2016
ANNUAL REPORT
OceanFirst Financial cOrp. operates as the holding company for OceanFirst Bank, a community-oriented
financial institution offering a wide variety of financial services to meet the needs of the communities it
serves throughout central and southern New Jersey. The Bank provides commercial and residential financing
solutions, wealth management, and deposit services. OceanFirst Bank is the fourth largest New Jersey-based
banking institution by deposit market share.
P hila d elp hia
Philadelp hia
✪
New York
Headquarters
Retail Branches,
Loan Production
Offices, and Wealth
Management Offices
Financial Summary
(dollars in thousands, except per share amounts)
At or for the year ended December 31,
2016
2015
2014
2013
Selected Financial condition data:
Total assets
Loans receivable, net
Deposits
Stockholders’ equity
Selected operating data:
Net interest income
Other income
Operating expenses(1)
Net income(1)
Diluted earnings per share(1)
Selected Financial ratioS:
Tangible stockholders’ equity per share
Cash dividend per share
Tangible stockholders’ equity to total tangible assets
Return on average assets(1)
Return on average tangible stockholders’ equity(1)
Net interest rate spread
Net interest rate margin
Operating expenses to average assets(1)
Efficiency ratio(1)
Non-performing loans as a percent of total loans receivable
$5,167,052
3,803,443
4,187,750
572,038
$2,593,068
1,970,703
1,916,678
238,446
$2,356,714
1,688,846
1,720,135
218,259
$ 2,249,711
1,541,460
1,746,763
214,350
120,262
20,412
102,852
23,046
0.98
12.95
0.54
8.30%
0.62
7.13
3.38
3.47
2.76
73.11
0.35
76,829
16,426
60,775
20,322
1.21
13.67
0.52
9.12%
0.82
8.96
3.18
3.28
2.47
65.17
0.91
72,348
18,577
57,764
19,920
1.19
12.91
0.49
9.26%
0.86
9.18
3.23
3.31
2.50
63.53
1.06
70,529
16,458
59,244
16,330
0.95
12.33
0.48
9.53%
0.71
7.51
3.16
3.24
2.58
68.11
2.88
(1) Amounts and performance ratios for 2016 include merger related expenses of $16.5 million and an advance prepayment fee of $136,000 with a combined after-tax cost of $11.8
million, or $0.51 per diluted share. Amounts and performance ratios for 2015 include merger related expenses of $1.9 million with an after-tax cost of $1.3 million, or $0.08 per
diluted share. Amounts and performance ratios for 2013 include expenses related to the prepayment of advances of $4.3 million and the consolidation of two branches into
newer, in-market facilities, at a cost of $579,000 with a combined after-tax cost of $3.1 million, or $0.19 per diluted share.
OceanFirst Milestones—115 Years of Growth
Founded
Point Pleasant, NJ
OceanFirst Foundation
Exceeds $25 Million in
Cumulative Grants
Cape Bancorp
Acquired
Ocean Shore
Holding Co. Acquired
IPO to Mutual
Depositors
Created OceanFirst
Foundation
Colonial American
Bank Acquired
1902
1985
1996
1999
2000
2014
2015
2016
2017
Branch Expansion into
Middlesex County
Branch Expansion into
Monmouth County
Commercial LPO
Expansion into Mercer
County
Established
Commercial Lending
Established Trust and
Asset Management
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
Letter to SharehoLderS
April 11, 2017
Dear Fellow Shareholders:
2016 proved to be a transformative year for our Company. OceanFirst continued to build on its successful strategy
by employing our relationship-focused community bank model while also completing two significant acquisitions.
The acquisition of Cape Bank provided excellent deposit funding, enabling OceanFirst to expand throughout
southern New Jersey and westward into the Philadelphia metropolitan area, introducing important new markets for
our commercial lending business, and providing the additional operating scale to compete in an increasingly complex
environment. The Cape Bank acquisition was announced in January 2016, closed in May 2016, and was fully integrated
into the OceanFirst family in October 2016. The Ocean City Home Bank acquisition provided the rare and unique
opportunity to welcome more customers and staff along the southern New Jersey shore while also strengthening
the Bank’s residential lending business, a business in which Ocean City Home Bank had excelled. The Ocean City
Home Bank acquisition was announced in July 2016, closed in November 2016, and the full integration is on schedule
for completion in May 2017. Each of these individual transactions would have been worthy on its own merits; however,
the combination of both delivered enhanced value for our franchise.
Strategic Growth
$5.2
Building Earnings Momentum
Total assets at the Bank have grown 99% in 2016
and now exceed $5.1 billion, making OceanFirst
the dominant community bank in central and
southern New Jersey and one of the largest
banks headquartered in New Jersey. The best
illustration of the future earnings performance
$35.0
$1.49
of our franchise is the growth in core earnings.(1)
The core earnings run rate in the fourth quarter
$2.3
$19.4
$20.0
$2.6
$2.4
$21.6
of 2016 was $10.6 million, an 86% increase over
1.5
the $5.7 million in the fourth quarter of 2015.
1.2
0.9
This improvement in earnings translated into
0.6
$1.14
$1.29
$1.19
a 15% increase in core earnings per share and
0.3
0.0
supported an increase in our quarterly cash
dividend to $0.15 per share, which is also a 15%
increase over the prior year. Of course, the goal
of increasing shareholder value is ongoing
and we plan to continue to improve operating
2013
2014
2015
2016
Core Diluted Earnings Per Share
(1)
Annual Core Earnings
In millions
Total Assets
In billions
performance as these integrations mature.
(1) Refer to footnote on previous page
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
6
5
4
3
2
1
0
The external environment was volatile throughout the
Dollars in thousands
year, especially in the period since the presidential
election in November. The year-end economic outlook
strengthened, as evidenced by strong employment
gains, a significant boost to consumer and corporate
OCFC Stock Price
$30.03
$20.03
confidence, and the Federal Reserve Bank’s adoption
of a tighter monetary policy. As we discussed at length
$17.13
$17.14
in the 2014 Annual Report, the Bank has carefully and
deliberately been managing interest rate risk for the
past several years, a practice that certainly had
dampened short-term profitability. However, careful
management of deposit funding costs, conservative
loan terms, and the acquisition of two well-funded
banks combined to put the Bank in an enviable
2013
2014
2015
2016
position as the interest rate cycle appears to be turning. Total shareholder return for the year of 54% was exceptional
as the market valued the future opportunities for our franchise and acknowledged the care that we have implemented
in completing the acquisitions to date.
Commercial Banking
The lending landscape in 2016 was complicated by two factors. Economic conditions in the first half of the year
appeared to be weakening while the integration of
Dollars in thousands
acquired loan portfolios in the second half of the
year required that we take action to ensure the Bank’s
2.88%
Improving Asset Quality
balance sheet would demonstrate the conservative
credit risk position that is central to our risk
management strategy. Asset quality improved
dramatically during the year as non-performing
loans as a percent of total loans decreased from
0.91% of total loans to just 0.35%, a reduction of 61%.
The strategy to reduce credit risk was especially
important as there was significant uncertainty
regarding economic conditions during the election
year. However, the workout of underperforming
1.06%
0.91%
0.35%
2013
2014
2015
2016
Non-performing loans as a percent of total loans
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0%
loans, loan sales, and portfolio management activities resulted in modest loan portfolio attrition in the second half of
2016. Loan originations were strong, with $483 million in total loan originations throughout 2016, and the year ended
with a strong pipeline entering 2017. Loan portfolio growth in 2017 is targeted to return to the pace we achieved
during 2013 through 2016.
Deposit Growth
Deposit growth was strong, both organically and as a result of the acquisition of two high quality deposit portfolios.
Organic deposit growth totaled $150 million, a respectable figure given the fierce competition for deposits in our
markets. In addition, the acquisitions contributed
$2.1 billion of low cost deposits. Deposit retention
has been strong as the deposit bases acquired
Excellent Deposit Funding
Dollars in millions, as of December 31, 2016
Total Deposits $4,188
from Colonial American Bank, Cape Bank, and
Ocean City Home Bank have all experienced
Money Market & Savings
$1,131
Non-Interest Checking
$783
net deposit growth since each acquisition. The
result of our disciplined approach to deposit
gathering has produced a deposit profile that
should prove valuable in the event interest rates
increase, as expected in the coming quarters.
Certificates of Deposit
$647
Interest Checking
$1,627
Direct Banking and Branch Distribution
Consumer preferences continue to place a high value on convenience. However, the customers’ definition of convenience
is rapidly changing with an emphasis on accessibility through mobile devices, alternative payment systems, and digital,
rather than paper-based communications. The Bank has made substantial investments in customer delivery technology
but must also offset those investments by transforming the retail bank branch. Our goal is to provide excellent
customer service within an efficient delivery model. For several years the Bank has been consolidating locations and
introducing new services, such as the interactive teller machines. As we better understand our customers’ use of these
technologies, we have identified the opportunity to consolidate full-time staffed physical locations while introducing
a wider use of video enabled service points. This trend allows us to continue to serve all of our markets, while reducing
the number of physical branches that closely overlap. The branch consolidations that were announced in February
will result in ten fewer branches in the Southern Region, most of which are in close proximity to each other. We will
continue to maintain convenient locations in all of the markets we serve. A similar branch consolidation is planned
for the Central Region, with the same emphasis on investing in digital service points for the Bank’s customers and
continuing to serve all of our markets.
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
Capital Management
Capital management is a critical function that allows our Company to balance the need to demonstrate a strong
capital position while funding prudent growth initiatives and understanding that excess capital positions should be
returned to our investors. During 2016 the Bank demonstrated strong absolute capital levels while managing to deploy
a significant amount of capital in the acquisitions, increased the quarterly dividend by 15%, and executed a more
modest stock buyback program as we balanced those needs. Over the coming years, the external environment
appears to indicate that favorable growth opportunities will be available to the Bank, thus creating a bias towards
retaining a material percentage of earnings to support growth opportunities. Our dividend philosophy will remain on
track with a targeted core earnings payout ratio of approximately 30 to 40% and dividend growth should be expected
to loosely parallel core earnings growth over the long term. Share repurchases will be a low priority and will be
pursued on an opportunistic basis. Balancing safety and soundness, funding growth initiatives, and providing effective
shareholder returns will continue to be the priority of the Company’s capital management philosophy.
Board and Management Development
As we move forward in 2017, it is important to mark the retirement of John R. Garbarino from our Board of Directors,
effective at the annual shareholder meeting in June. John’s contributions to the Company and to our community have
left an indelible imprint. John joined Ocean Federal Savings in 1971, a prosperous but modest, local Savings and
Loan. Rising through the leadership ranks, he transformed the company into a diversified community bank and a
respected and high performing, publicly traded company.
John was the driving force behind the creation of the OceanFirst Foundation,
the first charitable foundation in the United States to be formed by a mutual
savings bank as part of its initial public offering. The Foundation’s original
endowment of $13 million in OceanFirst stock has blossomed, generating
over $30 million worth of grants distributed to support non-profits
throughout our community, while the Foundation’s remaining assets were
valued at $39 million at year end 2016. Indirectly, the genius of John’s
approach has been widely copied by banks throughout the nation, resulting
in hundreds of millons of dollars being granted to local non-profit
organizations across the country. His leadership radically transformed the Company and has touched the lives of tens
of thousands of people. Every generation stands on the shoulders of those that come before us and we are quite
fortunate to have had the opportunity to stand on John’s.
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
The exciting changes at OceanFirst extend far beyond the balance sheet or income statement. As a result of conventional
recruiting and the acquisition of talent due to acquisitions, the Company has grown to 800+ professionals. The
Board of Directors has expanded to welcome four new Directors as a result of the acquisitions in 2016: Michael Devlin
from Cape Bank, and Steven Brady, Dorothy McCrosson, and Samuel Young from Ocean City Home Bank. As a result,
our previously strong Board was reinforced with a new contingent of Directors with vast and varied experience that
will be invaluable as we develop the premier community bank in our markets.
The officers and staff faced a challenging year in 2016 as the Bank doubled in size and we undertook the significant
challenges of integrating two new banks nearly simultaneously. This resulted in long hours, weekend and holiday
work, complex project plans, and tested our infrastructure in many ways. I am quite proud of our employees and the
results of these projects. Hundreds of staff dedicated tens of thousands of hours to ensure that our new employees,
customers, and shareholders received a warm welcome into the OceanFirst family. Our expanded employee base
shares the OceanFirst Vision for providing extraordinary community banking and will make a material difference as
we compete in new markets.
Our Clients
Finally, the prosperity of our Company will always rely on the extraordinary relationships we maintain with our
customers. This year’s report has been expanded to provide even more customers with an opportunity to share their
banking experiences with OceanFirst. We are humbled by their words on the following pages and will continue to
strive to exceed their expectations in the years ahead.
Our Company continues to build on the successes of 2016. We remain excited about the Company’s future and
appreciate the support and confidence you demonstrate by investing in OceanFirst.
Sincerely,
Christopher D. Maher
Chairman of the Board
President and Chief Executive Officer
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
american BaSeBall company, llc
Joseph Finley & Joseph Caruso—Owners
The Lakewood BlueClaws, a minor league affiliate of the Philadelphia Phillies, have been entertaining residents and
visitors at the Jersey Shore since 2001. More than 6.7 million fans have enjoyed watching future Phillies legends
begin their baseball careers and cheering on several South Atlantic League Championship teams. The ballpark is a
destination when the team is on the road and during the off-season with the BlueClaws staff providing plenty of
special events for all to experience. The community also benefits from the generosity of American Baseball Company
through BlueClaws Charities which helps thousands of our neighbors in need.
“OceanFirst Bank has been one of our most valued business partners for 16 years, since the team’s
inception in 2001. OceanFirst has assisted the BlueClaws in financing major capital expenditures throughout
the stadium and without their contributions, much of what we are able to offer and present to our fans would
not be possible. Everyone from the corporate offices to the local branches have been helpful and accommodating
beyond description. We’ve enjoyed this unique partnership and relationship with OceanFirst Bank and look
forward to many more prosperous years to come.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
c+K plaSticS, inc. llc
Robert Carrier, President
Founded in 1963, C+K Plastics provides innovative and cost-effective solutions in most any thermoformed application.
From an 85,000 square-foot, state-of-the-art headquarters located in Metuchen, New Jersey—and a Georgia facility
added in 2016—C+K Plastics helps clients take projects from concept to finished product. With more than 130 years
of collective thermoforming knowledge on staff, C+K Plastics is one of the most experienced companies in the industry
and is continually striving to stay on the leading edge of new technological advancements.
“OceanFirst Bank has been a critical part of C+K Plastics’ success. They understand our needs and
concerns, and we value their unwavering support. Our partnership, and their willingness to believe
in our mission and expansion strategy, have made it possible for C+K to look forward with optimism
and confidence.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
Harold import co.
Robert Laub, President
For the past 60 years, HIC, Harold Import Co., has built a reputation as a family-owned and operated wholesaler
of fine cooking tools, supplies and equipment that is committed to the belief that quality, value and superior
customer service never go out of style. Today, HIC carries over 3,500 home and commercial cooking supplies
that are imported from 25 countries on five continents, and sold online and in over 10,000 stores worldwide.
Distribution includes several of the company’s own brands including: HIC, Mrs. Anderson’s Baking®, Helen Chen’s
Asian Kitchen®, Fante’s Italian Home Cooking, The World’s Greatest™ Gadgets, Beyond Gourmet, and Elizabeth
Karmel’s Grill Friends®.
capabilities of a large international bank. HIC does business in over 50 countries around the world, and
“OceanFirst gives us the personal service of a local community bank while also providing us with the
OceanFirst has consistently proven to be more than able to handle all of our needs locally and globally.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
JoSepH Fazzio, inc.
Christopher P. Fazzio, President
In 1965, Joseph Fazzio, Inc. was established in Glassboro, NJ. Today, the original facility remains; however, the
company has expanded significantly and also has a Monmouth County facility in Wall Township. Combined, the
sites encompass 50 acres of land and over 350,000 square feet of building space. Focusing on industrial hardware,
steel and metals, Joseph Fazzio’s has 36,000 tons of inventory available onsite or online at shopjfi.com. Joseph
Fazzio’s is a one-stop resource for their customers, delivering great service from their experienced team led by
the Fazzio family.
commitment to prosper and grow together. We value the relationship we have with our lending team at OceanFirst
“Our business spans several generations of the Fazzio family all focused on serving our customers with a
and appreciate working with experienced bankers who understand our vision for Joseph Fazzio, Inc.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
maSSarelli
Mario Massarelli, President
It’s been 45 years since Mario Massarelli established Massarelli’s when he was 17 years old. Today, Massarelli’s,
makers of fine stone garden accents, has a 100,000 square foot manufacturing facility plus a storage warehouse
and showroom located in Hammonton, NJ. A leader in the garden center industry, this family-owned and operated
business serves nearly 2,000 independent dealers throughout the United States and Canada. Massarelli’s boasts
an extensive selection of quality products to exceed the expectations of their many thousands of customers while
remaining focused on their number one goal of complete customer satisfaction.
“Massarelli’s has built our reputation by delivering quality products with great service. We understand
what it takes to exceed customer expectations, so for the banking needs of our business and our family we have
high standards. We rely on our banking team at OceanFirst to provide us with competitive banking products
while keeping the individualized touch of service that we expect.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
monmoutH univerSity
Grey Dimenna, Esq., President
Monmouth University offers a welcoming and dynamic coastal campus setting for student development fostered
by critical thinking. Known for its innovative academic programs, individual faculty attention, and nationally ranked
Division I athletics, this private university is consistently recognized in U.S. News & World Report rankings of “Best
Colleges.” Monmouth’s beautiful campus sits at the heart of a vibrant region rich in history, the arts, technology
and entrepreneurship. Its renowned faculty are actively involved in advancing academic research nationwide
while encouraging meaningful community involvement and immersive learning experiences that extend beyond
the classroom.
“OceanFirst Bank has demonstrated a strong commitment to our students and our neighbors over many
years. Their ongoing leadership in the community, commitment to growth, and strong support of grants and
scholarships for our students make them an outstanding partner. We are also proud that our showcase
campus arena is named the OceanFirst Bank Center, which resonates so well with our coastal location.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
St. auguStine preparatory ScHool
Fr. Donald F. Reilly, O.S.A., President
Located in southern New Jersey, St. Augustine Preparatory School educates young men from grades nine through
twelve. Established in 1959 with 27 students, today there are approximately 700 students traveling from seven
counties for an education driven by Catholic and Augustinian values. The campus has grown over the years, adding
buildings to support an enhanced academic, cultural and athletic experience. The young men who attend the Prep
proudly wear their very recognizable blue blazers and continue into college and throughout life committed to:
“Setting hearts on fire with a passionate search for Truth, Unity and Love.”
“OceanFirst Bank has been a trusted partner in securing the necessary resources to transform the
St. Augustine Prep campus into a vibrant educational environment. Expansion and growth have been
a staple of our culture, and with the banking resources OceanFirst has provided we have been able to build
for students today, and future generations of Hermit Brothers.”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
SurF taco
Rob Nagel, Founder and President
Surf Taco opened their first location in Point Pleasant Beach on Memorial Day in 2001. Today there are 10 locations
throughout Ocean and Monmouth counties plus the most recent shop in Middlesex County at Rutgers University,
New Brunswick. Surf Taco’s secret recipe includes a combination of Good Food, Good People, and Good Vibes.
The Surf Taco team is committed to consistently delivering fresh and tasty food in a cool, casual environment, flowing
with positive energy. They aim to feed the heart and soul of their customers in order to create the ultimate
dining experience.
“OceanFirst has played an integral role in Surf Taco’s growth. They have been a supportive, knowledgeable
and progressive community bank that understood our needs and goals. The OceanFirst team worked seamlessly
and professionally to provide information and capital for our growth. We admire OceanFirst’s commitment to
service in the communities they serve. We look forward to working together as we expand to new locations.
Eat Tacoooos!”
O C E A N F I R S T F I N A N C I A L C O R P. N A S D A Q : O C F C
2016 FORM 10-K
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, 2016
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
(State or other jurisdiction of
incorporation or organization)
22-3412577
(I.R.S. Employer
Identification No.)
975 Hooper Avenue, Toms River, New Jersey 08753
(Address of principal executive offices)
Registrant’s telephone number, including area code: (732) 240-4500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
The Nasdaq Global Select Market
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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
.
.
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
No
.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
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 $444,843,000 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 March 8, 2017 was 32,392,685.
Portions of the Proxy Statement for the 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days from December 31, 2016, are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
PAGE
3
22
27
27
28
28
29
31
33
46
49
96
96
96
97
97
97
97
97
98
100
101
INDEX
PART I
PART II
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
PART IV
Signatures
2
PART I
Item 1.
General
Business
OceanFirst Financial Corp. (the “Company”) is incorporated under Delaware law and serves as the holding company for OceanFirst
Bank (the “Bank”). At December 31, 2016, the Company had consolidated total assets of $5.2 billion and total stockholders’ equity
of $572.0 million. The Company is a savings and loan holding company 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”). The
Bank’s principal business has been and continues to be attracting retail and business deposits in the communities surrounding its
branch offices and investing those deposits primarily in loans, consisting of commercial real estate and other commercial loans which
have become a key focus of the Bank and single-family, owner-occupied residential mortgage loans. The Bank also invests in other
types of loans, including residential construction and consumer loans. In addition, the Bank invests in mortgage-backed securities
(“MBS”), securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by
applicable law and regulations. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest
on its investment and mortgage-backed securities. The Bank also receives income from fees and service charges on loan and deposit
products, Bankcard services, wealth management services and the sale of alternative investment products, e.g., mutual funds, annuities
and life insurance. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed
securities, investment maturities, proceeds from the sale of loans, Federal Home Loan Bank (“FHLB”) advances and other borrowings.
The Company’s website address is www.oceanfirst.com. The Company’s annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as
reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the
information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
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 community-oriented financial institution, offering a wide variety of financial services to meet the needs of the
communities it serves. The Bank conducts its business through an administrative/branch office located in Toms River, New Jersey,
and sixty additional branch offices and two deposit production facilities located throughout Central and Southern New Jersey. The
Bank also operates a wealth management office in Manchester, New Jersey and commercial loan production offices in the Philadelphia
area and Mercer County, New Jersey. The Bank’s deposit gathering and lending activities are concentrated in the markets surrounding
its branch office network.
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’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. The state of New
Jersey, and 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 donated $30 million to enrich
the lives of local citizens by supporting initiatives in health and human services, education, affordable housing, youth development
and the arts.
Acquisitions
On July 31, 2015, the Company completed its acquisition of Colonial American Bank (“Colonial American”), which added $142.4
million to assets, $121.2 million to loans, and $123.3 million to deposits. The in-market acquisition strengthened the Bank’s position
in the attractive Monmouth County, New Jersey marketplace by adding offices in Middletown and Shrewsbury, New Jersey.
On March 11, 2016, the Bank purchased an existing retail branch located in the Toms River market with total deposits of $17.0
million.
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. ("Cape") which added $1.5 billion to assets, $1.2
billion to loans, and $1.2 billion to deposits. The transaction was a market extension, creating a preeminent New Jersey based
community banking franchise operating throughout Central and Southern New Jersey while also providing a gateway into the
demographically attractive Philadelphia metropolitan area.
On November 30, 2016, the Company completed its acquisition of Ocean Shore Holding Company ("Ocean Shore") which added
$995.9 million to assets, $875.1 million to deposits, and $774.0 million to loans. The in-market transaction solidified the Bank's
position as the premier banking franchise in Central and Southern New Jersey with a strong core deposit franchise and enhanced
operating scale.
While the Bank intends to concentrate on integrating its recent acquisitions, reducing non-interest expenses and on organic growth,
the Company will continue to evaluate potential acquisition opportunities for those that are expected to create shareholder value.
Lending Activities
Loan Portfolio Composition. At December 31, 2016, the Bank had total loans outstanding of $3.831 billion, of which $1.653 billion,
or 43.2% of total loans were one-to-four family, residential mortgage loans. The remainder of the portfolio consisted of $1.669 billion
of commercial real estate, multi-family and land loans, or 43.6% of total loans; $65.4 million of residential construction loans, or 1.7%
of total loans; $290.7 million of consumer loans, primarily home equity loans and lines of credit, or 7.6% of total loans; and, $152.8
million of commercial loans, or 4.0% of total loans. Included in total loans are $1.6 million in loans held-for-sale at December 31,
2016. At that same date, 31.5% 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 law 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
4
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,
2016
2015
2014
2013
2012
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:
One-to-four family
$ 1,653,246
43.15% $ 793,946
39.68% $
742,090
43.07% $
751,370
47.79% $ 809,705
52.24%
Commercial real
estate, multi-family
and land
Residential
construction
Consumer (1)
Commercial and
industrial
1,668,872
43.56
818,445
40.90
649,951
37.73
528,945
33.64
475,155
30.66
65,408
290,676
152,810
1.71
7.59
3.99
50,757
193,160
144,788
2.54
9.65
7.23
47,552
2.76
30,821
1.96
9,013
0.58
199,349
83,946
11.57
4.87
200,683
60,545
12.76
3.85
198,143
57,967
12.78
3.74
Total loans
3,831,012
100.00% 2,001,096
100.00% 1,722,888
100.00%
1,572,364
100.00% 1,549,983
100.00%
Loans in process
Deferred origination
costs, net
(14,249)
3,414
Allowance for loan losses
(15,183)
Total loans, net
3,804,994
Less:
Loans held for sale
1,551
Loans receivable,
net
$ 3,803,443
Total loans:
(14,206)
3,232
(16,722)
1,973,400
(16,731)
3,207
(16,317)
1,693,047
(12,715)
3,526
(20,930)
1,542,245
(3,639)
4,112
(20,510)
1,529,946
2,697
$ 1,970,703
4,201
$ 1,688,846
785
$ 1,541,460
6,746
$ 1,523,200
Adjustable rate
$ 1,207,247
31.51% $ 765,022
38.23% $
651,566
37.82% $
602,976
38.35% $ 635,264
40.99%
Fixed rate
2,623,765
68.49
1,236,074
61.77
1,071,322
62.18
969,388
61.65
914,719
59.01
$ 3,831,012
100.00% $ 2,001,096
100.00% $ 1,722,888
100.00% $ 1,572,364
100.00% $ 1,549,983
100.00%
(1) Consists primarily of home equity loans and lines of credit, and to a lesser extent, loans on savings accounts and overdraft lines
of credit.
5
Loan Maturity. The following table shows the contractual maturity of the Bank’s total loans at December 31, 2016. The table does not
include principal prepayments.
At December 31, 2016
One-to-
four
family
Commercial
real estate,
multi-family
and land
Residential
construction (1)
Consumer
Commercial
and
industrial
Total
loans
receivable
$
1,544
$
236,204
$
(in thousands)
61,491
$
3,813
$
49,733
$
352,785
13,662
13,678
95,764
483,080
1,045,518
1,651,702
339,575
349,286
494,419
164,468
84,920
1,432,668
3,585
—
—
—
332
3,917
11,066
11,466
72,326
187,747
4,258
286,863
$
1,653,246
$
1,668,872
$
65,408
$
290,676
$
31,076
23,399
21,735
10,950
15,917
103,077
152,810
398,964
397,829
684,244
846,245
1,150,945
3,478,227
3,831,012
(14,249)
3,414
(15,183)
3,804,994
1,551
$
3,803,443
One year or less
After one year:
More than one year to three years
More than three years to five years
More than five years to ten years
More than ten years to twenty years
More than twenty years
Total due after December 31, 2017
Total amount due
Loans in process
Deferred origination costs, net
Allowance for loan losses
Loans receivable, net
Less: Loans held for sale
Total loans, net
(1) Residential construction loans are primarily originated on a construction/permanent basis with such loans converting to an amortizing loan following the
completion of the construction phase.
The following table sets forth at December 31, 2016, the dollar amount of total loans receivable, contractually due after December 31,
2017, and whether such loans have fixed interest rates or adjustable interest rates.
Real estate loans:
One-to-four family
Commercial real estate, multi-family and land
Residential construction
Consumer
Commercial and industrial
Total loans receivable
Due After December 31, 2017
Fixed
Adjustable
(in thousands)
Total
$
$
1,234,389
$
417,313
$
944,335
3,489
137,872
62,066
488,333
428
148,991
41,011
1,651,702
1,432,668
3,917
286,863
103,077
2,382,151
$
1,096,076
$
3,478,227
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.
Total loans:
Beginning balance
Loans originated:
One-to-four family
Commercial real estate, multi-family and land
Residential construction
Consumer
Commercial and industrial
Total loans originated
Loans purchased
Net loans acquired in acquisition
Total
Less:
Principal repayments
Sales of loans
Charge-offs (gross)
Transfer to other real estate owned
Total loans
2016
For the Years Ended December 31,
2015
(in thousands)
2014
$
2,001,096
$
1,722,888
$
1,572,364
135,107
122,806
42,805
43,780
138,495
482,993
37,561
1,930,853
4,452,503
536,432
78,736
4,490
1,833
124,225
187,454
48,558
48,594
76,931
485,762
21,992
121,466
107,816
193,025
50,556
52,070
50,833
454,300
20,363
—
2,352,108
2,047,027
294,284
48,614
1,135
6,979
249,704
62,318
7,828
4,289
$
3,831,012
$
2,001,096
$
1,722,888
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 their 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, 2016, the Bank’s total loans outstanding were $3.831 billion, of which $1.653 billion, or 43.2%, 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 homes and non-owner occupied investment properties. The average size of the
Bank’s one-to-four family mortgage loans was approximately $181,000 at December 31, 2016.
The Bank currently offers a number of 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 risks inherent in fixed-rate loans, primarily because as interest rates rise, the
payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of ARM loans with an
initial fixed period of five years or less must qualify based on the greater of the note rate plus 2% or the fully-indexed rate. Seven- to
ten-year ARMs must qualify based on the note rate. The Bank does not originate ARM loans which provide for negative amortization.
The Bank’s fixed-rate mortgage loans are currently made for terms from 10 to 30 years. Prior to the fourth quarter of 2014, the Bank
generally retained the servicing on loans sold. Currently, servicing rights are generally sold as part of the loan sale. The Bank generally
holds for its portfolio shorter-term, fixed-rate loans and certain longer-term, fixed-rate loans, generally consisting of loans with balances
exceeding the conforming loan limits of the government agencies (“Jumbo” loans) and loans to officers, directors or employees of the
Bank. The Bank may retain a portion of its longer-term, fixed-rate loans after considering volume and yield and after evaluating interest
rate risk and capital management considerations. The retention of fixed-rate mortgage loans may increase the level of interest rate risk
exposure of the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to
substantial increases in prepayments during periods of falling interest rates. During the past several years, the Bank has generally sold
7
much of its 30-year, fixed-rate, one-to-four family loans into the secondary market primarily to manage interest rate risk. With the
recent rise in market interest rates and the reduction in refinance volume, the Bank anticipates retaining most of its 30-year fixed-rate
loan originations in 2017 to replace anticipated repayments of the existing residential loan portfolio.
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 55.5% at December 31, 2016 based on appraisal values at the time of origination.
Title insurance is typically required for first mortgage loans. 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
mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.
The Bank currently brokers reverse mortgage loans for a third-party originator. The loans qualify under the Home Equity Conversion
Mortgage program of the Federal Housing Administration and are insured by the Department of Housing and Urban Development.
For the year ended December 31, 2016, the Bank recognized fee income on reverse mortgage loans of $95,000, as compared to $233,000
for the year ended December 31, 2015.
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.”
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’s underwriting procedures provide
that commercial real estate loans may be made in amounts up to 80% of the appraised value of the property. 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. The loans typically contain prepayment penalties over the initial term. In reaching its decision on whether to make a commercial
real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history and profitability
among other factors. The Bank has generally required that the properties securing commercial real estate loans have debt service
coverage ratios of at least 130%. The Bank generally requires the personal guarantee of the principal borrowers for commercial real
estate loans.
