Item 1. Business
Item 1. Business
General
OceanFirst Financial Corp. (the “Company”) is incorporated under Delaware law and serves as the holding company for OceanFirst Bank N.A. (the “Bank”). At December 31, 2021, the Company had consolidated total assets of $11.7 billion and total stockholders’ equity of $1.5 billion. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”) and the Securities and Exchange Commission (the “SEC”). The Bank is primarily subject to regulation and supervision by the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”). Currently, the Company does not transact any material business other than through the Bank, its subsidiary.
The Company has been the holding company for the Bank since it acquired the stock of the Bank upon the Bank’s conversion from a federally-chartered mutual savings bank to a federally-chartered capital stock savings bank in 1996 (the “Conversion”). Effective January 31, 2018, the Bank converted to a national bank charter and the Company became a bank holding company. The conversions on January 31, 2018 did not change the entities which regulate and supervise the Bank and Company. The Bank’s principal business is attracting retail and commercial deposits and investing those deposits primarily in loans, consisting of commercial real estate and other commercial loans, which have become a key focus of the Bank, and single-family, owner-occupied residential mortgage loans. The Bank also invests in other types of loans, including residential construction and consumer loans. In addition, the Bank invests in mortgage-backed securities (“MBS”), securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by applicable law and regulations. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest on its debt and equity securities. The Bank also receives income from bankcard services, trust and asset management services, deposit account services, gains on sales of loans, gains on equity investments, bank owned life insurance, commercial loan swap income, and other fees. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, maturities of debt securities, Federal Home Loan Bank (“FHLB”) advances, access to the Federal Reserve discount window, other borrowings such as subordinated debt, and to a lesser extent, investment maturities and proceeds from the sale of loans and equity investments .
The Company’s website address is www.oceanfirst.com . The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Forward-Looking Statements
In addition to historical information, this Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of plans or strategies is 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 nationally and in local markets, unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory/tax changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, disruption due to pandemic or other public health emergencies; a failure in or breach of the Bank’s operational or security systems or infrastructure, including cyberattacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; demand for financial services in the Company’s market area, accounting principles and guidelines, and the Bank’s ability to successfully integrate acquired operations.
Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when
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COVID-19 can be fully controlled and abated and, the timing of full inoculation against the virus. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: the demand for the Bank’s products and services may decline, making it difficult to grow assets and income; loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; the Company’s allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect the Company’s net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank; if legislation or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges the Bank may receive or on its ability to charge overdraft or other fees, it could adversely impact the Company’s financial results; the Company’s cybersecurity risks would be increased as the result of an increased use of the Bank’s online banking platform or an increase in the number of employees working remotely; and Federal Deposit Insurance Corporation (“FDIC”) premiums may increase if the agency experiences additional resolution costs.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Market Area and Competition
The Bank is a regional community bank offering a wide variety of financial services to meet the needs of the communities it serves. At December 31, 2021, the Bank operated its business through its branch office and headquarters located in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, an administrative office located in Mount Laurel, New Jersey, 46 additional branch offices, and four deposit production facilities located throughout central and southern New Jersey and the greater metropolitan area of New York City and Philadelphia. The Bank also operated commercial loan production offices in New Jersey, New York City, the greater Philadelphia area, Baltimore, and Boston.
The Bank is one of the largest and oldest financial institutions in New Jersey, with headquarters approximately midway between New York City and Philadelphia. The economy in the Bank’s primary market area, which represents central and southern New Jersey, is based on a mixture of service and retail trade; with other empl oyment provided by a variety of wholesale trade, manufacturing, federal, state and local government, hospitals and utilities. The area is home to commuters working in and around New York City and Philadelphia and also includes a significant number of vacation and second homes in the communities along the New Jersey shore. In addition, the Bank provides banking services through teams located in the major metropolitan markets of Philadelphia, New York, Baltimore, Washington D.C., and Boston.
The Bank’s future growth opportunities will be influenced by the growth and stability of its geographic marketplace and the competitive environment. The Bank faces significant competition both in making loans and in attracting deposits. In addition, rapid technological changes and consumer preferences may result in increased competition for the Company’s other services as a number of well-funded technology-focused companies are innovating in the payments, distributed ledger, and cryptocurrency networks to disintermediate portions of the traditional banking model. The state of New Jersey, New York City, Philadelphia, Baltimore, Washington D.C., and Boston are attractive markets to many financial institu tions. Many of the Bank’s competitors are significantly larger institutions headquartered out-of-market that 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. 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 bank competitors with teams of local financial experts in each market providing personalized accounts and extraordinary customer service.
Community Involvement
The Bank promotes efforts to enhance the quality of life in the communities it serves through employee volunteer efforts and the work of OceanFirst Foundation (the “Foundation”). Employees are encouraged to help their neighbors in many ways and receive up to eight hours of Bank-paid volunteer time each year. Known as the WaveMakers when helping in the community, employees collectively spend thousands of hours volunteering and serving in leadership roles with local nonprofit organizations, along with participating in other activities that contribute to improving the quality of life for others. The Foundation, established in 1996 during the Company’s initial public offering, has granted over $43.8 million to enrich the lives
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of local citizens by supporting initiatives in health and human services, education, affordab le housing, youth development, and the arts.
Acquisitions
On November 4, 2021, the Company announced the execution of a definitive agreement and plan of merger with Partners Bancorp (“Partners”), a multi-bank holding company operating under the brands of Virginia Partners Bank, Maryland Partners Bank, The Bank of Delmarva, and Liberty Bell Bank. The transaction is subject to receipt of the approval of Partners’ stockholders and required regulatory approvals. Subject to receipt of those approvals and fulfillment of other customary closing conditions, the Company plans to close the transaction in the first half of 2022.
On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which added $1.1 billion to assets, $940.1 million to loans, and $941.8 million to deposits. Two River’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.
On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits. Country Bank’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”), which added $494.4 million to assets, $307.3 million to loans, and $449.0 million to deposits. Capital Bank’s results of operations are included in the consolidated results for the period beginning on February 1, 2019.
These transactions have enhanced the Bank’s position as the premier community banking franchise in central and southern New Jersey, strengthened its presence in the major metropolitan areas of Philadelphia and New York, grown business lines, expanded its geographic footprint, and improved financial performance. The announced transaction with Partners will supplement the Company’s existing expansion efforts into Baltimore and Washington D.C. The Company will continue to evaluate potential acquisition opportunities to further create stockholder value.
Lending Activities
Loan Portfolio Composition . At December 31, 2021, the Bank had total loans outstanding of $8.62 billion, of which $5.43 billion, or 63.0% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of: $2.48 billion of residential real estate loans, or 28.8% of total loans; $449.2 million of commercial and industrial loans, or 5.2% of total loans; and $260.8 million of consumer loans, primarily home equity loans and lines of credit, or 3.0% of total loans. At December 31, 2021, the Bank had no loans held-for-sale and 36.7% of the Bank’s total loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the FRB, and legislative and tax policies.
