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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number: 001-11713
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3412577
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
110 West Front Street, Red Bank, New Jersey 07701
(Address of principal executive offices)
Registrant’s telephone number, including area code: (732240-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange in which registered
Common stock, $0.01 par value per share
 
OCFC
 
NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” , “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 x
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised final accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  .
The aggregate market fair value of the voting and non-voting common equity held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $1,244,042,000 based upon the closing price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares outstanding of the registrant’s Common Stock as of February 24, 2020 was 60,298,897.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days from December 31, 2019, are incorporated by reference into Part III of this Form 10-K.



INDEX
 
 
 
PAGE
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
 
 

2


 
PART I

Item 1.
Business
General
OceanFirst Financial Corp. (the “Company”) is incorporated under Delaware law and serves as the holding company for OceanFirst Bank N.A. (the “Bank”). At December 31, 2019, the Company had consolidated total assets of $8.2 billion and total stockholders’ equity of $1.2 billion. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”) and the Securities and Exchange Commission (“SEC”). The Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). Currently, the Company does not transact any material business other than through its subsidiary, the Bank.
The Company has been the holding company for the Bank since it acquired the stock of the Bank upon the Bank’s conversion from a Federally-chartered mutual savings bank to a Federally-chartered capital stock savings bank in 1996 (the “Conversion”). Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company. The conversions on January 31, 2018 do not change the entities which regulate and supervise the Bank and Company. The Bank’s principal business has been, and continues to be, attracting retail and commercial deposits and investing those deposits primarily in loans, consisting of commercial real estate and other commercial loans which have become a key focus of the Bank and single-family, owner-occupied residential mortgage loans. The Bank also invests in other types of loans, including residential construction and consumer loans. In addition, the Bank invests in mortgage-backed securities (“MBS”), securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by applicable law and regulations. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest on its investment and mortgage-backed securities. The Bank also receives income from bankcard services, trust and asset management, deposit account services, Bank Owned Life Insurance, derivative fee income and other fees. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, investment maturities, Federal Home Loan Bank (“FHLB”) advances and other borrowings.
The Company’s website address is www.oceanfirst.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
In addition to historical information, this Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, those items discussed under Item 1A. Risk Factors herein and the following: changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Market Area and Competition
The Bank is a regional bank, offering a wide variety of financial services to meet the needs of the communities it serves. At December 31, 2019, the Bank operated its business through its branch office and headquarters located in Toms River, its branch and administrative office located in Red Bank, 54 additional branch offices and five deposit production facilities located throughout central and southern New Jersey. The Bank also operates commercial loan production offices in New York City, the greater Philadelphia area and in Atlantic and Mercer Counties in New Jersey. On January 1, 2020, the Bank acquired an additional 14 branches and one loan office as part of the Two River acquisition and five branches and one loan office as part of the Country Bank acquisition, which expands the Bank’s presence in both New Jersey and New York City.

3



The Bank is the largest and oldest community-based financial institution headquartered in Ocean County, New Jersey, approximately midway between New York City and Philadelphia. The economy in the Bank’s primary market area, which represents the broader central and southern New Jersey market is based upon a mixture of service and retail trade. Other employment is provided by a variety of wholesale trade, manufacturing, Federal, state and local government, hospitals and utilities. The area is also home to commuters working in areas in and around New York City and Philadelphia. The market area includes a significant number of vacation and second homes in the communities along the New Jersey shore. The Bank also operates in the metropolitan areas of New York City and Philadelphia, the first and eighth largest metropolitan areas, respectively, in the United States.
The Bank’s future growth opportunities will be partly influenced by the growth and stability of its geographic marketplace and the competitive environment. The Bank faces significant competition both in making loans and in attracting deposits. In addition, rapid technological changes and consumer preferences may result in increased competition for the Company’s other services, while a number of well-funded technology focused companies are innovating in the payments, distributed ledger, and cryptocurrency networks to disintermediate portions of the traditional banking model. The state of New Jersey, including the Bank’s primary market areas of central and southern New Jersey, is an attractive market to many financial institutions. Many of the Bank’s competitors are branches of significantly larger institutions headquartered out-of-market which have greater financial resources than the Bank. The Bank’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, internet-based providers and insurance companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions although the Bank also faces competition for deposits from short-term money market funds, other corporate and government securities funds, internet-only providers and from other financial service institutions such as brokerage firms and insurance companies. The Bank distinguishes itself from large banking competitors through its local presence and ability to deliver personalized service.
Community Involvement
The Bank proudly promotes a higher quality of life in the communities it serves through employee volunteer efforts and the work of OceanFirst Foundation (the “Foundation”). Employees are continually encouraged to become leaders in their communities and use the Bank’s support to help others. Through the Foundation, established in 1996, OceanFirst has granted over $39 million to enrich the lives of local citizens by supporting initiatives in health and human services, education, affordable housing, youth development and the arts.
Acquisitions
On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”) which added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. Sun’s results of operations are included in the consolidated results for the period from February 1, 2018 to December 31, 2018.
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”) which added $494.7 million to assets, $307.8 million to loans, and $449.0 million to deposits. Capital Bank’s results of operations are included in the consolidated results for the period from February 1, 2019 to December 31, 2019.
On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”). Based on the $25.54 per share closing price of the Company’s common stock on December 31, 2019, the total transaction value was $197.1 million. The acquisition added $1.1 billion to assets, $938 million to loans, and $942 million to deposits. Two River’s results of operations are not included in any of the periods presented herein.
On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”). Based on the $25.54 per share closing price of the Company’s common stock on December 31, 2019, the total transaction value was $112.8 million. The acquisition added $798 million to assets, $616 million to loans, and $654 million to deposits. Country Bank’s results of operations are not included in any of the periods presented herein.
These transactions have enhanced the Bank’s position as the premier community banking franchise in central and southern New Jersey and have provided the Company with the opportunity to grow business lines, expand geographic footprint and improve financial performance. The Company will continue to evaluate potential acquisition opportunities for those that are expected to create stockholder value.

4


Lending Activities
Loan Portfolio Composition. At December 31, 2019, the Bank had total loans outstanding of $6.215 billion, of which $3.089 billion, or 49.7% of total loans, were commercial real estate, multi-family and land loans. The remainder of the portfolio consisted of $2.321 billion of one-to-four family residential mortgage loans, or 37.3% of total loans; $408.0 million of consumer loans, primarily home equity loans and lines of credit, or 6.6% of total loans; and, $396.4 million of commercial and industrial loans, or 6.4% of total loans. At December 31, 2019 the Bank did not have any loans held-for-sale. At that same date, 33.9% of the Bank’s total loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to Federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the Federal government, including the FRB, and legislative tax policies.

