10-Q 1 d518887d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2013

 

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

For the transition period from                      to                     

Commission file number 001-11713

 

 

OceanFirst Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3412577

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

975 Hooper Avenue, Toms River, NJ   08753
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (732) 240-4500

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨.

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

 

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

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

As of May 3, 2013, there were 17,660,229 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

           PAGE  

PART I.

   FINANCIAL INFORMATION   
Item 1.    Consolidated Financial Statements (unaudited)   
  

Consolidated Statements of Financial Condition as of March 31, 2013 (unaudited) and December  31, 2012

     10   
  

Consolidated Statements of Income (unaudited) for the three months ended March 31, 2013 and 2012

     11   
  

Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2013 and 2012

     12   
  

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2013 and 2012

     13   
  

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and 2012

     14   
   Notes to Unaudited Consolidated Financial Statements      16   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      1   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      9   

Item 4.

   Controls and Procedures      9   
PART II.    OTHER INFORMATION   

Item 1.

   Legal Proceedings      31   

Item 1A.

   Risk Factors      31   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 3.

   Defaults Upon Senior Securities      31   

Item 4.

   Mine Safety Disclosures      31   

Item 5.

   Other Information      31   

Item 6.

   Exhibits      31   

Signatures

     32   


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

FINANCIAL SUMMARY

 

      At or for the Quarter Ended  
(dollars in thousands, except per share amounts)    March 31, 2013     December 31, 2012     March 31, 2012  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,303,711      $ 2,269,228      $ 2,261,214   

Loans receivable, net

     1,501,362        1,523,200        1,554,862   

Deposits

     1,740,294        1,719,671        1,680,444   

Stockholders’ equity

     219,554        219,792        220,471   

SELECTED OPERATING DATA:

      

Net interest income

     17,189        18,017        19,105   

Provision for loan losses

     1,100        3,100        1,700   

Other income

     3,409        4,492        4,311   

Operating expenses

     12,665        13,244        12,940   

Net income

     4,436        4,041        5,647   

Diluted earnings per share

     0.26        0.23        0.31   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     12.43        12.28        11.86   

Cash dividend per share

     0.12        0.12        0.12   

Stockholders’ equity to total assets

     9.53     9.69     9.75

Return on average assets (1)

     0.77        0.70        0.99   

Return on average stockholders’ equity (1)

     8.06        7.36        10.38   

Average interest rate spread

     3.08        3.20        3.42   

Net interest margin

     3.16        3.29        3.52   

Operating expenses to average assets (1)

     2.21        2.30        2.27   

Efficiency ratio

     61.49        58.84        55.26   

ASSET QUALITY:

      

Non-performing loans

   $ 47,437      $ 43,374      $ 44,523   

Non-performing assets

     50,250        46,584        46,561   

Allowance for loan losses as a percent of total loans receivable

     1.34     1.32     1.16

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

     43.20        47.29        40.97   

Non-performing loans as a percent of total loans receivable

     3.11        2.80        2.83   

Non-performing assets as a percent of total assets

     2.18        2.05        2.06   

 

(1) Ratios are annualized

 

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Table of Contents

Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank serving Ocean and Monmouth Counties in New Jersey. The term the “Company” refers to OceanFirst Financial Corp., OceanFirst Bank and all of the Bank’s subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from loan sales, loan servicing, loan originations, merchant credit card services, deposit accounts, trust and asset management services, the sale of investment products and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, data processing, federal deposit insurance and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are generally priced against shorter-term indices. Beginning in the second half of 2011 and through the first quarter of 2013, the Company’s net interest margin has generally contracted as compared to prior linked periods. Due to the low interest rate environment, high loan refinance volume 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 2013, 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 2012, and in overall labor market conditions as the national unemployment rate in the first quarter of 2013 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 months ended March 31, 2013 were as follows:

Total assets increased to $2.304 billion at March 31, 2013, from $2.269 billion at December 31, 2012. Mortgage-backed securities available for sale increased by $49.3 million, to $383.1 million at March 31, 2013, as compared to $333.9 million at December 31, 2012. Loans receivable, net decreased $21.8 million at March 31, 2013, as compared to December 31, 2012 primarily due to prepayments and the sale of newly originated 30-year fixed-rate one-to-four family loans.

Deposits increased by $20.6 million at March 31, 2013, as compared to December 31, 2012. An increase of $29.5 million in core deposits (i.e. all deposits excluding time deposits) was partly offset by a decline of $8.9 million in time deposits.

Net income for the three months ended March 31, 2013 decreased to $4.4 million, or $0.26 per diluted share, as compared to net income of $5.6 million, or $0.31 per diluted share for the corresponding prior year period due to reductions in net interest income and the net (loss) gain on the sales of loans available for sale, partly offset by reductions in the provision for loan losses and operating expenses.

Net interest income for the three months ended March 31, 2013 decreased to $17.2 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 3.16% for the three months ended March 31, 2013, as compared to 3.52% for the corresponding prior year period.

The provision for loan losses was $1.1 million for the three months ended March 31, 2013, as compared to $1.7 million in the same prior year period. The Company’s non-performing loans increased $4.1 million, to $47.4 million at March 31, 2013, from $43.4 million at December 31, 2012. The increase was expected as it was related to loans adversely affected by superstorm Sandy which were identified and provided for in the fourth quarter of 2012.

Other income decreased $902,000 for the three months ended March 31, 2013 as compared to the same prior year period. The net (loss) gain on the sales of loans available for sale for the three months ended March 31, 2013 was adversely impacted by an addition of $975,000 to the reserve for repurchased loans as compared to an addition of $150,000 in the same prior year period.

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

Return on average stockholders’ equity was 8.06% for the three months ended March 31, 2013, as compared to 10.38% for the corresponding prior year period.

 

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Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth certain information relating to the Company for the three months ended March 31, 2013 and 2012. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.

 

     FOR THE THREE MONTHS ENDED MARCH 31,  
     2013     2012  
     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

   $ 85,951       $ 26         0.12   $ 49,840       $ 21         0.17

Investment securities (1)

     223,146         520         0.93        179,237         490         1.09   

FHLB stock

     17,108         194         4.54        17,900         229         5.12   

Mortgage-backed securities (1)

     324,943         1,648         2.03        359,530         2,318         2.58   

Loans receivable, net (2)

     1,524,156         17,664         4.64        1,565,956         19,805         5.06   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,175,304         20,052         3.69        2,172,463         22,863         4.21   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     118,148              103,620         
  

 

 

         

 

 

       

Total assets

   $ 2,293,452            $ 2,276,083         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,330,639         563         0.17      $ 1,283,926         916         0.29   

Time deposits

     221,200         762         1.38        255,999         1,102         1.72   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,551,839         1,325         0.34        1,539,925         2,018         0.52   

Borrowed funds

     319,645         1,538         1.92        351,311         1,740         1.98   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,871,484         2,863         0.61        1,891,236         3,758         0.79   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     185,066              151,143         

Non-interest-bearing liabilities

     16,845              16,125         
  

 

 

         

 

 

       

Total liabilities

     2,073,395              2,058,504         

Stockholders’ equity

     220,057              217,579         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,293,452            $ 2,276,083         
  

 

 

         

 

 

       

Net interest income

      $ 17,189            $ 19,105      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.08           3.42
        

 

 

         

 

 

 

Net interest margin (4)

           3.16           3.52
        

 

 

         

 

 

 

 

(1) Amounts are recorded at average amortized cost.
(2) Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loss allowances and includes loans held for sale and non-performing loans.
(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets at March 31, 2013 were $2.304 billion, an increase of $34.5 million, compared to $2.269 billion at December 31, 2012.

