10-Q 1 d406821d10q.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 September 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 November 5, 2012, there were 18,005,046 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 September 30, 2012 (unaudited) and December 31, 2011

     11   
  

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

     12   
  

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

     13   
  

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

     14   
  

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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)    September 30, 2012     December 31, 2011     September 30, 2011  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,304,426      $ 2,302,094      $ 2,281,792   

Loans receivable, net

     1,545,640        1,563,019        1,588,115   

Deposits

     1,739,974        1,706,083        1,687,906   

Stockholders’ equity

     219,687        216,849        215,897   

SELECTED OPERATING DATA:

      

Net interest income

     18,000        19,273        19,072   

Provision for loan losses

     1,400        2,000        1,850   

Other income

     4,878        4,214        3,731   

Operating expenses

     13,839        13,021        13,131   

Net income

     4,959        5,459        5,074   

Diluted earnings per share

     0.28        0.30        0.28   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     12.19        11.61        11.46   

Cash dividend per share

     0.12        0.12        0.12   

Stockholders’ equity to total assets

     9.53     9.42     9.46

Return on average assets (1)

     0.86        0.95        0.89   

Return on average stockholders’ equity (1)

     9.08        10.07        9.48   

Average interest rate spread

     3.18        3.43        3.45   

Net interest margin

     3.28        3.53        3.55   

Operating expenses to average assets (1)

     2.39        2.27        2.31   

Efficiency ratio

     60.49        55.44        57.58   

ASSET QUALITY:

      

Non-performing loans

   $ 41,173      $ 44,008      $ 48,398   

Non-performing assets

     44,801        45,978        49,591   

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

     1.17     1.15     1.42

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

     44.42        41.42        47.33   

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

     2.63        2.77        3.00   

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

     1.94        2.00        2.17   

 

(1)

Ratios are annualized

(2)

As discussed in the section “Comparison of Operating Results for the Three and Nine Months Ended September 30, 2012 and September 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. If the modified charge-off policy was in effect at September 30, 2011, the Company would have recognized a cumulative charge-off of $5.6 million and reported the following asset quality ratios: allowance for loan losses as a percent of total loans receivable of 1.06%; allowance for loan losses as a percent of total non-performing loans of 38.58%; non-performing loans as a percent of total loans receivable of 2.74%; and non-performing assets as a percent of total assets of 1.93%.

 

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 three quarters 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 mid 2015. 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 three quarters 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 nine months ended September 30, 2012 were as follows:

Total assets increased to $2.304 billion at September 30, 2012, from $2.302 billion at December 31, 2011. Loans receivable, net decreased $17.4 million at September 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 $22.2 million, as the cash and due from banks was invested in investment and mortgage-backed securities available for sale, which collectively increased by $38.2 million, to $568.4 million at September 30, 2012, as compared to $530.2 million at December 31, 2011.

Deposits increased by $33.9 million at September 30, 2012, as compared to December 31, 2011. An increase of $67.2 million in core deposits (i.e. all deposits excluding time deposits) was partly offset by a decline of $33.3 million in time deposits. Federal Home Loan Bank (“FHLB”) advances decreased $41.0 million, to $225.0 million at September 30, 2012 from $266.0 million at December 31, 2011.

Net income for the three and nine months ended September 30, 2012 was adversely impacted by a non-recurring severance expense relating to the departure of the Bank’s former President and Chief Operating Officer of $747,000, net of related expense savings, or $468,000, net of tax benefit. The net, after tax amount, reduced diluted earnings per share by $0.03 for the three and nine months ended September 30, 2012. Excluding this non-recurring expense, diluted earnings per share increased 10.7%, to $0.31 for the three months ended September 30, 2012. The improvement was primarily due to a decrease in the provision for loan losses, an increase in other income and a reduction in average shares outstanding.

Net interest income for the three months ended September 30, 2012 decreased to $18.0 million, as compared to $19.1 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 3.28% for the three months ended September 30, 2012, as compared to 3.55% for the corresponding prior year period.

The provision for loan losses was $1.4 million for the three months ended September 30, 2012, as compared to $1.9 million in the same prior year period. The Company’s non-performing loans decreased $2.8 million, totaling $41.2 million at September 30, 2012, from $44.0 million at December 31, 2011.

The Company remains well-capitalized with a tangible common equity ratio of 9.53%.

Return on average stockholders’ equity was 9.08% for the three months ended September 30, 2012, as compared to 9.48% 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 nine months ended September 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 SEPTEMBER 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

   $ 55,475       $ 15         0.11   $ 43,922       $ 21         0.19

Investment securities (1)

     211,065         521         0.99        151,642         363         0.96   

FHLB stock

     17,695         197         4.45        18,233         202         4.43   

Mortgage-backed securities (1)

     363,388         2,065         2.27        328,830         2,500         3.04   

Loans receivable, net (2)

     1,547,696         18,716         4.84        1,603,735         20,357         5.08   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,195,319         21,514         3.92        2,146,362         23,443         4.37   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     116,227              122,660         
  

 

 

         

 

 

       

Total assets

   $ 2,311,546            $ 2,269,022         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,317,658         971         0.29      $ 1,253,509         1,289         0.41   