The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
 
 
At December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
(dollars in thousands)
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate, multi-family and land
$
3,089,063

 
49.71
%
 
$
2,764,024

 
49.46
%
 
$
1,757,106

 
44.19
%
 
$
1,668,872

 
43.72
%
 
$
818,445

 
41.19
%
One-to-four family
2,321,157

 
37.35

 
2,044,523

 
36.58

 
1,749,166

 
43.99

 
1,704,405

 
44.66

 
830,497

 
41.80

Consumer (1)
407,998

 
6.56

 
475,170

 
8.50

 
282,438

 
7.10

 
290,676

 
7.62

 
193,160

 
9.72

Commercial and industrial
396,434

 
6.38

 
304,996

 
5.46

 
187,645

 
4.72

 
152,810

 
4.00

 
144,788

 
7.29

Total loans
6,214,652

 
100.00
%
 
5,588,713

 
100.00
%
 
3,976,355

 
100.00
%
 
3,816,763

 
100.00
%
 
1,986,890

 
100.00
%
Deferred origination costs, net
9,880

 
 
 
7,086

 
 
 
5,380

 
 
 
3,414

 
 
 
3,232

 
 
Allowance for loan losses
(16,852
)
 
 
 
(16,577
)
 
 
 
(15,721
)
 
 
 
(15,183
)
 
 
 
(16,722
)
 
 
Total loans, net
6,207,680

 
 
 
5,579,222

 
 
 
3,966,014

 
 
 
3,804,994

 
 
 
1,973,400

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale

 
 
 

 
 
 
241

 
 
 
1,551

 
 
 
2,697

 
 
Loans receivable, net
$
6,207,680

 
 
 
$
5,579,222

 
 
 
$
3,965,773

 
 
 
$
3,803,443

 
 
 
$
1,970,703

 
 
Total loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable rate
$
2,107,790

 
33.92
%
 
$
1,974,387

 
35.33
%
 
$
1,266,817

 
31.86
%
 
$
1,192,998

 
31.26
%
 
$
750,816

 
37.79
%
Fixed rate
4,106,862

 
66.08

 
3,614,326

 
64.67

 
2,709,538

 
68.14

 
2,623,765

 
68.74

 
1,236,074

 
62.21

 
$
6,214,652

 
100.00
%
 
$
5,588,713

 
100.00
%
 
$
3,976,355

 
100.00
%
 
$
3,816,763

 
100.00
%
 
$
1,986,890

 
100.00
%
(1)
Consists primarily of home equity loans and lines of credit and student loans, and to a lesser extent, loans on savings accounts and overdraft lines of credit.


5


Loan Maturity. The following table shows the contractual maturity of the Bank’s total loans at December 31, 2019. The table does not include principal prepayments.
 
 
At December 31, 2019
 
 
Commercial
Real Estate,
Multi-Family
and Land
 
One-to-
Four
Family
 
Consumer
 
Commercial
and
Industrial
 
Total
Loans
Receivable
 
 
(in thousands)
One year or less
 
$
363,559

 
$
69,731

 
$
2,485

 
$
165,621

 
$
601,396

After one year:
 
 
 
 
 
 
 
 
 
 
More than one year to three years
 
551,909

 
10,835

 
8,262

 
53,932

 
624,938

More than three years to five years
 
492,877

 
11,437

 
20,692

 
65,086

 
590,092

More than five years to ten years
 
1,327,767

 
123,639

 
119,233

 
74,270

 
1,644,909

More than ten years to twenty years
 
302,813

 
458,151

 
237,834

 
13,810

 
1,012,608

More than twenty years
 
50,138

 
1,647,364

 
19,492

 
23,715

 
1,740,709

Total due after December 31, 2020
 
2,725,504

 
2,251,426

 
405,513

 
230,813

 
5,613,256

Total amount due
 
$
3,089,063

 
$
2,321,157

 
$
407,998

 
$
396,434

 
6,214,652

Deferred origination costs, net
 
 
 
 
 
 
 
 
 
9,880

Allowance for loan losses
 
 
 
 
 
 
 
 
 
(16,852
)
Loans receivable, net
 
 
 
 
 
 
 
 
 
6,207,680

Less: Loans held for sale
 
 
 
 
 
 
 
 
 

Total loans, net
 
 
 
 
 
 
 
 
 
$
6,207,680

The following table sets forth at December 31, 2019, the dollar amount of total loans receivable, contractually due after December 31, 2020, and whether such loans have fixed interest rates or adjustable interest rates.
 
 
Due After December 31, 2020
 
 
Fixed
 
Adjustable
 
Total
 
 
(in thousands)
Real estate loans:
 
 
 
 
 
 
Commercial real estate, multi-family and land
 
$
1,544,637

 
$
1,180,867

 
$
2,725,504

One-to-four family
 
1,939,407

 
312,019

 
2,251,426

Consumer
 
241,004

 
164,509

 
405,513

Commercial and industrial
 
118,259

 
112,554

 
230,813

Total loans receivable
 
$
3,843,307

 
$
1,769,949

 
$
5,613,256



6


Origination, Sale and Servicing of Loans. The following table sets forth the Bank’s loan originations, purchases, sales, principal repayments and loan activity, including loans held-for-sale, for the periods indicated.
 
 
For the Year Ended December 31,
 
 
2019
 
2018
 
2017
 
 
(in thousands)
Total loans:
 
 
 
 
 
 
Beginning balance
 
$
5,588,713

 
$
3,976,355

 
$
3,816,763

Loans originated:
 
 
 
 
 
 
Commercial real estate, multi-family and land
 
701,009

 
327,513

 
295,519

One-to-four family
 
579,101

 
395,387

 
298,272

Consumer
 
50,787

 
68,489

 
68,872

Commercial and industrial
 
175,449

 
87,549

 
165,191

Total loans originated
 
1,506,346

 
878,938

 
827,854

Loans purchased
 
101,674

 
199,580

 
37,337

Net loans acquired in acquisition
 
307,778

 
1,517,345

 

Total
 
7,504,511

 
6,572,218

 
4,681,954

Less:
 
 
 
 
 
 
Principal repayments
 
1,278,734

 
965,520

 
680,118

Sales of loans
 
7,358

 
13,152

 
16,371

Charge-offs (gross)
 
