10-Q 1 d354348d10q.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 June 30, 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 August 2, 2012, there were 18,154,504 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 June 30, 2012 (unaudited) and December 31, 2011

     11   
  

Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2012 and 2011

     12   
  

Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2012 and 2011

     13   
  

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2012 and 2011

     14   
  

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011

     15   
  

Notes to Unaudited Consolidated Financial Statements

     17   

Item 2.

  

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

     1   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     9   

Item 4.

  

Controls and Procedures

     10   
PART II.    OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     34   

Item 1A.

  

Risk Factors

     34   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3.

  

Defaults Upon Senior Securities

     34   

Item 4.

  

Mine Safety Disclosures

     34   

Item 5.

  

Other Information

     34   

Item 6.

  

Exhibits

     34   

Signatures

        36   


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)    June 30, 2012     December 31, 2011     June 30, 2011  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,287,532      $ 2,302,094      $ 2,239,011   

Loans receivable, net

     1,548,935        1,563,019        1,617,812   

Deposits

     1,708,376        1,706,083        1,639,230   

Stockholders’ equity

     218,836        216,849        213,367   

SELECTED OPERATING DATA:

      

Net interest income

     18,390        19,273        19,645   

Provision for loan losses

     1,700        2,000        2,200   

Other income

     4,545        4,214        3,897   

Operating expenses

     12,867        13,021        13,385   

Net income

     5,373        5,459        5,103   

Diluted earnings per share

     0.30        0.30        0.28   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     12.02        11.61        11.32   

Cash dividend per share

     0.12        0.12        0.12   

Stockholders’ equity to total assets

     9.57     9.42     9.53

Return on average assets (1)

     0.94        0.95        0.90   

Return on average stockholders’ equity (1)

     9.79        10.07        9.87   

Average interest rate spread

     3.28        3.43        3.56   

Net interest margin

     3.39        3.53        3.67   

Operating expenses to average assets (1)

     2.26        2.27        2.37   

Efficiency ratio

     56.10        55.44        56.86   

ASSET QUALITY:

      

Non-performing loans

   $ 44,232      $ 44,008      $ 46,714   

Non-performing assets

     47,667        45,978        49,521   

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

     2.82     2.77     2.85

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

     2.08        2.00        2.21   

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

     1.12        1.15        1.31   

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

     39.92        41.42        45.93   

 

(1)

Ratios are annualized

(2)

As discussed in the section “Comparison of Operating Results for the Three and Six Months Ended June 30, 2012 and June 30, 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 $7.7 million and $5.7 million at June 30, 2012 and December 31, 2011, respectively, the Company would have reported the following asset quality ratios as of June 30, 2012 and December 31, 2011, respectively: non-performing loans as a percent of total loans receivable of 3.31% and 3.12%; non-performing assets as a percent of total assets of 2.41% and 2.24%; allowance for loan losses as a percent of total loans receivable of 1.61% and 1.50%; and allowance for loan losses as a percent of total non-performing loans of 48.86% and 48.12%.

 

1


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 half 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 prepayments and the sale of newly originated 30-year fixed-rate one-to-four family loans while lower yielding securities have increased. Based upon current economic conditions, the Federal Reserve has indicated that it intends to keep interest rates at current levels through 2014. As a result, management expects the low interest rate environment to continue beyond 2012, causing 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 half of 2012, and in overall labor market conditions as the national unemployment rate in 2012 has improved over prior year levels. 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 and six months ended June 30, 2012 were as follows:

Total assets decreased to $2.288 billion at June 30, 2012, from $2.302 billion at December 31, 2011. Loans receivable, net decreased $14.1 million at June 30, 2012, as compared to December 31, 2011 primarily due to prepayments and sale of newly originated 30-year fixed-rate one-to-four family loans. Cash and due from banks decreased by $37.6 million, as the cash and due from banks was invested in investment and mortgage-backed securities, which collectively increased by $40.7 million, to $570.9 million at June 30, 2012 as compared to $530.2 million at December 31, 2011.

Deposits increased by $2.3 million at June 30, 2012, as compared to December 31, 2011. Federal Home Loan Bank (“FHLB”) advances decreased $19.0 million, to $247.0 million at June 30, 2012 from $266.0 million at December 31, 2011.

Diluted earnings per share increased 7.1%, to $0.30 for the quarter ended June 30, 2012, from $0.28 for the corresponding prior year quarter. The improvement was primarily due to a decrease in the provision for loan losses, an increase in other income and a decrease in operating expenses.

Net interest income for the three months ended June 30, 2012 decreased to $18.4 million, as compared to $19.6 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 3.39% for the three months ended June 30, 2012, as compared to 3.67% for the corresponding prior year period.

The provision for loan losses was $1.7 million for the three months ended June 30, 2012, as compared to $2.2 million in the same prior year period. The Company’s non-performing loans remained fairly stable, totaling $44.2 million at June 30, 2012, a $224,000 increase from $44.0 million at December 31, 2011.

The Company remains well-capitalized with a tangible common equity ratio of 9.57%.

Return on average stockholders’ equity was 9.79% for the three months ended June 30, 2012, as compared to 9.87% for the corresponding prior year period.