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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,
2021 2020 2019
Amount Percent
of Total Amount Percent
of Total Amount Percent
of Total
(dollars in thousands)
Commercial and industrial $ 449,224 5.21 % $ 470,656 6.03 % $ 396,434 6.38 %
Commercial real estate 5,433,126 63.01 4,636,529 59.43 3,089,063 49.71
Residential real estate 2,479,701 28.76 2,354,983 30.19 2,321,157 37.35
Consumer (1)
260,819 3.02 339,462 4.35 407,998 6.56
Total loans 8,622,870 100.00 % 7,801,630 100.00 % 6,214,652 100.00 %
Deferred origination costs, net 9,332 9,486 9,880
Allowance for loan credit losses (48,850) (60,735) (16,852)
Loans receivable, net 8,583,352 7,750,381 6,207,680
Less:
Loans held for sale — 45,524 —
Total loans receivable, net $ 8,583,352 $ 7,704,857 $ 6,207,680
Total loans:
Adjustable rate $ 3,162,950 36.68 % $ 2,991,321 38.34 % $ 2,107,790 33.92 %
Fixed rate 5,459,920 63.32 4,810,309 61.66 4,106,862 66.08
$ 8,622,870 100.00 % $ 7,801,630 100.00 % $ 6,214,652 100.00 %
(1) Consists primarily of home equity loans, home equity lines of credit, student loans, and, to a lesser extent, loans on savings accounts and overdraft lines of credit.
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Loan Maturity . The following table shows the contractual maturity of the Bank’s total loans at December 31, 2021. The table does not include principal prepayments:
At December 31, 2021
Commercial
and
Industrial Commercial Real Estate Residential
Real Estate Consumer Total
Loans
Receivable
(in thousands)
One year or less $ 142,308 $ 653,007 $ 5,678 $ 2,409 $ 803,402
After one year:
More than one year to five years 238,636 1,959,435 21,190 35,565 2,254,826
More than five years to fifteen years 41,898 2,705,307 349,940 129,458 3,226,603
More than fifteen years 26,382 115,377 2,102,893 93,387 2,338,039
Total due after December 31, 2022 306,916 4,780,119 2,474,023 258,410 7,819,468
Total amount due $ 449,224 $ 5,433,126 $ 2,479,701 $ 260,819 8,622,870
Deferred origination costs, net 9,332
Allowance for loan credit losses (48,850)
Loans receivable, net $ 8,583,352
The following table sets forth at December 31, 2021, the dollar amount of total loans receivable, contractually due after December 31, 2022, and whether such loans have fixed interest rates or adjustable interest rates:
Due After December 31, 2022
Fixed Adjustable Total
(in thousands)
Commercial and industrial $ 139,447 $ 167,469 $ 306,916
Commercial real estate 2,458,850 2,321,269 4,780,119
Residential real estate 2,268,017 206,006 2,474,023
Consumer 142,763 115,647 258,410
Total loans receivable $ 5,009,077 $ 2,810,391 $ 7,819,468
Commercial and Industrial . At December 31, 2021, commercial and industrial (“C&I”) loans totale d $449.2 million, or 5.2% of the Bank’s total loans outstanding. The Bank originates C&I loans and lines of credit (including for working capital, fixed asset purchases, and acquisition, receivable, and inventory financing) primarily in the Bank’s market are a. In underwriting C&I loans and credit lines, the Bank reviews and analyzes the financial history and capacity of the borrower, collateral value, strength and character of the principals, and general payment history of the principal borrowers in coming to a credit decision. The Bank generally originates C&I loans secured by the assets of the business including accounts receivable, inventory, and fixtures. The Bank generally requires the personal guarantee of the principal borrowers for all C&I loans. Risk of loss on a C&I business loan is dependent largely on the borrower’s ability to remain financially able to repay the loan from the ongoing operations of the business. In addition, any collateral securing such loans may depreciate over time, may be difficult to appraise, and may fluctuate in value.
Commercial Real Estate . Th e Bank originates commercial real estate loans that are secured by properties, or properties under construction, that are generally used for business purposes such as office, industrial, or retail facilities. A substantial majority of the Bank’s commercial real estate loans are located in its primary market area. The Bank generally originates commercial real estate loans with terms of up to ten years and amortization schedules up to 30 years with fixed or adjustable rates. Fixed-rate loans typically contain prepayment penalties over an initial term. Additionally, the B ank offers an interest rate swap program that allows commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. In reaching its decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history, and profitability, among other factors.
At December 31, 2021, the Bank’s total commercial real estate loans outstanding were $5.43 billion, or 63.0% of total loans, as compared to $4.64 billion, or 59.4% of total loans at December 31, 2020. The Bank continues to grow this market segment primarily through the addition of experienced commercial lenders and through expansive commercial lending teams i n various New Jersey counties as well as teams in New York City, Philadelphia, Baltimore, Washington D.C., and Boston. Of the total
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commercial real estate portfolio, 19.4% is considered owner-occupied, whereby the underlying business owner occupies a majority of the property.
The commercial real estate portfolio also includes loans for the construction of commercial properties. In certain cases, 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, 2021 and 2020, the Bank had an outstanding balance in commercial construction loans of less than 5% of total exposure .
The Bank originates mu lti-family mortgage loans and, to a lesser extent, land loans, which are included in commercial real estate. At December 31, 2021 and 2020, the Bank’s multi-family loans were $1.05 billion and $710.2 million, respectively, and land loans were $4.2 million and $8.2 million , respectively.
Consumer: Residential Real Estate . The Bank offers both fixed-rate and adjustable-rate mortgage (“ARM”) loans secured by one-to-four family residences with maturities up to 30 years. The majority of such loans are secured by property located in the Bank’s primary market area. Loan originations are typically generated by the Bank’s commissioned loan representatives and are largely derived from contacts within the local real estate industry, members of the local communities, and the Bank’s existing or past customers. Additionally, for the year ended December 31, 2021, the Bank purchased $302.0 million of loans originated by others.
At December 31, 2021, $2.48 billion, or 28.8% of total loans, were residential real estate loans, primarily single family and owner occupied. To a lesser extent and included in this activity are residential mortgage loans secured by seasonal second homes, non-owner occupied investment properties and construction loans. The average size of the Bank’s residential real estate loans, excluding purchased loan pools, was approximately $280,000 at December 31, 2021.
The Bank currently offers several ARM loan programs with interest rates that adjust every one, three, five, or ten years. The Bank’s ARM loans generally provide for periodic caps of 2% or 3% and an overall cap of 6% on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate on these loans is indexed to the applicable three-, five- or ten-year U.S. Treasury constant maturity yield, with a repricing margin which ranges generally from 2.75% to 3.50% above the index. The Bank also offers three-, five-, seven- and ten-year ARM loans which operate as fixed-rate loans for the first three, five, seven, or ten years and then convert to one-year ARM loans for the remainder of the term. The ARM loans are then indexed to a margin of generally 2.75% to 3.50% above the one-year U.S. Treasury constant maturity yield.
Generally, ARM loans pose credit risks different than the risks inherent in fixed-rate loans, primarily because as interest rates rise, the payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of ARM loans with an initial fixed period of five years or less must qualify based on the greater of the note rate plus 2% or the fully-indexed rate. Seven- to ten-year ARM loans must qualify based on the note rate. The Bank does not originate ARM loans that can result in negative amortization.