2,804

 
3,841

 
5,384

Transfer to other real estate owned
 
963

 
992

 
3,726

Total loans
 
$
6,214,652

 
$
5,588,713

 
$
3,976,355

Commercial Real Estate, Multi-Family and Land Lending. The Bank originates commercial real estate loans that are secured by properties, or properties under construction, generally used for business purposes such as office, industrial or retail facilities. A substantial majority of the Bank’s commercial real estate loans are located in its primary market area. The Bank generally originates commercial real estate loans with terms of up to ten years and amortization schedules up to thirty years with fixed or adjustable rates. Fixed rate loans typically contain prepayment penalties over the initial term. Additionally, the Bank offers an interest rate swap program that allows commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. In reaching its decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history and profitability among other factors.
At December 31, 2019, the Bank’s total loans outstanding were $6.215 billion, of which $3.089 billion, or 49.7% of total loans, were commercial real estate loans, as compared to $2.764 billion, or 49.5% of total loans, at December 31, 2018. The Bank continues to grow this market segment primarily through the addition of experienced commercial lenders and through an expansive lending area with commercial lending teams in various New Jersey counties including Atlantic, Burlington, Cumberland, Mercer, Monmouth, and Ocean as well as teams in New York City and the greater Philadelphia area. Of the total commercial real estate portfolio, 25.7% is considered owner-occupied, whereby the underlying business owner occupies a majority of the property.
The commercial real estate portfolio includes loans for the construction of commercial properties. Typically, these loans are underwritten based upon commercial leases in place prior to funding. In many cases, commercial construction loans are extended to owners that intend to occupy the property for business operations, in which case the loan is based upon the financial capacity of the related business and the owner of the business. At December 31, 2019, the Bank had an outstanding balance in commercial construction loans of $101.7 million, as compared to $181.7 million at December 31, 2018.
The Bank also originates multi-family mortgage loans and to a lesser extent land loans. The Bank’s multi-family loans and land loans at December 31, 2019 totaled $470.0 million and $3.7 million, respectively, as compared to $387.0 million and $8.7 million, respectively, at December 31, 2018.
One-to-Four Family Mortgage Lending. The Bank offers both fixed-rate and adjustable-rate mortgage (“ARM”) loans secured by one-to-four family residences with maturities up to 30 years. The majority of such loans are secured by property located in the Bank’s primary market area. Loan originations are typically generated by commissioned loan representatives in the exclusive employment of the Bank and are largely derived from contacts within the local real estate industry, members of the local communities and the Bank’s existing or past customers. On occasion the Bank purchases loans originated by other banks.
At December 31, 2019, $2.321 billion, or 37.3% of total loans, were one-to-four family residential mortgage loans, primarily single family and owner occupied. To a lesser extent and included in this activity are residential mortgage loans secured by seasonal second

7


homes and non-owner occupied investment properties. The average size of the Bank’s one-to-four family mortgage loans was approximately $257,000 at December 31, 2019.
The Bank currently offers several ARM loan programs with interest rates which adjust every three, five or ten years. The Bank’s ARM loans generally provide for periodic caps of 2% or 3% and an overall cap of 6% on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate on these loans is indexed to the applicable three-, five- or ten-year U.S. Treasury constant maturity yield, with a repricing margin which ranges generally from 2.75% to 3.50% above the index. The Bank also offers three-, five-, seven- and ten-year ARM loans which operate as fixed-rate loans for the first three, five, seven or ten years and then convert to one-year ARM loans for the remainder of the term. The ARM loans are then indexed to a margin of generally 2.75% to 3.50% above the one-year U.S. Treasury constant maturity yield.
Generally, ARM loans pose credit risks different than the risks inherent in fixed-rate loans, primarily because as interest rates rise, the payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of ARM loans with an initial fixed period of five years or less must qualify based on the greater of the note rate plus 2% or the fully-indexed rate. Seven- to ten-year ARMs must qualify based on the note rate. The Bank does not originate ARM loans that can result in negative amortization.
The Bank’s fixed-rate mortgage loans are currently made for terms from 10 to 30 years. The Bank generally holds its residential loans for its portfolio, and may sell a portion of its longer-term, fixed-rate loans after reviewing volume and yield and after evaluating interest rate risk and capital management considerations. Servicing rights are generally sold as part of the loan sale. The retention of fixed-rate mortgage loans may increase the level of interest rate risk exposure of the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to substantial increases in prepayments during periods of falling interest rates. Prior to 2017, the Bank generally sold much of its 30-year, fixed-rate, one-to-four family loans in the secondary mortgage market primarily to manage interest rate risk. However, since the beginning of 2017 and through 2019, the Bank generally retained newly originated mortgage loans in its portfolio. Given the recent decline in the interest rate environment, the Company will evaluate the portfolio for potential sales in the future.
The Bank’s policy is to originate one-to-four family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained. Appraisals are obtained for loans secured by real estate properties. The weighted average loan-to-value ratio of the Bank’s one-to-four family mortgage loans was 61% at December 31, 2019 based on appraisal values at the time of origination. Title insurance is typically required for first mortgage loans. Residential mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed-rate residential mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.
The Bank has made, and may continue to make, residential mortgage loans that will not qualify as Qualified Mortgage Loans under the Dodd-Frank Act and the Consumer Financial Protection Bureau (“CFPB”) regulations. See Risk Factors – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans, such as the Bank.
Included in the Bank’s one-to-four family loan balance at December 31, 2019, were residential construction loans which totaled $74.7 million. The Bank originates residential construction loans primarily on a construction/permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. All of the Bank’s residential construction loans are made to individuals building a residence.
Construction lending, by its nature, entails additional risks compared to one-to-four family mortgage lending, attributable primarily to the fact that funds are advanced based upon a security interest in a project which is not yet complete. The Bank addresses these risks through its underwriting policies and procedures and its experienced staff.
Consumer Loans. At December 31, 2019, the Bank’s consumer loans totaled $408.0 million, or 6.6% of the Bank’s total loan portfolio. Of the total consumer loan portfolio, home equity loans comprised $151.3 million; home equity lines of credit comprised $167.2 million; student loans comprised $87.5 million; overdraft line of credit loans totaled $1.2 million; and loans on savings accounts and other consumer loans totaled $734,000.
The Bank originates home equity loans typically as fixed-rate loans with terms ranging from 5 to 20 years. The Bank also offers variable-rate home equity lines of credit. Home equity loans and lines of credit are based on the applicant’s income and their ability to repay and are secured by a mortgage on the underlying real estate, typically owner-occupied, one-to-four family residences. Generally, the loan when combined with the balance of any applicable first mortgage lien, may not exceed 80% of the appraised value of the property at the time of the loan commitment. The Bank charges an early termination fee should a home equity loan or line of credit be closed within two or three years of origination. A borrower is required to make monthly payments of principal and interest, at a minimum of $50, based upon a 10-, 15- or 20-year amortization period. Certain home equity lines of credit require the payment of interest-only

