10-Q 1 ocfc-93017x10q.htm 10-Q 9/30/2017 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 September 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 November 3, 2017 there were 32,582,472 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)
September 30, 2017
 
June 30, 2017
 
September 30, 2016
SELECTED FINANCIAL CONDITION DATA:
 
 
 
 
 
Total assets
$
5,383,912

 
$
5,202,200

 
$
4,151,017

Loans receivable, net
3,870,109

 
3,868,805

 
3,028,696

Deposits
4,350,259

 
4,176,909

 
3,324,681

Stockholders’ equity
596,252

 
587,303

 
417,244

SELECTED OPERATING DATA:
 
 
 
 
 
Net interest income
43,056

 
42,174

 
33,935

Provision for loan losses
1,165

 
1,165

 
888

Other income
7,359

 
6,973

 
5,896

Operating expenses
30,733

 
37,133

 
25,026

Net income
12,817

 
7,679

 
9,128

Diluted earnings per share
0.39

 
0.23

 
0.35

SELECTED FINANCIAL RATIOS:
 
 
 
 
 
Stockholders’ equity per common share
18.31

 
18.05

 
16.14

Tangible stockholders’ equity per common share (1)
13.47

 
13.19

 
13.42

Cash dividend per share
0.15

 
0.15

 
0.13

Stockholders’ equity to total assets
11.07
%
 
11.29
%
 
10.05
%
Tangible stockholders’ equity to total tangible assets (1)
8.39

 
8.51

 
8.50

Return on average assets (2) (3)
0.95

 
0.59

 
0.88

Return on average stockholders’ equity (2) (3)
8.60

 
5.25

 
8.77

Return on average tangible stockholders’ equity (1) (2) (3)
11.74

 
7.19

 
10.58

Net interest rate spread
3.41

 
3.48

 
3.49

Net interest margin
3.50

 
3.57

 
3.56

Operating expenses to average assets (2) (3)
2.29

 
2.86

 
2.43

Efficiency ratio (3) (4)
60.96

 
75.55

 
62.83

Loan to deposit ratio
88.96

 
92.62

 
91.10

ASSET QUALITY:
 
 
 
 
 
Non-performing loans
$
15,121

 
$
16,261

 
$
16,507

Non-performing assets
24,455

 
25,159

 
25,614

Allowance for loan losses as a percent of total loans receivable
0.42
%
 
0.42
%
 
0.51
%
Allowance for loan losses as a percent of total non-performing loans
109.68

 
101.82

 
94.61

Non-performing loans as a percent of total loans receivable
0.39

 
0.42

 
0.54

Non-performing assets as a percent of total assets
0.45

 
0.48

 
0.62

 
(1)
Tangible stockholders’ equity and tangible assets exclude 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 $3.2 million, or $2.1 million, net of tax benefit, for the quarter ended September 30, 2017; $8.6 million, or $5.6 million, net of tax benefit, for the quarter ended June 30, 2017; and $1.3 million, or $1.1 million, net of tax benefit, for the quarter ended September 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 regions. 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, Inc. (“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 September 30, 2017, Sun had total assets of $2.2 billion, total loans of $1.6 billion and total deposits of $1.7 billion. On October 24 and 25, 2017, Sun and the Company received their respective requisite stockholder approvals for the merger.  Regulatory approval of the merger was received from the Federal Reserve Bank of Philadelphia on October 17, 2017. The regulatory application for the transaction remains under review by the Office of the Comptroller of the Currency (“OCC”).   Subject to receipt of OCC approval and other customary closing conditions, the Company expects to close the transaction in January 2018 and anticipates full integration of Sun’s branches and core operating systems in the second quarter of 2018.
Highlights of the Company’s financial results and corporate activities for the three months ended September 30, 2017 were as follows:

The Company grew deposits $173.4 million, reducing its loan to deposit ratio to 89.0%, while the cost of deposits increased only one basis point from the prior linked quarter to 0.29%.

Asset quality improved as non-performing loans decreased to $15.1 million and non-performing loans as a percentage of total loans decreased to 0.39%.

Net income for the quarter ended September 30, 2017, was $12.8 million, or $0.39 per diluted share, as compared to $9.1 million, or $0.35 per diluted share, for the corresponding prior year period. Net income for the quarters ended September 30, 2017 and 2016, included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $2.1 million and by $1.1 million, respectively, and reduced diluted earnings per share by $0.06 and $0.05, respectively. Net income increased over the prior year period primarily due to the Acquisition Transactions.

