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 | | $ | (2,159) | | | $ | 2,007 | | | $ | (152) | | | $ | 509 | | | $ | (285) | | | $ | 224 | |
Securities (1) | | 5,220 | | | 8,866 | | | 14,086 | | | 7,576 | | | (11,332) | | | (3,756) | |
Loans receivable, net (2) | | | | | | | | | | | | |
Commercial | | 44,828 | | | 21,072 | | | 65,900 | | | 2,812 | | | (18,417) | | | (15,605) | |
Residential real estate | | 13,877 | | | (2,141) | | | 11,736 | | | (5,640) | | | (7,784) | | | (13,424) | |
Other consumer | | (1,937) | | | (550) | | | (2,487) | | | (4,460) | | | (495) | | | (4,955) | |
| | | | | | | | | | | | |
Loans receivable, net (2) | | 56,768 | | | 18,381 | | | 75,149 | | | (7,288) | | | (26,696) | | | (33,984) | |
Total interest-earning assets | | 59,829 | | | 29,254 | | | 89,083 | | | 797 | | | (38,313) | | | (37,516) | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing checking | | 650 | | | (2,706) | | | (2,056) | | | 3,611 | | | (9,606) | | | (5,995) | |
Money market | | (6) | | | 1,135 | | | 1,129 | | | 356 | | | (2,153) | | | (1,797) | |
Savings | | 5 | | | 122 | | | 127 | | | 201 | | | (2,075) | | | (1,874) | |
Time deposits | | 2,083 | | | 4,528 | | | 6,611 | | | (6,935) | | | (6,479) | | | (13,414) | |
Total | | 2,732 | | | 3,079 | | | 5,811 | | | (2,767) | | | (20,313) | | | (23,080) | |
FHLB advances | | 5,183 | | | 5,182 | | | 10,365 | | | (3,509) | | | (3,509) | | | (7,018) | |
Securities sold under agreements to repurchase with customers | | (57) | | | (37) | | | (94) | | | 40 | | | (349) | | | (309) | |
Other borrowings | | (1,348) | | | 2,210 | | | 862 | | | 1,063 | | | (559) | | | 504 | |
Total borrowings | | 3,778 | | | 7,355 | | | 11,133 | | | (2,406) | | | (4,417) | | | (6,823) | |
Total interest-bearing liabilities | | 6,510 | | | 10,434 | | | 16,944 | | | (5,173) | | | (24,730) | | | (29,903) | |
Net change in net interest income | | $ | 53,319 | | | $ | 18,820 | | | $ | 72,139 | | | $ | 5,970 | | | $ | (13,583) | | | $ | (7,613) | |
(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 securities credit losses.
(2)Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held-for-sale and non-performing loans.
Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Total assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, $171.6 million of residential loan pool purchases. Total debt securities decreased by $28.7 million at December 31, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment. This was partly offset by purchases in the second half of the year. Other assets increased by $74.1 million to $221.1 million at December 31, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs.
Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021. FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as
deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion. Total deposits, excluding time deposits, decreased by $824.6 million to $8.13 billion at December 31, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of non-interest-bearing and interest-bearing checking balances. Time deposits increased to $1.54 billion, or 15.9% of total deposits, at December 31, 2022, from $775.0 million, or 8.0% of total deposits, at December 31, 2021, primarily due to an increase in brokered time deposits. The loans-to-deposit ratio at December 31, 2022 was 102.5%, as compared to 88.6% at December 31, 2021. Other borrowings also decreased by $33.7 million to $195.4 million at December 31, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022.
Other liabilities increased by $224.1 million to $346.2 million at December 31, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties.
Stockholders’ equity increased to $1.59 billion at December 31, 2022, as compared to $1.52 billion at December 31, 2021. Accumulated other comprehensive loss increased by $33.2 million to $36.0 million at December 31, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale, which were adversely impacted by the rising interest rate environment. For the year ended December 31, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82. There were 2,934,438 shares available for repurchase at December 31, 2022 under the existing repurchase program. Stockholders’ equity per common share increased to $26.81 at December 31, 2022, as compared to $25.63 at December 31, 2021.
Comparison of Operating Results for the Years Ended December 31, 2022 and December 31, 2021
General
Net income available to common stockholders for the year ended December 31, 2022 was $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share for the prior year. Net income available to common stockholders for the year ended December 31, 2022 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $2.7 million, $713,000, and $9.7 million, respectively. These items increased net income for the year ended December 31, 2022 by $4.6 million, net of tax. Net income for the year ended December 31, 2021 included merger related expenses, net branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively. These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax.
Interest Income
Interest income for the year ended December 31, 2022 increased to $431.2 million, as compared to $342.1 million in the prior year. Average interest-earning assets increased by $779.9 million for the year ended December 31, 2022, as compared to the prior year, primarily due to loan growth and, to a lesser extent securities growth, funded by the redeployment of excess cash and increased FHLB advances. Average loans receivable, net of allowance for loan credit losses, increased by $1.40 billion for the year ended December 31, 2022, as compared to the prior year, primarily in commercial loans. The yield on average interest-earning assets increased to 3.85% for the year ended December 31, 2022, as compared to 3.29% for the prior year, primarily due to the impact of the rising rate environment on interest-earning assets.
Interest Expense
Interest expense for the year ended December 31, 2022 was $53.7 million, as compared to $36.8 million in the prior year. For the year ended December 31, 2022, the cost of average interest-bearing liabilities increased to 0.65%, from 0.49% in the prior year, as a result of higher costs associated with FHLB advances and interest-bearing deposits, including time deposits issued in an elevated rate environment in 2022. The total cost of deposits (including non-interest bearing deposits) increased to 0.31% for the year ended December 31, 2022, as compared to 0.26% for the prior year.
Net Interest Income and Margin
Net interest income for the year ended December 31, 2022 increased to $377.5 million, as compared to $305.3 million for the prior year, reflecting an increase in average interest-earning assets and net interest margin. Net interest margin increased to 3.37% for the year ended December 31, 2022, from 2.93% for the prior year. The net interest margin expansion was enhanced by the impact of the rising rate environment on interest-earning assets and the redeployment of excess cash into loans, partly offset by an increased cost of funds and the growth of interest-bearing liabilities.
Credit Loss Expense (Benefit)
Credit loss expense for the year ended December 31, 2022 was $7.8 million, as compared to credit loss benefit of $11.8 million for the prior year. The credit loss expense for the year ended December 31, 2022 was primarily influenced by loan growth, slowing prepayment assumptions, and increasingly uncertain macro-economic forecasts due to persistent inflation, interest rate increases, and global economic headwinds, partly offset by positive trends in the Company’s criticized and classified assets. Net loan recoveries were $340,000 for the year ended December 31, 2022, as compared to $461,000 in the prior year. Non-performing loans totaled $23.3 million at December 31, 2022, as compared to $25.5 million at December 31, 2021. The decrease was primarily due to loans that were paid off and partly due to loans that returned to accrual status.
Non-interest Income
Other income for the year ended December 31, 2022 increased to $59.1 million, as compared to $51.9 million for the prior year. The increase was driven by the impact of Trident, which added $10.4 million primarily related to title-related fees and service charges; an increase in commercial loan swap income of $3.0 million; and an increase in net gain on equity investments of $2.5 million. Net gains on equity investments in the current year included a $17.5 million unrealized gain on the Auxilior investment. These increases were partly offset by decreases in bankcard services of $4.1 million, primarily as a result of the Durbin amendment, net gain on sale of loans of $2.8 million, fees and service charges (excluding Trident) of $814,000, and Paycheck Protection Program loan origination referral fees of $800,000 recognized in the prior year.
Non-interest Expense
Operating expenses for the year ended December 31, 2022 increased to $234.9 million, as compared to $226.9 million in the prior year. Operating expenses for the year ended December 31, 2022 and 2021 included $3.4 million and $13.8 million, respectively, of merger related and net branch consolidation expenses. The remaining increase of $18.4 million in operating expenses for the year ended December 31, 2022, as compared to the prior year, was partly due to the impact of Trident, which added $8.5 million of expenses. Other increases included compensation and benefits expense of $6.6 million, primarily related to higher compensation and incentive costs, professional fees of $1.9 million, data processing expense of $1.5 million, and federal deposit insurance and regulatory assessments of $1.2 million, partly offset by a decrease in amortization of core deposit intangible of $734,000.
Income Tax Expense
The provision for income taxes for the year ended December 31, 2022 was $46.6 million, as compared to $32.2 million for the prior year, primarily reflecting the increase in income before provision for income taxes. The effective tax rate was 24.0% for the year ended December 31, 2022, as compared to 22.6% for the prior year.
Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020
Refer to the Company’s 2021 Form 10-K on pages 48-49.
Liquidity and Capital Resources
The primary sources of liquidity specifically available to OceanFirst Financial Corp. are dividends from the Bank, proceeds from sale of investments, the issuance of preferred and common stock, and debt. For the year ended December 31, 2022, the holding company received dividend payments of $73.0 million primarily from the Bank. At December 31, 2022, OceanFirst Financial Corp. held $43.5 million in cash.
The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, other borrowings, and proceeds from the sale of loans and investments. While scheduled payments on loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition. The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions and access to the Federal Reserve Bank discount window.
At December 31, 2022 the Bank had $1.21 billion of term advances and no overnight borrowings from the FHLB, as compared to $0 at December 31, 2021. The Bank regularly utilizes overnight and short-term borrowings to fund short-term liquidity needs.
The Company’s cash needs for the year ended December 31, 2022 were primarily satisfied by the net proceeds from FHLB advances, principal repayments on debt securities and loans, and proceeds from maturities and calls of debt maturities. The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt securities, dividend payments, and redemption of subordinate debt. The Company’s cash needs for the year ended December 31, 2021 were primarily satisfied by the increase in deposits, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities, purchases of residential loan pools, loan originations, and payment for sale of branches.
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, 2022, outstanding commitments to originate loans totaled $166.1 million and outstanding undrawn lines of credit totaled $1.78 billion, of which $1.37 billion were commitments to commercial and commercial construction borrowers and $410.9 million were commitments to consumer borrowers and residential construction borrowers. 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 existing contracts. 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. These commitments are further discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements.
Time deposits scheduled to mature in one year or less totaled $1.04 billion at December 31, 2022.
At December 31, 2022, the Company also had various contractual obligations, which included debt obligations of $1.48 billion, including finance lease obligations of $1.9 million and an additional $20.1 million in operating lease obligations included in other liabilities, and purchase obligations of $111.2 million. Refer to Note 9 Borrowed Funds and Note 17 Leases to the Consolidated Financial Statements for further discussion of debt obligations and lease obligations, respectively. 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. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
The Company has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Company and the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Company and Bank continue to maintain adequate liquidity under all stress scenarios.
Under the Company’s stock repurchase program, 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. For the year ended December 31, 2022, the Company repurchased 373,223 shares of its common stock at a total cost of $7.4 million. For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock at a total cost of $36.1 million. At December 31, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.
Cash dividends on common stock declared and paid during the year ended December 31, 2022 were $43.5 million, as compared to $40.5 million for the prior year. The increase in dividends was a result of an increase in the dividend rate from $0.17 to $0.20 per common share. On January 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend was paid on February 17, 2023 to common stockholders of record at the close of business on February 6, 2023.
Cash dividends on preferred stock declared and paid during the years ended December 31, 2022 and 2021 were $4.0 million for both periods. The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, paid on February 15, 2023 to preferred stockholders of record on January 31, 2023.
The Company’s ability to continue to pay dividends remains dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by 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. Additionally,
regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.
The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations. See Regulation and Supervision—Bank Regulation – Capital Requirements.
At December 31, 2022, the Company maintained stockholders’ equity to total assets ratio of 12.10%.
Impact of New Accounting Pronouncements
Accounting Pronouncements Adopted in 2022
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In December 2022, Financial Accounting Standards Board issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance. The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024. Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from LIBOR towards alternative reference rates. As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024. The Company does not expect this update to have a material impact on its financial statements.
The Company has exposure to LIBOR-based products within its lending and corporate treasury functions. As of December 31, 2021, the Company ceased issuing LIBOR-based products and has transitioned to alternative reference rates, including, but not limited to, SOFR, and Prime (collectively with other indices, “Alternative Rates”).
To prepare for the transition to the Alternative Rates, management formed a cross-functional project team to address the LIBOR transition. The project team performed an assessment to identify the potential risks related to the transition from LIBOR to the Alternative Rates. The project team provides updates to executive leadership and the Board.
The Company’s LIBOR transition plan is organized around key work streams, including continued engagement with regulators, industry working groups, counterparties, and clients; comprehensive review of legacy documentation, internal operational and technological readiness; and risk management, among other things.
For the tenors of U.S. dollar LIBOR utilized by the Company, the administrator of LIBOR has extended publication until June 30, 2023. The Company has developed a transition plan for existing LIBOR-based products that are not expected to mature or settle prior to the cessation date. Contract language for existing loans, securities, derivatives, and borrowings is under review and certain contracts will need updated provisions for the transition. Other contracts will automatically convert to an Alternative Rate with no action required. The Company has plans for impacted lines of business to remediate these contracts, train impacted functions, and provide timely notice to clients and counterparties. The Company has approximately $1.2 billion of loans that reference LIBOR, a majority of which have related swaps that also reference LIBOR. In addition, the Company has approximately $250 million of securities, and has issued approximately $80 million of other borrowings that reference LIBOR. The Company expects them all to be converted to the Alternative Rates before LIBOR cessation except for certain contracts, such as a loan in bankruptcy or workout, and may be unable to completely remove exposure to LIBOR prior to the cessation date.
Current fallback language used for recent, renewed, and modified contracts is generally consistent with ARRC recommendations and includes use of “hardwired fallback” language, where appropriate. The Company continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition.
Recent Accounting Pronouncements Not Yet Adopted
In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restriction. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.
In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. The amendments in this ASU were issued to (1) eliminate accounting guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty; (2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company plans to adopt this standard on January 1, 2023. The adoption of this update will not have a material impact on the Company’s consolidated financial statements.
In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. The Company does not expect this standard to have a material impact to the consolidated financial statements.
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.
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Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of OceanFirst Financial Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiaries (the "Company") as of December 31, 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, 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 24, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the 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 loan credit losses - Refer to Notes 1 and 5 to the financial statements
Critical Audit Matter Description
The allowance for loan credit losses (“ACL”) is management's estimate of credit losses currently expected over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date.
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 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.
We identified the ACL as a critical audit matter because of the complexity of the Company’s model and the significant assumptions used by management. Auditing the ACL required a high degree of auditor judgment and an increased extent of effort, including the need to involve credit specialists when performing audit procedures to evaluate the reasonableness of management’s model and assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to qualitative adjustments within the ACL included the following, among others:
•We tested the design and operating effectiveness of management’s controls covering the key data, assumptions and judgments impacting the ACL.
•We evaluated the appropriateness of the Company’s accounting policies and methodologies, involved in determining the ACL.
•We involved credit specialists to assist us in evaluating the Company’s development of the CECL model, including the reasonableness of the models and the selection of and calibration to economic factors.
•We assessed the reasonableness of the Company’s qualitative methodology, tested key calculations utilized within the qualitative estimate and agreed underlying data within the calculation to source documents.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 24, 2023
We have served as the Company’s auditor since 2022.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of OceanFirst Financial Corp.:
Opinion on Internal Control Over Financial Reporting
We have audited the internal control over financial reporting of OceanFirst Financial Corp. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 24, 2023, expressed an unqualified opinion on those 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’s Report on Internal control Over 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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 24, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
OceanFirst Financial Corp.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of financial condition of OceanFirst Financial Corp. and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
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 Public Company Accounting Oversight Board (United States) (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
We served as the Company’s auditor from 1989 to 2022.