Cash and due from banks increased by $8.8 million, to $71.4 million at March 31, 2013, as compared to $62.5 million at December 31, 2012. Mortgage-backed securities available for sale increased by $49.3 million, to $383.1 million at March 31, 2013, as compared to $333.9 million at December 31, 2012, as excess liquidity was invested.

Loans receivable, net decreased by $21.8 million, to a balance of $1.501 billion at March 31, 2013, as compared to a balance of $1.523 billion at December 31, 2012, primarily due to prepayments and the sale of newly originated 30-year fixed-rate one-to-four family loans.

Total deposits increased $20.6 million, to $1.740 billion at March 31, 2013, from $1.720 billion at December 31, 2012. The mix of deposits changed as non-interest-bearing deposits and savings deposits increased by $22.7 million and $29.8 million, respectively, while interest-bearing checking and time deposits decreased $29.6 million and $8.9 million, respectively. Securities sold under agreements to repurchase with retail customers increased by $10.5 million, to $71.3 million at March 31, 2013, from $60.8 million at December 31, 2012.

Stockholders’ equity at March 31, 2013 decreased to $219.6 million, as compared to $219.8 million at December 31, 2012, primarily due to the repurchase of 254,340 shares of common stock for $3.6 million (average cost $14.32) and the cash dividend on common stock, partly offset by net income and other comprehensive income.

 

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Comparison of Operating Results for the Three Months Ended March 31, 2013 and March 31, 2012

General

Net income for the three months ended March 31, 2013 decreased to $4.4 million, or $0.26 per diluted share, as compared to net income of $5.6 million, or $0.31 per diluted share for the corresponding prior year period due to reductions in net interest income and the net (loss) gain on the sales of loans available for sale, partly offset by reductions in the provision for loan losses and operating expenses.

Interest Income

Interest income for the three months ended March 31, 2013 was $20.1 million, as compared to $22.9 million for the three months ended March 31, 2012. The yield on interest-earning assets declined to 3.69% for the three months ended March 31, 2013, as compared to 4.21% for the same prior year period. For the three months ended March 31, 2012, the yield on loans receivable benefited from commercial loan prepayment fees of $254,000, most of which was related to a single large commercial loan, which increased the yield on interest-earning assets by 5 basis points. Prepayment fee income for the three months ended March 31, 2013 was $32,000. Average interest-earning assets increased by $2.8 million for the three months ended March 31, 2013, as compared to the same prior year period. The increase in average interest-earning assets was primarily due to the increase in average short-term investments which increased $36.1 million for the three months ended March 31, 2013 and to the increase in average investment and mortgage-backed securities available for sale, which collectively increased $9.3 million. These increases were partly offset by a decrease in average loans receivable, net, of $41.8 million for the quarter ended March 31, 2013, as compared to the same prior year period.

Interest Expense

Interest expense for the three months ended March 31, 2013 was $2.9 million as compared to $3.8 million for the three months ended March 31, 2012. The cost of interest-bearing liabilities decreased to 0.61% for the three months ended March 31, 2013 as compared to 0.79% in the same prior year period. Average interest-bearing liabilities decreased by $19.8 million for the three months ended March 31, 2013, as compared to the same prior year period. The decrease was due to declines in average borrowed funds of $31.7 million and average time deposits of $34.8 million for the three months ended March 31, 2013 as compared to the same prior year period, partly offset by an increase in average transaction deposits of $46.7 million.

Net Interest Income

Net interest income for the three months ended March 31, 2013 decreased to $17.2 million, as compared to $19.1 million in the same prior year period, reflecting a lower net interest margin partly offset by slightly higher interest-earning assets. The net interest margin decreased to 3.16% for the three months ended March 31, 2013, from 3.52% in the same prior year period due to a change in the mix of average interest-earning assets from higher-yielding loans receivable into lower-yielding short-term investments and investment and mortgage-backed securities 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 months ended March 31, 2013, the provision for loan losses was $1.1 million as compared to $1.7 million for the corresponding prior year period. The decrease for the quarter ended March 31, 2013 was partly due to a reduction of $573,000 in net charge-offs for the three months ended March 31, 2013 as compared to the same prior year period and a reduction in loans receivable, net at March 31, 2013 as compared to December 31, 2012. Although non-performing loans increased $4.1 million at March 31, 2013, as compared to December 31, 2012, all of the increase, $4.5 million, relates to loans adversely affected by superstorm Sandy. These loans were identified at December 31, 2012 and potential losses were provided for at that time.

Other Income

Other income decreased to $3.4 million for the three months ended March 31, 2013, as compared to $4.3 million in the same prior year period. Higher fees and service charges and an improvement in the net gain (loss) from other real estate owned was offset by a decrease in the net (loss) gain on sales of loans available for sale. Effective January 1, 2013, income from the origination of reverse mortgage loans of $166,000 is classified as part of fees and service charges as compared to inclusion in the net (loss) gain on the sales of loans in the prior period as the Bank no longer closes these loans in its name. For the three months ended March 31, 2013, the net (loss) gain on the sales of loans decreased $1.1 million to a loss of $174,000, due to an increase in the provision for repurchased loans, a decrease in loan sale volume and the reclassification of reverse mortgage income. The net (loss) gain on the sales of loans for the three months ended March 31, 2013 was adversely impacted by an addition of $975,000 to the reserve for repurchased loans as compared to an addition of $150,000 in the same prior year period. (Refer to Note 6. Reserve for Repurchased Loans and Loss Sharing Obligations.) For the quarter ended March 31, 2013, fees and service charges, exclusive of the $166,000 in fees on reverse mortgage loans, decreased $16,000, due to a reduction in fees from investment services and deposit accounts partly offset by increases in bankcard services and trust revenue. Finally, the net gain (loss) from other real estate owned improved $52,000 for the quarter ended March 31, 2013, as compared to the same prior year period.

 

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Operating Expenses

Operating expenses decreased by $275,000, to $12.7 million, for the three months ended March 31, 2013, as compared to $12.9 million for the corresponding prior year period primarily due to a reduction in the incentive plan accrual.