8


during the first five years with fully-amortizing payments thereafter. At December 31, 2019, these loans totaled $22.7 million, as compared to $26.3 million at December 31, 2018.
Generally, the adjustable rate of interest charged is based upon the prime rate of interest (as published in the Wall Street Journal), although the range of interest rates charged may vary from 1.0% below prime to 1.5% over prime. The loans have an 18% lifetime cap on interest rate adjustments.
The student loans are targeted at high income, strong credit score borrowers in stable fields, such as doctors, nurses, dentists, lawyers and graduates of the top business schools. These loans are refinancing of other student loans and are made primarily after the borrowers have finished their education, are employed, have a strong credit score and verified income, and have demonstrated an ability and willingness to pay their student loans.
Commercial and Industrial Lending. At December 31, 2019, commercial and industrial (“C&I”) loans totaled $396.4 million, or 6.4% of the Bank’s total loans outstanding. The Bank originates commercial and industrial loans and lines of credit (including for working capital, fixed asset purchases, and acquisition, receivable and inventory financing) primarily in the Bank’s market area. In underwriting commercial and industrial loans and credit lines, the Bank reviews and analyzes financial history and capacity, collateral value, strength and character of the principals, and general payment history of the principal borrowers in coming to a credit decision. The Bank generally originates C&I loans secured by the assets of the business including accounts receivable, inventory, fixtures, etc. The Bank generally requires the personal guarantee of the principal borrowers for all commercial and industrial loans. Risk of loss on a commercial and industrial business loan is dependent largely on the borrower’s ability to remain financially able to repay the loan from ongoing operations.
Loan Approval Procedures and Authority. The Board establishes the loan approval policies of the Bank based on total exposure to the individual borrower. The Board has authorized the approval of loans by a minimum of two officers of the Bank or the Management Credit Committee, on a scale which requires approval by personnel with progressively higher levels of credit approval authority as the loan amount increases. Pursuant to applicable regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital.
Due to the Bank’s acquisition activity, significant portions of the acquired loan portfolios were underwritten according to the underwriting standards and guidelines of the acquired banks. Acquired loans are evaluated under OceanFirst’s credit risk management policies during pre-closing due diligence and during post-closing risk rating reviews.
In addition to internal credit reviews, the Bank has engaged an independent firm specializing in commercial loan reviews to examine a selection of commercial real estate and commercial and industrial loans, and provide management with objective analysis regarding the quality of these loans throughout the year. The independent firm reviewed 61% of the outstanding loan balances for the Company’s commercial real estate and commercial and industrial loans during 2019. Their conclusion was that the Bank’s internal credit reviews are consistent with both Bank policy and general industry practice.
Loan Servicing. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent borrowers, supervising foreclosures, and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers, and generally administering the loans. The Bank also services mortgage loans for others. In 2014, the Bank sold most of the servicing rights on residential mortgage loans serviced for Federal agencies. All of the remaining loans currently being serviced for others are loans which were originated by the Bank. At December 31, 2019, the Bank was servicing $50.0 million of loans for others.
Delinquencies and Classified Assets. The steps taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank sends the borrower a written notice of non-payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. The Bank may offer to modify the terms or take other forbearance actions which afford the borrower an opportunity to satisfy the loan terms. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 120 days or more, the Bank will either; (i) commence litigation to realize on the collateral, including foreclosure proceedings against any real property that secures the loan; or (ii) sell non-performing loans where foreclosure proceedings may or may not have been initiated. If a foreclosure action is instituted and the loan is not brought current, paid in full, or an acceptable workout accommodation is not agreed upon before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Foreclosure timelines in New Jersey are among the longest in the nation and have remained protracted over the past several years.
The Bank’s internal Asset Classification Committee, which is chaired by the Chief Risk Officer, reviews and classifies the Bank’s assets quarterly and reports the results of its review to the Board. As part of this process, the Chief Risk Officer compiles a quarterly list of all criticized and classified loans, and a narrative report of classified commercial and industrial, commercial real estate, multi-family, land and construction loans. The Bank classifies assets in accordance with certain regulatory guidelines and definitions. At December 31, 2019, the Bank had $73.2 million of assets, including all other real estate owned (“OREO”), classified as “Substandard.”

9


There were no assets classified as “Doubtful” or as “Loss.” At December 31, 2018, the Bank had $74.8 million of assets, including all OREO, classified as “Substandard.” There were no assets classified as “Doubtful” or as “Loss.” Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses, such as past delinquencies, are designated “Special Mention.” Special Mention assets totaled $34.5 million at December 31, 2019, as compared to $35.8 million at December 31, 2018.
Non-Accrual Loans and OREO. The following table sets forth information regarding non-accrual loans and OREO, excluding Purchased Credit Impaired (“PCI”) loans. The Bank obtained PCI loans as part of its acquisitions of Colonial American Bank (“Colonial American”), Cape Bancorp, Inc. (“Cape”), Ocean Shore Holding Co. (“Ocean Shore”), Sun, and Capital Bank. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows with no related allowance for loan losses. PCI loans totaled $13.3 million and $8.9 million at December 31, 2019 and 2018, respectively. It is the policy of the Bank to cease accruing interest on loans 90 days or more past due or in the process of foreclosure. For the years ended December 31, 2019, 2018 and 2017, the amount of interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $372,000, $419,000, and $639,000, respectively.
 
 
At December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
(dollars in thousands)
Non-accrual loans:
 
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate, multi-family and land
 
$
7,728

 
$
5,525

 
$
14,243

 
$
2,935

 
$
10,796

One-to-four family
 
7,181

 
7,389

 
4,190

 
8,126

 
5,779

Consumer
 
2,733

 
2,914

 
1,929

 
2,064

 
1,576

Commercial and industrial
 
207

 
1,587

 
503

 
441

 
123

Total
 
17,849

 
17,415

 
20,865

 
13,566

 
18,274

OREO
 
264

 
1,381

 
8,186

 
9,803

 
8,827

Total non-performing assets
 
$
18,113

 
$
18,796

 
$
29,051

 
$
23,369

 
$
27,101

Allowance for loan losses as a percent of total loans receivable (1)
 
0.27
%
 
0.30
%
 
0.40
%
 
0.40
%
 
0.84
%
Allowance for loan losses as a percent of total non-performing loans (1) (2)
 
94.41

 
95.19

 
75.35

 
111.92

 
91.51

Non-performing loans as a percent of total loans receivable (2)
 
0.29

 
0.31

 
0.52

 
0.35

 
0.91

Non-performing assets as a percent of total assets (2)
 