Net interest income for the three months ended September 30, 2017 increased to $43.1 million, as compared to $33.9 million for the corresponding prior year period reflecting an increase in interest-earning assets primarily due to the Acquisition Transactions.

Other income increased to $7.4 million for the three months ended September 30, 2017, as compared to $5.9 million for the corresponding prior year period. The increase was primarily due to the impact of the Acquisition Transactions, which added $1.1 million to other income. Operating expenses increased to $30.7 million for the three months ended September 30, 2017, as compared to $25.0 million in the same prior year period. Operating expenses for the three months ended September 30, 2017 included $3.2 million of merger related and branch consolidation expenses, as compared to $1.3 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 Acquisition Transactions, which added $2.4 million for the three months ended September 30, 2017.

The Company declared a quarterly cash dividend on common stock. The dividend for the quarter ended September 30, 2017 of $0.15 per share will be paid on November 17, 2017 to stockholders of record on November 6, 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 nine months ended September 30, 2017 and September 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
 
September 30, 2017
 
September 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
$
183,514

 
$
438

 
0.95
%
 
$
168,045

 
$
139

 
0.33
%
Securities (1) and FHLB stock
817,867

 
4,263

 
2.07

 
533,809

 
2,561

 
1.91

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,865,970

 
22,423

 
4.77

 
1,723,520

 
20,970

 
4.84

Residential
1,737,739

 
17,588

 
4.02

 
1,118,435

 
10,874

 
3.87

Home Equity
279,900

 
3,289

 
4.66

 
255,919

 
2,745

 
4.27

Other
1,112

 
29

 
10.35

 
1,163

 
18

 
6.16

Allowance for loan loss net of deferred loan fees
(12,370
)
 

 

 
(13,346
)
 

 

Loans Receivable, net
3,872,351

 
43,329

 
4.44

 
3,085,691

 
34,607

 
4.46

Total interest-earning assets
4,873,732

 
48,030

 
3.91

 
3,787,545

 
37,307

 
3.92

Non-interest-earning assets
460,795

 
 
 
 
 
316,290

 
 
 
 
Total assets
$
5,334,527

 
 
 
 
 
$
4,103,835

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
1,852,421

 
1,173

 
0.25
%
 
$
1,425,350

 
583

 
0.16
%
Money market
389,035

 
299

 
0.30

 
386,490

 
295

 
0.30

Savings
672,548

 
59

 
0.03

 
488,749

 
49

 
0.04

Time deposits
620,308

 
1,595

 
1.02

 
477,496

 
1,156

 
0.96

Total
3,534,312

 
3,126

 
0.35

 
2,778,085

 
2,083

 
0.30

Securities sold under agreements to repurchase
74,285

 
30

 
0.16

 
68,540

 
24

 
0.14

FHLB Advances
264,652

 
1,153

 
1.73

 
264,213

 
1,067

 
1.61

Other borrowings
56,502

 
665

 
4.67

 
26,207

 
198

 
3.01

Total interest-bearing liabilities
3,929,751

 
4,974

 
0.50

 
3,137,045

 
3,372

 
0.43

Non-interest-bearing deposits
781,047

 
 
 
 
 
521,088

 
 
 
 
Non-interest-bearing liabilities
32,360

 
 
 
 
 
31,536

 
 
 
 
Total liabilities
4,743,158

 
 
 
 
 
3,689,669

 
 
 
 
Stockholders equity
591,369

 
 
 
 
 
414,166

 
 
 
 
Total liabilities and equity
$
5,334,527

 
 
 
 
 
$
4,103,835

 
 
 
 
Net interest income
 
 
$
43,056

 
 
 
 
 
$
33,935

 
 
Net interest rate spread (3)
 
 
 
 
3.41
%
 
 
 
 
 
3.49
%
Net interest margin (4)
 
 
 
 
3.50
%
 
 
 
 
 
3.56
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.29
%
 
 
 
 
 
0.25
%


5


 
FOR THE NINE MONTHS ENDED
 
September 30, 2017
 
September 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
$
180,821

 
$
1,058

 
0.78
%
 
$
86,007

 
$
209

 
0.32
%
Securities (1) and FHLB stock
769,932

 
12,186

 
2.12

 
517,051

 
7,149

 
1.85

Loans receivable, net (2)
 
 
 
 
 
 
 
 
 
 
 
Commercial
1,849,246

 
65,619

 
4.74

 
1,390,196

 
49,750

 
4.78

Residential
1,720,185

 
52,231

 
4.06

 
1,009,012

 
29,139

 
3.86

Home Equity
283,419

 
9,760

 
4.60

 
228,172

 
7,233

 
4.23

Other
1,180

 
69

 
7.82

 
893

 
41

 
6.13

Allowance for loan loss net of deferred loan fees
(12,338
)
 