Provision for Income Taxes

Income tax expense was $2.4 million for the three months ended March 31, 2013, as compared to $3.1 million for the same prior year period. The effective tax rate was 35.1% for the three months ended March 31, 2013 as compared to 35.7% in the same prior year period.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, FHLB and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit.

At March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012.

The Company’s cash needs for the three months ended March 31, 2013 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, deposit growth and short-term borrowings. The cash was principally utilized for loan originations and the purchase of investment and mortgage-backed securities. The Company’s cash needs for the three months ended March 31, 2012 were primarily satisfied by principal payments on loans and mortgage-backed securities and proceeds from the sale of mortgage loans held for sale. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities, to fund deposit outflow and reduce FHLB borrowings.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At March 31, 2013, outstanding commitments to originate loans totaled $59.7 million; outstanding unused lines of credit totaled $243.5 million; and outstanding commitments to sell loans totaled $11.7 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $129.4 million at March 31, 2013. 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 three months ended March 31, 2013, the Company repurchased 254,340 shares of common stock at a total cost of $3.6 million compared with repurchases of 113,500 at a cost of $1.6 million for the three months ended March 31, 2012. At March 31, 2013, there were 580,444 shares remaining to be repurchased under the existing stock repurchase program.

Cash dividends on common stock declared and paid during the first three months of 2013 were $2.1 million, as compared to $2.2 million in the same prior year period. On April 17, 2013, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on May 10, 2013, to stockholders of record at the close of business on April 29, 2013.

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 three months ended March 31, 2013, the Company received a dividend payment of $4.0 million from the Bank. At March 31, 2013, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment

 

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of $8.0 million in dividends from the Bank to the Holding Company over the next two quarters, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises throughout the period. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At March 31, 2013, OceanFirst Financial Corp. held $17.8 million in cash and $5.7 million in investment securities available for sale.

As of March 31, 2013, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible capital

   $ 216,350         9.40   $ 34,531         1.50

Core capital

     216,350         9.40        92,082         4.00   

Tier 1 risk-based capital

     216,350         15.04        57,574         4.00   

Total risk-based capital

     234,361         16.29        115,147         8.00   

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

At March 31, 2013, the Company maintained tangible common equity of $219.6 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 $11.7 million.

The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2013 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 323,811       $ 142,311       $ 149,000       $ 10,000       $ 22,500   

Commitments to Originate Loans

     59,671         59,671         —           —           —     

Commitments to Fund Unused Lines of Credit

     243,457         243,457         —           —           —     

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.

 

6


Table of Contents

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.

 

     March 31,
2013
    December 31,
2012
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate—one-to-four family

   $ 29,567      $ 26,521   

Commercial real estate

     12,718        11,567   

Construction

     —          —     

Consumer

     4,680        4,540   

Commercial

     472        746   
  

 

 

   

 

 

 

Total non-performing loans

     47,437        43,374   

OREO, net

     2,813        3,210   
  

 

 

   

 

 

 

Total non-performing assets

   $ 50,250      $ 46,584   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 14,782      $ 11,437   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     1.34     1.32

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

     43.20        47.29   

Non-performing loans as a percent of total loans receivable

     3.11        2.80   

Non-performing assets as a percent of total assets

     2.18        2.05   

The Company’s non-performing loans increased $4.1 million at March 31, 2013, as compared to December 31, 2012 due to the impact of superstorm Sandy which caused substantial disruption in the Bank’s market area on October 29 and 30, 2012. The Bank increased its allowance for loan losses at December 31, 2012 by $1.8 million in expectation of increasing levels of non-performing loans for borrowers impacted by superstorm Sandy. The Bank previously identified 124 loans totaling $30.1 million which were adversely impacted by the storm. At March 31, 2013, the status of these loans was as follows:

 

     Amount
(000’s)
 

Loans repaid or brought current

   $ 19,421   

Loans for which the Bank granted a temporary repayment plan under which the borrower is performing

     4,494   

Loan is 30-89 days delinquent

     1,705   

Loan is 90 days or more delinquent

     4,469   
  

 

 

 
   $ 30,089   
  

 

 

 

Included in the non-performing loan total at March 31, 2013 was $19.3 million of troubled debt restructured loans, as compared to $18.2 million of troubled debt restructured loans at December 31, 2012. Non-performing loans are concentrated in one-to-four family loans which comprise 62.3% of the total. At March 31, 2013, the average weighted loan-to-value ratio of non-performing one-to-four family loans, after any related charge-offs, was 60% using appraisal values at time of origination and 78% using updated appraisal values. Appraisals are updated for all non-performing residential loans secured by real estate and subsequently updated annually if the loan remains delinquent for an extended period. At March 31, 2013, the average weighted loan-to-value ratio of the total one-to-four family loan portfolio was 56% using appraisal values at time of origination. The largest non-performing loan relationship consists of several credits to a single borrower with an aggregate balance of $6.3 million which was criticized due to poor, but improving, operating results. 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 $9.3 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 loan was renewed in December 2012 at comparable terms. The borrower is current as to payments under the restructured terms but remains classified as a non-accrual loan due to continued uncertainty about the borrower’s ability to service the debt. 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.

 

7


Table of Contents

The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Loans and other assets excluding investment securities:

  

Special Mention

   $ 10,120       $ 6,245   

Substandard

     67,175         65,039   

Doubtful

     865         1,081   

Investment securities:

     

Substandard

     —           25,000   

The largest Special Mention loan at March 31, 2013 is a commercial real estate mortgage to a local builder for $1.8 million which was current as to payments. The loan is well collateralized by residential property and several vacant lots. The largest Substandard loan relationship is the marina credit for $6.3 million noted above. The largest Doubtful asset with a balance of $862,000 is a portion of a commercial real estate loan to a self-storage facility. The remaining balance of $1.3 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 previously classified select investment securities as Substandard, representing the amount with a credit rating below investment grade from one of the internationally recognized credit rating services. These securities have consistently remained current as to principal and interest payments. During the first quarter of 2013, the Company performed, with the assistance of an independent expert, a detailed analysis relating to the collectability of these securities. The analysis concluded that the issuers of these securities have an adequate capacity to meet financial commitments as originally agreed for the projected life of the security, the risk of default is low and the full and timely repayment of principal and interest is expected.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 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 confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake—and specifically disclaims any obligation—to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Further description of the risks and uncertainties to the business are included in Item 1, Business and Item 1A, Risk Factors of the Company’s 2012 Form 10-K and Item 1A of this
Form 10-Q.

 

8


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2013, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At March 31, 2013, the Company’s one-year gap was positive 0.63% as compared to positive 0.90% at December 31, 2012.