Short Hills, New Jersey
February 25, 2022
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Assets | | | | |
Cash and due from banks | | $ | 167,946 | | | $ | 204,949 | |
Debt securities available-for-sale, at estimated fair value (encumbered $239,953 at December 31, 2022 and $293,968 at December 31, 2021) | | 457,648 | | | 568,255 | |
Debt securities held-to-maturity, net of allowance for securities credit losses of $1,128 at December 31, 2022 and $1,467 at December 31, 2021 (estimated fair value of $1,110,041 at December 31, 2022 and $1,152,744 at December 31, 2021) (encumbered $778,268 at December 31, 2022 and $756,706 at December 31, 2021) | | 1,221,138 | | | 1,139,193 | |
Equity investments (encumbered of $40,122 at December 31, 2021) | | 102,037 | | | 101,155 | |
Restricted equity investments, at cost | | 109,278 | | | 53,195 | |
Loans receivable, net of allowance for loan credit losses of $56,824 at December 31, 2022 and $48,850 at December 31, 2021 | | 9,868,718 | | | 8,583,352 | |
Loans held-for-sale | | 690 | | | — | |
Interest and dividends receivable | | 44,704 | | | 32,606 | |
Other real estate owned | | — | | | 106 | |
Premises and equipment, net | | 126,705 | | | 125,828 | |
| | | | |
Bank owned life insurance | | 261,603 | | | 259,207 | |
| | | | |
Assets held for sale | | 2,719 | | | 6,229 | |
Goodwill | | 506,146 | | | 500,319 | |
Core deposit intangible | | 13,497 | | | 18,215 | |
Other assets | | 221,067 | | | 147,007 | |
Total assets | | $ | 13,103,896 | | | $ | 11,739,616 | |
Liabilities and Stockholders’ Equity | | | | |
Deposits | | $ | 9,675,206 | | | $ | 9,732,816 | |
Federal Home Loan Bank ("FHLB") advances | | 1,211,166 | | | — | |
Securities sold under agreements to repurchase with customers | | 69,097 | | | 118,769 | |
Other borrowings | | 195,403 | | | 229,141 | |
Advances by borrowers for taxes and insurance | | 21,405 | | | 20,305 | |
Other liabilities | | 346,155 | | | 122,032 | |
Total liabilities | | 11,518,432 | | | 10,223,063 | |
Stockholders’ equity: | | | | |
Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, 57,370 shares issued at both December 31, 2022 and December 31, 2021 | | 1 | | | 1 | |
Common stock, $0.01 par value, 150,000,000 shares authorized, 61,877,686 and 61,535,381 shares issued at December 31, 2022 and December 31, 2021, respectively; and 59,144,128 and 59,175,046 shares outstanding at December 31, 2022 and December 31, 2021, respectively | | 612 | | | 611 | |
Additional paid-in capital | | 1,154,821 | | | 1,146,781 | |
Retained earnings | | 540,507 | | | 442,306 | |
Accumulated other comprehensive loss | | (35,982) | | | (2,821) | |
Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP") | | (6,191) | | | (8,615) | |
Treasury stock, 2,733,558 and 2,360,335 shares at December 31, 2022 and December 31, 2021, respectively | | (69,106) | | | (61,710) | |
| | | | |
| | | | |
OceanFirst Financial Corp. stockholders’ equity | | 1,584,662 | | | 1,516,553 | |
Non-controlling interest | | 802 | | | — | |
Total stockholders’ equity | | 1,585,464 | | | 1,516,553 | |
Total liabilities and stockholders’ equity | | $ | 13,103,896 | | | $ | 11,739,616 | |
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, |
| | 2022 | | 2021 | | 2020 |
Interest income: | | | | | | |
Loans | | $ | 390,386 | | | $ | 315,237 | | | $ | 349,221 | |
Debt securities | | 34,407 | | | 22,033 | | | 24,116 | |
Equity investments and other | | 6,382 | | | 4,822 | | | 6,271 | |
Total interest income | | 431,175 | | | 342,092 | | | 379,608 | |
Interest expense: | | | | | | |
Deposits | | 31,021 | | | 25,210 | | | 48,290 | |
Borrowed funds | | 22,677 | | | 11,544 | | | 18,367 | |
Total interest expense | | 53,698 | | | 36,754 | | | 66,657 | |
Net interest income | | 377,477 | | | 305,338 | | | 312,951 | |
Credit loss expense (benefit) | | 7,768 | | | (11,832) | | | 59,404 | |
Net interest income after credit loss expense (benefit) | | 369,709 | | | 317,170 | | | 253,547 | |
Other income: | | | | | | |
Bankcard services revenue | | 9,219 | | | 13,360 | | | 11,417 | |
Trust and asset management revenue | | 2,386 | | | 2,336 | | | 2,052 | |
Fees and service charges | | 22,802 | | | 13,833 | | | 15,808 | |
| | | | | | |
| | | | | | |
Net gain on sales of loans | | 358 | | | 3,186 | | | 8,278 | |
Net gain on equity investments | | 9,685 | | | 7,145 | | | 21,214 | |
Net gain (loss) from other real estate operations | | 48 | | | (15) | | | 35 | |
Income from bank owned life insurance | | 6,578 | | | 6,832 | | | 6,424 | |
Commercial loan swap income | | 7,065 | | | 4,095 | | | 8,080 | |
Other | | 953 | | | 1,159 | | | 618 | |
Total other income | | 59,094 | | | 51,931 | | | 73,926 | |
Operating expenses: | | | | | | |
Compensation and employee benefits | | 131,915 | | | 120,014 | | | 114,155 | |
Occupancy | | 20,817 | | | 20,481 | | | 20,782 | |
Equipment | | 4,987 | | | 5,443 | | | 7,769 | |
Marketing | | 2,947 | | | 2,169 | | | 3,117 | |
Federal deposit insurance and regulatory assessments | | 7,359 | | | 6,155 | | | 4,871 | |
Data processing | | 23,095 | | | 21,570 | | | 17,467 | |
Check card processing | | 4,971 | | | 5,182 | | | 5,458 | |
Professional fees | | 12,993 | | | 11,043 | | | 12,247 | |
FHLB advance prepayment fees | | — | | | — | | | 14,257 | |
Amortization of core deposit intangible | | 4,718 | | | 5,453 | | | 6,186 | |
Branch consolidation expense, net | | 713 | | | 12,337 | | | 7,623 | |
Merger related expenses | | 2,735 | | | 1,503 | | | 15,947 | |
Other operating expense | | 17,631 | | | 15,510 | | | 16,552 | |
Total operating expenses | | 234,881 | | | 226,860 | | | 246,431 | |
Income before provision for income taxes | | 193,922 | | | 142,241 | | | 81,042 | |
Provision for income taxes | | 46,565 | | | 32,165 | | | 17,733 | |
Net income | | 147,357 | | | 110,076 | | | 63,309 | |
Net income attributable to non-controlling interest | | 754 | | | — | | | — | |
Net income attributable to OceanFirst Financial Corp. | | 146,603 | | | 110,076 | | | 63,309 | |
Dividends on preferred shares | | 4,016 | | | 4,016 | | | 2,097 | |
Net income available to common stockholders | | $ | 142,587 | | | $ | 106,060 | | | $ | 61,212 | |
Basic earnings per share | | $ | 2.43 | | | $ | 1.79 | | | $ | 1.02 | |
Diluted earnings per share | | $ | 2.42 | | | $ | 1.78 | | | $ | 1.02 | |
Average basic shares outstanding | | 58,730 | | | 59,406 | | | 59,919 | |
Average diluted shares outstanding | | 58,878 | | | 59,649 | | | 60,072 | |
See accompanying Notes to Consolidated Financial Statements.
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net income | | $ | 147,357 | | | $ | 110,076 | | | $ | 63,309 | |
Other comprehensive (loss) income: | | | | | | |
Unrealized (loss) gain on debt securities (net of tax benefit of $10,629 and $1,142 in 2022 and 2021, respectively, and tax expense of $411 in and 2020) | | (33,402) | | | (3,837) | | | 1,039 | |
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $242, $272 and $310 in 2022, 2021, and 2020, respectively) | | 348 | | | 395 | | | 446 | |
Unrealized loss on derivative hedges (net of tax benefit of $8 in 2022) | | (25) | | | — | | | — | |
Reclassification adjustment on debt securities for (gains) loss included in net income (net of tax benefit of $26 in 2022 and tax expense of $101 in 2020) | | (82) | | | — | | | 344 | |
Total other comprehensive (loss) income, net of tax | | (33,161) | | | (3,442) | | | 1,829 | |
Total comprehensive income | | 114,196 | | | 106,634 | | | 65,138 | |
Less: comprehensive income attributable to non-controlling interest | | 754 | | | — | | | — | |
Total comprehensive income attributable to OceanFirst Financial Corp. | | 113,442 | | | 106,634 | | | 65,138 | |
Less: Dividends on preferred shares | | 4,016 | | | 4,016 | | | 2,097 | |
Total comprehensive income available to common stockholders | | $ | 109,426 | | | $ | 102,618 | | | $ | 63,041 | |
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 Years Ended December 31, 2022, 2021 and 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Gain | Employee Stock Ownership Plan | Treasury Stock | Non-Controlling Interest | | | Total |
Balance at December 31, 2019 | $ | — | | $ | 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 compensation | — | | 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) | | — | | — | | — | | — | | | | 1,241 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase 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 (“Two River”) | — | | 42 | | 122,501 | | — | | — | | — | | 26,066 | | — | | | | 148,609 | |
Acquisition of Country Bank Holding Company, Inc. (“Country Bank”) | — | | 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 | |
Net income | — | | — | | — | | 110,076 | | — | | — | | — | | — | | | | 110,076 | |
Other comprehensive loss, net of tax | — | | — | | — | | — | | (3,442) | | — | | — | | — | | | | (3,442) | |
Stock compensation | — | | — | | 5,415 | | — | | — | | — | | — | | — | | | | 5,415 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Acquisition of common stock by ESOP | — | | — | | — | | — | | — | | (3,200) | | — | | — | | | | (3,200) | |
Allocation of ESOP stock | — | | — | | 179 | | — | | — | | 2,018 | | — | | — | | | | 2,197 | |
Cash dividend – $0.68 per share | — | | — | | — | | (40,494) | | — | | — | | — | | — | | | | (40,494) | |
Exercise of stock options | — | | 2 | | 3,472 | | (1,528) | | — | | — | | — | | — | | | | 1,946 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase 1,711,484 shares of common stock | — | | — | | — | | — | | — | | — | | (36,059) | | — | | | | (36,059) | |
| | | | | | | | | | | |
Preferred stock dividend | — | | — | | — | | (4,016) | | — | | — | | — | | — | | | | (4,016) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at December 31, 2021 | 1 | | 611 | | 1,146,781 | | 442,306 | | (2,821) | | (8,615) | | (61,710) | | — | | | | 1,516,553 | |
Net income | — | | — | | — | | 146,603 | | — | | — | | — | | 754 | | | | 147,357 | |
Other comprehensive loss, net of tax | — | | — | | — | | — | | (33,161) | | — | | — | | — | | | | (33,161) | |
Stock compensation | — | | — | | 6,638 | | — | | — | | — | | — | | — | | | | 6,638 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Allocation of ESOP stock | — | | — | | 82 | | — | | — | | 2,424 | | — | | — | | | | 2,506 | |
Cash dividend – $0.74 per share | — | | — | | — | | (43,495) | | — | | — | | — | | — | | | | (43,495) | |
Exercise of stock options | — | | 1 | | 1,320 | | (897) | | — | | — | | — | | — | | | | 424 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase 373,223 shares of common stock | — | | — | | — | | — | | — | | — | | (7,396) | | — | | | | (7,396) | |
| | | | | | | | | | | |
Preferred stock dividend | — | | — | | — | | (4,016) | | — | | — | | — | | — | | | | (4,016) | |
Acquisition of Trident Abstract Title Agency, LLC (“Trident”) | — | | — | | — | | — | | — | | — | | — | | 836 | | | | 836 | |
Distribution to non-controlling interest | — | | — | | — | | 6 | | — | | — | | — | | (788) | | | | (782) | |
Balance at December 31, 2022 | $ | 1 | | $ | 612 | | $ | 1,154,821 | | $ | 540,507 | | $ | (35,982) | | $ | (6,191) | | $ | (69,106) | | $ | 802 | | | | $ | 1,585,464 | |
See accompanying Notes to Consolidated Financial Statements.
