Issuance Of Preferred And Common Stock

12 Months Ended

Dec. 31, 2011

Issuance Of Preferred And Common Stock [Abstract]

Issuance Of Preferred And Common Stock

(18) Issuance of Preferred and Common Stock

On January 16, 2009, (the "Closing Date") as part of the U.S. Department of the Treasury Troubled Asset Relief Program Capital Purchase Program, the Company entered into a Letter Agreement ("Letter Agreement") and a Securities Purchase Agreement – Standard Terms attached thereto ("Securities Purchase Agreement") with the Treasury, pursuant to which the Company agreed to issue and sell, and the Treasury agreed to purchase, (i) 38,263 shares of the Company's Fixed Rate Cumulative Preferred Stock, Series A (the "preferred stock"), having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant (the "warrant") to purchase up to 380,853 shares of the Company's common stock, $0.01 par value ("common stock"), at an exercise price of $15.07 per share, for an aggregate purchase price of $38.3 million in cash.

During the period that the preferred stock was outstanding cumulative dividends on the preferred stock accrued on the liquidation preference at a rate of 5% per annum and were paid only if, as and when declared by the Company's Board of Directors. The Company paid all of its dividends on the preferred stock when such dividends were due.

Of the $38.3 million in issuance proceeds, $36.9 million and $1.3 million were allocated to the preferred stock and the warrant, respectively, based upon their relative fair values as of the Closing Date. The resulting discount of $1.3 million was accreted by a charge to retained earnings over a five year estimated life.

In determining the fair value of the preferred stock, the Company utilized a discounted cash flow approach with the fair value derived by the present value of all future cash flow streams, discounted at an expected market interest rate. The discounted cash flow valuation model included the following assumptions:

• Interest Cash Flows – observable input derived from Security Purchase Agreement.

• Principal Cash Flows – observable input derived from Security Purchase Agreement

• Term/Period – unobservable input based on the terms of the Security Purchase Agreement and the Company's expectations to redeem the preferred stock. The preferred stock had no maturity date, however, the Company could redeem the preferred shares at any time with the approval of the Secretary of the Treasury after consultation with the Office of Thrift Supervision. Under the terms of the Security Purchase Agreement, cumulative dividends on the preferred stock accrue at 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Company accepted the preferred stock investment on a voluntary basis due to the uncertainties surrounding the economic recession. The Company was more than well-capitalized before receipt of the preferred stock investment and the Company's conservative risk profile did not make the preferred stock investment necessary. Due to the increase in the dividend rate after five years and the resulting prohibitive cost of the preferred stock and relative dilutive effect on earnings per share, the estimated term was established at five years. The Company expected to fund the repurchase through internally generated capital or through access to the capital markets.

• Discount Rate – unobservable input derived from data obtained from independent investment bankers who are active market participants for similarly structured transactions. A 14% discount rate was utilized, reflecting the most likely rate to be used by an active market participant.

In determining the fair value of the warrants on the closing date of January 16, 2009, the Company utilized the Black-Scholes option pricing model. The Black-Scholes option pricing model includes the following assumptions:

• Strike Price – observable input derived from Security Purchase Agreement ($15.07).

• OceanFirst Stock Price at Initial Recognition – observable input derived from Nasdaq stock market close ($14.83).

• Term – under the terms of the American Recovery and Reinvestment Act of 2009, in the event the Company redeems the preferred stock, the Treasury must liquidate the warrants at the current market price. As a result, the expiration date of the warrants will be the same as the term of the preferred stock. For the reasons noted above, the expected term is five years.

• Risk Free Rate (5 Year Treasury Rate) – observable input derived from Bond market (1.47%).

• Dividend Rate – observable input derived from OceanFirst cash dividend payments and stock market activity (4.79%).

• Volatility – observable input derived from OceanFirst's historical volatility as of initial recognition. Historical volatility was used as a proxy in determining the volatility assumption (27.0%).

• Number of Shares – observable input from Securities Purchase Agreement as all shares were expected to be exercised (380,853).

In November 2009, the Company closed on a public offering of 6,389,400 shares of its common stock at $9.00 per share. Net proceeds from the offering totaled $54.2 million after anticipated expenses. The Company used part of the net proceeds to repurchase the Fixed Rate Cumulative Perpetual Preferred Stock, Series A sold to the U.S. Treasury pursuant to the Capital Purchase Program.

On December 30, 2009, the Company redeemed all of the 38,263 shares of preferred stock originally issued to U.S. Department of the Treasury under the Capital Purchase Program. The preferred stock that the Company repurchased for $38,263,000 had a carrying value of $37,160,000 (net of $1,103,000 unaccreted discount) on the Company's statement of financial condition. As a result of the repurchase, the Company accelerated the accretion of the $1,103,000 discount and recorded a total reduction in stockholders' equity of $38,263,000. The unaccreted discount was a charge against net income available to common stockholders for the year ended December 31, 2009. As a result of the repurchase of the preferred stock, all of the limitations affecting Company activities in the Securities Purchase Agreement, as noted above, were removed. Also, as a result of the Company's completion of the November 2009 Qualified Equity Offering, the amount of the warrant was reduced by 50% to 190,427 shares. This warrant remained outstanding at December 31, 2009, however, subsequent to year-end the Company negotiated the repurchase of the warrant from the U.S. Treasury for $431,000.