 

 
(13,379
)
 

 

Loans Receivable, net
3,841,692

 
127,679

 
4.44

 
2,614,894

 
86,163

 
4.40

Total interest-earning assets
4,792,445

 
140,923

 
3.93

 
3,217,952

 
93,521

 
3.88

Non-interest-earning assets
461,752

 
 
 
 
 
236,399

 
 
 
 
Total assets
$
5,254,197

 
 
 
 
 
$
3,454,351

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
1,746,601

 
3,086

 
0.24
%
 
$
1,181,110

 
1,391

 
0.16
%
Money market
418,681

 
891

 
0.28

 
280,836

 
546

 
0.26

Savings
675,684

 
285

 
0.06

 
413,388

 
117

 
0.04

Time deposits
628,126

 
4,559

 
0.97

 
386,505

 
3,071

 
1.06

Total
3,469,092

 
8,821

 
0.34

 
2,261,839

 
5,125

 
0.30

Securities sold under agreements to repurchase
74,729

 
82

 
0.15

 
76,289

 
78

 
0.14

FHLB Advances
258,147

 
3,340

 
1.73

 
272,405

 
3,351

 
1.64

Other borrowings
56,450

 
1,967

 
4.66

 
23,846

 
459

 
2.57

Total interest-bearing liabilities
3,858,418

 
14,210

 
0.49

 
2,634,379

 
9,013

 
0.46

Non-interest-bearing deposits
781,608

 
 
 
 
 
448,459

 
 
 
 
Non-interest-bearing liabilities
28,351

 
 
 
 
 
23,650

 
 
 
 
Total liabilities
4,668,377

 
 
 
 
 
3,106,488

 
 
 
 
Stockholders equity
585,820

 
 
 
 
 
347,863

 
 
 
 
Total liabilities and equity
$
5,254,197

 
 
 
 
 
$
3,454,351

 
 
 
 
Net interest income
 
 
$
126,713

 
 
 
 
 
$
84,508

 
 
Net interest rate spread (3)
 
 
 
 
3.44
%
 
 
 
 
 
3.42
%
Net interest margin (4)
 
 
 
 
3.54
%
 
 
 
 
 
3.51
%
Total cost of deposits (including non-interest-bearing deposits)
 
 
 
 
0.28
%
 
 
 
 
 
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 September 30, 2017 and December 31, 2016

Total assets increased by $216.9 million to $5.384 billion at September 30, 2017, from $5.167 billion at December 31, 2016. Cash and due from banks decreased by $46.1 million, to $255.3 million at September 30, 2017, from $301.4 million at December 31, 2016, as these funds were deployed into higher-yielding securities which increased $199.1 million. Loans receivable, net, increased by $66.7 million, to $3.870 billion at September 30, 2017 from $3.803 billion at December 31, 2016. Premises and equipment decreased $7.0 million at September 30, 2017, as compared to December 31, 2016, due to the consolidation of 15 branches during the nine months ended September 30, 2017. The premises and equipment at these locations were written down to their net realizable value and the remaining balance was reclassified to assets held for sale.

Deposits increased by $162.5 million, to $4.350 billion at September 30, 2017, from $4.188 billion at December 31, 2016. The loan-to-deposit ratio at September 30, 2017 was 89.0%, as compared to 90.8% at December 31, 2016.