0.22

 
0.25

 
0.54

 
0.45

 
1.05

(1)
The loans acquired from Capital Bank, Sun, Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for loan losses, was $30,260, $31,647, $17,531, $25,973, and $2,202 at December 31, 2019, 2018, 2017, 2016, and 2015 respectively.
(2)
Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. Non-performing assets consist of non-performing loans and OREO.
Non-performing loans totaled $17.8 million at December 31, 2019, an increase of $434,000, as compared to December 31, 2018. Non-performing loans at December 31, 2019 and 2018 do not include $13.3 million and $8.9 million, respectively, of PCI loans acquired from Colonial American, Cape, Ocean Shore, Sun and Capital Bank. The Company’s OREO totaled $264,000 at December 31, 2019, a $1.1 million decrease from December 31, 2018. The decrease was primarily due to the sale of OREO properties.
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects probable incurred losses in the loan portfolio. The adequacy of the allowance for loan losses is based on management’s evaluation of the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged-off. The allowance is reduced by loan charge-offs. A description of the methodology used in establishing the allowance for loan losses is set forth in the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Allowance for Loan Losses.
As of December 31, 2019 and 2018, the Bank’s allowance for loan losses was 0.27% and 0.30% of total loans, respectively. The net credit mark on all acquired loans, not reflected in the allowance for loan losses, was $30.3 million and $31.6 million at December 31, 2019 and 2018, respectively. The allowance for loan losses as a percent of total non-performing loans was 94.41% at December 31, 2019, a decrease from 95.19% in the prior year. The Bank had non-accrual loans of $17.8 million at December 31, 2019, an increase from $17.4 million at December 31, 2018. The Bank will continue to monitor its allowance for loan losses as conditions dictate.

10


The following table sets forth activity in the Bank’s allowance for loan losses for the periods set forth in the table:
 
 
At or for the Year Ended December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
(dollars in thousands)
Balance at beginning of year
 
$
16,577

 
$
15,721

 
$
15,183

 
$
16,722

 
$
16,317

Charge-offs:
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
899

 
2,253

 
1,049

 
3,399

 
103

Residential real estate
 
1,299

 
1,021

 
3,820

 
558

 
295

Consumer
 
606

 
337

 
135

 
349

 
678

Commercial and industrial
 

 
230

 
380

 
184

 
59

Total
 
2,804

 
3,841

 
5,384

 
4,490

 
1,135

Recoveries
 
1,443

 
1,207

 
1,477

 
328

 
265

Net charge-offs
 
1,361

 
2,634

 
3,907

 
4,162

 
870

Provision for loan losses
 
1,636

 
3,490

 
4,445

 
2,623

 
1,275

Balance at end of year
 
$
16,852

 
$
16,577

 
$
15,721

 
$
15,183

 
$
16,722

Ratio of net charge-offs during the year to average net loans outstanding during the year
 
0.02
%
 
0.05
%
 
0.10
%
 
0.15
%
 
0.05
%
The increase in net charge-offs for the year ended December 31, 2016, was primarily due to charge-offs of $2.1 million on the bulk sales of non-performing and under-performing loans.

The following table sets forth the Bank’s percent of allowance for loan losses to total allowance and the percent of loans to total loans in each of the categories listed at the dates indicated (dollars in thousands):
 
At December 31,
 
2019
2018
2017
2016
2015
 
Amount
Percent of
Allowance
to Total
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent of
Allowance
to Total
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent of
Allowance
to Total
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent of
Allowance
to Total
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent of
Allowance
to Total
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
Commercial and industrial
$
1,458

8.65
%
6.38
%
$
1,609

9.71
%
5.46
%
$
1,801

11.45
%
4.72
%
$
2,037

13.41
%
4.00
%
$
1,639

9.80
%
7.29
%
Commercial real estate
12,776

75.81

49.71

11,047

66.64

49.46

11,127

70.78

44.19

9,360

61.65

43.72

7,165

42.85

41.19

Residential real estate
2,002

11.88

37.35

2,413

14.56

36.58

1,804

11.48

43.99

2,245

14.79

44.66

6,590

39.41

41.80

Consumer
591

3.51

6.56

486

2.93

8.50

614

3.91

7.10

1,110

7.31

7.62

1,095

6.55

9.72

Unallocated
25

0.15


1,022

6.16


375

2.38


431

2.84


233

1.39


Total
$
16,852

100.00
%
100.00
%
$
16,577

100.00
%
100.00
%
$
15,721

100.00
%
100.00
%
$
15,183

100.00
%
100.00
%
$
16,722

100.00
%
100.00
%
Reserve for Repurchased Loans and Loss Sharing Obligations. The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to repurchase requests which may be received on residential real estate loans previously sold to investors. The reserve also includes an estimate of the Bank’s obligation under a loss sharing arrangement with the FHLB relating to loans sold into their Mortgage Partnership Finance (“MPF”) program. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans and loss sharing obligations at each quarter-end.
At December 31, 2019 and 2018, the Company maintained a reserve for repurchased loans and loss sharing obligations of $1.1 million and $1.3 million, respectively. Provisions for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. There were no losses for the years ended December 31, 2019, 2018, and losses of $383,000 for the year ended December 31, 2017. The Company evaluates the adequacy of the reserve quarterly. As a result of this review, the reserve decreased by $200,000 during 2019 and 2018, which was included in other income. Included in the losses on loans repurchased are cash settlements in lieu of repurchases. At December 31, 2019 and 2018, there were no outstanding loan repurchase requests.
Management believes that the Bank has established and maintained the reserve for repurchased loans and loss sharing obligations at adequate levels, however, future adjustments to the reserve may be necessary due to economic, operating or other conditions beyond the Bank’s control.