Time deposits

     238,133         936         1.57        270,261         1,213         1.80   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,555,791         1,907         0.49        1,523,770         2,502         0.66   

Borrowed funds

     335,231         1,607         1.92        366,813         1,869         2.04   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,891,022         3,514         0.74        1,890,583         4,371         0.92   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     183,780              152,030         

Non-interest-bearing liabilities

     18,350              12,224         
  

 

 

         

 

 

       

Total liabilities

     2,093,152              2,054,837         

Stockholders’ equity

     218,394              214,185         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,311,546            $ 2,269,022         
  

 

 

         

 

 

       

Net interest income

      $ 18,000            $ 19,072      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.18           3.45
        

 

 

         

 

 

 

Net interest margin (4)

           3.28           3.55
        

 

 

         

 

 

 

 

     FOR THE NINE MONTHS ENDED SEPTEMBER 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

   $ 54,133       $ 58         0.14   $ 27,027       $ 45         0.22

Investment securities (1)

     191,463         1,482         1.03        139,734         1,004         0.96   

FHLB stock

     17,749         626         4.70        17,930         647         4.81   

Mortgage-backed securities (1)

     361,198         6,618         2.44        333,607         7,730         3.09   

Loans receivable, net (2)

     1,555,556         57,642         4.94        1,626,568         62,546         5.13   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,180,099         66,426         4.06        2,144,866         71,972         4.47   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     108,665              117,484         
  

 

 

         

 

 

       

Total assets

   $ 2,288,764            $ 2,262,350         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,295,640         2,887         0.30      $ 1,255,228         4,457         0.47   

Time deposits

     247,704         3,073         1.65        272,197         3,647         1.79   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,543,344         5,960         0.51        1,527,425         8,104         0.71   

Borrowed funds

     340,563         4,971         1.95        371,631         5,813         2.09   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,883,907         10,931         0.77        1,899,056         13,917         0.98   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     169,400              140,655         

Non-interest-bearing liabilities

     16,935              15,015         
  

 

 

         

 

 

       

Total liabilities

     2,070,242              2,054,726         

Stockholders’ equity

     218,522              207,624         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,288,764            $ 2,262,350         
  

 

 

         

 

 

       

Net interest income

      $ 55,495            $ 58,055      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.29           3.49
        

 

 

         

 

 

 

Net interest margin (4)

           3.39           3.61
        

 

 

         

 

 

 

 

(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.

 

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Table of Contents

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

Total assets at September 30, 2012 were $2.304 billion, an increase of $2.3 million, compared to $2.302 billion at December 31, 2011.

Cash and due from banks decreased by $22.2 million, to $55.4 million at September 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 available for sale, which collectively increased by $38.2 million, to $568.4 million at September 30, 2012, as compared to $530.2 million at December 31, 2011.

Loans receivable, net decreased by $17.4 million, to a balance of $1.546 billion at September 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. Bank owned life insurance increased by $10.8 million at September 30, 2012, as compared to December 31, 2011, primarily due to an additional investment during the third quarter of 2012.

Total deposits increased $33.9 million, to $1.740 billion at September 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 $42.7 million and $17.3 million, respectively, while time deposits decreased $33.3 million. FHLB advances decreased by $41.0 million, to $225.0 million at September 30, 2012, as compared to $266.0 million at December 31, 2011 due to excess liquidity and cash flows from loans receivable.

Stockholders’ equity at September 30, 2012 increased to $219.7 million, as compared to $216.8 million at December 31, 2011, primarily due to net income and a reduction in accumulated other comprehensive gain (loss), partly offset by the cash dividend on common stock and by the repurchase of 718,253 shares of common stock for $10.2 million.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2012 and September 30, 2011

General

Net income for the three months ended September 30, 2012 decreased to $5.0 million, as compared to net income of $5.1 million for the corresponding prior year period. Diluted earnings per share was $0.28 for the three months ended September 30, 2012, unchanged from the corresponding prior year period. Net income for the nine months ended September 30, 2012 increased to $16.0 million, as compared to $15.3 million for the corresponding prior year period. Diluted earnings per share was $0.89 for the nine months ended September 30, 2012, as compared to $0.84 for the corresponding prior year period. Net income for the three and nine months ended September 30, 2012 was adversely impacted by a non-recurring severance expense relating to the departure of the Bank’s former President and Chief Operating Officer of $747,000, net of related expense savings, or $468,000, net of tax benefit. The net, after tax amount, reduced diluted earnings per share by $0.03 for the three and nine months ended September 30, 2012. Excluding this non-recurring expense, diluted earnings per share increased 10.7%, to $0.31, for the three months ended September 30, 2012 and 9.5%, to $0.92, for the nine months ended September 30, 2012. The improvements were primarily due to a decrease in the provision for loan losses, an increase in other income, a decrease in operating expenses (after excluding the non-recurring severance expense) and a reduction in average shares outstanding.

