10-Q 1 ocfc-33117x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________ 
FORM 10-Q
 ________________________________________________  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-11713
________________________________________________  
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
 ________________________________________________ 
Delaware
22-3412577
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
975 Hooper Avenue, Toms River, NJ
08753
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732) 240-4500
________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   ý    NO   o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
o
Accelerated Filer
 
ý
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
o
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o    NO  ý.
As of May 5, 2017 there were 32,472,121 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.



OceanFirst Financial Corp.
INDEX TO FORM 10-Q
 
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL SUMMARY
At or for the Quarters Ended
(dollars in thousands, except per share amounts)
March 31, 2017
 
December 31, 2016
 
March 31, 2016
SELECTED FINANCIAL CONDITION DATA:
 
 
 
 
 
Total assets
$
5,196,340

 
$
5,167,052

 
$
2,588,447

Loans receivable, net
3,825,600

 
3,803,443

 
1,996,993

Deposits
4,198,663

 
4,187,750

 
1,971,360

Stockholders’ equity
582,680

 
572,038

 
241,076

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
41,483

 
35,754

 
20,559

Provision for loan losses
700

 
510

 
563

Other income
5,995

 
6,257

 
3,376

Operating expenses
30,961

 
32,465

 
16,716

Net income
12,018

 
6,052

 
4,205

Diluted earnings per share
0.36

 
0.22

 
0.25

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share
17.95

 
17.80

 
13.89

Tangible stockholders’ equity per common share (1)
13.07

 
12.95

 
13.75

Cash dividend per share
0.15

 
0.15

 
0.13

Stockholders’ equity to total assets
11.21
%
 
11.07
%
 
9.31
%
Tangible stockholders’ equity to total tangible assets (1)
8.43

 
8.30

 
9.23

Return on average assets (2) (3)
0.94

 
0.53

 
0.65

Return on average stockholders’ equity (2) (3)
8.42

 
5.10

 
7.01

Return on average tangible stockholders’ equity (1) (2) (3)
11.50

 
6.48

 
7.07

Net interest rate spread
3.47

 
3.31

 
3.23

Net interest margin
3.56

 
3.40

 
3.34

Operating expenses to average assets (2) (3)
2.41

 
2.83

 
2.57

Efficiency ratio (3)
65.21

 
77.28

 
69.84

Loans to deposit ratio
91.11

 
90.82

 
101.30

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
21,679

 
$
13,566

 
$
16,193

Non-performing assets
30,453

 
23,369

 
25,222

Allowance for loan losses as a percent of total loans receivable
0.42
%
 
0.40
%
 
0.80
%
Allowance for loan losses as a percent of total non-performing loans
74.50

 
111.92

 
100.13

Non-performing loans as a percent of total loans receivable
0.56

 
0.35

 
0.80

Non-performing assets as a percent of total assets
0.59

 
0.45

 
0.97

Wealth Management
 
 
 
 
 
Assets under administration
$
215,593

 
$
218,336

 
$
203,723

 
(1)
Tangible stockholders’ equity is calculated by excluding intangible assets relating to goodwill and core deposit intangible.
(2)
Ratios are annualized.
(3)
Performance ratios include the adverse impact of merger related expenses of $1.4 million, or $1.0 million, net of tax benefit, for the quarter ended March 31, 2017; $6.6 million, or $4.5 million, net of tax benefit, for the quarter ended December 31, 2016; and $1.4 million, or $1.2 million, net of tax benefit, for the quarter ended March 31, 2016.

3


Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank headquartered in Ocean County, New Jersey, serving business and retail customers in the central and southern New Jersey region. The term “Company” refers to OceanFirst Financial Corp., OceanFirst Bank and all of the Bank’s subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, wealth management, deposit accounts, the sale of investment products, loan originations, loan sales, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance, data processing and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and the actions of regulatory agencies.

Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are generally priced against shorter-term indices. The Company has attempted to mitigate the adverse impact of low absolute levels of interest rates by focusing on commercial loan and core deposit growth. Interest rates have begun what appears will be a slow march higher. The pace of change will be governed by the response of the economy to more restrictive monetary policy and potentially more stimulative fiscal policy.
Although the housing sector has enjoyed steady improvement, overall the economic recovery has fallen short of the robust levels of previous recoveries. Sub par economic growth is projected for 2017 even though the national unemployment has breached the Federal Reserve's threshold for full employment. Price pressures and wages have increased even as inflation expectations remain low.
Highlights of the Company’s financial results and corporate activities for the three months ended March 31, 2017 were as follows:

Net income for the quarter ended March 31, 2017, was $12.0 million, or $0.36 per diluted share, as compared to $4.2 million, or $0.25 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2017 includes merger related expenses and an accelerated stock award expense from a director retirement of $1.1 million, net of tax benefit, as compared to $1.2 million in merger related expenses, net of tax benefit, for the same prior year period. Net income increased over the prior year period primarily due to the acquisitions ("Acquisition Transactions") of Cape Bancorp ("Cape") and Ocean City Home Bank ("Ocean Shore").

Net interest income for the three months ended March 31, 2017 increased to $41.5 million, as compared to $20.6 million for the corresponding prior year period reflecting an increase in interest-earning assets and a higher net interest margin primarily due to the Acquisition Transactions.
Other income increased to $6.0 million for the three months ended March 31, 2017, as compared to $3.4 million for the same prior year period. The increase was primarily due to the impact of the Acquisition Transactions, which added $2.1 million to total other income. Operating expenses, excluding merger related expenses, increased $14.2 million for the three months ended March 31, 2017, as compared to the same prior year period primarily due to the operations of Ocean Shore and Cape, which added $11.2 million to operating expenses.
In the first quarter of 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09 "Compensation - Stock Compensation" which resulted in a $1.4 million decrease in income tax expense related to the exercise of options assumed in the acquisitions of Cape and Ocean Shore and the increase in the Company's stock price.