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 147,357 | | | $ | 110,076 | | | $ | 63,309 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization of premises and equipment | | 11,683 | | | 9,357 | | | 8,453 | |
Allocation of ESOP stock | | 2,506 | | | 2,197 | | | 1,135 | |
Stock compensation | | 6,638 | | | 5,415 | | | 4,258 | |
| | | | | | |
Net excess tax expense on stock compensation | | 216 | | | 93 | | | 123 | |
Amortization of core deposit intangible | | 4,718 | | | 5,453 | | | 6,186 | |
Net accretion of purchase accounting adjustments | | (9,752) | | | (14,484) | | | (21,557) | |
Amortization of servicing asset | | 77 | | | 72 | | | 93 | |
Net premium amortization in excess of discount accretion on securities | | 7,164 | | | 8,466 | | | 2,997 | |
Net amortization of deferred costs on borrowings | | 548 | | | 824 | | | 553 | |
Net amortization of deferred costs and discounts on loans | | 1,129 | | | 1,242 | | | 4,872 | |
Credit loss expense (benefit) | | 7,768 | | | (11,832) | | | 59,404 | |
Deferred tax provision (benefit) | | 1,777 | | | 3,608 | | | (4,615) | |
Net gain on sale and write-down of other real estate owned | | (54) | | | — | | | (390) | |
Net write-down of fixed assets held-for-sale to net realizable value | | 1,482 | | | 7,787 | | | 3,853 | |
Net gain on sale of fixed assets | | (38) | | | — | | | (6) | |
Net gain on equity investments | | (9,685) | | | (7,145) | | | (21,214) | |
Net gain on sales of loans | | (358) | | | (3,186) | | | (8,278) | |
| | | | | | |
| | | | | | |
| | | | | | |
Proceeds from sales of residential loans held for sale | | 12,616 | | | 102,648 | | | 171,263 | |
Residential loans originated for sale | | (13,158) | | | (53,938) | | | (213,428) | |
Increase in value of bank owned life insurance | | (6,578) | | | (6,832) | | | (6,424) | |
Net gain on sale of assets held for sale | | (1,959) | | | (318) | | | (21) | |
(Increase) decrease in interest and dividends receivable | | (12,098) | | | 2,663 | | | (9,434) | |
(Increase) decrease in other assets | | (80,233) | | | 33,093 | | | 17,030 | |
Increase (decrease) in other liabilities | | 178,684 | | | (35,287) | | | 74,494 | |
Total adjustments | | 103,093 | | | 49,896 | | | 69,347 | |
Net cash provided by operating activities | | 250,450 | | | 159,972 | | | 132,656 | |
Cash flows from investing activities: | | | | | | |
Net increase in loans receivable | | (1,126,997) | | | (556,449) | | | (428,444) | |
Purchases of loans receivable | | (171,623) | | | (301,954) | | | — | |
Premiums paid on purchased loan pools | | (866) | | | (8,874) | | | — | |
Proceeds from sale of loans | | 13,388 | | | 825 | | | 449,462 | |
Purchase of debt securities available-for-sale | | (69,493) | | | (510,070) | | | (77,519) | |
Purchase of debt securities held-to-maturity | | (249,751) | | | (447,447) | | | (224,073) | |
Purchase of equity investments | | (9,366) | | | (86,462) | | | (96,519) | |
Proceeds from maturities and calls of debt securities available-for-sale | | 104,449 | | | 103,720 | | | 43,503 | |
Proceeds from maturities and calls of debt securities held-to-maturity | | 30,241 | | | 38,042 | | | 53,959 | |
Proceeds from sales of debt securities available-for-sale | | 30,257 | | | 3,000 | | | 10,598 | |
Proceeds from sales of debt securities held-to-maturity | | — | | | — | | | 12,450 | |
Proceeds from sales of equity investments | | 19,234 | | | 98,777 | | | 16,978 | |
Principal repayments on debt securities available-for-sale | | — | | | — | | | 306 | |
Principal repayments on debt securities held-to-maturity | | 135,417 | | | 215,734 | | | 186,687 | |
Proceeds from bank owned life insurance | | 4,182 | | | 12,878 | | | 1,022 | |
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from investing activities (continued): | | | | | | |
Proceeds from the redemption of restricted equity investments | | 234,627 | | | 2,200 | | | 78,190 | |
Purchases of restricted equity investments | | (290,710) | | | (3,267) | | | (59,525) | |
Proceeds from sales of other real estate owned | | 160 | | | — | | | 855 | |
Proceeds from sales of assets held-for-sale | | 8,130 | | | 3,544 | | | 1,169 | |
Purchases of premises and equipment | | (16,107) | | | (42,039) | | | (14,728) | |
Purchases of operating lease equipment | | (4,789) | | | — | | | — | |
| | | | | | |
Cash consideration received for acquisition | | 38,609 | | | — | | | 23,460 | |
Net cash used in investing activities | | (1,321,008) | | | (1,477,842) | | | (22,169) | |
Cash flows from financing activities: | | | | | | |
Net (decrease) increase in deposits | | (56,963) | | | 407,569 | | | 1,507,943 | |
Net payment for sale of branches | | — | | | (86,282) | | | — | |
Decrease in short-term borrowings | | (49,672) | | | (9,685) | | | (226,018) | |
Net proceeds from FHLB advances | | 1,211,166 | | | — | | | 525,000 | |
Repayments of FHLB advances | | — | | | — | | | (840,200) | |
Net proceeds from issuance of subordinated notes | | — | | | — | | | 122,180 | |
Proceeds from Federal Reserve Bank advances | | — | | | — | | | 53,778 | |
Repayments from Federal Reserve Bank advances | | — | | | — | | | (53,778) | |
Repayments of other borrowings | | (35,104) | | | (7,612) | | | (8,109) | |
Increase (decrease) in advances by borrowers for taxes and insurance | | 1,100 | | | 3,009 | | | (2,803) | |
Exercise of stock options | | 424 | | | 1,946 | | | 1,241 | |
Payment of employee taxes withheld from stock awards | | (1,502) | | | (1,183) | | | (2,084) | |
Purchase of treasury stock | | (7,396) | | | (36,059) | | | (14,814) | |
Net proceeds from the issuance of preferred stock | | — | | | — | | | 55,529 | |
Acquisition of common stock by ESOP | | — | | | (3,200) | | | — | |
Dividends paid | | (47,511) | | | (44,510) | | | (42,917) | |
Distributions to non-controlling interest | | (782) | | | — | | | — | |
Net cash provided by financing activities | | 1,013,760 | | | 223,993 | | | 1,074,948 | |
Net (decrease) increase in cash and due from banks and restricted cash | | (56,798) | | | (1,093,877) | | | 1,185,435 | |
Cash and due from banks and restricted cash at beginning of year | | 224,784 | | | 1,318,661 | | | 133,226 | |
Cash and due from banks and restricted cash at end of year | | $ | 167,986 | | | $ | 224,784 | | | $ | 1,318,661 | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash and due from banks at beginning of year | | $ | 204,949 | | | $ | 1,272,134 | | | $ | 120,544 | |
Restricted cash at beginning of year | | 19,835 | | | 46,527 | | | 12,682 | |
Cash and due from banks and restricted cash at beginning of year | | $ | 224,784 | | | $ | 1,318,661 | | | $ | 133,226 | |
Cash and due from banks at end of year | | $ | 167,946 | | | $ | 204,949 | | | $ | 1,272,134 | |
Restricted cash at end of year | | 40 | | | 19,835 | | | 46,527 | |
Cash and due from banks and restricted cash at end of year | | $ | 167,986 | | | $ | 224,784 | | | $ | 1,318,661 | |
Cash paid during the year for: | | | | | | |
Interest | | $ | 49,700 | | | $ | 37,381 | | | $ | 66,454 | |
Income taxes | | 25,383 | | | 50,524 | | | 5,742 | |
Non-cash activities: | | | | | | |
Accretion of unrealized loss on securities reclassified to held-to-maturity | | 590 | | | 667 | | | 756 | |
Net loan (recoveries) charge-offs | | (340) | | | (442) | | | 18,859 | |
Transfer of premises and equipment to assets held-for-sale | | 2,776 | | | 4,035 | | | 3,953 | |
Transfer of debt securities from available-for-sale to held-to-maturity | | — | | | 12,721 | | | — | |
Transfer of loans receivable to other real estate owned | | — | | | — | | | 106 | |
Transfer of loans receivable to loans held-for-sale | | 13,178 | | | — | | | 444,543 | |
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Supplemental disclosure of cash flow information (continued): | | | | | | |
Acquisition: | | | | | | |
Non-cash assets acquired: | | | | | | |
Securities | | $ | — | | | $ | — | | | $ | 208,880 | |
Restricted equity investments | | — | | | — | | | 5,334 | |
Loans | | — | | | — | | | 1,558,480 | |
Other current assets | | 238 | | | — | | | — | |
Premises and equipment | | 18 | | | — | | | 9,744 | |
Right of use ("ROU") asset | | 779 | | | — | | | — | |
| | | | | | |
Accrued interest receivable | | — | | | — | | | 4,161 | |
Bank owned life insurance | | — | | | — | | | 22,440 | |
Deferred tax asset | | — | | | — | | | 41 | |
Other assets | | 81 | | | — | | | 10,073 | |
Goodwill and other intangible assets, net | | 5,827 | | | — | | | 139,501 | |
Total non-cash assets acquired | | $ | 6,943 | | | $ | — | | | $ | 1,958,654 | |
Liabilities assumed: | | | | | | |
Deposits | | $ | — | | | $ | — | | | $ | 1,594,403 | |
Borrowings | | — | | | — | | | 92,618 | |
Lease liability | | 779 | | | — | | | — | |
Other liabilities | | 43,937 | | | — | | | 33,648 | |
| | | | | | |
Total liabilities assumed | | $ | 44,716 | | | $ | — | | | $ | 1,720,669 | |
| | | | | | |
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 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.; the Bank’s direct and indirect wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Management Corp., OceanFirst Realty Corp., Casaba Real Estate Holdings Corporation, and Country Property Holdings, Inc.; and a majority controlling interest in Trident Abstract Title Agency, LLC. Certain other subsidiaries were dissolved in 2022 and 2020 and are included in the consolidated financial statements for prior periods. All significant intercompany accounts and transactions have been eliminated in consolidation.
Business
The Bank provides a range of regional community banking services to retail and commercial customers through a network of branches and offices throughout New Jersey and in the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The Bank is subject to competition from other financial institutions 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 (“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. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for 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 and forecasted 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.
Cash and 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. 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 securities available-for-sale (“AFS”). Debt securities include U.S. government and agency obligations, state, municipal and sovereign debt obligations, corporate debt securities, asset-backed securities, and mortgage-backed securities (“MBS”). Mortgage-backed securities include: agency residential mortgage-backed securities which are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), or the Government National Mortgage Association (“GNMA”); agency commercial mortgage-backed securities which are issued and guaranteed by the Small Business Administration (“SBA”), or agency commercial mortgage-backed securities (“ACMBS”); and non-agency commercial mortgage-backed securities which are issued and guaranteed by commercial mortgage-backed securities (“CMBS”), and collateralized mortgage obligations (“CMOs”).
Management determines the appropriate classification at the time of purchase. If management has the positive intent not to sell a security and the Company would not be required to sell such a security prior to maturity, the securities can be classified as HTM debt securities. Such securities are stated at amortized cost. Securities in the AFS 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 other 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.
Upon the transfer of debt securities from AFS to HTM classification, unrealized gains or losses at the transfer date continue to be reflected in accumulated other comprehensive income and are amortized into interest income over the remaining life of the securities.
Securities also include equity investments. Equity investments with readily determinable fair value are reported at fair value, with changes in fair value reported in net income. Equity investments 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
For AFS debt securities where fair value is less than amortized cost, the 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 amortized cost basis.
On a quarterly basis the Company evaluates the AFS debt securities for impairment. Securities that are in an unrealized loss position are reviewed to determine if a securities credit loss exists based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether an impairment exists include: (a) the extent to which the fair value is less than the amortized cost 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.
If a determination is made that an AFS debt security is 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 securities credit loss expense through an allowance for securities credit losses. The securities 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 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.
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 loan credit 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, 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 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 and 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.
Loans Held for Sale
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.
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 real estate - investor (including commercial real estate - construction and land), commercial real estate - owner occupied, commercial and industrial, 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.
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 or has been individually evaluated. For TDRs individually evaluated that have been modified and the interest rate is the primary concession, the ACL is measured using a discounted cash flow method. Loans that were modified in accordance with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act are not considered TDRs.
Loan Commitments and Allowance for Loan 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 loan 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 loan credit losses on off-balance sheet credit exposures through a charge to loan 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 Statements of Financial Condition.
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, loan term 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.
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.
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.
Other Real Estate Owned (“OREO”)
Other real estate owned 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 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. During 2022, the remaining OREO was sold and there was no OREO as of December 31, 2022.
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 software and equipment: 3 years; furniture, fixtures and other electronic equipment: 5 years; building and leasehold improvements: 10 years; and buildings: 30 years. Depreciable assets are placed in service when they are in a condition for use and available for their designated function. The Company has not developed any internal use software. Repair and maintenance items are expensed and improvements are capitalized. Gains and losses on dispositions are reflected in branch consolidation expenses and other income.
Leases
The Company recognizes 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; otherwise the Company utilizes its incremental borrowing rate, at lease inception, over a similar term.
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 other factors. 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.
The Company completed its annual goodwill impairment test as of August 31, 2022. Based upon its qualitative assessment of goodwill, the Company concluded that goodwill was not impaired and no further quantitative analysis was warranted. At December 31, 2022, management concluded no events or circumstances occurred subsequent to August 31, 2022 that would trigger another impairment test.
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 in the major metropolitan markets of Philadelphia, New York, Baltimore, and Boston. Management makes operating decisions and assesses performance based on an ongoing review of the Company’s consolidated financial results. Therefore, management concluded 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 Company’s ESOP and by incentive plans.
Stock-Based Compensation
The Company recognizes compensation expense related to stock options and awards over the requisite service period, generally based on the instruments’ grant-date fair value, reduced by actual and estimated forfeitures. Certain performance-based stock awards and the associated compensation expense fluctuates based on the estimated probability of achievement of the Company-defined performance goals.
Derivative Instruments
The Company accounts for derivative financial instruments under ASC Topic 815, Derivatives and Hedging, which requires the Company to record all derivatives on the balance sheet at fair value. Accounting for changes in the fair value of a derivative depends on whether or not the derivative has been designated and qualifies for hedge accounting. For derivatives not designated as hedging instruments, changes in the fair value are recognized directly in earnings. For derivatives designated as hedging instruments, the accounting treatment is dependent upon the type of hedge. For the year ended December 31, 2022, the Company only had a cash flow hedge.
Cash flow hedges are used to mitigate the variability in the cash flows of a specific pool of assets, or of forecasted transactions, caused by interest rate fluctuations. The changes in the fair value of cash flow hedges are initially reported in other comprehensive income. Amounts are subsequently reclassified from accumulated other comprehensive income to earnings when the hedged transactions occur, specifically within the same line item as the hedged item.
To qualify for hedge accounting, the Company assesses the effectiveness of the derivative in offsetting the risk associated with the exposure being hedged, at inception and on a quarterly basis thereafter. The Company uses quantitative methods, such as regression analyses, and qualitative comparisons of critical terms and the evaluation of any changes in those terms. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued prospectively.
Accounting Pronouncements Adopted in 2022
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In December 2022, Financial Accounting Standards Board issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance. The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024. Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from LIBOR towards alternative reference rates. As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31 2024. The Company does not expect this update to have a material impact on its consolidated financial statements.
Note 2. Regulatory Matters
The Company and the Bank are required by applicable regulations to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2022, the Company and the Bank were required to maintain a minimum ratio of Tier 1 capital to total average assets of 4.0%; a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0%; a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 10.5%. These ratios include the impact of the required 2.50% capital conservation buffer.
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 an 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 Tier 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, 2022 and 2021, the Company and the Bank exceeded all regulatory capital requirements currently applicable.
The following is a summary of the Company’s and Bank’s regulatory capital amounts and ratios as of December 31, 2022 and 2021 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For capital adequacy purposes | | To be well-capitalized under Prompt Corrective Action |
As of December 31, 2022 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Company: | | | | | | | | | | | |
Tier 1 capital (to average assets) | $ | 1,150,690 | | | 9.43 | % | | $ | 488,297 | | | 4.00 | % | | N/A | | N/A |
Common equity Tier 1 (to risk-weighted assets) | 1,021,774 | | | 9.93 | | | 720,641 | | | 7.00 | | (1) | N/A | | N/A |
Tier 1 capital (to risk-weighted assets) | 1,150,690 | | | 11.18 | | | 875,064 | | | 8.50 | | (1) | N/A | | N/A |
Total capital (to risk-weighted assets) | 1,336,652 | | | 12.98 | | | 1,080,961 | | | 10.50 | | (1) | N/A | | N/A |
Bank: | | | | | | | | | | | |
Tier 1 capital (to average assets) | $ | 1,122,946 | | | 9.20 | % | | $ | 488,033 | | | 4.00 | % | | $ | 610,041 | | | 5.00 | % |
Common equity Tier 1 (to risk-weighted assets) | 1,122,946 | | | 11.02 | | | 713,194 | | | 7.00 | | (1) | 662,251 | | | 6.50 | |
Tier 1 capital (to risk-weighted assets) | 1,122,946 | | | 11.02 | | | 866,021 | | | 8.50 | | (1) | 815,078 | | | 8.00 | |
Total capital (to risk-weighted assets) | 1,183,705 | | | 11.62 | | | 1,069,791 | | | 10.50 | | (1) | 1,018,848 | | | 10.00 | |
As of December 31, 2021 | | | | | | | | | | | |
Company: | | | | | | | | | | | |
Tier 1 capital (to average assets) | $ | 1,044,518 | | | 9.22 | % | | $ | 453,087 | | | 4.00 | % | | N/A | | N/A |
Common equity Tier 1 (to risk-weighted assets) | 917,088 | | | 10.26 | | | 625,801 | | | 7.00 | | (1) | N/A | | N/A |
Tier 1 capital (to risk-weighted assets) | 1,044,518 | | | 11.68 | | | 759,902 | | | 8.50 | | (1) | N/A | | N/A |
Total capital (to risk-weighted assets) | 1,257,372 | | | 14.06 | | | 938,702 | | | 10.50 | | (1) | N/A | | N/A |
Bank: | | | | | | | | | | | |
Tier 1 capital (to average assets) | $ | 1,027,660 | | | 9.08 | % | | $ | 452,669 | | | 4.00 | % | | $ | 565,836 | | | 5.00 | % |
Common equity Tier 1 (to risk-weighted assets) | 1,027,660 | | | 11.62 | | | 619,178 | | | 7.00 | | (1) | 574,951 | | | 6.50 | |
Tier 1 capital (to risk-weighted assets) | 1,027,660 | | | 11.62 | | | 751,860 | | | 8.50 | | (1) | 707,633 | | | 8.00 | |
Total capital (to risk-weighted assets) | 1,079,766 | | | 12.21 | | | 928,768 | | | 10.50 | | (1) | 884,541 | | | 10.00 | |
(1) Includes the Capital Conservation Buffer of 2.50%.
