10-Q 1 ocfc-63017x10q.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 June 30, 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
 
ý
Accelerated Filer
 
o
 
 
 
 
 
 
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 August 4, 2017 there were 32,530,582 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)
June 30, 2017
 
March 31, 2017
 
June 30, 2016
SELECTED FINANCIAL CONDITION DATA:
 
 
 
 
 
Total assets
$
5,202,200

 
$
5,196,340

 
$
4,047,493

Loans receivable, net
3,868,805

 
3,825,600

 
3,130,046

Deposits
4,176,909

 
4,198,663

 
3,206,262

Stockholders’ equity
587,303

 
582,680

 
409,258

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
42,174

 
41,483

 
30,014

Provision for loan losses
1,165

 
700

 
662

Other income
6,973

 
5,995

 
4,883

Operating expenses
37,133

 
30,961

 
28,646

Net income
7,679

 
12,018

 
3,661

Diluted earnings per share
0.23

 
0.36

 
0.16

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share
18.05

 
17.95

 
15.89

Tangible stockholders’ equity per common share (1)
13.19

 
13.07

 
13.14

Cash dividend per share
0.15

 
0.15

 
0.13

Stockholders’ equity to total assets
11.29
%
 
11.21
%
 
10.11
%
Tangible stockholders’ equity to total tangible assets (1)
8.51

 
8.43

 
8.51

Return on average assets (2) (3)
0.59

 
0.94

 
0.40

Return on average stockholders’ equity (2) (3)
5.25

 
8.42

 
3.79

Return on average tangible stockholders’ equity (1) (2) (3)
7.19

 
11.50

 
4.32

Net interest rate spread
3.48

 
3.47

 
3.47

Net interest margin
3.57

 
3.56

 
3.57

Operating expenses to average assets (2) (3)
2.86

 
2.41

 
3.16

Efficiency ratio (3) (4)
75.55

 
65.21

 
82.09

Loan to deposit ratio
92.62

 
91.11

 
97.62

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
16,261

 
$
21,679

 
$
15,330

Non-performing assets
25,159

 
30,453

 
25,121

Allowance for loan losses as a percent of total loans receivable
0.42
%
 
0.42
%
 
0.53
%
Allowance for loan losses as a percent of total non-performing loans
101.82

 
74.50

 
108.79

Non-performing loans as a percent of total loans receivable
0.42

 
0.56

 
0.48

Non-performing assets as a percent of total assets
0.48

 
0.59

 
0.62

 
 
 
 
 
 
 
 
 
 
 
 
 
(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 and branch consolidation expenses of $8.6 million, or $5.6 million, net of tax benefit, for the quarter ended June 30, 2017; $1.5 million, or $1.0 million, net of tax benefit, for the quarter ended March 31, 2017; and $7.2 million, or $5.0 million, net of tax benefit, for the quarter ended June 30, 2016.
(4)
Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

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 relatively low absolute levels of interest rates by focusing on commercial loan and core deposit growth.

Over the past two years the Company has grown significantly through acquisitions, acquiring Cape Bancorp ("Cape") and Ocean City Home Bank ("Ocean Shore") (the "Acquisition Transactions"). The Acquisition Transactions added $2.5 billion in assets and $2.1 billion in deposits. In addition, on June 30, 2017, the Company announced it had entered into a definitive agreement (the "merger agreement") to acquire Sun Bancorp, Inc. ("Sun"). At June 30, 2017, Sun had total assets of $2.2 billion, total loans of $1.6 billion and total deposits of $1.7 billion. The acquisition of Sun is expected to close in the first quarter of 2018, subject to each company receiving the required approval of its shareholders, receipt of all required regulatory approvals and fulfillment of other customary closing conditions.
Highlights of the Company’s financial results and corporate activities for the three months ended June 30, 2017 were as follows:

Total loans grew $47.5 million, including $26.6 million in consumer loan growth and $20.9 million in commercial loan growth, while asset quality improved as non-performing loans decreased $5.4 million, or 25%, to $16.3 million, and non-performing loans as a percentage of total loans decreased to 0.42%, as compared to 0.56% in the prior linked quarter.

The Company maintained a loan to deposit ratio of 92.6% while cost of deposits increased one basis point from the prior linked quarter to 0.28%.

The Company successfully completed the consolidation of 15 branches, five of which occurred early in the third quarter, with total expected annualized cost savings of $6.1 million.