 

2


Table of Contents

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 and six months ended June 30, 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 JUNE 30,  
     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

   $ 57,068       $ 22         0.15   $ 14,923       $ 8         0.21

Investment securities (1)

     183,872         471         1.02        141,190         343         0.97   

FHLB stock

     17,654         200         4.53        18,014         195         4.33   

Mortgage-backed securities (1)

     360,650         2,235         2.48        336,464         2,667         3.17   

Loans receivable, net (2)

     1,553,103         19,121         4.92        1,628,701         21,024         5.16   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,172,347         22,049         4.06        2,139,292         24,237         4.53   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     106,066              116,716         
  

 

 

         

 

 

       

Total assets

   $ 2,278,413            $ 2,256,008         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,284,938         999         0.31      $ 1,256,710         1,504         0.48   

Time deposits

     249,085         1,036         1.66        266,868         1,189         1.78   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,534,023         2,035         0.53        1,523,578         2,693         0.71   

Borrowed funds

     335,206         1,624         1.94        374,363         1,899         2.03   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,869,229         3,659         0.78        1,897,941         4,592         0.97   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     173,276              139,709         

Non-interest-bearing liabilities

     16,313              11,562         
  

 

 

         

 

 

       

Total liabilities

     2,058,818              2,049,212         

Stockholders’ equity

     219,595              206,796         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,278,413            $ 2,256,008         
  

 

 

         

 

 

       

Net interest income

      $ 18,390            $ 19,645      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.28           3.56
        

 

 

         

 

 

 

Net interest margin (4)

           3.39           3.67
        

 

 

         

 

 

 

 

     FOR THE SIX MONTHS ENDED JUNE 30,  
     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

   $ 53,454       $ 43         0.16   $ 18,440       $ 23         0.25

Investment securities (1)

     181,554         960         1.06        133,682         642         0.96   

FHLB stock

     17,777         429         4.83        17,775         445         5.01   

Mortgage-backed securities (1)

     360,090         4,553         2.53        336,035         5,230         3.11   

Loans receivable, net (2)

     1,559,529         38,927         4.99        1,638,173         42,188         5.15   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,172,404         44,912         4.13        2,144,105         48,528         4.53   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     104,844              114,853         
  

 

 

         

 

 

       

Total assets

   $ 2,277,248            $ 2,258,958         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,284,433         1,916         0.30      $ 1,256,007         3,169         0.50   

Time deposits

     252,542         2,137         1.69        273,182         2,433         1.78   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,536,975         4,053         0.53        1,529,189         5,602         0.73   

Borrowed funds

     343,259         3,364         1.96        374,079         3,944         2.11   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,880,234         7,417         0.79        1,903,268         9,546         1.00   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     162,209              134,968         

Non-interest-bearing liabilities

     16,218              16,433         
  

 

 

         

 

 

       

Total liabilities

     2,058,661              2,054,669         

Stockholders’ equity

     218,587              204,289         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,277,248            $ 2,258,958         
  

 

 

         

 

 

       

Net interest income

      $ 37,495            $ 38,982      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.34           3.53
        

 

 

         

 

 

 

Net interest margin (4)

           3.45           3.64
        

 

 

         

 

 

 

 

(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.

 

3


Table of Contents

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total assets at June 30, 2012 were $2.288 billion, a decrease of $14.6 million, or 0.6%, compared to $2.302 billion at December 31, 2011.

Cash and due from banks decreased by $37.6 million, to $39.9 million at June 30, 2012, as compared to $77.5 million at December 31, 2011. The cash and due from banks was invested in investment and mortgage-backed securities, which collectively increased by $40.7 million, to $570.9 million at June 30, 2012, as compared to $530.2 million at December 31, 2011.

Loans receivable, net decreased by $14.1 million, to a balance of $1.549 billion at June 30, 2012, as compared to a balance of $1.563 billion at December 31, 2011, primarily due to prepayments and sale of newly originated 30-year fixed-rate one-to-four family loans.

Total deposits increased $2.3 million to $1.708 billion at June 30, 2012, from $1.706 billion at December 31, 2011. The mix of deposits changed as non-interest bearing deposits and savings deposits increased by $42.5 million and $13.5 million, respectively, while interest-bearing checking and time deposits decreased $31.1 million and $27.5 million. FHLB advances decreased by $19.0 million to $247.0 million at June 30, 2012, as compared to $266.0 million at December 31, 2011 due to excess liquidity.

Stockholders’ equity at June 30, 2012 increased to $218.8 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 513,737 shares of common stock for $7.3 million.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2012 and June 30, 2011

General

Net income for the three months ended June 30, 2012 increased to $5.4 million, as compared to net income of $5.1 million for the corresponding prior year period. Diluted earnings per share increased 7.1%, to $0.30 for the three months ended June 30, 2012, as compared to $0.28 for the corresponding prior year period. Net income for the six months ended June 30, 2012 increased to $11.0 million, as compared to $10.2 million for the corresponding prior year period. Diluted earnings per share increased 8.9%, to $0.61 for the six months ended June 30, 2012, as compared to $0.56 for the corresponding prior year period.

