10-Q 1 d329791d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

 

¨ 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  x    NO  ¨.

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  x    NO  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x.

As of May 7, 2012, there were 18,572,441 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.


Table of Contents

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

           PAGE  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Consolidated Financial Statements (unaudited)   
   Consolidated Statements of Financial Condition as of March 31, 2012 (unaudited) and December 31, 2011      10   
   Consolidated Statements of Income (unaudited) for the three months ended March 31, 2012 and 2011      11   
   Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2012 and 2011      12   
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2012 and 2011      13   
   Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011      14   
   Notes to Unaudited Consolidated Financial Statements      16   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      1   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      8   

Item 4.

   Controls and Procedures      9   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      30   

Item 1A.

   Risk Factors      30   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 3.

   Defaults Upon Senior Securities      31   

Item 4.

   Mine Safety Disclosures      31   

Item 5.

   Other Information      31   

Item 6.

   Exhibits      31   

Signatures

     32   


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FINANCIAL SUMMARY   At or for the Quarter Ended  
(dollars in thousands, except per share amounts)   March 31, 2012     December 31, 2011     March 31, 2011  

SELECTED FINANCIAL CONDITION DATA:

     

Total assets

  $ 2,261,214      $ 2,302,094      $ 2,263,283   

Loans receivable, net

    1,554,862        1,563,019        1,636,251   

Deposits

    1,680,444        1,706,083        1,645,788   

Stockholders’ equity

    220,471        216,849        205,986   

SELECTED OPERATING DATA:

     

Net interest income

    19,105        19,273        19,337   

Provision for loan losses

    1,700        2,000        1,700   

Other income

    4,311        4,214        3,459   

Operating expenses

    12,940        13,021        13,128   

Net income

    5,647        5,459        5,106   

Diluted earnings per share

    0.31        0.30        0.28   

SELECTED FINANCIAL RATIOS:

     

Stockholders’ equity per common share

    11.86        11.61        10.93   

Cash dividend per share

    0.12        0.12        0.12   

Stockholders’ equity to total assets

    9.75     9.42     9.10

Return on average assets (1)

    0.99        0.95        0.90   

Return on average stockholders’ equity (1)

    10.38        10.07        10.12   

Average interest rate spread

    3.42        3.43        3.48   

Net interest margin

    3.52        3.53        3.60   

Operating expenses to average assets (1)

    2.27        2.27        2.32   

Efficiency ratio

    55.26        55.44        57.59   

ASSET QUALITY:

     

Non-performing loans

  $ 44,523      $ 44,008      $ 35,686   

Non-performing assets

    46,561        45,978        37,600   

Non-performing loans as a percent of total loans receivable (2)

    2.83     2.77     2.15

Non-performing assets as a percent of total assets (2)

    2.06        2.00        1.66   

Allowance for loan losses as a percent of total loans receivable(2)

    1.16        1.15        1.23   

Allowance for loan losses as a percent of total non-performing loans (2)

    40.97        41.42        57.25   

 

(1) Ratios are annualized
(2) As discussed in the section “Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011 – Provision for Loan Losses”, during the fourth quarter of 2011, the Company modified its charge-off policy on problem loans secured by real estate, which accelerated the recognition of loan charge-offs. Without the additional cumulative charge-offs of $6.8 million and $5.7 million at March 31, 2012 and December 31, 2011, respectively, the Company would have reported the following asset quality ratios as of March 31, 2012 and December 31, 2011, respectively: non-performing loans as a percent of total loans receivable of 3.26% and 3.12%; non-performing assets as a percent of total assets of 2.35% and 2.24%; allowance for loan losses as a percent of total loans receivable of 1.59% and 1.50%; and allowance for loan losses as a percent of total non-performing loans of 48.79% and 48.12%.

 

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Table of Contents

Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank serving Ocean and Monmouth Counties in New Jersey. The term the “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 loan sales, loan servicing, loan originations, merchant credit card services, deposit accounts, trust and asset management services, the sale of investment products and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, data processing, federal deposit insurance 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 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. In late 2011 and into the first quarter of 2012, the Company’s net interest margin contracted as compared to prior linked periods. Due to the low interest rate environment, high loan refinance volume has caused yields on loans and mortgage-backed securities to trend downward. At the same time, the Company’s asset mix has shifted as higher-yielding loans have decreased due to weak demand, prepayments and the sale of newly originated 30-year fixed-rate one-to-four family loans while lower yielding securities have increased. Management expects the low interest rate environment to continue beyond 2012, resulting in further pressure on the net interest margin. In addition to the interest rate environment, the Company’s results are affected by national and local economic conditions. Recent economic indicators point to some improvement in the economy, which expanded moderately in 2011 and the first quarter of 2012, and in overall labor market conditions as the national unemployment rate has decreased in seven of the last eight months through April 2012. Despite these signs, the overall economy remains weak and the unemployment rate remains at elevated levels. Additionally, housing values remain significantly below their peak levels in 2006. These economic conditions have generally had an adverse impact on the Company’s results of operations.

Highlights of the Company’s financial results for the three months ended March 31, 2012 were as follows:

Total assets decreased to $2.261 billion at March 31, 2012, from $2.302 billion at December 31, 2011. Loans receivable, net decreased $8.2 million at March 31, 2012, as compared to December 31, 2011 primarily due to weak commercial loan demand, prepayments and sale of newly originated 30-year fixed-rate one-to-four family loans. Cash and due from banks decreased by $39.4 million. Part of the cash and due from banks was invested in mortgage-backed securities which increased $11.5 million, to $376.5 million at March 31, 2012 as compared to $364.9 million at December 31, 2011.

Deposits decreased by $25.6 million, or 1.5%, at March 31, 2012, as compared to December 31, 2011. Additionally, Federal Home Loan Bank (“FHLB”) advances decreased $21.0 million, to $245.0 million at March 31, 2012 from $266.0 million at December 31, 2011.

Diluted earnings per share increased 10.7%, to $0.31 for the quarter ended March 31, 2012, from $0.28 for the corresponding prior year quarter. The improvement was primarily due to an increase in other income and a decrease in operating expenses.

Net interest income for the three months ended March 31, 2012 decreased to $19.1 million, as compared to $19.3 million in the same prior year period, reflecting a lower net interest margin partly offset by greater interest-earning assets. The net interest margin decreased to 3.52% for the three months ended March 31, 2012, as compared to 3.60% for the corresponding prior year period. Total revenue, however, increased 2.7%, to $23.4 million for the quarter ended March 31, 2012, as compared to $22.8 million for the corresponding prior year period due to an increase in other income.

The provision for loan losses was $1.7 million for the three months ended March 31, 2012, unchanged from the corresponding prior year period. The Company’s non-performing loans totaled $44.5 million at March 31, 2012, a $515,000 increase from $44.0 million at December 31, 2011.

The Company remains well-capitalized with a tangible common equity ratio of 9.75%.

Return on average stockholders’ equity was 10.38% for the three months ended March 31, 2012, as compared to 10.12% for the corresponding prior year period.

 

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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 table sets forth certain information relating to the Company for the three months ended March 31, 2012 and 2011. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.