Stockholders’ equity increased to $596.3 million at September 30, 2017, as compared to $572.0 million at December 31, 2016. At September 30, 2017, there were 1.8 million shares available for repurchase under the Company’s stock repurchase programs. In the nine months ended September 30, 2017, the Company did not repurchase any shares under these repurchase programs. Tangible stockholders’ equity per common share increased to $13.47 at September 30, 2017, as compared to $12.95 at December 31, 2016.
Comparison of Operating Results for the three and nine months ended September 30, 2017 and September 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 nine months ended September 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 nine months ended September 30, 2017, but are excluded from the results of operations for the three and nine months ended September 30, 2016.
Net income for the quarter ended September 30, 2017, was $12.8 million, or $0.39 per diluted share, as compared to $9.1 million, or $0.35 per diluted share, for the corresponding prior year period. Net income for the nine months ended September 30, 2017 was $32.5 million, or $0.98 per diluted share, as compared to net income of $17.0 million, or $0.77 per diluted share, for the corresponding prior year period. Net income for the three and nine months ended September 30, 2017 includes merger related and branch consolidation expenses and for the nine months ended September 30, 2017, also includes the acceleration of stock award expense due to the retirement of a director. These items decreased net income, net of tax benefit, for the three and nine months ended September 30, 2017, by $2.1 million and $8.8 million, respectively. Net income for the three and nine months ended September 30, 2016 includes merger related expenses of $1.3 million and $9.9 million, respectively. The after-tax impact of these items reduced diluted earnings per share by $0.06 and $0.27 for the three and nine months ended September 30, 2017, respectively, and by $0.05 and $0.34, respectively, for the same prior year periods. Excluding these items, net income for the three and nine ended September 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 nine months ended September 30, 2017, of $158,000 and $1.7 million, respectively.
Interest Income
Interest income for the three and nine months ended September 30, 2017 increased to $48.0 million and $140.9 million, respectively, as compared to $37.3 million and $93.5 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1.086 billion and $1.574 billion, respectively, for the three and nine months ended September 30, 2017, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2017, were favorably impacted by the Acquisition Transactions. The yields on average interest-earning assets decreased to 3.91% and increased to 3.93%, respectively, for the three and nine months ended September 30, 2017, from 3.92% and 3.88%, respectively, for the same prior year periods.
Interest Expense
Interest expense for the three and nine months ended September 30, 2017 was $5.0 million and $14.2 million, respectively, as compared to $3.4 million and $9.0 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $792.7 million and $1.224 billion, respectively, for the three and nine months ended September 30, 2017, as compared to the same prior year periods. For the three and nine months ended September 30, 2017, the cost of average interest-bearing liabilities increased to 0.50% and 0.49%, respectively, from 0.43% and 0.46%, respectively, in the corresponding prior year periods.

7


The total cost of deposits (including non-interest bearing deposits) was 0.29% and 0.28%, respectively, for the three and nine months ended September 30, 2017, as compared to 0.25% for both the three and nine months ended September 30, 2016.
Net Interest Income
Net interest income for the three and nine months ended September 30, 2017 increased to $43.1 million and $126.7 million, respectively, as compared to $33.9 million and $84.5 million, respectively, for the same prior year periods, reflecting an increase in interest-earning assets. The net interest margin for the three and nine months ended September 30, 2017 decreased to 3.50% and increased to 3.54%, respectively, from 3.56% and 3.51%, respectively, for the same prior year periods.
Provision for Loan Losses
For the three and nine months ended September 30, 2017, the provision for loan losses was $1.2 million and $3.0 million, respectively, as compared to $888,000 and $2.1 million, respectively, for the corresponding prior year periods. Net loan charge-offs were $1.1 million and $1.6 million, respectively, for the three and nine months ended September 30, 2017, as compared to net loan charge-offs of $1.9 million and $3.2 million, respectively, in the corresponding prior year periods. Non-performing loans increased to $15.1 million at September 30, 2017, as compared to $13.6 million at December 31, 2016. The increase was primarily due to the addition of two commercial real estate relationships totaling $7.4 million, partially offset by the payoff of two non-performing loans totaling $1.7 million. An increase in non-performing residential mortgage loans was offset by the bulk sale of $7.8 million in non-performing residential loans in the second and third quarters of 2017.
Other Income
For the three and nine months ended September 30, 2017, other income increased to $7.4 million and $20.3 million, respectively, as compared to $5.9 million and $14.2 million, respectively, for the corresponding prior year periods. The increases were primarily due to the impact of the Acquisition Transactions, which added $1.1 million and $4.9 million, respectively, to other income for the three and nine months ended September 30, 2017, as compared to the same prior year periods. Excluding the Acquisition Transactions, the remaining increase in other income for the three months ended September 30, 2017, was primarily due to higher deposit and bank card related fees of $272,000 and $71,000, respectively, as compared to the same prior year period. In addition, income from other real estate operations, excluding the Acquisition Transactions, increased $364,000 which was offset by a decrease in the net gain on the sale of loans available for sale (included in other income) of $360,000. For the nine months ended September 30, 2017, excluding the Acquisition Transactions, the increase in other income was primarily due to higher deposit and bank card related fees of $1.0 million and $153,000, respectively, as compared to the same prior year period. Excluding the Acquisition Transactions, an increase in income from other real estate operations of $609,000 was offset by a decrease in the net gain on the sale of loans (included in other income) of $697,000.
Operating Expenses
Operating expenses increased to $30.7 million and $98.8 million, respectively, for the three and nine months ended September 30, 2017, as compared to $25.0 million and $70.4 million, respectively, in the same prior year periods. Operating expenses for the three and nine months ended September 30, 2017 included $3.2 million and $13.2 million, respectively, of merger related and branch consolidation expenses, as compared to $1.3 million and $9.9 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 Acquisition Transactions, which added $2.4 million and $18.9 million for the three and nine months ended September 30, 2017, respectively. For the three months ended September 30, 2017, excluding the Acquisition Transaction expenses, there were increases in marketing expense and loan related expenses. For the nine months ended September 30, 2017, excluding the Acquisition Transaction expenses, there were increases in compensation and employee benefits expense, equipment expense, marketing expense and professional fees.
Provision for Income Taxes
The provision for income taxes was $5.7 million and $12.7 million, respectively, for the three and nine months ended September 30, 2017, as compared to $4.8 million and $9.2 million, respectively, for the same prior year periods. The effective tax rate was 30.8% and 28.0%, respectively, for the three and nine months ended September 30, 2017, as compared to 34.4% and 35.0%, respectively, for the same prior year periods. The lower effective tax rate for the three and nine months ended September 30, 2017 resulted from the adoption of ASU 2016-09 “Compensation - Stock Compensation,” which decreased income tax expense by $158,000 and $1.7 million, respectively. Excluding the impact of ASU 2016-09, the effective tax rate would have been 31.6% and 31.8% for the three and nine months ended September 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 nine months ended September 30, 2017, was related to the