Interest Income

Interest income for the three and six months ended June 30, 2012 was $22.0 million and $44.9 million, respectively, as compared to $24.2 million and $48.5 million for the three and six months ended June 30, 2011. The yield on interest-earning assets declined to 4.06% and 4.13%, respectively, for the three and six months ended June 30, 2012, as compared to 4.53% for the same prior year periods. For the six months ended June 30, 2012, the yield on loans receivable benefited from a single large commercial loan prepayment fee of $219,000 which increased the yield on interest-earning assets by 2 basis points for the six months ended June 30, 2012. Average interest-earning assets increased by $33.1 million, or 1.5%, and $28.3 million, or 1.3%, respectively, for the three and six months ended June 30, 2012, as compared to the same prior year periods. The increases in average interest-earning assets were primarily due to the increases in average investment and mortgage-backed securities, which collectively increased $66.9 million and $71.9 million, respectively, and the increases in average short-term investments which increased $42.1 million and $35.0 million. These increases were partly offset by a decrease in average loans receivable, net, of $75.6 million and $78.6 million, respectively.

Interest Expense

Interest expense for the three and six months ended June 30, 2012 was $3.7 million and $7.4 million, respectively, as compared to $4.6 million and $9.5 million for the three and six months ended June 30, 2011. The cost of interest-bearing liabilities decreased to 0.78% and 0.79%, respectively, for the three and six months ended June 30, 2012 as compared to 0.97% and 1.00% in the same prior year periods. Average interest-bearing liabilities decreased by $28.7 million and $23.0 million, respectively, for the three and six months ended June 30, 2012, as compared to the same prior year periods. The decreases were due to declines in average borrowed funds of $39.2 million and $30.8 million, respectively, and average time deposits of $17.8 million and $20.6 million as compared to the same prior year periods, partly offset by increases in average transaction deposits of $28.2 million and $28.4 million.

 

4


Table of Contents

Net Interest Income

Net interest income for the three and six months ended June 30, 2012 decreased to $18.4 million and $37.5 million, respectively, as compared to $19.6 million and $39.0 million in the same prior year periods, reflecting a lower net interest margin partly offset by greater interest-earning assets. The net interest margin decreased to 3.39% and 3.45%, respectively, for the three and six months ended June 30, 2012, from 3.67% and 3.64% in the same prior year periods due to a change in the mix of average interest-earning assets from higher-yielding loans receivable into lower-yielding short-term investments, investment securities and mortgage-backed securities. High loan refinance volume also caused yields on loans to trend downward.

Provision for Loan Losses

For the three and six months ended June 30, 2012, the provision for loan losses was $1.7 million and $3.4 million, respectively, as compared to $2.2 million and $3.9 million in the corresponding prior year periods. The higher amounts for the three and six months ended June 30, 2011 were related to a significant increase in non-performing loans for those time periods. Non-performing loans remained fairly stable, increasing $224,000, or 0.5%, at June 30, 2012, to $44.2 million from $44.0 million at December 31, 2011. Net charge-offs for the three and six months ended June 30, 2012 were $2.3 million and $4.0 million, respectively, as compared to $1.2 million and $2.1 million in the same prior year periods. 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 $4.5 million and $8.9 million, respectively, for the three and six months ended June 30, 2012, as compared to $3.9 million and $7.4 million in the same prior year periods primarily due to an increase in the net gain on the sale of investment securities and loans, higher fees and service charges, and, for the six months ended June 30, 2012, a reduction in the net loss from other real estate operations. For the three and six months ended June 30, 2012, the Company recognized a gain of $226,000 on the sale of equity securities. For the three and six months ended June 30, 2012, the net gain on the sale of loans increased $338,000 and $550,000, respectively, due to increases in loan sale volume and strong gain on sale margins. However, the net gain on the sale of loans for the three and six months ended June 30, 2012 was adversely affected by an increase of $100,000 and $250,000, respectively, in the reserve for repurchased loans primarily due to an increase in repurchase requests on loans previously sold to investors. For the three and six months ended June 30, 2012, fees and service charges increased $44,000 and $266,000, respectively, due to increases in trust revenue, merchant service fees and retail checking account fees. Finally, the net loss from real estate operations decreased $304,000 for the six months ended June 30, 2012, as compared to the same prior year period. The prior year amount included write-downs in the value of properties previously acquired.

Operating Expenses

Operating expenses decreased by 3.9%, to $12.9 million, and by 2.7%, to $25.8 million, respectively, for the three and six months ended June 30, 2012, as compared to $13.4 million and $26.5 million for the corresponding prior year periods. Compensation and employee benefits costs decreased by $320,000, or 4.5%, to $6.8 million for the three months ended June 30, 2012 and by $525,000, or 3.7%, to $13.6 million, for the six months ended June 30, 2012, as compared to the corresponding prior year periods. The decreases were primarily due to the increase in mortgage loan closings from prior year levels. Higher loan closings in the current year increased deferred loan expense which is reflected as a decrease in compensation expense. Additionally, Federal deposit insurance expense for the three and six months ended June 30, 2012 decreased by $201,000 and $410,000, respectively, from the corresponding prior year periods due to a lower assessment rate and a change in the assessment methodology from deposit-based to a total liability-based assessment.