 

    FOR THE THREE MONTHS ENDED MARCH 31,  
    2012     2011  
    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

  $ 49,840      $ 21        .17   $ 21,996      $ 15        .27

Investment securities (1)

    179,237        490        1.09        126,090        299        .95   

FHLB stock

    17,900        229        5.12        17,534        250        5.70   

Mortgage-backed securities (1)

    359,530        2,318        2.58        335,602        2,563        3.05   

Loans receivable, net (2)

    1,565,956        19,805        5.06        1,647,750        21,164        5.14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    2,172,463        22,863        4.21        2,148,972        24,291        4.52   
   

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-earning assets

    103,620            112,969       
 

 

 

       

 

 

     

Total assets

  $ 2,276,083          $ 2,261,941       
 

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Transaction deposits

  $ 1,283,926        916        .29      $ 1,255,244        1,665        .53   

Time deposits

    255,999        1,102        1.72        279,566        1,244        1.78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,539,925        2,018        .52        1,534,810        2,909        .76   

Borrowed funds

    351,311        1,740        1.98        373,792        2,045        2.19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    1,891,236        3,758        .79        1,908,602        4,954        1.04   
   

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-bearing deposits

    151,143            130,227       

Non-interest-bearing liabilities

    16,125            21,358       
 

 

 

       

 

 

     

Total liabilities

    2,058,504            2,060,187       

Stockholders’ equity

    217,579            201,754       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 2,276,083          $ 2,261,941       
 

 

 

       

 

 

     

Net interest income

    $ 19,105          $ 19,337     
   

 

 

       

 

 

   

Net interest rate spread (3)

        3.42         3.48
     

 

 

       

 

 

 

Net interest margin (4)

        3.52         3.60
     

 

 

       

 

 

 

 

(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.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets at March 31, 2012 were $2.261 billion, a decrease of $40.9 million, or 1.8%, compared to $2.302 billion at December 31, 2011.

Cash and due from banks decreased by $39.4 million, to $38.1 million at March 31, 2012, as compared to $77.5 million at December 31, 2011. Part of the cash and due from banks was invested in mortgage-backed securities which increased by $11.5 million, to $376.5 million at March 31, 2012, as compared to $364.9 million at December 31, 2011.

Loans receivable, net decreased by $8.2 million, to a balance of $1.555 billion at March 31, 2012, as compared to a balance of $1.563 billion at December 31, 2011, primarily due to weak commercial loan demand, prepayments and sale of newly originated 30-year fixed-rate one-to-four family loans.

Total deposits decreased $25.6 million, or 1.5%, to $1.680 billion at March 31, 2012, from $1.706 billion at December 31, 2011. Additionally, Federal Home Loan Bank advances decreased by $21.0 million to $245.0 million at March 31, 2012, as compared to $266.0 million at December 31, 2011.

Stockholders’ equity at March 31, 2012 increased by 1.7%, to $220.5 million, as compared to $216.8 million at December 31, 2011, primarily due to net income and a reduction in accumulated other comprehensive loss, partly offset by the cash dividend on common stock and by the repurchase of 113,500 shares of common stock for $1.6 million.

 

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Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

General

Net income for the three months ended March 31, 2012 was $5.6 million, as compared to net income of $5.1 million for the corresponding prior year period, an increase of $541,000 or 10.6%. On a per share basis net income per diluted share was $0.31 for the three months ended March 31, 2012, as compared to $0.28 for the corresponding prior year period.

Interest Income

Interest income for the three months ended March 31, 2012 was $22.9 million, as compared to $24.3 million for the three months ended March 31, 2011. The yield on interest-earning assets declined to 4.21% for the three months ended March 31, 2012, as compared to 4.52% for the same prior year period. For the quarter ended March 31, 2012, the yield on loans receivable benefited from loan prepayment fees of $254,000, most of which was related to a single large commercial loan. The loan prepayment fees increased the yield on interest-earning assets by 5 basis points for the quarter ended March 31, 2012. Average interest-earning assets increased by $23.5 million, or 1.1%, for the three months ended March 31, 2012, as compared to the same prior year period. The increase in average interest-earning assets was due to the increase in average investment and mortgage-backed securities, which together increased $77.1 million, or 16.7%, and the increase in average short-term investments which increased $27.8 million. These increases were partly offset by a decrease in average loans receivable, net, of $81.8 million.

Interest Expense

Interest expense for the three months ended March 31, 2012 was $3.8 million, as compared to $5.0 million for the three months ended March 31, 2011. The cost of interest-bearing liabilities decreased to .79% for the three months ended March 31, 2012 as compared to 1.04% in the same prior year period. Average interest-bearing liabilities decreased by $17.4 million, or .9%, for the three months ended March 31, 2012, as compared to the same prior year period. The decrease was due to declines in average time deposits and average borrowed funds of $23.6 million and $22.5 million, respectively, as compared to the same prior year period, partly offset by an increase of average transaction deposits of $28.7 million.

Net Interest Income

Net interest income for the quarter ended March 31, 2012 decreased to $19.1 million, as compared to $19.3 million in the same prior year period, reflecting a lower net interest margin partly offset by greater interest-earning assets. The net interest margin decreased to 3.52% for the quarter ended March 31, 2012, from 3.60% in the same prior year period due to a change in the mix of average interest-earning assets from higher-yielding loans receivable into lower-yielding short-term investments and investment and mortgage-backed securities. High loan refinance volume also caused yields on loans and mortgage-backed securities to trend downward.

Provision for Loan Losses

For the three months ended March 31, 2012, the provision for loan losses was $1.7 million, unchanged from the corresponding prior year period. Non-performing loans increased $515,000, or 1.2%, at March 31, 2012, to $44.5 million from $44.0 million at December 31, 2011. Net charge-offs for the three months ended March 31, 2012 were $1,689,000, as compared to $970,000 in the same prior year period. During the fourth quarter of 2011, the Company modified its charge-off policy on problem loans secured by real estate which accelerated the recognition of loan charge-offs. The Company now takes charge-offs in the period the loan, or portion thereof, is deemed uncollectable, generally after the loan becomes 120 days delinquent and a recent appraisal is received which reflects a collateral shortfall. Previously, specific valuation reserves were established until the loan charge-off was recorded upon final resolution of the collateral.

Other Income

Other income increased to $4.3 million for the quarter ended March 31, 2012, as compared to $3.5 million in the same prior year period primarily due to a reduction in the net loss from other real estate owned, higher fees and service charges and an increase in the net gain on the sale of loans. The net loss from other real estate owned decreased by $316,000 for the quarter ended March 31, 2012, as compared to the same prior year period. Additionally, for the quarter ended March 31, 2012, fees and service charges increased $221,000 due to increases in trust revenue, merchant service fees and checking account fees. Finally, for the quarter ended March 31, 2012, the net gain on the sale of loans increased $213,000, due to strong gain on sale margins. The net gain on the sale of loans was adversely affected by a $150,000 increase in the reserve for repurchased loans.

 

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Operating Expenses

Operating expenses decreased by 1.4%, to $12.9 million for the three months ended March 31, 2012, as compared to $13.1 million for the corresponding prior year period. Federal deposit insurance expense for the three months ended March 31, 2012 decreased by $210,000 from the corresponding prior year period due to a lower assessment rate and a change in the assessment methodology from deposit-based to a total liability-based assessment. Additionally, compensation and employee benefits costs decreased by $205,000, or 2.9%, to $6.8 million for the three months ended March 31, 2012, as compared to the corresponding prior year period.

Provision for Income Taxes

Income tax expense was $3.1 million for the three months ended March 31, 2012, as compared to $2.9 million for the same prior year period. The effective tax rate decreased to 35.7% for the three months ended March 31, 2012, as compared to 35.9% in the same prior period.