 

At March 31, 2013

   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

   $ 50,614      $ —        $ —        $ —        $ —        $ 50,614   

Investment securities

     60,518        41,621        87,830        27,928        4,992        222,889   

FHLB stock

     —          —          —          —          17,120        17,120   

Mortgage-backed securities

     66,220        57,547        119,127        79,304        51,191        373,389   

Loans receivable (2)

     304,675        404,338        421,810        176,069        215,116        1,522,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     482,027        503,506        628,767        283,301        288,419        2,186,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     24,523        9,740        21,453        16,218        52,863        124,797   

Savings accounts

     56,661        24,770        49,686        37,607        117,091        285,815   

Interest-bearing checking accounts

     500,797        61,004        113,075        92,680        142,991        910,547   

Time deposits

     47,810        81,610        42,038        39,585        6,308        217,351   

FHLB advances

     46,000        25,000        144,000        10,000        —          225,000   

Securities sold under agreements to repurchase

     71,311        —          —          —          —          71,311   

Other borrowings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     769,602        202,124        375,252        196,090        319,253        1,862,321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (287,575   $ 301,382      $ 253,515      $ 87,211      $ (30,834   $ 323,699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (287,575   $ 13,807      $ 267,322      $ 354,533      $ 323,699      $ 323,699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (13.16 )%      0.63     12.23     16.22     14.81     14.81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 March 31, 2013 and December 31, 2012. 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 2012 Form 10-K.

 

     March 31, 2013     December 31, 2012  
     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

   $ 247,014         (5.2 )%      11.2   $ 63,373         (3.2 )%    $ 248,847         (2.0 )%      11.5   $ 64,291         (4.3 )% 

200

     259,781         (0.3     11.5        65,276         (0.3     260,055         2.4        11.7        66,484         (1.0

100

     265,998         2.1        11.6        65,776         0.5        263,429         3.7        11.6        67,311         0.2   

Static

     260,530         —          11.1        65,455         —          254,020         —          11.0        67,163         —     

(100)

     221,501         (15.0     9.3        61,459         (6.1     206,602         (18.7     8.8        62,877         (6.4

 

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 5d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

9


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     March 31,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 71,361      $ 62,544   

Investment securities available for sale

     214,546        213,593   

Federal Home Loan Bank of New York stock, at cost

     17,120        17,061   

Mortgage-backed securities available for sale

     383,134        333,857   

Loans receivable, net

     1,501,362        1,523,200   

Mortgage loans held for sale

     4,121        6,746   

Interest and dividends receivable

     6,095        5,976   

Other real estate owned, net

     2,813        3,210   

Premises and equipment, net

     22,386        22,233   

Servicing asset

     4,515        4,568   

Bank Owned Life Insurance

     53,482        53,167   

Other assets

     22,776        23,073   
  

 

 

   

 

 

 

Total assets

   $ 2,303,711      $ 2,269,228   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 1,740,294      $ 1,719,671   

Securities sold under agreements to repurchase with retail customers

     71,311        60,791   

Federal Home Loan Bank advances

     225,000        225,000   

Other borrowings

     27,500        27,500   

Advances by borrowers for taxes and insurance

     7,947        7,386   

Other liabilities

     12,105        9,088   
  

 

 

   

 

 

 

Total liabilities

     2,084,157        2,049,436   
  

 

 

   

 

 

 

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 17,660,229 and 17,894,929 shares outstanding at March 31, 2013 and December 31, 2012, respectively

     336        336   

Additional paid-in capital

     262,635        262,704   

Retained earnings

     200,467        198,109   

Accumulated other comprehensive gain (loss)

     829        49   

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (3,832     (3,904

Treasury stock, 15,906,543 and 15,671,843 shares at March 31, 2013 and December 31, 2012, respectively

     (240,881     (237,502

Common stock acquired by Deferred Compensation Plan

     (651     (647

Deferred Compensation Plan Liability

     651        647   
  

 

 

   

 

 

 

Total stockholders’ equity

     219,554        219,792   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,303,711      $ 2,269,228   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

10


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended March 31,
 
     2013     2012  
     (Unaudited)  

Interest income:

    

Loans

   $ 17,664      $ 19,805   

Mortgage-backed securities

     1,648        2,318   

Investment securities and other

     740        740   
  

 

 

   

 

 

 

Total interest income

     20,052        22,863   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     1,325        2,018   

Borrowed funds

     1,538        1,740   
  

 

 

   

 

 

 

Total interest expense

     2,863        3,758   
  

 

 

   

 

 

 

Net interest income

     17,189        19,105   

Provision for loan losses

     1,100        1,700   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     16,089        17,405   
  

 

 

   

 

 

 

Other income:

    

Loan servicing income

     156        138   

Fees and service charges

     3,093        2,943   

Net (loss) gain on sales of loans available for sale

     (174     972   

Net gain (loss) from other real estate owned

     2        (50

Income from Bank Owned Life Insurance

     315        306   

Other

     17        2   
  

 

 

   

 

 

 

Total other income

     3,409        4,311   
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and employee benefits

     6,578        6,837   

Occupancy

     1,363        1,304   

Equipment

     638        595   

Marketing

     250        346   

Federal deposit insurance

     524        531   

Data processing

     973        943   

Check card processing

     411        299   

Professional fees

     611        652   

Other operating expense

     1,317        1,433   
  

 

 

   

 

 

 

Total operating expenses

     12,665        12,940   
  

 

 

   

 

 

 

Income before provision for income taxes

     6,833        8,776   

Provision for income taxes

     2,397        3,129   
  

 

 

   

 

 

 

Net income

   $ 4,436      $ 5,647   
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.26      $ 0.31   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.26      $ 0.31   
  

 

 

   

 

 

 

Average basic shares outstanding

     17,285        18,064   
  

 

 

   

 

 

 

Average diluted shares outstanding

     17,324        18,108   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

11


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended March 31,
 
     2013      2012  
     (Unaudited)  

Net income

   $ 4,436       $ 5,647   

Other comprehensive income:

     

Unrealized gain on securities (net of tax expense $539 in 2013 and $1,003 in 2012)

     780         1,364   
  

 

 

    

 

 

 

Total comprehensive income

   $ 5,216       $ 7,011   
  

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

12


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, 2011

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

Net income

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

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

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

Tax expense of stock plans

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

Stock awards

     —           —           175        —          —          —          —          —          —          175   

Treasury stock allocated to restricted stock plan

     —           —           (282     42        —          —          240        —          —          —     

Purchased 113,500 shares of common stock

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

Allocation of ESOP stock

     —           —           47        —          —          72        —          —          —          119   

Cash dividend $0.12 per share

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

Exercise of stock options

     —           —           —          (6     —          —          66        —          —          60   

Sale of stock for the deferred compensation plan

     —           —           —          —          —          —          —          192        (192     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ —         $ 336       $ 262,704      $ 198,109      $ 49      $ (3,904   $ (237,502   $ (647   $ 647      $ 219,792   

Net income

     —           —           —          4,436        —          —          —          —          —          4,436   

Unrealized gain on securities (net of tax expense $539)

     —           —           —          —          780        —          —          —          —          780   

Stock awards

     —           —           157        —          —          —          —          —          —          157   

Treasury stock allocated to restricted stock plan

     —           —           (274     11        —          —          263        —          —          —     