Interest Income

Interest income for the three and nine months ended September 30, 2012 was $21.5 million and $66.4 million, respectively, as compared to $23.4 million and $72.0 million for the three and nine months ended September 30, 2011. The yield on interest-earning assets declined to 3.92% and 4.06%, respectively, for the three and nine months ended September 30, 2012, as compared to 4.37% and 4.47%, respectively, for the same prior year periods. For the nine months ended September 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 1 basis point. Average interest-earning assets increased by $49.0 million, or 2.3%, and $35.2 million, or 1.6%, respectively, for the three and nine months ended September 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 available for sale, which collectively increased $94.0 million and $79.3 million, respectively, and the increases in average short-term investments which increased $11.6 million and $27.1 million, respectively. These increases were partly offset by a decrease in average loans receivable, net, of $56.0 million and $71.0 million, respectively.

Interest Expense

Interest expense for the three and nine months ended September 30, 2012 was $3.5 million and $10.9 million, respectively, as compared to $4.4 million and $13.9 million for the three and nine months ended September 30, 2011. The cost of interest-bearing liabilities decreased to 0.74% and 0.77%, respectively, for the three and nine months ended September 30, 2012 as compared to 0.92% and 0.98% in the same prior year periods. Average interest-bearing liabilities increased by $439,000 and decreased by $15.1 million, respectively, for the three and nine months ended September 30, 2012, as compared to the same prior year periods. The changes were due to declines in average borrowed funds of $31.6 million and $31.1 million, respectively, and average time deposits of $32.1 million and $24.5 million as compared to the same prior year periods, partly offset by increases in average transaction deposits of $64.1 million and $40.4 million.

 

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Table of Contents

Net Interest Income

Net interest income for the three and nine months ended September 30, 2012 decreased to $18.0 million and $55.5 million, respectively, as compared to $19.1 million and $58.1 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 3.28% and 3.39%, respectively, for the three and nine months ended September 30, 2012, from 3.55% and 3.61% 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 and investment and mortgage-backed securities available for sale. High loan refinance volume also caused yields on loans and mortgage-backed securities to trend downward.

Provision for Loan Losses

For the three and nine months ended September 30, 2012, the provision for loan losses was $1.4 million and $4.8 million, respectively, as compared to $1.9 million and $5.8 million in the corresponding prior year periods. The lower amounts for the three and nine months ended September 30, 2012 were related to a decrease in non-performing loans for those time periods. Non-performing loans at September 30, 2012 decreased $2.8 million, or 6.4%, to $41.2 million from $44.0 million at December 31, 2011. Net charge-offs for the three and nine months ended September 30, 2012 were $766,000 and $4.7 million, respectively, as compared to $399,000 and $2.5 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 $4.9 million and $13.7 million, respectively, for the three and nine months ended September 30, 2012, as compared to $3.7 million and $11.1 million in the same prior year periods primarily due to an increase in the net gain on the sale of loans, higher fees and service charges and an improvement in the net gain (loss) from other real estate operations. For the nine months ended September 30, 2012, the Company recognized a gain of $226,000 on the sale of equity securities as compared to the recognition of an other-than-temporary impairment loss on equity securities of $148,000 for the three and nine months ended September 30, 2011. For the three and nine months ended September 30, 2012, the net gain on the sale of loans increased $521,000 and $1.1 million, respectively, due to increases in loan sale volume and strong gain on sale margins. However, the increase in the net gain on the sale of loans for the three and nine months ended September 30, 2012 was adversely affected by an increase of $100,000 and $350,000, 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 nine months ended September 30, 2012, fees and service charges increased $266,000 and $531,000, respectively, due to increases in trust revenue, merchant service fees and retail checking account fees. Finally, the net gain (loss) from other real estate operations improved $120,000 and $425,000 for the three and nine months ended September 30, 2012, as compared to the same prior year periods. The prior year amount included write-downs in the value of properties previously acquired.

Operating Expenses

Operating expenses increased by $708,000, to $13.8 million, and by $2,000, to $39.6 million, respectively, for the three and nine months ended September 30, 2012, as compared to $13.1 million and $39.6 million, respectively, for the corresponding prior year periods. Excluding the $747,000 non-recurring severance expense included in compensation and employee benefits, net of related expense savings, for the three and nine months ended September 30, 2012, operating expenses decreased by $39,000 and $745,000 respectively, as compared to the corresponding prior year periods. The decrease for the three and nine months ended September 30, 2012 as compared to the corresponding prior year periods was primarily due to lower compensation and employee benefits costs, net of the non-recurring severance cost, which decreased by $537,000, or 7.5%, to $6.6 million for the three months ended September 30, 2012 and by $1.1 million, or 5.0%, to $20.2 million for the nine months ended September 30, 2012. The decreases were due to a reduction in the incentive plan accrual of $300,000 for the three and nine months ended September 30, 2012 and were also due to the increase in mortgage loan closings from prior year levels. Higher loan closings in the current period increased deferred loan expense which is reflected as a decrease in compensation expense. Additionally, Federal deposit insurance expense for the nine months ended September 30, 2012 decreased $440,000 from the corresponding prior year period due to a lower assessment rate and a change in the assessment methodology from deposit-based to a total liability-based assessment. These changes to Federal deposit insurance affected the expense for the first six months of 2012 as compared to the same prior year period.