Net income for the quarter ended June 30, 2017, was $7.7 million, or $0.23 per diluted share, as compared to $3.7 million, or $0.16 per diluted share, for the corresponding prior year period. Net income for the quarter ended June 30, 2017, includes merger related and branch consolidation expenses. These items decreased net income, net of tax benefit, for the three months ended June 30, 2017, by $5.6 million. Net income increased over the prior year period primarily due to the Acquisition Transactions.

Net interest income for the three months ended June 30, 2017 increased to $42.2 million, as compared to $30.0 million for the corresponding prior year period reflecting an increase in interest-earning assets primarily due to the Acquisition Transactions.

Other income increased to $7.0 million for the three months ended June 30, 2017, as compared to $4.9 million for the same prior year period. The increase was primarily due to the impact of the Acquisition Transactions, which added $1.7 million to other income. Operating expenses increased to $37.1 million for the three months ended June 30, 2017, as compared to $28.6 million in the same prior year period. Operating expenses for the three months ended June 30, 2017 included $8.6 million of merger related and branch consolidation expenses, as compared to $7.2 million in the prior year period. Excluding the impact of merger and branch consolidation expenses, the increase in operating expenses over the prior year was primarily due to the operations of the Cape and Ocean Shore, which added $5.9 million for the three months ended June 30, 2017.

The Company declared a quarterly cash dividend on common stock. The dividend for the quarter ended June 30, 2017 of $0.15 per share will be paid on August 18, 2017 to stockholders of record on August 7, 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 and six months ended June 30, 2017 and June 30, 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,
 
June 30, 2017
 
June 30, 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
$
114,019

 
$
211

 
0.74
%
 
$
40,567

 
$
41

 
0.41
%
Securities (1) and FHLB stock
786,964

 
4,060

 
2.07

 
571,463

 
2,579

 
1.82

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,850,737

 
22,057

 
4.78

 
1,471,159

 
17,783

 
4.86

Residential
1,718,413

 
17,304

 
4.04

 
1,076,557

 
10,225

 
3.82

Home Equity
283,124

 
3,225

 
4.57

 
236,937

 
2,498

 
4.24

Other
1,161

 
22

 
7.60

 
1,011

 
15

 
5.97

Allowance for loan loss net of
deferred loan fees
(12,518
)
 

 

 
(13,146
)
 

 

Loans Receivable, net
3,840,917

 
42,608

 
4.45

 
2,772,518

 
30,521

 
4.43

Total interest-earning assets
4,741,900

 
46,879

 
3.97

 
3,384,548

 
33,141

 
3.94

Non-interest-earning assets
473,736

 
 
 
 
 
262,554

 
 
 
 
Total assets
$
5,215,636

 
 
 
 
 
$
3,647,102

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
1,716,930

 
$
1,038

 
0.24
%
 
$
1,166,298

 
$
503

 
0.17
%
Money market
422,439

 
281

 
0.27

 
298,530

 
180

 
0.24

Savings
679,806

 
97

 
0.06

 
434,438

 
41

 
0.04

Time deposits
624,020

 
1,498

 
0.96

 
417,301

 
1,047

 
1.01

Total
3,443,195

 
2,914

 
0.34

 
2,316,567

 
1,771

 
0.31

Securities sold under agreements
to repurchase
73,574

 
25

 
0.14

 
76,907

 
26

 
0.14

FHLB Advances
259,291

 
1,118

 
1.73

 
287,171

 
1,201

 
1.68

Other borrowings
56,456

 
648

 
4.60

 
22,500

 
129

 
2.31

Total interest-bearing
liabilities
3,832,516

 
4,705

 
0.49

 
2,703,145

 
3,127

 
0.47

Non-interest-bearing deposits
772,739

 
 
 
 
 
529,230

 
 
 
 
Non-interest-bearing liabilities
23,260

 
 
 
 
 
26,033

 
 
 
 
Total liabilities
4,628,515

 
 
 
 
 
3,258,408

 
 
 
 
Stockholders’ equity
587,121

 
 
 
 
 
388,694

 
 
 
 
Total liabilities and equity
$
5,215,636

 
 
 
 
 
$
3,647,102

 
 
 
 
Net interest income
 
 
$
42,174

 
 
 
 
 
$
30,014

 
 
Net interest rate spread (3)
 
 
 
 
3.48
%
 
 
 
 
 
3.47
%
Net interest margin (4)
 
 
 
 
3.57
%
 
 
 
 
 
3.57
%
Total cost of deposits (including non-
interest-bearing deposits)
 
 
 
 
0.28
%
 
 
 