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, FHLB and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit.

At March 31, 2012 and December 31, 2011, the Company had no outstanding overnight borrowings from the FHLB. The Company periodically utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings of $245.0 million at March 31, 2012, a decrease from $266.0 million at December 31, 2011.

The Company’s cash needs for the three months ended March 31, 2012 were primarily satisfied by principal payments on loans and mortgage-backed securities and proceeds from the sale of mortgage loans held for sale. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities, deposit outflow and to reduce FHLB borrowings. The Company’s cash needs for the three months ended March 31, 2011 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and increased FHLB borrowings. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and deposit outflow.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At March 31, 2012, outstanding commitments to originate loans totaled $73.4 million; outstanding unused lines of credit totaled $225.2 million; and outstanding commitments to sell loans totaled $13.8 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 $169.2 million at March 31, 2012. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.

The Company has a detailed contingency funding plan and comprehensive reporting of trends on a monthly and quarterly basis. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs a liquidity stress test in several scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios.

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the three months ended March 31, 2012, the Company repurchased 113,500 shares of common stock at a total cost of $1.6 million compared with no repurchases for the three months ended March 31, 2011. At March 31, 2012, there were 663,652 shares remaining to be repurchased under the existing stock repurchase program.

Cash dividends on common stock declared and paid during the first three months of 2012 were $2.2 million, unchanged as compared to the same prior year period. On April 18, 2012, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on May 11, 2012 to stockholders of record at the close of business on April 30, 2012.

 

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The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the banking subsidiary and the issuance of preferred and common stock and long-term debt. For the first three months of 2012, the Company received a dividend payment of $5.5 million from the Bank. At March 31, 2012, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment of $11.1 million in dividends from the Bank to the Company over the next two quarters although the Federal Reserve reserved the right to revoke its decision at any time if a safety and soundness concern arises throughout the period. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At March 31, 2012, OceanFirst Financial Corp. held $16.1 million in cash and $4.5 million in investment securities available for sale.

As of March 31, 2012, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible capital

   $ 214,607         9.51   $ 33,867         1.50

Core capital

     214,607         9.51        90,313         4.00   

Tier 1 risk-based capital

     214,607         14.55        59,016         4.00   

Total risk-based capital

     232,848         15.78        118,032         8.00   

The Bank is considered a “well-capitalized” institution under the Prompt Corrective Action Regulations.

At March 31, 2012, the Company maintained tangible common equity of $220.5 million, for a tangible common equity to assets ratio of 9.75%.

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 unused lines of credit and commitments to extend credit. The Company also has outstanding commitments to sell loans amounting to $13.8 million.

The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2012 (in thousands):

 

Contractual Obligation

   Total      Less than
one year
     1-3 years      3-5 years      More than
5 years
 

Debt Obligations

   $ 341,294       $ 88,794       $ 146,000       $ 84,000       $ 22,500   

Commitments to Originate Loans

     73,381         73,381         —           —           —     

Commitments to Fund Unused Lines of Credit

     225,202         225,202         —           —           —     

Commitments to originate loans and commitments to fund unused lines of credit 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.

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 (“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.

 

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Table of Contents
     March 31,
2012
    December 31,
2011
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate – one-to-four family

   $ 28,962      $ 29,193   

Commercial real estate

     10,584        10,552   

Construction

     —          43   

Consumer

     4,067        3,653   

Commercial

     910        567   
  

 

 

   

 

 

 

Total non-performing loans

     44,523        44,008   

OREO, net

     2,038        1,970   
  

 

 

   

 

 

 

Total non-performing assets

   $ 46,561      $ 45,978   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 9,401      $ 14,972   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     1.16     1.15

Allowance for loan losses as percent of total non-performing loans

     40.97        41.42   

Non-performing loans as a percent of total loans receivable

     2.83        2.77   

Non-performing assets as a percent of total assets

     2.06        2.00   

Included in the non-performing loan total at March 31, 2012 was $16.2 million of troubled debt restructured loans, as compared to $14.5 million of troubled debt restructured loans at December 31, 2011. Non-performing loans are concentrated in one-to-four family loans which comprise 65.0% of the total. At March 31, 2012, the average weighted loan-to-value ratio of non-performing one-to-four family loans, after any related charge-offs, was 62% using appraisal values at time of origination and 80% using updated appraisal values. Appraisals are updated for all non-performing loans secured by real estate and subsequently updated annually if the loan remains delinquent for an extended period. At March 31, 2012, the average weighted loan-to-value ratio of the total one-to-four family loan portfolio was 57% using appraisal values at time of origination. Based upon sales data for the first quarter of 2012 from the Ocean and Monmouth Counties Multiple Listing Service, home values in the Company’s primary market area have declined by approximately 23% from the peak of the market in 2006. Individual home values may move more or less than the average based upon the specific characteristics of the property. There can be no assurance that home values will not decline further, possibly resulting in losses to the Company. The largest non-performing loan relationship consists of several credits totaling $6.3 million. The loans are collateralized by commercial and residential real estate, all business assets and also carry a personal guarantee. An appraisal performed in May 2011 values the real estate collateral at $9.1 million. In November 2011, the Company entered into a troubled debt restructuring with the borrower which capitalized delinquent interest and reduced the interest rate in exchange for additional collateral. The Company’s non-performing loans remain at elevated levels partly due to the extended foreclosure process in the State of New Jersey. The protracted foreclosure process delays the Company’s ability to resolve non-performing loans through the sale of the underlying collateral. Of the non-performing one-to-four family loans at March 31, 2012, 72% were originated by alternative Bank delivery channels which were previously shuttered.

The Company classifies loans and other assets in accordance with regulatory guidelines. At March 31, 2012, the Company had $11.5 million in loans designated as Special Mention, $69.6 million in loans classified as Substandard and $352,000 in other assets classified as Doubtful, as compared to $11.5 million, $63.1 million and $74,600, respectively, at December 31, 2011. The largest Special Mention loan relationship at March 31, 2012 is comprised of several credit facilities to a commercial lending borrower specializing in residential home building and ownership of commercial office properties totaling $1.8 million. The loans are current as to payments but criticized due to poor operating results. The loans are collateralized by residential and commercial real estate. The largest Substandard loan relationship is comprised of several credit facilities to a building supply company with an aggregate balance of $9.3 million, which was current as to payments, but criticized due to poor, but improving, operating results. The loans are collateralized by commercial real estate and other business assets. In addition to loan classifications, the Company classified investment securities with an amortized cost of $25.0 million and a carrying value of $18.1 million as Substandard, which represents the amount of investment securities with a credit rating below investment grade from one of the internationally recognized credit rating services. These securities are all current as to principal and interest payments.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 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 fair value. Policies

 

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with respect to the methodologies used to determine the allowance for loan losses, the reserve for repurchased loans and the valuation of Mortgage Servicing Rights and judgments regarding securities 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. 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 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 probability or 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 the 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, 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. These risks and uncertainties are further discussed in the 2011 Form 10-K and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on these 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 2011 Form 10-K and Item 1A of this Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2012, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. At March 31, 2012, the Company’s one-year gap was negative 0.50% as compared to negative 0.03% at December 31, 2011.