The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations.
Capital distributions and certain discretionary bonus payments are limited if the capital conservation buffer of 2.50% 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 Combinations
Trident Acquisition
On April 1, 2022, the Company completed its acquisition of a majority controlling interest of 60% in Trident. Trident provides commercial and residential title services throughout New Jersey, and through strategic alliances can also service clients’ title insurance needs outside of New Jersey. The acquisition is complimentary to the Company’s existing consumer and commercial lending business. Total consideration paid was $7.1 million and goodwill from the transaction amounted to $5.8 million.
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. The excess of consideration paid over the estimated fair value of the net assets acquired, excluding the net assets attributable to the non-controlling interest, has been recorded as goodwill.
The Company consolidated Trident’s assets, liabilities and components of comprehensive income within its consolidated results. Thus, the consolidated results include amounts attributable to the Company and the non-controlling interest. Amounts attributable to the non-controlling interest are presented separately as a single line on the Consolidated Statements of Income (net income attributable to non-controlling interest) and the Consolidated Statements of Financial Condition (non-controlling interest in stockholders’ equity). Amounts attributed to the non-controlling interest are based upon the ownership interest in Trident that the Company does not own. For further discussion on the accounting for this arrangement refer to Note 18 Variable Interest Entity, of this Form 10-K.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed by the Company at the date of the acquisition for Trident, net of total consideration paid (in thousands): | | | | | |
| At April 1, 2022 |
| Estimated Fair Value |
Total purchase price: | $ | 7,084 | |
Assets acquired: | |
Cash and cash equivalents | $ | 45,693 | |
Other current assets | 238 | |
Premises and equipment | 18 | |
ROU asset | 779 | |
Other assets | 81 | |
Total assets acquired | 46,809 | |
Liabilities assumed: | |
Lease liability | 779 | |
Other liabilities | 43,937 | |
Total liabilities assumed | $ | 44,716 | |
Net assets acquired | $ | 2,093 | |
Net assets attributable to non-controlling interest | $ | 836 | |
Goodwill recorded | $ | 5,827 | |
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. The Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.
Merger Related Expenses
The Company incurred merger related expenses of $2.7 million, $1.5 million, and $15.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. The following table summarizes the merger related expenses for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in thousands) |
Data processing fees | $ | 790 | | | $ | 253 | | | $ | 3,758 | |
Professional fees | 1,936 | | | 343 | | | 3,638 | |
Employee severance payments | 7 | | | 663 | | | 7,727 | |
Other/miscellaneous fees | 2 | | | 244 | | | 824 | |
Merger related expenses | $ | 2,735 | | | $ | 1,503 | | | $ | 15,947 | |
Merger related expenses for 2022 included expenses related to the terminated merger agreement with Partners Bancorp. Merger related expenses for 2021 and 2020 included expenses related to acquisitions of Two River and Country Bank, which were both completed on January 1, 2020.
Core Deposit Intangibles
The estimated future amortization expense for the core deposit intangibles over the next five years and thereafter is as follows (in thousands):
| | | | | | | | |
For the Year Ending December 31, | | Amortization Expense |
2023 | | $ | 3,984 | |
2024 | | 3,250 | |
2025 | | 2,516 | |
2026 | | 1,784 | |
2027 | | 1,112 | |
Thereafter | | 851 | |
Total | | $ | 13,497 | |
Note 4. Securities
The amortized cost, estimated fair value, and allowance for securities credit losses of debt securities available-for-sale and held-to-maturity at December 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Allowance for Securities Credit Losses |
At December 31, 2022 | | | | | | | | | | |
Debt securities available-for-sale: | | | | | | | | | | |
U.S. government and agency obligations | | $ | 87,648 | | | $ | 1 | | | $ | (7,635) | | | $ | 80,014 | | | $ | — | |
Corporate debt securities | | 8,928 | | | — | | | (756) | | | 8,172 | | | — | |
Asset-backed securities | | 296,222 | | | — | | | (19,349) | | | 276,873 | | | — | |
| | | | | | | | | | |
Agency commercial MBS | | 110,606 | | | — | | | (18,017) | | | 92,589 | | | — | |
Total debt securities available-for-sale | | $ | 503,404 | | | $ | 1 | | | $ | (45,757) | | | $ | 457,648 | | | $ | — | |
Debt securities held-to-maturity: | | | | | | | | | | |
| | | | | | | | | | |
State, municipal and sovereign debt obligations | | $ | 260,249 | | | $ | 46 | | | $ | (24,940) | | | $ | 235,355 | | | $ | (60) | |
Corporate debt securities | | 56,893 | | | 380 | | | (3,778) | | | 53,495 | | | (1,059) | |
Mortgage-backed securities: | | | | | | | | | | |
Agency residential | | 849,985 | | | 795 | | | (83,586) | | | 767,194 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Agency commercial | | 32,127 | | | 23 | | | (1,189) | | | 30,961 | | | — | |
Non-agency commercial | | 25,310 | | | — | | | (2,274) | | | 23,036 | | | (9) | |
Total mortgage-backed securities | | 907,422 | | | 818 | | | (87,049) | | | 821,191 | | | (9) | |
Total debt securities held-to-maturity | | $ | 1,224,564 | | | $ | 1,244 | | | $ | (115,767) | | | $ | 1,110,041 | | | $ | (1,128) | |
Total debt securities | | $ | 1,727,968 | | | $ | 1,245 | | | $ | (161,524) | | | $ | 1,567,689 | | | $ | (1,128) | |
At December 31, 2021 | | | | | | | | | | |
Debt securities available-for-sale: | | | | | | | | | | |
U.S. government and agency obligations | | $ | 164,756 | | | $ | 1,135 | | | $ | (471) | | | $ | 165,420 | | | $ | — | |
Corporate debt securities | | 5,000 | | | 42 | | | (11) | | | 5,031 | | | — | |
Asset-backed securities | | 298,976 | | | 41 | | | (1,489) | | | 297,528 | | | — | |
Agency commercial MBS | | 101,142 | | | 57 | | | (923) | | | 100,276 | | | — | |
Total debt securities available-for-sale | | $ | 569,874 | | | $ | 1,275 | | | $ | (2,894) | | | $ | 568,255 | | | $ | — | |
Debt securities held-to-maturity: | | | | | | | | | | |
| | | | | | | | | | |
State, municipal and sovereign debt obligations | | $ | 281,389 | | | $ | 10,185 | | | $ | (1,164) | | | $ | 290,410 | | | $ | (85) | |
Corporate debt securities | | 68,823 | | | 1,628 | | | (1,279) | | | 69,172 | | | (1,343) | |
| | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | |
Agency residential | | 756,844 | | | 6,785 | | | (7,180) | | | 756,449 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Agency commercial | | 4,385 | | | 7 | | | (44) | | | 4,348 | | | — | |
Non-agency commercial | | 32,107 | | | 362 | | | (104) | | | 32,365 | | | (39) | |
Total mortgage-backed securities | | 793,336 | | | 7,154 | | | (7,328) | | | 793,162 | | | (39) | |
Total debt securities held-to-maturity | | $ | 1,143,548 | | | $ | 18,967 | | | $ | (9,771) | | | $ | 1,152,744 | | | $ | (1,467) | |
Total debt securities | | $ | 1,713,422 | | | $ | 20,242 | | | $ | (12,665) | | | $ | 1,720,999 | | | $ | (1,467) | |
There was no allowance for securities credit losses on debt securities available-for-sale at December 31, 2022 and 2021.
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | For the Years Ended, |
| | 2022 | | 2021 |
Allowance for credit losses | | | | |
Beginning balance | | $ | (1,467) | | | $ | (1,715) | |
| | | | |
Credit loss benefit | | 339 | | | 248 | |
Total ending allowance balance | | $ | (1,128) | | | $ | (1,467) | |
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. Credit ratings of BBB- or Baa3 or higher are considered investment grade. Where multiple ratings are available, the Company considers the lowest rating when determining the allowance for securities credit losses. Under this approach, the amortized cost of debt securities held-to-maturity at December 31, 2022, aggregated by credit quality indicator, are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
|
| Investment Grade | | Non-Investment Grade/Non-rated | | Total |
As of December 31, 2022 | | | | | |
| | | | | |
| | | | | |
State, municipal and sovereign debt obligations | $ | 260,249 | | | $ | — | | | $ | 260,249 | |
Corporate debt securities | 41,900 | | | 14,993 | | | 56,893 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Non-agency commercial MBS | 25,310 | | | — | | | 25,310 | |
| | | | | |
Total debt securities held-to-maturity | $ | 327,459 | | | $ | 14,993 | | | $ | 342,453 | |
During 2021 and 2013, the Bank transferred $12.7 million and $536.0 million, respectively, of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $209,000 and $13.3 million at the time of transfer in 2021 and 2013, respectively, which continues to be reflected in accumulated other comprehensive loss on the Consolidated Statement of Financial Condition, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the debt securities held-to-maturity at December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Amortized cost | | $ | 1,224,564 | | | $ | 1,143,548 | |
Net loss on date of transfer from available-for-sale | | (13,556) | | | (13,556) | |
Allowance for securities credit losses | | (1,128) | | | (1,467) | |
Accretion of net unrealized loss on securities reclassified as held-to-maturity | | 11,258 | | | 10,668 | |
Carrying value | | $ | 1,221,138 | | | $ | 1,139,193 | |
There were $108,000 of realized losses on debt securities for the year ended December 31, 2022. There were no realized gains or losses on debt securities for the year ended December 31, 2021. The realized gains/losses on debt securities is presented within other of the Consolidated Statement of Income.
The amortized cost and estimated fair value of debt securities at December 31, 2022 by contractual maturity are shown below (in thousands):
| | | | | | | | | | | | | | |
At December 31, 2022 | | Amortized Cost | | Estimated Fair Value |
Less than one year | | $ | 41,088 | | | $ | 40,795 | |
Due after one year through five years | | 167,126 | | | 154,288 | |
Due after five years through ten years | | 224,954 | | | 207,054 | |
Due after ten years | | 276,772 | | | 251,772 | |
| | $ | 709,940 | | | $ | 653,909 | |
Actual maturities may differ from contractual maturities in instances where issuers have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2022, corporate debt securities, state and municipal obligations, and asset-backed securities with an amortized cost of $62.9 million, $83.2 million, and $296.2 million, respectively, and an estimated fair value of $58.8 million, $78.2 million, and $276.9 million, respectively, were callable prior to the maturity date. 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 and unrealized losses for debt securities available-for-sale and held-to-maturity at December 31, 2022 and December 31, 2021, segregated by the duration of the unrealized losses, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
At December 31, 2022 | | | | | | | | | | | | |
Debt securities available-for-sale: | | | | | | | | | | | | |
U.S. government and agency obligations | | $ | 27,232 | | | $ | (450) | | | $ | 52,782 | | | $ | (7,185) | | | $ | 80,014 | | | $ | (7,635) | |
Corporate debt securities | | 4,735 | | | (193) | | | 3,437 | | | (563) | | | 8,172 | | | (756) | |
Asset-backed securities | | 143,392 | | | (9,179) | | | 133,481 | | | (10,170) | | | 276,873 | | | (19,349) | |
Agency commercial MBS | | 8,782 | | | (1,675) | | | 83,807 | | | (16,342) | | | 92,589 | | | (18,017) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total debt securities available-for-sale | | 184,141 | | | (11,497) | | | 273,507 | | | (34,260) | | | 457,648 | | | (45,757) | |
Debt securities held-to-maturity: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
State, municipal and sovereign debt obligations | | 133,492 | | | (11,952) | | | 97,135 | | | (12,988) | | | 230,627 | | | (24,940) | |
Corporate debt securities | | 11,783 | | | (598) | | | 36,152 | | | (3,180) | | | 47,935 | | | (3,778) | |
| | | | | | | | | | | | |
MBS: | | | | | | | | | | | | |
Agency residential | | 297,296 | | | (12,404) | | | 397,036 | | | (71,182) | | | 694,332 | | | (83,586) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Agency commercial | | 25,936 | | | (1,150) | | | 2,062 | | | (39) | | | 27,998 | | | (1,189) | |
Non-agency commercial | | 16,839 | | | (1,621) | | | 6,198 | | | (653) | | | 23,037 | | | (2,274) | |
Total MBS | | 340,071 | | | (15,175) | | | 405,296 | | | (71,874) | | | 745,367 | | | (87,049) | |
Total debt securities held-to-maturity | | 485,346 | | | (27,725) | | | 538,583 | | | (88,042) | | | 1,023,929 | | | (115,767) | |
Total debt securities | | $ | 669,487 | | | $ | (39,222) | | | $ | 812,090 | | | $ | (122,302) | | | $ | 1,481,577 | | | $ | (161,524) | |
At December 31, 2021 | | | | | | | | | | | | |
Debt securities available-for-sale: | | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. government and agency obligations | | $ | 82,395 | | | $ | (471) | | | $ | — | | | $ | — | | | $ | 82,395 | | | $ | (471) | |
Corporate debt securities | | 1,989 | | | (11) | | | — | | | — | | | 1,989 | | | (11) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Asset-backed securities | | 279,486 | | | (1,489) | | | — | | | — | | | 279,486 | | | (1,489) | |
Agency commercial MBS | | 80,726 | | | (923) | | | — | | | — | | | 80,726 | | | (923) | |
Total debt securities available-for-sale | | 444,596 | | | (2,894) | | | — | | | — | | | 444,596 | | | (2,894) | |
Debt securities held-to-maturity: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
State, municipal and sovereign debt obligations | | 75,329 | | | (1,063) | | | 4,383 | | | (101) | | | 79,712 | | | (1,164) | |
Corporate debt securities | | 38,304 | | | (1,279) | | | — | | | — | | | 38,304 | | | (1,279) | |
| | | | | | | | | | | | |
MBS: | | | | | | | | | | | | |
Agency residential | | 445,399 | | | (5,822) | | | 50,133 | | | (1,358) | | | 495,532 | | | (7,180) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Agency commercial | | 2,255 | | | (41) | | | 886 | | | (3) | | | 3,141 | | | (44) | |
Non-agency commercial | | 10,722 | | | (104) | | | — | | | — | | | 10,722 | | | (104) | |
Total MBS | | 458,376 | | | (5,967) | | | 51,019 | | | (1,361) | | | 509,395 | | | (7,328) | |
Total debt securities held-to-maturity | | 572,009 | | | (8,309) | | | 55,402 | | | (1,462) | | | 627,411 | | | (9,771) | |
Total debt securities | | $ | 1,016,605 | | | $ | (11,203) | | | $ | 55,402 | | | $ | (1,462) | | | $ | 1,072,007 | | | $ | (12,665) | |
The Company concluded that debt securities were not impaired at December 31, 2022 based on a consideration of several factors. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments, and no interest payments were deferred. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the change in net unrealized losses were primarily due to changes in the general credit and interest rate environment and not credit quality. Historically, the Company has not utilized securities sales as a source of liquidity and the Company’s liquidity plans include adequate sources of liquidity outside the securities portfolio.