Provision for Income Taxes

Income tax expense was $3.0 million and $6.1 million, respectively, for the three and six months ended June 30, 2012, as compared to $2.9 million and $5.7 million for the same prior year periods. The effective tax rate was 35.8% and 35.7%, respectively, for the three and six months ended June 30, 2012, as compared to 35.9% in both prior year periods.

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.

 

5


Table of Contents

At June 30, 2012, the Company had $22.0 million in overnight borrowings from the FHLB as compared to no overnight borrowings at December 31, 2011. The Company periodically utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including overnight borrowings, of $247.0 million at June 30, 2012, a decrease from $266.0 million at December 31, 2011.

The Company’s cash needs for the six months ended June 30, 2012 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and proceeds from maturities of investment securities available for sale. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and to reduce FHLB borrowings. The Company’s cash needs for the six months ended June 30, 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 June 30, 2012, outstanding commitments to originate loans totaled $79.7 million; outstanding unused lines of credit totaled $230.7 million; and outstanding commitments to sell loans totaled $17.7 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 $151.1 million at June 30, 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 multiple liquidity stress test 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 six months ended June 30, 2012, the Company repurchased 513,737 shares of common stock at a total cost of $7.3 million compared with no repurchases for the six months ended June 30, 2011. At June 30, 2012, there were 263,415 shares remaining to be repurchased under the existing stock repurchase program.

Cash dividends on common stock declared and paid during the first six months of 2012 were $4.3 million, as compared to $4.4 million in the same prior year period. On July 18, 2012, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on August 10, 2012 to stockholders of record at the close of business on July 30, 2012.

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 six months of 2012, the Company received a dividend payment of $11.0 million from the Bank. At June 30, 2012, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment of $5.6 million in dividends from the Bank to the Company over the next quarter 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 June 30, 2012, OceanFirst Financial Corp. held $16.5 million in cash and $4.8 million in investment securities available for sale.

As of June 30, 2012, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible capital

   $ 216,164         9.45   $ 34,285         1.50

Core capital

     216,164         9.45        91,427         4.00   

Tier 1 risk-based capital

     216,164         14.57        59,301         4.00   

Total risk-based capital

     233,821         15.76        118,601         8.00   

 

6


Table of Contents

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

At June 30, 2012, the Company maintained tangible common equity of $218.8 million, for a tangible common equity to assets ratio of 9.57%.

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 $17.7 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2012 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 341,899       $ 135,399       $ 144,000       $ 40,000       $ 22,500   

Commitments to Originate Loans

     79,677         79,677         —           —           —     

Commitments to Fund Unused Lines of Credit

     230,677         230,677         —           —           —     

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.

 

     June 30,
2012
    December 31,
2011
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate – one-to-four family

   $ 27,755      $ 29,193   

Commercial real estate

     11,932        10,552   

Construction

     —          43   

Consumer

     3,785        3,653   

Commercial

     760        567   
  

 

 

   

 

 

 

Total non-performing loans

     44,232        44,008   

OREO, net

     3,435        1,970   
  

 

 

   

 

 

 

Total non-performing assets

   $ 47,667      $ 45,978   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 14,225      $ 14,972   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     1.12     1.15

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

     39.92        41.42   

Non-performing loans as a percent of total loans receivable

     2.82        2.77   

Non-performing assets as a percent of total assets

     2.08        2.00   

Included in the non-performing loan total at June 30, 2012 was $16.3 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 62.7% of the total. At June 30, 2012, the average weighted loan-to-value ratio of non-performing one-to-four family loans, after any related charge-offs, was 61% using appraisal values at time of origination and 82% using updated appraisal values. Appraisals are updated for all non-performing loans secured by real estate and

 

7


Table of Contents

subsequently updated annually if the loan remains delinquent for an extended period. At June 30, 2012, the average weighted loan-to-value ratio of the total one-to-four family loan portfolio was 59% using appraisal values at time of origination. Based upon sales data for the first half of 2012 from the Ocean and Monmouth Counties Multiple Listing Service, home values in the Company’s primary market area have declined by approximately 20% 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 $6.4 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 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 June 30, 2012, 71% were originated by alternative Bank delivery channels which were previously shuttered. Subsequent to June 30, 2012, the Company sold its largest non-performing one-to-four family mortgage loan at a modest recovery above its carrying value of $2.6 million.

The Company classifies loans and other assets in accordance with regulatory guidelines. At June 30, 2012, the Company had $10.3 million in loans designated as Special Mention, $74.0 million in loans classified as Substandard and $1.2 million in loans and 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 at June 30, 2012 is a commercial real estate mortgage to a local builder for $1.8 million. The loan is well collateralized by residential property and several vacant lots. The largest Substandard loan relationship is comprised of several credit facilities to a building supply company with an aggregate balance of $9.5 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. The largest Doubtful asset with a balance of $1.2 million is a portion of a commercial real estate loan to a self-storage facility. The remaining balance, also $1.2 million, is rated Substandard. In September 2011, the Company entered into a troubled debt restructuring with the borrower which reduced the interest rate and extended the payment term. All scheduled payments under the restructured terms have been made since that date. In addition to loan classifications, the Company classified investment securities with an amortized cost of $25.0 million and a carrying value of $19.5 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 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

 

8


Table of Contents

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 June 30, 2012, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At June 30, 2012, the Company’s one-year gap was negative 2.52% as compared to negative 0.03% at December 31, 2011.