 

At March 31, 2012

  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

  $ 12,020      $ —        $ —        $ —        $ —        $ 12,020   

Investment securities

    64,853        23,078        86,521        —          4,294        178,746   

FHLB stock

    —          —          —          —          17,747        17,747   

Mortgage-backed securities

    52,753        54,675        105,397        65,573        87,478        365,876   

Loans receivable (2)

    311,064        431,446        468,413        182,785        179,121        1,572,829   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    440,690        509,199        660,331        248,358        288,640        2,147,218   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

           

Money market deposit accounts

    38,399        9,127        20,077        15,149        49,020        131,772   

Savings accounts

    28,361        21,837        45,006        34,065        106,061        235,330   

Interest-bearing checking accounts

    520,857        61,426        111,039        91,743        117,719        902,784   

Time deposits

    71,419        97,827        33,449        38,849        11,412        252,956   

FHLB advances

    20,000        —          146,000        79,000        —          245,000   

Securities sold under agreements to repurchase

    68,794        —          —          —          —          68,794   

Other borrowings

    22,500        —          —          5,000        —          27,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    770,330        190,217        355,571        263,806        284,212        1,864,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

  $ (329,640   $ 318,982      $ 304,760      $ (15,448   $ 4,428      $ 283,082   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

  $ (329,640   $ (10,658   $ 294,102      $ 278,654      $ 283,082      $ 283,082   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap as a percent of total interest-earning assets

    (15.35 )%      (0.50 )%      13.70     12.98     13.18     13.18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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  (3) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in net portfolio value (“NPV”) and net interest income under varying rate shocks as of March 31, 2012 and December 31, 2011. 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 2011 Form 10-K.

 

     March 31, 2012     December 31, 2011  
     Net Portfolio Value      Net Interest Income     Net Portfolio Value     Net Interest Income  

Change

in

Interest

Rates in

Basis

Points

(Rate Shock)

   Amount      %
Change
    NPV
Ratio
     Amount      %
Change
    Amount      %
Change
    NPV
Ratio
    Amount      %
Change
 
(dollars in thousands)                                                                  

300

   $ 243,642         (4.7 )%      11.3       $ 65,173         (11.1 )%    $ 238,057         (4.8 )%      10.9   $ 65,048         (11.1 )% 

200

     255,217         (0.1     11.6         68,585         (6.4     252,307         0.9        11.2        68,659         (6.2

100

     260,209         1.8        11.6         71,294         (2.7     261,068         4.4        11.4        71,441         (2.4

Static

     255,576         —          11.2         73,291         —          250,109         —          10.7        73,189         —     

(100)

     218,866         (14.4     9.4         68,984         (5.9     204,786         (18.1     8.7        67,900         (7.2

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     March 31,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 38,095      $ 77,527   

Investment securities available for sale

     166,356        165,279   

Federal Home Loan Bank of New York stock, at cost

     17,747        18,160   

Mortgage-backed securities available for sale

     376,461        364,931   

Loans receivable, net

     1,554,862        1,563,019   

Mortgage loans held for sale

     4,081        9,297   

Interest and dividends receivable

     6,381        6,432   

Other real estate owned, net

     2,038        1,970   

Premises and equipment, net

     22,226        22,259   

Servicing asset

     4,765        4,836   

Bank Owned Life Insurance

     42,135        41,987   

Other assets

     26,067        26,397   
  

 

 

   

 

 

 

Total assets

   $ 2,261,214      $ 2,302,094   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 1,680,444      $ 1,706,083   

Securities sold under agreements to repurchase with retail customers

     68,794        66,101   

Federal Home Loan Bank advances

     245,000        266,000   

Other borrowings

     27,500        27,500   

Due to brokers

     —          5,186   

Advances by borrowers for taxes and insurance

     8,316        7,113   

Other liabilities

     10,689        7,262   
  

 

 

   

 

 

 

Total liabilities

     2,040,743        2,085,245   
  

 

 

   

 

 

 

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 18,593,968 and 18,682,568 shares outstanding at March 31, 2012 and December 31, 2011, respectively

     336        336   

Additional paid-in capital

     262,750        262,812   

Retained earnings

     190,173        186,666   

Accumulated other comprehensive loss

     (1,104     (2,468

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (4,121     (4,193

Treasury stock, 14,972,804 and 14,884,204 shares at March 31, 2012 and December 31, 2011, respectively

     (227,563     (226,304

Common stock acquired by Deferred Compensation Plan

     (679     (871

Deferred Compensation Plan Liability

     679        871   
  

 

 

   

 

 

 

Total stockholders’ equity

     220,471        216,849   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,261,214      $ 2,302,094   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months ended March 31,  
     2012     2011  
     (Unaudited)  

Interest income:

    

Loans

   $ 19,805      $ 21,164   

Mortgage-backed securities

     2,318        2,563   

Investment securities and other

     740        564   
  

 

 

   

 

 

 

Total interest income

     22,863        24,291   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     2,018        2,909   

Borrowed funds

     1,740        2,045   
  

 

 

   

 

 

 

Total interest expense

     3,758        4,954   
  

 

 

   

 

 

 

Net interest income

     19,105        19,337   

Provision for loan losses

     1,700        1,700   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     17,405        17,637   
  

 

 

   

 

 

 

Other income:

    

Loan servicing income

     138        96   

Fees and service charges

     2,943        2,722   

Net gain on sales of loans available for sale

     972        759   

Net loss from other real estate owned

     (50     (366

Income from Bank Owned Life Insurance

     306        248   

Other

     2        —     
  

 

 

   

 

 

 

Total other income

     4,311        3,459   
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and employee benefits

     6,837        7,042   

Occupancy

     1,304        1,195   

Equipment

     595        647   

Marketing

     346        336   

Federal deposit insurance

     531        741   

Data processing

     943        883   

Legal

     239        256   

Check card processing

     299        320   

Accounting and audit

     133        140   

Other operating expense

     1,713        1,568   
  

 

 

   

 

 

 

Total operating expenses

     12,940        13,128   
  

 

 

   

 

 

 

Income before provision for income taxes

     8,776        7,968   

Provision for income taxes

     3,129        2,862   
  

 

 

   

 

 

 

Net income

   $ 5,647      $ 5,106   
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.31      $ 0.28   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.31      $ 0.28   
  

 

 

   

 

 

 

Average basic shares outstanding

     18,064        18,162   
  

 

 

   

 

 

 

Average diluted shares outstanding

     18,108        18,211   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months ended March 31,  
     2012      2011  
     (Unaudited)  

Net income

   $ 5,647       $ 5,106   

Other comprehensive income:

     

Unrealized gain on securities (net of tax expense $1,003 in 2012 and $993 in 2011)

     1,364         1,436   
  

 

 

    

 

 

 

Total comprehensive income

   $ 7,011       $ 6,542   
  

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(in thousands, except per share amounts)

 

    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, 2010

  $ —        $ 336      $ 260,739      $ 174,677      $ (5,560   $ (4,484   $ (224,457   $ (946   $ 946      $ 201,251   
                   

 

 

 

Net income

    —          —          —          5,106        —          —          —          —          —          5,106   

Unrealized gain on securities (net of tax expense $993)

    —          —          —          —          1,436        —          —          —          —          1,436   

Tax expense of stock plans

    —          —          (8     —          —          —          —          —          —          (8

Stock awards

    —          —          265        —          —          —          —          —          —          265   

Treasury stock allocated to restricted stock plan

    —          —          (280     37        —          —          243        —          —          —     