The Company remains well-capitalized with a tangible common equity ratio of 8.43% at March 31, 2017. On April 27, 2017, the Company announced the authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock up to an additional 1.6 million shares ). This amount is in addition to the remaining 154,804 shares available for repurchase under the existing 2014 Repurchase Program at March 31, 2017. No shares were repurchased during the first quarter of 2017.

The Company declared a quarterly cash dividend on common stock. The dividend for the quarter ended March 31, 2017 of $0.15 per share will be paid on May 19, 2017 to stockholders of record on May 8, 2017.

4


Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.
The following tables set forth certain information relating to the Company for the three months ended March 31, 2017 and March 31, 2016. The yields and costs are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.
 
FOR THE THREE MONTHS ENDED,
 
March 31, 2017
 
March 31, 2016
 
AVERAGE
BALANCE
 
INTEREST
 
AVERAGE
YIELD/
COST
 
AVERAGE
BALANCE
 
INTEREST
 
AVERAGE
YIELD/
COST
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-
term investments
$
214,165

 
$
409

 
0.77
%
 
$
48,501

 
$
28

 
0.23
%
Securities (1) and FHLB stock
703,712

 
3,863

 
2.23

 
445,696

 
2,010

 
1.81

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,830,641

 
21,140

 
4.68

 
972,050

 
10,998

 
4.53

Residential
1,704,035

 
17,339

 
4.13

 
830,840

 
8,039

 
3.87

Home Equity
287,335

 
3,245

 
4.58

 
191,355

 
1,990

 
4.16

Other
1,248

 
18

 
5.85

 
501

 
8

 
6.39

Allowance for loan loss net of
deferred loan fees
(12,123
)
 

 

 
(13,645
)
 

 

Loans Receivable, net
3,811,136

 
41,742

 
4.44

 
1,981,101

 
21,035

 
4.27

Total interest-earning assets
4,729,013

 
46,014

 
3.95

 
2,475,298

 
23,073

 
3.75

Non-interest-earning assets
482,058

 
 
 
 
 
129,719

 
 
 
 
Total assets
$
5,211,071

 
 
 
 
 
$
2,605,017

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
1,668,545

 
876

 
0.21

 
$
899,883

 
305

 
0.14

Money market
445,186

 
311

 
0.28

 
156,326

 
70

 
0.18

Savings
674,721

 
130

 
0.08

 
316,148

 
26

 
0.03

Time deposits
640,269

 
1,464

 
0.93

 
263,722

 
870

 
1.33

Total
3,428,721

 
2,781

 
0.33

 
1,636,079

 
1,271

 
0.31

Securities sold under agreements
to repurchase
76,351

 
27

 
0.14

 
83,506

 
28

 
0.13

FHLB Advances
250,339

 
1,070

 
1.73

 
266,234

 
1,084

 
1.63

Other borrowings
56,392

 
653

 
4.70

 
22,500

 
131

 
2.33

Total interest-bearing
liabilities
3,811,803

 
4,531

 
0.48

 
2,008,319

 
2,514

 
0.50

Non-interest-bearing deposits
791,036

 
 
 
 
 
343,371

 
 
 
 
Non-interest-bearing liabilities
29,399

 
 
 
 
 
13,328

 
 
 
 
Total liabilities
4,632,238

 
 
 
 
 
2,365,018

 
 
 
 
Stockholders’ equity
578,833

 
 
 
 
 
239,999

 
 
 
 
Total liabilities and equity
$
5,211,071

 
 
 
 
 
$
2,605,017

 
 
 
 
Net interest income
 
 
$
41,483

 
 
 
 
 
$
20,559

 
 
Net interest rate spread (3)
 
 
 
 
3.47
%
 
 
 
 
 
3.25
%
Net interest margin (4)
 
 
 
 
3.56
%
 
 
 
 
 
3.34
%
Total cost of deposits (including non-
interest-bearing deposits)
 
 
 
 
0.27
%
 
 
 
 
 
0.26
%
(1)
Amounts are recorded at average amortized cost.
(2)
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loss allowances and includes loans held for sale and non-performing loans.
(3)
Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.