The Bank’s commercial real estate loan portfolio at December 31, 2016 was $1.669 billion, or 43.6% of total loans, as compared to
$818.4 million, or 40.9% of total loans, at December 31, 2015. The Bank continues to grow this market segment primarily through the
addition of experienced commercial lenders and has commercial lending teams in Monmouth, Atlantic, Cape May, and Mercer Counties
and in the Philadelphia area. Of the total commercial real estate portfolio, 32.0% is considered owner-occupied, whereby the underlying
business owner occupies a majority of the property. The average size of the Bank’s commercial real estate loans at December 31, 2016
was approximately $778,000.
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, 2016, the Bank had an outstanding balance in commercial construction loans of $123.2
million, as compared to $29.2 million at December 31, 2015. The increase was primarily due to the acquisitions of Cape and Ocean
Shore and commercial construction loan origination opportunities in the Bank's local market.
The Bank also originates multi-family mortgage loans and land loans on a limited basis. The Bank’s multi-family loans and land loans
at December 31, 2016 totaled $34.8 million and $7.7 million, respectively, as compared to $28.4 million and $8.0 million, respectively,
at December 31, 2015.
Residential Construction Lending. At December 31, 2016, residential construction loans totaled $65.4 million, or 1.7%, of the Bank’s
total loans outstanding.
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. Most 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.
8
Consumer Loans. At December 31, 2016, the Bank’s consumer loans totaled $290.7 million, or 7.6% of the Bank’s total loan portfolio.
Of the total consumer loan portfolio, home equity loans comprised $149.8 million; home equity lines of credit comprised $143.4
million; overdraft line of credit loans totaled $771,000; loans on savings accounts and other consumer loans totaled $785,000. There
was also $4.1 million of unaccreted fair value marks on the consumer loan portfolio.
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
during the first five years with fully-amortizing payments thereafter. At December 31, 2016, these loans totaled $41.4 million, as
compared to $15.7 million at December 31, 2015.
Generally, the adjustable rate of interest charged is based upon the prime rate of interest (as published in the Wall Street Journal),
although the range of interest rates charged may vary from 1.0% below prime to 1.5% over prime. The loans have an 18% lifetime cap
on interest rate adjustments.
Commercial and Industrial Lending. At December 31, 2016, commercial and industrial (“C&I”) loans totaled $152.8 million, or 4.0%
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.
Commercial and industrial business lending is generally considered to involve a higher degree of risk than real estate lending. 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. The average size of the Bank’s commercial and industrial loans at December 31, 2016 was approximately
$261,000.
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 various officers of the Bank or a Management Credit Committee,
on a scale which requires approval by personnel with progressively higher levels of responsibility as the loan amount increases. Pursuant
to applicable regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital. At December 31, 2016
this limit amounted to $66.8 million. At December 31, 2016, the Bank’s maximum loan exposure to a single borrower was a $22.3
million relationship secured by pledges and assignments of notes receivables and various real estate collateral.
Due to the recent acquisitions, a majority of the loan portfolio was underwritten under the underwriting standards and guidelines of
the acquired bank. Acquired loans have been 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 more than 60% of the Company’s commercial real estate
and commercial and industrial loans during 2016. Their conclusion was that the Bank’s internal credit reviews are consistent with both
Bank policy and general industry practice.
Loan Servicing. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making
inspections as required of mortgaged premises, contacting delinquent borrowers, supervising foreclosures and property dispositions
in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering
the loans. The Bank also services mortgage loans for others. On October 31, 2014, the Bank sold most of the servicing rights on
residential mortgage loans serviced for Federal agencies, recognizing a net gain of $408,000. Smaller sales in 2015 resulted in a net
gain of $111,000. All of the remaining loans currently being serviced for others are loans which were originated by the Bank. At
December 31, 2016, the Bank was servicing $137.9 million of loans for others. At December 31, 2016, 2015, and 2014, the balance
of the Bank’s Mortgage Servicing Rights (“MSR”) totaled $228,000, $589,000, and $701,000, respectively. For the years ended
December 31, 2016, 2015, and 2014, loan servicing income totaled $250,000, $268,000, and $816,000, respectively. The Bank evaluates
the MSR for impairment on a quarterly basis. No impairment was recognized for the years ended December 31, 2016, 2015, and 2014.
The valuation of MSR is determined through a discounted analysis of future cash flows, incorporating numerous assumptions which
are subject to significant change in the near term. Generally, a decline in market interest rates will cause expected prepayment speeds
to increase resulting in a lower valuation for mortgage servicing rights and ultimately lower future servicing fee income.
9
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 commence litigation to realize on the collateral, including foreclosure
proceedings against any real property that secures the loan. 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, 2016, the Bank had $70.5 million of assets, including all other real estate owned ("OREO"), classified as “Substandard”,
$111,000 classified as “Doubtful” and no assets classified as “Loss.” At December 31, 2015, the Bank had $33.3 million of assets
classified as “Substandard,” no assets classified as “Doubtful” and no assets classified 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 $15.7 million at December 31, 2016, as compared to
$23.1 at December 31, 2015.
Non-Accrual Loans and OREO. The following table sets forth information regarding non-accrual loans and OREO, excluding Purchase
Credit Impaired (“PCI”) loans. The Bank obtained PCI loans as part of its acquisitions of Colonial American, Cape and Ocean Shore.
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 $7.6 million and $461,000 at December 31, 2016 and 2015, 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, 2016,
2015 and 2014, respectively, 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 $391,000, $848,000, and $1,630,000, respectively.
December 31,
2016
2015
2014
2013
2012
(dollars in thousands)
Non-accrual loans:
Real estate:
One-to-four family
$
Commercial real estate, multi-family and land
Consumer
Commercial and industrial
Total
OREO
8,126
2,935
2,064
441
13,566
9,803
$
5,779
$
3,115
$
10,796
1,576
123
18,274
8,827
12,758
1,877
557
18,307
4,664
$
28,213
12,304
4,328
515
45,360
4,345
26,521
11,567
4,540
746
43,374
3,210
Total non-performing assets
$
23,369
$
27,101
$
22,971
$
49,705
$
46,584
Allowance for loan losses as a percent of total
loans receivable (1)
Allowance for loan losses as a percent of total
non-performing loans (2)
Non-performing loans as a percent of total loans
receivable (1)(2)
Non-performing assets as a percent of total
assets (2)
0.40%
0.84%
0.95%
1.33%
1.32%
111.92
91.51
89.13
46.14
47.29
0.35
0.45
0.91
1.05
1.06
0.97
2.88
2.21
2.80
2.05
(1) Total loans includes loans receivable and loans held for sale.
(2) Non-performing assets consist of non-performing loans and OREO. Non-performing loans consist of all loans 90 days or more past due and other loans in the
process of foreclosure.
Non-performing loans totaled $13.6 million at December 31, 2016, a decrease of $4.7 million, as compared to December 31, 2015,
partly due to the bulk sale of non-performing and under-performing loans during the year. Non-performing loans at December 31, 2016
and 2015 do not include $7.6 million and $461,000, respectively, of PCI loans acquired from Colonial American, Cape and Ocean
Shore. The Company’s OREO totaled $9.8 million at December 31, 2016, a $976,000 increase from December 31, 2015. The amount
10
at December 31, 2016 and 2015 includes $7.0 million relating to a hotel, golf and banquet facility located in New Jersey which the
Company acquired in the fourth quarter of 2015.
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, 2016 and 2015, the Bank’s allowance for loan losses was 0.40% and 0.84% respectively, of total loans. The decline
in the loan coverage ratio from the prior year was primarily a result of Cape and Ocean Shore loans acquired at fair value, with no
corresponding allowance. The net credit mark on all acquired loans, not reflected in the allowance for loan losses, was $26.0 million
and $2.2 million, respectively, at December 31, 2016 and 2015. The allowance for loan losses as a percent of total non-performing
loans was 111.92% at December 31, 2016, an increase from 91.51% in the prior year. The Bank had non-accrual loans of $13.6 million
at December 31, 2016, a decrease from $18.3 million at December 31, 2015. The Bank will continue to monitor its allowance for loan
losses as conditions dictate.
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 Years Ended December 31,
Balance at beginning of year
$
16,722
$
16,317
2016
2015
2014
(dollars in thousands)
$
20,930
$
2013
2012
20,510
$
18,230
Charge-offs:
Residential real estate
Commercial real estate
Consumer
Commercial and industrial
Total
Recoveries
Net charge-offs
Provision for loan losses
Balance at end of year
Ratio of net charge-offs during the year to
average net loans outstanding during the
year
558
3,399
349
184
4,490
328
4,162
2,623
295
103
678
59
1,135
265
870
1,275
6,955
323
471
78
7,827
584
7,243
2,630
2,444
—
842
235
3,521
1,141
2,380
2,800
4,679
47
2,282
76
7,084
1,464
5,620
7,900
$
15,183
$
16,722
$
16,317
$
20,930
$
20,510
0.15%
0.05%
0.45%
0.16%
0.36%
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 elevated charge-offs in 2014 was due to the bulk sale of non-performing
residential and consumer loans which resulted in a charge-off of $5.0 million on these loans.
11
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).
2016
2015
At December 31,
2014
2013
2012
Percent of
Allowance
to Total
Allowance
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Percent of
Allowance
to Total
Allowance
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Percent of
Allowance
to Total
Allowance
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Percent of
Allowance
to Total
Allowance
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Percent of
Allowance
to Total
Allowance
Amount
Residential
real estate
Commercial
real estate
Consumer
Commercial
and industrial
Unallocated
Total
$ 2,245
14.79%
44.86% $ 6,590
39.41% 42.22% $ 4,291
26.30% 45.83% $ 4,859
23.22% 49.75% $ 5,241
25.56% 52.82%
9,360
1,110
61.65
7.31
2,037
13.41
431
2.84
43.56
7.59
3.99
—
7,165
1,095
1,639
233
42.85
6.55
9.80
1.39
40.90
9.65
7.23
—
8,935
1,146
863
1,082
54.76
7.02
5.29
6.63
37.73
11.57
4.87
—
10,371
49.55
1,360
6.50
1,383
2,957
6.61
14.12
33.64
12.76
3.85
—
8,937
2,264
1,348
2,720
43.57
11.04
6.57
13.26
30.66
12.78
3.74
—
$ 15,183
100.00% 100.00% $ 16,722
100.00% 100.00% $ 16,317
100.00% 100.00% $ 20,930
100.00% 100.00% $ 20,510
100.00% 100.00%
Throughout 2014, 2015, and 2016, the Bank has refined and enhanced its assessment of the adequacy of the allowance by reviewing
the look-back periods, updating the loss emergence periods, and enhancing the analysis of qualitative factors. These refinements have
increased the level of precision in the allowance and the unallocated portion has declined substantially. Additionally, the reduction in
the unallocated portion of the allowance for loan losses in 2014 was due to the improved risk profile of the loan portfolio and related
credit metrics, and the lower level of uncertainty relating to future loan losses due to the bulk sale of non-performing residential and
consumer loans.
Reserve for Repurchased Loans and Loss Sharing Obligations. The reserve for repurchased loans and loss sharing obligations was
established to provide for expected losses related to repurchase requests which may be received on residential mortgage 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, 2016 and 2015, the Company maintained a reserve for repurchased loans and loss sharing obligations of $846,000
and $986,000, 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. Losses were $140,000, $56,000, and $436,000, respectively, for the years ended December 31, 2016, 2015
and 2014. Included in the losses on loans repurchased are cash settlements in lieu of repurchases. At December 31, 2016 and 2015,
there were no outstanding loan repurchase requests.
Management believes that the Bank has established and maintained the reserve for repurchased loans and loss sharing obligations at
adequate levels, however, future adjustments to the reserve may be necessary due to economic, operating or other conditions beyond
the Bank’s control.
Investment Activities
The investment policy of the Bank as established by the Board attempts to provide and maintain liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk, and complement the Bank’s lending activities. Specifically, the
Bank’s policies generally limit investments to government and Federal agency-backed securities, municipal 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 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. Securities to be held for indefinite periods of time, but not necessarily to maturity
are classified as available-for-sale. Securities available-for-sale include securities that management intends to use 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. See “Note 4 to the Consolidated
Financial Statements.”
12
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 ARM 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 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.
With the increase in interest rates at the end of 2016, prepayments have slowed as compared to recent years.
The Bank has investments in mortgage-backed securities and has utilized such investments to complement its lending activities.
The Bank invests in a large variety of mortgage-backed securities, including ARM, 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.
Beginning balance
Mortgage-backed securities acquired
Mortgage-backed securities purchased
Less: Principal repayments
Less: Sales
Amortization of premium
Ending balance
For the Years Ended December 31,
2016
2015
(in thousands)
280,872
$
326,117
$
203,416
59,590
(73,470)
(6,394)
(1,131)
—
16,913
(60,924)
—
(1,234)
462,883
$
280,872
$
2014
349,550
—
35,203
(57,199)
—
(1,437)
326,117
$
$
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.
2016
At December 31,
2015
2014
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(in thousands)
$
144,016
$
141,754
$
120,116
$
118,991
$
141,494
$
217,445
92,475
8,947
217,096
92,230
8,975
160,254
162,170
184,003
502
—
597
—
620
—
140,444
187,495
739
—
Mortgage-backed securities:
FHLMC
FNMA
GNMA
SBA
Total mortgage-backed securities
$
462,883
$
460,055
$
280,872
$
281,758
$
326,117
$
328,678
Investment Securities. At December 31, 2016, the amortized cost of the Company’s investment securities totaled $157.5 million,
and consisted of $32.5 million of U.S. agency obligations, $39.2 million of state and municipal obligations, $77.1 million of
corporate debt securities, and $8.8 million of other investments. Each of the U.S. agency obligations are rated AA+ by Standard
13
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 a $1.0
million issue of a local community bank purchased in late 2015 which is not rated by any of the credit rating services. Excluding
this item, the remaining corporate debt securities are issued by various corporate entities with an amortized cost of $76.1 million.
Credit ratings range from a high of AA- to a low of Ba1 as rated by one of the internationally-recognized credit rating services.
See “Note 4 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.
2016
At December 31,
2015
2014
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(in thousands)
Investment securities:
U.S. agency obligations
$
32,502
$
32,253
$
85,084
$
85,108
$
106,294
$
106,245
State and municipal obligations
Corporate debt securities
Other investments
39,155
77,057
8,778
38,309
71,141
8,550
13,311
56,000
—
13,326
47,473
—
13,829
55,000
—
13,846
45,250
—
Total investment securities
$
157,492
$
150,253
$
154,395
$
145,907
$
175,123
$
165,341
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, 2016.
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, 2016
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
State and municipal obligations (1)
Corporate debt securities (2)
Total investment securities
Weighted average yield
Mortgage-backed securities:
FHLMC
FNMA
GNMA
SBA
Total mortgage-backed securities
Weighted average yield
$
$
$
$
$
5,032
4,387
1,000
10,419
$
1.35%
$
$
27,470
17,360
16,144
60,974
1.75%
— $
1,865
$
8
—
—
8
670
—
—
— $
— $
17,408
2,971
20,379
$
2.75%
$
26,685
49,013
151
—
—
56,942
56,942
1.54%
115,466
167,754
92,324
8,947
$
$
$
32,502
39,155
77,057
32,253
38,309
71,141
148,714
$
141,703
1.78%
$
144,016
217,445
92,475
8,947
141,754
217,096
92,230
8,975
$
2,535
$
75,849
$
384,491
$
462,883
$
460,055
4.49%
1.69%
2.65%
2.28%
2.14%
(1) State and municipal obligations are reported at tax equivalent yield.
(2) $60.9 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over LIBOR on a quarterly basis.
Sources of Funds
General. Deposits, repayments and prepayments of loans and mortgage-backed securities, proceeds from sales of loans, investment
maturities, cash flows generated from operations and FHLB advances and other borrowings are the primary sources of the Bank’s
funds for use in lending, investing and for other general purposes.
14
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, 2016, the Bank had $269.0 million in time deposits in amounts of $100,000 or more maturing as follows:
Maturity Period
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
Total
Amount
Weighted
Average
Rate
(dollars in thousands)
52,447
43,077
55,562
117,864
268,950
1.02%
1.19
1.03
1.55
1.28%
$
$
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 Years Ended December 31,
2016
Percent
of Total
Average
Deposits
Average
Balance
Average
Rate
Paid
Average
Balance
2015
Percent
of Total
Average
Deposits
Average
Rate
Paid
Average
Balance
2014
Percent
of Total
Average
Deposits
Average
Rate
Paid
(dollars in thousands)
Money market deposit accounts
$ 316,977
10.75%
0.27% $ 129,775
6.95%
0.14% $ 113,406
6.49%
0.08%
Savings accounts
Interest-bearing checking
accounts
Non-interest-bearing accounts
Time deposits
447,484
15.17
1,266,135
497,166
422,026
42.92
16.85
14.31
0.04
0.17
—
1.03
306,151
16.39
875,326
327,216
229,785
46.85
17.51
12.30
0.03
0.11
—
1.33
295,289
16.89
869,383
257,058
213,566
49.71
14.70
12.21
0.04
0.11
—
1.39
Total average deposits
$2,949,788
100.00%
0.25% $ 1,868,253
100.00%
0.23% $ 1,748,702
100.00%
0.24%
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, 2016, the Bank had $250.5 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, 2016, these letters of credit totaled $456.0 million.
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, 2016, the Bank had borrowed $69.9 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, 2016, the Bank had no borrowings
outstanding with the Reserve Bank.
15
Subsidiary Activities
At December 31, 2016, the Bank owned 9 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.
• OCHB Preferred Corp. was acquired by the Bank part of its acquisition of Ocean Shore in 2016 and, like OceanFirst
Realty Corp., is intended to qualify as a real estate investment trust.
• OCHB Investment Corp. was acquired by the Bank as part of its acquisition of Ocean Shore in 2016 and serves to hold and
manage investment securities.
•
975 Holdings, LLC, Hooper Holdings, LLC, and TRREO Holdings, LLC were established in 2010, 2015, and 2016,
respectively, as wholly-owned subsidiaries of the Bank. Casaba Real Estate Holding Corporation and Cohensey Bridge,
L.L.C. 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.
• 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.
Personnel
As of December 31, 2016, the Bank had 675 full-time employees and 122 part-time employees, for a total of 797 employees. The
employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be
good. From time to time the Bank may operate subsidiaries which may include employees not directly employed in banking
activities. As of December 31, 2016, subsidiaries of the Bank had 81 full-time and 23 part-time employees to manage a repossessed
commercial property.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by Federal law to file reports with, and comply with the rules
and regulations of the FRB. As a Federally-chartered savings bank, 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 is a member of the Federal
Home Loan Bank System and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the FDIC. 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. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank and the Company, is subject to change and is qualified
in its entirety by reference to the actual laws and regulations involved.
The Dodd-Frank Act. The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit,
investment, compliance and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires
various Federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and
reports for Congress. The Federal agencies are given significant discretion in drafting the implementing rules and regulations, and
consequently, many of the details and the full impact of the Dodd-Frank Act are still not yet known. In addition, as a result of the
2016 election, there is some chance that certain provisions of the Dodd-Frank Act may be repealed or amended.
16
The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has
broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including
the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority
over all banks and savings institutions with more than $10 billion in assets. Savings institutions such as the Bank with $10 billion
or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators (the OCC
in the case of the Bank), although the CFPB will have back-up authority over such institutions. 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 39 cents ($0.39). The Dodd-Frank Act exempts from the FRB’s
rule banks with assets less than $10 billion, such as the Bank. Although exempt from the rule, market forces in future periods may
result in reduced fees charged by all issuers, regardless of asset size, which may result in reduced revenues for the Bank. For the
year ended December 31, 2016, the Bank’s revenues from interchange fees was $4.3 million, an increase of $1.2 million from
2015.
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 allow 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 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.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within the meaning of Federal law. Generally, a
unitary savings and loan holding company, such as the Company, is not restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender (“QTL”). See “Federal Savings Institution Regulation
—QTL Test.” The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association unless
it engages only in the financial activities permitted for financial holding companies or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies
may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities
with respect to unitary savings and loan holding companies existing prior to May 4, 1999, such as the Company, so long as the
17
Bank continues to comply with the QTL test. The Company qualifies for the grandfather provision. Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings
institution, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of
the Bank Holding Company Act.
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of
another savings institution or savings and loan holding company without prior written approval of the FRB and from acquiring
or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the FRB considers the financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the
community and competitive factors.
Holding Company Capital Requirements. Until recently, savings and loan holding companies were not subject to specific regulatory
capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital
requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components
of capital, than those applicable to depository institutions themselves. The Dodd-Frank Act final rule applied consolidated regulatory
capital requirements to savings and loan holding companies as of January 1, 2015. As is the case with depository institutions
themselves, a capital conservation buffer will be phased in between 2016 and 2019. The Dodd-Frank Act also extended the “source
of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all
bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing
capital, liquidity and other support in times of financial stress.
Dividends. The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common
stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should
be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent
with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory
review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of
dividends previously paid over that period is insufficient to fully fund the dividend or the Company’s overall rate of earnings
retention is inconsistent with the Company’s capital needs and overall financial condition. The ability of a holding company to
pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding
company should inform the FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock
if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction,
as of the end of the quarter, in the amount of such instruments outstanding compared with the beginning of the quarter in which
the redemption or repurchase occurred. These regulatory policies may affect the ability of the Company to pay dividends, repurchase
shares of common stock or otherwise engage in capital distributions.
Acquisition of the Company. Under the Federal Change in Bank Control Act (“CBCA”) and applicable regulations, a notice must
be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the
Company’s outstanding voting stock, unless the FRB has found that the acquisition will not result in a change of control of the
Company. Under CBCA, the FRB has 60 days from the filing of a complete notice to act, taking into consideration certain factors,
including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan holding company.
Federal Savings Institution Regulation
Business Activities. The activities of Federal savings institutions are governed by Federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which Federal savings banks may engage. In particular, many types
of lending authority for Federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution’s capital or assets.
Capital Requirements. FDIC regulations require banks to maintain minimum levels of capital including: a common equity Tier 1
capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of
8%, and a 4% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the
result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking
Supervision and certain requirements of the Dodd-Frank Act.
As noted, the risk-based capital standards for banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and
total capital to risk-weighted assets of at least 4.5%, 6%, and 8%, respectively. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are
18
multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher
levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined
as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional
Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus
additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified
requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible
securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease
losses limited to a maximum of 1.25% of risk-weighted assets. Unrealized gains and losses on certain “available-for-sale” securities
are included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Bank has exercised the opt-
out. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing
an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well,
and has the authority to establish higher capital requirements for individual banks where necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5%
of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital
requirements. The capital conservation buffer requirement is being phased in over four years beginning January 1, 2016. The
capital conservation buffer requirement is being phased in incrementally, starting at 0.625% on January 1, 2016, and increasing
to 1.25% on January 1, 2017, 1.875% on January 1, 2018, and 2.50% on January 1, 2019, when the full capital conservation buffer
requirement will be effective. Both the Bank and the Company are in compliance with the capital conservation buffer requirements
applicable to them.
The Federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution’s
exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital
adequacy. Under such a risk assessment, examiners evaluate a bank’s capital for interest rate risk on a case-by-case basis, with
consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold
additional capital. According to the Federal banking agencies, applicable considerations include: quality of the bank’s interest rate
risk management process; the overall financial condition of the bank; and the level of other risks at the bank for which capital is
needed.
The following table presents the Bank’s capital position at December 31, 2016. The Bank exceeded all of its capital requirements
at that date.
As of December 31, 2016
Bank:
Tier 1 capital (to average assets)
Common equity Tier 1 (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Actual
Capital
Required
Capital
Excess
Amount
Actual
Percent
Required
Percent
Capital
(dollars in thousands)
$
445,576
$
176,856
445,576
445,576
461,386
180,178
232,913
303,227
$
$
$
$
268,720
265,398
212,663
158,159
10.08% (2)
4.000%
12.67
12.67
13.12
5.125
6.625
8.625
(1)
(1)
(1)
(1) Includes the Capital Conservation Buffer of 0.625%
(2) Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The average assets for the
fourth quarter exclude the assets acquired from Ocean Shore for the period from October 1, 2016 through November 30, 2016. The Tier 1 capital ratio for the
Bank based on total assets as of the end of the period is 8.75%.
Prompt Corrective Action. Federal law requires, among other things, that the Federal bank regulatory authorities take “prompt
corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the law establishes
five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. The FDIC’s regulations define the five categories as follows:
An institution is classified as “well capitalized” if:
•
•
•
•
its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet
a specific capital level; and
its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and
its ratio to Tier 1 capital to risk-weighted assets is at least 8%; and
its ratio of total capital to risk-weighted assets is at least 10%.
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An institution is classified as “adequately capitalized” if:
•
•
•
•
its ratio of Tier 1 capital to total assets is at least 4%; and
its ratio of common equity tier 1 capital to risk-weighted assets is at least 4.5%; and
its ratio to Tier 1 capital to risk-weighted assets is at least 6%; and
its ratio of total capital to risk-weighted assets is at least 8%.
An institution is classified as “undercapitalized” if:
•
•
•
•
its leverage ratio is less than 4%; and
its ratio of common equity tier 1 capital to risk-weighted assets is less than 4.5%; and
its ratio to Tier 1 risk based capital is at less than 6%; and
its ratio of total capital to risk-weighted assets is at least 8%.
An institution is classified as “significantly undercapitalized” if:
•
•
•
•
its leverage ratio is less than 3%; or
its ratio of common equity tier 1 capital to risk-weighted assets is less than 3.0%; or
its ratio to Tier 1 risk based capital is at less than 4%; or
its total risk-based capital is less than 6%.
An institution that has a tangible capital to total assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”
The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured bank if that bank is “critically
undercapitalized.” The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial
condition or upon the occurrence of certain events, including:
•
•
•
•
•
insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
existence of an unsafe or unsound condition to transact business;
likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course
of business; and
insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital
with no reasonable prospect of replenishment of capital without Federal assistance.
Based on the regulatory guidelines, the Bank meets the requirements to be classified as “well-capitalized.”
Insurance of Deposit Accounts. Deposit accounts at the Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC.
The Bank is therefore subject to FDIC deposit insurance assessments which are determined using a risk-based system.
In 2011 the FDIC approved a final rule, required by Dodd-Frank, that changed the assessment base from domestic deposits to
average assets minus average tangible equity, adopted a new large-bank pricing assessment scheme, and set a target size for the
DIF. The rule finalized a target size for the DIF at 2% of insured deposits. It also implemented a lower assessment rate schedule
when the fund reaches 1.15% (so that the average rate over time should be about 8.5 basis points) and, in lieu of dividends, provided
for a lower rate schedule when the reserve ratio reaches 2% and 2.5%. The rule lowered overall assessment rates in order to
generate the same approximate amount of revenue under the new larger base as was raised under the old base. The assessment
rates in total are between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points
for banks in the highest risk category. Deposit accounts are insured by the FDIC generally up to a maximum of $250,000 per
separately insured depositor.
The FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that
might lead to termination of deposit insurance.
In addition to the FDIC assessments, the Financing Corporation, formed in the 1980s to recapitalize the former Federal Savings
and Loan Insurance Corporation, is authorized to impose and collect, through the FDIC, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the Financing Corporation. The bonds issued by the Financing Corporation
are due to mature in 2017 through 2019.
The total expense incurred in 2016 and 2015 for the deposit insurance assessment and the Financing Corporation payments was
$2.2 million and $1.6 million, respectively.
20
Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower
applicable to national banks. Subject to certain exceptions, a savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 2016, the Bank’s
limit on loans to one borrower was $66.8 million and the largest loan exposure to a single borrower was $22.3 million.
Qualified Thrift Lender Test. The Home Owners Loan Act requires savings institutions to meet a qualified thrift lender test. Under
the test, a savings institution is required to either qualify as a “domestic building and loan association” under the Internal Revenue
Code or maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets;
(2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift
investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least
nine months out of each 12 month period. Additionally, education loans, credit card loans and small business loans may be
considered “qualified thrift investments.”
A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to
convert to a bank charter. As of December 31, 2016, the Bank met the qualified thrift lender test with a ratio of qualified thrift
investments to portfolio assets of 70.6%. See “Risk Factors. The Bank is required to maintain a significant percentage of total
assets in residential mortgage loans and investments secured by residential mortgage loans, which restricts the ability to diversify
the loan portfolio.”
Limitation on Capital Distributions. Applicable regulations impose limitations upon all capital distributions by a savings institution,
including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out
merger. Under the regulations, an application to and the approval of the OCC, is required prior to any capital distribution if the
institution does not meet the criteria for “expedited treatment” of applications under the regulations (i.e., generally, examination
ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required,
the institution must still provide prior notice to the FRB of the capital distribution if, like the Bank, it is a subsidiary of a holding
company. In the event the Bank’s capital fell below its regulatory requirements or the FRB or OCC notified it that it was in need
of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the FRB or OCC
could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the FRB
or OCC determine that such distribution would constitute an unsafe or unsound practice. If the FRB or OCC objects to the Bank’s
notice to pay a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future, pay
a dividend at the same rate as historically paid, be able to repurchase stock, or to meet current debt obligations. In addition, capital
requirements made applicable to the Company as a result of the Dodd-Frank Act and Basel III may limit the Company’s ability
to pay dividends or repurchase stock in the future.
Assessments. Savings institutions are required to pay assessments to fund regulatory operations. The assessments, paid on a semi-
annual basis, are based upon the institution’s total assets, including consolidated subsidiaries as reported in the Bank’s latest
quarterly regulatory report, as well as the institution’s regulatory rating and complexity component. The assessments paid by the
Bank for the years ended December 31, 2016 and 2015 totaled $623,000 and $477,000, respectively.
Transactions with Related Parties. The Bank’s authority to engage in transactions with “affiliates” (e.g., any company that controls
or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by
Federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus
of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings
institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a
type described in Federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with
affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time
for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase
the securities of any affiliate other than a subsidiary.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional FHLBs. Each FHLB provides
member institutions with a central credit facility. The Bank, as a member of the FHLB-NY is required to acquire and hold shares
of capital stock in that FHLB in an amount at least equal to 0.20% of mortgage-related assets and 4.5% of the specified value of
certain transactions with the FHLB. The Bank was in compliance with this requirement with an investment in FHLB-NY stock
at December 31, 2016 of $19.3 million.
21
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts
(primarily interest-bearing checking and regular checking accounts). The regulations generally provide that reserves be maintained
against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including
$110.2 million; a 10% reserve ratio is applied above $110.2 million. The first $15.2 million of otherwise reservable balances
(subject to adjustments by the FRB) are exempt from the reserve requirements. The amounts are adjusted annually. The Bank
complies with the foregoing requirements. For 2017, the FRB has set the 3% reserve limit at $115.1 million and the exemption at
$15.5 million.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar year basis using the accrual method of accounting, and
are subject to Federal income taxation in the same manner as other corporations with some exceptions, including particularly the
Bank’s reserve for bad debts. The following discussion of tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Bank or the Company. The Bank has not been audited by the IRS in
over 10 years. For its 2016 taxable year, the Bank is subject to a maximum Federal income tax rate of 35%.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”) imposes a tax on alternative
minimum taxable income (“AMTI”) at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI
is increased by an amount equal to 75% of the amount by which the Bank’s adjusted current earnings exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating losses). The Bank does not expect to be subject to the
AMTI.
Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70%
in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then
80% of any dividends received may be deducted.
State and Local Taxation
New Jersey Taxation. The Bank files New Jersey income tax returns. For New Jersey income tax purposes, the Bank is subject to
a tax rate of 9% of taxable income. For this purpose, “taxable income” generally means Federal taxable income, subject to certain
adjustments (including addition of interest income on state and municipal obligations).
The Company is required to file a New Jersey income tax return because it does business in New Jersey. For New Jersey tax
purposes, regular corporations are presently taxed at a rate equal to 9% of taxable income. However, if the Company meets certain
requirements, it may be eligible to elect to be taxed as a New Jersey Investment Company at a tax rate presently equal to 3.60%
(40% of 9%) of taxable income.
OceanFirst REIT Holdings, Inc. files a New Jersey income tax return and qualifies as a New Jersey Investment Company which
is taxed at a rate presently equal to 3.60% of taxable income.