Allocation of ESOP stock

    —          —          44        —          —          73        —          —          —          117   

Cash dividend $0.12 per share

    —          —          —          (2,194     —          —          —          —          —          (2,194

Exercise of stock options

    —          —          —          (2     —          —          15        —          —          13   

Purchase of stock for the deferred compensation plan

    —          —          —          —          —          —          —          (4     4        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

  $ —        $ 336      $ 260,760      $ 177,624      $ (4,124   $ (4,411   $ (224,199   $ (950   $ 950      $ 205,986   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

  $ —        $ 336      $ 262,812      $ 186,666      $ (2,468   $ (4,193   $ (226,304   $ (871   $ 871      $ 216,849   

Net income

    —          —          —          5,647        —          —          —          —          —          5,647   

Unrealized gain on securities (net of tax expense $1,003)

    —          —          —          —          1,364        —          —          —          —          1,364   

Tax expense of stock plans

    —          —          (2     —          —          —          —          —          —          (2

Stock awards

    —          —          175        —          —          —          —          —          —          175   

Treasury stock allocated to restricted stock plan

    —          —          (282     42        —          —          240        —          —          —     

Purchased 113,500 shares of common stock

    —          —          —          —          —          —          (1,565     —          —          (1,565

Allocation of ESOP stock

    —          —          47        —          —          72        —          —          —          119   

Cash dividend $0.12 per share

    —          —            (2,176     —          —          —          —          —          (2,176

Exercise of stock options

    —          —          —          (6     —          —          66        —          —          60   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          192        (192     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

  $ —        $ 336      $ 262,750      $ 190,173      $ (1,104   $ (4,121   $ (227,563   $ (679   $ 679      $ 220,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the three months ended March 31,  
     2012     2011  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 5,647      $ 5,106   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of premises and equipment

     628        598   

Allocation of ESOP stock

     119        117   

Stock awards

     175        265   

Amortization of servicing asset

     410        484   

Net premium amortization in excess of discount accretion on securities

     800        590   

Net amortization of deferred costs and discounts on loans

     192        259   

Provision for loan losses

     1,700        1,700   

Provision for repurchased loans

     150        —     

Net loss on sale of other real estate owned

     30        269   

Net gain on sales of loans

     (1,122     (759

Proceeds from sales of mortgage loans held for sale

     44,116        40,680   

Mortgage loans originated for sale

     (38,117     (36,470

Increase in value of Bank Owned Life Insurance

     (306     (248

Proceeds from Bank Owned Life Insurance

     158        —     

Decrease (increase) in interest and dividends receivable

     51        (314

(Increase) decrease in other assets

     (673     186   

Increase (decrease) in other liabilities

     3,277        (8,860
  

 

 

   

 

 

 

Total adjustments

     11,588        (1,503
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,235        3,603   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans receivable

     5,998        22,356   

Purchase of investment securities available for sale

     (1,777     (30,311

Purchase of mortgage-backed securities available for sale

     (45,977     (29,808

Principal repayments on mortgage-backed securities available for sale

     28,860        21,845   

Proceeds from maturities of investment securities available for sale

     2,668        —     

Decrease (increase) in Federal Home Loan Bank of New York stock

     413        (1,442

Proceeds from sales of other real estate owned

     169        334   

Purchases of premises and equipment

     (595     (559
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,241     (17,585
  

 

 

   

 

 

 

 

Continued

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the three months ended March 31,  
     2012     2011  
     (Unaudited)  

Cash flows from financing activities:

    

Decrease in deposits

   $ (25,639   $ (18,180

Increase in short-term borrowings

     2,693        39,350   

Proceeds from Federal Home Loan Bank advances

     —          25,000   

Repayments of Federal Home Loan Bank advances

     (21,000     (31,000

Increase in advances by borrowers for taxes and insurance

     1,203        908   

Exercise of stock options

     60        13   

Purchase of treasury stock

     (1,565     —     

Dividends paid – common stock

     (2,176     (2,194

Tax expense of stock plans

     (2     (8
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (46,426     13,889   
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (39,432     (93

Cash and due from banks at beginning of period

     77,527        31,455   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 38,095      $ 31,362   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 3,826      $ 5,052   

Income taxes

     12        4,900   

Non-cash activities:

    

Transfer of loans receivable to other real estate owned

     267        222   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its wholly-owned subsidiaries, Columbia Home Loans, LLC (“Columbia”), OceanFirst REIT Holdings, Inc., OceanFirst Services, LLC and 975 Holdings, LLC. The operations of Columbia were shuttered in late 2007.

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations that may be expected for all of 2012. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates.

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2011.

Note 2. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2012 and 2011 (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Weighted average shares issued net of Treasury shares

     18,651        18,828   

Less: Unallocated ESOP shares

     (493     (527

Unallocated incentive award shares and shares held by deferred compensation plan

     (94     (139
  

 

 

   

 

 

 

Average basic shares outstanding

     18,064        18,162   

Add: Effect of dilutive securities:

    

Shares held by deferred compensation plan

     44        49   
  

 

 

   

 

 

 

Average diluted shares outstanding

     18,108        18,211   
  

 

 

   

 

 

 

For the three months ended March 31, 2012 and 2011, antidilutive stock options of 2,043,000 and 1,972,000, respectively, were excluded from earnings per share calculations.

Note 3. Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at March 31, 2012 and December 31, 2011 are as follows (in thousands):

 

March 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 101,855       $ 854       $ (11   $ 102,698   

State and municipal obligations

     17,597         29         (1     17,625   

Corporate debt securities

     55,000         —           (14,029     40,971   

Equity investments

     4,294         768         —          5,062   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 178,746       $ 1,651       $ (14,041   $ 166,356   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 102,059       $ 760       $ (43   $ 102,776   

State and municipal obligations

     18,526         26         (8     18,544   

Corporate debt securities

     55,000         —           (15,551     39,449   

Equity investments

     4,294         250         (34     4,510   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 179,879       $ 1,036       $ (15,636   $ 165,279   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no realized gains or losses on the sale of investment securities available for sale for the three months ended March 31, 2012 or March 31, 2011.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at March 31, 2012 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2012, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $41.0 million, respectively, were callable prior to the maturity date.

 

March 31, 2012

   Amortized
Cost
     Estimated
Market
Value
 

Less than one year

   $ 32,931       $ 32,972   

Due after one year through five years

     86,521         87,351   

Due after five years through ten years

     —           —     

Due after ten years

     55,000         40,971   
  

 

 

    

 

 

 
   $ 174,452       $ 161,294   
  

 

 

    

 

 

 

The estimated market value and unrealized loss for investment securities available for sale at March 31, 2012 and December 31, 2011 segregated by the duration of the unrealized loss are as follows (in thousands):

 

     Less than 12 months     12 months or longer     Total  

March 31, 2012

   Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

U.S. Agency obligations

   $ 5,107       $ (11   $ —         $ —        $ 5,107       $ (11

State and municipal obligations

     403         (1     —           —          403         (1

Corporate debt securities

     —           —          40,971         (14,029     40,971         (14,029
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 5,510       $ (12   $ 40,971       $ (14,029   $ 46,481       $ (14,041
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or longer     Total  