The Bank’s fixed-rate mortgage loans are currently made for terms from ten to 30 years. The Bank generally holds its residential loans for its portfolio, but from time to time may sell a portion of its longer-term, fixed-rate loans after reviewing volume and yield, and after evaluating interest rate risk and capital management considerations. Servicing rights are generally sold as part of the loan sale. The retention of fixed-rate mortgage loans may increase the level of interest rate risk exposure of the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to substantial increases in prepayments during periods of falling interest rates.
The Bank’s policy is to originate residential real estate loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 95% of the appraised value or selling price if private mortgage insurance is obtained. Appraisals are obtained for loans secured by real estate properties. The weighted average loan-to-value ratio of the Bank’s residential real estate loans, excluding purchased loan pools, was 59% at December 31, 2021 based on appraisal values at the time of origination. Title insurance is typically required for first mortgage loans. Residential mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed-rate residential mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.
The Bank has made, and may continue to make, residential mortgage loans that will not qualify as Qualified Mortgage Loans under the Dodd-Frank Act and the CFPB regulations. See Risk Factors – Risks Related to Lending Activities – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans .
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Included in the Bank’s residential real estate loan balance at December 31, 2021 were residential construction loans which totaled $153.5 million. The Bank originates residential construction loans primarily on a construction to permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. All of the Bank’s residential construction loans are made to individuals building a residence.
Construction lending, by its nature, entails additional risks compared to residential real estate lending, attributable primarily to the fact that funds are advanced based upon a security interest in a project which is not yet complete. Risk of loss on a construction loan depends largely upon whether initial estimate of the property's value at completion of construction equals or exceeds the cost of the property construction. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed. The Bank addresses these risks through its underwriting policies and procedures and its experienced staff.
Other Consumer: Home Equity Lines and Loans, Student Loans and Other Consumer . At December 31, 2021, th e Bank’s other consumer loans totaled $260.8 million, or 3.0% of the Bank’s total loan portfolio. Of the total consumer loan portfolio, home equity loans comprised $108.0 million; home equity lines of credit comprised $120.2 million; and student loans comprised $31.7 million.
The Bank originates home equity loans typically as fixed-rate loans with terms ranging from five to 20 years. The Bank also offers variable-rate home equity lines of credit. Home equity loans and lines of credit are originated based on the applicant’s income and their ability to repay and are secured by a mortgage on the underlying real estate, typically owner-occupied, one-to-four family residences. Generally, the loan when combined with the balance of any applicable first mortgage lien, may not exceed 70% of the appraised value of the property at the time of the loan commitment. The Bank charges an early termination fee should a home equity loan or line of credit be closed within two or three years of origination. A borrower is required to make monthly payments of principal and interest, at a minimum of $50, based upon a 10-, 15- or 20-year amortization period. Certain home equity lines of credit require the payment of interest-only during the first five years with fully-amortizing payments thereafter. At December 31, 2021, these loans totaled $12.1 million , as compared to $17.8 million at December 31, 2020.
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.
Other consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy, and insolvency laws may limit the amount that can be recovered on such loans.
Loan Approval Procedures and Authority . The Loan Committee of the Board of Directors (“Board”) establishes the loan approval policies of the Bank based on total exposure to the individual borrower. The Board has authorized the approval of loans by a minimum of two officers of the Bank or the Management Credit Committee, on a scale which requires approval by personnel with progressively higher levels of credit approval authority as the loan amount increases. Pursuant to applicable regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital.
Due to the Bank’s acquisition activity, significant portions of the acquired loan portfolios were underwritten according to the underwriting standards and guidelines of the acquired banks. Acquired loans are evaluated under OceanFirst’s credit risk management policies during pre-closing due diligence and during post-closing risk rating reviews.
In addition to internal credit reviews, the Bank has engaged an independent firm specializing in commercial loan reviews to examine a selection of commercial real estate and commercial and industrial loans, and provide management with objective analysis regarding the quality of these loans throughout the year. The independent firm reviewed 62% of the outstanding loan balances for the Bank’s commercial real estate and commercial and industrial loans during 2021. 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, property dispositions in the event of defaults, making certain insurance and tax payments on behalf of the borrowers, and generally administering the
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loans. The Bank also services mortgage loans for others. All of the loans currently being serviced for others are loans which were originated by the Bank. At December 31, 2021, the Bank was servicing $60.4 million of loans for others.
Delinquencies and Classified Assets . The steps taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank sends the borrower a written notice of non-payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. The Bank may offer to modify the terms or take other forbearance actions which afford the borrower an opportunity to satisfy the loan terms. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 120 days or more, the Bank will either: (i) commence litigation to realize on the collateral, including foreclosure proceedings against any real property that secures the loan; or (ii) sell non-performing loans where foreclosure proceedings may or may not have been initiated. If a foreclosure action is instituted and the loan is not brought current, paid in full, or an acceptable workout accommodation is not agreed upon before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Foreclosure timelines in New Jersey are among the longest in the nation and have remained protracted over the past several years.
The Bank classifies assets in accordance with its Classification of Assets and Allowance for Credit Losses Policy (“ACL Policy”), which considers certain regulatory guidelines and definitions. As part of this ACL Policy, the Deputy Chief Credit Officer reviews and confirms the criticized and classified commercial loans report on a monthly basis. At December 31, 2021, the Bank h ad $148.6 million of assets, including all other real estate owned (“OREO”), classified as Substandard. At December 31, 2020, the Bank had $194.5 million of assets, including all OREO, classified as Substandard. Assets which do not currently expose the Bank to sufficient risk to warrant classification but possess potential weaknesses, such as past delinquencies, are designated Special Mention. Special Mention assets totaled $91.6 million at December 31, 2021, as compared to $165.8 million at December 31, 2020. The decrease in Special Mention and Substandard assets were primarily due to the improved economic outlook and greater certainty regarding these borrowers’ ability to service their loans. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, Impact of COVID-19 .
Non-Performing Loans and OREO. The following table sets forth information regarding non-accrual loans (“non-performing loans”) and OREO, excluding loans p urchased with credit deterioration (“PCD”, or, previously, purchased credit impaired) loans. The Bank obtained purchased credit impaired loans as part of i ts acquisitions of Colonial American Bank (“Colonial American”), Cape Bancorp, Inc. (“Cape”), Ocean Shore Holding Co. (“Ocean Shore”), Sun Bancorp, Inc. (“Sun”), and Capital Bank. These were reclassified as PCD loans as of January 1, 2020. Further, the Bank obtained PCD loans from Two River and Country Bank. PCD loans are accounted for at the purchase price or acquisition date fair value, with an estimate of expected credit losse s for groups of PCD loans with similar risk characteristics and individual PCD loans without similar characteristics, to arrive at an initial amortized cost basis. 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.
At December 31,
2021 2020 2019
(dollars in thousands)
Non-performing loans (1)
$ 18,948 $ 36,410 $ 17,849
OREO 106 106 264
Non-performing assets (1)
$ 19,054 $ 36,516 $ 18,113
Allowance for credit losses on loans as a percent of total loans receivable (2)
0.57 % 0.78 % 0.27 %
Allowance for credit losses on loans as a percent of total non-performing loans (1) (2)
257.81 166.81 94.41
Non-performing loans as a percent of total loans receivable (2)
0.22 0.47 0.29
Non-performing assets as a percent of total assets (2)
0.16 0.32 0.22
(1) Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure, and do not include PCD loans. Non-performing assets consist of non-performing loans and OREO.