8


exercise of options assumed in the acquisitions of Cape and Ocean Shore and the increase in the Company’s stock price. Excluding the tax benefit of exercised stock options and vested stock awards, the lower effective tax rate for the three and nine months ended September 30, 2017, as compared to the same prior year periods, was primarily due to the deductibility of merger related expenses and an increase in tax exempt income.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (FHLB) advances and other borrowings and, to a lesser extent, investment maturities and proceeds from the sale of loans. 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. 
At September 30, 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, including overnight borrowings, of $259.2 million and $250.5 million, respectively, at September 30, 2017 and December 31, 2016.
The Company’s cash needs for the nine months ended September 30, 2017 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of investment securities, deposit growth, 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 nine months ended September 30, 2016 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and the sale of higher risk loans, proceeds from maturities and calls of investment securities, proceeds from sale of available-for-sale securities, deposit growth and the issuance of subordinated notes. The cash was 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 September 30, 2017, outstanding undrawn lines of credit totaled $550.5 million and outstanding commitments to originate loans totaled $111.5 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 $322.7 million at September 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 nine months ended September 30, 2017 and 2016, the Company did not repurchase any shares of common stock. At September 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 nine months of 2017 were $14.4 million, as compared to $8.8 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Acquisition Transactions. On October 25, 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 November 17, 2017 to stockholders of record at the close of business on November 6, 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 nine months ended September 30, 2017, the Company received a dividend payment of $24.0 million from the Bank and $8.0 million 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

9


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 September 30, 2017, OceanFirst Financial Corp. held $31.1 million in cash.
As of September 30, 2017 and December 31, 2016, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (in thousands):
As of September 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)
 
$
460,836

 
8.91
%

$
206,958

 
4.000
%
 
$
258,698

 
5.00
%
Common equity Tier 1 (to risk-weighted assets)
 
460,836

 
12.82

 
206,710

 
5.750

(1) 
233,672

 
6.50

Tier 1 capital (to risk-weighted assets)
 
460,836

 
12.82

 
260,635

 
7.250

(1) 
287,597

 
8.00

Total capital (to risk-weighted assets)
 
478,047

 
13.30

 
332,534

 
9.250

(1) 
359,496

 
10.00

OceanFirst Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
 
$
467,540

 
9.02
%

$
207,380

 
4.000
%
 
N/A

 
N/A

Common equity Tier 1 (to risk-weighted assets)
 
448,307

 
12.46

 
206,951

 
5.750

(1) 
N/A

 
N/A

Tier 1 capital (to risk-weighted assets)
 
467,540

 
12.99

 
260,938

 
7.250

(1) 
N/A

 
N/A

Total capital (to risk-weighted assets)
 