5



Comparison of Financial Condition at March 31, 2017 and December 31, 2016
Total assets increased by $29.3 million to $5.196 billion at March 31, 2017, from $5.167 billion at December 31, 2016. Cash and due from banks and interest-bearing deposits decreased by $126.1 million, to $175.3 million at March 31, 2017, from $301.4 million at December 31, 2016, as these funds were deployed into higher-yielding securities which increased $132.1 million. Loans receivable, net, increased by $22.2 million, to $3.826 billion at March 31, 2017 from $3.803 billion at December 31, 2016.
Deposits increased by $10.9 million, to $4.199 billion at March 31, 2017, from $4.188 billion at December 31, 2016, reflecting increases in non-interest bearing checking and savings accounts totaling $24.2 million and $9.3 million, respectively. These increases were partially offset by decreases in money market and time deposit accounts of $10.8 million and $14.7 million, respectively. The loan-to-deposit ratio at March 31, 2017 was 91.1%, as compared to 90.8% at December 31, 2016.
Stockholders' equity increased to $582.7 million at March 31, 2017, as compared to $572.0 million at December 31, 2016. At March 31, 2017, there were 154,804 shares available for repurchase under the Company's stock repurchase program adopted in July of 2014. Subsequent to quarter end, the Board of Directors approved the 2017 Repurchase Program, pursuant to which the Company may repurchase up to an additional 1.6 million shares. In the first quarter, the Company did not repurchase any shares under these repurchase programs. Tangible stockholders' equity per common share increased to $13.07 at March 31, 2017, as compared to $12.95 at December 31, 2016.
Comparison of Operating Results for the three months ended March 31, 2017 and March 31, 2016
General
On May 2, 2016, the Company completed its acquisition of Cape and its results of operations are included in the consolidated results for the quarter ended March 31, 2017, but are not included in the results of operations for the quarter ended March 31, 2016.
On November 30, 2016, the Company completed its acquisition of Ocean Shore and its results of operations are included in the consolidated results for the quarter ended March 31, 2017, but are not included in the results of operations for the quarter ended March 31, 2016.
Net income for the quarter ended March 31, 2017, was $12.0 million, or $0.36 per diluted share, as compared to $4.2 million, or $0.25 per diluted share, for the corresponding prior year period. Net income for the quarter ended March 31, 2017 includes merger related expenses and an accelerated stock award expense from a director retirement of $1.1 million, net of tax benefit, as compared to $1.2 million in merger related expenses, net of tax benefit, for the same prior year period. Net income increased over the prior year period primarily due to the Acquisition Transactions. In addition, in the first quarter of 2017, the Company adopted ASU 2016-09 "Compensation - Stock Compensation" which resulted in a $1.4 million decrease in income tax expense. The after-tax impact of merger related expenses and the accelerated stock award expense reduced diluted earnings per share by $0.04 for the three months ended March 31, 2017, and by $0.07 for the three months ended March 31, 2016. Excluding these two items, diluted earnings per share increased over the prior year period due to higher net interest income and other income, partly offset by higher operating expenses and an increase in average diluted shares outstanding.

Interest Income
Interest income for the three months ended March 31, 2017 increased to $46.0 million, as compared to $23.1 million in the corresponding prior year period. Average interest-earning assets increased $2.254 billion for the quarter ended March 31, 2017, as compared to the same prior year period. The increase mainly resulted from the Acquisition Transactions, which added $2.005 billion to average interest-earning assets. The remaining increase is related to interest-earning deposits, securities and loans, which increased by $147.5 million, $27.1 million, and $63.4 million, respectively. The yield on average interest-earning assets increased to 3.95% for the quarter ended March 31, 2017, from 3.75% for the same prior year period. The yield on average interest-earning assets for the quarter ended March 31, 2017 benefited from an increase in the accretion of purchase accounting adjustments of $1.8 million and the generally higher interest rate environment.
Interest Expense
Interest expense for the three months ended March 31, 2017 was $4.5 million, as compared to $2.5 million in the corresponding prior year period. Average interest-bearing liabilities increased $1.803 billion for the quarter ended March 31, 2017, as compared to the same prior year period. The cost of average interest-bearing liabilities decreased to 0.48%, from 0.50%, in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.27% for the quarter ended March 31, 2017, as compared to 0.26% for the corresponding prior year period.


6


Net Interest Income
Net interest income for the quarter ended March 31, 2017 increased to $41.5 million, as compared to $20.6 million for the same prior year period, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased $2.254 billion for the quarter ended March 31, 2017, as compared to the same prior year period. The net interest margin increased to 3.56% for the quarter ended March 31, 2017, from 3.34% for the same prior year period.
Provision for Loan Losses
For the three months ended March 31, 2017, the provision for loan losses was $700,000, as compared to $563,000 for the corresponding prior year period. Net loan recoveries were $268,000 for the three months ended March 31, 2017, as compared to net charge-offs of $1.1 million in the corresponding prior year period.  Non-performing loans increased to $21.7 million at March 31, 2017, as compared to $13.6 million at December 31, 2016. This increase was primarily due to the addition of a single commercial real estate relationship with a balance of $4.2 million and, to a lesser extent, an increase of $3.9 million in non-performing residential mortgage loans.
Other Income
For the three months ended March 31, 2017, other income increased to $6.0 million, as compared to $3.4 million in the same prior year period. The increase from the prior period was primarily due to the impact of the Acquisition Transactions, which added $2.1 million to other income for the three months ended March 31, 2017. Excluding the Acquisition Transactions, the increase was primarily related to deposit related fees. For the three months ended March 31, 2017 and March 31, 2016, other income included losses of $250,000 and $272,000, respectively, attributable to the operations of a hotel, golf and banquet facility acquired as Other Real Estate Owned ("OREO") in the fourth quarter of 2015. The Bank is currently engaged in a sales process with qualified buyers for this property.
Operating Expenses
Operating expenses increased to $31.0 million for the three months ended March 31, 2017, as compared to $16.7 million in the same prior year period. Operating expenses for the each of the quarters ended March 31, 2017 and 2016 include $1.4 million in merger related expenses. The increase in operating expenses over the prior year was primarily due to the operations of Cape and Ocean Shore, which added $11.2 million for the quarter. Excluding the Acquisition Transactions expenses, there were increases of $1.1 million relating to compensation and employee benefits, partly due to higher stock plan expense of $400,000, including $242,000 of accelerated expense relating to a director retirement, $1.7 million relating to general and administrative expenses, partly due to higher data and check processing charges, and $345,000 relating to marketing expenses.
Provision for Income Taxes
The provision for income taxes was $3.8 million for the three months ended March 31, 2017, as compared to $2.5 million for the same prior year period. The effective tax rate was 24.0% for the three months ended March 31, 2017, as compared to 36.8% for the same prior year period. The lower effective tax rate for the three months ended March 31, 2017 resulted from the adoption of ASU 2016-09 "Compensation - Stock Compensation" which resulted in a $1.4 million decrease in income tax expense. Excluding the impact of ASU 2016-09, the effective tax rate would have been 32.7% for the first quarter of 2017. Under the ASU, the tax benefits of exercised stock options and vested stock awards are recognized as a benefit to income tax expense in the reporting period in which they occur. The tax benefit relating to the Company's stock plans was $62,000 for the year ended December 31, 2016, which was recorded directly into stockholder's equity. The elevated tax benefit for the quarter ended March 31, 2017 was related to the exercise of options assumed in the acquisitions of Cape and Ocean Shore and the increase in the Company's stock price.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, Federal Home Loan Bank (FHLB) advances and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. 
At March 31, 2017 and December 31, 2016, the Company had no outstanding overnight borrowings from the FHLB. The Company utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. The Company had total FHLB borrowings of $250.0 million and $250.5 million, respectively, at March 31, 2017 and December 31, 2016.