New York Taxation. Due to an increase in loan activity both organically and through acquisition, the Bank is required to file a
New York State and MTA tax return. The New York return requires consolidation of all entities, including OceanFirst Realty, and
New York taxable income, consistent with other states, generally means Federal taxable income subject to certain adjustments.
The allocation and apportionment of taxable income to New York state may positively effect the overall tax rate.
Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware
corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
Item 1A.
Risk Factors
An investment in the Company's common stock involves risks. Stockholders should carefully consider the risks described below,
together with other information contained in this Annual Report on Form 10-K, before making any purchase or sale decisions
regarding the Company's common stock. If any of the following risks actually occur, the Company's financial condition or operating
results may be harmed. In that case, the trading price of the Company's common stock may decline, and stockholders may lose
part or all of their investment in the Company's common stock.
22
A downturn in the local economy or in local real estate values could adversely impact profits. Most of the Bank’s loans are secured
by real estate and are made to borrowers in Central and Southern New Jersey and the surrounding areas. A downturn in the local
economy or a decline in real estate values could increase the amount of non-performing loans and cause residential and commercial
mortgage loans to become inadequately collateralized, which could expose the Bank to a greater risk of loss.
Hurricanes and other natural disasters, climate change or increases to flood insurance premiums could adversely affect asset quality
and earnings. The Bank’s trade area includes counties in New Jersey with extensive coastal regions. These areas may be vulnerable
to flooding or other damage from future storms or hurricanes. This damage may be as bad as, or worse than, that suffered during
Superstorm Sandy in 2012. Further storms like this, although rare, could negatively impact the Company’s results of operations
by disrupting operations, adversely impacting the ability of the Company’s borrowers to repay their loans, damaging collateral or
reducing the value of real estate used as collateral.
Increased emphasis on commercial lending may expose the Bank to increased lending risks. At December 31, 2016, $1.8 billion,
or 47.6%, of the Bank’s total loans consisted of commercial real estate, multi-family and land loans, and commercial and industrial
loans. This portfolio has grown in recent years and the Bank intends to continue to emphasize these types of lending. These types
of loans may expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because
repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such
loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family
residential mortgage loans.
The long foreclosure timeline in New Jersey continues to adversely impact the Bank’s recoveries on non-performing loans. The
Judicial foreclosure process in New Jersey is protracted, which delays the Company’s ability to resolve non-performing loans
through the sale of the underlying collateral. The longer timelines were the result of the economic crisis, additional consumer
protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both
voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure.
These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the
foreclosure process and completion time of foreclosures for residential mortgage lenders, which may result in a material adverse
effect on collateral values and the Bank’s ability to minimize its losses.
The Company has grown and may continue to grow through acquisitions. To be successful as a larger institution, the Company
must successfully integrate the operations and retain the customers of acquired institutions, attract and retain the management
required to successfully manage larger operations, and control costs. Since July 31, 2015, the Company has acquired Colonial,
Cape and Ocean Shore.
Future results of operations will depend in large part on the Company’s ability to successfully integrate the operations of the
acquired institutions and retain the customers of those institutions. If the Company is unable to successfully manage the integration
of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be
acquired in the future, the Company’s results of operations may be adversely affected.
In addition, to successfully manage substantial growth, the Company may need to increase non-interest expenses through additional
personnel, leasehold and data processing costs, among others. In order to successfully manage growth, the Company may need
to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee the
Company’s operations. No assurance can be given that the Company will be successful in this strategy.
The Company may be challenged to successfully manage its business as a result of the strain on management and operations that
may result from growth. The ability to manage growth will depend on its ability to continue to attract, hire and retain skilled
employees. Success will also depend on the ability of officers and key employees to continue to implement and improve operational
and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage employees.
Finally, substantial growth may stress regulatory capital levels, and may require the Company to raise additional capital. No
assurance can be given that the Company will be able to raise any required capital, or that it will be able to raise capital on terms
that are beneficial to stockholders.
Future acquisition activity could dilute tangible book value. Both nationally and locally, the banking industry is undergoing
consolidation marked by numerous mergers and acquisitions. From time to time the Company may be presented with opportunities
to acquire institutions and/or bank branches which result in discussions and negotiations. Acquisitions typically involve the payment
of a premium over book and trading values, and therefore, may result in the dilution of tangible book value per share.
The Dodd-Frank Act imposes obligations on originators of residential mortgage loans, such as the Bank. Among other things, the
Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a
borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard,
23
the burden is on the lender to demonstrate the appropriateness of its policies and the strength of its controls. The Dodd-Frank Act
contains an exception from this Ability-To-Repay rule for “Qualified Mortgages.” The rule sets forth specific underwriting criteria
for a loan to qualify as a Qualified Mortgage. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB
regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting the failure of the originator to establish
the consumer’s Ability-To-Repay. Additionally, conforming fixed-rate loans with a debt-to-income ratio greater than 43% would
also qualify as an Ability-To-Repay Qualified Mortgage based upon an automated loan approval from one of the government
sponsored mortgage entities. However, a consumer may assert the lender’s failure to comply with the Ability-To-Repay rule for
all residential mortgage loans other than Qualified Mortgages, and may challenge whether a loan actually met the criteria to be
deemed an Ability-to-Pay Qualified Mortgage. These challenges have yet to be addressed by the courts.
Although the majority of residential mortgages historically originated by the Bank would be considered Qualified Mortgages, the
Bank currently originates residential mortgage loans that do not qualify. As a result of the Ability-to-Repay rules, the Bank may
experience loan losses, litigation related expenses and delays in taking title to real estate collateral in a foreclosure proceeding if
these loans do not perform and borrowers challenge whether the Bank satisfied the Ability-To-Repay rule upon originating the
loan.
The Bank’s allowance for loan losses may be inadequate, which could hurt the Company’s earnings. The Bank’s allowance for
loan losses may prove to be inadequate to cover actual loan losses and if the Bank is required to increase its allowance, current
earnings may be reduced. The Bank provides for losses by reserving what it believes to be an adequate amount to absorb any
probable incurred losses. A “charge-off” reduces the Bank’s reserve for possible loan losses. If the Bank’s reserves were insufficient,
it would be required to record a larger reserve, which would reduce earnings for that period.
Changes in interest rates could adversely affect results of operations and financial condition. The Bank’s ability to make a profit
largely depends on net interest income, which could be negatively affected by changes in interest rates. The interest income earned
on interest-earning assets and the interest expense paid on interest-bearing liabilities are generally fixed for a contractual period
of time. Interest-bearing liabilities generally have shorter contractual maturities than interest-earning assets. This imbalance can
create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest
income earned on interest-earning assets may not increase as rapidly as the interest paid on interest-bearing liabilities.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed securities. A reduction in interest
rates causes increased prepayments of loans and mortgage-backed securities as borrowers refinance their debt to reduce their
borrowing costs. This creates reinvestment risk, which is the risk that the Bank may not be able to reinvest the funds from faster
prepayments at rates that are comparable to the rates earned on the prepaid loans or mortgage-backed securities. Conversely, an
increase in interest rates generally reduces prepayments. Additionally, increases in interest rates may decrease loan demand and/
or make it more difficult for borrowers to repay adjustable-rate loans.
Changes in interest rates also affect the current estimated fair value of the interest-earning securities portfolio. Generally, the value
of securities moves inversely with changes in interest rates. Unrealized net losses on securities available-for-sale are reported as
a separate component of equity. To the extent interest rates increase and the value of the available-for-sale portfolio decreases,
stockholders’ equity will be adversely affected.
Changes in the estimated fair value of securities may reduce stockholders’ equity and net income. At December 31, 2016, the
Company maintained a securities portfolio of $610.9 million, of which $12.2 million was classified as available-for-sale. The
estimated fair value of the available-for-sale securities portfolio may increase or decrease depending on the credit quality of the
underlying issuer, market liquidity, changes in interest rates and other factors. Stockholders’ equity is increased or decreased by
the amount of the change in the unrealized gain or loss (difference between the estimated fair value and the amortized cost) of the
available-for-sale securities portfolio, net of the related tax expense or benefit, under the category of accumulated other
comprehensive income (loss). Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported
stockholders’ equity, as well as book value per common share. The decrease will occur even though the securities are not sold.
The Company conducts a periodic review and evaluation of the complete securities portfolio to determine if the decline in the
estimated fair value of any security below its cost basis is other-than-temporary. Factors which are considered in the analysis
include, but are not limited to, the severity and duration of the decline in estimated fair value of the security, the financial condition
and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry
conditions, the intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair
value and the likelihood of any near-term fair value recovery. If such decline is deemed to be other-than-temporary, the security
is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income.
At December 31, 2016 the securities portfolio included corporate debt securities issued by national and regional banks in an
unrealized loss position for greater than one year. The portfolio consisted of ten $5.0 million issues and two $2.5 million issues
spread among eight issuers. At December 31, 2016, the securities in a loss position had a book value of $55.0 million and an
24
estimated fair value of $49.1 million. At December 31, 2016, the Company determined that no other-than-temporary charge was
required. However, the Company may be required to recognize an other-than-temporary impairment charge related to these
securities if circumstances change.
The Bank may be required to repurchase mortgage loans for a breach of representations and warranties, which could harm the
Company’s earnings. The Company has entered into loan sale agreements with investors in the normal course of business. The
loan sale agreements generally require the repurchase of certain loans previously sold in the event of a violation of various
representations and warranties customary to the mortgage banking industry. FNMA, FHLMC and investors carefully examine
loan documentation on delinquent loans for a possible reason to request a repurchase by the loan originator. A subsequent sale of
the repurchased mortgage loan or underlying collateral could typically be at a significant discount to the unpaid principal balance.
The Company maintains a reserve for repurchased loans, however, if repurchase activity is greater than anticipated, the reserve
may need to be increased to cover actual losses which could harm future earnings.
The Company and the Bank operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations. The Company is subject to examination and regulation by the FRB. The Bank is subject to extensive regulation,
supervision and examination by the OCC, its primary Federal regulator, and by the FDIC, as insurer of deposits. Such regulation
and supervision governs the activities in which an institution and its holding company may engage. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the
classification of assets and determination of the level of the allowance for loan losses. The laws and regulations that govern the
Company and the Bank’s operations are designed for the protection of depositors and the public, but not the Company’s stockholders.
In July of 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act is a broad legislative initiative that is significantly changing
the bank regulatory structure and affecting the operating activities of financial institutions and their holding companies. In addition,
the Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has broad
rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the
authority to prohibit “unfair, deceptive or abusive” acts and practices.
The Dodd-Frank Act also directed the FRB to issue rules to limit debit-card interchange fees, (the fees that issuing banks charge
merchants each time a consumer uses a debit card) collected by banks with assets of $10 billion or more. Although the Bank is
exempt from this rule, market forces in future periods, may result in reduced fees charged by all issuers, regardless of asset size,
which may result in reduced revenues for the Bank. For the year ended December 31, 2016, the Bank’s revenues from interchange
fees were $4.3 million, an increase of $1.2 million from 2015. See “Regulation and Supervision, General, The Dodd-Frank Act.”
In July 2013 the FDIC and the other Federal bank regulatory agencies issued a final rule that revised their leverage and risk-based
capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were
reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. See “Regulation and
Supervision, General, The Dodd-Frank Act”.
The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from
being used for money laundering, terrorist financing and other illicit activities. If such activities are detected, financial institutions
are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These
rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open
new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Although the Bank has developed
policies and procedures designated to comply with these laws and regulations, these policies and procedures may not be totally
effective in preventing violations of these laws and regulations.
These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the
financial industry, may impact the profitability of the Company’s business activities and may change certain business practices,
including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads,
and could expose the Company to additional costs, including increased compliance costs. These changes also may require the
Company to invest significant management attention and resources to make any necessary changes to operations in order to comply,
and could therefore also materially and adversely affect the Company’s business, financial condition and results of operations.
There is no guaranty that the Company will be able to continue to pay a dividend or, if continued, will be able to pay a dividend
at the current rate. The Board of Directors of the Company determines at its discretion if, when and the amount of dividends that
may be paid on the common stock. In making such determination under the Company’s capital management plan, the Board of
Directors takes into account various factors including economic conditions, earnings, liquidity needs, the financial condition of
the Company, applicable state law, regulatory requirements and other factors deemed relevant by the Board of Directors. Although
the Company has a history of paying a quarterly dividend on its common stock, there is no guaranty that such dividends will
continue to be paid in the future or at what rate.
25
Competition from other banks, financial institutions, government-sponsored entities and emerging technological providers in
originating loans, attracting deposits and providing various financial services may adversely affect profitability and liquidity. The
Company has substantial competition in originating loans, both commercial and consumer, in its market area. This competition
comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of these competitors
enjoy advantages, including greater financial resources and access to capital, stronger regulatory ratios and higher lending limits,
a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable
pricing alternatives, as well as lower origination and operating costs. In addition, rapid technological changes and consumer
preferences may result in increased competition for the Bank’ services. Increased competition could reduce the Company’s net
income by decreasing the number and size of loans that the Bank originates and the interest rates charged on these loans, or reducing
the Bank’s ability to attract deposits.
In attracting consumer, business and public fund deposits, the Company faces substantial competition from other insured depository
institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives,
including money market funds. Many of its competitors enjoy advantages, including greater financial resources and access to
capital, stronger regulatory ratios, stronger asset quality and performance, more aggressive marketing campaigns, better brand
recognition and more branch locations. These competitors may offer higher interest rates than the Company, which could decrease
the deposits that the Company attracts or require the Company to increase its rates to retain existing deposits or attract new deposits.
Increased deposit competition could adversely affect the Company’s ability to generate the funds necessary for lending operations.
As a result, the Company may need to seek other sources of funds that may be more expensive to obtain which could increase the
cost of funds. Public fund deposits from local government entities such as counties, townships, school districts and other
municipalities generally have higher average balances and the Bank’s inability to retain such funds could adversely affect liquidity
or result in the use of higher-cost funding sources.
Over the past few years, the FRB has been a consistently large purchaser of U.S. Treasury and GSE-backed mortgage-backed
securities. The Bank has also faced increased competition for mortgage loans due to the unprecedented involvement of the GSEs
in the mortgage market as a result of the economic crisis. The actions of the FRB and the GSEs have caused the interest rate for
30-year fixed-rate mortgage loans that conform to GSE guidelines to remain artificially low. As a result of these factors, it may
be difficult for the Bank to originate mortgage loans and grow the residential mortgage loan portfolio, which could have a materially
adverse impact on the Bank’s earnings.
The Company’s inability to tailor its retail delivery model to respond to consumer preferences in banking may negatively affect
earnings. The Bank has expanded its market presence through de novo branching and acquisitions . The branch continues to be a
very significant source of new business generation, however, consumers continue to migrate much of their routine banking to self-
service channels. In recognition of this shift in consumer patterns, the Bank has undertaken a comprehensive review of its branch
network, resulting in branch consolidation accompanied by the enhancement of the Bank’s capabilities to serve its customers
through channels other than branches. The benefits of this strategy are dependent on the Bank's ability to realize expected expense
reductions without experiencing significant customer attrition.
The Company must continue to attract and retain qualified personnel and maintain cost controls and asset quality. The Company’s
ability to manage growth successfully will depend on its ability to continue to attract and retain management and loan officers
experienced in banking and financial services and familiar with the communities in its market area. The unexpected loss of service
of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could adversely affect
the Company. If the Company grows too quickly and is not able to attract qualified personnel and maintain cost controls and asset
quality, this continued growth could adversely affect the Company.
Risks associated with system failures, interruptions, or breaches of security could disrupt businesses, result in the disclosure of
confidential information, damage the reputation of, and create significant financial and legal exposure for the Company. Information
technology systems are critical to the Company’s business. Various systems are used to manage customer relationships, including
deposits and loans, general ledger and securities investments.
Although the Company devotes significant resources to maintain and regularly upgrade its systems and processes that are designed
to protect the security of the Company’s computer systems, software, networks and other technology assets and the confidentiality,
integrity and availability of information belonging to the Company and its customers, there is no assurance that all of the Company’s
security measures will provide absolute security. This risk is evidenced by recent events where financial institutions and companies
engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved
sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or
degrade service, sabotage systems or cause other damage, often through the introduction of computer viruses or malware,
cyberattacks, ransomware and other means. Additionally, there is the risk of distributed denial-of-service attacks from technically
sophisticated and well-resourced third parties which are intended to disrupt online services, as well as data breaches due to
cyberattacks which result in unauthorized access to customer data. Despite the Company’s efforts to ensure the integrity of its
26
systems, it is possible that the Company may not be able to anticipate or to implement effective preventive measures against all
security breaches of these types, especially because the techniques used change frequently or are not recognized until launched,
and because cyberattacks can originate from a wide variety of sources, including third parties outside the Company such as persons
who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations
or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of the
Company’s systems to disclose sensitive information in order to gain access to the Company’s data or that of its customers or
clients. These risks may increase in the future as the Company continues to increase its mobile and other internet-based product
offerings.
In addition, a majority of data processing is outsourced to certain third-party providers. If these third-party providers encounter
difficulties, or if there is difficulty communicating with them, the ability to adequately process and account for transactions could
be affected, and business operations could be adversely affected. Threats to information security also exist in the processing of
customer information through various vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security of the Company’s or its vendors’ systems could cause
serious negative consequences for the Company, including significant disruption of the Company’s operations, misappropriation
of confidential information of the Company or that of its customers, or damage to computers or systems of the Company and those
of its customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to the Company
or to its customers, loss of confidence in the Company’s security measures, customer dissatisfaction, significant litigation exposure,
and harm to the Company’s reputation, all of which could have a material adverse effect on the Company.
The Company may incur impairments to goodwill. At December 31, 2016, the Bank had $145.1 million in goodwill which is
evaluated for impairment, at least annually. Significant negative industry or economic trends, including declines in the market
price the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill.
The valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical
experience and to rely on projections of future operating performance. The Company operates in competitive environments and
projections of future operating results and cash flows may vary significantly from actual results. If the analysis results in impairment
to goodwill, an impairment charge to earnings would be recorded in the financial statements during the period in which such
impairment is determined to exist. Any such charge could have an adverse effect on the results of operations.
The Bank is required to maintain a significant percentage of total assets in residential mortgage loans and investments secured by
residential mortgage loans, which restricts the ability to diversify the loan portfolio. A Federal savings bank differs from a
commercial bank in that it is required to maintain at least 65% of its total assets in “qualified thrift investments” which generally
include loans and investments for the purchase, refinance, construction, improvement, or repair of residential real estate, as well
as home equity loans, education loans and small business loans. To maintain the Federal savings bank charter the Bank has to be
a “qualified thrift lender” or “QTL” in nine out of each 12 immediately preceding months. The QTL requirement limits the extent
to which the Bank can grow the commercial loan portfolio. However, a loan that does not exceed $2 million (including a group
of loans to one borrower) that is for commercial, corporate, business, or agricultural purposes is included in the qualified thrift
investments. As of December 31, 2016, the Bank maintained 70.6% of its portfolio assets in qualified thrift investments. Because
of the QTL requirement, the Bank may be limited in its ability to change its asset mix and increase the yield on earning assets by
growing the commercial loan portfolio. Alternatively, the Bank may find it necessary to pursue different structures, including
converting from a savings bank charter to a commercial bank charter.
The value of the Company’s deferred tax asset could be reduced if corporate tax rates in the U.S. are decreased. There have been
recent discussions in Congress and by the executive branch regarding potentially decreasing the U.S. corporate tax rate. While
the Company may benefit in some respects from any decreases in these corporate tax rates, any reduction in the U.S. corporate
tax rate would result in a decrease to the value of the net deferred tax asset, which could negatively affect the Company’s financial
condition and results of operations.
Item 1B.
Unresolved Staff Comments
None
Item 2.
Properties
The Bank conducts its business through its administrative office, which includes a branch office, 60 additional branch offices and
2 deposit production facilities. The branch offices are located throughout Central and Southern New Jersey. The Bank also operates
a wealth management office in Ocean County, and commercial loan production offices in the Philadelphia area and Mercer County,
New Jersey.
27
Item 3.
Legal Proceedings
The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in
the ordinary course of business. Such other routine legal proceedings in the aggregate are believed by management to be immaterial
to the Company’s financial condition or results of operations.
Item 4.
Mine Safety Disclosures
Not Applicable.
28
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
OceanFirst Financial Corp.’s common stock is traded on the Nasdaq Global Select Market under the symbol OCFC. The table
below shows the reported high and low daily closing prices of the common stock during the periods indicated in 2016 and 2015.
2016
High
Low
2015
High
Low
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
19.95
16.30
First
Quarter
17.42
16.11
$
$
19.48
16.96
Second
Quarter
18.76
16.75
$
$
19.95
18.12
Third
Quarter
19.04
16.59
$
$
30.07
19.05
Fourth
Quarter
20.94
17.22
As of December 31, 2016, the Company had approximately 4,100 stockholders, including the number of persons or entities holding
stock in nominee or street name through various brokers and banks.
Stock Performance Graph
The following graph shows a comparison of total stockholder return on OceanFirst Financial Corp.‘s common stock, based on the
market price of the Company’s common stock with the cumulative total return of companies in the Nasdaq Composite Index and
the SNL Thrift Index for the period December 31, 2011 through December 31, 2016. The graph may not be indicative of possible
future performance of the Company’s common stock. Cumulative return assumes the reinvestment of dividends and is expressed
in dollars based on an initial investment of $100.
Index
OceanFirst Financial Corp.
Nasdaq Composite
SNL Thrift
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Period Ending
100.00
100.00
100.00
108.90
117.45
121.63
29
139.85
164.57
156.09
144.11
188.84
167.88
173.49
201.98
188.78
267.66
219.89
231.23
For the years ended December 31, 2016 and 2015, the Company paid an annual cash dividend of $0.54 and $0.52 per share,
respectively.
On July 24, 2014, the Company announced authorization by the Board of Directors to repurchase up to 5% of the Company’s
outstanding common stock, or 867,923 shares. Information regarding the Company’s common stock repurchases for the three
month period ended December 31, 2016 is as follows:
Period
October 1, 2016 through October 31, 2016
November 1, 2016 through November 30, 2016
December 1, 2016 through December 31, 2016
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
—
90,000
—
244,804
154,804
154,804
Total
Number of
Shares
Purchased
Average Price
Paid per Share
—
— $
90,000
—
20.86
—
30
Item 6.
Selected Financial Data
The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in
conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual
Report.
Selected Financial Condition Data:
Total assets
Securities available-for-sale, at estimated fair
value
Securities held-to-maturity, net
Federal Home Loan Bank of New York stock
Loans receivable, net
Deposits
Federal Home Loan Bank advances
Securities sold under agreements to
repurchase and other borrowings
Stockholders’ equity
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
loan losses
Other income
Operating expenses
Merger related expenses
Federal Home Loan Bank advance
prepayment fee
Branch consolidation expense
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
2016
2015
2014
2013
2012
(dollars in thousands)
At December 31,
$
5,167,052
$
2,593,068
$
2,356,714
$
2,249,711
$
2,269,228
12,224
598,691
19,313
3,803,443
4,187,750
250,498
126,494
572,038
29,902
394,813
19,978
1,970,703
1,916,678
324,385
98,372
238,446
19,804
469,417
19,170
1,688,846
1,720,135
305,238
95,312
218,259
43,836
495,599
14,518
1,541,460
1,746,763
175,000
95,804
214,350
547,450
—
17,061
1,523,200
1,719,671
225,000
88,291
219,792
For the Years Ended December 31,
2016
2015
2014
2013
2012
(dollars in thousands; except per share amounts)
$
133,425
$
85,863
$
79,853
$
80,157
$
13,163
120,262
2,623
117,639
20,412
86,182
16,534
136
—
35,199
12,153
23,046
1.00
0.98
$
$
$
$
$
$
9,034
76,829
1,275
75,554
16,426
58,897
1,878
—
—
31,205
10,883
20,322
1.22
1.21
7,505
72,348
2,630
69,718
18,577
57,764
—
—
—
30,531
10,611
19,920
1.19
1.19
$
$
$
$
$
$
9,628
70,529
2,800
67,729
16,458
54,400
—
4,265
579
24,943
8,613
16,330
0.96
0.95
$
$
$
87,615
14,103
73,512
7,900
65,612
17,724
52,389
—
—
—
30,947
10,927
20,020
1.13
1.12
31
Selected Financial Ratios and Other Data (1):
Performance Ratios:
Return on average assets (2)
Return on average stockholders’ equity (2)
Return on average tangible stockholders’ equity (2)(3)
Stockholders’ equity to total assets
Tangible stockholders’ equity to tangible assets (3)
Average interest rate spread (4)
Net interest margin (5)
Average interest-earning assets to average interest-bearing
liabilities
Operating expenses to average assets (2)
Efficiency ratio (2)(6)
Asset Quality Ratios:
Non-performing loans as a percent of total loans receivable
(7)(8)
Non-performing assets as a percent of total assets (8)
Allowance fro loan losses as a percent of total loans
receivable (8)(9)
Allowance for loan losses as a percent of total non-performing
loans (8)
Wealth Management:
Assets under administration (000’s)
Per Share Data:
Cash dividends per common share
At or For the Year Ended December 31,
2016
2015
2014
2013
2012
(continued)
0.62%
0.82%
0.86%
0.71%
0.87%
6.08
7.13
11.07
8.30
3.38
3.47
122.46
2.76
73.11
0.35
0.45
0.40
8.92
8.96
9.19
9.12
3.18
3.28
123.80
2.47
65.17
0.91
1.05
0.84
9.18
9.18
9.26
9.26
3.23
3.31
121.21
2.50
63.53
1.06
0.97
0.95
7.51
7.51
9.53
9.53
3.16
3.24
117.19
2.58
68.11
2.88
2.21
1.33
9.15
9.15
9.69
9.69
3.27
3.37
115.71
2.29
57.42
2.80
2.05
1.32
111.92
91.51
89.13
46.14
47.29
$ 218,336
$ 229,039
$ 225,234
$ 216,144
$ 172,879
Stockholders’ equity per common share at end of period
Tangible stockholders’ equity per common share at end of
period (3)
Number of full-service customer facilities:
17.80
12.95
61
13.79
13.67
27
12.91
12.91
23
12.33
12.33
23
$
0.54
$
0.52
$
0.49
$
0.48
$
0.48
12.28
12.28
24
(1) With the exception of end of year ratios, all ratios are based on average daily balances.
(2) Performance ratios for 2016 include merger related expenses and the Federal Home Loan Bank advance prepayment fee
totaling $16.7 million with an after tax cost of $11.9 million. Performance ratios for 2015 include merger related expenses
of $1.9 million with an after tax cost of $1.3 million. Performance ratios for 2013 include expenses relating to the Federal
Home Loan Bank advance prepayment fee of $4.3 million and the consolidation of two branches into newer, in-market
facilities, at a cost of $579,000. The total after tax cost was $3.1 million. Performance ratios for 2012 include an additional
loan loss provision of $1.8 million relating to Superstorm Sandy and $687,000 in net severance expense. The total after
tax cost was $1.6 million.
(3) Tangible stockholder’s equity excludes intangible assets relating to goodwill and core deposit intangible.
(4) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percentage of average interest-earning assets.
(6) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.
(7) Total loans receivable includes loans receivable and loans held-for-sale.
(8) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans
consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to
cease accruing interest on all such loans and to reverse previously accrued interest.
32
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
OceanFirst Financial Corp. has been the holding company for OceanFirst Bank since it acquired the stock of the Bank upon the
Bank’s Conversion.
The Company conducts business primarily through its ownership of the Bank which operates its administrative/branch office
located in Toms River, 60 additional branch offices and 2 deposit production facilities located throughout Central and Southern
New Jersey. The Bank also operates a wealth management office in Manchester, New Jersey and commercial loan production
offices in the Philadelphia area and Mercer County, New Jersey.
The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest
income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-
bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from
Bankcard services, wealth management, deposit account services, the sale of alternative investments, loan originations, loan sales,
Bank Owned Life Insurance and other fees. The Company’s operating expenses primarily consist of compensation and employee
benefits, occupancy and equipment, marketing, Federal deposit insurance, data processing, check card processing, professional
fees and other general and administrative expenses. The Company’s results of operations are also significantly affected by
competition, general economic conditions including levels of unemployment and real estate values as well as changes in market
interest rates, government policies and actions of regulatory agencies.
Acquisitions
On July 31, 2015, the Company completed its acquisition of Colonial American Bank ("Colonial American"), which added $142.4
million to assets, $121.2 million to loans, and $123.3 million to deposits. Colonial American’s results of operations are included
in the consolidated results for the year ended December 31, 2016, but are only included in the results of operations for the period
from August 1, 2015 through December 31, 2015.
On March 11, 2016, the Bank purchased an existing retail branch in the Toms River, New Jersey market with total deposits of
$17.0 million.
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. ("Cape"), which added $1.5 billion to assets, $1.2
billion to loans, and $1.2 billion to deposits. Cape's results of operations from May 2, 2016 through December 31, 2016 are included
in the consolidated results for the year ended December 31, 2016, but are not included in the results of operations for the
corresponding prior year.
On November 30, 2016, the Company completed its acquisition of Ocean Shore Holding Company ("Ocean Shore"), which added
$995.9 million to assets, $774.0 million to loans, and $875.1 million to deposits. Ocean Shore's results of operations from December
1, 2016 through December 31, 2016 are included in the consolidated results for the year ended December 31, 2016, but are not
included in the results of operations for the corresponding prior year.
These acquisitions 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.
Strategy
The Company operates as a full service community bank delivering commercial and residential financing solutions, deposit services
and wealth management throughout the Central and Southern New Jersey region. The Bank is the largest and oldest community-
based financial institution headquartered in Ocean County, New Jersey. The Bank competes with larger, out-of-market financial
service providers through its local focus and the delivery of superior service. The Bank also competes with smaller in-market
financial service providers by offering a broad array of products and by having an ability to extend larger credits.
The Company’s strategy has been to grow profitability while limiting exposure to credit, interest rate and operational risks. To
accomplish these objectives, the Bank has sought to (1) grow commercial loans receivable through the offering of commercial
lending services to local businesses; (2) grow core deposits (defined as all deposits other than time deposits) through product
offerings appealing to a broadened customer base; and (3) increase non-interest income by expanding the menu of fee-based
products and services and investing additional resources in these product lines. The growth in these areas has occurred both
organically and through acquisitions.
33
The Company will focus on prudent growth to create value for stockholders, which may include opportunistic acquisitions. The
Company will also continue to build additional operational infrastructure and invest in key personnel in response to growth and
changing business conditions.
Growing Commercial Loans
With industry consolidation eliminating most locally-headquartered competitors, the Company fills a void for locally-delivered
commercial loan and deposit services. The Bank continues to grow this market segment primarily through the addition of
experienced commercial lenders. Additionally, a loan production office was opened in Mercer County in the first quarter of 2015
to better serve the broader Central New Jersey market area. An additional loan production office in the Philadelphia area was
acquired in the Cape transaction. As a result of these initiatives, commercial loans represented 47.6% of the Bank’s total loans at
December 31, 2016, as compared to 31.9% at December 31, 2011 and only 3.6% at December 31, 1997. Commercial loan balances
increased by $856.1 million, or 88.9%, in 2016, including $820.4 million acquired from the Cape and Ocean Shore transactions.
Commercial loan products entail a higher degree of credit risk than is involved in one-to-four family residential mortgage lending
activity. As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and
close management and Board monitoring. See “Risk Factors – Increased emphasis on commercial lending may expose the Bank
to increased lending risks”.
Increasing core deposits
The Bank seeks to increase core deposit market share in its primary market area by improving market penetration. Deposits
increased by $2.271 billion, to $4.188 billion at December 31, 2016, from $1.917 billion at December 31, 2015, including deposits
of $2.140 billion acquired from Cape, Ocean Shore and the retail branch purchase. Excluding these transactions, deposits increased
$130.7 million, while core deposits (all deposits excluding time deposits) increased $169.7 million. The loan to deposit ratio was
90.8% at December 31, 2016. Core account development has benefited from Bank efforts to attract business deposits in conjunction
with its commercial lending operations and from an expanded mix of retail core account products. As a result of these efforts the
Bank’s core deposit ratio has grown to 84.5% at December 31, 2016, as compared to 84.2% at December 31, 2011 and only 33.0%
at December 31, 1997.