 
 
0.25
%


5


 
FOR THE SIX MONTHS ENDED,
 
June 30, 2017
 
June 30, 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
$
163,815

 
$
620

 
0.76
%
 
$
44,533

 
$
70

 
0.32
%
Securities (1) and FHLB stock
745,568

 
7,923

 
2.14

 
508,590

 
4,588

 
1.81

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,840,745

 
43,197

 
4.73

 
1,221,604

 
28,780

 
4.74

Residential
1,711,263

 
34,643

 
4.08

 
954,059

 
18,265

 
3.85

Home Equity
285,208

 
6,470

 
4.57

 
214,146

 
4,488

 
4.21

Other
1,215

 
40

 
6.64

 
756

 
23

 
6.12

Allowance for loan loss net of
deferred loan fees
(12,322
)
 

 

 
(13,396
)
 

 

Loans Receivable, net
3,826,109

 
84,350

 
4.45

 
2,377,169

 
51,556

 
4.36

Total interest-earning assets
4,735,492

 
92,893

 
3.96

 
2,930,292

 
56,214

 
3.86

Non-interest-earning assets
477,874

 
 
 
 
 
195,768

 
 
 
 
Total assets
$
5,213,366

 
 
 
 
 
$
3,126,060

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
1,692,820

 
$
1,913

 
0.23
%
 
$
1,033,091

 
$
808

 
0.16
%
Money market
433,750

 
591

 
0.27

 
227,428

 
250

 
0.22

Savings
677,278

 
227

 
0.07

 
375,293

 
67

 
0.04

Time deposits
632,099

 
2,964

 
0.95

 
340,511

 
1,917

 
1.13

Total
3,435,947

 
5,695

 
0.33

 
1,976,323

 
3,042

 
0.31

Securities sold under agreements
to repurchase
74,955

 
52

 
0.14

 
80,207

 
54

 
0.14

FHLB Advances
254,840

 
2,186

 
1.73

 
276,547

 
2,284

 
1.66

Other borrowings
56,424

 
1,303

 
4.66

 
22,500

 
261

 
2.33

Total interest-bearing
liabilities
3,822,166

 
9,236

 
0.49

 
2,355,577

 
5,641

 
0.48

Non-interest-bearing deposits
781,888

 
 
 
 
 
436,300

 
 
 
 
Non-interest-bearing liabilities
26,312

 
 
 
 
 
19,836

 
 
 
 
Total liabilities
4,630,366

 
 
 
 
 
2,811,713

 
 
 
 
Stockholders’ equity
583,000

 
 
 
 
 
314,347

 
 
 
 
Total liabilities and equity
$
5,213,366

 
 
 
 
 
$
3,126,060

 
 
 
 
Net interest income
 
 
$
83,657

 
 
 
 
 
$
50,573

 
 
Net interest rate spread (3)
 
 
 
 
3.47
%
 
 
 
 
 
3.38
%
Net interest margin (4)
 
 
 
 
3.56
%
 
 
 
 
 
3.47
%
Total cost of deposits (including non-
interest-bearing deposits)
 
 
 
 
0.27
%
 
 
 
 
 
0.25
%
(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.


6


Comparison of Financial Condition at June 30, 2017 and December 31, 2016

Total assets increased by $35.1 million to $5.202 billion at June 30, 2017, from $5.167 billion at December 31, 2016. Cash and due from banks decreased by $193.7 million, to $107.7 million at June 30, 2017, from $301.4 million at December 31, 2016, as these funds were deployed into higher-yielding securities which increased $171.8 million. Loans receivable, net, increased by $65.4 million, to $3.869 billion at June 30, 2017 from $3.803 billion at December 31, 2016. Premises and equipment decreased $11.9 million at June 30, 2017, as compared to December 31, 2016, due to the consolidation of 15 branches, of which 5 were closed in early July. The premises and equipment at these locations were written down to their net realizable value and the remaining balance of $5.8 million was reclassified to assets held for sale.

Deposits decreased by $10.8 million, to $4.177 billion at June 30, 2017, from $4.188 billion at December 31, 2016. The loan-to-deposit ratio at June 30, 2017 was 92.6%, as compared to 90.8% at December 31, 2016.