519,751

 
14.44

 
332,921

 
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
%
(2) 
$
176,856

 
4.000
%
 
$
221,070

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

 
12.81

 
180,178

 
5.125

(3) 
228,519

 
6.50

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

 
12.81

 
232,913

 
6.625

(3) 
281,254

 
8.00

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

 
13.26

 
303,227

 
8.625

(3) 
351,567

 
10.00

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

 
9.96
%
(2) 
$
176,897

 
4.000
%
 
N/A

 
N/A

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

 
12.12

 
180,512

 
5.125

(3) 
N/A

 
N/A

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

 
12.51

 
233,345

 
6.625

(3) 
N/A

 
N/A

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

 
13.95

 
303,788

 
8.625

(3) 
N/A

 
N/A

(1) Includes the Capital Conservation Buffer of 1.25%.
(2) Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The 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.
(3) Includes the Capital Conservation Buffer of 0.625%.
The Company and the Bank satisfy the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At September 30, 2017, the Company maintained tangible common equity of $438.7 million, for a tangible common equity to assets ratio of 8.39%. 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 September 30, 2017 and December 31, 2016, the reserve for repurchased loans and loss sharing obligations amounted to $463,000 and $846,000, respectively.
The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2017 (in thousands):
Contractual Obligations
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
More than
5 years
Debt Obligations
$
390,978

 
$
130,326

 
$
159,060

 
$
45,126

 
$
56,466

Commitments to Fund Undrawn Lines of Credit
 
 
 
 
 
 
 
 
 
Commercial
346,159

 
346,159

 

 

 

Consumer/Construction
204,292

 
204,292

 

 

 

Commitments to Originate Loans
111,525

 
111,525

 

 

 

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 other real estate owned.  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.
 
September 30, 2017
 
December 31, 2016
 
(dollars in thousands)
Non-performing loans:
 
 
 
Commercial and industrial
$
63

 
$
441

Commercial real estate – owner occupied
923

 
2,414

Commercial real estate – investor
8,720

 
521

Residential mortgage
3,551

 
8,126

Home equity loans and lines
1,864

 
2,064

Total non-performing loans
15,121

 
13,566

Other real estate owned
9,334

 
9,803

Total non-performing assets
$
24,455

 
$
23,369

Purchased credit impaired loans (“PCI”)
$
4,867

 
$
7,575

Delinquent loans 30-89 days
$
24,548

 
$
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
109.68

 
111.92

Non-performing loans as a percent of total loans receivable
0.39

 
0.35

Non-performing assets as a percent of total assets
0.45

 
0.45


The Company’s non-performing loans totaled $15.1 million at September 30, 2017, as compared to $13.6 million at December 31, 2016. Included in the non-performing loans total was $270,000 and $3.5 million of troubled debt restructured (“TDR”) loans at September 30, 2017 and December 31, 2016, respectively. The increase in non-performing loans was primarily due to the addition of two commercial real estate relationships totaling $7.4 million, partially offset by the payoff of two non-performing loans totaling $1.7 million. An increase in non-performing residential mortgage loans was offset by the bulk sale of $7.8 million in non-performing residential loans in the second and third quarters of 2017. Non-performing loans do not include $4.9 million of PCI loans acquired in the Acquisition Transactions. At September 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 $19.8 million and $26.0 million, respectively, at September 30, 2017 and December 31, 2016. These loans were acquired at fair value with no related allowances for loan losses. Other real estate owned 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):
 
September 30, 2017
 
December 31, 2016
Special Mention
$
25,778

 
$
15,692

Substandard
58,939

 
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

12


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 September 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 September 30, 2017, the Company’s one-year gap was negative 4.38% as compared to negative 3.47% at December 31, 2016. These results were within the approved policy guidelines.
 
At September 30, 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
$
174,079

 
$
971

 
$
2,713

 
$

 
$

 
$
177,763

Investment securities
66,168

 
28,181

 
85,296

 
58,300

 
71,492

 
309,437

Mortgage-backed securities
33,735

 
71,473

 
156,030

 
118,022

 
129,833

 
509,093

FHLB stock

 

 

 

 
18,472

 
18,472

Loans receivable (2)
596,331

 
813,588

 
1,217,892

 
694,223

 
560,352

 
3,882,386

Total interest-earning assets
870,313

 
914,213

 
1,461,931

 
870,545

 
780,149

 
4,897,151

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Money market deposit accounts
27,938

 
26,132

 
60,662

 
49,481

 
219,893

 
384,106

Savings accounts
83,497

 
51,208

 
115,685

 
90,608

 
327,372

 
668,370

Interest-bearing checking accounts
1,278,133

 
56,591

 
123,083

 
92,490

 
342,535

 
1,892,832

Time deposits
103,322

 
219,578

 
183,652

 
112,287

 
5,069

 
623,908

FHLB advances

 
55,000

 
159,060

 
45,126

 

 
259,186

Securities sold under agreements to repurchase and other borrowings
97,826

 