 

At June 30, 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

   $ 11,477      $ —        $ —        $ —        $ —        $ 11,477   

Investment securities

     64,794        18,993        90,350        28,823        4,519        207,479   

FHLB stock

     —          —          —          —          18,036        18,036   

Mortgage-backed securities

     66,058        38,415        91,298        77,287        91,454        364,512   

Loans receivable (2)

     323,069        435,132        458,430        173,087        178,421        1,568,139   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     465,398        492,540        640,078        279,197        292,430        2,169,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     35,501        9,051        19,902        15,009        48,481        127,944   

Savings accounts

     33,986        22,311        45,329        34,310        106,825        242,761   

Interest-bearing checking accounts

     540,611        62,276        111,072        92,172        105,216        911,347   

Time deposits

     59,360        91,695        38,782        43,580        7,979        241,396   

FHLB advances

     22,000        46,000        144,000        35,000        —          247,000   

Securities sold under agreements to repurchase

     67,399        —          —          —          —          67,399   

Other borrowings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     781,357        231,333        359,085        225,071        268,501        1,865,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (315,959   $ 261,207      $ 280,993      $ 54,126      $ 23,929      $ 304,296   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (315,959   $ (54,752   $ 226,241      $ 280,367      $ 304,296      $ 304,296   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (14.56 )%      (2.52 )%      10.43     12.92     14.03     14.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.

(2)

For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.

(3)

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

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 June 30, 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.

 

    June 30, 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

  $ 235,719        (5.0 )%      10.8      $ 62,407        (10.5 )%    $ 238,057        (4.8 )%      10.9   $ 65,048        (11.1 )% 

200

    248,729        0.2        11.1        65,621        (5.9     252,307        0.9        11.2        68,659        (6.2

100

    254,986        2.7        11.2        68,044        (2.4     261,068        4.4        11.4        71,441        (2.4

Static

    248,191        —          10.7        69,699        —          250,109        —          10.7        73,189        —     

(100)

    211,253        (14.9     9.0        65,269        (6.4     204,786        (18.1     8.7        67,900        (7.2

 

9


Table of Contents

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

10


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     June 30,     December 31,  
     2012     2011  
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 39,912      $ 77,527   

Investment securities available for sale

     195,889        165,279   

Federal Home Loan Bank of New York stock, at cost

     18,036        18,160   

Mortgage-backed securities available for sale

     375,000        364,931   

Loans receivable, net

     1,548,935        1,563,019   

Mortgage loans held for sale

     5,734        9,297   

Interest and dividends receivable

     6,459        6,432   

Other real estate owned, net

     3,435        1,970   

Premises and equipment, net

     22,394        22,259   

Servicing asset

     4,708        4,836   

Bank Owned Life Insurance

     42,430        41,987   

Other assets

     24,600        26,397   
  

 

 

   

 

 

 

Total assets

   $ 2,287,532      $ 2,302,094   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 1,708,376      $ 1,706,083   

Securities sold under agreements to repurchase with retail customers

     67,399        66,101   

Federal Home Loan Bank advances

     247,000        266,000   

Other borrowings

     27,500        27,500   

Due to brokers

     —          5,186   

Advances by borrowers for taxes and insurance

     8,570        7,113   

Other liabilities

     9,851        7,262   
  

 

 

   

 

 

 

Total liabilities

     2,068,696        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 18,205,904 and 18,682,568 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     336        336   

Additional paid-in capital

     262,987        262,812   

Retained earnings

     193,377        186,666   

Accumulated other comprehensive loss

     (652     (2,468

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (4,049     (4,193

Treasury stock, 15,360,868 and 14,884,204 shares at June 30, 2012 and December 31, 2011, respectively

     (233,163     (226,304

Common stock acquired by Deferred Compensation Plan

     (684     (871

Deferred Compensation Plan Liability

     684        871   
  

 

 

   

 

 

 

Total stockholders’ equity

     218,836        216,849   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,287,532      $ 2,302,094   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

11


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)  

Interest income:

        

Loans

   $ 19,121      $ 21,024      $ 38,927      $ 42,188   

Mortgage-backed securities

     2,235        2,667        4,553        5,230   

Investment securities and other

     693        546        1,432        1,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     22,049        24,237        44,912        48,528   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     2,035        2,693        4,053        5,602   

Borrowed funds

     1,624        1,899        3,364        3,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,659        4,592        7,417        9,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     18,390        19,645        37,495        38,982   

Provision for loan losses

     1,700        2,200        3,400        3,900   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     16,690        17,445        34,095        35,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

        

Loan servicing income

     141        100        279        196   

Fees and service charges

     2,982        2,938        5,926        5,660   

Net gain on sales of investment securities available for sale

     226        —          226        —     

Net gain on sales of loans available for sale

     947        609        1,918        1,368   

Net loss from other real estate owned

     (47     (36     (98     (402

Income from Bank Owned Life Insurance

     295        284        601        531   

Other

     1        2        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     4,545        3,897        8,855        7,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Compensation and employee benefits