(2) The loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and PCD marks on these loans, not reflected in the allowance for loan credit losses, were $18.9 million, $28.0 million, and $30.3 million at December 31, 2021, 2020, and 2019, respectively.
Non-performing loans totaled $18.9 million at December 31, 2021, a decrease of $17.5 million as compared to December 31, 2020, primarily due to loans that returned to accrual status and partly due to loans that were paid off. Non-performing loans at December 31, 2021 and 2020 do not include PCD loans acquired from prior bank acquisitions of $41.8 million and $48.5 million, respectively. The Company’s OREO totaled $106,000 at both December 31, 2021, and December 31, 2020.
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Allowance for Credit Losses (“ACL”): Under the current expected credit loss (“CECL”) model, the ACL on financial assets is a valuation allowance estimated at each balance sheet date in accordance with generally accepted accounting principles (“GAAP”) that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial assets. The CECL model also applies to certain off-balance sheet credit exposures.
The Company estimates the loan ACL based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the loan ACL. A description of the methodology used in establishing the ACL is set forth in the section Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Allowance for Credit Losses .
As of December 31, 2021 and 2020, the Bank’s loan ACL as a percentage of total loans were 0.57% and 0.78%, respectively. The net unamortized credit and PCD marks on all acquired loans, not reflected in the allowance, was $18.9 million and $28.0 million at December 31, 2021 and 2020, respectively. The loan ACL as a percent of total non-performing loans was 257.81% at December 31, 2021, an increase from 166.81% in the prior year. The Bank will continue to monitor its allowance for loan credit losses as conditions dictate.
The following table sets forth activity in the Bank’s loan ACL, or allowance for loan losses, as appropriate, for the periods set forth in the table:
At or for the Year Ended December 31,
2021 2020 2019
(dollars in thousands)
Balance at beginning of year $ 60,735 $ 16,852 $ 16,577
Charge-offs:
Commercial and industrial 154 890 —
Commercial real estate 410 14,850 899
Residential real estate 254 3,200 1,299
Other consumer 213 1,244 606
Total charge-offs 1,031 20,184 2,804
Recoveries 1,492 1,325 1,443
Net (recoveries) charge-offs (461) 18,859 1,361
Credit loss (benefit) expense (12,346) 57,402 1,636
Impact of CECL adoption — 2,701 —
Initial allowance for credit losses on PCD loans — 2,639 —
Balance at end of year $ 48,850 $ 60,735 $ 16,852
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The following table sets forth the net charge-offs/recoveries and the percent of net charge-offs/recoveries by loan category to average net loans outstanding for the periods indicated (dollars in thousands):
At or for the Year Ended December 31,
2021 2020 2019
Net (Recoveries) Charge-offs Ratio of Net (Recoveries) Charge-offs to Average Loans Net Charge-offs Ratio of Net Charge-offs to Average Loans Net Charge-offs (Recoveries) Ratio of Net Charge-offs (Recoveries) to Average Loans
Net (recoveries) charge-offs:
Commercial and industrial $ 30 — % $ 744 0.01 % $ (160) — %
Commercial real estate 205 — 14,743 0.18 (144) —
Residential real estate (98) — 2,317 0.03 1,203 0.02
Other consumer (598) (0.01) 1,055 0.01 462 0.01
Total net (recoveries) charge-offs (461) (0.01) % 18,859 0.23 % 1,361 0.02 %
Average net loans outstanding during the year $ 7,921,611 $ 8,122,631 $ 5,973,015
The increase in net recoveries for the year ended December 31, 2021 was primarily due to improved credit quality and successful recovery of previously charged-off balances. The increase in net charge-offs for the year ended December 31, 2020 was primarily due to charge-offs of $14.6 million related to the sale of higher risk commercial real estate loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans. The Company executed these loan sales as part of its strategy to limit exposure to credit risk, accelerated the resolution of potential credit losses on higher risk credit exposures, and minimized the operational impact associated with potential litigation and foreclosure proceedings.
The following table sets forth the Bank’s percent of loan ACL by category to the total loan ACL at December 31, 2021 and 2020, the percent of loan allowance by category to total loan allowance at December 31, 2019, and the percent of loans to total loans in each of the categories listed at the dates indicated (dollars in thousands):
At December 31,
2021 2020 2019
Amount Percent of
ACL
to Total
ACL Percent
of Loans to Total
Loans Amount Percent of
ACL
to Total
ACL Percent
of Loans to Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent
of Loans to Total
Loans
Commercial and industrial $ 5,039 10.32 % 5.21 % $ 5,390 8.87 % 6.03 % $ 1,458 8.65 % 6.38 %
Commercial real estate 31,388 64.24 63.01 41,757 68.76 59.43 12,776 75.81 49.71
Residential real estate 11,155 22.84 28.76 11,818 19.46 30.19 2,002 11.88 37.35
Other consumer 1,268 2.60 3.02 1,770 2.91 4.35 591 3.51 6.56
Unallocated — — — — — — 25 0.15 —
Total $ 48,850 100.00 % 100.00 % $ 60,735 100.00 % 100.00 % $ 16,852 100.00 % 100.00 %
Reserve for Repurchased Loans and Loss Sharing Obligations . The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to repurchase requests which may be received on residential real estate loans previously sold to investors. The reserve also includes an estimate of the Bank’s obligation under a loss sharing arrangement with the FHLB relating to loans sold into their Mortgage Partnership Finance (“MPF”) program. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans and loss sharing obligations at each quarter-end.
At December 31, 2021 and 2020, the Company maintained a reserve for repurchased loans and loss sharing obligations of $1.2 million. Provisions or credits for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. There were no losses for the years ended December 31, 2021, 2020, or 2019. Losses on loans repurchased would include cash settlements in lieu of repurchases. At December 31, 2021 and 2020, there were no outstanding loan repurchase requests.
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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 Bank views its securities portfolio primarily as a source of income and liquidity. Interest and principal payments generated from securities provide a source of liquidity to fund loans and meet short-term cash needs. In times of reduced loan demand, the securities portfolio can provide an alternative source of investment income. The portfolio is also used to provide collateral for qualified deposits and borrowings and to manage interest rate risk.
The investment policy is overseen by the Board of Directors and generally limits investments to government and federal agency obligations, agency and non-agency mortgage-backed securities, municipal, corporate, and asset-backed securities. The Company’s investment policy mirrors that of the Bank except that it allows for the purchase of certain other debt, preferred stock, and equity securities in limited amounts. The Board of Directors has delegated authority to implement the investment policy to the Bank’s Investment Committee under the oversight of the Asset Liability Committee. Day-to-day management of the portfolio rests with the Treasurer.
Management determines the appropriate classification of securities at the time of purchase. If the Bank has the intent and the ability at the time of purchase to hold debt securities until maturity, they may be classified as held-to-maturity. Debt securities identified as held-to-maturity are carried at cost, adjusted for amortization of premium and accretion of discount, which are recognized as adjustments to interest income. Debt securities to be held for indefinite periods of time, but not necessarily to maturity are classified as available-for-sale. Such debt securities are carried at an estimated fair value and unrealized gains and losses, net of tax effect, are included as a separate component of stockholders’ equity. Refer to Note 4 Securities, to the Consolidated Financial Statements.