 

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Provision for Income Taxes

Income tax expense was $2.7 million and $8.8 million, respectively, for the three and nine months ended September 30, 2012, as compared to $2.7 million and $8.5 million for the same prior year periods. The effective tax rate was 35.1% and 35.5%, respectively, for the three and nine months ended September 30, 2012, as compared to 35.1% and 35.6%, respectively, in the same 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.

At September 30, 2012 and December 31, 2011, the Company had no overnight borrowings from the FHLB. The Company periodically utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings of $225.0 million at September 30, 2012, a decrease from $266.0 million at December 31, 2011.

The Company’s cash needs for the nine months ended September 30, 2012 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, proceeds from maturities of investment securities available for sale and deposit growth. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities, the purchase of Bank owned life insurance and to reduce FHLB borrowings. The Company’s cash needs for the nine months ended September 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 deposit growth. The cash was principally utilized for loan originations and the purchase of investment and mortgage-backed securities.

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 September 30, 2012, outstanding commitments to originate loans totaled $78.2 million; outstanding unused lines of credit totaled $232.8 million; and outstanding commitments to sell loans totaled $18.1 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 $142.3 million at September 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 funding trends on a monthly and quarterly basis which is reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios.

Under the Company’s 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 nine months ended September 30, 2012, the Company repurchased 718,253 shares of common stock at a total cost of $10.2 million compared with no repurchases for the nine months ended September 30, 2011. At September 30, 2012, there were 58,899 shares remaining to be repurchased under the existing stock repurchase program.

Cash dividends on common stock declared and paid during the first nine months of 2012 were $6.5 million, as compared to $6.6 million in the same prior year period. On October 18, 2012, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on November 9, 2012 to stockholders of record at the close of business on October 29, 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 nine months of 2012, the Company received dividend payments of $16.5 million from the Bank. 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 September 30, 2012, OceanFirst Financial Corp. held $16.3 million in cash and $5.6 million in investment securities available for sale.

 

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

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible capital

   $ 215,132         9.34   $ 34,560         1.50

Core capital

     215,132         9.34        92,160         4.00   

Tier 1 risk-based capital

     215,132         14.35        59,970         4.00   

Total risk-based capital

     233,423         15.57        119,941         8.00   

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

At September 30, 2012, the Company maintained tangible common equity of $219.7 million, for a tangible common equity to assets ratio of 9.53%.

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 $18.1 million.

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

 

Contractual Obligation

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

Debt Obligations

   $ 324,649       $ 133,149       $ 139,000       $ 30,000       $ 22,500   

Commitments to Originate Loans

     78,158         78,158         —           —           —     

Commitments to Fund Unused Lines of Credit

     232,785         232,785         —           —           —     

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.

 

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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.

 

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

Non-performing loans:

  

Real estate – one-to-four family

   $ 25,475      $ 29,193   

Commercial real estate

     11,397        10,552   

Construction

     —          43   

Consumer

     3,670        3,653   

Commercial

     631        567   
  

 

 

   

 

 

 

Total non-performing loans

     41,173        44,008   

OREO, net

     3,628        1,970   
  

 

 

   

 

 

 

Total non-performing assets

   $ 44,801      $ 45,978   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 11,275      $ 14,972   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     1.17     1.15

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

     44.42        41.42   

Non-performing loans as a percent of total loans receivable

     2.63        2.77   

Non-performing assets as a percent of total assets

     1.94        2.00   

Included in the non-performing loan total at September 30, 2012 was $14.8 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 61.9% of the total. At September 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 81% using updated appraisal values. Appraisals are updated for all non-performing loans secured by real estate and subsequently updated annually if the loan remains delinquent for an extended period. At September 30, 2012, the average weighted loan-to-value ratio of the total one-to-four family loan portfolio was 57% using appraisal values at time of origination. Based upon sales data for the first nine months 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 $6.3 million. The loans are collateralized by commercial and residential real estate, all business assets and also carry a personal guarantee. An appraisal performed in May 2011 values the real estate collateral at $9.2 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 September 30, 2012, 66% were originated by alternative Bank delivery channels which were previously shuttered. During the third quarter, 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 as follows:

 

     September 30,
2012
     December 31,
2011
 

Loans and other assets excluding investment securities:

  

Special Mention

   $ 7,740,000       $ 11,535,000   

Substandard

     73,260,000         63,055,000   

Doubtful

     1,035,000         75,000   

Investment securities:

     

Substandard

     25,000,000         25,000,000   

The largest Special Mention loan at September 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 $10.1 million, which was current as to payments, but criticized due to poor operating results through 2011. Operating results have significantly improved in 2012. The loans are collateralized by commercial real estate and other business assets. The largest Doubtful asset with a balance of $1.0 million is a portion of a commercial real estate loan to a self-storage facility. The remaining balance of $1.2

 

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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 $18.3 million at September 30, 2012 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 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 September 30, 2012, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

 

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At September 30, 2012, the Company’s one-year gap was negative -4.65 % as compared to negative 0.03% at December 31, 2011.