Purchased 254,340 shares of common stock

     —           —           —          —          —          —          (3,642     —          —          (3,642

Allocation of ESOP stock

     —           —           48        —          —          72        —          —          —          120   

Cash dividend $0.12 per share

     —           —           —          (2,089     —          —          —          —          —          (2,089

Sale of stock for the deferred compensation plan

     —           —           —          —          —          —          —          (4     4        —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ —         $ 336       $ 262,635      $ 200,467      $ 829      $ (3,832   $ (240,881   $ (651   $ 651      $ 219,554   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the three months
ended March 31,
 
     2013     2012  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 4,436      $ 5,647   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     680        628   

Allocation of ESOP stock

     120        119   

Stock awards

     157        175   

Amortization of servicing asset

     386        410   

Net premium amortization in excess of discount accretion on securities

     966        800   

Net amortization of deferred costs and discounts on loans

     162        192   

Provision for loan losses

     1,100        1,700   

Provision for repurchased loans and loss sharing obligations

     975        150   

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

     (21     30   

Net gain on sales of loans

     (801     (1,122

Proceeds from sales of mortgage loans held for sale

     36,284        44,116   

Mortgage loans originated for sale

     (33,191     (38,117

Proceeds from Bank Owned Life Insurance

     —          158   

Increase in value of Bank Owned Life Insurance

     (315     (306

(Increase) decrease in interest and dividends receivable

     (119     51   

Increase in other assets

     (242     (673

Increase in other liabilities

     2,042        3,277   
  

 

 

   

 

 

 

Total adjustments

     8,183        11,588   
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,619        17,235   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans receivable

     20,002        5,998   

Purchase of investment securities available for sale

     (7,016     (1,777

Purchase of mortgage-backed securities available for sale

     (81,467     (45,977

Principal repayments on mortgage-backed securities available for sale

     30,949        28,860   

Proceeds from maturities of investment securities available for sale

     7,657        2,668   

(Increase) decrease in Federal Home Loan Bank of New York stock

     (59     413   

Proceeds from sales of other real estate owned

     992        169   

Purchases of premises and equipment

     (833     (595
  

 

 

   

 

 

 

Net cash used in investing activities

     (29,775     (10,241
  

 

 

   

 

 

 

 

Continued

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

 

     For the three months
ended March 31,
 
     2013     2012  
     (Unaudited)  

Cash flows from financing activities:

    

Increase (decrease) in deposits

   $ 20,623      $ (25,639

Increase in short-term borrowings

     10,520        2,693   

Repayments of Federal Home Loan Bank advances

     —          (21,000

Increase in advances by borrowers for taxes and insurance

     561        1,203   

Exercise of stock options

     —          60   

Purchase of treasury stock

     (3,642     (1,565

Dividends paid

     (2,089     (2,176

Tax expense of stock plans

     —          (2
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     25,973        (46,426
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     8,817        (39,432

Cash and due from banks at beginning of period

     62,544        77,527   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 71,361      $ 38,095   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 2,858      $ 3,826   

Income taxes

     275        12   

Non-cash activities:

    

Loans charged-off, net

     1,116        1,689   

Transfer of loans receivable to other real estate owned

     574        267   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

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

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results of operations that may be expected for all of 2013. 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, 2012.

Note 2. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 (in thousands):

 

     Three months ended
March 31,
 
     2013     2012  

Weighted average shares issued net of Treasury shares

     17,832        18,651   

Less: Unallocated ESOP shares

     (459     (493

Unallocated incentive award shares and shares held by deferred compensation plan

     (88     (94
  

 

 

   

 

 

 

Average basic shares outstanding

     17,285        18,064   

Add: Effect of dilutive securities:

    

Shares held by deferred compensation plan

     39        44   
  

 

 

   

 

 

 

Average diluted shares outstanding

     17,324        18,108   
  

 

 

   

 

 

 

For the three months ended March 31, 2013 and 2012, antidilutive stock options of 1,109,000 and 2,043,000, respectively, were excluded from earnings per share calculations.

Note 3. Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at March 31, 2013 and December 31, 2012 are as follows (in thousands):

 

March 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 138,030       $ 855       $ —        $ 138,885   

State and municipal obligations

     24,867         38         (16     24,889   

Corporate debt securities

     55,000         —           (9,913     45,087   

Equity investments

     4,992         698         (5     5,685   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 222,889       $ 1,591       $ (9,934   $ 214,546   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 138,105       $ 945       $ —        $ 139,050   

State and municipal obligations

     25,856         5         (81     25,780   

Corporate debt securities

     55,000         —           (11,530     43,470   

Equity investments

     4,992         424         (123     5,293   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 223,953       $ 1,374       $ (11,734   $ 213,593   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no realized gains or losses on the sale of investment securities available for sale for the three months ended March 31, 2013 and 2012.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at March 31, 2013 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2013, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $45.1 million, respectively, were callable prior to the maturity date.

 

March 31, 2013

   Amortized
Cost
     Estimated
Market
Value
 

Less than one year

   $ 47,139       $ 47,410   

Due after one year through five years

     115,758         116,364   

Due after five years through ten years

     —           —     

Due after ten years

     55,000         45,087   
  

 

 

    

 

 

 
   $ 217,897       $ 208,861   
  

 

 

    

 

 

 

The estimated market value and unrealized loss for investment securities available for sale at March 31, 2013 and December 31, 2012 segregated by the duration of the unrealized loss are as follows (in thousands):

 

     Less than 12 months     12 months or longer     Total  

March 31, 2013

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

State and municipal obligations

   $ 5,195       $ (16   $ —         $ —        $ 5,195       $ (16

Corporate debt securities

     —           —          45,087         (9,913     45,087         (9,913

Equity investments

     744         (5     —           —          744         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 5,939       $ (21   $ 45,087       $ (9,913   $ 51,026       $ (9,934
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less than 12 months     12 months or longer     Total  

December 31, 2012

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

State and municipal obligations

   $ 15,918       $ (81   $ —         $ —        $ 15,918       $ (81

Corporate debt securities

     —           —          43,470         (11,530     43,470         (11,530

Equity investments

     1,264         (123     —           —          1,264         (123
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 17,182       $ (204   $ 43,470       $ (11,530   $ 60,652       $ (11,734
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2013, 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       $ 11,925       Ba2/BB+

Chase Capital

     10,000         8,350       Baa2/BBB

Wells Fargo Capital

     5,000         4,225       A3/A-

Huntington Capital

     5,000         3,950       Baa3/BB+

Keycorp Capital

     5,000         4,100       Baa3/BBB-

PNC Capital

     5,000         4,262       Baa2/BBB

State Street Capital

     5,000         4,200       A3/BBB+

SunTrust Capital

     5,000         4,075       Baa3/BB+
  

 

 

    

 

 

    
   $ 55,000       $ 45,087      
  

 

 

    

 

 

    

At March 31, 2013, 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. Following the purchase of these securities , the required spread increased for these types of securities causing a decline in the market price. The Company concluded that unrealized losses on available for sale securities were only temporarily impaired at March 31, 2013. 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. Recently, credit spreads have decreased for these types of securities and market prices have improved. 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 March 31, 2013.

Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at March 31, 2013 and December 31, 2012 are as follows (in thousands):

 

March 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 150,415       $ 1,586       $ (103   $ 151,898   

FNMA

     222,189         8,144         (84     230,249   

GNMA

     785         202         —          987   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 373,389       $ 9,932       $ (187   $ 383,134   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

December 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 118,294       $ 1,284       $ (53   $ 119,525   

FNMA

     204,296         9,017         (11     213,302   

GNMA

     824         206         —          1,030   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 323,414       $ 10,507       $ (64   $ 333,857   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no gains or losses realized on the sale of mortgage-backed securities available for sale for the three months ended March 31, 2013 and 2012.

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

The estimated market value and unrealized loss for mortgage-backed securities available for sale at March 31, 2013 and December 31, 2012, segregated by the duration of the unrealized loss are as follows (in thousands):

 

     Less than 12 months     12 months or longer      Total  

March 31, 2013

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

FHLMC

   $ 32,086       $ (103   $ —         $ —         $ 32,086       $ (103

FNMA

     19,659         (84     —           —           19,659         (84
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,745       $ (187   $ —         $ —         $ 51,745       $ (187
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months     12 months or longer      Total  

December 31, 2012

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

FHLMC

   $ 16,186       $ (53   $ —         $ —         $ 16,186       $ (53

FNMA

     4,871         (11     —           —           4,871         (11
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,057       $ (64   $ —         $ —         $ 21,057       $ (64
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The mortgage-backed securities are issued and guaranteed by either FHLMC or FNMA, corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally-recognized credit rating services. FHLMC and FNMA have been under the conservatorship of the Federal Housing Financial Agency since September 8, 2008. The conservatorships have no specified termination date. Also, FHLMC and FNMA have entered into Stock Purchase Agreements, which following the issuance of Senior Preferred Stock and Warrants to the United States Treasury, provide FHLMC and FNMA funding commitments from the United States Treasury. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the mortgage-backed securities. Although these mortgage-backed securities are available for sale, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that unrealized losses on these available for sale securities were only temporarily impaired at March 31, 2013.

 

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Table of Contents

Note 5. Loans Receivable, Net

Loans receivable, net at March 31, 2013 and December 31, 2012 consisted of the following (in thousands):

 

     March 31, 2013     December 31, 2012  

Real estate:

    

One-to-four family

   $ 784,929      $ 802,959   

Commercial real estate, multi family and land

     470,504        475,155   

Residential construction

     10,947        9,013   

Consumer

     192,606        198,143   

Commercial

     63,747        57,967   
  

 

 

   

 

 

 

Total loans

     1,522,733        1,543,237   

Loans in process

     (4,846     (3,639

Deferred origination costs, net

     3,969        4,112   

Allowance for loan losses

     (20,494     (20,510
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,501,362      $ 1,523,200   
  

 

 

   

 

 

 

At March 31, 2013 and December 31, 2012, loans in the amount of $47,437,000 and $43,374,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At March 31, 2013, the impaired loan portfolio totaled $38,312,000 for which there was a specific allocation in the allowance for loan losses of $3,143,000. At December 31, 2012, the impaired loan portfolio totaled $37,546,000 for which there was a specific allocation in the allowance for loan losses of $2,554,000. The average balance of impaired loans for the three months ended March 31, 2013 and 2012 was $38,187,000 and $28,733,000, respectively.

An analysis of the allowance for loan losses for the three months ended March 31, 2013 and 2012 is as follows (in thousands):

 

     Three months ended
March 31,
 
     2013     2012  

Balance at beginning of period

   $ 20,510      $ 18,230   

Provision charged to operations

     1,100        1,700   

Charge-offs

     (1,361     (1,800

Recoveries

     245        111   
  

 

 

   

 

 

 

Balance at end of period

   $ 20,494      $ 18,241   
  

 

 

   

 

 

 

 

20


Table of Contents

The following table presents an analysis of the allowance for loan losses for the three months ended March 31, 2013 and 2012 and the balance in the allowance for loan loses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2013 and December 31, 2012 (in thousands):

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial     Unallocated      Total  

For the three months ended March 31, 2013

             

Allowance for loan losses:

             

Balance at beginning of period

   $ 5,241      $ 8,937      $ 2,264      $ 1,348      $ 2,720       $ 20,510   

Provision (benefit) charged to operations

     830        324        (94     (21     61         1,100   

Charge-offs

     (950     —          (176     (235     —           (1,361

Recoveries

     64        25        154        2        —           245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 5,185      $ 9,286      $ 2,148      $ 1,094      $ 2,781       $ 20,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

For the three months ended March 31, 2012

             

Allowance for loan losses:

             

Balance at beginning of period

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

Provision charged to operations

     140        108        772        323        357         1,700   

Charge-offs

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

Recoveries

     29        74        6        2        —           111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

March 31, 2013

             

Allowance for loan losses:

             

Ending allowance balance attributed to loans:

             

Individually evaluated for impairment

   $ 166      $ 2,457      $ 520      $ —        $ —         $ 3,143   

Collectively evaluated for impairment

     5,019        6,829        1,628        1,094        2,781         17,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total ending allowance balance

   $ 5,185      $ 9,286      $ 2,148      $ 1,094      $ 2,781       $ 20,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

             

Loans individually evaluated for impairment

   $ 22,303      $ 13,057      $ 2,663      $ 289      $ —         $ 38,312   

Loans collectively evaluated for impairment

     773,573        457,447        189,943        63,458        —           1,484,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total ending loan balance

   $ 795,876      $ 470,504      $ 192,606      $ 63,747      $ —         $ 1,522,733   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

December 31, 2012

             

Allowance for loan losses:

             

Ending allowance balance attributed to loans:

             

Individually evaluated for impairment

   $ 179      $ 1,834      $ 541      $ —        $ —         $ 2,554   

Collectively evaluated for impairment

     5,062        7,103        1,723        1,348        2,720         17,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total ending allowance balance

   $ 5,241      $ 8,937      $ 2,264      $ 1,348      $ 2,720       $ 20,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

             

Loans individually evaluated for impairment

   $ 22,427      $ 12,116      $ 2,712      $ 291      $ —         $ 37,546   

Loans collectively evaluated for impairment

     789,545        463,039        195,431        57,676        —           1,505,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total ending loan balance

   $ 811,972      $ 475,155      $ 198,143      $ 57,967      $ —         $ 1,543,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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A summary of impaired loans at March 31, 2013 and December 31, 2012 is as follows (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Impaired loans with no allocated allowance for loan losses

   $ 25,815       $ 25,513   

Impaired loans with allocated allowance for loan losses

     12,497         12,033   
  

 

 

    

 

 

 
   $ 38,312       $ 37,546   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 3,143       $ 2,554   
  

 

 

    

 

 

 

At March 31, 2013, impaired loans include troubled debt restructuring loans of $35,615,000 of which $16,328,000 were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2012, impaired loans include troubled debt restructuring loans of $35,893,000 of which $17,733,000 were performing in accordance with their restructured terms and were accruing interest.