The majority of the Bank’s residential and commercial mortgage-backed securities are issued or guaranteed by an agency of the U.S. government including Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and Government National Mortgage Association (“GNMA”). Agency mortgage-backed securities along with obligations issued directly by the U.S. government and its agencies entail a lesser degree of risk than loans made by the Bank and most other securities by virtue of the guarantees that back them, they require less capital under risk-based capital rules, are generally more liquid, and are more easily used to collateralize borrowings or other obligations of the Bank. Each of the U.S. government, agency, and agency guaranteed obligations are rated AA+ by Standard and Poor’s and Aaa by Moody’s.
The municipal portfolio provides tax-advantaged yield and diversification of risk and is generally comprised of general obligation and revenue bonds issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways, sewer systems, hospitals, or other critical infrastructure. The asset-backed securities portfolio provides attractive yields and diversification of risk and is largely comprised of senior classes of collateralized loan obligations that invest in U.S. based broadly syndicated and middle market loans. The corporate debt securities portfolio is comprised of U.S. financial services and industrial companies that exhibit strong credit characteristics and provide attractive returns. The Bank may occasionally invest in non-agency residential or commercial mortgage-backed securities that are rated investment grade depending on credit and return on investment profiles. The vast majority of municipal, asset-backed, corporate, and other mortgage-backed securities are issued by entities with current credit ratings by one of the nationally recognized statistical rating organizations that are considered investment grade. See Note 4 Securities, to the Consolidated Financial Statements.
At December 31, 2021, the amortized cost of the Company’s debt securities totaled $1.71 billion, and consisted of $164.8 million of U.S. government and agency obligations, $281.4 million of state, municipal, and sovereign debt obligations, $73.8 million of corporate debt securities, $299.0 million of asset-backed securities, and $894.5 million of mortgage-backed securities.
The ta ble below sets forth certain information regarding the amortized cost, weighted average yield, and contractual maturities, excluding scheduled principal amortization, of the Bank’s debt securities as of December 31, 2021. The weighted average yield is calculated based on the yield to maturity weighted for the size of each debt security over the entire portfolio of debt securities. The weighted average yields on tax-exempt obligations have been computed on a tax-equivalent basis. 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.
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At December 31, 2021
Total
One Year
or Less Amortized Cost Weighted Average Yield More than One Year to Five Years Amortized Cost Weighted Average Yield More than Five Years to Ten Years Amortized Cost Weighted Average Yield More than Ten Years Amortized Cost Weighted Average Yield Amortized
Cost Estimated
Fair
Value
(dollars in thousands)
U.S. government and agency obligations $ 80,393 1.23 % $ 40,390 1.59 % $ 43,973 1.35 % $ — — % $ 164,756 $ 165,420
State, municipal, and sovereign debt obligations 13,606 1.67 104,464 1.64 79,832 2.04 83,487 2.50 281,389 290,410
Corporate debt securities (1)
6,485 2.94 3,477 4.04 53,656 2.50 10,205 2.46 73,823 74,203
Asset-backed securities (2)
— — — — 98,273 1.66 200,703 1.75 298,976 297,528
Mortgage-backed securities:
Agency residential 121 1.77 24,308 2.20 89,879 2.12 642,536 1.75 756,844 756,449
Agency commercial — — — — 90,262 1.56 15,265 1.84 105,527 104,624
Non-agency commercial 1,504 0.46 18,646 2.87 — — 11,957 3.67 32,107 32,365
Total mortgage-backed securities $ 1,625 0.56 % $ 42,954 2.49 % $ 180,141 1.84 % $ 669,758 1.78 % $ 894,478 $ 893,438
Total debt securities $ 102,109 1.38 % $ 191,285 1.87 % $ 455,875 1.86 % $ 964,153 1.85 % $ 1,713,422 $ 1,720,999
(1) $53.0 million of the Bank’s corporate debt securities carry interest rates which adjust to a spread over London Inter-Bank Offered Rate (“LIBOR”) on a quarterly basis.
(2) All of the Bank’s asset-backed securities carry interest rates which adjust to a spread over LIBOR on a quarterly basis.
Equity Investments . At December 31, 2021, and 2020, the Company held equity investments of $101.2 million and $107.1 million, respectively. The equity investments are primarily comprised of select financial services institutions’ common or preferred stocks paying attractive dividends and funds that invest in financial services institutions.
Sources of Funds
General . Repayments and prepayments of loans, proceeds from sales of loans, cash flows generated from operations, borrowings, proceeds from maturities and sales of securities, and deposits are the primary sources of the Bank’s funds for use in lending, investing and for other general purposes.
Deposits . The Bank offers a variety of deposit accounts with a range of interest rates and terms to retail, government, and business customers. The Bank’s deposits consist of money market accounts, savings accounts, interest-bearing checking accounts, non-interest-bearing accounts, and time deposits. The flow of deposits is influenced significantly by general economic conditions, 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, 2021 and 2020, the Bank had $5.14 billion and $4.90 billion, respectively, of total uninsured deposits (in excess of the Federal Deposit Insurance Corporation limit). At those dates, the Bank had no deposits that were otherwise uninsured.
At December 31, 2021, the Bank had $145.4 million in time deposits in amounts of $250,000 or more maturing as follows:
Maturity Period Time Deposits Weighted
Average
Rate
(dollars in thousands)
Three months or less $ 35,849 1.69 %
Over three through six months 27,608 1.24
Over six through twelve months 39,278 1.15
Over twelve months 42,712 1.92
Total $ 145,447 1.53 %
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The following table sets forth the distribution of the Bank’s average deposit accounts and the average rate paid on those deposits for the periods indicated:
For the Year Ended December 31,
2021 2020 2019
Average
Balance Percent
of Total
Average
Deposits Average
Rate
Paid Average
Balance Percent
of Total
Average
Deposits Average
Rate
Paid Average
Balance Percent
of Total
Average
Deposits Average
Rate
Paid
(dollars in thousands)
Interest-bearing checking accounts $ 3,878,465 40.21 % 0.35 % $ 3,168,889 35.76 % 0.61 % $ 2,517,068 40.05 % 0.67 %
Non-interest-bearing accounts 2,429,547 25.19 — 2,031,100 22.93 — 1,325,836 21.10 —
Money market deposit accounts 769,157 7.98 0.14 677,554 7.65 0.43 605,607 9.64 0.81
Savings accounts 1,581,472 16.40 0.04 1,449,982 16.37 0.17 906,086 14.42 0.13
Time deposits 985,328 10.22 1.02 1,531,857 17.29 1.53 929,488 14.79 1.67
Total average deposits $ 9,643,969 100.00 % 0.26 % $ 8,859,382 100.00 % 0.55 % $ 6,284,085 100.00 % 0.61 %
Borrowings . From time to time, the Bank obtains advances from the FHLB and other sources for cash management and interest rate risk management purposes or as an alternative to deposits. Advances are collateralized primarily by certain of the Bank’s mortgage loans and debt 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, 2021, the Bank had no 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, 2021, these municipal letters of credit totaled $1.45 billion.
The Bank also borrows funds using securities sold under agreements to repurchase. Under this form of borrowing specific securities are pledged as collateral to secure the borrowing. These pledged securities are held by a third-party custodian. At December 31, 2021, the Bank had borrowed $118.8 million through securities sold under agreements to repurchase.