December 31, 2011

   Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

U.S. Agency obligations

   $ 20,791       $ (43   $ —         $ —        $ 20,791       $ (43

State and municipal obligations

     421         (1     1,935         (7     2,356         (8

Corporate debt securities

     —           —          39,449         (15,551     39,449         (15,551

Equity investments

     1,465         (34     —           —          1,465         (34
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 22,677       $ (78   $ 41,384       $ (15,558   $ 64,061       $ (15,636
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2012, the amortized cost, estimated market value and credit rating of the individual corporate debt securities in an unrealized loss position for greater than one year are as follows (in thousands):

 

Security Description

   Amortized Cost      Estimated
Market
Value
     Credit Rating
Moody’s/S&P
 

BankAmerica Capital

   $ 15,000       $ 10,377         Ba1/BB+   

Chase Capital

     10,000         7,639         A2/BBB   

Wells Fargo Capital

     5,000         3,881         A3/A-   

Huntington Capital

     5,000         3,796         Baa3/BB+   

Keycorp Capital

     5,000         3,853         Baa3/BBB-   

PNC Capital

     5,000         3,904         Baa2/BBB   

State Street Capital

     5,000         3,917         A3/BBB+   

SunTrust Capital

     5,000         3,604         Baa3/BB+   
  

 

 

    

 

 

    
   $ 55,000       $ 40,971      
  

 

 

    

 

 

    

At March 31, 2012, the market value of each corporate debt security was below cost. However, the estimated market value of the corporate debt securities portfolio increased over prior periods. The corporate debt securities are issued by other financial institutions with credit ratings ranging from a high of A2 to a low of BB+ as rated by one of the internationally recognized credit rating services. These floating-rate securities were purchased during the period May 1998 to September 1998 and have paid coupon interest continuously since issuance. Floating-rate debt securities such as these pay a fixed interest rate spread over 90-day LIBOR. Subsequent to purchase, the required spread increased for these types of securities causing a decline in the market price. The Company concluded that unrealized losses on available for sale securities were only temporarily impaired at March 31, 2012. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments and no interest payments were deferred. All of the financial institutions were also considered well-capitalized. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements for the foreseeable future. Furthermore, although these investment securities are available for sale, the Company does not have the intent to sell these securities and it is more likely than not that the Company will not be required to sell the securities. The Company has held the securities continuously since 1998 and expects to receive its full principal at maturity in 2028 or prior if called by the issuer. The Company has historically not actively sold investment securities and does not utilize the securities portfolio as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.

Capital markets in general and the market for these corporate securities in particular have been disrupted since the second half of 2007. In its analysis, the Company considered that the severity and duration of unrecognized losses was at least partly due to the illiquidity caused by market disruptions. Since that time, markets have stabilized partly due to steps taken by the U.S. Treasury, the Federal Reserve Board, the Federal Deposit Insurance Corporation and foreign central banks to restore liquidity and confidence in the capital markets. Each of these issuers has been able to raise capital in recent years and the fair values of these securities have increased since the lows reached in the second half of 2008.

Due to the reasons noted above, especially the continuing restoration of the capital markets, the improved valuation of the corporate securities portfolio from the 2008 lows, the capital position of the issuers and the uninterrupted payment of all contractually due interest, management has determined that only a temporary impairment existed at March 31, 2012.

Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at March 31, 2012 and December 31, 2011 are as follows (in thousands):

 

March 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 106,267       $ 898       $ (128   $ 107,037   

FNMA

     258,695         9,657         (17     268,335   

GNMA

     914         175         —          1,089   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 365,876       $ 10,730       $ (145   $ 376,461   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 74,155       $ 950       $ (48   $ 75,057   

FNMA

     279,414         9,369         (21     288,762   

GNMA

     935         177         —          1,112   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 354,504       $ 10,496       $ (69   $ 364,931   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no gains or losses realized on the sale of mortgage-backed securities available for sale for the three months ended March 31, 2012 and 2011.

The contractual maturities of mortgage-backed securities available for sale vary; however, the effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at March 31, 2012 and December 31, 2011, segregated by the duration of the unrealized loss are as follows (in thousands).

 

0000000 0000000 0000000 0000000 0000000 0000000
     Less than 12 months     12 months or longer     Total  

March 31, 2012

   Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

FHLMC

   $ 49,157       $ (128   $ —         $ —        $ 49,157       $ (128

FNMA

     14,653         (16     87         (1     14,740         (17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 63,810       $ (144   $ 87       $ (1   $ 63,897       $ (145
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or longer     Total  

December 31, 2011

   Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

FHLMC

   $ 24,662       $ (48   $ —         $ —        $ 24,662       $ (48

FNMA

     15,348         (21     —           —          15,348         (21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 40,010       $ (69   $ —         $ —        $ 40,010       $ (69
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The mortgage-backed securities are issued and guaranteed by either FHLMC or FNMA, corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally-recognized credit rating services. FHLMC and FNMA have been under the conservatorship of the Federal Housing Financial Agency since September 8, 2008. The conservatorships have no specified termination date. Also, FHLMC and FNMA have entered into Stock Purchase Agreements, which following the issuance of Senior Preferred Stock and Warrants to the United States Treasury, provide FHLMC and FNMA funding commitments from the United States Treasury. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the mortgage-backed securities. Although these mortgage-backed securities are available for sale, the Company does not intend to sell these securities and it is more likely than not that the Bank will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that unrealized losses on these available for sale securities were only temporarily impaired at March 31, 2012.

 

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Table of Contents

Note 5. Loans Receivable, Net

Loans receivable, net at March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

     March 31, 2012     December 31, 2011  

Real estate:

    

One-to-four family

   $ 859,667      $ 873,253   

Commercial real estate, multi family and land

     460,067        460,725   

Residential construction

     7,692        6,657   

Consumer

     197,283        192,918   

Commercial

     46,729        45,889   
  

 

 

   

 

 

 

Total loans

     1,571,438        1,579,442   

Loans in process

     (2,690     (2,559

Deferred origination costs, net

     4,355        4,366   

Allowance for loan losses

     (18,241     (18,230
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,554,862      $ 1,563,019   
  

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, loans in the amount of $44,523,000 and $44,008,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At March 31, 2012, the impaired loan portfolio totaled $28,977,000 for which there was a specific allocation in the allowance for loan losses of $2,080,000. At December 31, 2011, the impaired loan portfolio totaled $28,491,000 for which there was a specific allocation in the allowance for loan losses of $2,165,000. The average balance of impaired loans for the three months ended March 31, 2012 and 2011 was $28,733,000 and $20,381,000, respectively.