 

At September 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

   $ 33,611      $ —        $ —        $ —        $ —        $ 33,611   

Investment securities

     60,713        22,491        96,325        35,492        4,992        220,013   

FHLB stock

     —          —          —          —          17,148        17,148   

Mortgage-backed securities

     64,337        39,952        92,050        74,507        76,961        347,807   

Loans receivable (2)

     301,491        418,107        443,141        186,365        216,243        1,565,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     460,152        480,550        631,516        296,364        315,344        2,183,926   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     32,938        8,939        19,672        14,852        48,180        124,581   

Savings accounts

     39,660        20,519        45,306        34,292        106,772        246,549   

Interest-bearing checking accounts

     580,336        62,014        110,941        91,971        102,812        948,074   

Time deposits

     58,189        84,106        42,005        44,998        6,315        235,613   

FHLB advances

     —          61,000        139,000        25,000        —          225,000   

Securities sold under agreements to repurchase

     72,149        —          —          —          —          72,149   

Other borrowings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     805,772        236,578        356,924        216,113        264,079        1,879,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (345,620   $ 243,972      $ 274,592      $ 80,251      $ 51,265      $ 304,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (345,620   $ (101,648   $ 172,944      $ 253,195      $ 304,460      $ 304,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (15.83 )%      (4.65 )%      7.92     11.59     13.94     13.94
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 September 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.

 

    September 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

  $ 216,286        (9.2 )%      9.8   $ 64,602        (6.4 )%    $ 238,057        (4.8 )%      10.9   $ 65,048        (11.1 )% 

200

    232,540        (2.3     10.3        67,135        (2.7     252,307        0.9        11.2        68,659        (6.2

100

    242,101        1.7        10.5        68,486        (0.8     261,068        4.4        11.4        71,441        (2.4

Static

    238,074        —          10.2        69,030        —          250,109        —          10.7        73,189        —     

(100)

    201,610        (15.3     8.5        65,118        (5.7     204,786        (18.1     8.7        67,900        (7.2

Item 4. Controls and Procedures

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

 

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OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     September 30,     December 31,  
     2012     2011  
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 55,365      $ 77,527   

Investment securities available for sale

     208,336        165,279   

Federal Home Loan Bank of New York stock, at cost

     17,148        18,160   

Mortgage-backed securities available for sale

     360,084        364,931   

Loans receivable, net

     1,545,640        1,563,019   

Mortgage loans held for sale

     5,598        9,297   

Interest and dividends receivable

     6,963        6,432   

Other real estate owned, net

     3,628        1,970   

Premises and equipment, net

     22,233        22,259   

Servicing asset

     4,659        4,836   

Bank Owned Life Insurance

     52,806        41,987   

Other assets

     21,966        26,397   
  

 

 

   

 

 

 

Total assets

   $ 2,304,426      $ 2,302,094   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 1,739,974      $ 1,706,083   

Securities sold under agreements to repurchase with retail customers

     72,149        66,101   

Federal Home Loan Bank advances

     225,000        266,000   

Other borrowings

     27,500        27,500   

Due to brokers

     1,355        5,186   

Advances by borrowers for taxes and insurance

     7,296        7,113   

Other liabilities

     11,465        7,262   
  

 

 

   

 

 

 

Total liabilities

     2,084,739        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 18,020,046 and 18,682,568 shares outstanding at September 30, 2012 and December 31, 2011, respectively

     336        336   

Additional paid-in capital

     262,590        262,812   

Retained earnings

     196,184        186,666   

Accumulated other comprehensive gain (loss)

     354        (2,468

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (3,976     (4,193

Treasury stock, 15,546,726 and 14,884,204 shares at September 30, 2012 and December 31, 2011, respectively

     (235,801     (226,304

Common stock acquired by Deferred Compensation Plan

     (689     (871

Deferred Compensation Plan Liability

     689        871   
  

 

 

   

 

 

 

Total stockholders’ equity

     219,687        216,849   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,304,426      $ 2,302,094   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended September 30,
    For the nine months
ended September 30,
 
     2012      2011     2012     2011  
     (Unaudited)     (Unaudited)  

Interest income:

         

Loans

   $ 18,716       $ 20,357      $ 57,642      $ 62,546   

Mortgage-backed securities

     2,065         2,500        6,618        7,730   

Investment securities and other

     733         586        2,166        1,696   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     21,514         23,443        66,426        71,972   
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense:

         

Deposits

     1,907         2,502        5,960        8,104   

Borrowed funds

     1,607         1,869        4,971        5,813   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     3,514         4,371        10,931        13,917   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     18,000         19,072        55,495        58,055   

Provision for loan losses

     1,400         1,850        4,800        5,750   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     16,600         17,222        50,695        52,305   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other income:

         

Loan servicing income

     130         96        409        292   

Fees and service charges

     3,113         2,847        9,038        8,507   

Net gain on sales of and other than temporary impairment loss on investment securities available for sale

     —           (148     226        (148

Net gain on sales of loans available for sale

     1,218         697        3,136        2,066   

Net gain (loss) from other real estate owned

     40         (80     (57     (482

Income from Bank Owned Life Insurance

     376         317        977        848   

Other

     1         2        5        4   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total other income

     4,878         3,731        13,734        11,087   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Compensation and employee benefits