Stockholders' equity increased to $587.3 million at June 30, 2017, as compared to $572.0 million at December 31, 2016. At June 30, 2017, there were 1.8 million shares available for repurchase under the Company's stock repurchase programs. In the six months ended June 30, 2017, the Company did not repurchase any shares under these repurchase programs. Tangible stockholders' equity per common share increased to $13.19 at June 30, 2017, as compared to $12.95 at December 31, 2016.
Comparison of Operating Results for the three and six months ended June 30, 2017 and June 30, 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 three and six months ended June 30, 2017, but are excluded from the results of operations for the period from January 1, 2016 to May 1, 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 three and six months ended June 30, 2017, but are excluded from the results of operations for the three and six months ended June 30, 2016.
Net income for the quarter ended June 30, 2017, was $7.7 million, or $0.23 per diluted share, as compared to $3.7 million, or $0.16 per diluted share, for the corresponding prior year period. Net income for the six months ended June 30, 2017 was $19.7 million, or $0.59 per diluted share, as compared to net income of $7.9 million, or $0.39 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2017 include merger related and branch consolidation expenses and for the six months ended June 30, 2017, also includes the acceleration of stock award expense from a director retirement. These items decreased net income, net of tax benefit, for the three and six months ended June 30, 2017, by $5.6 million and $6.7 million, respectively. Net income for the three and six months ended June 30, 2016 include merger related expenses of $7.2 million and $8.6 million, respectively, a Federal Home Loan Bank prepayment fee of $136,000 and a loss on the sale of investment securities available-for-sale of $12,000. The after-tax impact of these items reduced diluted earnings per share by $0.17 and $0.21 for the three and six months ended June 30, 2017, respectively, and by $0.22 and $0.29, respectively, for the same prior year periods. Net income for the three and six months ended June 30, 2017 increased over the prior year periods primarily due to the Acquisition Transactions. In addition, in the first quarter of 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09 "Compensation - Stock Compensation" which resulted in decreases in income tax expense for the three and six months ended June 30, 2017, of $172,000 and $1.5 million, respectively.
Interest Income
Interest income for the three and six months ended June 30, 2017 increased to $46.9 million and $92.9 million, respectively, as compared to $33.1 million and $56.2 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1.357 billion and $1.805 billion, respectively, for the three and six months ended June 30, 2017, as compared to the same prior year periods. The averages for the three and six months ended June 30, 2017, were favorably impacted by the Acquisition Transactions. The yield on average interest-earning assets increased to 3.97% and 3.96%, respectively, for the three and six months ended June 30, 2017, as compared to 3.94% and 3.86%, respectively, for the same prior year periods. The yields on average interest-earning assets for the three and six months ended June 30, 2017 benefited from an increase in the accretion of purchase accounting adjustments of $632,000 and $2.6 million, respectively, and the generally higher interest rate environment.
Interest Expense
Interest expense for the three and six months ended June 30, 2017 was $4.7 million and $9.2 million, respectively, as compared to $3.1 million and $5.6 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $1.129 billion and $1.467 billion, respectively, for the three and six months ended June 30, 2017, as compared to the same prior year periods. For both the three and six months ended June 30, 2017, the cost of average interest-bearing liabilities increased to 0.49%, from 0.47% and 0.48%, respectively, in the corresponding prior year periods. The total cost of deposits (including non-