     6,794        7,114        13,631        14,156   

Occupancy

     1,314        1,305        2,618        2,499   

Equipment

     635        644        1,230        1,291   

Marketing

     435        420        780        756   

Federal deposit insurance

     522        723        1,054        1,464   

Data processing

     881        904        1,824        1,786   

Legal

     192        171        426        427   

Check card processing

     337        284        636        604   

Accounting and audit

     188        173        320        313   

Other operating expense

     1,569        1,647        3,288        3,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,867        13,385        25,807        26,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     8,368        7,957        17,143        15,926   

Provision for income taxes

     2,995        2,854        6,123        5,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,373      $ 5,103      $ 11,020      $ 10,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.30      $ 0.28      $ 0.61      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.30      $ 0.28      $ 0.61      $ 0.56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     17,889        18,181        17,977        18,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     17,930        18,231        18,018        18,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

12


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended June 30,
     For the six months
ended June 30,
 
     2012     2011      2012     2011  
     (Unaudited)      (Unaudited)  

Net income

   $ 5,373      $ 5,103       $ 11,020      $ 10,209   

Other comprehensive income:

         

Unrealized gain on securities (net of tax expense $343 and $1,346 in 2012 and $2,806 and $3,809 in 2011)

     586        4,080         1,950        5,516   

Reclassification adjustment for gains included in net income (net of tax expense $92)

     (134     —           (134     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 5,825      $ 9,183       $ 12,836      $ 15,725   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

13


Table of Contents

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

    —          —          —          10,209        —          —          —          —          —          10,209   

Unrealized gain on securities (net of tax expense $3,809)

    —          —          —          —          5,516        —          —          —          —          5,516   

Tax expense of stock plans

    —          —          (7     —          —          —          —          —          —          (7

Stock awards

    —          —          522        —          —          —          —          —          —          522   

Treasury stock allocated to restricted stock plan

    —          —          (280     37        —          —          243        —          —          —     

Allocation of ESOP stock

    —          —          86        —          —          145        —          —          —          231   

Cash dividend $0.24 per share

    —          —          —          (4,393     —          —          —          —          —          (4,393

Exercise of stock options

    —          —          —          —          —          —          38        —          —          38   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          32        (32     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ —        $ 336      $ 261,060      $ 180,530      $ (44   $ (4,339   $ (224,176   $ (914   $ 914      $ 213,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

Net income

    —          —          —          11,020        —          —          —          —          —          11,020   

Unrealized gain on securities (net of tax expense $1,254)

    —          —          —          —          1,816        —          —          —          —          1,816   

Tax expense of stock plans

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

Stock awards

    —          —          362        —          —          —          —          —          —          362   

Treasury stock allocated to restricted stock plan

    —          —          (282     42        —          —          240        —          —          —     

Purchased 513,737 shares of common stock

    —          —          —          —          —          —          (7,314     —          —          (7,314

Allocation of ESOP stock

    —          —          97        —          —          144        —          —          —          241   

Cash dividend $0.24 per share

    —          —            (4,342     —          —          —          —          —          (4,342

Exercise of stock options

    —          —          —          (9     —          —          215        —          —          206   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          187        (187     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

  $ —        $ 336      $ 262,987      $ 193,377      $ (652   $ (4,049   $ (233,163   $ (684   $ 684      $ 218,836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

14


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2012     2011  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 11,020      $ 10,209   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     1,286        1,216   

Allocation of ESOP stock

     241        231   

Stock awards

     362        522   

Amortization of servicing asset

     814        956   

Net premium amortization in excess of discount accretion on securities

     1,580        1,050   

Net amortization of deferred costs and discounts on loans

     447        422   

Provision for loan losses

     3,400        3,900   

Provision for repurchased loans

     250        —     

Net (gain) loss on sale of other real estate owned

     (25     140   

Net gain on sales of investment securities available for sale

     (226     —     

Net gain on sales of loans

     (2,168     (1,368

Proceeds from sales of mortgage loans held for sale

     87,492        67,410   

Mortgage loans originated for sale

     (82,447     (64,177

Increase in value of Bank Owned Life Insurance

     (601     (531

Proceeds from Bank Owned Life Insurance

     158        —     

Increase in interest and dividends receivable

     (27     (223

Decrease (increase) in other assets

     545        (478

Increase (decrease) in other liabilities

     2,339        (14,517
  

 

 

   

 

 

 

Total adjustments

     13,420        (5,447
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,440        4,762   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans receivable

     8,107        36,592   

Purchase of investment securities available for sale

     (41,617     (35,164

Purchase of mortgage-backed securities available for sale

     (74,371     (29,808

Principal repayments on mortgage-backed securities available for sale

     58,095        36,494   

Proceeds from maturities of investment securities available for sale

     12,521        —     

Proceeds from sale of investment securities available for sale

     1,221        —     

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

     124        (1,351

Proceeds from sales of other real estate owned

     690        1,409   

Purchases of premises and equipment

     (1,421     (1,175
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (36,651     6,997   
  

 

 

   

 

 

 

 

Continued

 

15


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2012     2011  
     (Unaudited)  

Cash flows from financing activities:

    