Enhancing non-interest income
Management continues to diversify the Bank’s product line and expand related resources in order to enhance non-interest income.
The Bank is focused on growth opportunities in areas such as wealth management services and in Bankcard services, which
includes interchange revenue, merchant services and ATM fees. The Bank also offers alternative investment products (annuities,
mutual funds and life insurance) for sale through its retail branch network. Income from fees and service charges continues to be
an area of focus, increasing $3.8 million, or 27.6%, to $17.7 million, for the year ended December 31, 2016, as compared to the
prior year. Of the total increase $3.1 million was related to the Colonial American, Cape and Ocean Shore acquisitions. By
comparison, income from fees and service charges was $13.8 million for the year ended December 31, 2011 and only $1.4 million
for the year ended December 31, 1997.
Branch Rationalization and Service Delivery
In light of the recent acquisition activity, Management performed a comprehensive review of the Bank’s branch network, which
resulted in the January 2017 announcement of the consolidation of ten branches in the legacy Cape and Ocean Shore market area
by mid-year 2017, with expected annualized cost savings of $3.6 million. Further, the Bank expects to consolidate other branches
in its Central New Jersey market area by the end of the year. In addition to branch consolidation, the Bank has adapted to the
industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff
handling sales and service transactions. In certain locations, routine transactions are handled through “Personal Teller Machines”,
an advanced technology with a live team member in a remote location who performs transactions for multiple Personal Teller
Machines. The Bank is also investing in its multiple electronic delivery channels to enhance the customer experience.
Capital Management
In addition to the objectives described above, the Company determined to more actively manage its capital position to improve
return on equity. The Company has, over the past few years, implemented or announced, three stock repurchase programs. The
most recent plan to repurchase up to 5% of outstanding common stock was announced on July 24, 2014. For the year ended
December 31, 2016, the Company repurchased 90,000 shares of common stock for $1.9 million. At December 31, 2016, there
were 154,804 shares remaining to be repurchased under the existing stock repurchase plan.
Summary
Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities,
primarily deposits and borrowings, are generally priced against shorter-term indices. The Company has attempted to mitigate the
34
adverse impact of low absolute levels of interest rates by focusing on commercial loan and core deposit growth, as noted above.
Based upon current economic conditions, characterized by moderate growth and low inflation, interest rates may remain at, or
close to, historically low levels with increases in the Federal funds rate expected to be gradual. The continuation of the low interest
rate environment may have an adverse impact on the Company’s net interest margin in future periods.
In addition to the interest rate environment, the Company’s results are affected by economic conditions. Recent economic indicators
point to some improvement in the U.S. economy, which expanded moderately in 2016, while measures of inflation remain subdued.
Highlights of the Company’s financial results for the year ended December 31, 2016 were as follows:
Total assets increased to $5.2 billion at December 31, 2016, from $2.6 billion at December 31, 2015, primarily as a result of the
acquisitions of Cape and Ocean Shore. Loans receivable, net increased $1.833 billion at December 31, 2016, as compared to
December 31, 2015, which included $1.931 billion of acquired loans. Deposits increased $2.271 billion at December 31, 2016,
as compared to December 31, 2015, which included $2.140 billion of acquired deposits.
Net income for the year ended December 31, 2016 was $23.0 million, or $0.98 per diluted share, as compared to net income of
$20.3 million, or $1.21 per diluted share for the prior year. Net income for the years ended December 31, 2016 and 2015 includes
merger related expenses, net of tax benefit, of $11.8 million and $1.3 million, respectively. The merger related expenses reduced
diluted earnings per share by $0.50 and $0.08, respectively, for the years ended December 31, 2016 and 2015.
Non-performing loans decreased 25.8%, to $13.6 million, at December 31, 2016, from $18.3 million at December 31, 2015. Non-
performing loans as a percent of total loans receivable decreased to 0.35% at December 31, 2016, from 0.91% at December 31,
2015, the lowest level in the past 10 years.
Risk management activities related to the acquisitions included the sale of certain higher risk loan pools, including 63 residential
loans with a carrying value of $4.4 million, 72 SBA loans with a carrying value of $8.4 million, and 61 commercial loans with a
carrying value of $17.5 million.
The Company remains well-capitalized with a tangible common equity ratio of 8.30% at December 31, 2016.
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2016 contains a summary
of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of
financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology
used to determine the allowance for loan losses and judgments regarding securities and goodwill impairment are the most critical
accounting policies because they are important to the presentation of the Company’s financial condition and results of operations,
involve a higher degree of complexity and require management to make difficult and subjective judgments which often require
assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result
in material differences in the results of operations or financial condition. These critical accounting policies and their application
are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.
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.
The allowance for loan losses is maintained at an amount management considers sufficient to provide for probable losses. The
analysis considers known and inherent risks in the loan portfolio resulting from management’s continuing review of the factors
underlying the quality of the loan portfolio.
The Bank’s allowance for loan losses includes specific allowances and a general allowance, each updated on a quarterly basis. A
specific allowance is determined for all non-accrual loans (excluding PCI loans) where the value of the underlying collateral can
reasonably be evaluated. For these loans, the specific allowance represents the difference between the Bank’s recorded investment
in the loan, net of any interim charge-offs, and the estimated fair value of the collateral, less estimated selling costs. Acquired
loans are marked to fair value on the date of acquisition. In conjunction with the quarterly evaluation of the adequacy of the
allowance for loan losses, the Company performs an analysis on acquired loans to determine whether or not there has been
35
subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the
calculation of the allowance for loan losses after the initial valuation, and provide accordingly.
If a loan becomes 90 days delinquent, the Bank obtains an updated collateral appraisal. For residential real estate loans, the appraisal
is updated annually if the loan remains delinquent for an extended period. For non-accrual commercial real estate loans, the Bank
assesses whether there has likely been an adverse change in the collateral value supporting the loan. The Bank utilizes information
based on its knowledge of changes in real estate conditions in its lending area to identify whether a possible deterioration of
collateral value has occurred. Based on the severity of the changes in market conditions, management determines if an updated
commercial real estate appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined
that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward
adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated
appraisal is received.
A general allowance is determined for all loans that are not individually evaluated for a specific allowance (excluding purchased
loans). In determining the level of the general allowance, the Bank segments the loan portfolio into various loan segments as
follows: residential real estate; commercial real estate; consumer; and commercial and industrial.
The loan portfolio is further segmented by delinquency status and risk rating (Pass, Special Mention, Substandard and Doubtful).
An estimated loss factor is then applied to each risk rating tranche. To determine the loss factor, the Bank utilizes historical loss
experience as a percent of loan principal adjusted for certain qualitative factors and the loss emergence period.
The Bank’s historical loss experience is based on a rolling 24-month look-back period for all loan segments. This was selected
based on (1) management’s judgment that this period captures sufficient loss events (in both dollar terms and number of individual
events) to be relevant; and (2) that the Bank’s underwriting criteria and risk characteristics have remained relatively stable
throughout this period.
The historical loss experience is adjusted for certain qualitative factors including, but not limited to, (1) delinquency trends, (2) net
charge-off trends, (3) nature and volume of the loan portfolio, (4) loan policies and underwriting standards, (5) experience and
ability of lending personnel, (6) changes in current economic conditions, (7) concentrations of credit, (8) loan review system, and
external factors such as (9) local competition and (10) regulation. Existing economic conditions which the Bank considered to
estimate the allowance for loan losses include local and regional trends in economic growth, unemployment and real estate
values. The Bank considers the applicability of each of these qualitative factors in estimating the general allowance for each loan
portfolio segment. Each quarter, the conditions that existed in the 24-month look-back period are compared to current conditions
to support a conclusion as to which qualitative adjustments are (or are not) deemed necessary for a particular portfolio segment.
The Bank calculates and analyzes the loss emergence period on an annual basis or more frequently if conditions warrant. The
Bank’s methodology is to use loss events in the past 8 quarters to determine the loss emergence period for each loan segment. The
loss emergence period is specific to each loan segment and determined based on (1) the occurrence of a loss event which resulted
in a potential loss and (2) confirmation of the potential loss is deemed to occur when the Bank records an initial charge-off on the
loan or downgrades the risk-rating to substandard or doubtful.
The Bank also maintains an unallocated portion of the allowance for loan losses. The primary purpose of the unallocated component
is to account for the inherent imprecision of the overall loss estimation process including the periodic updating of appraisals,
commercial loan risk ratings, and continued economic uncertainty that may not be fully captured in the Company’s loss history
or the qualitative factors.
Upon completion of the aforementioned procedures, an overall management review is performed including ratio analyses to
identify divergent trends compared with the Bank’s own historical loss experience, the historical loss experience of the Bank’s
peer group, and management’s understanding of general regulatory expectations. Based on that review, management may identify
issues or factors that previously had not been considered in the estimation process, which may warrant further analysis or adjustments
to estimated loss factors or the allowance for loan losses.
Of the Bank’s loan portfolio, 96.0% is secured by real estate, whether residential or commercial. Additionally, most of the Bank’s
borrowers are located in central and southern New Jersey and the surrounding area. These concentrations may adversely affect
the Bank’s loan loss experience should local real estate values decline further or should the markets served experience difficult
economic conditions including increased unemployment or should the area be affected by a natural disaster such as a hurricane
or flooding.
Management believes the primary risk characteristics for each portfolio segment are a decline in the economy generally, including
elevated levels of unemployment, a decline in real estate market values and increases in interest rates. Any one or a combination
36
of these events may adversely affect the borrowers’ ability to repay the loans, resulting in increased delinquencies, loan charge-
offs and future levels of provisions.
Although management believes that the Bank has established and maintained the allowance for loan losses at adequate levels,
additions may be necessary if future economic and other conditions differ substantially from the current operating environment.
In addition, various regulatory agencies, as part of their examination process, periodically review the Bank’s allowance for loan
losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available to
them at the time of their examination. Although management uses what it believes to be the best information available, future
adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Bank’s
control.
Impairment of Securities
On a quarterly basis, the Company evaluates whether any securities are other-than-temporarily impaired. In making this
determination, the Company considers the extent and duration of the impairment, the nature and financial health of the issuer, the
ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in estimated fair value
and other factors relevant to specific securities, such as the credit risk of the issuer and whether a guarantee or insurance applies
to the security. If a security is determined to be other-than-temporarily impaired, the credit related component is charged to income
with the non-credit related component recognized in other comprehensive income, during the period the impairment is found to
exist.
As of December 31, 2016, the Company concluded that any remaining unrealized losses in the securities portfolio were temporary
in nature because they were primarily related to market interest rates, market illiquidity and wider credit spreads for these types
of securities. Additionally, the Company does not intend to sell the securities and it is more likely than not that the Company will
not be required to sell the securities before recovery of their amortized cost. Future events that could materially change this
conclusion and require an impairment loss to be charged to operations include a change in the credit quality of the issuers or a
determination that a market recovery in the foreseeable future is unlikely.
Goodwill Impairment
Acquired assets and liabilities, including goodwill and other intangible assets are recorded at fair value at the acquisition date.
Goodwill totaling $145.1 million at December 31, 2016, is not amortized but is subject to annual tests for impairment or more
often if events or circumstances indicate it may be impaired. Other intangible assets, such as core deposit intangibles, are amortized
over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to
realize the carrying amount. Such evaluation of other intangible assets is based on undiscounted cash flow projections. The initial
recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the
acquired assets and assumed liabilities.
The goodwill impairment analysis is generally a two-step test. However, the Company may first assess qualitative factors to
determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company is not required to
calculate the fair value of the reporting unit if, based on a qualitative assessment, it is determined that it was more likely than not
that the unit’s fair value was not less than its carrying amount. The first step compares the fair value of the reporting unit with its
carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional step
must be performed. That additional step compares the implied fair value of the reporting unit’s goodwill with the carrying amount
of that goodwill. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a
business combination, i.e., by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step
above, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting
unit was being acquired in a business combination at the impairment test date. An impairment loss is recorded to the extent that
the carrying amount of goodwill exceeds its implied fair value. The loss establishes a new basis in the goodwill and subsequent
reversal of goodwill impairment losses are not permitted.
37
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.
Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest
rate earned or paid on them.
The following table sets forth certain information relating to the Company for each of the years ended December 31, 2016,
2015 and 2014. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances.
The yields and costs include fees which are considered adjustments to yields.
Years Ended December 31,
2016
2015
2014
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
(dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits
and short-term
investments
Securities (1)
FHLB-NY stock
Loans receivable, net (2)
Total interest-earning
assets
Non-interest-earning assets
Total assets
Liabilities and Equity:
Interest-bearing liabilities:
Money market deposit
Accounts
Savings accounts
Interest-bearing checking
Accounts
Time deposits
Total
FHLB advances
Securities sold under
agreements to
repurchase
Other borrowings
Total interest-bearing
liabilities
Non-interest-bearing
deposits
Non-interest-bearing
liabilities
Total liabilities
Stockholders’ equity
$
154,830
$
505,124
19,028
693
8,965
805
2,782,858
122,962
0.45% $
38,371
$
1.77
4.23
4.42
464,415
16,891
1,826,161
44
7,425
700
77,694
0.11% $
39,549
$
1.60
4.14
4.25
526,637
15,972
1,603,434
41
8,535
713
70,564
3,461,840
269,622
$ 3,731,462
$
316,977
447,484
1,266,135
422,026
2,452,622
266,981
75,227
32,029
133,425
3.85
2,345,838
85,863
3.66
2,185,592
79,853
119,035
$ 2,464,873
$
129,775
306,151
875,326
229,785
1,541,037
253,843
73,029
26,988
0.27
0.04
0.17
1.03
0.31
1.67
0.14
3.35
858
191
2,114
4,354
7,517
4,471
102
1,073
120,677
$ 2,306,269
$
113,406
295,289
869,383
213,566
1,491,644
219,847
64,223
27,500
0.14
0.03
0.11
1.33
0.28
1.52
0.14
2.89
187
102
952
3,060
4,301
3,850
103
780
92
112
925
2,974
4,103
2,515
78
809
2,826,859
13,163
0.47
1,894,897
9,034
0.48
1,803,214
7,505
497,166
28,454
3,352,479
378,983
327,216
14,851
2,236,964
227,909
$ 2,464,873
257,058
29,082
2,089,354
216,915
$ 2,306,269
Total liabilities and equity
$ 3,731,462
Net interest income
Net interest rate spread (3)
Net interest margin (4)
Ratio of interest-earning
assets to interest-
bearing liabilities
$
120,262
$
76,829
$
72,348
3.38%
3.47%
3.18%
3.28%
122.46%
123.80%
121.21%
(1)
(2)
(3)
(4)
Amounts are recorded at average amortized cost.
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loan loss allowances and includes loans held-for-
sale and non-performing loans.
Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
Net interest margin represents net interest income divided by average interest-earning assets.
38
0.10%
1.62
4.46
4.40
3.65
0.08
0.04
0.11
1.39
0.28
1.14
0.12
2.94
0.42
3.23%
3.31%
Rate Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information
is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to
rate.
(in thousands)
Interest-earning assets:
Interest-earning deposits and short-
term investments
$
Securities
FHLB-NY stock
Loans receivable, net
Total interest-earning assets
Interest-bearing liabilities:
Money market deposit accounts
Savings accounts
Interest-bearing checking accounts
Time deposits
Total
FHLB advances
Securities sold under agreements
to repurchase
Other borrowings
Total interest-bearing
liabilities
Year Ended December 31, 2016
Compared to
Year Ended December 31, 2015
Increase (Decrease)
Due to
Year Ended December 31, 2015
Compared to
Year Ended December 31, 2014
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
$
322
696
90
42,057
43,165
408
52
523
2,105
3,088
214
(1)
—
3,301
327
844
15
3,211
4,397
263
37
639
(811)
128
407
—
293
828
$
649
$
(1) $
4
$
1,540
105
45,268
47,562
671
89
1,162
1,294
3,216
621
(1)
293
4,129
(1,005)
40
9,587
8,621
15
6
27
218
266
424
11
—
701
(105)
(53)
(2,457)
(2,611)
80
(16)
—
(132)
(68)
911
14
(29)
828
3
(1,110)
(13)
7,130
6,010
95
(10)
27
86
198
1,335
25
(29)
1,529
4,481
Net change in net interest income
$
39,864
$
3,569
$
43,433
$
7,920
$
(3,439) $
Comparison of Financial Condition at December 31, 2016 and December 31, 2015
Total assets increased by $2.574 billion to $5.167 billion at December 31, 2016, from $2.593 billion at December 31, 2015, primarily as
a result of the acquisitions of Cape and Ocean Shore. Cash and due from banks and interest-bearing deposits increased by $257.4 million,
to $301.4 million at December 31, 2016, from $43.9 million at December 31, 2015. The increase was primarily due to cash flows from
a reduction in loans receivable (exclusive of acquired loans), deposit growth not utilized to reduce FHLB advances (exclusive of acquired
deposits), and the issuance of subordinated notes. Loans receivable, net, increased by $1.833 billion, to $3.803 billion at December 31,
2016, from $1.971 billion at December 31, 2015, due to acquired loans of $1.931 billion. As part of the Colonial, Cape and Ocean Shore
acquisitions ("Acquisition Transactions"), and the purchase of an existing retail branch in the Toms River market, the Company had
outstanding goodwill of $145.1 million and core deposit intangibles of $10.9 million at December 31, 2016.
Deposits increased by $2.271 billion, to $4.188 billion at December 31, 2016, from $1.917 billion at December 31, 2015, which include
deposits of $2.140 billion acquired from Ocean Shore, Cape, and the purchase of an existing retail branch. Excluding those acquired,
deposits increased $130.7 million, while core deposits (all deposits excluding time deposits) increased $169.7 million. The loan-to-
deposit ratio at December 31, 2016 was 90.8%, as compared to 102.8% at December 31, 2015. The deposit growth offset a decrease in
FHLB advances of $73.9 million, to $250.5 million at December 31, 2016 from $324.4 million at December 31, 2015. The increase in
other borrowings relates to the September 2016 issuance of $35.0 million in subordinated notes at an all-in cost of 5.45% with a stated
maturity of September 30, 2026.
Stockholders' equity increased to $572.0 million at December 31, 2016, as compared to $238.4 million at December 31, 2015. The
acquisitions of Cape and Ocean Shore added $165.9 million and $152.3 million, respectively, to stockholders' equity. At December 31,
2016, there were 154,804 shares available for repurchase under the Company's stock repurchase program adopted in July of 2014. During
the year, the Company repurchased 90,000 shares under this plan at an average cost of $20.86 per share. Tangible stockholders' equity
per common share decreased to $12.95 at December 31, 2016, as compared to $13.67 at December 31, 2015, due to the addition of
intangible assets in the Ocean Shore and Cape acquisitions.
39
Comparison of Operating Results for the Years Ended December 31, 2016 and December 31, 2015
General
Net income for the year ended December 31, 2016 was $23.0 million, or $0.98 per diluted share, as compared to net income of
$20.3 million, or $1.21 per diluted share for the prior year. Net income for the years ended December 31, 2016 and 2015 includes
merger related expenses, net of tax benefit, of $11.8 million and $1.3 million, respectively. Additionally, net income for the year
ended December 31, 2016, includes an FHLB Advance prepayment fee of $136,000 and a loss on the sale of investment securities
available-for-sale of $12,000. Excluding these items, diluted earnings per share increased over the prior year due to higher net
interest income and other income partially offset by increases in operating expenses, provision for loan losses, and average diluted
shares outstanding.
Interest Income
Interest income for the year ended December 31, 2016, increased to $133.4 million, as compared to $85.9 million, in the prior
year. Average interest-earning assets increased $1.116 billion for the year ended December 31, 2016, as compared to the prior
year, benefiting from the interest-earning assets from the Acquisition Transactions of $900.7 million. The yield on average interest-
earning assets increased to 3.85% for the year ended December 31, 2016, as compared to 3.66% for the prior year. The asset yield
benefited from the accretion of purchase accounting adjustments on the Acquisition Transactions (an additional 10 basis points
of yield), the higher-yielding interest-earning assets acquired from Cape, and the higher interest rate environment at the end of
2016.
Interest Expense
Interest expense for the year ended December 31, 2016, was $13.2 million, as compared to $9.0 million in the prior year, due to
an increase in average-interest bearing liabilities of $932.0 million. The cost of average interest-bearing liabilities decreased to
0.47% for the year ended December 31, 2016, as compared to 0.48% in the prior year. The total cost of deposits (including non-
interest bearing deposits) was 0.25% for the year ended December 31, 2016, as compared to 0.23% in the prior year.
Net Interest Income
Net interest income for the year ended December 31, 2016 increased to $120.3 million, as compared to $76.8 million in the prior
year, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased
$1.116 billion for the year ended December 31, 2016, as compared to the prior year. The net interest margin increased to 3.47%
for the year ended December 31, 2016, from 3.28%, for the prior year. Net interest income benefited from the accretion of purchase
accounting adjustments on the Acquisition Transactions of $4.5 million for the year ended December 31, 2016, as compared to
$317,000 in the prior year.
Provision for Loan Losses
For the year ended December 31, 2016, the provision for loan losses was $2.6 million as compared to $1.3 million for the prior
year. Net charge-offs increased to $4.2 million for the year ended December 31, 2016, as compared to net charge-offs of $870,000
in the prior year. The increase in net charge-offs for the year ended December 31, 2016, was primarily due to charge-offs of $2.1
million on the sale of under-performing loans , and to a lesser extent, charge-offs of $886,000 on two non-performing commercial
loans. Excluding charge-offs attributable to the loan sales, net charge-offs for the year totaled $2.0 million. Non-performing
loans totaled $13.6 million at December 31, 2016, as compared to $18.3 million at December 31, 2015. At December 31, 2016,
the Company’s allowance for loan losses was 0.40% of total loans, a decrease from 0.84% at December 31, 2015. These ratios
exclude existing fair value credit marks of $26.0 million at December 31, 2016 on the Colonial American, Cape and Ocean Shore
loans and $2.2 million at December 31, 2015 on the Colonial American loans. These loans were acquired at fair value with no
related allowance for loan losses. The allowance for loan losses as a percent of total non-performing loans was 111.92% at
December 31, 2016, as compared to 91.51% at December 31, 2015.
Other Income
For the year ended December 31, 2016, other income increased to $20.4 million, as compared to $16.4 million in the prior year,
an increase of $4.0 million. The increase from the prior year was primarily due to the impact of the Acquisition Transactions,
which added $3.8 million to total other income for the year ended December 31, 2016. Excluding the impact of the Acquisition
Transactions, other income increased by approximately $202,000 for the year ended December 31, 2016. For the year ended
December 31, 2016, other income included losses of $342,000 attributable to the operations of a hotel, golf and banquet facility
acquired as Other Real Estate Owned in the fourth quarter of 2015. The Bank is currently engaged in a sales process with qualified
buyers for this property.
40
Operating Expenses
Operating expenses increased to $102.9 million for the year ended December 31, 2016, as compared to $60.8 million in the prior
year. Operating expenses for the year ended December 31, 2016 include $16.5 million in merger related expenses, as compared
to merger related expenses of $1.9 million in the prior year. Excluding merger related expenses, the increase in operating expenses
over the prior year were primarily due to the Acquisition Transactions, which added operating expenses of $21.3 million; the
investment in commercial lending which added expenses of $816,000; the addition of new branches (excluding those acquired
in the Acquisition Transactions) which added expenses of $1.2 million; the amortization of the core deposit intangible which added
expenses of $602,000; expenses associated with the Bank's re-branding effort of $363,000; and the FHLB advance prepayment
fee of $136,000.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 2016 was $12.2 million, as compared to $10.9 million for the
prior year. The effective tax was 34.5% for the year ended December 31, 2016, as compared to 34.9% for the prior year. The
effective tax rate was impacted in both periods by non-deductible merger related expenses.
Comparison of Operating Results for the Years Ended December 31, 2015 and December 31, 2014
General
Net income for the year ended December 31, 2015 was $20.3 million, or $1.21 per diluted share, as compared to net income of
$19.9 million, or $1.19 per diluted share for the prior year. Net income for the year ended December 31, 2015 includes merger
related expenses, net of tax benefit of $1.3 million, which reduced diluted earnings per share by $0.08. Excluding the merger
related expenses, the increase in diluted earnings per share over the previous year was primarily due to higher net interest income
and lower provisions for loan losses, partly offset by a reduction in other income and higher operating expenses.
Interest Income
Interest income for the year ended December 31, 2015, increased to $85.9 million, as compared to $79.9 million, in the prior year.
Average interest-earning assets increased $160.2 million for the year ended December 31, 2015, as compared to the prior year,
benefiting from the interest-earning assets acquired from Colonial American which averaged $51.2 million, for the year ended
December 31, 2015. The yield on average interest-earning assets increased to 3.66% for the year ended December 31, 2015, as
compared to 3.65% for the prior year. The asset yield benefited from a shift in the mix of interest-earning assets as average loans
receivable, net, increased $222.7 million, for the year ended December 31, 2015, as compared to the prior year, while average
interest-earning securities decreased $62.2 million, as compared to the prior year.
Interest Expense
Interest expense for the year ended December 31, 2015, was $9.0 million, as compared to $7.5 million, in the prior year. The cost
of average interest-bearing liabilities increased to 0.48% for the year ended December 31, 2015, as compared to 0.42% in the prior
year as the Company extended its borrowed funds into longer-term maturities, which carry a higher cost, to better manage the
Company’s interest rate risk. Between December 31, 2013, and December 31, 2015, the Bank has extended $197.4 million of
short-term funding into 3-5 year maturities, extending the weighted average maturity of term borrowings from 1.3 years to 3.1
years at December 31, 2015. The total cost of deposits (including non-interest bearing deposits) was 0.23% for the year ended
December 31, 2015, unchanged compared to the prior year.
Net Interest Income
Net interest income for the year ended December 31, 2015 increased to $76.8 million, as compared to $72.3 million in the prior
year, reflecting an increase in interest-earning assets, partly offset by a lower net interest margin. Average interest-earning assets
increased $160.2 million for the year ended December 31, 2015, as compared to the prior year. The net interest margin decreased
to 3.28% for the year ended December 31, 2015, from 3.31%, for the prior year. Yields and costs for the year ended December
31, 2015 were impacted by fair value adjustments to interest-earning assets and interest-bearing liabilities acquired from Colonial
American as of the July 31, 2015 merger date.
41
Provision for Loan Losses
For the year ended December 31, 2015, the provision for loan losses was $1.3 million as compared to $2.6 million for the prior
year. Net charge-offs decreased to $870,000 for the year ended December 31, 2015, as compared to net charge-offs of $7.2 million
in the prior year. In September 2014, the Company completed the bulk sale of certain non-performing residential mortgage loans
which resulted in a loan charge-off of $5.0 million. The provision exceeded the net charge-offs for the year ended December 31,
2015 to account for loan growth. Non-performing loans totaled $18.3 million at December 31, 2015, unchanged from December
31, 2014. At December 31, 2015, the Company’s allowance for loan losses was 0.84% of total loans, a decline from 0.95% at
December 31, 2014. The decline in the loan coverage ratio from the prior year was partly a result of Colonial American loans
acquired at fair value, with no corresponding allowance. The allowance for loan losses as a percent of total non-performing loans
was 91.51% at December 31, 2015, an increase from 89.13% in the prior year.
Other Income
For the year ended December 31, 2015, other income decreased to $16.4 million, as compared to $18.6 million in the prior year,
a decrease of $2.2 million. The 2014 amount includes gains on sales of equity securities of $1.0 million as compared to no gains
in 2015. In 2014, the Company sold the servicing rights to residential mortgage loans serviced for the Federal agencies, which
reduced other income by $845,000 in 2015, including the reduced gains on the sale of servicing rights and the reduction in loan
servicing income. Fees and service charges declined $465,000 due to the sector wide impact of the consumer shift away from
deposit overdrafts.
Operating Expenses
Operating expenses increased to $60.8 million for the year ended December 31, 2015, as compared to $57.8 million, in the prior
year. Operating expenses for the year ended December 31, 2015 include $1.9 million in merger expenses relating to the acquisition
of Colonial American. Additionally, operating expenses attributable to Colonial American for the year ended December 31, 2015
were $1.1 million. Approximately $368,000 of these expenses were associated with operating duplicate systems from the merger
date (July 31, 2015) through December 31, 2015. Compensation and employee benefits expense increased $519,000 for the year
ended December 31, 2015, as compared to the prior year, which included $196,000 in severance related expenses due to the
Company’s strategic decision to improve efficiency in the residential mortgage loan area. The increase was primarily due to higher
salary expense associated with the Colonial American acquisition, personnel increases in commercial lending, and the opening of
two new branches.
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 2015 was $10.9 million, as compared to $10.6 million for the
prior year. The effective tax was 34.9% for the year ended December 31, 2015, as compared to 34.8% for prior year.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities,
proceeds from the sales of loans, FHLB advances and other borrowings and, to a lesser extent, investment maturities. While
scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional
funds arises, including various lines of credit.
At December 31, 2016, the Bank had no outstanding overnight borrowings from the FHLB, compared to $82.0 million outstanding
at December 31, 2015. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. FHLB
advances, including overnight borrowings, totaled $250.5 million at December 31, 2016, a decrease from $324.4 million at
December 31, 2015.
The Company's cash needs for the year ended December 31, 2016 were primarily satisfied by principal payments on loans and
mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and the sale of under-performing loans, proceeds
from maturities and calls of investment securities, proceeds from sale of available-for-sale securities, deposit growth and the
issuance of subordinated notes. The cash was primarily utilized for loan originations, the purchase of loans receivable, the purchase
of securities and to reduce borrowings. The Company’s cash needs for the year ended December 31, 2015 were primarily satisfied
by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held-for-sale, proceeds
from maturities of investment securities, deposit growth and increased total borrowings. The cash was principally utilized for loan
originations, the purchase of loans receivable and the purchase of securities.
42
In the normal course of business, the Bank routinely enters into various commitments, primarily relating to the origination and
sale of loans. At December 31, 2016, outstanding commitments to originate loans totaled $131.7 million; outstanding unused lines
of credit totaled $495.6 million, of which $297.8 million were commitments to commercial borrowers and $197.8 million were
commitments to consumer/construction borrowers; and, outstanding commitments to sell loans totaled $2.8 million. The Bank
expects to have sufficient funds available to meet current commitments in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $374.5 million at December 31, 2016. Based upon historical
experience, management estimates that a significant portion of such deposits will remain with the Bank.
The Company has a detailed contingency funding plan and comprehensive reporting of trends on a monthly and quarterly basis
which is reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank.
Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain
significant liquidity under all stress scenarios.
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, 2016, the Company
repurchased 90,000 shares of common stock at a total cost of $1.9 million, compared to 373,594 shares of common stock at a total
cost of $6.5 million for the year ended December 31, 2015. At December 31, 2016, there were 154,804 shares remaining to be
repurchased under the current stock repurchase authorization.
Cash dividends on common stock declared and paid during the year ended December 31, 2016 were $12.6 million, as compared
to $8.7 million for the prior year. On January 26, 2017, the Board of Directors declared a quarterly cash dividend of fifteen cents
($0.15) per common share. The dividend was payable on February 17, 2017 to common stockholders of record at the close of
business on February 6, 2017.
The primary sources of liquidity specifically available to the Company are capital distributions from the Bank and the issuance
of preferred and common stock and debt. In September 2016, the Company issued $35.0 million in subordinated notes at an
initial all-in cost of 5.45% and a stated maturity of September 30, 2026. For the year ended December 31, 2016, the Company
received dividend payments of $4.0 million from the Bank. The Bank elected not to pay dividends subsequent to the first quarter
of 2016 in order to retain capital subsequent to the Cape and Ocean Shore acquisitions. The Company’s ability to continue to pay
dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints
imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations
to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the
Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as
historically paid, or be able to meet current debt obligations. At December 31, 2016, OceanFirst Financial Corp. held $21.5 million
in cash.
The Bank is considered a “well-capitalized” institution under the Prompt Corrective Action Regulations. See “Regulation and
Supervision—Federal Savings Institution Regulation – Capital Requirements.”