 

 
33,966

 

 
131,792

Total interest-bearing liabilities
1,590,716

 
408,509

 
642,142

 
423,958

 
894,869

 
3,960,194

Interest sensitivity gap (3)
$
(720,403
)
 
$
505,704

 
$
819,789

 
$
446,587

 
$
(114,720
)
 
$
936,957

Cumulative interest sensitivity gap
$
(720,403
)
 
$
(214,699
)
 
$
605,090

 
$
1,051,677

 
$
936,957

 
$
936,957

Cumulative interest sensitivity gap as a percent of total interest-earning assets
(14.71
)%
 
(4.38
)%
 
12.36
%
 
21.48
%
 
19.13
%
 
19.13
%
 
(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 September 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.
 
 
September 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
$
778,489

 
(0.4
)%
 
15.4
%
 
$
155,106

 
(9.2
)%
 
$
664,767

 
(1.1
)%
 
14.1
%
 
$
156,689

 
(1.0
)%
200
797,951

 
2.0

 
15.4

 
161,134

 
(5.7
)
 
678,347

 
1.0

 
14.0

 
158,078

 
(0.1
)
100
799,982

 
2.3

 
15.1

 
166,414

 
(2.6
)
 
683,492

 
1.7

 
13.7

 
158,840

 
0.3

Static
781,958

 

 
14.4

 
170,833

 

 
671,878

 

 
13.2

 
158,309

 

(100)
733,571

 
(6.2
)
 
13.2

 
164,993

 
(3.4
)
 
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 September 30, 2017, as compared to December 31, 2016, is primarily the result of increased holdings 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 September 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)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Cash and due from banks
$
255,258

 
$
301,373

Securities available-for-sale, at estimated fair value
67,133

 
12,224

Securities held-to-maturity, net (estimated fair value of $746,497 at September 30, 2017 and $598,119 at December 31, 2016)
742,886

 
598,691

Federal Home Loan Bank of New York stock, at cost
18,472

 
19,313

Loans receivable, net
3,870,109

 
3,803,443

Loans held for sale
338

 
1,551

Interest and dividends receivable
13,627

 
11,989

Other real estate owned
9,334

 
9,803

Premises and equipment, net
64,350

 
71,385

Bank Owned Life Insurance
134,298

 
132,172

Deferred tax asset
29,718

 
38,787

Assets held for sale
5,241

 
360

Other assets
15,634

 
9,973

Core deposit intangible
9,380

 
10,924

Goodwill
148,134

 
145,064

Total assets
$
5,383,912

 
$
5,167,052

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
4,350,259

 
$
4,187,750

Securities sold under agreements to repurchase with deposit customers
75,326

 
69,935

Federal Home Loan Bank advances
259,186

 
250,498

Other borrowings
56,466

 
56,559

Advances by borrowers for taxes and insurance
14,371

 
14,030

Other liabilities
32,052

 
16,242

Total liabilities
4,787,660

 
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 32,567,477 and 32,136,892 shares outstanding at September 30, 2017 and December 31, 2016, respectively
336

 
336

Additional paid-in capital
353,817

 
364,433

Retained earnings
266,053

 
238,192

Accumulated other comprehensive loss
(5,037
)
 
(5,614
)
Less: Unallocated common stock held by Employee Stock Ownership Plan
(2,549
)
 
(2,761
)
Treasury stock, 999,295 and 1,429,880 shares at September 30, 2017 and December 31, 2016, respectively
(16,368
)
 
(22,548
)
Common stock acquired by Deferred Compensation Plan
(83
)
 
(313
)
Deferred Compensation Plan Liability
83

 
313

Total stockholders’ equity
596,252

 
572,038

Total liabilities and stockholders’ equity
$
5,383,912

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Interest income:
 
 
 
 
 
 
 
Loans
$
43,329

 
$
34,607

 
$
127,679

 
$
86,163

Mortgage-backed securities
2,738

 
1,700

 
8,189

 
4,823

Investment securities and other
1,963

 
1,000

 
5,055

 
2,535

Total interest income
48,030

 
37,307

 
140,923

 
93,521

Interest expense:
 
 
 
 
 
 
 
Deposits
3,126

 
2,083

 
8,821

 
5,125

Borrowed funds
1,848

 
1,289

 
5,389

 
3,888

Total interest expense
4,974

 
3,372

 
14,210

 
9,013

Net interest income
43,056

 
33,935

 
126,713

 
84,508

Provision for loan losses
1,165

 
888

 
3,030

 
2,113

Net interest income after provision for loan losses
41,891

 
33,047

 
123,683

 
82,395

Other income:
 