The Bank can also borrow from the Federal Reserve Bank of Philadelphia under its 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 Federal Reserve Bank of Philadelphia must be secured. At December 31, 2021, the Bank had no borrowings outstanding with the Federal Reserve Bank of Philadelphia.
Subsidiary Activities
At December 31, 2021, the Bank owned five 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.
• Casaba Real Estate Holding Corporation was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Cape in 2016. This subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties.
• CBNJ Investment Corp was acquired by the Bank as a wholly owned subsidiary as part of its acquisition of Capital Bank in 2019. This subsidiary held certain investments of Capital Bank and is currently inactive.
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• Country Property Holdings Inc. was acquired by the Bank as a wholly-owned subsidiary as part of its acquisition of Country Bank in 2020. This subsidiary is maintained for the purpose of taking legal possession of certain repossessed collateral for resale to third parties.
• TRCB Investment Corp was acquired by the Bank as a wholly owned subsidiary as part of its acquisition of Two River in 2020. This subsidiary held certain investments of Two River and is currently inactive.
In addition to the Bank, the Company holds OceanFirst Risk Management, Inc. as a direct subsidiary. OceanFirst Risk Management Inc. is a captive insurance company that insures certain risks relating to the business of the Bank and the Company.
Furthermore, the Company holds the following statutory business trusts: OceanFirst Capital Trust I, OceanFirst Capital Trust II, OceanFirst Capital Trust III, Sun Statutory Trust VII, Sun Capital Trust VII, Sun Capital Trust VIII, and Country Bank Statutory Trust I, collectively known as the “Trusts”. All of the Trusts are incorporated in Delaware and were formed for the issuance of trust preferred securities.
Human Capital
Employee profile
As of December 31, 2021, the Bank had 874 full-time employees, 43 part-time employees, and 20 commissioned employees, for a total of 937 employees. In addition, approximately 68% of the Bank’s employees are female and 32% are male, and the average tenure was eight years as of December 31, 2021.
Total rewards
As part of the Bank’s compensation philosophy, market competitive total rewards programs are maintained for employees in order to attract and retain superior talent. In addition to competitive base wages, additional programs include annual bonus opportunities, a Bank Employee Stock Ownership Plan (“ESOP”), a Bank matched 401(k) Plan, health and welfare benefits, flexible spending accounts, paid time off, family leave, and employee assistance programs. Some employees also receive grants of equity awards in the Company’s stock.
Health and safety
The safety, health, and wellness of Bank employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of the Bank’s management and staff, over a short period of time, a significant majority of employees were transitioned to effectively work remotely and a safely-distanced working environment for employees with customer facing responsibilities at branches and operations centers was ensured.
The Bank has developed a process to collect COVID-19 vaccination records and monitor any recent potential exposure to COVID-19. Employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and are provided additional paid time off to cover compensation during such absences.
On an ongoing basis, the Bank further promotes health and wellness by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum, and sponsoring various wellness programs.
Talent
A core tenet of the Bank’s talent philosophy is to both develop talent from within and supplement with external hires. Whenever possible, the Bank seeks to fill positions by promotion and transfer from within the organization. The Bank’s talent acquisition team uses internal and external resources to recruit highly skilled and talented candidates, and employee referrals for open positions are encouraged.
Diverse candidate pools are required for open positions within OceanFirst Bank branches and corporate offices. In the past year, a partnership with the African American Chamber of Commerce has provided increased connection with diverse candidates. Other available tools are also utilized to connect with prospective new hires. As of December 31, 2021, 17% of the Bank’s employees were persons of color.
Following a multi-pronged recruiting strategy, which includes sourcing diverse candidate pools, new hires participate in an onboarding program which includes an introduction to the Bank’s culture, policies, and procedures. New employees are assigned an ambassador, who extends the integration process beyond the typical orientation experience. Retention strategies include espousing a culture that inspires loyalty and trust through ongoing communication of strategic initiatives and executive roundtable conversations, in addition to the benefits mentioned above in Total rewards . The Bank’s leadership development programs and opportunities offered through OceanFirst Bank University help ensure that motivated individuals have the
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opportunity for continuous improvement. Employees each maintain a professional development action plan and participate in regular evaluation and growth opportunities. The Bank’s peer recognition program provides the space for ongoing recognition and celebration of accomplishments.
This approach has yielded loyalty and commitment from employees which in turn grows the business, products, and customers. This approach has also added new employees and ideas, which support a continuous improvement mindset and the goals of a diverse and inclusive workforce.
The Bank strives to promote inclusion through defined Company values and behaviors. With the support from the Board of Directors, the Bank continues to explore additional diversity, equity, inclusion, and belonging efforts through multiple approaches to inclusion: candidates, employees, and the marketplace. The ongoing diversity and inclusion initiatives support a goal that everyone throughout the Company is engaged in creating an inclusive workplace. The Bank is focused on sourcing and hiring with fairness and equitable approaches, creating an environment where all employees can develop and thrive.
REGULATION AND SUPERVISION
General
Prior to January 2018, the Bank was a Federally-chartered savings bank, and the Company was registered as a savings and loan holding company. Effective January 31, 2018, the Bank converted to a national bank charter, and the Company became a bank holding company (“BHC”) under Section 3 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a bank holding company, the Company is subject to the requirements of the BHC Act, including required approvals for investments in or acquisitions of banking organizations, or entities involved in activities that are deemed closely related to banking, capital adequacy standards, and limitations on nonbanking activities. The Company is registered with the FRB and is required by Federal law to file reports with, and comply with the rules and regulations of the FRB. The Bank is a member of the FHLB System and, with respect to deposit insurance, of the Deposit Insurance Fund (“DIF”) managed by the FDIC. The Bank is subject to extensive regulation, examination, and supervision by the OCC, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to consummating certain transactions such as mergers with, or acquisitions of, other insured depository institutions. The OCC conducts periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors and to ensure the safe and sound operation of the Bank. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for credit losses for regulatory purposes.
In addition, the Company elected to become a financial holding company under the Gramm-Leach Bliley Act (the “GLBA”) amendments to the BHC Act. Financial holding companies, and the nonbank companies under their control, are permitted to engage in activities considered financial in nature or incidental to financial activities and, if the FRB determines that they pose no risk to the safety or soundness of depository institutions or the financial system in general, activities that are considered complementary to financial activities.
The banking industry is highly regulated. Both the scope of the laws and regulations and the intensity of supervision to which the Company and the Bank are subject to have increased in recent years, in response to the financial crisis as well as other factors such as technological and market changes. Many of these changes have occurred as a result of the Dodd-Frank Act and its implementing regulations. In addition, in 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was enacted. This legislation includes targeted amendments to the Dodd-Frank Act and other financial services laws.
Statutory and regulatory controls increase a BHC’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions.
The description of statutory provisions and regulations applicable to national banks and BHCs set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company, is subject to change and is qualified in its entirety by reference to the actual laws and regulations involved.
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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 created the CFPB with broad p owers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. At December 31, 2021, the Bank’s total assets were $11.74 billion and, therefore, the Bank is subject to CFPB supervision and examination of compliance with 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 and establishes certain protections from liability under this requirement for “qualified mortgages”. The Ability-To-Repay/Qualified Mortgage Rule defines several categories of “qualified mortgage” loans, which obtain certain protections from liability. For further discussion, refer to Risk Factors – Risks Related to Lending Activities – The Dodd-Frank Act imposes obligations on originators of residential mortgage loans .