An analysis of the allowance for loan losses for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Balance at beginning of period

   $ 18,230      $ 19,700   

Provision charged to operations

     1,700        1,700   

Charge-offs

     (1,800     (976

Recoveries

     111        6   
  

 

 

   

 

 

 

Balance at end of period

   $ 18,241      $ 20,430   
  

 

 

   

 

 

 

 

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Table of Contents

The following table presents an analysis of the allowance for loan losses for the three months ended March 31, 2012 and 2011 and the balance in the allowance for loan loses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011 (in thousands):

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial     Unallocated     Total  

For the three months ended March 31, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

   $ 5,370      $ 8,474      $ 1,461      $ 900      $ 2,025      $ 18,230   

Provision charged to operations

     140        108        772        323        357        1,700   

Charge-offs

     (1,375     (47     (378     —          —          (1,800

Recoveries

     29        74        6        2        —          111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,164      $ 8,609      $ 1,861      $ 1,225      $ 2,382      $ 18,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2011

            

Allowance for loan losses:

            

Balance at beginning of period

   $ 5,977      $ 6,837      $ 3,264      $ 962      $ 2,660      $ 19,700   

Provision (benefit) charged to operations

     170        725        124        735        (54     1,700   

Charge-offs

     (297     (80     —          (599     —          (976

Recoveries

     4        —          1        1        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 5,854      $ 7,482      $ 3,389      $ 1,099      $ 2,606      $ 20,430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

          

Allowance for loan losses:

            

Ending allowance balance attributed to loans:

            

Individually evaluated for impairment

   $ 49      $ 1,923      $ 108      $ —        $ —        $ 2,080   

Collectively evaluated for impairment

     4,115        6,686        1,753        1,225        2,382        16,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 4,164      $ 8,609      $ 1,861      $ 1,225      $ 2,382      $ 18,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

            

Loans individually evaluated for impairment

   $ 17,424      $ 10,430      $ 827      $ 296      $ —        $ 28,977   

Loans collectively evaluated for impairment

     849,935        449,637        196,456        46,433        —          1,542,461   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

   $ 867,359      $ 460,067      $ 197,283      $ 46,729      $ —        $ 1,571,438   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

            

Allowance for loan losses:

            

Ending allowance balance attributed to loans:

            

Individually evaluated for impairment

   $ 45      $ 1,978      $ 142      $ —        $ —        $ 2,165   

Collectively evaluated for impairment

     5,325        6,496        1,319        900        2,025        16,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 5,370      $ 8,474      $ 1,461      $ 900      $ 2,025      $ 18,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

            

Loans individually evaluated for impairment

   $ 16,902      $ 10,178      $ 859      $ 552      $ —        $ 28,491   

Loans collectively evaluated for impairment

     863,008        450,547        192,059        45,337        —          1,550,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

   $ 879,910      $ 460,725      $ 192,918      $ 45,889      $ —        $ 1,579,442   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

A summary of impaired loans at March 31, 2012 and December 31, 2011 is as follows (in thousands):

 

     March 31,      December 31,  
     2012      2011  

Impaired loans with no allocated allowance for loan losses

   $ 19,986       $ 19,186   

Impaired loans with allocated allowance for loan losses

     8,991         9,305   
  

 

 

    

 

 

 
   $ 28,977       $ 28,491   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 2,080       $ 2,165   
  

 

 

    

 

 

 

The summary of loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

Three months ended and as of March 31, 2012

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 9,722       $ 9,503       $ —     

Originated by mortgage company

     4,832         4,807         —     

Originated by mortgage company - non-prime

     2,794         2,330         —     

Commercial real estate:

        

Commercial

     2,425         2,354         —     

Construction and land

     —           —           —     

Consumer

     726         696         —     

Commercial

     300         296         —     
  

 

 

    

 

 

    

 

 

 
   $ 20,799       $ 19,986       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 468       $ 395       $ 6   

Originated by mortgage company

     400         389         43   

Originated by mortgage company - non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     8,342         8,076         1,923   

Construction and land

     —           —           —     

Consumer

     131         131         108   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 9,341       $ 8,991       $ 2,080   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2011

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 9,491       $ 9,247       $ —     

Originated by mortgage company

     4,803         4,771         —     

Originated by mortgage company - non-prime

     2,794         2,494         —     

Commercial real estate:

        

Commercial

     1,438         1,405         —     

Construction and land

     —           —           —     

Consumer

     742         717         —     

Commercial

     558         552         —     
  

 

 

    

 

 

    

 

 

 
   $ 19,826       $ 19,186       $ —     
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ —         $ —         $ —     

Originated by mortgage company

     402         390         45   

Originated by mortgage company - non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     9,105         8,773         1,978   

Construction and land

     —           —           —     

Consumer

     142         142         142   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 9,649       $ 9,305       $ 2,165   
  

 

 

    

 

 

    

 

 

 

 

     Three months ended March 31,  
     2012      2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 9,375       $ 99       $ 5,126       $ 61   

Originated by mortgage company

     4,789         50         3,978         57   

Originated by mortgage company - non-prime

     2,412         1         —           —     

Commercial real estate:

           

Commercial

     2,378         —           397         —     

Construction and land

     —           —           —           —     

Consumer

     712         10         261         2   

Commercial

     424         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,090       $ 160       $ 9,762       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 197       $ —         $ 3,369       $ 39   

Originated by mortgage company

     389         4         204         1   

Originated by mortgage company - non-prime

     —           —           2,451         —     

Commercial real estate:

           

Commercial

     7,926         —           1,845         —     

Construction and land

     —           —           2,568         —     

Consumer

     131         1         182         4   

Commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,643       $ 5       $ 10,619       $ 44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the recorded investment in non-accrual loans by class of loans as of March 31, 2012 and December 31, 2011 (in thousands):

 

     Recorded Investment in Non-accrual Loans  
     March 31, 2012      December 31, 2011  

Residential real estate:

     

Originated by Bank

   $ 15,098       $ 15,874   

Originated by mortgage company

     10,828         9,768   

Originated by mortgage company – non-prime

     3,036         3,551   

Residential construction

     —           43   

Commercial real estate:

     

Commercial

     10,584         10,552   

Construction and land

     —           —     

Consumer

     4,067         3,653   

Commercial

     910         567   
  

 

 

    

 

 

 
   $ 44,523       $ 44,008   
  

 

 

    

 

 

 

As used in these footnotes, loans “Originated by mortgage company” are mortgage loans originated under the Bank’s underwriting guidelines by the Bank’s shuttered mortgage company, and retained as part of the Bank’s mortgage portfolio. These loans have significantly higher delinquency rates than similar loans originated by the Bank. Loans “Originated by mortgage company – non-prime” are subprime or Alt-A loans which were originated for sale into the secondary market.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans (in thousands):

 

     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
than

90 Days
Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

March 31, 2012

                 

Residential real estate:

                 

Originated by Bank

   $ 3,184       $ 2,696       $ 13,549       $ 19,429       $ 699,855       $ 719,284   

Originated by mortgage company

     1,553         —           10,656         12,209         123,415         135,624   

Originated by mortgage company – non-prime

     150         16         3,036         3,202         1,557         4,759   

Residential construction

     —           —           —           —           7,692         7,692   

Commercial real estate:

                 

Commercial

     3,443         55         155         3,653         445,122         448,775   

Construction and land

     50         —           —           50         11,242         11,292   

Consumer

     121         1,097         3,234         4,452         192,831         197,283   

Commercial

     333         401         15         749         45,980         46,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,834       $ 4,265       $ 30,645       $ 43,744       $ 1,527,694       $ 1,571,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Residential real estate:

                 

Originated by Bank

   $ 6,449       $ 2,024       $ 14,491       $ 22,964       $ 704,925       $ 727,889   

Originated by mortgage company

     4,265         1,228         8,710         14,203         126,288         140,491   

Originated by mortgage company – non-prime

     59         —           3,551         3,610         1,263         4,873   

Residential construction

     —           —           43         43         6,614         6,657   

Commercial real estate:

                 

Commercial

     7         746         373         1,126         442,322         443,448   

Construction and land

     —           —           —           —           17,277         17,277   

Consumer

     2,375         312         3,127         5,814         187,104         192,918   

Commercial

     —           —           15         15         45,874         45,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,155       $ 4,310       $ 30,310       $ 47,775       $ 1,531,667       $ 1,579,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company categorizes all commercial and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