7


interest bearing deposits) was 0.28% and 0.27%, respectively, for the three and six months ended June 30, 2017, as compared to 0.25% for both the three and six months ending June 30, 2016.
Net Interest Income
Net interest income for the three and six months ended June 30, 2017 increased to $42.2 million and $83.7 million, respectively, as compared to $30.0 million and $50.6 million, respectively, for the same prior year periods, reflecting an increase in interest-earning assets. The net interest margin remained stable at 3.57% for both the three months ended June 30, 2017 and 2016, and increased to 3.56% for the six months ended June 30, 2017, from 3.47% for the same prior year period.
Provision for Loan Losses
For the three and six months ended June 30, 2017, the provision for loan losses was $1.2 million and $1.9 million, respectively, as compared to $662,000 and $1.2 million, respectively, for the corresponding prior year periods. Net loan charge-offs were $759,000 and $491,000, respectively, for the three and six months ended June 30, 2017, as compared to net loan charge-offs of $198,000 and $1.3 million, respectively, in the corresponding prior year periods. Non-performing loans increased to $16.3 million at June 30, 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, which was partly offset by the payoff of two non-performing commercial loans totaling $1.7 million.
Other Income
For the three and six months ended June 30, 2017, other income increased to $7.0 million, and $13.0 million, respectively, as compared to $4.9 million and $8.3 million, respectively, in the same prior year periods. The increases were primarily due to the impact of the Acquisition Transactions, which added $1.7 million and $3.8 million, respectively, to other income for the three and six months ended June 30, 2017, as compared to the same prior year periods. Excluding the Acquisition Transactions, the remaining increase in other income was primarily related to higher deposit related fees of $389,000 and $902,000, respectively, for the three and six months ended June 30, 2017, as compared to the same prior year periods.
Operating Expenses
Operating expenses increased to $37.1 million and $68.1 million, respectively, for the three and six months ended June 30, 2017, as compared to $28.6 million and $45.4 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2017 included $8.6 million and $10.1 million, respectively, of merger related and branch consolidation expenses, as compared to $7.2 million and $8.6 million, respectively, in the prior year periods. Excluding the impact of merger and branch consolidation expenses, the increase in operating expenses over the prior year was primarily due to the operations of the Cape and Ocean Shore, which added $5.9 million and $17.3 million for the three and six months ended June 30, 2017, respectively. For the three months ended June 30, 2017, excluding the Acquisition Transaction expenses, there were increases in salary compensation, equipment expenses and professional fees. For the six months ended June 30, 2017, excluding the Acquisition Transaction expenses, there were increases in salary compensation, stock plan expense, equipment expenses and professional fees.
Provision for Income Taxes
The provision for income taxes was $3.2 million and $7.0 million, respectively, for the three and six months ended June 30, 2017, as compared to $1.9 million and $4.4 million, respectively, for the same prior year periods. The effective tax rate was 29.2% and 26.1%, respectively, for the three and six months ended June 30, 2017, as compared to 34.5% and 35.8%, respectively, for the same prior year periods. The lower effective tax rate for the three and six months ended June 30, 2017 resulted from the adoption of ASU 2016-09 "Compensation - Stock Compensation," which decreased income tax expense by $172,000 and $1.5 million, respectively. Excluding the impact of ASU 2016-09, the effective tax rate would have been 30.8% and 31.9% for the three and six months ended June 30, 2017, respectively. 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 stockholders equity. The elevated tax benefit for the three and six months ended June 30, 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 loan prepayments are greatly influenced by interest rates, economic conditions and competition. 

8


At June 30, 2017, the company had $23.0 million in outstanding overnight borrowings from the FHLB as compared to none outstanding at December 31, 2016. The Company utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. The Company had total FHLB borrowings, including overnight borrowings, of $277.5 million and $250.5 million, respectively, at June 30, 2017 and December 31, 2016.
The Company’s cash needs for the six months ended June 30, 2017 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of investment securities, and increased borrowings. 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 six months ended June 30, 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, proceeds from the sale of available-for-sale 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 June 30, 2017, outstanding undrawn lines of credit totaled $514.1 million and outstanding commitments to originate loans totaled $137.0 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 $338.6 million at June 30, 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 programs, 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 six months ended June 30, 2017 and 2016, the Company did not repurchase any shares of common stock. At June 30, 2017, there were 1,754,804 shares available to be repurchased under the stock repurchase programs authorized in July of 2014 and April of 2017.
Cash dividends on common stock declared and paid during the first six months of 2017 were $9.6 million, as compared to $5.5 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Acquisition Transactions. On July 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 August 18, 2017 to stockholders of record at the close of business on August 7, 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 notice of non-objection at any time if a safety and soundness concern arises. For the six months ended June 30, 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 June 30, 2017, OceanFirst Financial Corp. held $20.3 million in cash.

9


As of June 30, 2017 and December 31, 2016, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (in thousands):
As of June 30, 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)
$
461,085

 
9.10
%

$
202,698

 
4.000
%
 
$
253,372

 
5.00
%
Common equity Tier 1 (to risk-weighted
assets)
461,085

 
12.95

 
204,685

 
5.750

(1) 
231,383

 
6.50

Tier 1 capital (to risk-weighted assets)
461,085

 
12.95

 
258,081

 
7.250

(1) 
284,780

 
8.00

Total capital (to risk-weighted assets)
478,269

 
13.44

 
329,276

 
9.250

(1) 
355,974

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
$
450,472

 
8.88
%

$
202,922

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted
assets)
438,041

 
12.29

 
204,912

 
5.750

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
450,472

 
12.64

 
258,367

 
7.250

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
502,656

 
14.10

 
329,640

 
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 June 30, 2017, the Company maintained tangible common equity of $429.0 million, for a tangible common equity to assets ratio of 8.51%. 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%.