Equity Investments
At December 31, 2022 and 2021, the Company held equity investments of $102.0 million and $101.2 million, respectively. The equity investments primarily comprised of select financial services institutions’ preferred and common stocks, investments in funds and other financial institutions.
The realized and unrealized gains or losses on equity securities for the year ended December 31, 2022 and 2021 are shown in the table below (in thousands):
| | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | |
Net gain on equity investments | $ | 9,685 | | | $ | 7,145 | | | |
Less: Net gains recognized on equity investments sold | 1,351 | | | 8,123 | | | |
Unrealized gain (loss) recognized on equity investments still held | $ | 8,334 | | | $ | (978) | | | |
Note 5. Loans Receivable, Net
Loans receivable, net at December 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Commercial: | | | | |
Commercial real estate - investor | | $ | 5,171,952 | | | $ | 4,378,061 | |
Commercial real estate - owner occupied | | 997,367 | | | 1,055,065 | |
Commercial and industrial (1) | | 622,372 | | | 449,224 | |
Total commercial | | 6,791,691 | | | 5,882,350 | |
Consumer: | | | | |
Residential real estate | | 2,861,991 | | | 2,479,701 | |
| | | | |
Home equity loans and lines and other consumer (“other consumer”) | | 264,372 | | | 260,819 | |
| | | | |
Total consumer | | 3,126,363 | | | 2,740,520 | |
| | | | |
| | | | |
Total loans receivable | | 9,918,054 | | | 8,622,870 | |
| | | | |
Deferred origination costs, net of fees | | 7,488 | | | 9,332 | |
Allowance for loan credit losses | | (56,824) | | | (48,850) | |
Total loans receivable, net | | $ | 9,868,718 | | | $ | 8,583,352 | |
(1)The commercial and industrial loans balance at December 31, 2022 and 2021 includes Paycheck Protection Program (“PPP”) loans of $1.6 million and $22.9 million, respectively.
The Company categorizes all loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company evaluates risk ratings on an ongoing basis. 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. 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 collection or the liquidation of the debt. 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.
The following tables summarize total loans by year of origination, internally assigned credit grades, and risk characteristics (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and prior | | Revolving lines of credit | | Total |
December 31, 2022 | | | | | | | | | | | | | | | | |
Commercial real estate - investor | | | | | | | | | | | | | | | | |
Pass | | $ | 1,144,763 | | | $ | 1,339,289 | | | $ | 555,937 | | | $ | 524,428 | | | $ | 220,999 | | | $ | 881,344 | | | $ | 450,787 | | | $ | 5,117,547 | |
Special Mention | | — | | | 2,508 | | | 192 | | | 17,094 | | | — | | | 12,818 | | | 2,188 | | | 34,800 | |
Substandard | | — | | | — | | | — | | | 893 | | | — | | | 18,180 | | | 532 | | | 19,605 | |
Total commercial real estate - investor | | 1,144,763 | | | 1,341,797 | | | 556,129 | | | 542,415 | | | 220,999 | | | 912,342 | | | 453,507 | | | 5,171,952 | |
Commercial real estate - owner occupied | | | | | | | | | | | | | | | | |
Pass | | 119,912 | | | 110,440 | | | 59,952 | | | 115,385 | | | 88,204 | | | 458,708 | | | 14,932 | | | 967,533 | |
Special Mention | | — | | | — | | | — | | | — | | | 748 | | | 5,679 | | | — | | | 6,427 | |
Substandard | | — | | | — | | | 3,750 | | | 2,037 | | | 4,817 | | | 12,803 | | | — | | | 23,407 | |
Total commercial real estate - owner occupied | | 119,912 | | | 110,440 | | | 63,702 | | | 117,422 | | | 93,769 | | | 477,190 | | | 14,932 | | | 997,367 | |
Commercial and industrial | | | | | | | | | | | | | | | | |
Pass | | 60,078 | | | 23,724 | | | 14,072 | | | 17,175 | | | 10,992 | | | 47,370 | | | 443,211 | | | 616,622 | |
Special Mention | | — | | | 7 | | | — | | | — | | | — | | | 250 | | | 1,680 | | | 1,937 | |
Substandard | | — | | | 21 | | | 76 | | | 1,083 | | | 301 | | | 2,212 | | | 120 | | | 3,813 | |
Total commercial and industrial | | 60,078 | | | 23,752 | | | 14,148 | | | 18,258 | | | 11,293 | | | 49,832 | | | 445,011 | | | 622,372 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Residential real estate (1) | | | | | | | | | | | | | | | | |
Pass | | 919,364 | | | 591,745 | | | 419,712 | | | 247,387 | | | 99,945 | | | 577,392 | | | — | | | 2,855,545 | |
Special Mention | | — | | | 193 | | | 1,514 | | | 204 | | | 59 | | | 2,407 | | | — | | | 4,377 | |
Substandard | | — | | | — | | | — | | | 656 | | | 286 | | | 1,127 | | | — | | | 2,069 | |
Total residential real estate | | 919,364 | | | 591,938 | | | 421,226 | | | 248,247 | | | 100,290 | | | 580,926 | | | — | | | 2,861,991 | |
Other consumer (1) | | | | | | | | | | | | | | | | |
Pass | | 24,069 | | | 24,111 | | | 15,440 | | | 15,471 | | | 39,057 | | | 108,818 | | | 34,851 | | | 261,817 | |
Special Mention | | — | | | — | | | — | | | 75 | | | — | | | 598 | | | — | | | 673 | |
Substandard | | — | | | — | | | — | | | 157 | | | 18 | | | 1,707 | | | — | | | 1,882 | |
Total other consumer | | 24,069 | | | 24,111 | | | 15,440 | | | 15,703 | | | 39,075 | | | 111,123 | | | 34,851 | | | 264,372 | |
| | | | | | | | | | | | | | | | |
Total loans | | $ | 2,268,186 | | | $ | 2,092,038 | | | $ | 1,070,645 | | | $ | 942,045 | | | $ | 465,426 | | | $ | 2,131,413 | | | $ | 948,301 | | | $ | 9,918,054 | |
(1)For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 and prior | | Revolving lines of credit | | Total |
December 31, 2021 | | | | | | | | | | | | | | | | |
Commercial real estate - investor | | | | | | | | | | | | | | | | |
Pass | | $ | 1,387,753 | | | $ | 609,916 | | | $ | 535,551 | | | $ | 274,662 | | | $ | 375,646 | | | $ | 800,089 | | | $ | 255,613 | | | $ | 4,239,230 | |
Special Mention | | — | | | — | | | 23,794 | | | 9,400 | | | 2,731 | | | 28,663 | | | 582 | | | 65,170 | |
Substandard | | — | | | 4,267 | | | 28,802 | | | 468 | | | 8,495 | | | 28,228 | | | 3,401 | | | 73,661 | |
Total commercial real estate - investor | | 1,387,753 | | | 614,183 | | | 588,147 | | | 284,530 | | | 386,872 | | | 856,980 | | | 259,596 | | | 4,378,061 | |
Commercial real estate - owner occupied | | | | | | | | | | | | | | | | |
Pass | | 116,355 | | | 71,196 | | | 125,212 | | | 91,531 | | | 109,232 | | | 449,966 | | | 10,913 | | | 974,405 | |
Special Mention | | — | | | — | | | 1,365 | | | 3,829 | | | 479 | | | 14,371 | | | 2 | | | 20,046 | |
Substandard | | — | | | — | | | 14,166 | | | 8,549 | | | 5,606 | | | 31,576 | | | 717 | | | 60,614 | |
Total commercial real estate - owner occupied | | 116,355 | | | 71,196 | | | 140,743 | | | 103,909 | | | 115,317 | | | 495,913 | | | 11,632 | | | 1,055,065 | |
Commercial and industrial | | | | | | | | | | | | | | | | |
Pass | | 42,955 | | | 22,573 | | | 22,878 | | | 16,404 | | | 8,671 | | | 50,887 | | | 271,818 | | | 436,186 | |
Special Mention | | — | | | — | | | 231 | | | 350 | | | 85 | | | 172 | | | 3,645 | | | 4,483 | |
Substandard | | — | | | 457 | | | 2,281 | | | 813 | | | 198 | | | 2,029 | | | 2,777 | | | 8,555 | |
Total commercial and industrial | | 42,955 | | | 23,030 | | | 25,390 | | | 17,567 | | | 8,954 | | | 53,088 | | | 278,240 | | | 449,224 | |
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Residential real estate (1) | | | | | | | | | | | | | | | | |
Pass | | 876,135 | | | 475,134 | | | 288,699 | | | 127,756 | | | 105,385 | | | 602,331 | | | — | | | 2,475,440 | |
Special Mention | | — | | | 212 | | | — | | | 61 | | | — | | | 1,313 | | | — | | | 1,586 | |
Substandard | | — | | | — | | | — | | | — | | | 351 | | | 2,324 | | | — | | | 2,675 | |
Total residential real estate | | 876,135 | | | 475,346 | | | 288,699 | | | 127,817 | | | 105,736 | | | 605,968 | | | — | | | 2,479,701 | |
Other consumer (1) | | | | | | | | | | | | | | | | |
Pass | | 26,512 | | | 19,168 | | | 18,179 | | | 51,954 | | | 17,955 | | | 123,783 | | | — | | | 257,551 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | 322 | | | — | | | 322 | |
Substandard | | — | | | — | | | — | | | 18 | | | — | | | 2,928 | | | — | | | 2,946 | |
Total other consumer | | 26,512 | | | 19,168 | | | 18,179 | | | 51,972 | | | 17,955 | | | 127,033 | | | — | | | 260,819 | |
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Total loans | | $ | 2,449,710 | | | $ | 1,202,923 | | | $ | 1,061,158 | | | $ | 585,795 | | | $ | 634,834 | | | $ | 2,138,982 | | | $ | 549,468 | | | $ | 8,622,870 | |
(1)For residential real estate and other consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity.
An analysis of the allowance for credit losses on loans for the years ended December 31, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial Real Estate - Investor | | Commercial Real Estate - Owner Occupied | | Commercial and Industrial | | Residential Real Estate | | Other Consumer | | | | Total |
For the Year Ended December 31, 2022 | | | | | | | | | | | | | | |
Allowance for credit losses on loans | | | | | | | | | | | | | | |
Balance at beginning of year | | $ | 25,504 | | | $ | 5,884 | | | $ | 5,039 | | | $ | 11,155 | | | $ | 1,268 | | | | | $ | 48,850 | |
Credit loss (benefit) expense | | (4,481) | | | (1,569) | | | 561 | | | 13,275 | | | (152) | | | | | 7,634 | |
Charge-offs | | (8) | | | (62) | | | (60) | | | (56) | | | (387) | | | | | (573) | |
Recoveries | | 55 | | | 170 | | | 155 | | | 156 | | | 377 | | | | | 913 | |
Balance at end of year | | $ | 21,070 | | | $ | 4,423 | | | $ | 5,695 | | | $ | 24,530 | | | $ | 1,106 | | | | | $ | 56,824 | |
For the Year Ended December 31, 2021 | | | | | | | | | | | | | | |
Allowance for credit losses on loans | | | | | | | | | | | | | | |
Balance at beginning of year | | $ | 26,703 | | | $ | 15,054 | | | $ | 5,390 | | | $ | 11,818 | | | $ | 1,770 | | | | | $ | 60,735 | |
Credit loss benefit | | (974) | | | (9,190) | | | (321) | | | (761) | | | (1,100) | | | | | (12,346) | |
Charge-offs | | (345) | | | (65) | | | (154) | | | (254) | | | (213) | | | | | (1,031) | |
Recoveries | | 120 | | | 85 | | | 124 | | | 352 | | | 811 | | | | | 1,492 | |
Balance at end of year | | $ | 25,504 | | | $ | 5,884 | | | $ | 5,039 | | | $ | 11,155 | | | $ | 1,268 | | | | | $ | 48,850 | |
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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 and, therefore, is classified as non-accruing. At December 31, 2022 and 2021, the Company had collateral dependent loans with an amortized cost balance as follows: commercial real estate - investor of $4.6 million and $3.6 million, respectively; commercial real estate - owner occupied of $4.0 million and $11.9 million, respectively; and commercial and industrial of $160,000 and $277,000, respectively. In addition, the Company had residential and consumer loans collateralized by residential real estate, which are in the process of foreclosure, with an amortized cost balance of $858,000 and $438,000 at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the amount of foreclosed residential real estate property held by the Company was $0 and $106,000, respectively.
The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Commercial real estate – investor | | $ | 10,483 | | | $ | 3,614 | |
Commercial real estate – owner occupied | | 4,025 | | | 11,904 | |
Commercial and industrial | | 331 | | | 277 | |
Residential real estate | | 5,969 | | | 6,114 | |
Other consumer | | 2,457 | | | 3,585 | |
Total non-accrual loans | | $ | 23,265 | | | $ | 25,494 | |
At December 31, 2022 and 2021, the non-accrual loans were included in the allowance for credit loss calculation and the Company did not recognize or accrue interest income on these loans. At December 31, 2022, there was one PPP loan for $14,000 that was past due greater than 90 days and still accruing interest. Per SBA guidelines, the SBA will pay accrued interest through the deferral period up to a maximum of 120 days past due. Given these servicing guidelines, PPP loans that are 90 to 120 days past due will be reported as accruing loans. At December 31, 2021, there was one loan for $46,000 that was 90 days or greater past due and still accruing interest that was fully paid on January 14, 2022.
The following table presents the aging of the recorded investment in past due loans as of December 31, 2022 and 2021 by loan portfolio segment (in thousands).
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| | 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, 2022 | | | | | | | | | | | | |
Commercial real estate – investor | | $ | 217 | | | $ | 875 | | | $ | 3,700 | | | $ | 4,792 | | | $ | 5,167,160 | | | $ | 5,171,952 | |
Commercial real estate – owner occupied | | 143 | | | 80 | | | 3,750 | | | 3,973 | | | 993,394 | | | 997,367 | |
Commercial and industrial | | 159 | | | 47 | | | 180 | | | 386 | | | 621,986 | | | 622,372 | |
Residential real estate | | 7,003 | | | 4,377 | | | 2,069 | | | 13,449 | | | 2,848,542 | | | 2,861,991 | |
Other consumer | | 573 | | | 673 | | | 1,882 | | | 3,128 | | | 261,244 | | | 264,372 | |
| | $ | 8,095 | | | $ | 6,052 | | | $ | 11,581 | | | $ | 25,728 | | | $ | 9,892,326 | | | $ | 9,918,054 | |
December 31, 2021 | | | | | | | | | | | | |
Commercial real estate – investor | | $ | 1,717 | | | $ | 102 | | | $ | 1,709 | | | $ | 3,528 | | | $ | 4,374,533 | | | $ | 4,378,061 | |
Commercial real estate – owner occupied | | 599 | | | — | | | 575 | | | 1,174 | | | 1,053,891 | | | 1,055,065 | |
Commercial and industrial | | 25 | | | 151 | | | 277 | | | 453 | | | 448,771 | | | 449,224 | |
Residential real estate | | 9,705 | | | 1,586 | | | 2,675 | | | 13,966 | | | 2,465,735 | | | 2,479,701 | |
Other consumer | | 339 | | | 322 | | | 2,946 | | | 3,607 | | | 257,212 | | | 260,819 | |
| | $ | 12,385 | | | $ | 2,161 | | | $ | 8,182 | | | $ | 22,728 | | | $ | 8,600,142 | | | $ | 8,622,870 | |
The Company classifies certain loans as TDRs when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts, and/or the restructuring of scheduled principal payments. Residential real estate and consumer loans where the borrower’s debt is discharged in a bankruptcy filing are also considered TDR loans. For these loans, the Bank retains its security interest in the real estate collateral. At December 31, 2022 and 2021, TDR loans totaled $13.9 million and $23.6 million, respectively. At December 31, 2022 and 2021, there were $6.4 million and $11.3 million, respectively, of TDR loans included in the non-accrual loan totals. At December 31, 2022, the Company had a $590,000 specific reserve allocated to a loan that was classified as a TDR loan. At December 31, 2021, the Company had no specific reserves allocated to loans that were classified as TDRs. Non-accrual loans which become TDRs are generally returned to accrual status after six months of performance. In addition to the TDR loans included in non-accrual loans, the Company also has TDR loans classified as accruing loans, which totaled $7.5 million and $12.3 million at December 31, 2022 and 2021, respectively.