The summary of loans individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of March 31, 2013

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 11,945       $ 11,245       $ —     

Originated by mortgage company

     7,956         7,631         —     

Originated by mortgage company—non-prime

     2,781         2,197         —     

Commercial real estate:

        

Commercial

     2,694         2,657         —     

Construction and land

     —           —           —     

Consumer

     2,088         1,796         —     

Commercial

     289         289         —     
  

 

 

    

 

 

    

 

 

 
   $ 27,753       $ 25,815       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 828       $ 828       $ 131   

Originated by mortgage company

     402         402         35   

Originated by mortgage company—non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     10,047         9,928         2,440   

Construction and land

     472         472         17   

Consumer

     870         867         520   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 12,619       $ 12,497       $ 3,143   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2012

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 11,200       $ 10,956       $ —     

Originated by mortgage company

     7,210         7,061         —     

Originated by mortgage company—non-prime

     2,335         2,251         —     

Commercial real estate:

        

Commercial

     2,722         2,691         —     

Construction and land

     482         482         —     

Consumer

     1,956         1,781         —     

Commercial

     291         291         —     
  

 

 

    

 

 

    

 

 

 
   $ 26,196       $ 25,513       $ —     
  

 

 

    

 

 

    

 

 

 

 

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

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 1,761       $ 1,755       $ 142   

Originated by mortgage company

     404         404         37   

Originated by mortgage company—non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     9,022         8,943         1,834   

Construction and land

     —           —           —     

Consumer

     934         931         541   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 12,121       $ 12,033       $ 2,554   
  

 

 

    

 

 

    

 

 

 

 

     Three months ended March 31,  
     2013      2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 11,622       $ 93       $ 9,375       $ 99   

Originated by mortgage company

     7,338         72         4,789         50   

Originated by mortgage company—non-prime

     2,224         3         2,412         1   

Commercial real estate:

           

Commercial

     2,674         31         2,378         —     

Construction and land

     —           —           —           —     

Consumer

     1,794         15         712         10   

Commercial

     290         2         424         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,942       $ 216       $ 20,090       $ 160   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 828       $ 11       $ 197       $ —     

Originated by mortgage company

     402         7         389         4   

Originated by mortgage company—non-prime

     —           —           —           —     

Commercial real estate:

           

Commercial

     9,675         74         7,926         —     

Construction and land

     472         —           —           —     

Consumer

     868         14         131         1   

Commercial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,245       $ 106       $ 8,643       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the recorded investment in non-accrual loans by class of loans as of March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013      December 31, 2012  

Residential real estate:

     

Originated by Bank

   $ 16,754       $ 13,156   

Originated by mortgage company

     10,041         10,477   

Originated by mortgage company—non-prime

     2,772         2,888   

Residential construction

     —           —     

Commercial real estate:

     

Commercial

     12,246         11,085   

Construction and land

     472         482   

Consumer

     4,680         4,540   

Commercial

     472         746   
  

 

 

    

 

 

 
   $ 47,437       $ 43,374   
  

 

 

    

 

 

 

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

The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 and December 31, 2012 by class of loans (in thousands):

 

     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
than
90 Days
Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

March 31, 2013

                 

Residential real estate:

                 

Originated by Bank

   $ 3,192       $ 2,581       $ 15,570       $ 21,343       $ 650,383       $ 671,726   

Originated by mortgage company

     3,106         840         9,909         13,855         95,234         109,089   

Originated by mortgage company—non-prime

     122         321         2,255         2,698         1,416         4,114   

Residential construction

     —           —           —           —           10,947         10,947   

Commercial real estate:

                 

Commercial

     5,746         59         2,361         8,166         449,349         457,515   

Construction and land

     —           625         472         1,097         11,892         12,989   

Consumer

     961         129         4,585         5,675         186,931         192,606   

Commercial

     —           72         112         184         63,563         63,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,127       $ 4,627       $ 35,264       $ 53,018       $ 1,469,715       $ 1,522,733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

Residential real estate:

                 

Originated by Bank

   $ 5,863       $ 782       $ 10,624       $ 17,269       $ 666,833       $ 684,102   

Originated by mortgage company

     2,870         7         10,294         13,171         101,437         114,608   

Originated by mortgage company—non-prime

     431         47         2,369         2,847         1,402         4,249   

Residential construction

     —           —           —           —           9,013         9,013   

Commercial real estate:

                 

Commercial

     2,422         608         2,863         5,893         457,394         463,287   

Construction and land

     —           —           482         482         11,386         11,868   

Consumer

     719         576         4,457         5,752         192,391         198,143   

Commercial

     —           —           112         112         57,855         57,967   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,305       $ 2,020       $ 31,201       $ 45,526       $ 1,497,711       $ 1,543,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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Table of Contents

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. Loans not rated are included in groups of homogeneous loans. As of March 31, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

March 31, 2013

              

Commercial real estate:

              

Commercial

   $ 423,915       $ 1,775       $ 30,963       $ 862       $ 457,515   

Construction and land

     12,011         506         472         —           12,989   

Commercial

     63,374         —           373         —           63,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 499,300       $ 2,281       $ 31,808       $ 862       $ 534,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Commercial real estate:

              

Commercial

   $ 429,393       $ 1,775       $ 31,275       $ 844       $ 463,287   

Construction and land

     10,880         506         482         —           11,868   

Commercial

     57,341         —           391         235         57,967   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 497,614       $ 2,281       $ 32,148       $ 1,079       $ 533,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2013 and December 31, 2012 (in thousands):

 

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

company –
non-prime
     Residential
construction
     Consumer  

March 31, 2013

              

Performing

   $ 654,972       $ 99,048       $ 1,342       $ 10,947       $ 187,926   

Non-performing

     16,754         10,041         2,772         —           4,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 671,726       $ 109,089       $ 4,114       $ 10,947       $ 192,606   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Performing

   $ 670,946       $ 104,131       $ 1,361       $ 9,013       $ 193,603   

Non-performing

     13,156         10,477         2,888         —           4,540   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 684,102       $ 114,608       $ 4,249       $ 9,013       $ 198,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company classifies certain loans as troubled debt restructurings (“TDR”) when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the capitalization of past due amounts. Included in the non-accrual loan total at March 31, 2013 and December 31, 2012 were $19,287,000 and $18,160,000, respectively, of troubled debt restructurings. At March 31, 2013 and December 31, 2012, the Company has allocated $2,410,000 and $2,418,000, respectively, of specific reserves to loans which are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at March 31, 2013 and December 31, 2012, which totaled $16,328,000 and $17,733,000, respectively. Non-accruing and accruing troubled debt restructurings were adversely impacted at March 31, 2013 by $2,877,000 and $5,164,000, respectively, and at December 31, 2012 by $1,704,000 and

 

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Table of Contents

$6,291,000, respectively, due to the implementation of new guidance issued by the Bank’s regulator, the Office of the Comptroller of the Currency (“OCC”). The amount now includes one-to-four family and consumer loans where the borrower’s obligation was discharged due to bankruptcy. The updated guidance requires the Company to include certain loans as troubled debt restructurings due to the discharge of the borrower’s debt. These loans continue to make payments as agreed and the Bank retains its security interest in the real estate collateral. Troubled debt restructurings with six months of performance are considered in the allowance for loan losses similar to other performing loans. Troubled debt restructurings which are non-accrual or classified are considered in the allowance for loan losses similar to other non-accrual or classified loans.