10


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 require 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 June 30, 2017 and December 31, 2016, the reserve for repurchased loans and loss sharing obligations amounted to $763,000 and $846,000, respectively.
The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2017 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
409,214

 
$
139,990

 
$
162,601

 
$
50,000

 
$
56,623

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
309,907

 
309,907

 

 

 

Consumer/Construction
204,218

 
204,218

 

 

 

Commitments to Originate Loans
136,991

 
136,991

 

 

 

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.

11


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.
 
June 30, 2017
 
December 31, 2016
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
68

 
$
441

Commercial real estate – owner occupied
943

 
2,414

Commercial real estate – investor
5,608

 
521

Residential mortgage
7,936

 
8,126

Home equity loans and lines
1,706

 
2,064

Total non-performing loans
16,261

 
13,566

Other real estate owned
8,898

 
9,803

Total non-performing assets
$
25,159

 
$
23,369

Purchased credit impaired loans (“PCI”)
$
4,969

 
$
7,575

Delinquent loans 30-89 days
$
25,224

 
$
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
101.82

 
111.92

Non-performing loans as a percent of total loans receivable
0.42

 
0.35

Non-performing assets as a percent of total assets
0.48

 
0.45


The Company’s non-performing loans totaled $16.3 million at June 30, 2017, as compared to $13.6 million at December 31, 2016. Included in the non-performing loans total was $1.3 million and $3.5 million of troubled debt restructured (“TDR”) loans at June 30, 2017 and December 31, 2016, respectively. The increase in total non-performing loans was primarily due to the addition of a single commercial real estate relationship with a balance of $4.2 million, which was partially offset by the payoff of two non-performing commercial loans totaling $1.7 million. An increase in non-performing residential mortgage loans in the first quarter of 2017 was largely offset by the bulk sale of non-performing residential loans in the second quarter of 2017. Non-performing loans do not include $5.0 million of PCI loans acquired from Ocean Shore, Cape, and Colonial American Bank ("Colonial American"). At June 30, 2017, the allowance for loan losses totaled $16.6 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 $21.8 million and $26.0 million, respectively, at June 30, 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):
 
June 30, 2017
 
December 31, 2016
Special Mention
$
22,209

 
$
15,692

Substandard
60,752

 
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

12


condition. Goodwill will be evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances 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.


13


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 June 30, 2017, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At June 30, 2017, the Company’s one-year gap was negative 2.40% 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
$
63,215

 
$
988

 
$
2,950

 
$

 
$

 
$
67,153

Investment securities
66,383

 
22,519

 
62,524

 
66,646

 
58,282

 
276,354

Mortgage-backed securities
34,531

 
71,787

 
153,602

 
117,179

 
138,000

 
515,099

FHLB stock

 

 

 

 
20,358

 
20,358

Loans receivable (2)
607,197

 
809,192

 
1,244,109

 
677,591

 
543,076

 
3,881,165

Total interest-earning assets
771,326

 
904,486

 
1,463,185

 
861,416

 
759,716

 
4,760,129

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Money market deposit accounts
23,730

 
26,040

 
60,446

 
49,301

 
219,021

 
378,538

Savings accounts
85,865

 
55,892

 
116,235

 
91,038

 
328,909

 
677,939

Interest-bearing checking accounts
1,038,044

 
59,246

 
128,821

 
96,766

 
404,951

 
1,727,828

Time deposits
101,088

 
237,533

 
175,570

 
102,764

 
5,592

 
622,547

FHLB advances
23,482

 
41,458

 
162,601

 
50,000

 

 
277,541

Securities sold under agreements to repurchase and other borrowings
97,550

 

 

 
34,123

 

 
131,673

Total interest-bearing liabilities
1,369,759

 
420,169

 
643,673

 
423,992

 
958,473

 
3,816,066

Interest sensitivity gap (3)
$
(598,433
)
 
$
484,317

 
$
819,512

 
$
437,424

 
$
(198,757
)
 
$
944,063

Cumulative interest sensitivity gap
$
(598,433
)
 
$
(114,116
)
 
$
705,396

 
$
1,142,820

 
$
944,063

 
$
944,063

Cumulative interest sensitivity gap as a percent of total interest-earning assets
(12.58
)%
 
(2.40
)%
 
14.81
%
 
24.00
%
 
19.83
%
 
19.83
%
 
(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.

14


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 June 30, 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.
 