The following table presents information about TDRs which occurred during the years ended December 31, 2022 and 2021 (dollars in thousands):
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| | Number of Loans | | Pre-modification Recorded Investment | | Post-modification Recorded Investment |
For the Year Ended December 31, 2022 | | | | | | |
Troubled debt restructurings: | | | | | | |
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Commercial and industrial | | 1 | | $ | 65 | | | $ | 65 | |
Other consumer | | 8 | | 1,237 | | | 1,378 | |
For the Year Ended December 31, 2021 | | | | | | |
Troubled debt restructurings: | | | | | | |
Commercial real estate – investor | | 1 | | $ | 4,903 | | | $ | 4,903 | |
Commercial real estate – owner occupied | | 2 | | 6,406 | | | 6,423 | |
Residential real estate | | 3 | | 244 | | | 336 | |
Other consumer | | 3 | | 39 | | | 49 | |
There were no TDR loans that defaulted during the year ended December 31, 2022, which were modified within the preceding year. There was one TDR consumer loan and one TDR commercial real estate - investor loan for $15,000 and $923,000, respectively, that defaulted during the year ended December 31, 2021 which were modified within the preceding year. The TDR consumer loan is no longer in default as of December 31, 2022 and the TDR commercial real estate - investor loan was subsequently paid in full as of June 30, 2022.
Note 6. Interest and Dividends Receivable
Interest and dividends receivable at December 31, 2022 and 2021 are summarized as follows (in thousands):
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| | December 31, |
| | 2022 | | 2021 |
Loans receivable | | $ | 36,052 | | | $ | 26,208 | |
Debt securities | | 7,634 | | | 5,753 | |
Equity investments and other | | 1,018 | | | 645 | |
Total interest and dividends receivable | | $ | 44,704 | | | $ | 32,606 | |
Note 7. Premises and Equipment, Net
Premises and equipment, net of accumulated depreciation and amortization expense at December 31, 2022 and 2021 are summarized as follows (in thousands):
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| | December 31, |
| | 2022 | | 2021 |
Land | | $ | 15,916 | | | $ | 18,774 | |
Buildings and improvements | | 131,837 | | | 94,573 | |
Leasehold improvements | | 6,647 | | | 8,460 | |
Furniture and equipment | | 34,692 | | | 30,314 | |
Capitalized software | | 7,588 | | | 6,989 | |
Finance lease | | 3,189 | | | 2,386 | |
Other (1) | | 2,559 | | | 38,057 | |
Total | | 202,428 | | | 199,553 | |
Accumulated depreciation and amortization | | (75,723) | | | (73,725) | |
Total premises and equipment, net | | $ | 126,705 | | | $ | 125,828 | |
(1) 2021 included assets under construction of $36.2 million related to the expansion of the Company’s headquarters in Toms River, New Jersey, which was completed in 2022. In 2022, the Company’s headquarters in Toms River was classified within buildings and improvements.
Depreciation and amortization expense for the years ended December 31, 2022, 2021, and 2020 amounted to $11.5 million, $9.4 million, and $8.5 million, respectively. Depreciation and amortization expense is presented within occupancy, equipment, and data processing expenses of the Consolidated Statement of Income.
Note 8. Deposits
The major types of deposits at December 31, 2022 and 2021 were as follows (dollars in thousands):
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| | December 31, |
| | 2022 | | 2021 |
| | Amount | | Weighted Average Cost | | Amount | | Weighted Average Cost |
Non-interest-bearing | | $ | 2,101,308 | | | — | % | | $ | 2,412,056 | | | — | % |
Interest-bearing checking | | 3,829,683 | | | 0.45 | | | 4,201,736 | | | 0.24 | |
Money market deposit | | 714,386 | | | 0.57 | | | 736,090 | | | 0.06 | |
Savings | | 1,487,809 | | | 0.07 | | | 1,607,933 | | | 0.03 | |
Time deposits | | 1,542,020 | | | 2.34 | | | 775,001 | | | 0.95 | |
Total deposits | | $ | 9,675,206 | | | 0.60 | % | | $ | 9,732,816 | | | 0.19 | % |
Accrued interest payable related to deposits was $2.0 million and $244,000 at December 31, 2022 and 2021, respectively. Time deposits included $117.7 million and $145.4 million in deposits of $250,000 or more at December 31, 2022 and 2021, respectively. Time deposits also include brokered deposits of $873.4 million and $25.0 million at December 31, 2022 and 2021, respectively.
Time deposits at December 31, 2022 mature as follows (in thousands):
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For the Year Ending December 31, | Time Deposit Maturities |
2023 | $ | 1,042,730 | |
2024 | 381,548 | |
2025 | 81,524 | |
2026 | 10,747 | |
2027 | 19,565 | |
Thereafter | 5,906 | |
Total | $ | 1,542,020 | |
Interest expense on deposits for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Interest-bearing checking | | $ | 11,344 | | | $ | 13,400 | | | $ | 19,395 | |
Money market deposit | | 2,234 | | | 1,105 | | | 2,902 | |
Savings | | 758 | | | 631 | | | 2,505 | |
Time deposits | | 16,685 | | | 10,074 | | | 23,488 | |
Total interest expense on deposits | | $ | 31,021 | | | $ | 25,210 | | | $ | 48,290 | |
Note 9. Borrowed Funds
Borrowed funds are summarized as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
FHLB advances | | $ | 1,211,166 | | | 4.59 | % | | $ | — | | | — | % |
Securities sold under agreements to repurchase with customers | | 69,097 | | | 0.16 | | | 118,769 | | | 0.16 | |
Other borrowings | | 195,403 | | | 5.87 | | | 229,141 | | | 4.47 | |
Total borrowed funds | | $ | 1,475,666 | | | 4.55 | % | | $ | 347,910 | | | 3.00 | % |
In March 2022, the Company redeemed $35.0 million of subordinated debt due September 30, 2026, which was reported in Other borrowings. The debt carried an interest rate of 4.14% based on a floating rate of three months LIBOR plus 392 basis points.
The Company pledges certain securities and loans to secure various borrowings or borrowing capacity. The estimated fair value of securities pledged for the ability to draw on FHLB advances, access to the Federal Reserve discount window, and other borrowings and for other purposes required by law amounted to $935.4 million and $1.14 billion at December 31, 2022 and 2021, respectively, which included $105.3 million and $142.9 million at December 31, 2022 and 2021, respectively, pledged as collateral for securities sold under agreements to repurchase with customers. The securities pledged, which collateralize the 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 repurchase agreements.
The Company also pledges eligible mortgage loans to secure FHLB and Federal Reserve System (“FRB”) advances. At December 31, 2022, the Bank pledged $6.49 billion of eligible mortgage loans to secure FHLB and FRB advances.
FHLB advances and repurchase agreements had contractual maturities at December 31, 2022 as follows (in thousands):
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| | FHLB Advances | | Repurchase Agreements |
For the Year Ended December 31, | | | | |
2023 | | $ | 1,209,500 | | | $ | 69,097 | |
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2025 | | 1,666 | | | — | |
Total | | $ | 1,211,166 | | | $ | 69,097 | |
The other borrowings at December 31, 2022 included the following (in thousands):
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Type of Debt | | Stated Value | | Carrying Value | | Interest Rate | | Maturity |
Subordinated debt | | $ | 125,000 | | | $ | 123,537 | | | 5.701 | % | (1) | May 15, 2030 |
Trust preferred | | 10,000 | | | 8,123 | | | 3 month LIBOR plus 225 basis points | (2) | December 15, 2034 |
Trust preferred | | 30,000 | | | 23,589 | | | 3 month LIBOR plus 135 basis points | (2) | March 15, 2036 |
Trust preferred | | 5,000 | | | 5,000 | | | 3 month LIBOR plus 165 basis points | (2) | August 1, 2036 |
Trust preferred | | 7,500 | | | 7,500 | | | 3 month LIBOR plus 166 basis points | (2) | November 1, 2036 |
Trust preferred | | 10,000 | | | 7,922 | | | 3 month LIBOR plus 153 basis points | (2) | June 30, 2037 |
Trust preferred | | 10,000 | | | 10,000 | | | 3 month LIBOR plus 175 basis points | (2) | September 1, 2037 |
Trust preferred | | 10,000 | | | 7,798 | | | 3 month LIBOR plus 139 basis points | (2) | October 1, 2037 |
Finance lease | | 1,934 | | | 1,934 | | | 5.625 | % | | July 31, 2029 |
Total | | $ | 209,434 | | | $ | 195,403 | | | | | |
(1)Adjusts to a floating rate of 509.5 basis points over 3 month Secured Overnight Financing Rate (“SOFR”) on May 15, 2025.
(2)All trust preferred debt carry interest rates which adjust to a spread over LIBOR on a quarterly basis and are expected to convert to a spread over the SOFR upon LIBOR cessation.
All of the trust preferred debt is currently callable.
Interest expense on borrowings for the years ended December 31, 2022, 2021, and 2020 was as follows (in thousands):
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| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
FHLB advances | | $ | 10,365 | | | $ | — | | | $ | 7,018 | |
Reverse repurchase agreements | | 159 | | | 253 | | | 562 | |
Other borrowings | | 12,153 | | | 11,291 | | | 10,787 | |
Total interest expense on borrowings | | $ | 22,677 | | | $ | 11,544 | | | $ | 18,367 | |
Note 10. Income Taxes
The provision for income taxes for the years ended December 31, 2022, 2021 and 2020 consisted of the following (in thousands):
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| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Current | | | | | | |
Federal | | $ | 32,981 | | | $ | 19,696 | | | $ | 15,731 | |
State | | 11,807 | | | 8,861 | | | 6,617 | |
Total current | | 44,788 | | | 28,557 | | | 22,348 | |
Deferred | | | | | | |
Federal | | 2,231 | | | 3,228 | | | (2,746) | |
State | | (454) | | | 380 | | | (1,869) | |
Total deferred | | 1,777 | | | 3,608 | | | (4,615) | |
Total provision for income taxes | | $ | 46,565 | | | $ | 32,165 | | | $ | 17,733 | |
Included in other comprehensive income was the income tax impact attributable to the unrealized gain/loss on debt securities and accretion of unrealized losses on debt securities reclassified to held-to-maturity arising during the year in the amount of $10.4 million, $870,000, and $721,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
The income tax provision reconciled to the income taxes that would have been computed at the statutory federal rate for the years ended December 31, 2022, 2021 and 2020 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Income before provision for income taxes | | $ | 193,922 | | | $ | 142,241 | | | $ | 81,042 | |
Federal income tax, at statutory rates | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Computed “expected” federal income tax expense | | $ | 40,724 | | | $ | 29,871 | | | $ | 17,019 | |
Increase (decrease) in federal income tax expense resulting from | | | | | | |
State income taxes, net of federal benefit | | 8,927 | | | 7,223 | | | 3,751 | |
Earnings on BOLI | | (1,381) | | | (1,435) | | | (1,349) | |
Tax exempt interest | | (786) | | | (768) | | | (1,161) | |
Merger related expenses | | 90 | | | 24 | | | 138 | |
Stock compensation | | 26 | | | (110) | | | (136) | |
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Reclassification of certain tax effect from accumulated other comprehensive income | | (157) | | | (173) | | | (204) | |
Research and development and other credits | | (471) | | | (475) | | | — | |
Dividends received deduction | | (371) | | | (510) | | | — | |
Other items, net | | (36) | | | (1,482) | | | (325) | |
Total provision for income taxes | | $ | 46,565 | | | $ | 32,165 | | | $ | 17,733 | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are presented in the following table (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Deferred tax assets: | | | | |
Allowance for credit losses on loans and debt securities HTM | | $ | 14,887 | | | $ | 12,915 | |
Other reserves | | 2,870 | | | 3,115 | |
Incentive compensation | | 4,715 | | | 3,546 | |
Deferred compensation | | 419 | | | 471 | |
Stock plans | | 2,693 | | | 2,565 | |
Unrealized losses on assets held-for-sale | | 1,080 | | | 1,626 | |
Unrealized losses on AFS securities | | 11,849 | | | 1,332 | |
Net operating loss carryforwards related to acquisition | | 23,100 | | | 28,057 | |
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Other, net | | 3,031 | | | 1,867 | |
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Federal and state alternative minimum tax | | 2,294 | | | 2,295 | |
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Total gross deferred tax assets | | 66,938 | | | 57,789 | |
Deferred tax liabilities: | | | | |
| | | | |
Unrealized gain on equity securities | | (2,155) | | | — | |
Premises and equipment | | (4,362) | | | (5,704) | |
Deferred loan and commitment costs, net | | (1,937) | | | (2,579) | |
Purchase accounting adjustments | | (2,300) | | | (2,056) | |
Investments, discount accretion | | (365) | | | (371) | |
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Total gross deferred tax liabilities | | (11,119) | | | (10,710) | |
Net deferred tax assets | | $ | 55,819 | | | $ | 47,079 | |
The Company has federal net operating losses from the acquisitions of Colonial American Bank (“Colonial American”) and Sun Bancorp, Inc. (“Sun”). At December 31, 2022 and 2021, the net operating losses from Colonial American were $3.9 million and $4.3 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $330,000, and will expire between 2029 and 2034. At December 31, 2022 and 2021, the net operating losses
from Sun were $106.1 million and $129.4 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $23.3 million through 2022 and $9.3 million thereafter. These net operating losses will expire between 2029 and 2036.
At both December 31, 2022 and 2021, the Company had $2.3 million of Alternative Minimum Tax (“AMT”) Tax Credits that were part of the Sun acquisition. These credits are subject to the same Code Section 382 limitation as indicated above but do not expire.
At December 31, 2022, 2021 and 2020, 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, 2022 included approximately $10.8 million for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only for tax years prior to 1988. If the Bank were to liquidate, the entire amount would have to be recaptured and would create income for tax purposes only, which would be subject to the then-current corporate income tax rate.
The Company’s federal and state income tax returns are routinely subject to examination by the Internal Revenue Service and New Jersey, New York, Pennsylvania, and several other state and city tax authorities the Company operates in. The Company believes the assumptions used to record tax-related assets or liabilities have been appropriate. However, such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions.
The Company is currently under examination by the New Jersey Department of Taxation in connection with the 2014 to 2017 tax years. As of December 31, 2022, the Company has not received any notices of proposed adjustments from this audit. The Company also received notification of an upcoming examination by the New York State Department of Taxation and Finance in connection with the 2019 to 2021 tax years. The tax years that remain subject to examination by the federal government and most state or city tax authorities include the tax years 2019 and forward. Excluding the above, the tax years that remain subject to examination by New Jersey are 2018 and forward.
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 required that the effect of income tax law changes on deferred taxes 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. 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, 2022, subject to reclassification, was $550,000.
There were no unrecognized tax benefits for the years ended December 31, 2022, 2021 and 2020.