The Dodd-Frank Act also requires that the amount of any interchange fee received by a debit card issuer with respect to debit card transactions be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Rules adopted by the FRB to implement these requirements limit interchange fees per debit card transaction collected by banks with assets of $10 billion or more. For the year ended December 31, 2021, the Bank’s revenues from interchange fees was $12.7 million, an increase of $1.8 million from 2020, and the average interchange fee per transaction is forty four cents ($0.44). Under the temporary relief provisions of a joint rule published by the OCC, the FDIC, and the FRB, the Bank received relief from Dodd-Frank limitations on debit card interchange fees collected by banks with assets of $10 billion or more and will remain exempt from limits on debit card interchange fees until July 2022. At December 31, 2021, the Bank’s total assets were $11.74 billion and will therefore be subject to reduced interchange fees in 2022. For further discussion, see Risk Factors – Risks Related to Laws and Regulations – The Company and the Bank operated in a highly regulated environment and may be adversely affected by changes in laws and regulations .
The Dodd-Frank Act mandates that institutions with more than $10 billion in assets clear all eligible dealer swaps through a futures commission merchant to a central counterparty clearing house. The Bank has entered into relationships with a futures commission merchant and two central counterparty clearing houses.
Economic Growth, Regulatory Relief and Consumer Protection Act . EGRRCPA was intended to provide regulatory relief to midsized and regional banks. While many of its provisions are aimed at larger institutions, such as raising the threshold to be considered a systemically important financial institution to $250 billion in assets from $50 billion in assets, many of its provisions provide regulatory relief to those institutions with $10 billion or more in assets. Among other things, the EGRRCPA increased the asset threshold for depository institutions and holding companies to perform stress tests required under Dodd Frank from $10 billion to $250 billion in total consolidated assets, and raised the threshold for the requirement that publicly traded holding companies have a risk committee from $10 billion in consolidated assets to $50 billion in consolidated assets. In addition, the EGRRCPA limited the definition of loans that would be subject to the higher risk weighting applicable to high volatility commercial real estate.
Volcker Rule . Under the provisions of the Volcker Rule, insured depository institutions and companies affiliated with insured depository institutions (collectively, “banking entities”) are prohibited from: (i) engaging in short-term proprietary trading for their own account; and (ii) having certain investments in, and relationships with, hedge funds, private equity funds and similar funds, subject to certain exemptions, in each case as the applicable terms are defined in the Volcker Rule and the implementing regulations. The implementing regulations also require banking entities to establish and maintain a compliance program to ensure adherence with the Volcker Rule requirements.
Bank Holding Company Regulation
The Company is a BHC and is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.
FRB regulations provide that a BHC is expected to act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent those regulations.
Holding Company Consolidated Capital Requirements . The Dodd-Frank Act requires capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these
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provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital.
At December 31, 2021 , the Company exceeded all regulatory capital requirements currently applicable. The following table presents the Company’s capital position at December 31, 2021 :
Capital
As of December 31, 2021 Actual Capital Required Capital Excess Amount Actual Percent Required Percent
OceanFirst Financial Corp: (dollars in thousands)
Tier 1 capital (to average assets) $ 1,044,518 $ 453,087 $ 591,431 9.22 % 4.00 %
Common equity Tier 1 (to risk-weighted assets) 917,088 625,801 291,287 10.26 7.00 (1)
Tier 1 capital (to risk-weighted assets) 1,044,518 759,902 284,616 11.68 8.50 (1)
Total capital (to risk-weighted assets) 1,257,372 938,702 318,670 14.06 10.50 (1)
(1) Includes the Capital Conservation Buffer of 2.50%.
Dividends . The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Regulatory pressures to reclassify and charge off loans and to establish additional credit loss reserves can have the effect of reducing current operating earnings and thus impacting an institution’s ability to pay dividends. Further, regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of dividends previously paid over that period is insufficient to fully fund the dividend, the proposed dividend exceeds earnings for the period for which it is being paid, or the Company’s overall rate of earnings retention is inconsistent with the Company’s capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a banking holding company’s common stock dividend. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.
The policy statement also states that a holding company should inform the FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction in the amount of such instruments outstanding from the beginning of the quarter in which the redemption or repurchase occurred compared with the end of such quarter.
These regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions.
Acquisition of the Company . Under the Change in Bank Control Act, no person may acquire control of a bank holding company, such as the Company, unless the FRB has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquiror and the competitive effects of the acquisition. Control, as defined for this purpose, means ownership, control of power to vote 25% or more of any class of voting stock.
There is a rebuttable presumption of control upon the acquisition of 10% or more of a class of voting stock if the holding company involved has its shares registered under the Securities Exchange Act of 1934, or if no other persons will own, control or hold the power to vote a greater percentage of that class of voting security after the acquisition.
Financial Holding Company Status
When the Bank converted to a national bank charter and the Company became a BHC, the Company elected to become a financial holding company. Financial holding companies may engage in a broader scope of activities than a BHC. In addition, financial holding companies may undertake certain activities without prior FRB approval.
A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. Financial in nature activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and insurance agency activities; merchant banking; and activities that the FRB determines to be financial in nature or incidental to a financial activity or which are complementary to a financial activity and do not pose a safety and soundness risk.
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A financial holding company that engages in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.
A financial holding company generally may acquire a company (other than a BHC, bank, or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a BHC, bank, or savings association. In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.
If any subsidiary bank of a financial holding company ceases to be “well-capitalized” or “well-managed” and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the CRA of less than “satisfactory,” then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations until the rating is raised to “satisfactory” or better.
Regulation of Bank Subsidiary
Business Activities . The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. Approval of the OCC is required for branching, bank mergers in which the continuing bank is a national bank, and in connection with certain fundamental corporate changes affecting the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, as implemented by Regulation W, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries.
Capital Requirements . Federal regulations require banks to maintain minimum levels of capital including: a common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to risk-weighted assets ratio of 6.0%, a total capital to risk-weighted assets of 8.0%, and a Tier 1 capital to total assets leverage ratio of 4.0%.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit 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, federal regulators take into consideration, not only these numeric factors, but qualitative factors as well, and have the authority to establish higher capital requirements for individual banks where necessary.
In addition to establishing the minimum regulatory capital requirements, regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.50% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. On January 1, 2019, the full capital conservation buffer requirement of 2.50% became effective. Both the Bank and the Company are in compliance with the capital conservation buffer requirements applicable to them.
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The federal banking agencies, including the OCC, have also adopted regulations to require an assessment of an institution’s exposure to declines in the ec onomic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital adequacy. Under such a risk assessment, examiners evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Institutions with significant interest rate risk may be required to hold additional capital. According to the federal banking agencies, applicable considerations include: quality of the bank’s interest rate risk management process; the overall financial condition of the bank; and the level of other risks at the bank for which capital is needed.