Increase(decrease) in deposits

   $ 2,293      $ (24,738

Increase in short-term borrowings

     23,298        4,835   

Proceeds from Federal Home Loan Bank advances

     —          55,000   

Repayments of Federal Home Loan Bank advances

     (41,000     (46,000

Increase in advances by borrowers for taxes and insurance

     1,457        985   

Exercise of stock options

     206        38   

Purchase of treasury stock

     (7,314     —     

Dividends paid – common stock

     (4,342     (4,393

Tax expense of stock plans

     (2     (7
  

 

 

   

 

 

 

Net cash used in financing activities

     (25,404     (14,280
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (37,615     (2,521

Cash and due from banks at beginning of period

     77,527        31,455   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 39,912      $ 28,934   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 7,537      $ 9,756   

Income taxes

     5,818        12,662   

Non-cash activities:

    

Transfer of loans receivable to other real estate owned

     2,130        2,062   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

16


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 and six months ended June 30, 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 and six months ended June 30, 2012 and 2011 (in thousands):

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Weighted average shares issued net of Treasury shares

     18,468        18,845        18,560        18,837   

Less: Unallocated ESOP shares

     (484     (519     (489     (523

Unallocated incentive award shares and shares held by deferred compensation plan

     (95     (145     (94     (142
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     17,889        18,181        17,977        18,172   

Add: Effect of dilutive securities:

        

Shares held by deferred compensation plan

     41        50        41        49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     17,930        18,231        18,018        18,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2012 and 2011, antidilutive stock options of 1,975,000 and 1,904,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2012 and 2011 antidilutive stock options of 2,009,000 and 1,840,000, respectively, were excluded from earning per share calculation.

Note 3. Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at June 30, 2012 and December 31, 2011 are as follows (in thousands):

 

June 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 128,327       $ 795       $ (38   $ 129,084   

State and municipal obligations

     19,633         9         (48     19,594   

Corporate debt securities

     55,000         —           (12,566     42,434   

Equity investments

     4,519         365         (107     4,777   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 207,479       $ 1,169       $ (12,759   $ 195,889   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


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   
  

 

 

    

 

 

    

 

 

   

 

 

 

Realized gains on the sale of investment securities available for sale were $226,000 for the three and six months ended June 30, 2012. There were no realized gains or losses on the sale of investment securities available for sale for the three and six months ended June 30, 2011.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at June 30, 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 June 30, 2012, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $42.4 million, respectively, were callable prior to the maturity date.

 

            Estimated  
     Amortized      Market  

June 30, 2012

   Cost      Value  

Less than one year

   $ 28,787       $ 28,843   

Due after one year through five years

     119,173         119,835   

Due after five years through ten years

     —           —     

Due after ten years

     55,000         42,434   
  

 

 

    

 

 

 
   $ 202,960       $ 191,112   
  

 

 

    

 

 

 

The estimated market value and unrealized loss for investment securities available for sale at June 30, 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  

June 30, 2012

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

U.S. Agency obligations

   $ 21,589       $ (38   $ —         $ —        $ 21,589       $ (38

State and municipal obligations

     10,618         (48     —           —          10,618         (48

Corporate debt securities

     —           —          42,434         (12,566     42,434         (12,566

Equity investments

     643         (107     —           —          643         (107
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 32,850       $ (193   $ 42,434       $ (12,566   $ 75,284       $ (12,759
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

18


Table of Contents

At June 30, 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       $ 12,070      

Ba2/BB+

Chase Capital

     10,000         7,215      

Baa2/BBB

Wells Fargo Capital

     5,000         3,988      

A3/A-

Huntington Capital

     5,000         3,810      

Baa3/BB+

Keycorp Capital

     5,000         3,811      

Baa3/BBB-

PNC Capital

     5,000         4,002      

Baa2/BBB

State Street Capital

     5,000         3,908      

A3/BBB+

SunTrust Capital

     5,000         3,630      

Baa3/BB+

  

 

 

    

 

 

    
   $ 55,000       $ 42,434      
  

 

 

    

 

 

    

At June 30, 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 A3 to a low of Ba2 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 June 30, 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 June 30, 2012.

Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at June 30, 2012 and December 31, 2011 are as follows (in thousands):

 

June 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 119,452       $ 1,030       $ (330   $ 120,152   

FNMA

     244,169         9,710         (55     253,824   

GNMA

     891         133         —          1,024   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 364,512       $ 10,873       $ (385   $ 375,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

19


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 and six months ended June 30, 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 June 30, 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  

June 30, 2012

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

FHLMC

   $ 75,090       $ (330   $ —         $ —         $ 75,090       $ (330

FNMA

     14,776         (55     —           —           14,776         (55
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 89,866       $ (385   $ —         $ —         $ 89,866       $ (385
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 in loss positions 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 June 30, 2012.