Note 11. Employee Stock Ownership Plan
The Bank maintains an ESOP which all full-time employees are eligible to participate in 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. In 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 12 years to 30 years. In 2018, the loan agreement was amended (“amended loan”) 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 same time, the fixed interest rate of the loan was reduced from 8.25% to 3.25%. On November 9, 2021, the ESOP borrowed an additional $3.2 million from the Company to fund the purchase of 145,693 shares of common stock (“2021 loan”), and the loan had a fixed interest rate of 0.22% that matures on December 31, 2023. Both the amended loan and 2021 loan are to be repaid from contributions by the Bank to the ESOP trustee. The Bank is required to make contributions to the ESOP in amounts at least equal to the principal and interest requirement of both debts.
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, 2022 and 2021, contributions to the ESOP, which were used to fund principal and interest payments on the ESOP loans, totaled $2.7 million and $2.3 million, respectively. During 2022 and 2021, $245,000 and $268,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 2022 and 2021, the loan had an outstanding balance of $6.8 million and $9.2 million, respectively, and the ESOP had unallocated shares of 317,343 and 437,725, respectively. At December 31, 2022, the unallocated shares had a fair value of $6.7 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 years ended December 31, 2022, and 2021, the Bank recorded compensation expense related to the ESOP of $2.5 million and $2.2 million, respectively, which included $82,000 and $179,000, respectively, of 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. For the year ended December 31, 2020, the Bank recorded compensation expense related to the ESOP of $1.1 million including $80,000 related to a decrease in compensation expense to reflect the decrease in the average fair value of shares committed to be released and allocated shares below the Bank’s cost. As of December 31, 2022, 2,645,342 shares had been allocated to participants and 120,382 shares were committed to be released for services rendered in 2022.
Note 12. Incentive Plans
The Company offers long-term incentive plans that provide for the granting of stock awards (both time-vested and performance-based) and stock options, as well as phantom stock units. The Company has established these plans to attract and retain qualified personnel in key positions, provide officers, employees, and non-employee 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 non-employee directors of the Company and its affiliates are eligible to receive awards under the plans.
Overview of Incentive Plans
The OceanFirst Financial Corp. 2011 Stock Incentive Plan, which authorized the granting of stock options or awards of common stock, was approved by stockholders in 2011. This plan was subsequently amended in 2017 to increase the number of authorized shares available for grant and to update the performance goals under which performance-based awards may be granted.
The OceanFirst Financial Corp. 2020 Stock Incentive Plan, which also authorized the granting of stock options or awards of common stock, was approved by stockholders in 2020. This plan was subsequently amended in 2021 to increase the number of shares authorized for issuance through equity awards.
The following table presents the amount of the plans’ authorized shares and those that remain available for issuance as of December 31, 2022. Both plans allowed the Company to authorize shares subject to options or, in lieu of options, shares in the form of stock awards.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Authorized Awards | | Authorized but Not Issued |
| | Stock Options | | or | | Stock Awards | | Stock Options | | or | | Stock Awards |
2020 Plan | | 6,950,000 | | | | | 2,780,000 | | | 4,354,574 | | | | | 1,741,830 | |
2011 Plan | | 4,000,000 | | | | | 1,600,000 | | | 200,003 | | | | | 80,001 | |
Total | | 10,950,000 | | | | | 4,380,000 | | | 4,554,577 | | | | | 1,821,831 | |
Stock Awards
The Company grants time-based and performance-based stock awards. Time-based awards vest ratably, and generally have a three- to five- year vesting period. Performance-based stock awards, which are granted to certain senior executives, vest based on the estimated probability of achievement of defined tiered performance goals or include market-based conditions. 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 granted performance-based stock awards in 2022, 2021 and 2020. The 2022 performance-based stock awards were issued with a three year cliff vesting schedule and the 2021 and 2020 performance-based stock awards vest in equal amounts over a four- to five-year period.
The 2022 performance-based stock awards include market-based condition awards. The fair value of these awards were estimated through the use of the Monte Carlo valuation model applying the following assumptions:
| | | | | | | | | | | | |
| | | | | | 2022 |
Risk-free interest rate | | | | | | 1.36 | % |
Expected performance period | | | | | | 2.9 years |
Expected volatility | | | | | | 41.10 | % |
The risk-free interest rate is based on the U.S Treasury rate, at valuation date, with a term equal to the expected performance period. The expected performance period reflects the remaining term of the awards’ performance period. Expected volatility is based on actual historical results.
A summary of the granted but unvested stock award activity, which included both time- and performance-based stock awards, for the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | 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: | | 778,971 | | | $ | 22.30 | | | 575,996 | | | $ | 23.42 | | | 451,443 | | | $ | 25.61 | |
Granted | | 279,750 | | | 21.47 | | | 388,392 | | | 21.53 | | | 256,649 | | | 20.38 | |
Vested | | (190,094) | | | 23.14 | | | (126,292) | | | 24.04 | | | (96,564) | | | 24.41 | |
Forfeited | | (33,287) | | | 22.17 | | | (59,125) | | | 24.39 | | | (35,532) | | | 26.56 | |
Outstanding at end of year | | 835,340 | | | $ | 21.84 | | | 778,971 | | | $ | 22.30 | | | 575,996 | | | $ | 23.42 | |
Stock Options
The Company’s stock options expire 10 years from the date of grant and generally vest at a rate of 20% per year. The exercise price of each option equals the closing market price of the Company’s stock on the grant date. The Company typically issues treasury shares or authorized but unissued shares to satisfy stock option exercises.
The Company did not grant stock options for the years ended December 31, 2022 and 2021. The fair value of stock options granted in 2020 was estimated through the use of the Black-Scholes option pricing model applying the following assumptions:
| | | | | | | | | | | | |
| | | | | | 2020 |
Risk-free interest rate | | | | | | 1.03 | % |
Expected option life | | | | | | 7 years |
Expected volatility | | | | | | 23 | % |
Expected dividend yield | | | | | | 3.33 | % |
| | | | | | |
Weighted average fair value of an option share granted during the year | | | | | | $ | 2.93 | |
Intrinsic value of options exercised during the year (in thousands) | | | | | | 2,499 | |
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.
A summary of option activity for the years ended December 31, 2022, 2021 and 2020 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | 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 | | 2,458,255 | | | $ | 21.02 | | | 2,838,867 | | | $ | 20.67 | | | 2,424,032 | | | $ | 19.80 | |
Granted | | — | | | — | | | — | | | — | | | 699,651 | | | 20.44 | |
| | | | | | | | | | | | |
Exercised | | (217,038) | | | 14.17 | | | (264,717) | | | 14.80 | | | (213,506) | | | 9.50 | |
Forfeited | | — | | | — | | | (1,828) | | | 23.78 | | | (6,357) | | | 21.26 | |
Expired | | (30,533) | | | 23.68 | | | (114,067) | | | 26.62 | | | (64,953) | | | 22.51 | |
Outstanding at end of year | | 2,210,684 | | | $ | 21.66 | | | 2,458,255 | | | $ | 21.02 | | | 2,838,867 | | | $ | 20.67 | |
Options exercisable | | 1,645,901 | | | | | 1,583,521 | | | | | 1,596,927 | | | |
The following table summarizes information about stock options outstanding at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
$11.70 to $16.03 | | 194,374 | | | 0.3 years | | $ | 14.19 | | | 194,374 | | | 0.3 years | | $ | 14.19 | |
16.04 to 20.36 | | 464,706 | | | 2.2 | | 17.45 | | | 464,706 | | | 2.2 | | 17.45 | |
20.37 to 24.69 | | 733,485 | | | 6.9 | | 20.55 | | | 334,172 | | | 6.6 | | 20.68 | |
24.70 to 29.01 | | 818,119 | | | 5.2 | | 26.82 | | | 652,649 | | | 5.0 | | 27.16 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2,210,684 | | | 4.7 years | | $ | 21.66 | | | 1,645,901 | | | 4.0 years | | $ | 21.57 | |
The aggregate intrinsic value for stock options outstanding and stock options exercisable at December 31, 2022 was $3.7 million and $3.4 million, respectively.
Phantom Stock Units
In 2022, the Company also established the OceanFirst Bank Phantom Equity Plan to issue phantom stock units to select senior management employees. The phantom stock units are liability-classified time-based awards, which vest ratably over a three- to five- year period. The fair value is determined based on the Company’s stock price at the grant date and remeasured quarterly. The phantom stock units are settled in cash when they vest.
Compensation Expense
The compensation expense for stock awards, stock options and phantom stock units were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Stock awards | | $ | 5,698 | | | $ | 4,161 | | | $ | 2,792 | |
Stock options | | 940 | | | 1,244 | | | 1,466 | |
Phantom stock units | | 554 | | | — | | | — | |
Total | | $ | 7,192 | | | $ | 5,405 | | | $ | 4,258 | |
At December 31, 2022, the Company had an estimated $15.1 million of unrecognized compensation costs related to non-vested stock awards, stock options, and phantom stock units. This cost will be recognized over the remaining vesting period of 2.23 years.
Note 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, construction loan lines of credit, commercial lines of credit, and commitments to extend credit.
At December 31, 2022, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands):
| | | | | |
| December 31, 2022 |
Unused consumer and residential construction loan lines of credit (primarily floating-rate) | $ | 410,902 | |
Unused commercial and commercial construction loan lines of credit (primarily floating-rate) | 1,368,017 | |
Other commitments to extend credit: | |
Fixed-rate | 59,526 | |
Adjustable-rate | 11,280 | |
Floating-rate | 95,274 | |
The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 4.50% to 9.50% at December 31, 2022.
At December 31, 2022, the Company had $7.5 million of unfunded capital commitments related to investment funds.
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, 2022, the Company is obligated under noncancelable operating leases for premises and equipment. Rental and lease expense under these leases were $6.3 million, $7.2 million, and $7.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. Refer to Note 17 Leases for the projected minimum lease commitments as of December 31, 2022.
The Company grants residential real estate and first mortgage commercial real estate loans to borrowers primarily located throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, and Boston. The ability of borrowers to repay their obligations is dependent upon various factors including the borrowers’ income, 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. The Company is, therefore, subject to risk of loss. A decline in real estate values could cause some residential and commercial real estate loans to become inadequately collateralized, which would expose the Company to a greater risk of loss.
The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and collateral and/or guarantees are required for most 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. Earnings Per Share
The following reconciles average shares outstanding for basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 | | 2020 |
Weighted average shares outstanding | | 59,219 | | | 59,873 | | | 60,358 | |
Less: Unallocated ESOP shares | | (378) | | | (360) | | | (426) | |
Unallocated incentive award shares | | (111) | | | (107) | | | (13) | |
Average basic shares outstanding | | 58,730 | | | 59,406 | | | 59,919 | |
Add: Effect of dilutive securities: | | | | | | |
Incentive awards | | 148 | | | 243 | | | 153 | |
Average diluted shares outstanding | | 58,878 | | | 59,649 | | | 60,072 | |
For the years ended December 31, 2022, 2021 and 2020, antidilutive stock options of 1,544,000, 1,566,000, and 2,242,000, respectively, were excluded from the earnings per share calculations.
Note 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 value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.
Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.
Assets and Liabilities Measured at Fair Value
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Debt Securities Available-for-Sale
Debt securities classified as available-for-sale are reported at fair value. Fair value for these debt securities is determined using inputs other than quoted prices that are based on market observable information (Level 2). Level 2 debt securities are priced through third-party pricing services or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific securities, but comparing the debt securities to benchmark or comparable debt securities.
Equity Investments
Equity investments with readily determinable fair value are reported at fair value. Fair value for these investments is primarily determined using a quoted price in an active market or exchange (Level 1) or using inputs other than quoted prices that are based on market observable information (Level 2). Fair value for certain securities, including convertible preferred stock, was determined using broker or dealer quotes with limited levels of activity and price transparency (Level 3). Equity investments 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 (measurement
alternative). Certain equity investments without readily determinable fair values are measured at net asset value (“NAV”) per share as a practical expedient, which are excluded from the fair value hierarchy levels in the table below.
Interest Rate Derivatives
The Company’s interest rate swaps and cap contracts are reported at fair value utilizing discounted cash flow models provided by an independent, third-party and observable market data (Level 2). When entering into an interest rate swap or cap contract, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of the contract counterparty.
Other Real Estate Owned and Loans Individually Measured for Impairment
Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs. Fair value is based on independent appraisals (Level 3).
The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2022 and 2021, 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, 2022 | | | | | | | | |
Items measured on a recurring basis: | | | | | | | | |
Debt securities available-for-sale | | $ | 457,648 | | | $ | — | | | $ | 457,648 | | | $ | — | |
Equity investments | | 61,942 | | | 430 | | | 61,511 | | | — | |
Interest rate derivative assets | | 113,420 | | | — | | | 113,420 | | | — | |
Interest rate derivative liability | | (113,473) | | | — | | | (113,473) | | | — | |
Items measured on a non-recurring basis: | | | | | | | | |
Equity investments (1) (2) | | 40,095 | | | — | | | — | | | 37,076 | |
| | | | | | | | |
Loans measured for impairment based on the fair value of the underlying collateral (3) | | 9,635 | | | — | | | — | | | 9,635 | |
December 31, 2021 | | | | | | | | |
Items measured on a recurring basis: | | | | | | | | |
Debt securities available-for-sale | | $ | 568,255 | | | $ | — | | | $ | 568,255 | | | $ | — | |
Equity investments | | 90,726 | | | 14,608 | | | 73,400 | | | 2,718 | |
Interest rate derivative assets | | 22,787 | | | — | | | 22,787 | | | — | |
Interest rate derivative liability | | (22,855) | | | — | | | (22,855) | | | — | |
Items measured on a non-recurring basis: | | | | | | | | |
Equity investments | | 10,429 | | | — | | | — | | | 10,429 | |
Other real estate owned | | 106 | | | — | | | — | | | 106 | |
Loans measured for impairment based on the fair value of the underlying collateral (3) | | 16,233 | | | — | | | — | | | 16,233 | |
(1) Primarily consists of $37.1 million of equity investments measured under the measurement alternative, which included $20.0 million of unrealized gains as a result of observable price changes in the investments for the year ended December 31, 2022.
(2) Equity investments of $40.1 million includes $3.0 million of certain equity investment funds measured at NAV per share (or its equivalent) as a practical expedient to fair value and these equity investments have not been classified in the fair value hierarchy levels.
(3) Primarily consists of commercial loans, which are collateral dependent. The amounts are based on independent appraisals, which may be adjusted by management for qualitative factors, such as economic factors and estimated liquidation expenses. The range may vary but is generally 0% to 8% on the discount for costs to sell and 0% to 10% on appraisal adjustments.
The following table reconciles, for the year ended December 31, 2022 and 2021, the beginning and ending balances for equity investments that are recognized at fair value on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs (in thousands):
| | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 |
Beginning balance | | $ | 2,718 | | | $ | 2,540 | | | |
| | | | | | |
Total gains included in earnings | | — | | | 178 | | | |
| | | | | | |
Transfers out of Level 3 | | (2,718) | | | — | | | |
| | | | | | |
Ending balance | | $ | — | | | $ | 2,718 | | | |
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. During the year ended December 31, 2022, the Company executed its right to convert $2.7 million of preferred stock into common stock, which resulted in a transfer from Level 3 into Level 1. There were no transfers into or out of Level 3 assets or liabilities in the fair value hierarchy for the year ended December 31, 2021.
Assets and Liabilities Disclosed at Fair Value
A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Cash and Due from Banks
For cash and due from banks, the carrying amount approximates fair value.
Debt Securities Held-to-Maturity
Debt securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these debt securities to maturity. The Company determines the fair value of the debt securities utilizing Level 2 and, infrequently, Level 3 inputs. Most of the Company’s debt securities are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that actively participate in the buying and selling of debt securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain debt securities without relying exclusively on quoted prices for the specific debt securities, but comparing the debt securities to benchmark or comparable debt securities.