     7,347         7,137        20,978        21,293   

Occupancy

     1,279         1,279        3,897        3,778   

Equipment

     662         511        1,892        1,803   

Marketing

     451         456        1,231        1,212   

Federal deposit insurance

     533         563        1,587        2,027   

Data processing

     914         886        2,738        2,672   

Legal

     301         207        726        634   

Check card processing

     425         320        1,061        924   

Accounting and audit

     128         129        448        442   

Other operating expense

     1,799         1,643        5,088        4,859   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,839         13,131        39,646        39,644   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     7,639         7,822        24,783        23,748   

Provision for income taxes

     2,680         2,748        8,804        8,466   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 4,959       $ 5,074      $ 15,979      $ 15,282   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.28       $ 0.28      $ 0.90      $ 0.84   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.28       $ 0.28      $ 0.89      $ 0.84   
  

 

 

    

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     17,561         18,227        17,837        18,190   
  

 

 

    

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     17,621         18,276        17,896        18,239   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended September 30,
    For the nine months
ended September 30,
 
     2012      2011     2012     2011  
     (Unaudited)     (Unaudited)  

Net income

   $ 4,959       $ 5,074      $ 15,979      $ 15,282   

Other comprehensive income:

         

Unrealized gain (loss) on securities (net of tax expense (benefit) $695 and $2,041 in 2012 and $(578) and $3,231 in 2011)

     1,006         (838     2,956        4,678   

Reclassification adjustment for gains (losses) included in net income (net of tax expense (benefit) $92 and $(60))

     —           88        (134     88   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 5,965       $ 4,324      $ 18,801      $ 20,048   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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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

Gain (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

    —          —          —          15,282        —          —          —          —          —          15,282   

Unrealized gain on securities (net of tax expense $3,231)

    —          —          —          —          4,678        —          —          —          —          4,678   

Reclassification adjustment for losses included in net income (net of tax benefit $60)

    —          —          —          —          88        —          —          —          —          88   

Tax benefit of stock plans

    —          —          32        —          —          —          —          —          —          32   

Stock awards

    —          —          779        —          —          —          —          —          —          779   

Treasury stock allocated to restricted stock plan

    —          —          (280     37        —          —          243        —          —          —     

Allocation of ESOP stock

    —          —          122        —          —          218        —          —          —          340   

Cash dividend $0.36 per share

    —          —          —          (6,590     —          —          —          —          —          (6,590

Exercise of stock options

    —          —          —          (1     —          —          38        —          —          37   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          42        (42     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

  $ —        $ 336      $ 261,392      $ 183,405      $ (794   $ (4,266   $ (224,176   $ (904   $ 904      $ 215,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

Net income

    —          —          —          15,979        —          —          —          —          —          15,979   

Unrealized gain on securities (net of tax expense $1,949)

    —          —          —          —          2,822        —          —          —          —          2,822   

Tax expense of stock plans

    —          —          (482     —          —          —          —          —          —          (482

Stock awards

    —          —          396        —          —          —          —          —          —          396   

Treasury stock allocated to restricted stock plan

    —          —          (282     42        —          —          240        —          —          —     

Purchased 718,253 shares of common stock

    —          —          —          —          —          —          (10,196     —          —          (10,196

Allocation of ESOP stock

    —          —          146        —          —          217        —          —          —          363   

Cash dividend $0.36 per share

    —          —          —          (6,463     —          —          —          —          —          (6,463

Exercise of stock options

    —          —          —          (40     —          —          459        —          —          419   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          182        (182     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

  $ —        $ 336      $ 262,590      $ 196,184      $ 354      $ (3,976   $ (235,801   $ (689   $ 689      $ 219,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the nine months
ended September 30,
 
     2012     2011  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 15,979      $ 15,282   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     1,953        1,838   

Allocation of ESOP stock

     363        340   

Stock awards

     396        779   

Amortization of servicing asset

     1,225        1,417   

Net premium amortization in excess of discount accretion on securities

     2,525        1,584   

Net amortization of deferred costs and discounts on loans

     650        651   

Provision for loan losses

     4,800        5,750   

Provision for repurchased loans

     350        —     

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

     (151     189   

Net (gain) on sales of and other-than-temporary impairment loss on investment securities available for sale

     (226     148   

Net gain on sales of loans

     (3,486     (2,066

Proceeds from sales of mortgage loans held for sale

     135,426        96,500   

Mortgage loans originated for sale

     (129,288     (91,539

Purchase of Bank Owned Life Insurance

     (10,000     —     

Proceeds from Bank Owned Life Insurance

     158        —     

Increase in value of Bank Owned Life Insurance

     (977     (848

(Increase) decrease in interest and dividends receivable

     (531     42   

Decrease (increase) in other assets

     2,482        (589

Increase (decrease) in other liabilities

     3,853        (12,762
  

 

 

   

 

 

 

Total adjustments

     9,522        1,434   
  

 

 

   

 

 

 

Net cash provided by operating activities

     25,501        16,716   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans receivable

     8,517        64,256   

Purchase of investment securities available for sale

     (64,324     (63,260

Purchase of mortgage-backed securities available for sale

     (88,263     (55,624

Principal repayments on mortgage-backed securities available for sale

     89,460        54,975   

Proceeds from maturities of investment securities available for sale

     22,336        —     

Proceeds from sale of investment securities available for sale

     1,221        —     

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

     1,012        (1,233

Proceeds from sales of other real estate owned

     1,905        2,929   

Purchases of premises and equipment

     (1,927     (1,814
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (30,063     229   
  