At December 31, 2016, the Company maintained tangible common equity of $416.1 million for a tangible common equity to
assets ratio of 8.30%.
Off-Balance-Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Bank engages in a variety of financial transactions that, in accordance with generally
accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional
amounts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are
used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest
rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These
financial instruments and commitments include unused consumer lines of credit and commitments to extend credit and are discussed
in Note 13 to the Consolidated Financial Statements. The Bank also has outstanding commitments to sell loans amounting to $2.8
million.
The Company entered into loan sale agreements with investors in the normal course of business. The loan sale agreements generally
required the Company to repurchase loans previously sold in the event of a violation of various representations and warranties
customary to the mortgage banking industry. The Company is also obligated under a loss sharing arrangement with the FHLB
relating to loans sold into the MPF program. In the opinion of management, the potential exposure related to the loan sale agreements
and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included
in other liabilities. At December 31, 2016 and 2015, the reserve for repurchased loans and loss sharing obligations amounted to
$846,000 and $986,000, respectively.
43
The following table shows the contractual obligations of the Bank by expected payment period as of December 31, 2016 (in
thousands). Further discussion of these commitments is included in Notes 9 and 13 to the Consolidated Financial Statements.
Contractual Obligation
Debt Obligations
Total
Less than
one year
1-3 years
3-5 years
More than
5 years
$
376,992
$
71,857
$
148,576
$
100,000
$
56,559
Commitments to Originate Loans
131,686
131,686
Commitments to Fund Unused Lines of Credit
— Commercial
— Consumer/Construction
Operating Lease Obligations
Purchase Obligations
297,813
197,784
20,244
13,635
297,813
197,784
2,423
3,717
—
—
—
4,392
6,763
—
—
—
4,019
3,155
—
—
—
9,410
—
Debt obligations include borrowings from the Federal Home Loan Bank and other borrowings and have defined terms.
Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit
risk is represented by the contractual amount of the instruments.
Operating leases represent obligations entered into by the Bank for the use of land and premises. The leases generally have
escalation terms based upon certain defined indexes.
Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and
consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on
transaction volumes, number of users and other factors.
Impact of New Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2015-16,
“Business Combinations, Simplifying the Accounting for Measurement – Period Adjustments.” The amendments in this update
apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is
incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an
adjustment to provisional amounts recognized. In these cases, the acquirer must record, in the same period’s financial statements,
the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the
provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update
are effective for fiscal years beginning after December 31, 2015 including interim periods within those fiscal years. The adoption
of this update is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement
of Financial Assets and Financial Liabilities.” The main objective in developing this new ASU is to enhance the reporting model
for financial instruments to provide users of financial statements with more useful information. The update requires equity
investments to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment
of equity investments without readily determinable fair values by requiring a quantitative assessment to identify impairment. The
amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes. Financial assets and financial liabilities are to be presented separately by measurement category and the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with other deferred tax
assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The adoption of this update is not expected to have a material impact on the Company’s consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability
and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date.
Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after
December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified
retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The company is currently assessing the impact that the guidance will have on the Company’s
consolidated financial statements.
44
The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated financial
statements. To date, the Company has identified its leased real estate as within the scope of the guidance. The Company continues
to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As
such, no conclusions have yet been reached regarding the potential impact of adoption on the Company's consolidated financial
statements. Further, to date, no guidance has been issued by either the Company's or the Bank's primary regulator with respect
to how the impact of the amended standard is to be treated for regulatory capital purposes.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)." The objective of the Update
is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or
benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting
period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes
payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of
awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement,
excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an
employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The
amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. The adoption of this update is not expected to have a material impact on the Company's consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU significantly
changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair
value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new
model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses
and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans,
leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-
for-sale ("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner
similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost
of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than
as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt
securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and
methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance
for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective
for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual
reporting periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective
approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new
standard will have on the Company's consolidated financial statements.
While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of
the amended guidance including the potential impact on its consolidated financial statements. As a result of the required change
in approach toward determining estimated credit losses from the current "incurred loss" model to one based on estimated cash
flows over a loan's contractual life, adjusted for prepayments (a "life of loan" model), the Company expects that the new guidance
will result in an increase in the allowance for loan losses, particularly for longer duration loan portfolios. The Company also
expects that the new guidance may result in an allowance for debt securities. In both cases, the extent of the change is indeterminable
at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions
and forecasts at that time. Further, to date, no guidance has been issued by either the Company's or the Bank's primary regulator
with respect to how the impact of the amended standard is to be treated for regulatory purposes.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts
and Cash Payments." This ASU is intended to reduce diversity in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early
adoption permitted, including adoption in an interim period. A retrospective transition method should be applied to each period
presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for
those issues would be applied prospectively as of the earliest date practicable. The adoption of this update is not expected to have
a material impact on the Company's consolidated financial statements.
45
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - simplifying the Test for Goodwill
Impairment." This ASU intends to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill
impairment test. Instead, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity should recognize an impairment charge by which the carrying amount exceeds the reporting
unit's fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The
ASU also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019; early adoption is permitted for
annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this update is not expected
to have a material impact on the Company's consolidated financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with Generally Accepted
Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar
amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance
than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent
as the price of goods and services.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk (“IRR”)
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from
IRR inherent in its lending, investment and deposit-taking activities. The Company’s profitability is affected by fluctuations in
interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that
the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that
end, management actively monitors and manages IRR.
The principal objectives of the Company’s IRR management function are to evaluate the IRR inherent in certain balance sheet
accounts; determine the level of risk appropriate given the Company’s business focus, operating environment, capital and liquidity
requirements and performance objectives; and manage the risk consistent with Board approved guidelines. Through such
management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Company monitors its
IRR as such risk relates to its operating strategies. The Bank’s Board has established an Asset Liability Committee (“ALCO”)
consisting of members of the Bank’s management, responsible for reviewing the asset liability policies and IRR position. ALCO
meets monthly and reports trends and the Company’s IRR position to the Board on a quarterly basis. The extent of the movement
of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings of the Company.
The Bank utilizes the following strategies to manage IRR: (1) emphasizing the origination for portfolio of fixed-rate mortgage
loans generally having terms to maturity of not more than fifteen years, adjustable-rate loans, floating-rate and balloon maturity
commercial loans, and consumer loans consisting primarily of home equity loans and lines of credit; (2) attempting to reduce the
overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits; and (3) managing the maturities of
wholesale borrowings. The Bank may also sell fixed-rate mortgage loans into the secondary market. In determining whether to
retain fixed-rate mortgages or to purchase fixed-rate mortgage-backed securities, management considers the Bank’s overall IRR
position, the volume of such loans originated or the amount of MBS to be purchased, the loan or MBS yield and the types and
amount of funding sources. The Bank periodically retains fixed-rate mortgage loan production or purchases fixed-rate MBS in
order to improve yields and increase balance sheet leverage. During periods when fixed-rate mortgage loan production is retained,
the Bank generally attempts to extend the maturity on part of its wholesale borrowings. For the past few years, the Bank has sold
most 30 year fixed-rate mortgage loan originations in the secondary market. With the recent rise in market interest rates and the
reduction in refinance volume the Bank anticipates retaining most of its 30 year fixed-rate loan originations in 2017 to replace
anticipated repayments of the existing residential loan portfolio. The Company currently does not participate in financial futures
contracts, interest rate swaps or other activities involving the use of off-balance-sheet derivative financial instruments, but may
do so in the future to manage IRR.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest
rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined
as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount
of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest
46
rates, an institution with a negative gap position theoretically would not be in as favorable a position, compared to an institution
with a positive gap, to invest in higher-yielding assets. This may result in the yield on the institution’s assets increasing at a slower
rate than the increase in its cost of interest-bearing liabilities. Conversely, during a period of falling interest rates, an institution
with a negative gap might experience a repricing of its assets at a slower rate than its interest-bearing liabilities, which, consequently,
may result in its net interest income growing at a faster rate than an institution with a positive gap position.
The Company’s interest rate sensitivity is monitored through the use of an IRR model. The following table sets forth the amounts
of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2016, which were anticipated by the Company,
based upon certain assumptions, to reprice or mature in each of the future time periods shown. At December 31, 2016, the Company’s
one-year gap was negative 3.47% as compared to negative 1.71% at December 31, 2015. Except as stated below, the amount of
assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table is intended to provide an approximation of the projected
repricing of assets and liabilities at December 31, 2016, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three month period and subsequent selected time intervals. Loans receivable reflect principal
balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-
rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Loans were projected to
prepay at rates between 9% and 25% annually. Mortgage-backed securities were projected to prepay at rates between 5% and 24%
annually. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have average
lives of 6.0 years, 4.8 years and 6.5 years, respectively. Prepayment and average life assumptions can have a significant impact
on the Company’s estimated gap.
There can be no assurance that projected prepayment rates for loans and mortgage-backed securities will be achieved or that
projected average lives for deposits will be realized.
3 Months
or Less
More than
3 Months
to 1 Year
More than
1 Year to
3 Years
More than
3 Years to
5 Years
More than
5 Years
Total
$
239,051
$
— $
— $
— $
— $
239,051
61,308
40,299
—
10,043
77,604
—
21,092
130,170
—
35,891
84,934
—
546,948
725,287
1,077,014
655,812
29,158
129,876
19,313
811,702
157,492
462,883
19,313
3,816,763
887,606
812,934
1,228,276
776,637
990,049
4,695,502
83,684
97,600
1,039,969
110,517
477
40,050
71,535
61,670
263,938
1,445
77,880
141,527
128,866
181,748
148,576
52,275
95,670
91,498
85,748
100,000
205,022
266,187
458,911
672,519
304,710
1,626,713
5,152
—
647,103
250,498
92,435
—
—
34,059
—
126,494
At December 31, 2016
(dollars in thousands)
Interest-earning assets (1):
Interest-earning deposits and
short-term investments
Investment securities
Mortgage-backed securities
FHLB stock
Loans receivable (2)
Total interest-earning
assets
Interest-bearing liabilities:
Money market deposit
accounts
Savings accounts
Interest-bearing checking
accounts
Time deposits
FHLB advances
Securities sold under
agreements to repurchase
and other borrowings
Total interest-bearing
liabilities
Cumulative interest
sensitivity gap
Cumulative interest
sensitivity gap as a percent
of total interest-earning
assets
Interest sensitivity gap (3)
$ (537,076)
1,424,682
$ (537,076)
438,638
374,296
(162,780)
$
$
$
$
678,597
549,679
386,899
$
$
459,250
317,387
704,286
$
$
781,071
208,978
913,264
3,782,238
913,264
913,264
$
$
(11.44)%
(3.47)%
8.24%
15.00%
19.45%
19.45%
(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes loans held-for-sale and non-performing loans gross of the allowance for loan
losses, unamortized discounts and deferred loan fees.
(3) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
47
Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may
lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict
changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates,
loan prepayment rates and average lives of deposits would likely deviate significantly from those assumed in the calculation.
Finally, the ability of many borrowers to service their adjustable-rate loans may be impaired in the event of an interest rate increase.
Another method of analyzing an institution’s exposure to IRR is by measuring the change in the institution’s economic value of
equity (“EVE”) and net interest income under various interest rate scenarios. EVE is the difference between the net present value
of assets, liabilities and off-balance-sheet contracts. The EVE ratio, in any interest rate scenario, is defined as the EVE in that
scenario divided by the fair value of assets in the same scenario. The Company’s interest rate sensitivity is monitored by management
through the use of an IRR model which measures IRR by modeling the change in EVE and net interest income over a range of
interest rate scenarios.
The following table sets forth the Company’s EVE and net interest income projections as of December 31, 2016 and 2015 (dollars
in thousands). For purposes of this table, the Company used prepayment and average life assumptions similar to those used in
calculating the Company’s gap.
December 31, 2016
December 31, 2015
Change in
Interest Rates
in Basis Points
Economic Value of
Equity
Net Interest Income
Change in
Interest Rates
in Basis Points
Economic Value of
Equity
Net Interest Income
(Rate
Shock)
300
200
100
Static
(100)
Amount
%
Change
EVE
Ratio
Amount
%
Change
(Rate
Shock)
Amount
%
Change
EVE
Ratio
Amount
%
Change
$ 664,767
(1.1)%
14.1% $ 156,689
(1.0)% 300
$ 286,152
(9.0)%
11.8% $ 74,186
(9.3)%
678,347
683,492
671,878
620,675
1.0
1.7
—
(7.6)
14.0
13.7
13.2
11.9
158,078
158,840
158,309
152,007
(0.1)
0.3
—
(4.0)
200
100
Static
(100)
303,359
313,886
314,366
300,080
(3.5)
(0.2)
—
(4.5)
12.2
12.3
12.0
11.3
77,638
80,160
81,821
78,138
(5.1)
(2.0)
—
(4.5)
The decrease in interest rate sensitivity in a rising rate scenario at December 31, 2016, as compared to December 31, 2015, is
primarily due to the increase in interest-earning deposits of $220.0 million and the increased value of core deposits.
As is the case with the gap calculation, certain shortcomings are inherent in the methodology used in the EVE and net interest
income IRR measurements. The model requires the making of certain assumptions which may tend to oversimplify the manner
in which actual yields and costs respond to changes in market interest rates. First, the model assumes that the composition of the
Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being
measured. Second, the model assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless
of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Company’s
business or strategic plans. Accordingly, although the above measurements do provide an indication of the Company’s IRR exposure
at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market
interest rates on the Company’s EVE and net interest income and can be expected to differ from actual results.
48
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
OceanFirst Financial Corp.:
We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary
(the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of OceanFirst Financial Corp. and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2016 based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”),
and our report dated March 15, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
March 15, 2017
49
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
OceanFirst Financial Corp.:
We have audited OceanFirst Financial Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, OceanFirst Financial Corp. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary as of December 31, 2016 and 2015,
and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2016, and our report dated March 15, 2017 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
March 15, 2017
50
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Financial Condition
(dollars in thousands, except per share amounts)
December 31, 2016
December 31, 2015
$
301,373
$
Assets
Cash and due from banks
Securities available-for-sale (encumbered $12,192 at December 31, 2016 and
$29,902 at December 31, 2015)
Securities held-to-maturity, net (estimated fair value of $598,119 at December 31,
2016 and $397,763 at December 31, 2015) (encumbered $492,147 at
December 31, 2016 and $371,270 at December 31, 2015)
Federal Home Loan Bank of New York stock, at cost
Loans receivable, net
Mortgage loans held-for-sale
Interest and dividends receivable
Other real estate owned
Premises and equipment, net
Servicing asset
Bank Owned Life Insurance
Deferred tax asset
Other assets
Core deposit intangible
Goodwill
Total assets
Liabilities and Stockholders’ Equity
Deposits
Securities sold under agreements to repurchase with retail customers
Federal Home Loan Bank advances
Other borrowings
Advances by borrowers for taxes and insurance
Other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000
shares authorized, no shares issued
Common stock, $.01 par value, 55,000,000 shares authorized, 33,566,772
shares issued and 32,136,892 and 17,286,557 shares outstanding at
December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Unallocated common stock held by Employee Stock Ownership Plan
Treasury stock, 1,429,880 and 16,280,215 shares at December 31, 2016
and December 31, 2015, respectively
Common stock acquired by Deferred Compensation Plan
Deferred Compensation Plan Liability
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
51
$
$
$
12,224
598,691
19,313
3,803,443
1,551
11,989
9,803
71,385
228
132,172
38,787
10,105
10,924
145,064
5,167,052
4,187,750
69,935
250,498
56,559
14,030
16,242
4,595,014
$
$
43,946
29,902
394,813
19,978
1,970,703
2,697
5,860
8,827
28,419
589
57,549
16,807
10,900
256
1,822
2,593,068
1,916,678
75,872
324,385
22,500
7,121
8,066
2,354,622
—
—
336
364,433
238,192
(5,614)
(2,761)
(22,548)
(313)
313
572,038
5,167,052
$
336
269,757
229,140
(6,241)
(3,045)
(251,501)
(314)
314
238,446
2,593,068
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Income
(in thousands, except per share amount)
Years Ended December 31,
2016
2015
2014
$
122,962
$
77,694
$
Interest income:
Loans
Mortgage-backed securities
Investment securities and other
Total interest income
Interest expense:
Deposits
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income:
Bankcard services revenue
Wealth management revenue
Fees and services charges
Loan servicing income
Net gain on sale of loan servicing
Net gain on sales of loans
Net (loss) gain on sales of investment securities available-for-sale
Net loss from other real estate operations
Income from Bank Owned Life Insurance
Other
Total other income
Operating expenses:
Compensation and employee benefits
Occupancy
Equipment
Marketing
Federal deposit insurance
Data processing
Check card processing
Professional fees
Other operating expense
Amortization of core deposit intangible
Federal Home Loan Bank advance prepayment fee
Merger related expenses
Total operating expenses
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Average basic shares outstanding
Average diluted shares outstanding
See accompanying notes to consolidated financial statements.
52
$
$
$
6,697
3,766
133,425
7,517
5,646
13,163
120,262
2,623
117,639
4,833
2,324
10,508
250
—
986
(12)
(856)
2,230
149
20,412
47,105
8,332
5,104
1,882
2,825
7,577
2,210
2,848
7,676
623
136
16,534
102,852
35,199
12,153
23,046
1.00
0.98
23,093
23,526
$
$
$
6,051
2,118
85,863
4,301
4,733
9,034
76,829
1,275
75,554
3,537
2,187
8,124
268
111
822
—
(149)
1,501
25
16,426
31,946
5,722
3,725
1,516
2,072
4,731
1,815
1,865
5,484
21
—
1,878
60,775
31,205
10,883
20,322
1.22
1.21
16,600
16,811
$
$
$
70,564
6,845
2,444
79,853
4,103
3,402
7,505
72,348
2,630
69,718
3,478
2,280
8,589
816
408
772
1,031
(390)
1,477
116
18,577
31,427
5,510
3,278
1,795
2,128
4,239
1,934
2,267
5,186
—
—
—
57,764
30,531
10,611
19,920
1.19
1.19
16,687
16,797
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive income:
Unrealized (loss) gain on securities (net of tax benefit of $128 in
2016, tax expense of $38 in 2015, and tax benefit of $415 in
2014)
Reclassification adjustment for losses (gains) included in net
income (net of tax benefit of $5 in 2016 and tax expense of
$421 in 2014, respectively)
Accretion of unrealized loss on securities reclassified to held-to-
maturity (net of tax expense of $556, $562 and $497 in 2016,
2015 and 2014, respectively)
Total other comprehensive income (loss)
Total comprehensive income
See accompanying notes to consolidated financial statements.
Years Ended December 31,
2016
2015
2014
$
23,046
$
20,322
$
19,920
(186)
7
806
627
55
—
813
868
$
23,673
$
21,190
$
(601)
(610)
721
(490)
19,430
53
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(dollars in thousands, except per share amounts)
Years Ended December 31, 2016, 2015 and 2014
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Gain
Employee
Stock
Ownership
Plan
Treasury
Stock
Common Stock
Acquired by
Deferred
Compensation
Plan
Deferred
Compensati
on
Plan
Liability
Total
Balance at December 31, 2013
$
— $
336 $ 263,319 $
206,201 $
(6,619) $
(3,616) $ (245,271) $
(665) $
665 $
214,350
Net income
Other comprehensive loss, net of
tax
Stock awards
Tax benefit of stock plans
Treasury stock allocated to
restricted stock plan
Allocation of ESOP stock
Cash dividend – $0.49 per share
Exercise of stock options
Purchase of 551,291 shares of
common stock
Sale of stock for the deferred
compensation plan, net
Balance at December 31, 2014
Net income
Other comprehensive income, net
of tax
Stock awards
Tax benefit of stock plans
Treasury stock allocated to
restricted stock plan
Issued 660,098 treasury shares to
finance acquisition
Purchased 373,594 shares of
common stock
Allocation of ESOP stock
Cash dividend – $0.52 per share
Exercise of stock options
Purchase of stock for the deferred
compensation plan, net
Balance at December 31, 2015
Net income
Other comprehensive income, net
of tax
Stock awards
Tax benefit of stock plans
Treasury stock allocated
to restricted stock plan
Purchase 90,000 shares of
common stock
Allocation of ESOP stock
Cash dividend – $0.54 per share
Exercise of stock options
Sale of stock for the deferred
compensation plan, net
Issued 14,547,452 treasury shares to
finance acquisitions
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
336
—
—
—
—
—
—
—
—
—
—
—
336
—
—
—
—
—
—
—
—
—
—
—
—
19,920
—
928
51
678
284
—
—
—
—
—
—
—
(99)
—
(8,241)
(67)
—
—
—
(490)
—
—
—
—
—
—
—
—
—
—
—
—
—
286
—
—
—
—
—
—
—
—
(579)
—
—
416
(9,178)
—
265,260
217,714
(7,109)
(3,330)
(254,612)
—
—
1,300
32
1,214
1,633
—
318
—
—
—
20,322
—
—
—
(144)
—
—
—
(8,693)
(59)
—
—
868
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
285
—
—
—
—
—
—
—
(1,070)
10,185
(6,459)
—
—
455
—
269,757
229,140
(6,241)
(3,045)
(251,501)
—
—
1,505
62
23,046
—
—
—
1,046
(101)
—
373
—
—
—
91,690
—
—
(12,616)
(1,277)
—
—
—
627
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
284
—
—
—
—
—
—
—
—
(945)
(1,878)
—
—
5,266
—
226,510
—
—
—
—
—
—
—
—
—
361
(304)
—
—
—
—
—
—
—
—
—
—
(10)
(314)
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
19,920
(490)
928
51
—
570
(8,241)
349
(9,178)
(361)
304
—
—
218,259
20,322
—
—
—
—
—
—
—
—
—
10
314
—
—
—
—
—
—
—
—
—
868
1,300
32
—
11,818
(6,459)
603
(8,693)
396
—
238,446
23,046
627
1,505
62
—
(1,878)
657
(12,616)
3,989
(1)
—
—
318,200
Balance at December 31, 2016
$
— $
336 $ 364,433 $
238,192 $
(5,614) $
(2,761) $
(22,548) $
(313) $
313 $
572,038
See accompanying notes to consolidated financial statements.
54
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
2016
2015
2014
$
23,046
$
20,322
$
19,920
4,786
657
1,505
623
(4,505)
157
1,656
(274)
2,623
5,798
138
38
(986)
12
—
—
50,075
(47,943)
(2,230)
(200)
18,612
(20,781)
9,761
32,807
106,371
(37,561)
29,647
41,853
(10,021)
(6,006)
(59,590)
18,506
53,964
6,394
73,470
310
32,168
(23,571)
3,744
(6,670)
16,727
31,965
271,700
3,335
603
1,300
21
(317)
245
1,991
55
1,275
1,441
(269)
—
(822)
—
192
(111)
49,436
(47,110)
(1,501)
68
1,670
(3,690)
7,812
28,134
(146,416)
(22,054)
—
—
(9,972)
(16,349)
(10,312)
—
46,292
—
61,081
—
38,663
(39,157)
3,342
(3,891)
—
3,703
2,916
570
928
—
—
1,016
2,816
63
2,630
82
(46)
—
(772)
(1,031)
3,155
(408)
39,641
(42,571)
(1,477)
(126)
151
124
7,661
27,581
(152,852)
(20,574)
19,058
8,439
(20,547)
(5,003)
(35,203)
35,005
7,711
—
57,199
—
35,269
(39,921)
4,016
(3,970)
—
—
(95,070)
(111,373)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
Allocation of ESOP stock
Stock awards
Amortization of core deposit intangible
Net accretion/amortization of purchase accounting adjustments
Amortization of servicing asset
Net premium amortization in excess of discount accretion on securities
Net (accretion) amortization of deferred fees and discounts on loans
Provision for loan losses
Deferred tax provision
Net loss (gain) on sales of other real estate owned
Net loss on sale of fixed assets
Net gain on sales of loans
Net loss (gain) on sales of investment securities available for sale
Proceeds from sale of mortgage servicing rights
Net gain on sale of loan servicing
Proceeds from sales of mortgage loans held-for-sale
Mortgage loans originated for sale
Increase in value of Bank Owned Life Insurance
(Increase) decrease in interest and dividends receivable
Decrease in other assets
(Decrease) increase in other liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Net decrease (increase) in loans receivable
Purchase of loans receivable
Proceeds from sale of under-performing loans
Proceeds from sales of investment securities available-for-sale
Purchase of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Purchase of mortgage-backed securities held-to-maturity
Proceeds from maturities and calls of investment securities available-for-sale
Proceeds from maturities and calls of investment securities held-to-maturity
Proceeds from maturities and calls of mortgage backed securities held-to-maturity
Principal repayments on mortgage-backed securities held-to-maturity
Proceeds from Bank Owned Life Insurance
Proceeds from the redemption of Federal Home Loan Bank of New York stock
Purchases of Federal Home Loan Bank of New York stock
Net proceeds from sale and acquisition of other real estate owned
Purchases of premises and equipment
Cash acquired, net of cash paid for branch acquisition
Cash acquired, net of cash consideration paid for acquisitions
Net cash used in investing activities
55
OCEANFIRST FINANCIAL CORP.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Years Ended December 31,
2016
2015
2014
Cash flows from financing activities:
Increase in deposits
(Decrease) increase in short-term borrowings
Proceeds from Federal Home Loan Bank advances
Net proceeds from issuance of subordinated notes
Repayments of Federal Home Loan Bank advances
Repayments of other borrowings
Increase (decrease) in advances by borrowers for taxes and insurance
Exercise of stock options
Purchase of treasury stock
Dividends paid
Tax benefit of stock plans
Net cash (used in) provided by financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing activities:
Accretion of unrealized loss on securities reclassified to held-to-
maturity
Loans charged-off, net
Transfer of loans receivable to other real estate owned
Acquisition:
Non-cash assets acquired:
Securities
Federal Home Loan Bank of New York stock
Loans
Premises & equipment
Other real estate owned
Deferred tax asset
Other assets
Goodwill and other intangible assets, net
Total non-cash assets acquired
Liabilities assumed:
Deposits
Federal Home Loan Bank advances
Other liabilities
Total liabilities assumed
Total consideration for acquisition
See accompanying notes to consolidated financial statements.
56
131,308
(175,137)
55,161
33,898
(74,153)
(10,000)
2,286
3,989
(1,878)
(12,616)
62
(47,080)
257,427
43,946
73,284
(27,740)
55,000
—
(6,853)
(5,000)
798
396
(6,459)
(8,693)
32
74,765
7,829
36,117
$
$
301,373
$
43,946
$
13,201
$
10,912
8,928
$
10,562
1,406
4,162
1,833
1,375
870
6,979
$
305,139
$
6,758
$
7,932
1,930,853
41,067
3,025
28,197
97,162
154,211
2,567,586
2,123,440
128,160
29,747
2,281,347
286,239
$
$
$
$
$
$
$
$
314
121,466
—
257
3,227
8,279
2,099
142,400
123,346
6,800
309
130,455
11,945
$
$
$
$
(26,628)
24,746
215,000
—
(110,000)
—
(148)
349
(9,178)
(8,241)
51
85,951
2,159
33,958
36,117
7,243
11,801
1,218
7,243
4,289
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
subsidiary, OceanFirst Bank (the “Bank”) and its wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., and its wholly-
owned subsidiary OceanFirst Management Corp., and its wholly-owned subsidiary OceanFirst Realty Corp., OceanFirst Services,
LLC and its wholly-owned subsidiary OFB Reinsurance, Ltd., 975 Holdings, LLC, Hooper Holdings, LLC., TRREO Holdings
LLC, OCHB Investment Co., OCHB Preferred Corp, Casaba Real Estate Holdings Corporation, and Cohensey Bridge, L.L.C..
All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts previously reported have been reclassified to conform to the current year’s presentation.
Business
The Bank provides a range of community banking services to customers through a network of branches and offices in Central and
Southern New Jersey. The Bank is subject to competition from other financial institutions; 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. The
preparation of the accompanying consolidated financial statements in conformity with these accounting principles requires
management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the
amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues
and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, and the evaluation of securities and goodwill for other-than-temporary impairment. These estimates
and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions
on an ongoing basis using historical experience and other factors, including the current economic environment, which management
believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances
dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these
estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the
financial statements in future periods.
Cash Equivalents
Cash equivalents consist of interest-bearing deposits in other financial institutions and loans of Federal funds. 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 securities held-to-maturity and securities available-for-sale. Management determines the appropriate
classification at the time of purchase. If management has the positive intent not to sell and the Company would not be required
to sell prior to maturity, the securities are classified as held-to-maturity securities. Such securities are stated at amortized cost.
During 2013, the Company transferred $536.0 million of previously designated available-for-sale securities to held-to-maturity
designation at estimated fair value. The Company has the ability and intent to hold these securities as an investment until maturity
or call. The securities transferred had an unrealized loss of $13.3 million at the time of transfer which continues to be reflected in
accumulated other comprehensive income, net of subsequent amortization, which is being recognized over the life of the securities.
Securities in the available-for-sale category are securities which the Company may sell prior to maturity as part of its asset/liability
management strategy. Such securities are carried at estimated fair value and unrealized gains and losses, net of related tax effect,
are excluded from earnings, but are included as a separate component of stockholders’ equity and as part of comprehensive income.
Discounts and premiums on securities are accreted or amortized using the level-yield method over the estimated lives of the
securities, including the effect of prepayments. Gains or losses on the sale of such securities are included in other income using
the specific identification method.
57
Other-Than-Temporary Impairments on Securities
One of the significant estimates related to securities is the evaluation for other-than-temporary impairments. If a determination is
made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is
attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-
temporary impairment charge in non-interest income as a component of gain (loss) on securities, net. The non-credit related
component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties
and is intended to determine whether declines in the estimated fair value of investments should be recognized in current period
earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future
prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.
On a quarterly basis the Company evaluates the securities portfolio for other-than-temporary impairment. Securities that are in an
unrealized loss position are reviewed to determine if an other-than-temporary impairment is present based on certain quantitative
factors. The primary factors considered in evaluating whether a decline in value is other-than-temporary include: (a) the length of
time and extent to which the estimated fair value has been less than cost or amortized cost and the expected recovery period of
the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on
contractually obligated interest and principal payments and (d) whether the Company intends to sell the security and whether it
is more likely than not that the Company will not be required to sell the security.
Loans Receivable
Loans receivable, other than loans held-for-sale, are stated at unpaid principal balance, plus unamortized premiums less unearned
discounts, net of deferred loan origination and commitment fees and costs, and the allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized
in interest income using the level-yield method over the contractual life of the specifically identified loans, adjusted for actual
prepayments. For each loan class, a loan is considered past due when a payment has not been received in accordance with the
contractual terms. Loans which are more than 90 days past due, including impaired loans, and other loans in the process of
foreclosure are placed on non-accrual status. Interest income previously accrued on these loans, but not yet received, is reversed
in the current period. Any interest subsequently collected is credited to income in the period of recovery only after the full principal
balance has been brought current. A loan is returned to accrual status when all amounts due have been received and the remaining
principal balance is deemed collectible.
A loan is considered impaired when it is deemed probable that the Company will not collect all amounts due according to the
contractual terms of the loan agreement. The Company has defined the population of impaired loans to be all non-accrual commercial
real estate, multi-family, land, construction and commercial and industrial loans in excess of $250,000. Impaired loans are
individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral or the
present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio,
except when they are modified in a trouble debt restructuring.
Loan losses are charged-off in the period the loans, or portion, thereof are deemed uncollectible, generally after the loan becomes
120 days delinquent. The Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated
fair value of the underlying collateral, less cost to sell, if it is determined that it is probable that recovery will come primarily from
the sale of the collateral.
Purchased credit-impaired (PCI) loans are acquired at a discount that is due, in part, to credit quality. PCI loans are initially recorded
at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Interest income
on loans acquired at a discount is based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and
accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single
asset with a single composite interest rate and an aggregate expectation of cash flow.
The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable
yield”, is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows
subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life,
while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance
for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition
(representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).
58
The Bank periodically evaluates the remaining contractual required payments due and estimates of cash flows expected to be
collected. These evaluations require the continued use of key assumptions and estimates, similar to the initial estimate of fair
value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes
in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference.
For the pools with better than expected cash flows, the forecasted increase is recorded as an additional accretable yield that is
recognized as a prospective increase to interest income on loans.
Loans Held for Sale
The Company regularly sells part of its mortgage loan originations in order to manage interest rate risk and liquidity. The Bank
has generally sold fixed-rate mortgage loans with final maturities in excess of 15 years.
In determining whether to retain mortgages, management considers the Company’s overall interest rate risk position, the volume
of such loans, the loan yield and the types and amount of funding sources. The Company may also retain mortgage loan production
in order to improve yields and increase balance sheet leverage.
In addition, management periodically considers the sale of commercial and other loans as part of its management of credit risk.
Loans held for sale are carried at the lower of unpaid principal balance, net, or estimated fair value on an aggregate basis. Estimated
fair value is determined based on bid quotations from securities dealers.
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 fair 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.
The allowance for loan losses is maintained at an amount management considers sufficient to provide for probable losses. The
analysis considers known and inherent risks in the loan portfolio resulting from management’s continuing review of the factors
underlying the quality of the loan portfolio.
The Bank’s allowance for loan losses includes specific allowances and a general allowance, each updated on a quarterly basis. A
specific allowance is determined for all non-accrual loans (excluding PCI loans) where the estimated fair value of the underlying
collateral can reasonably be evaluated. For these loans, the specific allowance represents the difference between the Bank’s recorded
investment in the loan, net of any interim charge-offs, and the estimated fair value of the collateral, less estimated selling costs.
Acquired loans are marked to fair value on the date of acquisition. In conjunction with the quarterly evaluation of the adequacy
of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether or not there has been
subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the
calculation of the allowance for loan losses.
If a loan becomes 90 days delinquent, the Bank obtains an updated collateral appraisal. For residential real estate loans, the appraisal
is updated annually if the loan remains delinquent for an extended period. For non-accrual commercial real estate loans, the Bank
assesses whether there has been an adverse change in the collateral value supporting the loan. The Bank utilizes information based
on its knowledge of changes in real estate conditions in its lending area to identify whether a possible deterioration of collateral
value has occurred. Based on the severity of the changes in market conditions, management determines if an updated commercial
real estate appraisal is warranted or if downward adjustments to the previous appraisal are warranted. If it is determined that the
deterioration of the collateral value is significant enough to warrant ordering a new appraisal, an estimate of the downward
adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated
appraisal is received.
A general allowance is determined for all loans that are not individually evaluated for a specific allowance (excluding purchased
loans). In determining the level of the general allowance, the Bank segments the loan portfolio into various loan segments as
follows: residential real estate; commercial real estate; consumer; and commercial and industrial. Acquired loans (including PCI
loans) are initially valued at an estimated fair value on the date of acquisition, with no initial related allowance for loan losses.
These loans are periodically evaluated for impairment after initial valuation.
The loan portfolio is further segmented by delinquency status and risk rating (Pass, Special Mention, Substandard and Doubtful).
An estimated loss factor is then applied to each risk rating tranche. To determine the loss factor, the Bank utilizes historical loss
experience as a percent of loan principal adjusted for certain qualitative factors and the loss emergence period.
59
The Bank’s historical loss experience is based on a rolling 24-month look-back period for all loan segments. This was selected
based on (1) management’s judgment that this period captures sufficient loss events (in both dollar terms and number of individual
events) to be relevant; and (2) that the Bank’s underwriting criteria and risk characteristics have remained relatively stable
throughout this period.
The historical loss experience is adjusted for certain qualitative factors including, but not limited to, (1) delinquency trends, (2) net
charge-off trends, (3) nature and volume of the loan portfolio, (4) loan policies and underwriting standards, (5) experience and
ability of lending personnel, (6) changes in current economic conditions, (7) concentrations of credit, (8) loan review system, and
external factors such as (9) local competition and (10) regulation. The Bank considers the applicability of each of these qualitative
factors in estimating the general allowance for each loan portfolio segment. Each quarter, the conditions that existed in the 24-
month look-back period are compared to current conditions to support a conclusion as to which qualitative adjustments are (or
are not) deemed necessary for a particular portfolio segment.
The Bank calculates and analyzes the loss emergence period on an annual basis or more frequently if conditions warrant. The
Bank’s methodology is to use loss events in the past 8 quarters to determine the loss emergence period for each loan segment. The
loss emergence period is specific to each loan segment and determined based on (1) the occurrence of a loss event which resulted
in a potential loss and (2) confirmation of the potential loss is deemed to occur when the Bank records an initial charge-off on the
loan or downgrades the risk-weighting to substandard or doubtful.
The Bank also maintains an unallocated portion of the allowance for loan losses. The primary purpose of the unallocated component
is to account for the inherent imprecision of the overall loss estimation process including the periodic updating of appraisals,
commercial loan risk ratings, and continued economic uncertainty that may not be fully captured in the Company’s loss history
or the qualitative factors.
Upon completion of the aforementioned procedures, an overall management review is performed including ratio analyses to
identify divergent trends compared with the Bank’s own historical loss experience, the historical loss experience of the Bank’s
peer group and management’s understanding of general regulatory expectations. Based on that review, management may identify
issues or factors that previously had not been considered in the estimation process, which may warrant further analysis or adjustments
to estimated loss factors or the allowance for loan losses.
Reserve for Repurchased Loans and Loss Sharing Obligations
The reserve for repurchased loans and loss sharing obligations relates to potential losses on loans sold which may have to be
repurchased due to a violation of representations and warranties and an estimate of the Bank’s obligation under a loss sharing
arrangement for loans sold to the Federal Home Loan Bank ("FHLB"). Provisions for losses are charged to gain on sale of loans
and credited to the reserve while actual losses are charged to the reserve. The reserve represents the Company's estimate of the
total losses expected to occur and is considered to be adequate by management based upon the Company's evaluation of the
potential exposure related to the loan sale agreements over the period of repurchase risk. The reserve for repurchased loans and
loss sharing obligations is included in other liabilities on the Company's consolidated statement of financial condition.
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 loan losses. Operating results
from other real estate owned, including rental income, operating expenses, gains and losses realized from the sales of other real
estate owned and subsequent write-downs are recorded as incurred.
Premises and Equipment
Land is carried at cost and premises and equipment, including leasehold improvements, are stated at cost less accumulated
depreciation and amortization or, in the case of acquired premises, the value on the acquisition date. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of the assets or leases. Generally, depreciable lives
are as follows: computer equipment: 3 years; furniture, fixtures and other electronic equipment: 5 years; building improvements:
10 years; and buildings: 30 years. Repair and maintenance items are expensed and improvements are capitalized. Gains and losses
on dispositions are reflected in current operations.
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
60
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.
Impact of New Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2015-16,
“Business Combinations, Simplifying the Accounting for Measurement – Period Adjustments”. The amendments in this update
apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is
incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an
adjustment to provisional amounts recognized. In these cases, the acquirer must record, in the same period’s financial statements,
the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the
provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update
are effective for fiscal years beginning after December 31, 2016 including interim periods within those fiscal years. The adoption
of this update is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement
of Financial Assets and Financial Liabilities”. The main objective in developing this new ASU is to enhance the reporting model
for financial instruments to provide users of financial statements with more useful information. The update requires equity
investments to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment
of equity investments without readily determinable fair values by requiring a quantitative assessment to identify impairment. The
amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes. Financial assets and financial liabilities are to be presented separately by measurement category and the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with other deferred tax
assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The adoption of this update is not expected to have a material impact on the Company’s consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability
and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date.
Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after
December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified
retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The company is currently assessing the impact that the guidance will have on the Company’s
consolidated financial statements.
The Company has begun its evaluation of the amended guidance including the potential impact on its Consolidated financial
statements. To date, the Company has identified its leased real estate as within the scope of the guidance. The Company continues
to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As
such, no conclusions have yet been reached regarding the potential impact of adoption on the Company's consolidated financial
statements. Further, to date, no guidance has been issued by either the Company's or the Bank's primary regulator with respect
to how the impact of the amended standard is to be treated for regulatory capital purposes.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)." The objective of the Update
is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or
benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting
period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes
payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of
awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement,
excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an
employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The
amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. The adoption of this update is not expected to have a material impact on the Company's consolidated financial
statements.
61
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This ASU significantly
changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair
value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new
model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses
and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans,
leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-
for-sale ("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner
similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost
of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than
as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt
securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and
methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance
for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective
for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual
reporting periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective
approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new
standard will have on the Company's Consolidated Financial Statements.
While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of
the amended guidance including the potential impact on its consolidated financial statements. As a result of the required change
in approach toward determining estimated credit losses from the current "incurred loss" model to one based on estimated cash
flows over a loan's contractual life, adjusted for prepayments (a "life of loan" model), the Company expects that the new guidance
will result in an increase in the allowance for loan losses, particularly for longer duration loan portfolios. The Company also
expects that the new guidance may result in an allowance for debt securities. In both cases, the extent of the change is indeterminable
at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions
and forecasts at that time. Further, to date, no guidance has been issued by either the Company's or the Bank's primary regulator
with respect to how the impact of the amended standard is to be treated for regulatory purposes.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts
and Cash Payments." This ASU is intended to reduce diversity in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early
adoption permitted, including adoption in an interim period. A retrospective transition method should be applied to each period
presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for
those issues would be applied prospectively as of the earliest date practicable. The adoption of this update is not expected to have
a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill
Impairment." This ASU intends to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill
impairment test. Instead, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity should recognize an impairment charge by which the carrying amount exceeds the reporting
unit's fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The
ASU also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019; early adoption is permitted for
annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this update is not expected to
have a material impact on the Company’s consolidated financial statements.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss)
includes items recorded directly in equity, such as unrealized gains or losses on securities available-for-sale and accretion of
unrealized loss on securities reclassified to held-to-maturity.
Bank Owned Life Insurance (“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 recorded as a reduction to the carrying value.
62
Defined Benefit Plan
As part of the Cape Bancorp, Inc. ("Cape") acquisition, the Bank acquired a tax-qualified defined benefit pension plan, also now
known as the Cape Bank Defined Benefit Plan. The Plan previously froze benefits as of December 31, 2008 for employees eligible
to participate prior to January 1, 2008. The Bank is in the process of terminating the Plan and distributing accrued benefits and
recorded a $3.7 million liability as part of the acquisition date purchase accounting adjustment.
Intangible Assets
Intangible assets resulting from acquisitions under the acquisition method of accounting consist of goodwill and core deposit
intangible. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired
through purchase acquisitions. Goodwill with an indefinite useful life is not amortized, but is evaluated for impairment on an
annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement
dates. The Company prepares a qualitative assessment in determining whether goodwill may be impaired. The factors considered
in the assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the
Company, among others. The Company completed its annual goodwill impairment test as of August 30, 2016. Based upon its
qualitative assessment of goodwill, the Company concluded that goodwill was not impaired and no further quantitative analysis
was warranted.
Segment Reporting
The Company's operations are solely in the financial services industry and include providing traditional banking and other financial
services to its customers. The Company operates primarily in the geographical regions of Central and Southern New Jersey.
Management makes operating decisions and assesses performance based on an ongoing review of the Bank's consolidated financial
results. Therefore, the Company has a single operating segment for financial reporting purposes.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number
of shares of common stock outstanding. Diluted earnings per share is calculated by dividing net income available to common
stockholders by the weighted average number of shares of common stock outstanding plus potential common stock, utilizing the
treasury stock method. All share amounts exclude unallocated shares of stock held by the Employee Stock Ownership Plan
(“ESOP”) and the Incentive Plan.
Note 2: Regulatory Matters
Applicable regulations require the Bank to maintain minimum levels of regulatory capital. Under the regulations in effect at
December 31, 2016, the Bank was required to maintain a minimum ratio of Tier 1 capital to total adjusted assets of 4.0%; a
minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%; a minimum ratio of Tier 1 capital to risk weighted
assets of 6.0%; and, a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.
Under the regulatory framework for prompt corrective action, Federal regulators are required to take certain supervisory actions
(and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution’s financial statements. The regulations establish a framework for the classification of banking
institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Generally an institution is considered well-capitalized if it has a Tier 1 capital ratio of 5.0%; a common
equity Tier1 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, 2016 and 2015, the Bank was considered well-capitalized.
63
The following is a summary of the Bank and the Company's regulatory capital amounts and ratios as of December 31, 2016 and
2015 compared to the regulatory minimum capital adequacy requirements and the regulatory requirements for classification as
a well-capitalized institution then in effect (in thousands).
As of December 31, 2016
Actual
For capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
Bank:
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier 1 capital (to average assets)
$
445,576
10.08% (2) $
176,856
4.000%
$
221,071
5.00%
Common equity Tier 1 (to risk-weighted
assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
OceanFirst Financial Corp:
445,576
445,576
461,386
12.67
12.67
13.12
Tier 1 capital (to average assets)
$
440,552
9.96% (2) $
Common equity Tier 1 (to risk-weighted
assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
426,855
440,552
491,362
12.12
12.51
13.95
180,178
232,913
303,227
177
181
233
304
(1)
(1)
(1)
(1)
(1)
(1)
5.125
6.625
8.625
4.000%
5.125
6.625
8.625
228,519
281,254
351,567
N/A
N/A
N/A
N/A
6.50
8.00
10.00
N/A
N/A
N/A
N/A
As of December 31, 2015
Actual
For capital adequacy
purposes
To be well-capitalized
under prompt
corrective action
Bank:
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier 1 capital (to average assets)
Common equity Tier 1 (to risk-weighted
assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
OceanFirst Financial Corp:
Tier 1 capital (to average assets)
Common equity Tier 1 (to risk-weighted
assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
$
$
229,306
229,306
229,306
246,106
250,324
241,856
250,324
267,124
8.91% (2)
12.72
$
12.72
13.65
9.72%
$
13.40
13.87
14.80
102,935
81,114
108,152
144,203
102,984
81,234
108,312
144,416
$
4.000%
4.500
6.000
8.000
(1)
(1)
(1)
128,669
117,165
144,203
180,253
4.000%
4.500
6.000
8.000
N/A
N/A
N/A
N/A
5.00%
6.50
8.00
10.00
N/A
N/A
N/A
N/A
(1) Includes the Capital Conservation Buffer of 0.625%.
(2) Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The average assets for
the fourth quarter exclude the assets acquired from Ocean Shore for the period from October 1, 2016 through November 30, 2016. The Tier 1 capital ratios for
the Bank and the Company based on total assets as of the end of the period are 8.85% and 8.75%, respectively.
The capital conservation buffer requirement is being phased in incrementally, starting at 0.625% on January 1, 2016, and increasing
to 1.25% on January 1, 2017, 1.875% on January 1, 2018, and 2.50% on January 1, 2019, when the full capital conservation buffer
requirement will be effective. Capital distributions and certain discretionary bonus payments are limited if the capital conservation
buffer is not maintained. Applicable regulations also impose limitations upon capital distributions by the Bank, such as dividends
and payments to repurchase or otherwise acquire shares. The Bank 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.
64
Note 3. Business Combination
As a result of the following acquisitions, the Company incurred merger related expenses of $16.5 million for the year ended
December 31, 2016. Merger related expenses were classified as change in control payments, professional fees, IT expenses and
other/miscellaneous fees with amounts totaling $5.5 million, $5.7 million, $5.1 million and $200,000, respectively.
Branch Acquisition
On March 11, 2016, the Company completed its acquisition of an existing retail branch in the Toms River market ("Toms River
Retail Branch"). Under the terms of the Purchase and Assumption Agreement dated July 31, 2015, the Company paid a deposit
premium of $340,000, equal to 2.50% of core deposits; i.e., all deposits other than time deposits, government deposits, and
fiduciary accounts. Up to 1.00% of the deposit premium was contingent on the core deposit balance seventy-five days after
closing.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase
price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax.
The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table presents the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition
(in thousands):
Assets Acquired
Cash and cash equivalents
Loans
Other assets
Core deposit intangible
Total assets acquired
Liabilities Assumed
Deposits
Other liabilities assumed
Total liabilities assumed
Goodwill
At March 11, 2016
Book
Value
Fair Value
Adjustment
Fair
Value
$
$
$
$
16,727
$
9
15
—
16,751
$
16,953
$
138
17,091
$
— $
— $
— $
66
66
$
$
4
$
—
4
$
$
16,727
9
15
66
16,817
16,957
138
17,095
278
65
Cape Bancorp Acquisition
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. ("Cape"), which after purchase accounting
adjustments added $1.5 billion to assets, $1.2 billion to loans, and $1.2 billion to deposits. Total consideration paid for Cape was
$196.4 million, including cash consideration of $30.5 million. Cape was merged with and into the Company as of the date of
acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase
price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax.
The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the
acquisition for Cape, net of total consideration paid (in thousands):
(in thousands)
Total Purchase Price:
Assets acquired:
Cash and cash equivalents
Securities and Federal Home Loan Bank Stock
Loans:
Specific credit fair value on credit impaired loans
General credit fair value
Interest rate fair value
Reverse allowance for loan losses
Reverse net deferred fees, premiums and discounts
Premises and equipment
Other real estate owned
Deferred tax asset
Other assets
Core deposit intangible
Total assets acquired
Liabilities assumed:
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
Goodwill recorded in the merger
At May 2, 2016
Purchase
Accounting
Adjustments
Cape
Book Value
Estimated
Fair Value
$
196,403
$
30,025
$
218,577
1,169,568
— $
361
30,025
218,938
1,156,807
—
—
—
—
—
27,972
2,343
9,407
61,793
831
1,520,516
(1,247,688)
(123,587)
(7,611)
(1,378,886)
$
141,630
$
(5,859)
(20,545)
1,888
9,931
1,824
(1,973)
(408)
10,993
—
2,887
(901)
(679)
(879)
(5,398)
(6,956)
(7,857)
—
—
—
—
—
25,999
1,935
20,400
61,793
3,718
1,519,615
(1,248,367)
(124,466)
(13,009)
(1,385,842)
133,773
62,630
$
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. As the Company finalizes its review of the acquired assets and
liabilities, certain adjustments to the recorded carrying values may be required.
66
Ocean Shore Holding Co. Acquisition
On November 30, 2016, the Company completed its acquisition of Ocean Shore Holding Co. ("Ocean Shore"), which after purchase
accounting adjustments added $995.9 million to assets, $774.0 million to loans, and $875.1 million to deposits. Total consideration
paid for Ocean Shore was $180.7 million, including cash consideration of $28.4 million. Ocean Shore was merged with and into
the Company on the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase
price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax.
The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the
acquisition for Ocean Shore, net of total consideration paid (in thousands):
Ocean Shore
Book Value
At November 30, 2016
Purchase
Accounting
Adjustments
Estimated
Fair Value
Cash and cash equivalents
$
60,871
$
(in thousands)
Total Purchase Price:
Assets acquired:
Securities and Federal Home Loan Bank Stock
Loans:
Specific credit fair value on credit impaired loans
General credit fair value
Interest rate fair value
Reverse allowance for loan losses
Reverse net deferred fees, premiums and discounts
Premises and equipment
Other real estate owned
Deferred tax asset
Other assets
Core deposit intangible
Total assets acquired
Liabilities assumed:
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
Goodwill recorded in the merger
94,109
790,396
—
—
—
—
—
11,696
1,090
5,587
35,369
348
999,466
(874,301)
(3,694)
(17,629)
(895,624)
—
24
(2,062)
(8,127)
(5,779)
3,265
(3,647)
3,372
—
2,210
—
7,158
(3,586)
(772)
—
891
119
$
$
$
180,732
60,871
94,133
774,046
—
—
—
—
—
15,068
1,090
7,797
35,369
7,506
995,880
(875,073)
(3,694)
(16,738)
(895,505)
100,375
80,357
$
103,842
$
(3,467)
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. As the Company finalizes its review of the acquired assets and
liabilities, certain adjustments to the recorded carrying values may be required.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former Cape operations included in the Consolidated Statements
of Income from the date of the acquisition (May 2, 2016) through December 31, 2016 and regarding the former Ocean Shore
operations included in the Consolidated Statements of Income from the date of the acquisition (December 1, 2016) through
December 31, 2016. In addition, the table provides condensed pro forma financial information assuming the Cape and Ocean Shore
67
acquisitions had been completed as of January 1, 2016, for the year ended December 31, 2016, and as of January 1, 2015, for the
year ended December 31, 2015. The table has been prepared for comparative purposes only and is not necessarily indicative of
the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is
it indicative of future results. Furthermore, the pro forma information does not reflect management’s estimate of any revenue-
enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of
Cape's and Ocean Shore's operations. The pro forma information shown reflects adjustments related to certain purchase accounting
fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects.
(in thousands)
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Net income
Earnings per share:
Fully diluted
Core Deposit Intangible
Cape Actual from
May 2, 2016 to
December 31, 2016
34,565
Ocean Shore
Actual from
December 1, 2016 to
December 31, 2016
Pro forma
Year ended
December 31, 2016
Pro forma
Year ended
December 31, 2015
$
3,109
$
166,462
$
498
3,503
19,258
12,311
$
—
349
1,337
1,397
$
$
4,400
25,761
161,090
16,772
0.52
$
$
159,351
4,639
33,292
123,762
43,471
1.39
The estimated future amortization expense for the core deposit intangible over the next five years is as follows (in thousands):
Year Ended December 31,
2017
2018
2019
2020
2021
Thereafter
$
$
2,039
1,828
1,618
1,408
1,197
2,834
10,924
Fair Value Measurement of Assets Acquired and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the Retail Branch, Cape and Ocean
Shore acquisitions were as follows. Refer to Note 15, Fair Value Measurements, for a discussion of the fair value hierarchy.
Securities
The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in
active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying
and selling of securities.
Loans
The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash
flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where
reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair
value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating
the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis;
2) general credit fair value adjustment; and 3) specific credit fair value adjustment.
To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate.
Market rates for similar loans were obtained from various external data sources and reviewed by Company management for
reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present
value approach was utilized to calculate the interest rate fair value adjustment.
68
The general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime
losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated after consideration
of historical losses of the Company, the acquired bank and peer banks. The adjustment related to qualitative factors was impacted
by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.
To calculate the specific credit fair value adjustment the Company reviewed the acquired loan portfolio for loans meeting the
definition of an impaired loan with deteriorated credit quality. Loans meeting this criteria were reviewed by comparing the
contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value
resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment
to yield.
Premises and Equipment
Fair values are based upon appraisals from independent third parties. In addition to owned properties, Cape operated eight
properties subject to lease agreements, and Ocean Shore operated two properties subject to lease agreements.
Deposits and Core Deposit Premium
Core deposit premium represents the value assigned to non-interest bearing demand deposits, interest-bearing checking, money
market and saving accounts assumed as part of the acquisition. The core deposit premium value represents the future economic
benefit, including the present value of future tax benefits, of the potential cost saving from assuming the core deposits as part of
an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition.
The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for
similar time deposits and is valued utilizing Level 2 inputs.
Borrowings
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for
borrowings of similar remaining maturities.
Note 4: Securities
The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at December 31, 2016 and
2015 are as follows (in thousands)
Available-for-sale:
Investment securities:
U.S. agency obligations
Held-to-maturity:
Investment securities:
U.S. agency obligations
State and municipal obligations
Corporate debt securities
Other investments
Total investment securities
Mortgage-backed securities:
FHLMC
FNMA
GNMA
SBA
Total mortgage-backed securities
Total held-to-maturity
Total securities
$
$
$
$
Amortized
Cost
As of December 31, 2016
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Estimated
Fair
Value
12,542
$
— $
(318) $
12,224
69
10
85
—
164
195
2,175
119
28
2,517
2,681
2,681
$
— $
(856)
(6,001)
(228)
(7,085)
(2,457)
(2,524)
(364)
—
(5,345)
$
$
(12,430) $
(12,748) $
20,029
38,309
71,141
8,550
138,029
141,754
217,096
92,230
8,975
460,055
598,084
610,308
19,960
$
39,155
77,057
8,778
144,950
144,016
217,445
92,475
8,947
462,883
607,833
620,375
$
$
69
Available-for-sale:
Investment securities:
U.S. agency obligations
Held-to-maturity:
Investment securities:
U.S. agency obligations
State and municipal obligations
Corporate debt securities
Total investment securities
Mortgage-backed securities:
FHLMC
FNMA
GNMA
Total mortgage-backed securities
Total held-to-maturity
Total securities
Amortized
Cost
As of December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(continued)
Estimated
Fair
Value
$
$
$
$
29,906
$
23
$
(27) $
29,902
55,178
$
13,311
56,000
124,489
120,116
160,254
502
280,872
405,361
435,267
$
$
87
18
—
105
364
3,039
95
3,498
3,603
3,626
$
(59) $
(3)
(8,527)
(8,589)
(1,489)
(1,123)
—
(2,612)
$
$
(11,201) $
(11,228) $
55,206
13,326
47,473
116,005
118,991
162,170
597
281,758
397,763
427,665
During the third quarter 2013, the Bank transferred $536.0 million 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 $13.3 million at the
time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net
of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the held-to-maturity
investment securities at December 31, 2016 and 2015 are as follows (in thousands):
Amortized cost
Net loss on date of transfer from available-for-sale
Accretion of unrealized loss on securities reclassified to held-to-maturity
Carrying value
December 31,
2016
2015
$
$
607,833
$
(13,347)
4,205
598,691
$
405,361
(13,347)
2,799
394,813
Realized gains on the sale of securities were $75,000, $0, and $1.0 million for the years ended December 31, 2016, 2015 and 2014,
respectively. There was a realized loss of $87,000 during 2016. There were no realized losses during 2015 and 2014 on the sale
of securities.
The amortized cost and estimated fair value of investment securities at December 31, 2016 by contractual maturity, are shown
below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. At December 31, 2016, corporate debt securities with an amortized cost
and estimated fair value of $60.5 million and $54.6 million, respectively, were callable prior to the maturity date.
December 31, 2016
Less than one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Estimated
Fair Value
$
$
10,419
$
60,974
20,379
56,942
148,714
$
10,423
60,400
19,829
51,051
141,703
Other investments consist of mutual funds that do not have a contractual maturity date and are excluded from the table above.
Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the
contractual maturity date due to principal prepayments.
70
The estimated fair value of securities pledged as required security for deposits and for other purposes required by law amounted
to $506.0 million and $317.9 million, at December 31, 2016 and 2015, respectively. The estimated fair value of securities pledged
as collateral for reverse repurchase agreements amounted to $67.5 million and $83.2 million, at December 31, 2016 and 2015,
respectively.
The estimated fair value and unrealized loss for securities available-for-sale and held-to-maturity at December 31, 2016 and
December 31, 2015, segregated by the duration of the unrealized loss, are as follows (in thousands):
Available-for-sale:
Investment securities:
U.S. government & agency
obligations
Held-to-maturity:
Investment securities:
State and municipal
obligations
Corporate debt securities
Other investments
Total investment
securities
Mortgage-backed securities:
FHLMC
FNMA
GNMA
Total mortgage
backed securities
Total held-to-
maturity
Total securities
Less than 12 months
As of December 31, 2016
12 months or longer
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
$
12,224
$
(318) $
— $
— $
12,224
$
(318)
32,995
12,450
8,551
(856)
(120)
(228)
—
49,119
—
—
(5,881)
—
32,995
61,569
8,551
(856)
(6,001)
(228)
53,996
(1,204)
49,119
(5,881)
103,115
(7,085)
102,461
124,403
79,116
(1,665)
(2,185)
(364)
26,898
8,925
—
(792)
(339)
—
129,359
133,328
79,116
(2,457)
(2,524)
(364)
305,980
(4,214)
35,823
(1,131)
341,803
(5,345)
359,976
(5,418)
84,942
(7,012)
444,918
$
372,200
$
(5,736) $
84,942
$
(7,012) $
457,142
$
(12,430)
(12,748)
71
As of December 31, 2015
Less than 12 months
12 months or longer
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(continued)
Available-for-sale:
Investment securities:
U.S. agency obligations
$
14,937
$
(27) $
— $
— $
14,937
$
(27)
Held-to-maturity:
Investment securities:
U.S. agency obligations
State and municipal
obligations
Corporate debt securities
Total investment
securities
Mortgage-backed securities:
FHLMC
FNMA
Total mortgage-backed
securities
Total held-to-
maturity
Total securities
30,175
2,857
—
33,032
35,816
44,004
79,820
(43)
(2)
—
(45)
(200)
(434)
(634)
5,023
639
46,473
(16)
(1)
(8,527)
35,198
3,496
46,473
(59)
(3)
(8,527)
52,135
(8,544)
85,167
(8,589)
53,604
23,318
(1,289)
(689)
89,420
67,322
(1,489)
(1,123)
76,922
(1,978)
156,742
(2,612)
112,852
(679)
129,057
(10,522)
241,909
$
127,789
$
(706) $
129,057
$
(10,522) $
256,846
$
(11,201)
(11,228)
At December 31, 2016, the amortized cost, estimated fair value and credit rating of the individual corporate debt securities in an
unrealized loss position for greater than one year are as follows (in thousands):
Security Description
BankAmerica Capital
Chase Capital
Wells Fargo Capital
Huntington Capital
Keycorp Capital
PNC Capital
State Street Capital
SunTrust Capital
As of December 31, 2016
Amortized Cost
Estimated
Fair Value
$
15,000
$
10,000
5,000
5,000
5,000
5,000
5,000
5,000
13,525
9,050
4,488
4,150
4,400
4,600
4,600
4,306
$
55,000
$
49,119
Credit
Rating
Moody’s/
S&P
Ba1/BB+
Baa2/BBB-
A1/BBB+
Baa2/BB
Baa2/BB+
Baa1/BBB-
A3/BBB
Not Rated/BB+
At December 31, 2016, the estimated fair value of each of the above corporate debt securities was below cost. However, the total
estimated fair value of the corporate debt securities has steadily increased over the past several years. These corporate debt securities
are issued by other financial institutions with credit ratings ranging from a high of A1 to a low of BB as rated by one of the
internationally-recognized credit rating services. These floating-rate securities were purchased in 1998 and have paid coupon
interest continuously since issuance. Floating-rate debt securities such as these pay a fixed interest rate spread over 90-day LIBOR.
Following the purchase of these securities, the required credit spread increased for these types of securities causing a decline in
the market price. The Company concluded that unrealized losses on corporate debt securities were only temporarily impaired at
December 31, 2016. In concluding that the impairments were only temporary, the Company considered several factors in its
analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on
principal or interest payments and no interest payments were deferred. All of the financial institutions were also considered well-
capitalized. Credit spreads have now decreased for these types of securities and market prices have improved. Based on
management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over
72
the life of the security. Furthermore, the Company does not have the intent to sell these corporate debt securities and it is more
likely than not that the Company will not be required to sell the securities. The Company has held the securities continuously since
1998 and expects to receive its full principal at maturity in 2028 or prior if called by the issuer. Historically, the Company has not
utilized security sales as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity
outside the securities portfolio.
The mortgage-backed securities are issued and guaranteed by either the FHLMC, FNMA , GNMA, or SBA corporations which
are chartered by the United States government and whose debt obligations are typically rated AA+ by one of the internationally-
recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which
over time can have both a positive or negative impact on the estimated fair value of the mortgage-backed securities. The Company
does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities
before recovery of their amortized cost. As a result, the Company concluded that these securities were only temporarily impaired
at December 31, 2016.
Note 5: Loans Receivable, Net
A summary of loans receivable at December 31, 2016 and 2015 follows (in thousands):
Commercial:
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - investor
Total commercial
Consumer:
Residential mortgage
Residential construction
Home equity loans and lines
Other consumer
Total consumer
Purchased credit impaired ("PCI") loans
Total loans
Loans in Process
Deferred origination costs, net
Allowance for loan losses
Loans receivable, net
December 31,
2016
2015
$
$
$
152,569
534,214
1,132,075
1,818,858
1,647,154
65,319
288,991
1,564
2,003,028
3,821,886
7,575
3,829,461
(14,249)
3,414
(15,183)
3,803,443
$
144,538
307,509
510,725
962,772
791,249
50,757
192,368
792
1,035,166
1,997,938
461
1,998,399
(14,206)
3,232
(16,722)
1,970,703
The Bank’s eligible mortgage loans are pledged to secure FHLB advances.
At December 31, 2016, 2015 and 2014, loans in the amount of $13.6 million, $18.3 million, and $18.3 million, respectively, were
three or more months delinquent or in the process of foreclosure. The Company was not accruing interest income on these loans
and has reversed previously accrued interest. There were no loans ninety days or greater past due and still accruing interest. Non-
accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually
classified impaired loans.
The recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of
foreclosure amounted to $3.7 million at December 31, 2016. The amount of foreclosed residential real estate property held by the
Company was $1.7 million at December 31, 2016.
The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial
and industrial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At
December 31, 2016, the impaired loan portfolio totaled $31.0 million, for which there was a specific allocation in the allowance
for loan losses of $510,000. At December 31, 2015, the impaired loan portfolio totaled $38.4 million, for which there was a specific
allocation in the allowance for loan losses of $1.3 million. The average balance of impaired loans for the years ended December 31,
2016, 2015 and 2014 was $38.4 million, $41.5 million, and $41.0 million, respectively. If interest income on non-accrual loans
and impaired loans had been current in accordance with their original terms, approximately $391,000, $848,000, and $1.6 million
of interest income for the years ended December 31, 2016, 2015 and 2014, respectively, would have been recorded.
73
At December 31, 2016, there were no commitments to lend additional funds to borrowers whose loans are in non-accrual status.
An analysis of the allowance for loan losses for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
Balance at beginning of year
Provision charged to operations
Charge-offs
Recoveries
Balance at end of year
Years Ended December 31,
2016
2015
2014
$
$
16,722
2,623
(4,490)
328
15,183
$
$
16,317
1,275
(1,135)
265
16,722
$
$
20,930
2,630
(7,827)
584
16,317
74
The following table presents an analysis of the allowance for loan losses for the years ended December 31, 2016 and 2015, the
balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment
method as of December 31, 2016 and 2015 excluding PCI loans (in thousands):
Residential
Real Estate
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Investor
Consumer
Commercial
and
Industrial
Unallocated
Total
For the year ended December 31, 2016
Allowance for loan losses:
Balance at beginning of year
$
6,590
$
2,292
$
4,873
$
1,095
$
1,639
$
233
$
16,722
Provision (benefit) charged
to operations
Charge-offs
Recoveries
Balance at end of year
For the year ended December 31, 2015
Allowance for loan losses:
Balance at beginning of year
Provision (benefit) charged
to operations
Charge-offs
Recoveries
$
$
(3,858)
(558)
71
2,210
(1,509)
6
3,200
(1,890)
178
310
(349)
54
563
(184)
19
198
—
—
2,623
(4,490)
328
2,245
$
2,999
$
6,361
$
1,110
$
2,037
$
431
$
15,183
4,291
$
3,627
$
5,308
$
1,146
$
863
$
1,082
$
16,317
2,465
(295)
129
(1,335)
—
—
(361)
(103)
29
529
(678)
98
826
(59)
9
(849)
—
—
1,275
(1,135)
265
Balance at end of year
$
6,590
$
2,292
$
4,873
$
1,095
$
1,639
$
233
$
16,722
December 31, 2016
Allowance for loan losses:
Ending allowance balance
attributed to loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total ending allowance balance
Loans:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
$
$
$
266
$
— $
119
$
125
$
— $
— $
510
1,979
2,999
6,242
985
2,037
2,245
$
2,999
$
6,361
$
1,110
$
2,037
$
431
431
$
14,673
15,183
13,306
$
11,123
$
3,789
$
2,556
$
268
$
— $
31,042
1,699,167
523,091
1,128,286
287,999
152,301
—
3,790,844
Total ending loan balance
$
1,712,473
$
534,214
$
1,132,075
$
290,555
$
152,569
$
— $
3,821,886
December 31, 2015
Allowance for loan losses:
Ending allowance balance
attributed to loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total ending allowance balance
Loans:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Total ending loan balance
$
$
$
$
31
$
544
$
287
$
43
$
434
$
— $
1,339
6,559
1,748
4,586
1,052
1,205
6,590
$
2,292
$
4,873
$
1,095
$
1,639
$
233
233
$
15,383
16,722
13,165
$
18,964
$
2,686
$
2,307
$
1,250
$
— $
38,372
828,841
288,545
508,039
190,853
143,288
—
1,959,566
842,006
$
307,509
$
510,725
$
193,160
$
144,538
$
— $
1,997,938
75
A summary of impaired loans at December 31, 2016 and 2015 is as follows, excluding PCI loans (in thousands):
Impaired loans with no allocated allowance for loan losses
Impaired loans with allocated allowance for loan losses
Amount of the allowance for loan losses allocated
December 31,
2016
2015
25,228
5,814
31,042
510
$
$
$
35,177
3,195
38,372
1,339
$
$
$
At December 31, 2016, impaired loans include troubled debt restructuring loans of $30.5 million, of which $27.0 million were
performing in accordance with their restructured terms and were accruing interest. At December 31, 2015 impaired loans include
troubled debt restructuring loans of $31.3 million, of which $26.3 million were performing in accordance with their restructured
terms and were accruing interest.
The summary of loans individually evaluated for impairment by loan portfolio segment as of December 31, 2016 and 2015 and
for the years ended December 31, 2016 and 2015 follows, excluding PCI loans (in thousands):
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
As of December 31, 2016
With no related allowance recorded:
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
With an allowance recorded:
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
As of December 31, 2015
With no related allowance recorded:
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
With an allowance recorded:
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
9,848
$
9,694
$
11,886
2,239
2,559
300
26,832
3,998
—
2,011
581
—
$
$
11,123
1,897
2,246
268
25,228
3,612
—
1,892
310
—
$
$
6,590
$
5,814
$
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
13,431
$
13,056
$
18,742
498
2,577
703
35,951
109
276
2,171
81
547
$
$
18,688
466
2,264
703
35,177
109
276
2,220
43
547
$
$
—
—
—
—
—
—
266
—
119
125
—
510
—
—
—
—
—
—
31
544
287
43
434
3,184
$
3,195
$
1,339
$
$
$
$
$
$
$
$
76
With no related allowance recorded:
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
With an allowance recorded:
Residential real estate
Commercial real estate
Commercial real estate - investor
Consumer
Commercial and industrial
(continued)
For the years ended December 31,
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
14,497
18,095
535
2,549
411
36,087
786
466
1,027
67
—
2,346
$
$
$
$
394
467
98
122
13
1,094
163
—
79
29
—
271
$
$
$
$
12,844
15,931
397
2,183
705
32,060
110
990
7,966
42
365
9,473
$
$
$
$
585
451
11
123
8
1,178
3
1
9
2
2
17
The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of December 31, 2016
and 2015, excluding PCI loans (in thousands):
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
December 31,
2016
2015
8,126
2,414
521
2,064
441
13,566
$
$
5,779
7,684
3,112
1,576
123
18,274
$
$
The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 and 2015 by loan
portfolio segment, excluding PCI loans (in thousands):
December 31, 2016
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
December 31, 2015
Residential real estate
Commercial real estate - owner occupied
Commercial real estate - investor
Consumer
Commercial and industrial
30-59
Days
Past Due
60-89
Days
Past Due
Greater
than
90 Days
Past Due
Total
Past Due
Loans Not
Past Due
Total
$
$
$
$
9,532
3,962
—
1,519
5,548
20,561
4,075
80
217
1,661
8
6,041
$
$
$
$
3,038
1,032
—
436
181
4,687
2,716
—
1,208
115
—
4,039
$
$
$
$
7,159
890
521
1,963
384
10,917
3,168
7,684
2,649
1,248
360
15,109
$
$
$
$
19,729
5,884
521
3,918
6,113
36,165
9,959
7,764
4,074
3,024
368
25,189
$1,692,744
528,330
1,131,554
286,637
146,456
$3,785,721
$ 832,047
299,745
506,651
190,136
144,170
$1,972,749
$1,712,473
534,214
1,132,075
290,555
152,569
$3,821,886
$ 842,006
307,509
510,725
193,160
144,538
$1,997,938
77
The Company categorizes all commercial and commercial real estate loans, except for small business loans, into risk categories
based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation and current economic trends, among other factors. 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
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.
As of December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio
segment is as follows, excluding PCI loans (in thousands):
December 31, 2016
Commercial real estate - owner occupied
Commercial real estate - investor
Commercial and industrial
December 31, 2015
Commercial real estate - owner occupied
Commercial real estate - investor
Commercial and industrial
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
$
$
501,652
1,106,747
150,474
1,758,873
288,701
494,664
142,387
925,752
$
$
$
$
7,680
713
757
9,150
1,803
10,267
787
12,857
$
$
$
$
24,882
24,615
1,338
50,835
17,005
5,794
1,364
24,163
$
$
$
$
— $
—
—
— $
— $
—
—
— $
534,214
1,132,075
152,569
1,818,858
307,509
510,725
144,538
962,772
For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was
previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer
loans based on payment activity as of December 31, 2016 and 2015, excluding PCI loans (in thousands):
December 31, 2016
Performing
Non-performing
December 31, 2015
Performing
Non-performing
Residential Real Estate
Residential
Consumer
$
$
$
$
1,704,347
8,126
1,712,473
836,227
5,779
842,006
$
$
$
$
288,491
2,064
290,555
191,584
1,576
193,160
The Company classifies certain loans as troubled debt restructurings ("TDR") when credit terms to a borrower in financial
difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due
amounts and/or the restructuring of scheduled principal payments. One-to-four family and consumer loans where the
borrower’s debt is discharged in a bankruptcy filing are also considered troubled debt restructurings. For these loans, the Bank
retains its security interest in the real estate collateral. Included in the non-accrual loan total at December 31, 2016, 2015 and
2014 were $3.5 million, $4.9 million, and $2.0 million, respectively, of troubled debt restructurings. At December 31, 2016,
2015 and 2014, the Company has allocated $510,000, $262,000, and $419,000, respectively, of specific reserves to loans which
78
are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned
to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans,
the Company also has loans classified as troubled debt restructuring which are accruing at December 31, 2016, 2015 and 2014
which totaled $27.0 million, $26.3 million, and $21.5 million, respectively. Troubled debt restructurings are considered in the
allowance for loan losses similar to other impaired loans.
The following table presents information about troubled debt restructurings which occurred during the years ended December 31,
2016 and 2015, and troubled debt restructurings modified within the previous year and which defaulted during the years ended
December 31, 2016 and 2015 (dollars in thousands):
Year ended December 31, 2016
Residential real estate
Commercial real estate - investor
Consumer
Which Subsequently Defaulted:
Year ended December 31, 2015
Residential real estate
Commercial real estate - investor
Consumer
Which Subsequently Defaulted:
Number
of Loans
7
1
8
Number
of Loans
None
Number
of Loans
5
4
9
Number
of Loans
None
Pre-modification
Recorded Investment
Post-modification
Recorded Investment
$
$
$
$
1,574
1,592
852
Recorded Investment
None
Pre-modification
Recorded Investment
2,029
6,095
599
Recorded Investment
None
1,523
1,592
846
Post-modification
Recorded Investment
1,966
6,007
547
As part of the Ocean Shore, Cape, and Colonial American acquisitions, PCI loans were acquired at a discount primarily due to
deteriorated credit quality. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows,
with no related allowance for loan losses.
The following table presents information regarding the estimates of the contractually required payments, the cash flows expected
to be collected and the estimated fair value of the PCI loans acquired from Ocean Shore at December 1, 2016, Cape at May 2,
2016, and Colonial American at July 31, 2015 (in thousands):
Ocean Shore
December 1, 2016
7,385
$
Cape
May 2, 2016
Colonial American
July 31, 2015
21,345
$
3,263
(12,387)
8,958
(576)
8,382
$
(1,854)
1,409
(109)
1,300
$
$
(4,666)
2,719
(401)
2,318
Contractually required principal and interest
Contractual cash flows not expected to be collected (non-
accretable discount)
Expected cash flows to be collected at acquisition
Interest component of expected cash flows (accretable yield)
Fair value of acquired loans
$
79
The following table summarizes the changes in accretable yield for PCI loans during the years ended December 31, 2016 and
2015 (in thousands):
Beginning balance
Acquisition
Accretion
Reclassification from non-accretable difference
Ending balance
Note 6: Interest and Dividends Receivable
For the years ended December 31,
2016
2015
$
$
75
977
(459)
156
749
$
$
—
91
(16)
—
75
A summary of interest and dividends receivable at December 31, 2016 and 2015 follows (in thousands):
Loans
Investment securities
Mortgage-backed securities
December 31,
2016
2015
$
$
10,499
582
908
11,989
$
$
4,844
442
574
5,860
Note 7: Premises and Equipment, Net
Premises and equipment at December 31, 2016 and 2015 are summarized as follows (in thousands):
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Automobiles
Construction in progress
Total
Accumulated depreciation and amortization
December 31,
2016
2015
$
$
19,080
63,955
6,598
33,375
824
2,416
126,248
(54,863)
71,385
$
$
5,124
29,241
6,338
27,770
628
430
69,531
(41,112)
28,419
Depreciation expense for the years ended December 31, 2016, 2015, and 2014 amounted to $4.8 million, $3.3 million and $2.9
million, respectively.
80
Note 8: Deposits
Deposits, including accrued interest payable of $31,000 at both December 31, 2016 and 2015, are summarized as follows (in
thousands):
Non-interest-bearing accounts
Interest-bearing checking accounts
Money market deposit accounts
Savings accounts
Time deposits
Total deposits
December 31,
2016
2015
$
Amount
782,504
1,626,713
458,911
672,519
647,103
Weighted
Average
Cost
—% $
0.19%
0.30%
0.08%
1.14%
Amount
337,143
859,927
153,196
310,989
255,423
$
4,187,750
0.30% $
1,916,678
Weighted
Average
Cost
—%
0.12%
0.23%
0.03%
1.39%
0.26%
Included in time deposits at December 31, 2016 and 2015, respectively, is $269.0 million and $119.6 million in deposits of $100,000
and over.
Time deposits at December 31, 2016 mature as follows (in thousands):
Year Ended December 31,
2017
2018
2019
2020
2021
Thereafter
$
$
374,455
108,320
73,428
45,029
40,719
5,152
647,103
Interest expense on deposits for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
Interest-bearing checking accounts
Money market deposit accounts
Savings accounts
Time deposits
Note 9: Borrowed Funds
Borrowed funds are summarized as follows (in thousands):
Years Ended December 31,
2016
2015
2014
$
$
2,114
858
191
4,354
7,517
$
$
952
187
102
3,060
4,301
$
$
925
92
112
2,974
4,103
Federal Home Loan Bank advances
Securities sold under agreements to repurchase
Other borrowings
December 31,
2016
2015
Amount
250,498
69,935
56,559
376,992
$
$
Weighted
Average
Rate
1.75% $
0.13
4.21
1.81% $
Amount
324,385
75,872
22,500
422,757
Weighted
Average
Rate
1.41%
0.14
2.00
1.21%
Information concerning FHLB advances and securities sold under agreements to repurchase (“reverse repurchase agreements”)
is summarized as follows (in thousands):
81
Average balance
Maximum amount outstanding at any month end
Average interest rate for the year
Amortized cost of collateral:
Mortgage-backed securities
Estimated fair value of collateral:
Mortgage-backed securities
FHLB
Advances
Reverse
Repurchase
Agreements
$
2016
266,981
252,229
$
2015
253,843
352,624
$
1.67%
1.52%
2016
2015
75,227
81,738
$
0.14%
73,029
77,803
0.14%
—
—
— $
67,224
$
79,483
—
67,452
83,233
The securities collateralizing the reverse repurchase agreements are delivered to the lender with whom each transaction is executed
or to a third-party custodian. The lender, who may sell, loan or otherwise dispose of such securities to other parties in the normal
course of their operations, agrees to resell to the Company substantially the same securities at the maturity of the reverse repurchase
agreements. (See note 4)
FHLB advances and reverse repurchase agreements have contractual maturities at December 31, 2016 as follows (in thousands):
Year Ended December 31,
2017
2018
2019
2020
2021
FHLB
Advances
Reverse
Repurchase
Agreements
$
$
1,922
66,958
81,618
75,000
25,000
250,498
$
$
69,935
—
—
—
—
69,935
During September 2016, the Company issued $35.0 million of subordinated notes, which carry a fixed rate of 5.125% for the first
five years and a floating rate of 392 basis points over 3-month LIBOR for the subsequent five years. Accrued interest is payable
semi-annually and principal is due at maturity on September 30, 2026. During 2007, the Company issued $10.0 million of trust
preferred securities which carry a floating rate of 175 basis points over 3-month LIBOR adjusted quarterly. Accrued interest is
due quarterly with principal due at the maturity date of September 1, 2037. During 2006, the Company issued $12.5 million of
trust preferred securities. The trust preferred securities carry a floating rate of 166 basis points over 3-month LIBOR adjusted
quarterly. Accrued interest is due quarterly with principal due at the maturity date in 2036.
Interest expense on borrowings for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
Federal Home Loan Bank advances
Securities sold under agreements to repurchase
Other borrowings
Years Ended December 31,
2016
2015
2014
$
$
4,471
102
1,073
5,646
$
$
3,850
103
780
4,733
$
$
2,515
78
809
3,402
All FHLB advances are secured by the Bank’s mortgage loans and FHLB stock. As a member of the FHLB of New York, the Bank
is required to maintain a minimum investment in the capital stock of the FHLB, at cost, in an amount equal to 0.20% of the Bank’s
mortgage-related assets, plus 4.5% of the specified value of certain transactions between the Bank and the FHLB.
82
Note 10: Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2016, 2015 and 2014 consists of the following (in
thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Years Ended December 31,
2016
2015
2014
$
$
6,259
96
6,355
5,798
—
5,798
12,153
$
$
8,378
1,064
9,442
1,349
92
1,441
10,883
$
$
9,525
1,004
10,529
9
73
82
10,611
Included in other comprehensive income is income tax expense (benefit) attributable to net unrealized gains (losses) on securities
available-for-sale arising during the year in the amount of $423,000, $600,000, and $(338,000) for the years ended December 31,
2016, 2015 and 2014, respectively. Included in stockholders’ equity is income tax benefit (expense) attributable to stock plans in
the amount of $62,000, $32,000, and $51,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
A reconciliation between the provision for income taxes and the expected amount computed by multiplying income before the
provision for income taxes times the applicable statutory Federal income tax rate for the years ended December 31, 2016, 2015
and 2014 is as follows (in thousands):
Income before provision for income taxes
Applicable statutory Federal income tax rate
Computed “expected” Federal income tax expense
Increase (decrease) in Federal income tax expense resulting from:
Tax exempt interest
ESOP fair market value adjustment
ESOP dividends
Earnings on BOLI
Merger related expenses
State income taxes net of Federal benefit
Other items, net
Years Ended December 31,
2016
2015
2014
$
$
35,199
35.0%
12,320
$
$
31,205
35.0%
10,922
$
$
30,531
35.0%
10,686
(390)
131
(223)
(781)
1,005
62
29
(291)
111
(234)
(525)
132
751
17
$
12,153
$
10,883
$
(109)
99
(229)
(517)
—
695
(14)
10,611
83
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2016 and 2015 are presented in the following table (in thousands):
December 31,
2016
2015
Deferred tax assets:
Allowance for loan losses
Reserve for repurchased loans
Reserve for uncollected interest
Incentive compensation
Deferred compensation
Other reserves
Stock plans
ESOP
Fair value adjustments related to acquisition
Net operating loss carryforward related to acquisition
Other real estate owned
Unrealized loss on securities
Federal alternative minimum tax
State alternative minimum tax
Total gross deferred tax assets
Deferred tax liabilities:
Excess servicing on sale of mortgage loans
Investments, discount accretion
Deferred loan and commitment costs, net
Premises and equipment, differences in depreciation
Undistributed REIT income
Total gross deferred tax liabilities
Net deferred tax assets
$
$
$
6,269
346
70
1,695
1,549
375
2,151
224
16,905
5,829
26
5,118
1,060
1,160
42,777
(76)
(434)
(1,261)
(52)
(2,167)
(3,990)
38,787
$
6,847
403
382
1,245
644
95
1,894
198
508
2,177
128
4,311
—
1,160
19,992
(99)
(444)
(1,224)
(237)
(1,181)
(3,185)
16,807
The 2016 deferred tax expense does not equal the change in net deferred tax assets as a result of deferred taxes recorded in
connection with the Cape and Ocean Shore acquisitions of $26.6 million.
The Company has Federal Net Operating Losses from the acquisitions of Colonial and Cape. As of December 31, 2016 and 2015,
the net operating losses from Colonial were $5.9 million and $6.2 million, respectively. These net operating losses are subject to
annual limitation under Code Section 382 in the amount of approximately $330,000 and will expire between 2029 and 2034. As
of December 31, 2016, the net operating losses from Cape were $10.8 million. These net operating losses are subject to annual
limitation under Code Section 382 of approximately $4.5 million, and will expire between 2020-2023.
As of December 31, 2016 and 2015, the Company had $1.8 million of New Jersey AMA Tax Credits. These credits do not expire.
As of December 31, 2016, the Company had $1.0 million of AMT Tax Credits that were part of the Cape acquisition. These credits
are subject to the same Code Section 382 limitation as indicated above but do not expire.
At December 31, 2016, 2015 and 2014, 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, 2016 includes approximately $10.8 million for which no provision for income tax has been
made. This amount represents an allocation of income to bad debt deductions for tax purposes only. Events that would result in
taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation,
stock redemptions and excess distributions to stockholders. At December 31, 2016, the Company had an unrecognized deferred
tax liability of $4.4 million with respect to this reserve.
84
There were no unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014. The tax years that remain subject
to examination by the Federal government include the year ended December 31, 2013 and forward. The tax years that remain
subject to examination by the States of New Jersey and New York include the years ended December 31, 2012 and forward.
Note 11: Employee Stock Ownership Plan
As part of its mutual to stock conversion, the Bank established an Employee Stock Ownership Plan and in 2006 the Bank established
a Matching Contribution Employee Stock Ownership Plan (collectively the “ESOP”) to provide retirement benefits for eligible
employees. Effective December 31, 2015, the Matching Contribution Employee Stock Ownership Plan was terminated and merged
into the Employee Stock Ownership Plan. All full-time employees are eligible to participate in the ESOP after they attain age 21
and complete one year of service during which they work at least 1000 hours. ESOP shares are allocated among participants on
the basis of compensation earned during the year. Employees are fully vested in their ESOP account after the completion of five
years of credited service or completely if service was terminated due to death, retirement, disability or change in control of the
Company. ESOP participants are entitled to receive distributions from the ESOP account only upon termination of service, which
includes retirement and death except that a participant may elect to have dividends distributed as a cash payment on a quarterly
basis.
The ESOP originally borrowed $13.4 million from the Company to purchase 2,013,137 shares of common stock issued in the
conversion. On May 12, 1998, the initial loan agreement was amended to allow the ESOP to borrow an additional $8.2 million in
order to fund the purchase of 633,750 shares of common stock. At the same time the term of the loan was extended from the initial
twelve years to thirty years. As part of the establishment of the Matching Contribution Employee Stock Ownership Plan the term
of the loan was reduced by one year and now expires in 2026. The amended loan is to be repaid from contributions by the Bank
to the ESOP trust. The Bank is required to make contributions to the ESOP in amounts at least equal to the principal and interest
requirement of the debt, assuming a fixed interest rate of 8.25%.
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, 2016 and 2015, contributions to the ESOP,
which were used to fund principal and interest payments on the ESOP debt, totaled $507,000 and $510,000, respectively. During
2016 and 2015, $194,000 and $204,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service.
At December 31, 2016 and 2015, the loan had an outstanding balance of $3.3 million and $3.5 million, respectively, and the ESOP
had unallocated shares of 327,362 and 360,995, respectively. At December 31, 2016, the unallocated shares had a fair value of
$9.8 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, 2016, 2015 and 2014, the Bank recorded compensation expense related to the ESOP of $657,000,
$603,000, and $570,000, respectively, including $373,000, $318,000, and $284,000, respectively, representing additional
compensation expense to reflect the increase in the average fair value of committed to be released and allocated shares in excess
of the Bank’s cost. As of December 31, 2016, 2,285,891 shares had been allocated to participants and 33,634 shares were committed
to be released.
Note 12: Incentive Plan
On April 20, 2006, the OceanFirst Financial Corp. 2006 Stock Incentive Plan, which authorizes the granting of stock options or
awards of common stock, was approved by stockholders. On May 5, 2011, the OceanFirst Financial Corp. 2011 Stock Incentive
Plan, which also authorizes the granting of stock options or awards of common stock, was approved by stockholders. The purpose
of these plans is to attract and retain qualified personnel in key positions, provide officers, employees and non-employee directors
(“Outside Directors”) with a proprietary interest in the Company as an incentive to contribute to the success of the Company, align
the interests of management with those of other stockholders and reward employees for outstanding performance. All officers,
other employees and Outside Directors of the Company and its affiliates are eligible to receive awards under the plans.
Under the 2011 Stock Incentive Plan, the Company is authorized to issue up to an additional 2,400,000 shares subject to option
or, in lieu of options, up to 960,000 shares in the form of stock awards. At December 31, 2016, 653,815 options or 261,526 awards
remain to be issued. Under the 2006 Stock Incentive Plan, the Company is authorized to issue up to an additional 1,000,000 shares
subject to options, or in lieu of options, up to 333,333 shares in the form of stock awards. At December 31, 2016, no options or
awards remain to be issued.
As part of the Colonial American acquisition, 370,000 options were granted in 2015 for the conversion of Colonial American
outstanding options. These options had a weighted average exercise price of $26.11 and were fully vested upon acquisition. As
part of the Cape acquisition, 599,373 options were granted in 2016 for the conversion of outstanding Cape options. These options
had a weighted average exercise price of $10.34 per option and were fully vested upon acquisition. As part of the Ocean Shore
acquisition, 287,595 options were granted in 2016 for the conversion of outstanding Ocean Shore options. These options had a
85
weighted average exercise price of $9.37 per option and were fully vested upon acquisition. The Company will not recognize
compensation expense in the future on these options as they have been accounted for as part of the acquisition.
All options expire 10 years from the date of grant and generally vest at the rate of 20% per year. The exercise price of each option
equals the closing market price of the Company’s stock on the date of grant. The Company typically issues Treasury shares to
satisfy stock option exercises.
The Company recognizes the grant-date fair value of stock options and other stock-based compensation issued to employees in
the income statement. The modified prospective transition method was adopted and, as a result, the income statement includes
$829,000, $783,000, and $657,000, of expense for stock option grants for the years ended December 31, 2016, 2015 and 2014,
respectively. At December 31, 2016, the Company had $1.9 million in compensation cost related to non-vested awards not yet
recognized. This cost will be recognized over the remaining vesting period of 3.1 years.
The fair value of stock options granted by the Company was estimated through the use of the Black-Scholes option pricing model
applying the following assumptions:
Risk-free interest rate
Expected option life
Expected volatility
Expected dividend yield
2016
2015
2014
1.69%
7 years
21%
3.01%
1.72%
7 years
28%
2.99%
2.29%
7 years
29%
2.71%
Weighted average fair value of an option share granted during the year
$
2.64
$
Intrinsic value of options exercised during the year (in thousands)
3,412
$
3.58
136
4.17
131
The risk-free interest rate is based on the U.S. Treasury rate with a term equal to the expected option life. The expected option life
conforms to the Company’s actual experience. Expected volatility is based on actual historical results. Compensation cost is
recognized on a straight line basis over the vesting period.
A summary of option activity for the years ended December 31, 2016, 2015 and 2014 follows:
Outstanding at beginning of year
Granted
Assumed in acquisition
Exercised
Forfeited
Expired
Outstanding at end of year
Options exercisable
2016
2015
2014
Weighted
Average
Exercise
Price
17.62
17.27
10.30
13.20
16.37
25.02
14.94
Number
of
Shares
2,281,931
317,460
886,968
(375,576)
(11,625)
(340,325)
2,758,833
1,912,630
$
$
Weighted
Average
Exercise
Price
15.94
17.39
26.11
13.43
14.56
25.31
17.62
Number
Of
Shares
1,751,270
238,305
370,000
(29,480)
(8,900)
(39,264)
2,281,931
1,497,960
$
$
Weighted
Average
Exercise
Price
16.47
17.72
—
12.66
13.30
22.44
15.94
Number
Of
Shares
1,740,580
280,375
—
(27,634)
(7,751)
(234,300)
1,751,270
1,003,075
$
$
86
The following table summarizes information about stock options outstanding at December 31, 2016:
Exercise Prices
$ 8.44 to 9.98
10.00 to 12.28
12.40 to 14.62
16.06 to 18.45
20.25 to 22.17
27.34
Options Outstanding
Options Exercisable
Number
of
Options
453,681
362,835
732,125
975,482
89,710
145,000
2,758,833
Weighted
Average
Remaining
Contractual
Life
3.4 years
4.0
5.3
7.3
0.1
5.3
5.3 years
Weighted
Average
Exercise
Price
$
$
9.20
10.84
14.02
17.35
21.69
27.34
14.94
Number
Of
Options
453,681
361,861
576,275
298,353
89,710
132,750
1,912,630
Weighted
Average
Remaining
Contractual
Life
3.4 years
4.0
5.1
4.6
0.1
5.0
4.2 years
Weighted
Average
Exercise
Price
9.20
10.84
13.98
17.23
21.69
27.34
14.05
$
$
The aggregate intrinsic value for stock options outstanding and stock options exercisable at December 31, 2016 is $41.6 million
and $30.6 million, respectively.
A summary of the granted but unvested stock award activity for the years ended December 31, 2016, 2015 and 2014 follows:
Outstanding at beginning of year:
Granted
Vested
Forfeited
Outstanding at end of year
2016
2015
2014
Number
of
Shares
126,960
$
66,770
(33,651)
(3,134)
156,945
$
Weighted
Average
Grant Date
Fair Value
Number
Of
Shares
Weighted
Average
Grant Date
Fair Value
Number
of
Shares
Weighted
Average
Grant Date
Fair Value
16.90
17.66
16.31
16.54
17.25
81,775
$
70,890
(23,587)
(2,118)
126,960
$
15.85
17.39
14.86
15.16
16.90
59,962
$
40,380
(16,438)
(2,129)
81,775
$
13.84
17.70
13.31
14.18
15.85
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 and commitments to extend credit.
At December 31, 2016, the following commitments and contingent liabilities existed which are not reflected in the accompanying
consolidated financial statements (in thousands):
Unused consumer and construction loan lines of credit (primarily floating-rate)
Unused commercial loan lines of credit (primarily floating-rate)
Other commitments to extend credit:
$
Fixed-Rate
Adjustable-Rate
Floating-Rate
December 31, 2016
197,784
297,813
101,749
7,776
22,161
The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 3.00% to
5.54% at December 31, 2016.
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.
87
At December 31, 2016, the Company is obligated under noncancelable operating leases for premises and equipment. Rental expense
under these leases aggregated approximately $3.1 million, $2.3 million, and $2.0 million for the years ended December 31, 2016,
2015 and 2014, respectively.
The projected minimum rental commitments as of December 31, 2016 are as follows (in thousands):
Year Ended December 31,
2017
2018
2019
2020
2021
Thereafter
$
$
2,423
2,293
2,099
2,087
1,932
9,410
20,244
The Company grants one-to-four family and commercial first mortgage real estate loans to borrowers primarily located in Central
and Southern New Jersey. The ability of borrowers to repay their obligations is dependent upon various factors including the
borrowers’ income and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority
of the Company’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances
beyond the Company’s control; the Company is, therefore, subject to risk of loss. A decline in real estate values could cause some
residential and commercial mortgage loans to become inadequately collateralized, which would expose the Bank to a greater risk
of loss.
The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks. Collateral
and/or guarantees are required for all loans.