At December 31, 2021, the Bank exceeded all regulatory capital requirements currently applicable . The following table presents the Bank’s capital position at December 31, 2021:
Capital
As of December 31, 2021 Actual
Capital Required
Capital Excess
Amount Actual
Percent Required
Percent
Bank: (dollars in thousands)
Tier 1 capital (to average assets) $ 1,027,660 $ 452,669 $ 574,991 9.08 % 4.00 %
Common equity Tier 1 (to risk-weighted assets) 1,027,660 619,178 408,482 11.62 7.00 (1)
Tier 1 capital (to risk-weighted assets) 1,027,660 751,860 275,800 11.62 8.50 (1)
Total capital (to risk-weighted assets) 1,079,766 928,768 150,998 12.21 10.50 (1)
(1) Includes the Capital Conservation Buffer of 2.50%.
Prompt Corrective Action. Federal law requires, among other things, that the federal bank regulatory authorities take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC’s regulations define the five categories as follows:
An institution is classified as well capitalized if:
• its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level; and
• its ratio of common equity tier 1 capital to risk-weighted assets is at least 6.5%; and
• its ratio to Tier 1 capital to risk-weighted assets is at least 8%; and
• its ratio of total capital to risk-weighted assets is at least 10%.
An institution is classified as adequately capitalized 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%; 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 regulations provide that a capital restoration plan must be filed with the OCC within 45 days of the date a national bank receives notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Any holding company for the bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5.0% of the bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the bank to adequately capitalized status. Various restrictions, including as to growth and capital distributions, also apply to “undercapitalized” institutions. If an “undercapitalized” institution fails to submit an acceptable capital plan, it is treated as
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“significantly undercapitalized.” “Significantly undercapitalized” institutions must comply with one or more additional restrictions including, but not limited to, an order by the OCC to sell sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive.
Based on the regulatory guidelines, the Bank satisfies the criteria to be well-capitalized at December 31, 2021.
Insurance of Deposit Accounts . Deposit accounts at the Bank are insured by the DIF of the FDIC up to a maximum of $250,000 per separately insured depositor.
The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower FDIC assessments. Assessments for institutions with $10 billion or more of assets are primarily based on a scorecard approach by the FDIC, including factors such as examination ratings and modeling measuring the institution’s ability to withstand asset-related and funding-related stress and potential loss to the DIF should the bank fail. The assessment range (inclusive of possible adjustments specified by the regulations) for institutions with greater than $10 billion of total assets is 1.5 to 40 basis points.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the Bank’s operating expenses and results of operations. The Bank cannot predict what assessment rates will be in the future.
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.
The total expense incurred in 2021 and 2020 for the deposit insurance assessment were $4.8 million and $3.8 million, respectively.
Loans to One Borrower . Subject to certain exceptions, a national bank 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, which generally does not include real estate. As of December 31, 2021, the Bank was in compliance with the loans-to-one borrower limitations.
Limitation on Capital Distributions . Applicable regulations impose limitations upon all capital distributions by a banking institution, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the approval of the OCC, is required prior to any capital distribution if the total capital distributions for the calendar year exceeds net income for that year plus the amount of retained net income for the preceding two years. A national bank may not pay a dividend if it would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. A national bank may be further limited in payment of cash dividends if it does not maintain the capital conservation buffer.
In the event the Bank’s capital fell below its regulatory requirements or the 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 OCC could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OCC determines that such distribution would constitute an unsafe or unsound practice. If the Bank is unable for any reason to pay a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future, pay a dividend at the same rate as historically paid, be able to repurchase stock, or to meet current debt obligations. In addition, capital requirements made applicable to the Company as a result of the Dodd-Frank Act and Basel III may limit the Company’s ability to pay dividends or repurchase stock in the future. The Company may also be required to receive non-objection letters prior to performing any actions that may impact the Company’s capital.
Assessments . Banking institutions are required to pay assessments to fund regulatory operations. The assessments, paid on a semi-annual basis, are based upon the institution’s total assets, including consolidated subsidiaries as reported in the Bank’s latest quarterly regulatory report, as well as the institution’s regulatory rating and complexity component. The assessments paid by the Bank for the years ended December 31, 2021 and 2020 totaled $1.4 million and $1.1 million, 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-bank subsidiaries) is limited by
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federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the bank. The aggregate amount of covered transactions with all affiliates is limited to 20% of the bank’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, banks are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no bank may purchase the securities of any affiliate other than a subsidiary.
Federal Home Loan Bank System (“FHLB”)
The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional FHLBs. Each FHLB provides member institutions with a central credit facility. The Bank, as a member of the FHLB New York is required to acquire and hold shares of capital stock in that FHLB in a specified amount. The Bank was in compliance with this requirement with an investment in FHLB New York stock at December 31, 2021 and 2020 of $13.5 million and $12.6 million, respectively.
Federal Reserve System
The FRB regulations require depository institutions to maintain reserves against their transaction accounts (primarily interest-bearing checking and regular checking accounts). Effective March 26, 2020, the FRB reduced reserve requirement ratios to zero, effectively eliminating the requirements. The FRB indicated that it has no plans to re-impose reserve requirements but could in the future if conditions warrant.
In addition, as a national bank, the Bank is required to hold capital stock of the Federal Reserve Bank of Philadelphia. The required shares may be adjusted up or down based on changes to the Bank's common stock and paid-in surplus. The Bank is in compliance with these requirements, with a total investment in Federal Reserve Bank of Philadelphia stock of $39.3 million and $39.1 million at December 31, 2021 and 2020, respectively.
The Federal Reserve Bank of Philadelphia pays dividends on the common stock held by the Bank. However, the level of dividends is reduced for financial institutions that exceed a certain asset size. For 2021, the asset level is $10.79 billion, and financial institutions whose assets exceed that level receive dividends generally equal to the rate of the 10-year Treasury note, as opposed to 6% for smaller financial institutions. Such reduction has significantly decreased the dividends received from the Federal Reserve Bank of Philadelphia, which totaled $591,000 for the year ended December 31, 2021.
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 current applicable statutory tax rate is 21%.
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 50% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then 65% of any dividends received may be deducted.
State and Local Taxation
New Jersey Taxation . The Company files New Jersey income tax returns. For New Jersey income tax purposes, the Company is subject to a tax rate of 9% of taxable income. For this purpose, taxable income generally means Federal taxable income, excluding some entities not included in the unitary filing and other 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. New Jersey also imposes a temporary surtax of 2.5% which is effective through December 31, 2023. For 2019 and prospectively, New Jersey law requires
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combined filing for members of an affiliated group, but excludes companies that qualify as a New Jersey Investment Company and Real Estate Investment Companies.
New Jersey also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state. These changes are not temporary. As a result of the change in New Jersey tax code, the Company revalued its deferred tax asset resulting in a reduction of state income tax expense of $2.2 million for the year ended December 31, 2019.
OceanFirst REIT Holdings, Inc. files a separate New Jersey income tax return since it qualifies as a New Jersey Investment Company. It is taxed at a rate presently equal to 3.60% of taxable income.
New York Taxation . The Company is required to file New York State, MTA, and New York City tax returns. The New York State and New York City returns require consolidation of all entities, including OceanFirst Realty, and 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 and New York City may affect the overall tax rate.
Pennsylvania Taxation . The Bank is required to file a Pennsylvania bank shares tax return. The Bank’s net assets, less allowable deductions, are taxed at a rate presently equal to 0.95% of apportioned net assets. The allocation and apportionment to Pennsylvania may affect the overall tax rate.
Delaware Taxation . As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.