 

 

   

 

 

 

 

Continued

 

15


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the nine months
ended September 30,
 
     2012     2011  
     (Unaudited)  

Cash flows from financing activities:

    

Increase in deposits

   $ 33,891      $ 23,938   

Increase in short-term borrowings

     6,048        3,881   

Proceeds from Federal Home Loan Bank advances

     —          55,000   

Repayments of Federal Home Loan Bank advances

     (41,000     (54,000

Increase (decrease) in advances by borrowers for taxes and insurance

     183        (241

Exercise of stock options

     419        37   

Purchase of treasury stock

     (10,196     —     

Dividends paid – common stock

     (6,463     (6,590

Tax (expense) benefit of stock plans

     (482     32   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (17,600     22,057   
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (22,162     39,002   

Cash and due from banks at beginning of period

     77,527        31,455   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 55,365      $ 70,457   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 11,000      $ 14,171   

Income taxes

     6,118        16,381   

Non-cash activities:

    

Transfer of loans receivable to other real estate owned

     3,412        2,016   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

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

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 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 nine months ended September 30, 2012 and 2011 (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Weighted average shares issued net of Treasury shares

     18,130        18,846        18,415        18,840   

Less: Unallocated ESOP shares

     (476     (510     (484     (519

Unallocated incentive award shares and shares held by deferred compensation plan

     (93     (109     (94     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     17,561        18,227        17,837        18,190   

Add: Effect of dilutive securities:

        

Stock options

     19        —          18        —     

Shares held by deferred compensation plan

     41        49        41        49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     17,621        18,276        17,896        18,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2012 and 2011, antidilutive stock options of 1,101,000 and 2,064,000 respectively, were excluded from earnings per share calculations. For the nine months ended September 30, 2012 and 2011 antidilutive stock options of 1,168,000 and 2,042,000, 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 September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

September 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 138,416       $ 1,019       $ —        $ 139,435   

State and municipal obligations

     21,605         12         (31     21,586   

Corporate debt securities

     55,000         —           (13,286     41,714   

Equity investments

     4,992         680         (71     5,601   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 220,013       $ 1,711       $ (13,388   $ 208,336   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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 nine months ended September 30, 2012. There were no realized gains or losses on the sale of investment securities available for sale for the three months ended September 30, 2012 and for the three and nine months ended September 30, 2011. The Company recognized an other-than-temporary impairment loss on equity investments of $148,000 for the three and nine months ended September 30, 2011.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at September 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 September 30, 2012, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $41.7 million, respectively, were callable prior to the maturity date.

 

September 30, 2012

   Amortized
Cost
     Estimated
Market
Value
 

Less than one year

   $ 28,204       $ 28,276   

Due after one year through five years

     131,817         132,745   

Due after five years through ten years

     —           —     

Due after ten years

     55,000         41,714   
  

 

 

    

 

 

 
   $ 215,021       $ 202,735   
  

 

 

    

 

 

 

The estimated market value and unrealized loss for investment securities available for sale at September 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  

September 30, 2012

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

U.S. Agency obligations

   $ —         $ —        $ —         $ —        $ —         $ —     

State and municipal obligations

     10,166         (31     96         —          10,262         (31

Corporate debt securities

     —           —          41,714         (13,286     41,714         (13,286

Equity investments

     678         (71     —           —          678         (71
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 10,844       $ (102   $ 41,810       $ (13,286   $ 52,654       $ (13,388
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less than 12 months     12 months or longer     Total  

December 31, 2011

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

U.S. Agency obligations

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

State and municipal obligations

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

Corporate debt securities

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

Equity investments

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

At September 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       $ 10,714      

Ba2/BB+

Chase Capital

     10,000         7,656      

Baa2/BBB

Wells Fargo Capital

     5,000         4,028      

A3/A-

Huntington Capital

     5,000         3,814      

Baa3/BB+

Keycorp Capital

     5,000         3,817      

Baa3/BBB-

PNC Capital

     5,000         4,107      

Baa2/BBB

State Street Capital

     5,000         3,847      

A3/BBB+

SunTrust Capital

     5,000         3,731      

Baa3/BB+

  

 

 

    

 

 

    
   $ 55,000       $ 41,714      
  

 

 

    

 

 

    

At September 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 September 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 over the life of the security. 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 September 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 September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

September 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 108,420       $ 930       $ (6   $ 109,344   

FNMA

     238,522         11,202         —          249,724   

GNMA

     865         151         —          1,016   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 347,807       $ 12,283       $ (6   $ 360,084   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

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

FNMA

     279,414         9,369         (21     288,762   

GNMA

     935         177         —          1,112   
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

There were no gains or losses realized on the sale of mortgage-backed securities available for sale for the three and nine months ended September 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 September 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  

September 30, 2012

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

FHLMC

   $ 8,395       $ (6   $ —         $ —         $ 8,395       $ (6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,395       $ (6   $ —         $ —         $ 8,395       $ (6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
                

 

     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 September 30, 2012.