Management’s policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third-party pricing service and decides as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third-party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations, known as bond anticipation notes, as well as certain debt securities where management utilized Level 3 inputs, such as broker or dealer quotes with limited levels of activity and price transparency.
Restricted Equity Investments
The fair value for Federal Home Loan Bank of New York, Federal Reserve Bank stock, and Atlantic Community Bankers Bank is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment as stipulated by the respective entities.
Loans Receivable and Loans Held-for-Sale
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential real estate, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.
Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms.
The fair value of loans was measured using the exit price notion.
Deposits Other than Time Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts is, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported.
Time Deposits
The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase with Customers
Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.
FHLB Advances and Other Borrowings
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.
The book value and estimated fair value of the Company’s significant financial instruments not recorded at fair value as of December 31, 2022 and 2021 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, 2022 | | | | | | | | |
Financial Assets: | | | | | | | | |
Cash and due from banks | | $ | 167,946 | | | $ | 167,946 | | | $ | — | | | $ | — | |
Debt securities held-to-maturity | | 1,221,138 | | | — | | | 1,097,984 | | | 12,057 | |
Restricted equity investments | | 109,278 | | | — | | | — | | | 109,278 | |
Loans receivable, net and loans held-for-sale | | 9,869,408 | | | — | | | — | | | 9,103,137 | |
Financial Liabilities: | | | | | | | | |
Deposits other than time deposits | | 8,133,186 | | | — | | | 8,133,186 | | | — | |
Time deposits | | 1,542,020 | | | — | | | 1,504,601 | | | — | |
FHLB advances and other borrowings | | 1,406,569 | | | — | | | 1,416,384 | | | — | |
Securities sold under agreements to repurchase with customers | | 69,097 | | | 69,097 | | | — | | | — | |
December 31, 2021 | | | | | | | | |
Financial Assets: | | | | | | | | |
Cash and due from banks | | $ | 204,949 | | | $ | 204,949 | | | $ | — | | | $ | — | |
Debt securities held-to-maturity | | 1,139,193 | | | — | | | 1,138,529 | | | 14,215 | |
Restricted equity investments | | 53,195 | | | — | | | — | | | 53,195 | |
Loans receivable, net and loans held-for-sale | | 8,583,352 | | | — | | | — | | | 8,533,506 | |
Financial Liabilities: | | | | | | | | |
Deposits other than time deposits | | 8,957,815 | | | — | | | 8,957,815 | | | — | |
Time deposits | | 775,001 | | | — | | | 773,766 | | | — | |
Other borrowings | | 229,141 | | | — | | | 251,491 | | | — | |
Securities sold under agreements to repurchase with customers | | 118,769 | | | 118,769 | | | — | | | — | |
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, 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 and Hedging Activities
The Company enters into derivative financial instruments which involve, to varying degrees, interest rate 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 derivative financial instruments to accommodate the business needs of its customers as well as to economically hedge the exposure that this creates for the Company. Additionally, the Company enters into certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The Company does not use derivative financial instruments for trading purposes.
Customer Derivatives – Interest Rate Swaps and Cap Contracts
Derivatives Not Designated as Hedging Instruments
The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The Company also enters into interest rate cap contracts that enable commercial loan customers to lock in a cap on a variable-rate commercial loan agreement. This feature prevents the loan from repricing to a level that exceeds the cap contract’s specified interest rate, which serves to hedge the risk from rising interest rates. The Company then enters into an offsetting interest rate cap contract with a third party in order to economically hedge its exposure through the customer agreement.
These interest rate swaps and cap contracts with both the customers and third parties are not designated as hedges under ASC Topic 815, Derivatives and Hedging, therefore changes in fair value are reported in earnings. As the interest rate swaps and cap contracts are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC Topic 820, Fair Value Measurements. The Company recognized gains of $49,000, $72,000, and $428,000 in commercial loan swap income resulting from fair value adjustments for the years ended December 31, 2022, 2021 and 2020, respectively.
Derivatives Designated as Hedging Instruments
For the year ended December 31, 2022, the Company entered into an interest rate swap intended to add stability to its net interest income and to manage its exposure to future interest rate movements associated with a pool of floating rate commercial loans. The swap requires the Company to pay variable-rate amounts indexed to one-month term SOFR to the counterparty in exchange for the receipt of fixed-rate amounts at 4.0% from the counterparty. The swap was designated and qualified as a cash flow hedge, under ASC Topic 815, Derivatives and Hedging. The maximum length of time over which forecasted cash flows are hedged is approximately three years.
The effect on the Company’s accumulated other comprehensive income attributable to cash flow hedge derivative, net of tax, was a $25,000 loss for the year ended December 31, 2022 due to unrealized mark to market losses on the derivative. There were no gains or losses recognized in income from the Company’s cash flow hedge for the year ended December 31, 2022.
The table below presents the notional amount and fair value of derivatives designated and not designated as hedging instruments, as well as their location on the Consolidated Statements of Financial Condition (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional | | Fair Value | | | | |
| | | Other assets | | Other liabilities | | |
As of December 31, 2022 | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | |
Interest rate swaps and cap contracts | | $ | 1,368,245 | | | $ | 113,420 | | | $ | 113,440 | | | | | |
Derivatives Designated as Cash Flow Hedge | | | | | | | | | | |
Interest rate swap contract | | 100,000 | | | — | | | 33 | | | | | |
Total Derivatives | | $ | 1,468,245 | | | $ | 113,420 | | | $ | 113,473 | | | | | |
As of December 31, 2021 | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | |
Interest rate swaps and cap contracts | | $ | 938,727 | | | $ | 22,787 | | | $ | 22,855 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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Credit Risk-Related Contingent Features
The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by being 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 $40,000 and $19.8 million at December 31, 2022 and 2021, respectively. The amount of collateral received from third parties was $104.5 million at December 31, 2022. The amount of collateral posted with third parties and received from 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 $113.5 million and $22.9 million at December 31, 2022 and 2021, respectively.
The interest rate derivatives which the Company executes with the commercial borrowers are collateralized by the borrowers’ commercial real estate financed by the Company.
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, automated teller machine locations and office space with terms extending through 2038. The Company has one existing finance lease, which 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):
| | | | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended |
| | | | December 31, 2022 | | December 31, 2021 |
Lease ROU Assets | | Classification | | | | |
Operating lease ROU assets | | Other assets | | $ | 19,055 | | | $ | 17,442 | |
Finance lease ROU asset | | Premises and equipment, net | | 1,532 | | | 1,495 | |
Total lease ROU assets | | | | $ | 20,587 | | | $ | 18,937 | |
| | | | | | |
Lease Liabilities | | | | | | |
Operating lease liabilities (1) | | Other liabilities | | $ | 20,053 | | | $ | 17,982 | |
Finance lease liability | | Other borrowings | | 1,934 | | | 1,904 | |
Total lease liabilities | | | | $ | 21,987 | | | $ | 19,886 | |
(1) Operating lease liabilities excludes liabilities for future rent and estimated lease termination payments related to closed branches of $7.7 million and $8.2 million as of December 31, 2022 and 2021, respectively.
The calculated amount of the ROU assets and lease liabilities are impacted by the lease term and the discount rate used to calculate the present value of the minimum lease payments. Lease agreements often include one or more options to renew the lease at the Company’s discretion. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the ROU asset and lease liability. For the discount rate, ASC Topic 842, Leases 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, 2022 | | December 31, 2021 |
Weighted-Average Remaining Lease Term | | | | |
Operating leases | | 6.87 years | | 8.22 years |
Finance lease | | 6.60 years | | 7.59 years |
Weighted-Average Discount Rate | | | | |
Operating leases | | 2.86 | % | | 2.97 | % |
Finance lease | | 5.63 | % | | 5.63 | % |
The following table represents lease expenses and other lease information (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended December 31, |
| | | | 2022 | | 2021 | | 2020 |
Lease Expense | | | | | | | | |
Operating lease expense | | | | $ | 5,000 | | | $ | 5,935 | | | $ | 6,438 | |
Finance lease expense: | | | | | | | | |
Amortization of ROU assets | | | | 207 | | | 199 | | | 174 | |
Interest on lease liabilities (1) | | | | 104 | | | 112 | | | 110 | |
Total | | | | $ | 5,311 | | | $ | 6,246 | | | $ | 6,722 | |
| | | | | | | | |
Other Information | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases | | | | $ | 4,466 | | | $ | 5,263 | | | $ | 6,298 | |
Operating cash flows from finance leases | | | | 104 | | | 112 | | | 110 | |
Financing cash flows from finance leases | | | | 214 | | | 195 | | | 187 | |
(1)Included in borrowed funds interest expense on the Consolidated Statements of Income. All other costs are included in occupancy expense on the Consolidated Statements of Income.
Future minimum payments for the finance lease and operating leases with initial or remaining terms of one year or more as of December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Finance Lease | | Operating Leases |
For the Year Ending December 31, | | | | |
2023 | | $ | 350 | | | $ | 4,333 | |
2024 | | 350 | | | 3,961 | |
2025 | | 350 | | | 3,741 | |
2026 | | 350 | | | 3,008 | |
2027 | | 350 | | | 2,027 | |
Thereafter | | 559 | | | 5,348 | |
Total | | 2,309 | | | 22,418 | |
Less: Imputed interest | | (375) | | | (2,365) | |
Total lease liabilities | | $ | 1,934 | | | $ | 20,053 | |
Note 18. Variable Interest Entity
The Company accounts for Trident as a variable interest entity (“VIE”) under ASC 810, Consolidation, for which the Company is considered the primary beneficiary (i.e. the party that has a controlling financial interest). In accordance with ASC 810, Consolidation, the Company has consolidated Trident’s assets and liabilities. For further discussion on the acquisition of Trident refer to Note 3 Business Combinations, to this Form 10-K.
The summarized financial information for the Company’s consolidated VIE consisted of the following (in thousands):
| | | | | | | | |
| | As of December 31, 2022 |
Cash and cash equivalents | | $ | 30,062 | |
Other assets | | 941 | |
Total assets | | 31,003 | |
Other liabilities | | 28,998 | |
Net assets | | $ | 2,005 | |
Note 19. Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 2022 and 2021 and condensed statements of operations and cash flows for the years ended December 31, 2022, 2021 and 2020 for OceanFirst Financial Corp. (parent company only) reflect the Company’s investment in its wholly-owned subsidiaries, the Bank, and OceanFirst Risk Management, Inc., and non-wholly owned subsidiary, Trident, using the equity method of accounting.
Condensed Statement of Financial Condition
(in thousands) | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Assets: | | | | |
Cash and due from banks | | $ | 10,623 | | | $ | 8,803 | |
Advances to Bank | | 32,840 | | | 63,480 | |
Equity securities | | 95,261 | | | 87,622 | |
ESOP loan receivable | | 6,751 | | | 9,231 | |
Investment in subsidiaries | | 1,630,199 | | | 1,575,549 | |
Goodwill | | 5,827 | | | — | |
Other assets | | 1,760 | | | 2,781 | |
Total assets | | $ | 1,783,261 | | | $ | 1,747,466 | |
Liabilities and Stockholders’ Equity: | | | | |
Borrowings | | $ | 193,469 | | | $ | 227,237 | |
Other liabilities | | 4,328 | | | 3,676 | |
OceanFirst Financial Corp. stockholders’ equity | | 1,584,662 | | | 1,516,553 | |
Non-controlling interest | | 802 | | | — | |
Total stockholders’ equity | | 1,585,464 | | | 1,516,553 | |
Total liabilities and stockholders’ equity | | $ | 1,783,261 | | | $ | 1,747,466 | |
Condensed Statements of Operations
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Dividend income – subsidiaries | | $ | 73,011 | | | $ | 40,000 | | | $ | 54,000 | |
Interest and dividend income – debt and equity securities | | 2,387 | | | 2,070 | | | 949 | |
| | | | | | |
Interest income – advances to subsidiary Bank | | 562 | | | 298 | | | 403 | |
Interest income – ESOP loan receivable | | 227 | | | 289 | | | 301 | |
| | | | | | |
Net gain on equity investments | | 7,973 | | | 7,499 | | | 20,460 | |
| | | | | | |
Total income | | 84,160 | | | 50,156 | | | 76,113 | |
Interest expense – borrowings | | 10,861 | | | 11,102 | | | 10,592 | |
| | | | | | |
Operating expenses | | 4,258 | | | 3,307 | | | 3,382 | |
Income before income taxes and undistributed earnings of subsidiaries | | 69,041 | | | 35,747 | | | 62,139 | |
Benefit (provision) for income taxes | | 959 | | | 1,018 | | | (2,901) | |
Income before undistributed earnings of subsidiaries | | 70,000 | | | 36,765 | | | 59,238 | |
Undistributed earnings of subsidiaries | | 77,357 | | | 73,311 | | | 4,071 | |
Net income | | 147,357 | | | 110,076 | | | 63,309 | |
Net income attributable to non-controlling interest | | 754 | | | — | | | — | |
Net income attributable to OceanFirst Financial Corp. | | $ | 146,603 | | | $ | 110,076 | | | $ | 63,309 | |
Condensed Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 147,357 | | | $ | 110,076 | | | $ | 63,309 | |
Decrease (increase) in advances to subsidiary Bank | | 30,640 | | | 37,824 | | | (73,426) | |
Undistributed earnings of subsidiary Bank | | (77,357) | | | (73,311) | | | (4,071) | |
Net gain on equity investments | | (7,973) | | | (7,499) | | | (20,460) | |
Net premium amortization in excess of discount accretion on securities | | 1,185 | | | 755 | | | — | |
Amortization of deferred costs on borrowings | | 548 | | | 824 | | | 576 | |
Net amortization of purchase accounting adjustments | | 684 | | | 542 | | | 638 | |
Change in other assets and other liabilities | | 2,336 | | | 7,359 | | | 648 | |
Net cash provided by (used in) operating activities | | 97,420 | | | 76,570 | | | (32,786) | |
Cash flows from investing activities: | | | | | | |
Proceeds from sales of equity investments | | 6,482 | | | 98,791 | | | 15,339 | |
Purchase of equity investments | | (7,207) | | | (86,462) | | | (95,228) | |
Increase in ESOP loan receivable | | — | | | (3,200) | | | — | |
Repayments on ESOP loan receivable | | 2,480 | | | 2,040 | | | 1,200 | |
Cash consideration for acquisition, net of cash received | | (7,084) | | | — | | | — | |
Net cash (used in) provided by investing activities | | (5,329) | | | 11,169 | | | (78,689) | |
Cash flows from financing activities: | | | | | | |
Net proceeds from issuance of subordinated notes | | — | | | — | | | 122,180 | |
Repayments of other borrowings | | (35,000) | | | (7,500) | | | (7,999) | |
Dividends paid | | (47,511) | | | (44,510) | | | (42,917) | |
Purchase of treasury stock | | (7,396) | | | (36,059) | | | (14,814) | |
Net proceeds from the issuance of preferred stock | | — | | | — | | | 55,529 | |
Exercise of stock options | | 424 | | | 1,946 | | | 1,241 | |
Distributions to non-controlling interest | | (788) | | | — | | | — | |
Net cash (used in) provided by financing activities | | (90,271) | | | (86,123) | | | 113,220 | |
Net increase in cash and due from banks | | 1,820 | | | 1,616 | | | 1,745 | |
Cash and due from banks at beginning of year | | 8,803 | | | 7,187 | | | 5,442 | |
Cash and due from banks at end of year | | $ | 10,623 | | | $ | 8,803 | | | $ | 7,187 | |
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