The following table presents information about troubled debt restructurings which occurred during the three months ended March 31, 2013 and 2012, and troubled debt restructurings modified within the previous year and which defaulted during the three months ended March 31, 2013 and 2012 (dollars in thousands):

 

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

Three months ended March 31, 2013

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     3       $ 83       $ 75   

Consumer

     1         2         2   
      Number of Loans      Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

     None         None      
      Number of Loans      Pre-modification
Recorded Investment
     Post-modification
Recorded Investment
 

Three months ended March 31, 2012

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     2       $ 772       $ 679   

Commercial real estate:

        

Commercial

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

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

     None         None      

Note 6. Reserve for Repurchased Loans and Loss Sharing Obligations

An analysis of the reserve for repurchased loans and loss sharing obligations for the three months ended March 31, 2013 and 2012 is as follows (in thousands). The reserve is included in other liabilities in the accompanying statements of financial condition.

 

      Three months ended
March 31,
 
     2013     2012  

Balance at beginning of period

   $ 1,203      $ 705   

Provision charged to operations

     975        150   

Loss on loans repurchased, settlements or payments under loss sharing arrangements

     (695     —     

Recoveries

     205        —     
  

 

 

   

 

 

 

Balance at end of period

   $ 1,688      $ 855   
  

 

 

   

 

 

 

The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to outstanding loan repurchase requests, additional repurchase requests which may be received on loans previously sold to investors and other loss sharing obligations. In establishing the reserve for repurchased loans and loss sharing obligations, the Company considered all types of sold loans. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans and loss sharing obligations at each quarter-end. The reserve includes a specific loss estimate on the outstanding loan repurchase requests based on the estimated fair value of the underlying collateral modified by the likelihood of loss which was estimated based on historical experience. The reserve also includes a general loss estimate based on an estimate of loans likely to be returned for repurchase and the estimated loss on those loans. Finally, the reserve also includes

 

26


Table of Contents

an estimate of the Bank’s obligation under a loss sharing arrangement with the Federal Home Loan Bank relating to loans sold into their Mortgage Partnership Finance (“MPF”) program. Under this program, the Bank and the FHLB share credit risk for loans sold. The first loss position, equal to 1% of the aggregate amount of the loan pool, is absorbed by the FHLB through a reduction in credit enhancement fees paid to the Bank. The second loss position, generally covering the next 1.5% to 4.0% of the aggregate loan pool, is absorbed by the Bank. Loan losses above the combination of these two thresholds are fully absorbed by the FHLB. In establishing the reserve, the Company considered recent and historical experience, product type and volume of loan sales and the general economic environment.

The reserve for repurchased loans and loss sharing obligations was $1.7 million at March 31, 2013, a $485,000 increase from December 31, 2012 due to a general provision of $100,000 for repurchase requests, an additional provision relating to loans sold to the FHLB, incurred losses relating to the FHLB loan sales, a comprehensive settlement with one investor relating to existing and anticipated loan repurchase requests, and recoveries of previously charged-off amounts. For the three months ended March 31, 2013, the Bank recognized actual losses for the first time under the MPF program of $245,000 on two loans in a single pool. In light of these realized losses, the Bank performed an analysis of additional loss exposure and determined that additional covered losses within that loan pool were likely and recorded an additional provision of $875,000. The analysis also revealed the actual losses of $245,000 and the general provision of $875,000 related to asset quality deterioration in the loan pool should have been recognized in prior periods; however these amounts were not considered material to such periods. The Bank’s maximum remaining loss exposure on all loans sold to the FHLB is $1.8 million, although the Bank’s reserve includes an estimate of expected future losses. Therefore, additional losses will only be recognized if loan performance deteriorates beyond expectations. The reserve was reduced by a cash payment of $450,000 as part of a comprehensive settlement with a single investor which settled seven outstanding loan repurchase requests and terminated the right of the investor to make any future claims for repurchase. The anticipated loss on this comprehensive settlement was considered in establishing the reserve at December 31, 2012. The Bank also recognized $205,000 in recoveries relating to amounts previously charged-off. At March 31, 2013, there were six outstanding loan repurchase requests which the Company is disputing on loans with a total principal balance of $1.8 million, as compared to 12 outstanding loan repurchase requests with a principal balance of $3.6 million at December 31, 2012.

Note 7. Deposits

The major types of deposits at March 31, 2013 and December 31, 2012 were as follows (in thousands):

 

Type of Account

   March 31, 2013      December 31, 2012  

Non-interest-bearing

   $ 201,784       $ 179,074   

Interest-bearing checking

     910,547         940,190   

Money market deposit

     124,797         118,154   

Savings

     285,815         256,035   

Time deposits

     217,351         226,218   
  

 

 

    

 

 

 

Total deposits

   $ 1,740,294       $ 1,719,671   
  

 

 

    

 

 

 

Included in time deposits at March 31, 2013 and December 31, 2012, is $55,414,000 and $57,871,000, respectively, in deposits of $100,000 and over.

Note 8. Recent Accounting Pronouncements

Accounting Standards Update No. 2013-02, “Comprehensive Income – Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income” requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under Generally Accepted Accounting Principles (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The standard is effective prospectively for reporting periods, including interim periods, beginning after December 15, 2012. For the three months ended March 31, 2013, the Company had no reclassifications out of accumulated other comprehensive income and into net income.

Note 9. Fair Value Measurements

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

 

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The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the three months ended March 31, 2013. The fair value hierarchy is as follows:

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

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

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

Assets and Liabilities Measured at Fair Value

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

Investments and Mortgage-Backed Securities

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

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

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

 

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Other Real Estate Owned and Impaired Loans

Other real estate owned, and loans measured for impairment based on the fair value of the underlying collateral are recorded at estimated fair value, less estimated selling costs of 20% and 15%, respectively. Fair value is based on independent appraisals.

The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

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

March 31, 2013

           

Items measured on a recurring basis:

           

Investment securities available for sale:

           

U.S. agency obligations

   $ 138,885       $ —         $ 138,885       $ —