11


Investment Activities
The investment policy of the Bank as established by the Board attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank’s lending activities. Specifically, the Bank’s policies generally limit investments to government and Federal agency-backed securities, municipal securities and corporate debt obligations. The Bank’s policies provide that all investment purchases must be evaluated internally for creditworthiness and be approved by two officers (any two of the Senior Vice President/Treasurer, the Executive Vice President/Chief Financial Officer, and the President/Chief Executive Officer). The Company’s investment policy mirrors that of the Bank except that it allows for the purchase of equity securities in limited amounts.
Management determines the appropriate classification of securities at the time of purchase. If the Bank has the intent and the ability at the time of purchase to hold debt securities until maturity, they may be classified as held-to-maturity. Investment and mortgage-backed securities identified as held-to-maturity are carried at cost, adjusted for amortization of premium and accretion of discount, which are recognized as adjustments to interest income. Debt securities to be held for indefinite periods of time, but not necessarily to maturity are classified as available-for-sale. Such debt securities are carried at estimated fair value and unrealized gains and losses, net of related tax effect, are excluded from earnings, but are included as a separate component of stockholders’ equity. Refer to Note 4 Securities, to the Consolidated Financial Statements.
Mortgage-backed Securities. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which, in general, are passed from the mortgage originators, through intermediaries that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such intermediaries may be private issuers, or agencies including the Federal Home Loan Mortgage Company (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), and the Small Business Administration (“SBA”) that guarantee the payment of principal and interest to investors. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a certain range and with varying maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate loans.
The actual maturity of a mortgage-backed security varies, depending on when the mortgagors repay or prepay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the security, thereby affecting its yield to maturity and the related estimated fair value of the mortgage-backed security. The prepayments of the underlying mortgages depend on many factors, including the type of mortgages, the coupon rates, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages, the general levels of market interest rates, and general economic conditions. GNMA mortgage-backed securities that are backed by assumable Federal Housing Administration (“FHA”) or Department of Veterans Affairs (“VA”) loans generally have a longer life than conventional non-assumable loans underlying FHLMC and FNMA mortgage-backed securities. During periods of falling mortgage interest rates, prepayments generally increase, as opposed to periods of increasing interest rates when prepayments generally decrease. If the interest rate of underlying mortgages significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.
The Bank has investments in mortgage-backed securities and has utilized such investments to complement its lending activities. The Bank invests in a large variety of mortgage-backed securities, including adjustable-rate, balloon and fixed-rate securities and all were directly insured or guaranteed by either FHLMC, FNMA, GNMA or SBA.
The following table sets forth the Bank’s mortgage-backed securities activities at amortized cost for the periods indicated:
 
For the Year Ended December 31,
 
2019
 
2018
 
2017
 
(in thousands)
Beginning balance
$
647,105

 
$
531,110

 
$
462,883

Mortgage-backed securities acquired
41,460

 
235,700

 

Mortgage-backed securities purchased

 

 
165,501

Less: Principal repayments
(124,336
)
 
(119,780
)
 
(96,383
)
Less: Sales

 

 

Amortization of premium
280

 
75

 
(891
)
Ending balance
$
564,509

 
$
647,105

 
$
531,110


12


The following table sets forth certain information regarding the amortized cost and estimated fair value of the Bank’s mortgage-backed securities at the dates indicated.
 
At December 31,
 
2019
 
2018
 
2017
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
(in thousands)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
206,985

 
$
208,682

 
$
237,703

 
$
232,752

 
$
186,921

 
$
184,135

FNMA
244,923

 
247,115

 
278,264

 
272,982

 
263,103

 
261,296

GNMA
110,661

 
111,388

 
127,611

 
125,449

 
75,243

 
74,379

SBA
1,940

 
1,889

 
3,527

 
3,447

 
5,843

 
5,871

Total mortgage-backed securities
$
564,509

 
$
569,074

 
$
647,105

 
$
634,630

 
$
531,110

 
$
525,681

Investment Securities. At December 31, 2019, the amortized cost of the Company’s investment securities totaled $358.1 million, and consisted of $154.1 million of U.S. agency obligations, $124.5 million of state and municipal obligations and $79.5 million of corporate debt securities. Each of the U.S. agency obligations are rated AA+ by Standard and Poor’s and Aaa by Moody’s. The state and municipal obligations are issued by government entities with current credit ratings that are considered investment grade ranging from a high of AAA to a low of A-. The corporate debt securities include two issues totaling $5.4 million issued by community banks, which are not rated by any of the credit rating services. Excluding these items, the remaining corporate debt securities are issued by various corporate entities with an amortized cost of $74.1 million. Credit ratings range from a high of AA- to a low of BB+ as rated by one of the internationally-recognized credit rating services. See Note 4 Securities, to the Consolidated Financial Statements.
The following table sets forth certain information regarding the amortized cost and estimated fair value of the Company’s investment securities at the dates indicated.
 
At December 31,
 
2019
 
2018
 
2017
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
Amortized
Cost
 
Estimated
Fair
Value
 
(in thousands)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations
$
154,104

 
$
155,433

 
$
115,499

 
$
114,569

 
$
97,346

 
$
96,484

State and municipal obligations
124,455

 
125,784

 
123,987

 
122,357

 
149,958

 
148,702

Corporate debt securities
79,547

 
77,959

 
66,834

 
61,976

 
76,024

 
72,374

Total investment securities
$
358,106

 
$
359,176

 
$
306,320

 
$
298,902

 
$
323,328

 
$
317,560



13


The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities, excluding scheduled principal amortization, of the Bank’s investment and mortgage-backed securities as of December 31, 2019. Other investments consist of mutual funds that do not have a contractual maturity date and are excluded from the table. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. See Investment Activities – Mortgage-backed Securities.
 
At December 31, 2019
 
 
 
 
 
 
 
 
 
Total
 
One Year
or Less Amortized Cost
 
More than One Year to Five Years Amortized Cost
 
More than Five Years to Ten Years Amortized Cost
 
More than Ten Years Amortized Cost
 
Amortized
Cost
 
Estimated
Fair
Value
 
(dollars in thousands)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations
$
35,975

 
$
118,129

 
$

 
$

 
$
154,104

 
$
155,433

State and municipal obligations
21,647

 
74,884

 
25,042

 
2,882

 
124,455

 
125,784

Corporate debt securities (1)
12,013

 
10,068

 
46,548

 
10,918

 
79,547

 
77,959

Total investment securities
$
69,635

 
$
203,081

 
$
71,590

 
$
13,800

 
$
358,106

 
$
359,176

Weighted average yield
1.84
%
 
2.01
%
 
3.49
%
 
4.56
%
 
2.37
%
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
FHLMC
$
59

 
$
1,716

 
$
59,678

 
$
145,532

 
$
206,985

 
$
208,682

FNMA
73

 
13,612

 
75,292

 
155,946

 
244,923

 
247,115

GNMA

 
1

 
2,046

 
108,614

 
110,661

 
111,388

SBA

 

 

 
1,940

 
1,940

 
1,889

Total mortgage-backed securities
$
132

 
$
15,329

 
$
137,016

 
$
412,032

 
$
564,509

 
$
569,074

Weighted average yield
2.23
%
 
2.80
%
 
2.37
%
 
2.43
%
 
2.43
%
 
 
(1)
$49.2 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over LIBOR on a quarterly basis.
Sources of Funds
General. Repayments and prepayments of loans and mortgage-backed securities, cash flows generated from operations, borrowings, proceeds from maturities of debt securities, and deposits are the primary sources of the Bank’s funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms to retail, government and business customers. The Bank’s deposits consist of money market accounts, savings accounts, interest-bearing checking accounts, non-interest-bearing accounts and time deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank’s deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies on its community-banking focus, stressing customer service and long-standing relationships with its customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions could significantly affect the Bank’s ability to attract and retain deposits.
At December 31, 2019, the Bank had $150.6 million in time deposits in amounts of $250,000 or more maturing as follows:
Maturity Period
 
Amount
 
Weighted
Average
Rate
 
 
(dollars in thousands)
Three months or less
 
$
29,469

 
2.07
%
Over three through six months
 
29,328

 
1.95

Over six through twelve months
 
29,669

 
1.88

Over twelve months
 
62,116

 
2.34

Total
 
$
150,582

 
2.12
%

14


The following table sets forth the distribution of the Bank’s average deposit accounts and the average rate paid on those deposits for the periods indicated.
 