 
 
 
 
 
 
Bankcard services revenue
1,785

 
1,347

 
5,202

 
3,409

Wealth management revenue
541

 
608

 
1,622

 
1,779

Fees and service charges
3,702

 
2,916

 
11,163

 
7,235

Net gain (loss) from other real estate operations
432

 
(63
)
 
(196
)
 
(782
)
Income from Bank Owned Life Insurance
881

 
659

 
2,436

 
1,520

Other
18

 
429

 
97

 
994

Total other income
7,359

 
5,896

 
20,324

 
14,155

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee benefits
14,673

 
13,558

 
46,138

 
33,456

Occupancy
2,556

 
2,315

 
7,965

 
5,952

Equipment
1,605

 
1,452

 
5,006

 
3,605

Marketing
775

 
479

 
2,245

 
1,273

Federal deposit insurance
713

 
743

 
2,079

 
1,995

Data processing
2,367

 
2,140

 
6,809

 
5,286

Check card processing
871

 
623

 
2,640

 
1,548

Professional fees
846

 
681

 
2,901

 
1,879

Other operating expense
2,667

 
1,543

 
8,258

 
5,036

Federal Home Loan Bank prepayment fee

 

 

 
136

Amortization of core deposit intangible
507

 
181

 
1,544

 
319

Branch consolidation expenses
1,455

 

 
6,939

 

Merger related expenses
1,698

 
1,311

 
6,300

 
9,902

Total operating expenses
30,733

 
25,026

 
98,824

 
70,387

Income before provision for income taxes
18,517

 
13,917

 
45,183

 
26,163

Provision for income taxes
5,700

 
4,789

 
12,669

 
9,169

Net income
$
12,817

 
$
9,128

 
$
32,514

 
$
16,994

Basic earnings per share
$
0.40

 
$
0.36

 
$
1.01

 
$
0.79

Diluted earnings per share
$
0.39

 
$
0.35

 
$
0.98

 
$
0.77

Average basic shares outstanding
32,184

 
25,435

 
32,073

 
21,624

Average diluted shares outstanding
33,106

 
25,889

 
33,110

 
21,990


See accompanying Notes to Unaudited Consolidated Financial Statements.

17


OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
12,817

 
$
9,128

 
$
32,514

 
$
16,994

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (loss) gain on securities (net of tax benefit of $10 and tax expense of $34 in 2017, and net of tax benefit of $27 and tax expense of $10 in 2016, respectively)
(14
)
 
(39
)
 
49

 
14

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $122 and $365 in 2017 and net of tax expense of $153 and $431 in 2016, respectively)
176

 
221

 
528

 
623

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

 

 

 
(7
)
Total comprehensive income
$
12,979

 
$
9,310

 
$
33,091

 
$
17,624

See accompanying Notes to Unaudited Consolidated Financial Statements.

18


OceanFirst Financial Corp.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except per share amounts)
(Unaudited)
For the Nine Months Ended September 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

 

 

 
16,994

 

 

 

 

 

 
16,994

Other comprehensive income, net of tax

 

 

 

 
630

 

 

 

 

 
630

Tax expense of stock plans

 

 
(228
)
 

 

 

 

 

 

 
(228
)
Stock awards

 

 
1,181

 

 

 

 

 

 

 
1,181

Treasury stock allocated to restricted stock plan

 

 
1,081

 
(109
)
 

 

 
(972
)
 

 

 

Issued 8,282,296 treasury shares to finance acquisition

 

 
36,940

 

 

 

 
128,961

 

 

 
165,901

Allocation of ESOP stock

 

 
248

 

 

 
213

 

 

 

 
461

Cash dividend $0.39 per share

 

 

 
(8,789
)
 

 

 

 

 

 
(8,789
)
Exercise of stock options

 

 

 
(764
)
 

 

 
3,412

 

 

 
2,648

Sale of stock for the deferred compensation plan

 

 

 

 

 

 

 
4

 
(4
)
 

Balance at September 30, 2016
$

 
$
336

 
$
308,979

 
$
236,472

 
$
(5,611
)
 
$
(2,832
)
 
$
(120,100
)
 
$
(310
)
 
$
310

 
$
417,244

Balance at December 31, 2016
$

 
$
336

 
$
364,433

 
$
238,192

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

 
$
572,038

Net income

 

 

 
32,514

 

 

 

 

 

 
32,514

Other comprehensive income, net of tax

 

 

 

 
577

 

 

 

 

 
577

Effect of