The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management and its
legal counsel are of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the Company’s
consolidated financial condition, results of operations or liquidity.
Note 14: Earnings Per Share
The following reconciles average shares outstanding for basic and diluted earnings per share for the years ended December 31,
2016, 2015 and 2014 (in thousands):
Weighted average shares outstanding
Less: Unallocated ESOP shares
Unallocated Incentive award shares and shares held by deferred
compensation plan
Average basic shares outstanding
Add: Effect of dilutive securities:
Incentive awards and shares held by deferred compensation plan
Average diluted shares outstanding
December 31,
2016
2015
2014
23,481
(344)
(44)
23,093
433
23,526
17,037
(378)
(59)
16,600
211
16,811
17,197
(412)
(98)
16,687
110
16,797
For the years ended December 31, 2016, 2015 and 2014, 882,000, 926,000, and 767,000, respectively, of antidilutive stock options
were excluded from 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 market measurement assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset
or liability. The price in the principal (or the most advantageous) market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period
prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets
88
and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent,
(ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable
assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings,
to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required
to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to
valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be
observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed
based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own
assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best
information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that
gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no
transfers between the levels of the fair value hierarchy for the years ended December 31, 2016, 2015 and 2014. 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).
Securities Available-for-Sale
Securities classified as available-for-sale are reported at fair value. Fair value for these securities, all of which are U. S. agency
obligations, is determined using a quoted price in an active market or exchange (Level 1) or estimated by using inputs other than
quoted prices that are based on market observable information (Level 2). Level 2 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
securities without relying exclusively on quoted prices for the specific securities, but comparing the securities to benchmark or
comparable securities.
89
Other Real Estate Owned and Impaired Loans
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 of 15%. Fair value is based on independent appraisals.
The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2016 and 2015,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
December 31, 2016
Items measured on a recurring basis:
Investment securities available-for-sale:
U.S. agency obligations
Items measured on a non-recurring basis:
Other real estate owned
Loans measured for impairment based on the fair
value of the underlying collateral
December 31, 2015
Items measured on a recurring basis:
Investment securities available-for-sale:
U.S. agency obligations
Items measured on a non-recurring basis:
Other real estate owned
Loans measured for impairment based on the fair
value of the underlying collateral
Assets and Liabilities Disclosed at Fair Value
Fair Value Measurements at Reporting Date Using:
Total Fair
Value
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
$
12,224
$
— $
12,224
$
—
9,803
2,419
—
—
—
—
9,803
2,419
Fair Value Measurements at Reporting Date Using:
Total Fair
Value
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
$
29,902
$
— $
29,902
$
—
8,827
4,344
—
—
—
—
8,827
4,344
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.
Securities Held-to-Maturity
Securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold
these securities to maturity. The Company determines the fair value of the securities utilizing Level 1, Level 2 and, infrequently,
Level 3 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and
mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold
in active markets. Prices for these instruments are obtained through third-party pricing vendors or security industry sources that
actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix
pricing. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on
quoted prices for the specific securities, but comparing the securities to benchmark or comparable securities.
Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the
security. Illiquid credit markets have resulted in inactive markets for certain of the Company’s securities. As a result, there is
limited observable market data for these assets. Fair value estimates for securities for which limited observable market data is
available are based on judgments regarding current economic conditions, liquidity discounts, credit and interest rate risks, and
other factors. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result,
such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the security.
The Company utilizes third-party pricing services to obtain fair values for most of its securities held-to-maturity. Management’s
policy is to obtain and review all available documentation from the third-party pricing service relating to their fair value
90
determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries
of the third-party pricing service and makes a determination 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 (“BANs”) where management
utilized Level 3 inputs. In the case of the Level 2 securities, the significant observable inputs include benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, other market information and
observations of equity and credit default swap curves related to the issuer. Management based its fair value estimate of the BANs
on the local nature of the issuing entities, the short-term life of the security and current economic conditions.
Federal Home Loan Bank of New York Stock
The fair value for Federal Home Loan Bank of New York stock is its carrying value since this is the amount for which it could be
redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment based upon
the outstanding balance of mortgage related assets and outstanding borrowings.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as
residential mortgage, construction, consumer and commercial. Each loan category is further segmented into fixed and adjustable
rate interest terms.
Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated
prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. Fair values estimated in
this manner do not fully incorporate an exit price approach to fair value, but instead are based on a comparison to current market
rates for comparable loans.
Deposits Other than Time Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing
checking accounts and money market accounts are, 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 are based on the discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase with Retail Customers
Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.
Borrowed Funds
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings
of similar remaining maturities.
91
The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of December 31,
2016 and December 31, 2015 are presented in the following tables (in thousands):
December 31, 2016
Financial Assets:
Cash and due from banks
Securities held-to-maturity
Federal Home Loan Bank of New York stock
Loans receivable and mortgage loans
held-for-sale
Financial Liabilities:
Deposits other than time deposits
Time deposits
Securities sold under agreements to repurchase
with retail customers
Federal Home Loan Bank advances and
other borrowings
December 31, 2015
Financial Assets:
Cash and due from banks
Securities held-to-maturity
Federal Home Loan Bank of New York stock
Loans receivable and mortgage loans
held-for-sale
Financial Liabilities:
Deposits other than time deposits
Time deposits
Securities sold under agreements to repurchase
with retail customers
Federal Home Loan Bank advances and
other borrowings
Limitations
Fair Value Measurements at Reporting
Date Using:
Book
Value
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
$
301,373
$
301,373
$
— $
598,691
19,313
3,804,994
3,540,647
647,103
8,550
586,504
—
—
—
—
—
—
3,540,647
644,354
69,935
69,935
—
307,057
—
304,901
—
3,030
19,313
3,834,677
—
—
—
—
Fair Value Measurements at Reporting
Date Using:
Book
Value
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
$
43,946
$
43,946
$
— $
394,813
19,978
1,973,400
1,661,255
255,423
—
—
—
—
—
397,763
—
—
1,661,255
255,564
75,872
75,872
—
346,885
—
346,118
—
—
19,978
1,986,891
—
—
—
—
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.
92
Note 16: Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 2016 and 2015 and condensed statements of operations
and cash flows for the years ended December 31, 2016, 2015 and 2014 for OceanFirst Financial Corp. (parent company only)
reflects the Company’s investment in its wholly-owned subsidiary, the Bank, using the equity method of accounting.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
Assets:
Cash and due from banks
Advances to subsidiary Bank
Investment securities
ESOP loan receivable
Investment in subsidiary Bank
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Borrowings
Other liabilities
Stockholders' equity
Total liabilities and stockholders’ equity
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
December 31,
2016
2015
9,100
12,358
1,000
3,285
602,274
3,657
631,674
56,398
3,238
572,038
631,674
$
$
$
$
7
16,196
1,000
3,503
239,486
866
261,058
22,500
112
238,446
261,058
$
$
$
$
Years Ended December 31,
2016
2015
2014
Dividend income – subsidiary Bank
$
4,000
$
16,000
$
Interest and dividend income – investment securities
Net gain on sales of investment securities available-for-sale
Interest income – advances to subsidiary Bank
Interest income – ESOP loan receivable
Total income
Interest expense – borrowings
Operating expenses
Income before income taxes and undistributed earnings of
subsidiary Bank
Benefit for income taxes
Income before undistributed earnings of subsidiary Bank
Undistributed earnings of subsidiary Bank
Net Income
62
—
118
322
4,502
1,049
1,697
1,756
780
2,536
20,510
3
—
51
306
16,360
736
1,452
14,172
634
14,806
5,516
$
23,046
$
20,322
$
16,000
279
1,031
44
322
17,676
767
1,365
15,544
229
15,773
4,147
19,920
93
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Decrease (increase) in advances to subsidiary Bank
Undistributed earnings of subsidiary Bank
Net (gain) on sales of investment securities available for sale
Change in other assets and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of investment securities available-for-sale
Purchase of investment securities
Repayments on ESOP loan receivable
Cash consideration for acquisition, net of cash received
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net proceeds from issuance of subordinated notes
Repayment of borrowings
Dividends paid
Purchase of treasury stock
Exercise of stock options
Net cash provided by (used in) financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
$
$
Years Ended December 31,
2016
2015
2014
23,046
3,838
(20,510)
—
(1,619)
4,755
—
—
218
(19,274)
(19,056)
33,899
—
(12,616)
(1,878)
3,989
23,394
9,093
7
9,100
$
$
20,322
6,580
(5,516)
—
(707)
20,679
—
(1,000)
204
(127)
(923)
—
(5,000)
(8,693)
(6,459)
396
(19,756)
—
7
7
$
$
19,920
(6,023)
(4,147)
(1,031)
373
9,092
8,439
(651)
190
—
7,978
—
—
(8,241)
(9,178)
349
(17,070)
—
7
7
94
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data)
(Unaudited)
2016
Interest income
Interest expense
Net interest income
Provision for loans losses
Net interest income after provision for
loan losses
Other income
Operating expenses (excluding merger
related expenses)
Merger related expenses
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
2015
Interest income
Interest expense
Net interest income
Provision for loans losses
Net interest income after provision for
loan losses
Other income
Operating expenses (excluding merger
related expenses)
Merger related expenses
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
$
$
$
$
$
$
$
Dec. 31
Sept. 30
June 30
March 31
Quarters ended
$
39,904
$
37,307
$
33,141
$
4,150
35,754
510
35,244
6,257
25,833
6,632
9,036
2,984
6,052
0.22
0.22
$
$
$
3,372
33,935
888
33,047
5,896
23,715
1,311
13,917
4,789
9,128
0.36
0.35
$
$
$
3,127
30,014
662
29,352
4,883
21,457
7,189
5,589
1,928
3,661
0.16
0.16
$
$
$
23,073
2,514
20,559
563
19,996
3,376
15,313
1,402
6,657
2,452
4,205
0.25
0.25
Dec. 31
Sept. 30
June 30
March 31
20,168
2,035
18,133
375
17,758
3,985
13,687
50
8,006
2,745
5,261
0.32
0.31
23,149
$
21,970
$
20,576
$
2,395
19,575
300
19,275
4,152
15,117
1,030
7,280
2,582
4,698
0.28
0.28
$
$
$
2,143
18,433
300
18,133
4,171
14,208
184
7,912
2,779
5,133
0.31
0.31
$
$
$
2,461
20,688
300
20,388
4,118
15,885
614
8,007
2,777
5,230
0.31
0.31
$
$
$
95
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated
the effectiveness of the Company’s “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other
procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits
under the Exchange Act with the Securities and Exchange Commission (1) is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
There were no changes in the Company’s internal control over financial reporting for the year ended December 31, 2016 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(b) Management Report on Internal Control Over Financial Reporting
Management of OceanFirst Financial Corp. and subsidiary is responsible for establishing and maintaining effective internal control
over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control over
financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Company’s internal control over financial reporting as of December 31, 2016. This assessment was
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2016, the
Company maintained effective internal control over financial reporting based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s
internal control over financial reporting. This report appears on page 50.
Item 9B.
Other Information
None
96
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information relating to directors, executive officers and corporate governance and the Registrant’s compliance with Section 16
(a) of the Exchange Act required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the
Annual Meeting of Stockholders to be held on June 2, 2017 under the captions “Corporate Governance”, “Proposal 1. Election
of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”.
Item 11.
Executive Compensation
The information relating to executive compensation required by Part III is incorporated herein by reference from the Registrant’s
Proxy Statement for the Annual Meeting of Stockholders to be held on June 2, 2017 under the captions “Compensation Discussion
and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Report,” and “Compensation
Committee Interlocks and Insider Participation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership of certain beneficial owners and management and related stockholder matters
required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of
Stockholders to be held on June 2, 2017 under the caption “Stock Ownership.”
Information regarding the Company’s equity compensation plans existing as of December 31, 2016 is as follows:
Plan category
Equity compensation plans approved by
stockholders
Equity compensation plans not approved by
stockholders
Total
Number of securities
to be issued upon
exercise of outstanding
options,
warrants and rights (a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
2,758,833
$
—
2,758,833
14.94
—
14.94
653,815
—
653,815
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information relating to certain relationships and related transactions and director independence required by Part III is
incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on
June 2, 2017 under the caption “Transactions with Management.”
Item 14.
Principal Accountant Fees and Services
The information relating to the principal accounting fees and services is incorporated by reference to the Registrant’s Proxy
Statement for the Annual Meeting to be held on June 2, 2017 under the caption “Proposal 3. Ratification of Appointment of the
Independent Registered Public Accounting Firm.”
97
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a) (1) Financial Statements
The following documents are filed as a part of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and
2014
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2016,
2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements for the Years Ended December 31, 2016, 2015 and 2014
PAGE
49
51
52
53
54
55
57
(a) (2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(a) (3) Exhibits
3.1
3.2
4.0
10.1
10.1(a)
10.1(b)
10.1(c)
10.3
10.3(a)
10.4
10.4(a)
10.5
10.5(a)
10.8
10.15
10.16
10.18
10.19
10.20
10.21
10.21(a)
10.22
Certificate of Incorporation of OceanFirst Financial Corp. (1)
Bylaws of OceanFirst Financial Corp. (20)
Stock Certificate of OceanFirst Financial Corp. (1)
Form of OceanFirst Bank Employee Stock Ownership Plan (1)
Amendment to OceanFirst Bank Employee Stock Ownership Plan (2)
Amended Employee Stock Ownership Plan (10)
Form of Matching Contribution Employee Stock Ownership Plan (10)
OceanFirst Bank 1995 Supplemental Executive Retirement Plan (1)
OceanFirst Bank Executive Supplemental Retirement Income Agreement (11)
OceanFirst Bank Deferred Compensation Plan for Directors (1)
OceanFirst Bank New Executive Deferred Compensation Master Agreement (11)
OceanFirst Bank Deferred Compensation Plan for Officers (1)
OceanFirst Bank New Director Deferred Compensation Master Agreement (11)
Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (3)
Amendment of the OceanFirst Financial Corp. 2000 Stock Option Plan (4)
Form of OceanFirst Financial Corp. 2000 Stock Option Plan Non-Statutory Option Award
Agreement (6)
Amendment and form of OceanFirst Bank Employee Severance Compensation Plan (7)
Form of OceanFirst Financial Corp. Deferred Incentive Compensation Award Program (8)
2006 Stock Incentive Plan (9)
Form of Employment Agreement between OceanFirst Financial Corp. and certain executive
officers, including Michael J. Fitzpatrick. (10)
Amendment to form of Employment Agreement between OceanFirst Financial Corp and
certain executive officers, including Michael J. Fitzpatrick. (15)
Form of Employment Agreement between OceanFirst Bank and certain executive officers,
including Michael J. Fitzpatrick. (10)
98
10.23
10.23(a)
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.30A
10.31
10.31A
10.32
10.33
10.34
10.35
14.0
21.0
23.0
31.1
31.2
32.1
101.0
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Form of Change in Control Agreement between OceanFirst Financial Corp. and certain
executive officers, including Steven J. Tsimbinos (10)
Amendment to form of Change in Control Agreement between OceanFirst Financial Corp. and
certain executive officers, including Steven J. Tsimbinos (15)
Form of Change in Control Agreement between OceanFirst Bank and certain executive officers,
including Steven J. Tsimbinos (10)
Form of OceanFirst Financial Corp. 2011 Stock Incentive Plan Award Agreement for Stock
Options (13)
Form of OceanFirst Financial Corp. 2011 Stock Incentive Plan Award Agreement for Stock
Awards (13)
Form of OceanFirst Financial Corp. 2011 Cash Incentive Compensation Plan Award
Agreement (13)
2011 Stock Incentive Plan (14)
2011 Cash Incentive Compensation Plan (14)
Amended and restated Employment Agreement between Christopher D. Maher and OceanFirst
Financial Corp. dated April 23, 2014 (16)
Amendment No. 1 dated August 5, 2015 to the Amended and Restated Employment Agreement
between Christopher D. Maher and OceanFirst Financial Corp. dated April 23, 2014 (21)
Amended and restated Employment Agreement between Christopher D. Maher and OceanFirst
Bank dated April 23, 2014 (16)
Amendment No. 1 dated August 5, 2015 to the Amended and Restated Employment Agreement
between Christopher D. Maher and OceanFirst Bank dated April 23, 2014 (21)
Supplemental Executive Retirement Account Agreement between Christopher D. Maher and
OceanFirst Bank dated June 18, 2013 (17)
Letter Agreement between Craig C. Spengemen and OceanFirst Bank (18)
Form of OceanFirst Financial Corp 2011 Stock Incentive Plan Award Agreement for Stock
Awards (13)
Form of Employment Agreement between OceanFirst Bank, OceanFirst Financial Corp., and
certain executive officers, including Joseph R. Iantosca and Joseph J. Lebel (21)
OceanFirst Financial Corp. Code of Ethics and Standards of Personal Conduct (5)
Subsidiary information is incorporated herein by reference to “Part I – Subsidiary Activities”
Consent of KPMG LLP (filed herewith)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith)
Certifications pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes
Oxley Act of 2002 (filed herewith)
The following materials from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the
Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income,
(iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of
Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the
Notes to Consolidated Financial Statements.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Definitions Linkbase Document
99
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as
amended, Registration No. 33-80123.
Incorporated herein by reference from the Exhibits to Form 10-K filed on March 25, 1997.
Incorporated herein by reference from Schedule 14-A Definitive Proxy Statement filed on March 19, 1998.
Incorporated herein by reference from the Schedule 14-A Definitive Proxy Statement filed on March 21, 2003.
Incorporated herein by reference from the Exhibits to Form 10-K filed on March 15, 2004.
Incorporated by reference from Exhibit to Form 10-K filed on March 15, 2005.
Incorporated herein by reference from Exhibits to Form 10-Q filed on August 9, 2005.
Incorporated herein by reference from Exhibits to Form 10-K filed on March 14, 2006.
Incorporated herein by reference from Schedule 14-A Definitive Proxy Statement filed on March 14, 2006.
Incorporated by reference from Exhibit to Form 10-K filed on March 17, 2008.
Incorporated by reference from Exhibit to Form 8-K filed on September 23, 2008.
Incorporated by reference from Exhibit to Form 8-K filed January 20, 2009.
Incorporated by reference from Exhibit to Form 8-K filed May 10, 2011.
Incorporated herein by reference from Schedule 14-A Revised Definitive Proxy Statement filed on March 31, 2011.
Incorporated herein by reference from Exhibit to Form 8-K filed on July 21, 2011.
Incorporated herein by reference from Exhibit to Form 8-K filed April 25, 2014.
Incorporated herein by reference from Exhibit to Form 8-K filed June 20, 2013.
Incorporated herein by reference from Exhibit to Form 8-K filed December 5, 2013.
Incorporated herein by reference from Exhibit to Form 8-K filed on January 17, 2014.
Incorporated herein by reference from Exhibit to Form 8-K filed on January 23, 2015.
Incorporated herein by reference from Exhibit to Form 8-K filed on August 5, 2015.
Item 16.
Form 10-K Summary
Not applicable.
100
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OCEANFIRST FINANCIAL CORP.
By:
/s/ Christopher D. Maher
Christopher D. Maher
Chairman of the Board
President and Chief Executive Officer
Date:
March 6, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
Name
/s/ Christopher D. Maher
Christopher D. Maher
Chairman of the Board, President, and Chief Executive
Officer (principal executive officer)
/s/ Michael J. Fitzpatrick
Michael J. Fitzpatrick
Executive Vice President and Chief Financial Officer
(principal financial officer)
/s/ Angela K. Ho
Angela K. Ho
(principal accounting officer)
/s/ Steven E. Brady
Steven E. Brady
Director
/s/ Joseph J. Burke
Joseph J. Burke
Director
/s/ Angelo Catania
Angelo Catania
Director
/s/ Michael D. Devlin
Michael D. Devlin
Director
Date
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
101
Name
/s/ Jack M. Farris
Jack M. Farris
Director
/s/ John R. Garbarino
John R. Garbarino
Director
/s/ Dorothy F. McCrosson
Dorothy F. McCrosson
Director
/s/ Donald E. McLaughlin
Donald E. McLaughlin
Director
/s/ Diane F. Rhine
Diane F. Rhine
Director
/s/ Mark G. Solow
Mark G. Solow
Director
/s/ John E. Walsh
John E. Walsh
Director
/s/ Samuel R. Young
Samuel R. Young
Director
Date
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
102
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
The Board of Directors
OceanFirst Financial Corp.:
We consent to incorporation by reference in the registration statements (No. 333-215270; No. 333-215269; No. 333-177243;
and No. 333-141746) on Form S-8, in registration statements (No. 333-213307; and No. 333-209590) on Form S-4, as amended
by Post-Effective Amendments No. 1 on Form S-8, and in registration statement (No. 333-213487) on Form S-3 of OceanFirst
Financial Corp., of our reports dated March 15, 2017 with respect to the consolidated statements of financial condition of
OceanFirst Financial Corp. and subsidiary as of December 31, 2016 and 2015 and the related consolidated statements of
income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2016, and the effectiveness of internal control over financial reporting as of December 31, 2016, which
reports are incorporated by reference in the December 31, 2016 Annual Report on Form 10-K of OceanFirst Financial Corp.
/s/ KPMG LLP
Short Hills, New Jersey
March 15, 2017
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher D. Maher, certify that:
Exhibit 31.1
1.
I have reviewed this annual report on Form 10-K of OceanFirst Financial Corp. and subsidiary;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures or caused such disclosure controls to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared; and
Designed such internal control over financial reporting or caused such internal control over financial reporting
to be designed under our supervision, 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; and
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2017
/s/ Christopher D. Maher
Christopher D. Maher
Chief Executive Officer
(principal executive officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Fitzpatrick certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of OceanFirst Financial Corp. and subsidiary;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures or caused such disclosure controls to be designed
under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared; and
Designed such internal control over financial reporting or caused such internal control over financial
reporting to be designed under our supervision, 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; and
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2017
/s/ Michael J. Fitzpatrick
Michael J. Fitzpatrick
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADDED BY
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of OceanFirst Financial Corp. and subsidiary (the “Company”) on Form 10-K for the period
ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned
certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of and for the period covered by the Report.
/s/ Christopher D. Maher
Christopher D. Maher
Chief Executive Officer
March 15, 2017
/s/ Michael J. Fitzpatrick
Michael J. Fitzpatrick
Chief Financial Officer
March 15, 2017
OceanFirst Bank OFFicers
ExEcutivE OfficErs
Christopher D. Maher
Chairman of the Board
President
Chief Executive Officer
Michael J. Fitzpatrick
Executive Vice President
Chief Financial Officer
Joseph R. Iantosca
Executive Vice President
Chief Administrative
Officer
Joseph J. Lebel III
Executive Vice President
Chief Banking Officer
Steven J. Tsimbinos
Executive Vice President
General Counsel
Corporate Secretary
first sEniOr
vicE PrEsidEnts
Vincent M. D’Alessandro
President, Southern
Region
George Destafney
President, Central Region
Gary S. Hett
Human Resources
David R. Howard
Direct Banking
Margaret M. Lanning
Chief Credit Officer
sEniOr vicE
PrEsidEnts
Thomas A. Ando
Commercial Lending
Nina Anuario
Business Development
Debra A. Bassinder
BSA & Security
Michelle J. Berry
Residential Lending
Janet M. Bossi
Residential Lending
S. Joseph Casella
Commercial Lending
Sharon L. Danielson
Deposit Operations
Craig Degenova
Commercial Lending
Michael DellaBarca
Commercial Credit
Administration
Bradley J. Fouss
Commercial Lending
Steven L. Pellegrinelli
Commercial Lending
Edward J. Geletka
Business Development
Louis Petrini
Commercial Lending
Anthony Giordano
Senior Operations Officer
Charles L. Pinto
Retail Banking
Mark A. Harhigh
Commercial Credit
Administration
Michele E. Hart
Associate General
Counsel, Legal
Jill Apito Hewitt
Investor Relations
& Corporate
Communications
Angela K. Ho
Principal Accounting
Officer
Gayle S. Hoffman
Chief Risk Officer
Sean D. Kauffman
Commercial Lending
Kenneth L. Keller
Commercial Lending
Joseph A. LaDuca
Controller
Cara M. Larned
Marketing
Robert A. Laskowski
Treasurer
Raymond C. Leahy
Commercial Lending
Stacy S. Mattia
Commercial Lending
Nancy L. Mazza
Retail Banking
Scott McLaughlin
Commercial Credit
Administration
Michael C.K. Moorhead
Commercial Credit
Administration
Edward K. Moran
Commercial Lending
Donald Morgenweck
Accounting
Veronica Morey
Retail Banking
Rachel M. O’Keefe
Wealth Management
Operations
Michele A. Powelczyk
Commercial Credit
Administration
James M. Smith
Commercial Lending
Noel M. Spear
Real Estate Operations
Craig C. Spengeman
Wealth Management
Mark A. Tasy
Retail Banking
Suzanne L. Wegryn
Commercial Credit
Administration
David A. Williams
Information Technology
vicE PrEsidEnts
Enid Z. Agosto
Robert W. Baechler
Linda L. Blakaitis
Shannan Boyd
Elaine G. Boyko
Robert A. Brennan
Dawn Brodton
Vicki Buczynski
Kevin Burns
Brian R. Challender
Tricia Ciliberto
Catherine Colobert
Mark Conners
Francine S. Crudo
Lynda Dayton
Jeffrey Decesare
Keryn J. Dettlinger
Lauren Dezzi
Catherine Farley
Patricia Ferry
Edward Fitzpatrick
Jill G. Flynn
Sharon M. Franklin
Michael L. Frankovich
Gregory Fuller
Erin K. Garrabrant
Philip M. Gogarty
Matthew Grant
Christine R. Gray
Stephen H. Haak
Nancy Haig
Matthew Haines
Angela Hickman
Jonas L. Homa
Denise A. Horner
Jean G. Jacobson
Brandon C. Kaletkowski
Robert L. Kilgour
Theresa A. Killian
David Krause
Patricia A. Laird
Lana L. Latella
Brett Lawrence
Eleni D. Lemoniotis
Frederick Lopez
Kevin J. Madgey
Jodi Magazzu
Donna Mason
Bernard M. McCue
Marc A. Mosco
Jeffrey J. Muller
Elizabeth A. Nugent
Rita E. Permuko
Vernise L. Petrolito
Cheryl A. Pivola
Maureen A. Purcell
Karen N. Rack
Catherine R. Rollo
Jeffrey Ropiecki
Kenneth L. Rosshirt
Rebecca Rothstein
Frank A. Scarpone
Christine L. Schiess
Jonathan R. Seidel
Michael C. Serafino
Patricia M. Siciliano
Alicia F. Smith
Robert Sobkow
Kellie M. Spawton
Anne D. Sutherland
Sharon L. Taggart
Theresa Trainum
Lois A. Velardo
James O. Waters
Trevor A. Watson
Christin A. Wiggins
Margaret M. Williams
Lynn Wingender
Christopher S. Wolf
Barbara A. Wright
Wendy L. Wright
Patricia A. Zilly
AssistAnt
vicE PrEsidEnts
Kristen M. Acacia
Issan Acosta
Elizabeth M. Alexander
Carmela Bonsera
Jennifer L. Bottomly
Linda A. Calderon
Vicki Cannizzaro
Patrick M. Carrano
Lisa A. Chandler
Kimberlie L. Cooper-Truitt
Krysten Costa
Scott H. Courtney
Lori A. Cozzino
Richard J. Cunningham
Carol A. Daniels
Matthew A. Dietrich
Eileen Dipasquale
Jennifer L. Eng
Kellyanne Facenda
Karen L. Farrell
Mary Fischer
Catherine A. Galli
Lee Ann Gant
Patricia Germano
Dennis W. Gilbert
Brenda Gleeson
Diane M. Haake
Debra M. Hall
James F. Haller
Heather Hays
Michelle Hellick
Donna L. Hollenback
Jennifer W. Ingenito
Tracy H. Jenkins
Jane L. Jensen
Keshia E. Jones
Andre H. Jordan
Arnold L. Juliano
Pradeep Kamdar
Christopher Kent
Volha Kislaya
Karen Larned
Christine M. Marciano
Sara E. Martinez
Sally A. Matics
Patricia A. McGrath
Jackie McIlvaine
David N. Mowder
Dominick A. Mucchiello
Marc T. Mugler
John R. Murray
Stefanie A. Nolan
Cathyann O’Connell
Marifrances O’Neill
Susan Paz-Cubberley
William L. Peace
Katherine A. Pongracz
William D. Powell
Cynthia A. Presti
Leon H. Riggins
Jennifer L.D. Rivera
Kimberly Robinson
Kathleen G. Roche
Kimberlee Rubba
Kathleen Scardilli
Michael J. Segeren
Rosemarie Sherman
Tia M. Smith
Melissa A. Southard
Melissa Sterling
Debra K. Townsend
Susan Turner
Christopher Venturi
Christina Vespertino
Stephanie Villari
Maureen Webb
Nancy L. Wescoat
Terri V. Wesley
AssistAnt sEcrEtAriEs
Laurel A. Fluet
Mary Beth Hennessy
Janet Verdura
Karen A. Willis
BOard OF directOrs
Steven E. Brady
Retired
Ocean Shore Holding Co.
Joseph J. Burke, CPA
Retired
KPMG LLP
Angelo Catania
Retired
Homestar Services, LLC
Michael D. Devlin
Retired
Cape Bancorp, Inc.
Jack M. Farris
Vice President and
Deputy General Counsel
InfoSec & Cybersecurity for
Verizon Communications, Inc.
John R. Garbarino
Retired
OceanFirst Financial Corp.
Christopher D. Maher
Chairman of the Board
President and Chief Executive Officer
Dorothy F. McCrosson, Esq.
Managing Partner
McCrosson & Stanton, P.C.
Donald E. McLaughlin, CPA
Retired
Diane F. Rhine
Broker Sales Representative
Childers Sotheby’s
International Realty
Mark G. Solow
Retired
GarMark Advisors, LLC
John E. Walsh
Senior Vice President
T and M Associates, Inc.
Samuel R. Young
President and CEO
Tilton Fitness Management
directOrs emeritus
John W. Chadwick
Thomas F. Curtin
Robert E. Knemoller
James T. Snyder
Corporate InformatIon
OceanFirst Financial cOrp.
OceanFirst Bank
OceanFirst Financial cOrp.
cOrpOrate OFFicers
Christopher D. Maher
Chairman of the Board
President and Chief Executive Officer
Michael J. Fitzpatrick
Executive Vice President
Chief Financial Officer
Steven J. Tsimbinos
Executive Vice President
General Counsel
Corporate Secretary
Jill Apito Hewitt
Senior Vice President
Investor Relations Officer
Robert A. Laskowski
Senior Vice President
Treasurer
Linda L. Blakaitis
Vice President
Assistant Corporate Secretary
sharehOlder inFOrmatiOn
administrative OFFices
975 Hooper Avenue
Toms River, NJ 08754-2009
(732) 240-4500
www.oceanfirst.com
annual meeting OF sharehOlders
The Annual Meeting of Shareholders will be held on June 2, 2017
at 10:00 a.m. at Navesink Country Club, 50 Luffburrow Lane,
Middletown, New Jersey.
investOr relatiOns
Copies of the Company’s earnings releases and financial publica-
tions, including the annual report on Form 10-K (without exhibits)
filed with the Securities and Exchange Commission are available
without charge by contacting:
Jill Apito Hewitt, Senior Vice President, Extension 7516 or
investorrelations@oceanfirst.com
stOck transFer and registrar
Shareholders wishing to change the name, address or ownership of
stock, to report lost certificates or to consolidate accounts are asked
to contact the Company’s stock registrar and transfer agent directly:
American Stock Transfer and Trust Co.
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(800) 937-5449
independent registered puBlic accOunting Firm
KPMG LLP
51 John F. Kennedy Parkway
Short Hills, NJ 07078
OceanFirst Financial Corp.
975 Hooper Avenue
Toms River, NJ 08754-2009
732-240-4500
www.oceanfirst.com
NASDAQ: OCFC
Member FDIC • Equal Housing Lender
• Equal Opportunity Lender
EQUAL HOUSING
OPPORTUNI TY