 
For the Year Ended December 31,
 
 
2019
 
2018
 
2017
 
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Average
Rate
Paid
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Average
Rate
Paid
 
Average
Balance
 
Percent
of Total
Average
Deposits
 
Average
Rate
Paid
 
 
(dollars in thousands)
Interest-bearing checking accounts
 
$
2,517,068

 
40.05
%
 
0.67
%
 
$
2,336,917

 
40.43
%
 
0.39
%
 
$
1,796,370

 
41.96
%
 
0.25
%
Money market deposit accounts
 
605,607

 
9.64

 
0.81

 
571,997

 
9.90

 
0.49

 
410,373

 
9.59

 
0.30

Savings accounts
 
906,086

 
14.42

 
0.13

 
877,179

 
15.17

 
0.11

 
672,315

 
15.70

 
0.05

Non-interest-bearing accounts
 
1,325,836

 
21.10

 

 
1,135,602

 
19.64

 

 
776,344

 
18.13

 

Time deposits
 
929,488

 
14.79

 
1.67

 
858,978

 
14.86

 
1.11

 
625,847

 
14.62

 
1.00

Total average deposits
 
$
6,284,085

 
100.00
%
 
0.61
%
 
$
5,780,673

 
100.00
%
 
0.39
%
 
$
4,281,249

 
100.00
%
 
0.29
%
Borrowings. The Bank has obtained advances from the FHLB for cash management and interest rate risk management purposes or as an alternative to deposit funds and may do so in the future as part of its operating strategy. FHLB term advances are also used to acquire certain other assets as may be deemed appropriate for investment purposes. Advances are collateralized primarily by certain of the Bank’s mortgage loans and investment and mortgage-backed securities and secondarily by the Bank’s investment in capital stock of the FHLB. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time-to-time in accordance with the policies of the FHLB. At December 31, 2019, the Bank had $519.3 million in outstanding advances from the FHLB. The Bank also has outstanding municipal letters of credit issued by the FHLB used to secure government deposits. At December 31, 2019, these municipal letters of credit totaled $1.150 billion.
The Bank also borrows funds using securities sold under agreements to repurchase. Under this form of borrowing specific U.S. Government agency and/or mortgage-backed securities are pledged as collateral to secure the borrowing. These pledged securities are held by a third-party custodian. At December 31, 2019, the Bank had borrowed $71.7 million through securities sold under agreements to repurchase.
The Bank can also borrow from the Federal Reserve Bank of Philadelphia (“Reserve Bank”) under the primary credit program. Primary credit is available on a short-term basis, typically overnight, at a rate above the Federal Open Market Committee’s Federal funds target rate. All extensions of credit by the Reserve Bank must be secured. At December 31, 2019, the Bank had no borrowings outstanding with the Reserve Bank.
Subsidiary Activities
At December 31, 2019, the Bank owned 8 direct subsidiaries:
OceanFirst REIT Holdings, Inc. was established in 2007 as a wholly-owned subsidiary of the Bank and now acts as the holding company for OceanFirst Management Corp, which was organized in 2016 for the purpose of holding and managing investment securities, including the stock of OceanFirst Realty Corp. OceanFirst Realty Corp. was established in 1997 and invests in qualifying mortgage loans and is intended to qualify as a real estate investment trust, which may, among other things, be utilized by the Company to raise capital in the future.
Hooper Holdings, LLC, and TRREO Holdings, LLC were established in 2015, and 2016, respectively, as wholly-owned subsidiaries of the Bank. Casaba Real Estate Holding Corporation and Cohensey Bridge, L.L.C. were acquired by the Bank as wholly-owned subsidiaries as part of its acquisition of Cape in 2016. All of these subsidiaries are maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties.
Prosperis Financial, L.L.C. was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Sun in 2018. This subsidiary offered client access to various investment and advisory services and is currently inactive.
CBNJ Investment Corp was acquired by the Bank as a wholly owned subsidiary as part of its acquisition of Capital Bank in 2019. This subsidiary held certain investments of Capital Bank and is currently inactive.

15


OceanFirst Services, LLC is a wholly-owned subsidiary of the Bank that is now the holding company for OFB Reinsurance, Ltd., which was established in 2002 to reinsure a percentage of the private mortgage insurance (“PMI”) risks on one-to-four family residential mortgages originated by the Bank. There are no current reinsurance contracts in force by OFB Reinsurance, Ltd.
In addition to the Bank, the Company has OceanFirst Risk Management, Inc. as a direct subsidiary. OceanFirst Risk Management Inc. is a captive insurance company that insures certain risks relating to the business of the Bank and the Company.
Personnel
As of December 31, 2019, the Bank had 838 full-time employees and 86 part-time employees, for a total of 924 employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.
On January 1, 2020, the Company completed its acquisition of Two River and Country Bank. The Two River acquisition added 149 full-time and 3 part time employees, for a total of 152 employees. The Country Bank acquisition added 49 full-time and 3 part time employees, for a total of 52 employees.

REGULATION AND SUPERVISION
General
Prior to January 2018, the Bank was a Federally-chartered savings bank, and the Company was registered as a savings and loan holding company. Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and is subject to the requirements of the BHC Act, including required approvals for investments in or acquisitions of banking organizations, or entities involved in activities that are deemed closely related to banking, capital adequacy standards and limitations on nonbanking activities. The Company is registered with the FRB and is required by Federal law to file reports with, and comply with the rules and regulations of the FRB. The Bank is a member of the FHLB System and, with respect to deposit insurance, of the Deposit Insurance Fund (“DIF”) managed by the FDIC. The Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary Federal regulator, and the FDIC, as the deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to consummating certain transactions such as mergers with, or acquisitions of, other insured depository institutions. The OCC conducts periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors and to ensure the safe and sound operation of the Bank. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
In addition, the Company elected to become a financial holding company under the Gramm-Leach Bliley Act amendments to the BHC Act (the “GLBA”). A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities and, if the FRB determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general, activities that are considered complementary to financial activities.
The banking industry is highly regulated. Statutory and regulatory controls increase a BHC’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions.
The description of statutory provisions and regulations applicable to national banks and BHCs set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company, is subject to change and is qualified in its entirety by reference to the actual laws and regulations involved.
The Dodd-Frank Act. The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, compliance and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various Federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The Federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and the full impact of the Dodd-Frank Act are still not yet known.
The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has enforcement authority over all banks with more than $10 billion in assets.