 
June 30, 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
$
778,301

 
0.9
 %
 
16.0
%
 
$
155,902

 
(8.9
)%
 
$
664,767

 
(1.1
)%
 
14.1
%
 
$
156,689

 
(1.0
)%
200
794,196

 
3.0

 
15.9

 
161,909

 
(5.4
)
 
678,347

 
1.0

 
14.0

 
158,078

 
(0.1
)
100
792,289

 
2.7

 
15.5

 
167,171

 
(2.4
)
 
683,492

 
1.7

 
13.7

 
158,840

 
0.3

Static
771,418

 

 
14.7

 
171,215

 

 
671,878

 

 
13.2

 
158,309

 

(100)
667,382

 
(13.5
)
 
12.5

 
165,633

 
(3.3
)
 
620,675

 
(7.6
)
 
11.9

 
152,007

 
(4.0
)
The increased interest rate sensitivity of net interest income in a rising interest rate environment at June 30, 2017, as compared to December 31, 2016, is primarily the result of reducing low yield cash and short term investment balances and investing in fixed-rate securities and loans. Another factor in the increased net interest income sensitivity is a change in the assumption regarding the interest rate sensitivity of certain deposits without maturity dates. This change was made to reflect the Company's reasonable expectation of the increased sensitivity of these deposits in the face of rising interest rates.

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 June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


15



OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
 
June 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
107,660

 
$
301,373

Securities available-for-sale, at estimated fair value
62,154

 
12,224

Securities held-to-maturity, net (estimated fair value of $724,250 at June 30, 2017 and $598,119 at December 31, 2016)
720,511

 
598,691

Federal Home Loan Bank of New York stock, at cost
20,358

 
19,313

Loans receivable, net
3,868,805

 
3,803,443

Loans held for sale
168

 
1,551

Interest and dividends receivable
13,036

 
11,989

Other real estate owned
8,898

 
9,803

Premises and equipment, net
59,509

 
71,385

Servicing asset
181

 
228

Bank Owned Life Insurance
133,572

 
132,172

Deferred tax asset
29,804

 
38,787

Assets held for sale
6,114

 
360

Other assets
13,110

 
9,745

Core deposit intangible
9,887

 
10,924

Goodwill
148,433

 
145,064

Total assets
$
5,202,200

 
$
5,167,052

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
4,176,909

 
$
4,187,750

Securities sold under agreements to repurchase with retail customers
75,050

 
69,935

Federal Home Loan Bank advances
277,541

 
250,498

Other borrowings
56,623

 
56,559

Advances by borrowers for taxes and insurance
15,036

 
14,030

Other liabilities
13,738

 
16,242

Total liabilities
4,614,897

 
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 32,528,658 and 32,136,892 shares outstanding at June 30, 2017 and December 31, 2016, respectively
336

 
336

Additional paid-in capital
353,296

 
364,433

Retained earnings
258,470

 
238,192

Accumulated other comprehensive loss
(5,198
)
 
(5,614
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(2,620
)
 
(2,761
)
Treasury stock, 1,038,114 and 1,429,880 shares at June 30, 2017 and December 31, 2016, respectively
(16,981
)
 
(22,548
)
Common stock acquired by Deferred Compensation Plan
(176
)
 
(313
)
Deferred Compensation Plan Liability
176

 
313

Total stockholders’ equity
587,303

 
572,038

Total liabilities and stockholders’ equity
$
5,202,200

 
$
5,167,052


See accompanying Notes to Unaudited Consolidated Financial Statements.

16


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Interest income:
 
 
 
 
 
 
 
Loans
$
42,608

 
$
30,521

 
$
84,350

 
$
51,556

Mortgage-backed securities
2,791

 
1,708

 
5,451

 
3,123

Investment securities and other
1,480

 
912

 
3,092

 
1,535

Total interest income
46,879

 
33,141

 
92,893

 
$
56,214

Interest expense:
 
 
 
 
 
 
 
Deposits
2,914

 
1,771

 
5,695

 
3,042

Borrowed funds
1,791

 
1,356

 
3,541

 
2,599

Total interest expense
4,705

 
3,127

 
9,236

 
5,641

Net interest income
42,174

 
30,014

 
83,657

 
50,573

Provision for loan losses
1,165

 
662

 
1,865

 
1,225

Net interest income after provision for loan losses
41,009

 
29,352

 
81,792

 
49,348

Other income:
 
 
 
 
 
 
 
Bankcard services revenue
1,837

 
1,211

 
3,416

 
2,062

Wealth management revenue
565

 
621

 
1,081

 
1,171

Fees and service charges
3,658

 
2,597

 
7,465

 
4,470

Net loss on sale of investment securities available-for-sale

 
(12
)
 