 

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Table of Contents

Note 5. Loans Receivable, Net

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

 

     September 30, 2012     December 31, 2011  

Real estate:

    

One-to-four family

   $ 822,049      $ 873,253   

Commercial real estate, multi family and land

     476,513        460,725   

Residential construction

     8,204        6,657   

Consumer

     201,443        192,918   

Commercial

     54,673        45,889   
  

 

 

   

 

 

 

Total loans

     1,562,882        1,579,442   

Loans in process

     (3,133     (2,559

Deferred origination costs, net

     4,182        4,366   

Allowance for loan losses

     (18,291     (18,230
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,545,640      $ 1,563,019   
  

 

 

   

 

 

 

At September 30, 2012 and December 31, 2011, loans in the amount of $41,173,000 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 September 30, 2012, the impaired loan portfolio totaled $35,564,000 for which there was a specific allocation in the allowance for loan losses of $2,494,000. 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 $35,802,000 and $31,131,000 for the three and nine months ended September 30, 2012, respectively, and was $29,602,000 and $26,464,000 for the three and nine months ended September 30, 2011.

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Balance at beginning of period

   $ 17,657      $ 21,454      $ 18,230      $ 19,700   

Provision charged to operations

     1,400        1,850        4,800        5,750   

Charge-offs

     (1,694     (403     (6,037     (2,565

Recoveries

     928        4        1,298        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,291      $ 22,905      $ 18,291      $ 22,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial     Unallocated     Total  

For the three months ended September 30, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     609        (90     963        (577     495        1,400   

Charge-offs

     (1,126     —          (491     (77     —          (1,694

Recoveries

     210        —          104        614        —          928   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,461      $ 8,524      $ 2,224      $ 1,070      $ 2,012      $ 18,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2011

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     1,280        1,220        118        12        (780     1,850   

Charge-offs

     (217     (180     (6     —          —          (403

Recoveries

     —          —          —          4        —          4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,532      $ 8,269      $ 4,389      $ 961      $ 1,754      $ 22,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     2,710        (57     2,533        (373     (13     4,800   

Charge-offs

     (4,030     (47     (1,882     (78     —          (6,037

Recoveries

     411        154        112        621        —          1,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,461      $ 8,524      $ 2,224      $ 1,070      $ 2,012      $ 18,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 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

     2,216        3,129        1,180        131        (906     5,750   

Charge-offs

     (672     (1,697     (56     (140     —          (2,565

Recoveries

     11        —          1        8        —          20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,532      $ 8,269      $ 4,389      $ 961      $ 1,754      $ 22,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

September 30, 2012

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

   $ 203       $ 1,952       $ 339       $ —         $ —         $ 2,494   

Collectively evaluated for impairment

     4,258         6,572         1,885         1,070         2,012         15,797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,461       $ 8,524       $ 2,224       $ 1,070       $ 2,012       $ 18,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 21,612       $ 11,557       $ 2,101       $ 294       $ —         $ 35,564   

Loans collectively evaluated for impairment

     808,641         464,956         199,342         54,379         —           1,527,318   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 830,253       $ 476,513       $ 201,443       $ 54,673       $ —         $ 1,562,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     September 30,
2012
     December 31,
2011
 

Impaired loans with no allocated allowance for loan losses

   $ 22,378       $ 19,186   

Impaired loans with allocated allowance for loan losses

     13,186         9,305   
  

 

 

    

 

 

 
   $ 35,564       $ 28,491   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 2,494       $ 2,165   
  

 

 

    

 

 

 

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

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of September 30, 2012

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 10,568       $ 10,343       $ —     

Originated by mortgage company

     7,021         6,854         —     

Originated by mortgage company – non-prime

     2,064         1,773         —     

Commercial real estate:

        

Commercial

     1,707         1,701         —     

Construction and land

     —           —           —     

Consumer

     1,442         1,413         —     

Commercial

     295         294         —     
  

 

 

    

 

 

    

 

 

 
   $ 23,097       $ 22,378       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 1,695       $ 1,638       $ 119   

Originated by mortgage company

     405         405         83   

Originated by mortgage company – non-prime

     720         599         1   

Commercial real estate:

        

Commercial

     10,025         9,856         1,952   

Construction and land

     —           —           —     

Consumer

     688         688         339   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 13,533       $ 13,186       $ 2,494   
  

 

 

    

 

 

    

 

 

 

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 September 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

   $ 10,440       $ 125       $ 9,438       $ 112   

Originated by mortgage Company

     6,824         68         5,214         72   

Originated by mortgage company – non-prime

     1,960         1         —           —     

Commercial real estate:

           

Commercial

     1,710         22         5,464         88   

Construction and land

     —           —           —           —     

Consumer

     1,406         19         698         10   

Commercial

     294         3         302         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 22,634       $ 238       $ 21,116       $ 282   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 1,605       $ 14       $ 566       $ —     

Originated by mortgage Company

     405         7         —           —     

Originated by mortgage company – non-prime

     636         —           2,742         —     

Commercial real estate:

           

Commercial

     9,834         89         5,113         44   

Construction and land

     —           —           —           —     

Consumer

     688         10         65         5   

Commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,168