16


Institutions with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators (the OCC in the case of the Bank), although the CFPB will have back-up authority over such institutions. As a result of the acquisitions of Two River and Country Bank on January 1, 2020, the Bank’s assets exceeded $10 billion. Assuming the Bank maintains assets over $10 billion, it will be subject to authority enforcement by the CFPB. The Dodd-Frank Act also weakens the Federal preemption rules that have been applicable for national banks and Federal savings associations, and gives state attorney generals the ability to enforce Federal consumer protection laws.
Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments. The Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the burden is on the lender to demonstrate the appropriateness of its policies and the strength of its controls. The Dodd-Frank Act contains an exception from this Ability-To-Repay rule for “Qualified Mortgages.” The rule sets forth specific underwriting criteria for a loan to qualify as a Qualified Mortgage. The criteria generally exclude loans that (1) are interest-only, (2) have excessive upfront points or fees, or (3) have negative amortization features, balloon payments, or terms in excess of 30 years. To be defined as an Ability-To-Repay Qualified Mortgage, the underwriting criteria also impose a maximum debt to income ratio of 43%, based upon documented and verifiable information. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting the failure of the originator to establish the consumer’s Ability-To-Repay. Additionally, conforming fixed-rate loans with a debt-to-income ratio greater than 43% would also qualify as an Ability-To-Repay Qualified Mortgage based upon an automated loan approval from one of the government sponsored mortgage entities. However, a consumer may assert the lender’s failure to comply with the Ability-To-Repay rule for all residential mortgage loans other than Qualified Mortgages, and may challenge a lender’s determination that a loan was in fact a Qualified Mortgage. The qualified mortgage rule has yet to be fully addressed by the foreclosure courts and depending on the interpretation of these rules, collectability of non-qualifying mortgages could be subject to future action by the courts. See Risk Factors – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans, such as the Bank.
The Dodd-Frank Act also directed the FRB to issue rules to limit debit card interchange fees (the fees that issuing banks charge merchants each time a consumer uses a debit card) collected by banks with assets of $10 billion or more. The FRB issued a final rule which caps an issuer’s debit card interchange base fee at twenty-one cents ($0.21) per transaction and allows an additional 5 basis point charge per transaction to cover fraud losses. The FRB also issued an interim final rule that allows a fraud-prevention adjustment of one cent ($0.01) per transaction conditioned upon an issuer adopting effective fraud prevention policies and procedures. The Bank’s average interchange fee per transaction is thirty-nine cents ($0.39). The Dodd-Frank Act exempts from the FRB’s rule banks with assets less than $10 billion. At December 31, 2019, the Bank was exempt from this rule. As a result of the acquisitions of Two River and Country Bank on January 1, 2020, the Bank’s assets exceeded $10 billion. Assuming the Bank maintains assets over $10 billion, it will be subject to reduced interchange fees beginning in July 2021 of approximately $2.0 million for 2021, or $4.0 million annualized. In addition, market forces may result in reduced fees charged by all issuers, regardless of asset size, which may result in reduced revenues for the Bank. For the year ended December 31, 2019, the Bank’s revenues from interchange fees was $9.5 million, an increase of $1.0 million from 2018.
The Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and allows greater access by stockholders to the company’s proxy material by authorizing the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal banking agencies to promulgate rules prohibiting excessive compensation paid to bank executives, regardless of whether the company is publicly traded. The SEC has not yet implemented rules giving stockholders access to company proxy statements, and the banking agency rules primarily address incentive compensation. The rules prohibit incentive-based compensation that would encourage inappropriate risks by providing excessive compensation or that would expose the bank to inappropriate risks by providing compensation that could lead to a material financial loss.
It is still uncertain to what extent and how full implementation of and promulgation of rules under the Dodd-Frank Act, will occur and affect the Bank.
Economic Growth, Regulatory Relief and Consumer Protection Act. The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRGCPA”), adopted in May of 2018, was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions will provide regulatory relief to those institutions with $10 billion or more in assets. Among other things, the EGRGPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion, exempted institutions with less than $10 billion in consolidated assets from the Volker Rule, raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets, directed the federal banking agencies to adopt a “community bank leverage ratio,” applicable to institutions and holding companies with less

17


than $10 billion in assets, and to provide that compliance with the new ratio would be deemed compliance with all capital requirements applicable to the institution or holding company, and provided that residential mortgage loans meeting certain criteria and originated by institutions with less than $10 billion in total assets will be deemed to meet the “ability to repay rule” under the Truth in Lending Act. In addition, the EGRGCPA limited the definition of loans that would be subject to the higher risk weighting applicable to High Volatility Commercial Real Estate.
Many of the regulations needed to implement the EGRGCPA have yet to be promulgated by the federal banking agencies, and so it is still uncertain how full implementation of the EGRGCPA will affect the Company and the Bank.
Bank Holding Company Regulation
The Company is a BHC and is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.
The BHC Act prohibits the companies which do not elect to become financial holding companies, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that a BHC may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The BHC Act requires prior approval by the FRB of the acquisition by bank holding companies of more than 5% of the voting stock of any other entity, including another bank. Satisfactory capital ratios and Community Reinvestment Act (“CRA”) ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. FRB regulations provide that a BHC is expected to act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent those regulations.
Holding Company Capital Requirements. The Dodd-Frank Act requires capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. The Dodd-Frank Act also requires banking regulators to seek to make capital standards countercyclical, so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction.
At December 31, 2019, the Company exceeded all regulatory capital requirements currently applicable. The following table presents the Company’s capital position at December 31, 2019:
 
 
 
 
 
 
 
Capital
 
As of December 31, 2019
Actual Capital
 
Required Capital
 
Excess Amount
 
Actual Percent
 
Required Percent
 
OceanFirst Financial Corp:
(dollars in thousands)
 
 
 
 
 
Tier 1 capital (to average assets)
$
791,746

 
$
311,289

 
$
480,457

 
10.17
%