7


The Company’s cash needs for the three months ended March 31, 2017 were primarily satisfied by principal payments on loans and mortgage-backed securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable and the purchase of securities.  The Company’s cash needs for the three months ended March 31, 2016 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, proceeds from maturities and calls of investment securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, and to reduce borrowings. 
In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At March 31, 2017, outstanding undrawn lines of credit totaled $506.5 million and outstanding commitments to originate loans totaled $139.3 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $367.1 million at March 31, 2017. Based upon historical experience, management estimates that a significant portion of such time deposits will remain with the Company.
The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios.
Under the Company’s common stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the three months ended March 31, 2017 and 2016, the Company did not repurchase any shares of common stock. At March 31, 2017, there were 154,804 shares available to be repurchased under the stock repurchase program authorized in July of 2014. An additional 1.6 million shares were authorized for repurchase by the Company's Board of Directors on April 27, 2017.
Cash dividends on common stock declared and paid during the first three months of 2017 were $4.8 million, as compared to $2.2 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Acquisition Transactions. On April 27, 2017 the Company's Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15) per common share. The dividend is payable on May 19, 2017 to stockholders of record at the close of business on May 8, 2017.
The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary and the issuance of preferred and common stock and debt. During the first quarter of 2017, the Company received notice from the Federal Reserve Bank of Philadelphia that it did not object to the payment of $32.0 million in dividends from the Bank to the Company over the year, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises. For the three months ended March 31, 2017, the Company received a dividend payment of $8.0 million from the Bank and $24.0 remained to be paid. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At March 31, 2017, OceanFirst Financial Corp. held $25.6 million in cash.

8


As of March 31, 2017 and December 31, 2016, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (in thousands):
As of March 31, 2017
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
Bank:
Amount
 
Ratio
 
Amount  
 
Ratio  
 
Amount  
 
Ratio  
Tier 1 capital (to average assets)
$
452,151

 
8.91
%

$
203,047

 
4.000
%
 
$
253,809

 
5.00
%
Common equity Tier 1 (to risk-weighted
assets)
452,151

 
12.68

 
205,010

 
5.750

(1) 
231,750

 
6.50

Tier 1 capital (to risk-weighted assets)
452,151

 
12.68

 
258,491

 
7.250

(1) 
285,231

 
8.00

Total capital (to risk-weighted assets)
468,929

 
13.15

 
329,798

 
9.250

(1) 
356,539

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
$
446,333

 
8.78
%

$
203,332

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted
assets)
434,208

 
12.16

 
205,263

 
5.750

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
446,333

 
12.50

 
258,810

 
7.250

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
498,111

 
13.95

 
330,206

 
9.250

(1) 
N/A

 
N/A

As of December 31, 2016
Actual
 
For capital  adequacy
purposes
 
To be well-capitalized
under prompt
corrective action
Bank:
Amount
 
Ratio
 
Amount  
 
Ratio  
 
Amount  
 
Ratio  
Tier 1 capital (to average assets)
$
450,414

 
10.19
%
(3) 
$
176,856

 
4.000
%
 
$
221,070

 
5.00
%
Common equity Tier 1 (to risk-weighted
assets)
450,414

 
12.81

 
180,178

 
5.125

(2) 
228,519

 
6.50

Tier 1 capital (to risk-weighted assets)
450,414

 
12.81

 
232,913

 
6.625

(2) 
281,254

 
8.00

Total capital (to risk-weighted assets)
466,224

 
13.26

 
303,227

 
8.625

(2) 
351,567

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
$
440,552

 
9.96
%
(3) 
$
176,897

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted
assets)
426,855

 
12.12

 
180,512

 
5.125

(2) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
440,552

 
12.51

 
233,345

 
6.625

(2) 
N/A

 
N/A

Total capital (to risk-weighted assets)
491,362

 
13.95

 
303,788

 
8.625

(2) 
N/A

 
N/A

(1) Includes the Capital Conservation Buffer of 1.25%.
(2) Includes the Capital Conservation Buffer of 0.625%.
(3) Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The Tier 1 capital ratios for the Bank and the Company based on total assets as of the end of the period were 8.85% and 8.75%, respectively.
The Company and the Bank satisfy the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At March 31, 2017, the Company maintained tangible common equity of $424.5 million, for a tangible common equity to assets ratio of 8.43%. At December 31, 2016, the Company maintained tangible common equity of $416.1 million, for a tangible common equity to assets ratio of 8.30%.

9


Off-Balance-Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. 
The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally required the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At both March 31, 2017 and December 31, 2016, the reserve for repurchased loans and loss sharing obligations amounted to $846,000.
The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2017 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
383,819

 
$
77,207

 
$
175,021

 
$
75,000

 
$
56,591

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
290,498

 
290,498

 

 

 

Consumer/Construction
216,011

 
216,011

 

 

 

Commitments to Originate Loans
139,272

 
139,272

 

 

 

Debt obligations include advances from the FHLB and other borrowings and have defined terms.
Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

10


Non-Performing Assets
The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and OREO.  It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.
 
March 31, 2017
 
December 31, 2016
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
231

 
$
441

Commercial real estate – owner occupied
2,383

 
2,414

Commercial real estate – investor
5,118

 
521

Residential mortgage
11,993

 
8,126

Home equity loans and lines
1,954

 
2,064

Total non-performing loans
21,679

 
13,566

Other real estate owned
8,774

 
9,803

Total non-performing assets
$
30,453

 
$
23,369

Purchased credit impaired loans (“PCI”)
$
7,118

 
$
7,575

Delinquent loans 30-89 days
$
18,516

 
$
22,598

Allowance for loan losses as a percent of total loans receivable
0.42
%
 
0.40
%
Allowance for loan losses as a percent of total non-performing loans
74.50

 
111.92

Non-performing loans as a percent of total loans receivable
0.56

 
0.35

Non-performing assets as a percent of total assets
0.59

 
0.45


The Company’s non-performing loans totaled $21.7 million at March 31, 2017, as compared to $13.6 million at December 31, 2016. Included in the non-performing loans total was $3.5 million of troubled debt restructured (“TDR”) loans at both March 31, 2017 and at December 31, 2016. The increase in total non-performing loans was primarily due to a single commercial real estate relationship with a balance of $4.2 million and, to a lesser extent, an increase of $3.9 million in non-performing residential mortgage loans. Non-performing loans do not include $7.1 million of PCI loans acquired from Ocean Shore, Cape, and Colonial American Bank ("Colonial American"). At March 31, 2017, the allowance for loan losses totaled $16.2 million, or 0.42% of total loans, as compared to $15.2 million, or 0.40% of total loans at December 31, 2016. These ratios exclude existing fair value credit marks on acquired loans of $24.0 million and $26.0 million, respectively, at March 31, 2017 and December 31, 2016. These loans were acquired at fair value with no related allowances for loan losses. OREO includes $7.0 million relating to the hotel, golf and banquet facility located in New Jersey which the Company acquired in the fourth quarter of 2015.

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Special Mention
$
25,042

 
$
15,692

Substandard
67,008

 
70,543


Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for loan losses and judgments regarding securities and goodwill impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. Goodwill will be evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances

11


indicate potential impairment between annual measurement dates. These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report 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 future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines and the Bank's ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and subsequent securities filings and 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. Further description of the risks and uncertainties to the business are included in Item 1, Business, and Item 1A, Risk Factors, of the Company’s 2016 Form 10-K.


12


Item 3.        Quantitative and Qualitative Disclosures About Market Risk
The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2017, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At March 31, 2017, the Company’s one-year gap was negative 5.25% as compared to negative 3.47% at December 31, 2016. These results were within Board approved policy guidelines.
 
At March 31, 2017
3 Months
or Less
 
More than
3 Months to
1 Year
 
More than
1 Year to
3 Years
 
More than
3 Years to
5 Years
 
More than
5 Years
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits and short-term investments
$
112,454

 
$

 
$

 
$

 
$

 
$
112,454

Investment securities
62,950

 
8,024

 
53,715

 
65,116

 
43,331

 
233,136

Mortgage-backed securities
42,547

 
85,164

 
143,195

 
99,000

 
149,037

 
518,943

FHLB stock

 

 

 

 
19,253

 
19,253

Loans receivable (2)
569,186

 
723,181

 
1,105,308

 
655,778

 
784,895

 
3,838,348

Total interest-earning assets
787,137

 
816,369

 
1,302,218

 
819,894

 
996,516

 
4,722,134

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Money market deposit accounts
81,306

 
37,828

 
73,580

 
52,033

 
203,346

 
448,093

Savings accounts
95,969

 
73,658

 
142,528

 
96,365

 
273,333

 
681,853

Interest-bearing checking accounts
1,068,385

 
55,720

 
118,038

 
85,790

 
301,656

 
1,629,589

Time deposits
111,291

 
225,437

 
192,545

 
91,857

 
11,270

 
632,400

FHLB advances
479

 
1,452

 
173,090

 
75,000

 

 
250,021

Securities sold under agreements to repurchase and other borrowings
99,745

 

 

 
34,053

 

 
133,798

Total interest-bearing liabilities
1,457,175

 
394,095

 
699,781

 
435,098

 
789,605

 
3,775,754

Interest sensitivity gap (3)
$
(670,038
)
 
$
422,274

 
$
602,437

 
$
384,796

 
$
206,911

 
$
946,380

Cumulative interest sensitivity gap
$
(670,038
)
 
$
(247,764
)
 
$
354,673

 
$
739,469

 
$
946,380

 
$
946,380

Cumulative interest sensitivity gap as a percent of total interest-earning assets
(14.19
)%
 
(5.25
)%
 
7.51
%
 
15.66
%
 
20.04
%
 
20.04
%
 
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2)
For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3)
Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

13


Additionally, the table below sets forth the Company’s exposure to IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of March 31, 2017 and December 31, 2016. All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2016 Form 10-K.
 
 
March 31, 2017
 
December 31, 2016
Change in Interest Rates in Basis Points (Rate Shock)
Economic Value of Equity
 
Net Interest Income
 
Economic Value of Equity
 
Net Interest Income
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
 
Amount
 
% Change
 
EVE Ratio
 
Amount
 
% Change
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
300
$
634,883

 
(8.0
)%
 
13.4
%
 
$
165,639

 
(3.5
)%
 
$
664,767

 
(1.1
)%
 
14.1
%
 
$
156,689

 
(1.0
)%
200
662,847

 
(4.0
)
 
13.6

 
168,503

 
(1.9
)
 
678,347

 
1.0

 
14.0

 
158,078

 
(0.1
)
100
683,979

 
(0.9
)
 
13.6

 
170,773

 
(0.6
)
 
683,492

 
1.7

 
13.7

 
158,840

 
0.3

Static
690,378

 

 
13.4

 
171,723

 

 
671,878

 

 
13.2

 
158,309

 

(100)
644,441

 
(6.7
)
 
12.3

 
165,353

 
(3.7
)
 
620,675

 
(7.6
)
 
11.9

 
152,007

 
(4.0
)
The increase in interest rate sensitivity in a rising interest rate environment at March 31, 2017, as compared to December 31, 2016, is primarily the result of investing low yield cash and short term investments into fixed-rate securities and an increase in longer duration fixed-rate commercial real estate loans.

Item 4.    Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


14



OceanFirst Financial Corp.
Consolidated Statements of Financial Condition
(dollars in thousands, except per share amounts)
 
March 31, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
175,252

 
$
301,373

Securities available-for-sale, at estimated fair value
47,104

 
12,224

Securities held-to-maturity, net (estimated fair value of $695,564 at March 31, 2017 and $598,119 at December 31, 2016)
695,918

 
598,691

Federal Home Loan Bank of New York stock, at cost
19,253

 
19,313

Loans receivable, net
3,825,600

 
3,803,443

Loans held for sale
283

 
1,551

Interest and dividends receivable
12,258

 
11,989

Other real estate owned
8,774

 
9,803

Premises and equipment, net
70,806

 
71,385

Servicing asset
203

 
228

Bank Owned Life Insurance
132,789

 
132,172

Deferred tax asset
33,652

 
38,787

Other assets
16,233

 
10,105

Core deposit intangible
10,400

 
10,924

Goodwill
147,815

 
145,064

Total assets
$
5,196,340

 
$
5,167,052

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
4,198,663

 
$
4,187,750

Securities sold under agreements to repurchase with retail customers
77,207

 
69,935

Federal Home Loan Bank advances
250,021

 
250,498

Other borrowings
56,591

 
56,559

Advances by borrowers for taxes and insurance
14,876

 
14,030

Other liabilities
16,302

 
16,242

Total liabilities
4,613,660

 
4,595,014

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, no shares issued

 

Common stock, $.01 par value, 55,000,000 shares authorized, 33,566,772 shares issued and 32,465,413 and 32,136,892 shares outstanding at March 31, 2017 and December 31, 2016, respectively
336

 
336

Additional paid-in capital
352,316

 
364,433

Retained earnings
256,045

 
238,192

Accumulated other comprehensive loss
(5,382
)
 
(5,614
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(2,690
)
 
(2,761
)
Treasury stock, 1,101,359 and 1,429,880 shares at March 31, 2017 and December 31, 2016, respectively
(17,945
)
 
(22,548
)
Common stock acquired by Deferred Compensation Plan
(316
)
 
(313
)
Deferred Compensation Plan Liability
316

 
313

Total stockholders’ equity
582,680

 
572,038

Total liabilities and stockholders’ equity
$
5,196,340

 
$
5,167,052

See accompanying Notes to Unaudited Consolidated Financial Statements.

15


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(Unaudited)
Interest income:
 
 
 
Loans
$
41,742

 
$
21,035

Mortgage-backed securities
2,660

 
1,415

Investment securities and other
1,612

 
623

Total interest income
46,014

 
23,073

Interest expense:
 
 
 
Deposits
2,781

 
1,271

Borrowed funds
1,750

 
1,243

Total interest expense
4,531

 
2,514

Net interest income
41,483

 
20,559

Provision for loan losses
700

 
563

Net interest income after provision for loan losses
40,783

 
19,996

Other income:
 
 
 
Bankcard services revenue
1,579

 
851

Wealth management revenue
516

 
550

Fees and service charges
3,743

 
1,817

Loan servicing income
64

 
56

Net gain on sales of loans available-for-sale
42

 
179

Net loss from other real estate operations
(733
)
 
(406
)
Income from Bank Owned Life Insurance
772

 
319

Other
12

 
10

Total other income
5,995

 
3,376

Operating expenses:
 
 
 
Compensation and employee benefits
16,138

 
8,466

Occupancy
2,767

 
1,626

Equipment
1,698

 
969

Marketing
740

 
251

Federal deposit insurance
661

 
529

Data processing
2,396

 
1,265

Check card processing
953

 
420

Professional fees
960

 
498

Other operating expense
2,677

 
1,277

Amortization of core deposit intangible
524

 
13

Merger related expenses
1,447

 
1,402

Total operating expenses
30,961

 
16,716

Income before provision for income taxes
15,817

 
6,656

Provision for income taxes
3,799

 
2,451

Net income
$
12,018

 
$
4,205

Basic earnings per share
$
0.38

 
$
0.25

Diluted earnings per share
$
0.36

 
$
0.25

Average basic shares outstanding
31,901

 
16,906

Average diluted shares outstanding
33,090

 
17,118


See accompanying Notes to Unaudited Consolidated Financial Statements.

16


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(Unaudited)
Net income
$
12,018

 
$
4,205

Other comprehensive income:
 
 
 
Unrealized gain on securities (net of tax expense of $44 and $71 in 2017 and 2016, respectively)
64

 
102

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $116 and $149 in 2017 and 2016, respectively)
168

 
216

Total comprehensive income
$
12,250

 
$
4,523

See accompanying Notes to Unaudited Consolidated Financial Statements.

17


OceanFirst Financial Corp.
Changes in Stockholders’ Equity (Unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31, 2017 and 2016
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Employee
Stock
Ownership
Plan
 
Treasury
Stock
 
Common
Stock
Acquired by
Deferred
Compensation
Plan
 
Deferred
Compensation
Plan Liability
 
Total
Balance at December 31, 2015
$

 
$
336

 
$
269,757

 
$
229,140

 
$
(6,241
)
 
$
(3,045
)
 
$
(251,501
)
 
$
(314
)
 
$
314

 
$
238,446

Net income

 

 

 
4,205

 

 

 

 

 

 
4,205

Other comprehensive income, net of tax

 

 

 

 
318

 

 

 

 

 
318

Tax expense of stock plans

 

 
(270
)
 

 

 

 

 

 

 
(270
)
Stock awards

 

 
330

 

 

 

 

 

 

 
330

Treasury stock allocated to restricted stock plan

 

 
1,108

 
(113
)
 

 

 
(995
)
 

 

 

Allocation of ESOP stock

 

 
78

 

 

 
71

 

 

 

 
149

Cash dividend $0.13 per share

 

 

 
(2,197
)
 

 

 

 

 

 
(2,197
)
Exercise of stock options

 

 

 
(19
)
 

 

 
114

 

 

 
95

Purchase of stock for the deferred compensation plan

 

 

 

 

 

 

 
9

 
(9
)
 

Balance at March 31, 2016
$

 
$
336

 
$
271,003

 
$
231,016

 
$
(5,923
)
 
$
(2,974
)
 
$
(252,382
)
 
$
(305
)
 
$
305

 
$
241,076

Balance at December 31, 2016
$

 
$
336

 
$
364,433

 
$
238,192

 
$
(5,614
)
 
$
(2,761
)
 
$
(22,548
)
 
$
(313
)
 
$
313

 
$
572,038

Net income

 

 

 
12,018

 

 

 

 

 

 
12,018

Other comprehensive income, net of tax

 

 

 

 
232

 

 

 

 

 
232

Effect of adopting Accounting Standards Update ("ASU") No. 2016-09

 

 
(11,129
)
 
11,129

 

 

 

 

 

 

Stock awards

 

 
730

 

 

 

 

 

 

 
730

Treasury stock allocated to restricted stock plan

 

 
(1,892
)
 
892

 

 

 
1,000

 

 

 

Allocation of ESOP stock

 

 
174

 

 

 
71

 

 

 

 
245

Cash dividend $0.15 per share

 

 

 
(4,787
)
 

 

 

 

 

 
(4,787
)
Exercise of stock options

 

 

 
(1,399
)
 

 

 
3,603

 

 

 
2,204

Sale of stock for the deferred compensation plan

 

 

 

 

 

 

 
(3
)
 
3

 

Balance at March 31, 2017
$

 
$
336

 
$
352,316

 
$
256,045

 
$
(5,382
)
 
$
(2,690
)
 
$
(17,945
)
 
$
(316
)
 
$
316

 
$
582,680

See accompanying Notes to Unaudited Consolidated Financial Statements.

18


OceanFirst Financial Corp.
Consolidated Statements of Cash Flows
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2017
 
2016
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
12,018

 
$
4,205

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of premises and equipment
1,527

 
973

Allocation of ESOP stock
245

 
149

Stock awards
730

 
330

Net excess tax benefit (expense) on stock compensation
3,916

 
(270
)
Amortization of servicing asset
25

 
45

Net premium amortization in excess of discount accretion on securities
468

 
388

Net amortization of deferred costs and discounts on borrowings
32

 
128

Amortization of core deposit intangible
524

 
13

Net accretion of purchase accounting adjustments
(2,169
)
 
(164
)
Net amortization of deferred costs and discounts on loans
30

 

Provision for loan losses
700

 
563

Net loss on sale of other real estate owned
366

 
65

Net loss on sale of fixed assets
7

 

Net gain on sales of loans
(42
)
 
(179
)
Proceeds from sales of mortgage loans held for sale
1,949

 
9,080

Mortgage loans originated for sale
(639
)
 
(9,590
)
Increase in value of Bank Owned Life Insurance
(772
)
 
(319
)
Increase in interest and dividends receivable
(269
)
 
(161
)
(Increase) decrease in other assets
(5,141
)
 
428

(Decrease) increase in other liabilities
(1,552
)
 
2,206

Total adjustments
(65
)
 
3,685

Net cash provided by operating activities
11,953

 
7,890

Cash flows from investing activities:
 
 
 
Net increase in loans receivable
(16,292
)
 
(14,382
)
Purchase of loans receivable
(5,029
)
 
(12,942
)
Purchase of investment securities available-for-sale
(34,770
)
 

Purchase of investment securities held-to-maturity
(42,497
)
 

Purchase of MBS securities held-to-maturity
(79,984
)
 

Proceeds from maturities and calls of investment securities held-to-maturity
1,375

 
6,135

Principal repayments on mortgage-backed securities held-to-maturity
23,696

 
13,029

Proceeds from Bank Owned Life Insurance
155

 

Proceeds from the redemption of Federal Home Loan Bank of New York stock
60

 
5,706

Purchases of Federal Home Loan Bank of New York stock

 
(2,373
)
Proceeds from sales of other real estate owned
868

 
208

Purchases of premises and equipment
(961
)
 
(876
)
Cash acquired, net of cash paid for branch acquisition

 
16,727

Net cash (used in) provided by investing activities
(153,379
)
 
11,232

Continued



19



OceanFirst Financial Corp.
Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
 
(Unaudited)
Cash flows from financing activities:
 
 
 
Increase in deposits
$
11,204

 
$
37,771

Increase (decrease) in short-term borrowings
7,271

 
(73,959
)
Proceeds from Federal Home Loan Bank advances

 
10,000

Repayments of Federal Home Loan Bank advances
(477
)
 
(468
)
Increase in advances by borrowers for taxes and insurance
846

 
150

Exercise of stock options
2,204

 
95

Payment of employee taxes withheld from stock awards
(956
)
 
(199
)
Dividends paid
(4,787
)
 
(2,197
)
Net cash provided by (used in) financing activities
15,305

 
(28,807
)
Net decrease in cash and due from banks
(126,121
)
 
(9,685
)
Cash and due from banks at beginning of period
301,373

 
43,946

Cash and due from banks at end of period
$
175,252

 
$
34,261

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
5,266

 
$
2,485

Income taxes
2

 

Non-cash activities:
 
 
 
Accretion of unrealized loss on securities reclassified to held-to-maturity
293

 
366

Net loan recoveries (charge-offs)
268

 
(1,071
)
Transfer of loans receivable to other real estate owned
318

 
475

See accompanying Notes to Unaudited Consolidated Financial Statements.

20

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements



Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its subsidiaries.
The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results of operations that may be expected for all of 2017. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2016.
Note 2. Business Combinations
Branch Acquisition
On March 11, 2016, the Company completed its acquisition of an existing retail branch in the Toms River market. Under the terms of the Purchase and Assumption Agreement dated July 31, 2015, the Company paid a deposit premium of $340,000, equal to 2.50% of core deposits; i.e., all deposits other than time deposits, government deposits, and fiduciary accounts. Up to 1.00% of the deposit premium was contingent on the core deposit balance seventy-five days after closing.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table presents the assets acquired and liabilities assumed as of March 11, 2016 and the initial fair value estimates (in thousands):
 
Book Value
 
Fair Value Adjustment
 
Fair Value
Assets Acquired
 
 
 
 
 
Cash and cash equivalents
$
16,727

 
$

 
$
16,727

Loans
9

 

 
9

Other assets
15

 

 
15

Core deposit intangible

 
66

 
66

Total assets acquired
$
16,751

 
$
66

 
$
16,817

Liabilities Assumed
 
 
 
 
 
Deposits
$
16,953

 
$
4

 
$
16,957

Other liabilities
138

 

 
138

Total liabilities assumed
$
17,091

 
$
4

 
$
17,095

Goodwill
 
 
 
 
$
278



21

OceanFirst Financial Corp.
Notes to Unaudited Consolidated Financial Statements (Continued)


Cape Bancorp Acquisition
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”), which after purchase accounting adjustments added $1.5 billion to assets, $1.2 billion to loans, and $1.2 billion to deposits. Total consideration paid for Cape was $196.4 million, including cash consideration of $30.5 million. Cape was merged with and into the Company as of the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Cape, net of total consideration paid (in thousands):
 
At May 2, 2016
(in thousands)
Cape
Book Value
 
Purchase Accounting Adjustments
 
Estimated
Fair Value
Total Purchase Price:
 
 
 
 
$
196,403

Assets acquired:
 
 
 
 
 
Cash and cash equivalents
$
30,025

 
$

 
$
30,025

Securities and Federal Home Loan Bank Stock
218,577

 
361

 
218,938

Loans:
1,169,568

 
 
 
1,156,807

Specific credit fair value on credit impaired loans

 
(5,859
)
 

General credit fair value

 
(20,545
)
 

Interest rate fair value

 
1,888

 

Reverse allowance for loan losses

 
9,931

 

Reverse net deferred fees, premiums and discounts

 
1,824

 

Premises and equipment
27,972

 
(1,973
)
 
25,999

Other real estate owned
2,343

 
(408
)
 
1,935

Deferred tax asset
9,407

 
8,072

 
17,479

Other assets
61,793

 

 
61,793

Core deposit intangible
831

 
2,887

 
3,718

Total assets acquired
1,520,516

 
(3,822
)
 
1,516,694

Liabilities assumed:
 
 
 
 
 
Deposits
(1,247,688
)
 
(679
)
 
(1,248,367
)
Borrowings
(123,587
)
 
(879
)
 
(124,466
)
Other liabilities
(7,611
)
 
(4,612
)
 
(12,223
)
Total liabilities assumed
(1,378,886
)
 
(6,170
)
 
(1,385,056
)
Net assets acquired
$
141,630

 
$
(9,992
)
 
131,638

Goodwill recorded in the merger