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Table of Contents

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass related loans. Loans not rated are included in groups of homogeneous loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

March 31, 2012

              

Commercial real estate:

              

Commercial

   $ 416,197       $ 2,507       $ 30,071       $ —         $ 448,775   

Construction and land

     9,555         1,737         —           —           11,292   

Commercial

     41,691         —           5,038         —           46,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 467,443       $ 4,244       $ 35,109       $ —         $ 506,796   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Commercial real estate:

              

Commercial

   $ 416,706       $ 2,329       $ 24,413       $ —         $ 443,448   

Construction and land

     15,079         2,198         —           —           17,277   

Commercial

     41,589         —           4,232         68         45,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 473,374       $ 4,527       $ 28,645       $ 68       $ 506,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2012 and December 31, 2011 (in thousands):

 

     Residential Real Estate         
     Originated
by Bank
     Originated by
mortgage
company
     Originated by
mortgage

company  –
non-prime
     Residential
construction
     Consumer  

March 31, 2012

              

Performing

   $ 704,186       $ 124,796       $ 1,723       $ 7,692       $ 193,216   

Non-performing

     15,098         10,828         3,036         —           4,067   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 719,284       $ 135,624       $ 4,759       $ 7,692       $ 197,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Performing

   $ 712,015       $ 130,723       $ 1,322       $ 6,614       $ 189,265   

Non-performing

     15,874         9,768         3,551         43         3,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 727,889       $ 140,491       $ 4,873       $ 6,657       $ 192,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company classifies certain loans as troubled debt restructurings (“TDR”) when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the capitalization of past due amounts. Included in the non-accrual loan total at March 31, 2012 and December 31, 2011 were $16,230,000 and $14,491,000, respectively, of troubled debt restructurings. At March 31, 2012 and December 31, 2011, the Company has allocated $2,080,000 and $1,985,000, respectively, of specific reserves to loans which are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructuring which are accruing at March 31, 2012 and December 31, 2011, which totaled $12,747,000 and $13,118,000, respectively. Troubled debt restructurings with six months of performance are considered in the allowance for loan losses similar to other performing loans. Troubled debt restructurings which are non-accrual or classified are considered in the allowance for loan losses similar to other non-accrual or classified loans.

 

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Table of Contents

The following table presents information about troubled debt restructurings which occurred during the three months ended March 31, 2012 and troubled debt restructurings modified within the previous year and which defaulted during the three months ended March 31, 2012 (in thousands):

 

     Number
of
Loans
     Pre-modification
Recorded  Investment
     Post-modification
Recorded  Investment
 

Three months ended March 31, 2012

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     2       $ 772       $ 679   

Commercial real estate:

        

Commercial

     2       $ 1,284       $ 1,237   
     Number
of
Loans
     Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

     None         None      

Note 6. Reserve for Repurchased Loans

An analysis of the reserve for repurchased loans for the three months ended March 31, 2012 and 2011 is as follows (in thousands). The reserve is included in other liabilities in the accompanying statements of financial condition.

 

     Three months ended March 31,  
     2012      2011  

Balance at beginning of period

   $ 705       $ 809   

Provision charged to operations

     150         —     

Loss on loans repurchased or settlements

     —           —     
  

 

 

    

 

 

 

Balance at end of period

   $ 855       $ 809   
  

 

 

    

 

 

 

The reserve for repurchased loans was established to provide for expected losses related to outstanding loan repurchase requests and additional repurchase requests which may be received on loans previously sold to investors. In establishing the reserve for repurchased loans, the Company considered all types of sold loans. At March 31, 2012, there were nine outstanding loan repurchase requests, which the Company is disputing, on loans with a total principal balance of $2.3 million as compared to four outstanding loan repurchase requests on loans with a principal balance of $1.2 million at December 31, 2011. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans at each quarter-end. The reserve includes a specific loss estimate on the outstanding loan repurchase requests based on the estimated fair value of the underlying collateral modified by the likelihood of loss which was estimated based on historical experience. The reserve also includes a general loss estimate based on an estimate of loans likely to be returned for repurchase and the estimated loss on those loans. In establishing the reserve, the Company considers recent and historical experience, product type and volume of loan sales and the general economic environment.

Note 7. Deposits

The major types of deposits at March 31, 2012 and December 31, 2011 were as follows (in thousands):

 

Type of Account

   March 31, 2012      December 31, 2011  

Non-interest-bearing

   $ 157,602       $ 142,436   

Interest-bearing checking

     902,784         942,402   

Money market deposit

     131,772         123,105   

Savings

     235,330         229,241   

Time deposits

     252,956         268,899   
  

 

 

    

 

 

 

Total deposits

   $ 1,680,444       $ 1,706,083   
  

 

 

    

 

 

 

Note 8. Recent Accounting Pronouncements

Accounting Standards Update No. 2011-05, “Comprehensive Income” requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and did not have a material effect on the Company’s consolidated financial statements. The Company has included a separate Consolidated Statements of Comprehensive Income as part of these financial statements.

 

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Table of Contents

Accounting Standards Update No. 2011-04, “Fair Value Measurement, Amendments to achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRSs”). The amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of this Accounting Standard Update did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements”, amends Topic 860 (Transfers and Servicing) where an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements, based on whether or not the transferor has maintained effective control. In the assessment of effective control, Accounting Standard Update 2011-03 has removed the criteria that requires transferors to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. Other criteria applicable to the assessment of effective control have not been changed. This guidance is effective for prospective periods beginning on or after December 15, 2011. Early adoption is prohibited. The adoption of this Accounting Standard Update did not have a material effect on the Company’s consolidated financial statements.

Note 9. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair market measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or the most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the three months ended March 31, 2012. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.

Level 3 Inputs - Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

Assets and Liabilities Measured at Fair Value

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

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Table of Contents

Investments and Mortgage-Backed Securities

Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third party pricing vendors or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities, but comparing the securities to benchmark or comparable securities.

Fair value estimates are made at a point in time, based on relevant market data as well as the best information available about the security. Illiquid credit markets have resulted in inactive markets for certain of the Company’s securities. As a result, there is limited observable market data for these assets. Fair value estimates for securities for which limited observable market data is available are based on judgments regarding current economic conditions, liquidity discounts, credit and interest rate risks, and other factors. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the security.

The Company utilizes third party pricing services to obtain market values for its corporate bonds. Management’s policy is to obtain and review all available documentation from the third party pricing service relating to their market value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third party pricing service and makes a determination as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third party pricing service, management concluded that Level 2 inputs were utilized. The significant observable inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities and observations of equity and credit default swap curves related to the issuer.

Other Real Estate Owned and Impaired Loans

Other real estate owned and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs of 20%. Fair value is based on independent appraisals.

The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

       Fair Value Measurements at Reporting Date Using:  
     Total
Fair
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

March 31, 2012

           

Items measured on a recurring basis:

           

Investment securities available for sale:

           

U.S. Agency obligations

   $ 102,698       $ —         $ 102,698       $ —     

State and municipal obligations

     17,625         —           17,625         —     

Corporate debt securities

     40,971         —           40,971         —     

Equity investments

     5,062         5,062         —           —     

Mortgage-backed securities available for sale

     376,461         —           376,461         —     

Items measured on a non-recurring basis:

           

Other real estate owned

     1,441         —           —           1,441   

Loans measured for impairment based on the fair value of the underlying collateral

     8,076         —