 
(12
)
Net gain on sales of loans available-for-sale
15

 
170

 
57

 
349

Net gain (loss) from other real estate operations
105

 
(313
)
 
(628
)
 
(719
)
Income from Bank Owned Life Insurance
783

 
542

 
1,555

 
861

Other
10

 
67

 
23

 
77

Total other income
6,973

 
4,883

 
12,969

 
8,259

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee benefits
15,328

 
11,432

 
31,466

 
19,898

Occupancy
2,641

 
2,011

 
5,409

 
3,637

Equipment
1,703

 
1,184

 
3,400

 
2,153

Marketing
730

 
543

 
1,470

 
794

Federal deposit insurance
705

 
723

 
1,366

 
1,252

Data processing
2,046

 
1,881

 
4,442

 
3,146

Check card processing
815

 
505

 
1,768

 
925

Professional fees
1,095

 
700

 
2,055

 
1,198

Other operating expense
2,951

 
2,217

 
5,595

 
3,493

Federal Home Loan Bank prepayment fee

 
136

 

 
136

Amortization of core deposit intangible
513

 
125

 
1,037

 
138

Branch consolidation expenses
5,451

 

 
5,484

 

Merger related expenses
3,155

 
7,189

 
4,602

 
8,591

Total operating expenses
37,133

 
28,646

 
68,094

 
45,361

Income before provision for income taxes
10,849

 
5,589

 
26,667

 
12,246

Provision for income taxes
3,170

 
1,928

 
6,969

 
4,380

Net income
$
7,679

 
$
3,661

 
$
19,698

 
$
7,866

Basic earnings per share
$
0.24

 
$
0.16

 
$
0.62

 
$
0.40

Diluted earnings per share
$
0.23

 
$
0.16

 
$
0.59

 
$
0.39

Average basic shares outstanding
32,122

 
22,478

 
32,014

 
19,694

Average diluted shares outstanding
33,138

 
22,880

 
33,111

 
19,996


See accompanying Notes to Unaudited Consolidated Financial Statements.

17


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
7,679

 
$
3,661

 
$
19,698

 
$
7,866

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (loss) gain on securities (net of tax benefit of $1 and tax expense of $44 in 2017, and net of tax benefit of $34 and tax expense of $37 in 2016, respectively)
(1
)
 
(49
)
 
63

 
53

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $128 and $244 in 2017 and net of tax expense of $128 and $277 in 2016, respectively)
185

 
186

 
353

 
402

Reclassification adjustment for losses included in net income (net of tax benefit of $5 in 2016)

 
(12
)
 

 
(12
)
Total comprehensive income
$
7,863

 
$
3,786

 
$
20,114

 
$
8,309

See accompanying Notes to Unaudited Consolidated Financial Statements.

18


OceanFirst Financial Corp.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except per share amounts)
Six Months Ended June 30, 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

 

 

 
7,866

 

 

 

 

 

 
7,866

Other comprehensive income, net of tax

 

 

 

 
443

 

 

 

 

 
443

Tax expense of stock plans

 

 
(260
)
 

 

 

 

 

 

 
(260
)
Stock awards

 

 
756

 

 

 

 

 

 

 
756

Treasury stock allocated to restricted stock plan

 

 
1,108

 
(114
)
 

 

 
(994
)
 

 

 

Issued 8,282,296 treasury shares to finance acquisition

 

 
36,940

 

 

 

 
128,961

 

 

 
165,901

Allocation of ESOP stock

 

 
159

 

 

 
142

 

 

 

 
301

Cash dividend $0.26 per share

 

 

 
(5,481
)
 

 

 

 

 

 
(5,481
)
Exercise of stock options

 

 

 
(516
)
 

 

 
1,802

 

 

 
1,286

Sale of stock for the deferred compensation plan

 

 

 

 

 

 

 
6

 
(6
)
 

Balance at June 30, 2016
$

 
$
336

 
$
308,460

 
$
230,895

 
$
(5,798
)
 
$
(2,903
)
 
$
(121,732
)
 
$
(308
)
 
$
308

 
$
409,258

Balance at December 31, 2016
$

 
$
336

 
$
364,433

 
$
238,192

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

 
$
572,038

Net income

 

 

 
19,698

 

 

 

 

 

 
19,698

Other comprehensive income, net of tax

 

 

 

 
416

 

 

 

 

 
416

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

 

 
(11,129
)
 
11,129