 

20


Table of Contents

Note 5. Loans Receivable, Net

Loans receivable, net at June 30, 2012 and December 31, 2011 consisted of the following (in thousands):

 

     June 30, 2012     December 31, 2011  

Real estate:

    

One-to-four family

   $ 841,631      $ 873,253   

Commercial real estate, multi family and land

     463,760        460,725   

Residential construction

     7,866        6,657   

Consumer

     199,510        192,918   

Commercial

     52,406        45,889   
  

 

 

   

 

 

 

Total loans

     1,565,173        1,579,442   

Loans in process

     (2,768     (2,559

Deferred origination costs, net

     4,187        4,366   

Allowance for loan losses

     (17,657     (18,230
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,548,935      $ 1,563,019   
  

 

 

   

 

 

 

At June 30, 2012 and December 31, 2011, loans in the amount of $44,232,000 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 June 30, 2012, the impaired loan portfolio totaled $30,009,000 for which there was a specific allocation in the allowance for loan losses of $2,195,000. 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 was $29,369,000 and $28,843,000 for the three and six months ended June 30, 2012, respectively, and was $24,301,000 and $20,771,000 for the three and six months ended June 30, 2011.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Balance at beginning of period

   $ 18,241      $ 20,430      $ 18,230      $ 19,700   

Provision charged to operations

     1,700        2,200        3,400        3,900   

Charge-offs

     (2,542     (1,186     (4,342     (2,162

Recoveries

     258        10        369        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 17,657      $ 21,454      $ 17,657      $ 21,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 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 June 30, 2012 and December 31, 2011 (in thousands):

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial     Unallocated     Total  

For the three months ended June 30, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision charged to operations

     1,961        (76     798        (118     (865     1,700   

Charge-offs

     (1,529     —          (1,013     —          —          (2,542

Recoveries

     172        81        2        3        —          258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,768      $ 8,614      $ 1,648      $ 1,110      $ 1,517      $ 17,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2011

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     787        726        916        (157     (72     2,200   

Charge-offs

     (179     (979     (28     —          —          (1,186

Recoveries

     7        —          —          3        —          10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 6,469      $ 7,229      $ 4,277      $ 945      $ 2,534      $ 21,454   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 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

     2,101        32        1,570        205        (508     3,400   

Charge-offs

     (2,904     (47     (1,391     —          —          (4,342

Recoveries

     201        155        8        5        —          369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,768      $ 8,614      $ 1,648      $ 1,110      $ 1,517      $ 17,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 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

     936        1,909        1,062        119        (126     3,900   

Charge-offs

     (455     (1,517     (50     (140     —          (2,162

Recoveries

     11        —          1        4        —          16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 6,469      $ 7,229      $ 4,277      $ 945      $ 2,534      $ 21,454   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents
     Residential
Real Estate
     Commercial
Real Estate
     Consumer      Commercial      Unallocated      Total  

June 30, 2012

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

   $ 69       $ 2,018       $ 108       $ —         $ —         $ 2,195   

Collectively evaluated for impairment

     4,699         6,596         1,540         1,110         1,517         15,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,768       $ 8,614       $ 1,648       $ 1,110       $ 1,517       $ 17,657   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 17,300       $ 11,531       $ 883       $ 295       $ —         $ 30,009   

Loans collectively evaluated for impairment

     832,197         452,229         198,627         52,111         —           1,535,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 849,497       $ 463,760       $ 199,510       $ 52,406       $ —         $ 1,565,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

A summary of impaired loans at June 30, 2012 and December 31, 2011 is as follows (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Impaired loans with no allocated allowance for loan losses

   $ 18,612       $ 19,186   

Impaired loans with allocated allowance for loan losses

     11,397         9,305   
  

 

 

    

 

 

 
   $ 30,009       $ 28,491   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 2,195       $ 2,165   
  

 

 

    

 

 

 

The summary of loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of June 30, 2012

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 8,674       $ 8,423       $ —     

Originated by mortgage company

     5,175         5,003         —     

Originated by mortgage company – non-prime

     2,769         2,420         —     

Commercial real estate:

        

Commercial

     1,734         1,719         —     

Construction and land

     —           —           —     

Consumer

     782         752         —     

Commercial

     297         295         —     
  

 

 

    

 

 

    

 

 

 
   $ 19,431       $ 18,612       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 1,132       $ 1,054       $ 68   

Originated by mortgage company

     —           —           —     

Originated by mortgage company – non-prime

     520         400         1   

Commercial real estate:

        

Commercial

     10,054         9,812         2,018   

Construction and land

     —           —           —     

Consumer

     131         131         108   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 11,837       $ 11,397       $ 2,195   
  

 

 

    

 

 

    

 

 

 

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       $ —     
  

 

 

    

 

 

    

 

 

 

 

24


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 June 30,  
     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

   $ 8,653       $ 96       $ 8,821       $ 85   

Originated by mortgage company

     5,079         55         5,066         53   

Originated by mortgage company – non-prime

     2,256         1         137         —     

Commercial real estate:

           

Commercial

     1,730         24         2,368         —     

Construction and land

     —           —           —           —     

Consumer

     714         9         565         7   

Commercial

     295         3         101         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 18,727       $ 188       $ 17,058       $ 145   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 1,055       $ 6       $ 557       $ —     

Originated by mortgage company

     —           —           —           —     

Originated by mortgage company – non-prime

     401         —           2,494         —     

Commercial real estate:

           

Commercial

     9,055         99         3,336         49   

Construction and land

     —           —           856         —     

Consumer

     131         1         —           —     

Commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,642       $ 106       $ 7,243       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents
     Six months ended June 30,  
     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

   $ 8,606       $ 198       $ 8,149       $ 184   

Originated by mortgage company

     5,083         109         4,161         119   

Originated by mortgage company – non-prime

     2,175         2         137         —     

Commercial real estate: