10-Q 1 d542057d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 August 1, 2013, there were 17,604,117 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

         PAGE  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Consolidated Financial Statements (unaudited)

  
 

Consolidated Statements of Financial Condition as of June 30, 2013 (unaudited) and December  31, 2012

     11   
 

Consolidated Statements of Income (unaudited) for the three and six months ended June  30, 2013 and 2012

     12   
 

Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June  30, 2013 and 2012

     13   
 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2013 and 2012

     14   
 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2013 and 2012

     15   
 

Notes to Unaudited Consolidated Financial Statements

     17   

Item 2.

 

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

     1   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     9   

Item 4.

 

Controls and Procedures

     10   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     35   

Item 1A.

 

Risk Factors

     35   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     35   

Item 3.

 

Defaults Upon Senior Securities

     35   

Item 4.

 

Mine Safety Disclosures

     35   

Item 5.

 

Other Information

     35   

Item 6.

 

Exhibits

     35   

Signatures

       37   


Table of Contents

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

 

FINANCIAL SUMMARY    At or for the Quarter Ended  
(dollars in thousands, except per share amounts)    June 30, 2013     December 31, 2012     June 30, 2012  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,305,664      $ 2,269,228      $ 2,287,532   

Loans receivable, net

     1,505,680        1,523,200        1,548,935   

Deposits

     1,703,746        1,719,671        1,708,376   

Stockholders’ equity

     216,278        219,792        218,836   

SELECTED OPERATING DATA:

      

Net interest income

     17,544        18,017        18,390   

Provision for loan losses

     800        3,100        1,700   

Other income

     4,741        4,492        4,545   

Operating expenses

     13,724        13,244        12,867   

Net income

     4,987        4,041        5,373   

Diluted earnings per share

     0.29        0.23        0.30   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     12.29        12.28        12.02   

Cash dividend per share

     0.12        0.12        0.12   

Stockholders’ equity to total assets

     9.38     9.69     9.57

Return on average assets (1)

     0.87        0.70        0.94   

Return on average stockholders’ equity (1)

     9.06        7.36        9.79   

Average interest rate spread

     3.13        3.20        3.28   

Net interest margin

     3.21        3.29        3.39   

Operating expenses to average assets (1)

     2.38        2.30        2.26   

Efficiency ratio

     61.58        58.84        56.10   

ASSET QUALITY:

      

Non-performing loans

   $ 45,900      $ 43,374      $ 44,232   

Non-performing assets

     49,320        46,584        47,667   

Allowance for loan losses as a percent of total loans receivable

     1.36     1.32     1.12

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

     45.36        47.29        39.92   

Non-performing loans as a percent of total loans receivable

     3.00        2.80        2.82   

Non-performing assets as a percent of total assets

     2.14        2.05        2.08   

 

(1) Ratios are annualized

 

1


Table of Contents

Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank serving Ocean and Monmouth Counties in New Jersey. The term the “Company” refers to OceanFirst Financial Corp., OceanFirst Bank and all of the Bank’s subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from loan sales, loan servicing, loan originations, trust and asset management services, the sale of investment products, merchant credit card services, deposit accounts, 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. 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. Although high loan refinance volume and shifting asset mix continued into the second quarter of 2013, the Company’s net interest margin nonetheless expanded slightly as the Company invested excess liquidity and managed funding costs lower. Based upon current economic conditions, the Federal Reserve has indicated that it intends to keep short-term interest rates at current levels through mid-2015. Longer-term interest rates have recently increased, resulting in a steeper yield curve. While the impact of these factors on the Company’s financial results is difficult to predict, management anticipates further pressure on the net interest margin in subsequent quarters. 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 modestly in 2012 and through the first half of 2013. Labor market conditions also improved as the national unemployment rate in the first half of 2013 decreased over prior year levels. Despite these signs, the overall economy remains weak and the unemployment rate remains at an elevated level. Additionally, housing values remain significantly below their peak levels in 2006. These economic conditions have generally had an adverse impact on the Company’s results of operations.

Highlights of the Company’s financial results for the three and six months ended June 30, 2013 were as follows:

Total assets increased to $2.306 billion at June 30, 2013, from $2.269 billion at December 31, 2012. Mortgage-backed securities available for sale increased by $58.7 million, to $392.6 million at June 30, 2013, as compared to $333.9 million at December 31, 2012. Loans receivable, net decreased $17.5 million at June 30, 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 decreased by $15.9 million at June 30, 2013, as compared to December 31, 2012.

Net income for the three months ended June 30, 2013 decreased to $5.0 million, or $0.29 per diluted share, as compared to net income of $5.4 million, or $0.30 per diluted share for the corresponding prior year period due to higher operating expenses and lower net interest income, partly offset by a reduction in the provision for loan losses and higher other income.

Net interest income for the three months ended June 30, 2013 decreased to $17.5 million, as compared to $18.4 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 3.21% for the three months ended June 30, 2013, as compared to 3.39% for the corresponding prior year period and stabilized as compared to the 3.16% reported in the linked prior quarter.

The provision for loan losses was $800,000 for the three months ended June 30, 2013, as compared to $1.7 million in the same prior year period due to reductions in net charge-offs and loans receivable, net. The Company’s non-performing loans increased $2.5 million, to $45.9 million at June 30, 2013, from $43.4 million at December 31, 2012. The increase was expected as it was all related to loans adversely affected by superstorm Sandy which were identified and provided for in the fourth quarter of 2012.

Other income increased to $4.7 million for the three months ended June 30, 2013 as compared to $4.5 million in the same prior year period. Trust and asset management revenue, fees and service charges and the net gain (loss) from other real estate operations improved while the net gain on sales of loans and investment securities both declined.

The Company remains well-capitalized with a tangible common equity ratio of 9.38%.

Return on average stockholders’ equity was 9.06% for the three months ended June 30, 2013, as compared to 9.79% for the corresponding prior year period.

 

2


Table of Contents

Analysis of Net Interest Income

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

The following table sets forth certain information relating to the Company for the three months and six months ended June 30, 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 JUNE 30,  
     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

   $ 36,601       $ 19         0.21   $ 57,068       $ 22         0.15

Investment securities (1)

     231,860         519         0.90        183,872         471         1.02   

FHLB stock

     17,143         169         3.94        17,654         200         4.53   

Mortgage-backed securities (1)

     399,694         2,026         2.03        360,650         2,235         2.48   

Loans receivable, net (2)

     1,500,980         17,428         4.64        1,553,103         19,121         4.92   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,186,278         20,161         3.69        2,172,347         22,049         4.06   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     119,416              106,066         
  

 

 

         

 

 

       

Total assets

   $ 2,305,694            $ 2,278,413         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,318,230         438         0.13      $ 1,284,938         999         0.31   

Time deposits

     215,917         737         1.37        249,085         1,036         1.66   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,534,147         1,175         0.31        1,534,023         2,035         0.53   

Borrowed funds

     326,720         1,442         1.77        335,206         1,624         1.94   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,860,867         2,617         0.56        1,869,229         3,659         0.78   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     208,915              173,276         

Non-interest-bearing liabilities

     15,719              16,313         
  

 

 

         

 

 

       

Total liabilities

     2,085,501              2,058,818         

Stockholders’ equity

     220,193              219,595         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,305,694            $ 2,278,413         
  

 

 

         

 

 

       

Net interest income

      $ 17,544            $ 18,390      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.13           3.28
        

 

 

         

 

 

 

Net interest margin (4)

           3.21           3.39
        

 

 

         

 

 

 

 

     FOR THE SIX MONTHS ENDED JUNE 30,  
     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

   $ 61,140       $ 45         0.15   $ 53,454       $ 43         0.16

Investment securities (1)

     227,527         1,039         0.91        181,554         960         1.06   

FHLB stock

     17,126         363         4.24        17,777         429         4.83   

Mortgage-backed securities (1)

     362,525         3,675         2.03        360,090         4,553         2.53   

Loans receivable, net (2)

     1,512,501         35,091         4.64        1,559,529         38,927         4.99   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,180,819         40,213         3.69        2,172,404         44,912         4.13   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     118,786              104,844         
  

 

 

         

 

 

       

Total assets

   $ 2,299,605            $ 2,277,248         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,324,466         1,003         0.15      $ 1,284,433         1,916         0.30   

Time deposits

     218,544         1,498         1.37        252,542         2,137         1.69   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,543,010         2,501         0.32        1,536,975         4,053         0.53   

Borrowed funds

     323,202         2,979         1.84        343,259         3,364         1.96   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,866,212         5,480         0.59        1,880,234         7,417         0.79   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     196,990              162,209         

Non-interest-bearing liabilities

     16,279              16,218         
  

 

 

         

 

 

       

Total liabilities

     2,079,481              2,058,661         

Stockholders’ equity

     220,124              218,587         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,299,605            $ 2,277,248         
  

 

 

         

 

 

       

Net interest income

      $ 34,733            $ 37,495      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.10           3.34
        

 

 

         

 

 

 

Net interest margin (4)

           3.19           3.45
        

 

 

         

 

 

 

 

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

 

3


Table of Contents

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

Total assets increased by $36.4 million to $2.306 billion at June 30, 2013, from $2.269 billion at December 31, 2012. Cash and due from banks decreased $20.2 million, to $42.4 million, as compared to $62.5 million at December 31, 2012. Mortgage-backed securities available for sale increased by $58.7 million, to $392.6 million at June 30, 2013, as compared to $333.9 million at December 31, 2012, as excess liquidity was invested.

Loans receivable, net, decreased by $17.5 million, to $1.506 billion at June 30, 2013 from $1.523 billion at December 31, 2012, primarily due to prepayments and sale of newly-originated 30-year fixed-rate one-to-four family loans.

Deposits decreased by $15.9 million, to $1.704 billion at June 30, 2013, from $1.720 billion at December 31, 2012. The mix of deposits changed as non-interest-bearing deposits and savings deposits increased by $40.9 million and $36.5 million, respectively, while interest-bearing checking and time deposits decreased $84.0 million and $14.0 million, respectively. Securities sold under agreements to repurchase with retail customers increased by $10.3 million, to $71.0 million at June 30, 2013, from $60.8 million at December 31, 2012. Federal Home Loan Bank (“FHLB”) advances increased $44.4 million, to $269.4 million at June 30, 2013, from $225.0 million at December 31, 2012.

Stockholders’ equity decreased to $216.3 million at June 30, 2013, as compared to $219.8 million at December 31, 2012. Net income for the period was offset by an increase in accumulated other comprehensive loss of $4.9 million related to the unrealized loss on securities available for sale caused by the recent rise in interest rates, the repurchase of 314,961 shares of common stock for $4.5 million (average cost per share of $14.33) and the cash dividends on common stock of $4.2 million. At June 30, 2013, there were 519,823 shares remaining to be repurchased under the stock repurchase program adopted in the fourth quarter of 2012. Tangible stockholders’ equity per common share increased to $12.29 at June 30, 2013 as compared to $12.28 at December 31, 2012 primarily due to the reduction in shares outstanding.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2013 and June 30, 2012

General

Net income for the three months ended June 30, 2013 decreased to $5.0 million, or $0.29 per diluted share, as compared to net income of $5.4 million, or $0.30 per diluted share for the corresponding prior year period, due to higher operating expenses and lower net interest income, partly offset by reductions in the provision for loan losses and higher other income. Net income for the six months ended June 30, 2013 decreased to $9.4 million, or $0.55 per diluted share, as compared to net income of $11.0 million, or $0.61 per diluted share for the corresponding prior year period due to lower net interest income, lower other income and higher operating expenses, partly offset by a reduction in the provision for loan losses.

Interest Income

Interest income for the three and six months ended June 30, 2013 was $20.2 million and $40.2 million, respectively, as compared to $22.0 million and $44.9 million for the three and six months ended June 30, 2012. The yield on interest-earning assets declined to 3.69% for both the three and six months ended June 30, 2013, as compared to 4.06% and 4.13% for the same prior year periods. Average interest-earning assets increased by $13.9 million and $8.4 million for the three and six months ended June 30, 2013, as compared to the same prior year periods. The increases in average interest-earning assets were primarily due to the increases in average investment and mortgage-backed securities available for sale, which collectively increased $87.0 million and $48.4 million, respectively, for the three and six months ended June 30, 2013. These increases were partly offset by a decrease in average loans receivable, net, of $52.1 million and $47.0 million for the three and six months ended June 30, 2013, as compared to the same prior year period.

Interest Expense

Interest expense for the three and six months ended June 30, 2013 was $2.6 million and $5.5 million, respectively, as compared to $3.7 million and $7.4 million for the three and six months ended June 30, 2012. The cost of interest-bearing liabilities decreased to 0.56% and 0.59%, respectively, for the three and six months ended June 30, 2013 as compared to 0.78% and 0.79%, respectively, in the same prior year periods. Average interest-bearing liabilities decreased by $8.4 million and $14.0 million for the three and six months ended June 30, 2013, as compared to the same prior year periods. The decreases were due to declines in average borrowed funds of $8.5 million and $20.1 million, respectively, and average time deposits of $33.2 million and $34.0 million, respectively, for the three and six months ended June 30, 2013 as compared to the same prior year periods, partly offset by an increase in average transaction deposits of $33.3 million and $40.0 million. The growth in average interest-earning assets was funded by increases in average non-interest-bearing deposits of $35.6 million and $34.8 million, respectively, for the three and six months ended June 30, 3013 as compared to the same prior year periods.

 

4


Table of Contents

Net Interest Income

Net interest income for the three and six months ended June 30, 2013 decreased to $17.5 million and $34.7 million, respectively, as compared to $18.4 million and $37.5 million in the same prior year periods, reflecting a lower net interest margin partly offset by slightly higher interest-earning assets. The net interest margin decreased to 3.21% and 3.19%, respectively, for the three and six months ended June 30, 2013, from 3.39% and 3.45% in the same prior year periods due to a change in the mix of average interest-earning assets from higher-yielding loans receivable into lower-yielding investment and mortgage-backed securities available for sale. High loan refinance volume also caused yields on loans and mortgage-backed securities to trend downward.

Provision for Loan Losses

For the three and six months ended June 30, 2013, the provision for loan losses was $800,000 and $1.9 million, respectively, as compared to $1.7 million and $3.4 million, respectively, for the corresponding prior year periods. The decrease for the three and six months ended June 30, 2013 was partly due to reductions of $1.8 million and $2.4 million, respectively, in net charge-offs as compared to the same prior year periods and a reduction in loans receivable, net at June 30, 2013 as compared to both December 31, 2012 and June 30, 2012. Non-performing loans increased $2.5 million at June 30, 2013 as compared to December 31, 2012, driven fully by an increase of $3.7 million in 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 increased to $4.7 million for the three months ended June 30, 2013 as compared to $4.5 million in the same prior year period. For the six months ended June 30, 2013, other income decreased to $8.2 million as compared to $8.9 million in the same prior year period. For both the three and six months ended June 30, 2013 trust and asset management revenue, fees and service charges and the net gain (loss) from other real estate operations improved while the net gain on sales of loans available for sale and the net gain on the sale of investment securities available for sale declined. Effective January 1, 2013, income from the origination of reverse mortgage loans is classified as part of fees and service charges as compared to inclusion in the net gain on the sale of loans in the prior period as the Bank no longer closes these loans in its name. The amount of reverse mortgage fees included in fees and service charges for the three and six months ended June 30, 2013 was $180,000 and $345,000, respectively. For the three and six months ended June 30, 2013, trust and asset management revenue and fees and service charges, exclusive of fees on reverse mortgage loans, increased $222,000 and $206,000, respectively. Increases in trust and asset management revenue and bankcard service fees were partly offset by decreases in fees from investment services and deposit accounts. The net gain (loss) from other real estate operations improved $121,000 and $175,000, respectively, for the three and six months ended June 30, 2013, as compared to the same prior year periods. For the three and six months ended June 30, 2013, the net gain on the sale of loans decreased to $735,000 and $561,000, respectively, as compared to $947,000 and $1.9 million in the same prior year periods due to the reclassification of reverse mortgage income and a decrease in loan sale volume. Additionally, the net gain on the sale of loans for the six months ended June 30, 2013 was adversely impacted by an addition of $975,000 to the reserve for repurchased loans and loss sharing obligations as compared to an addition of $250,000 in the same prior year period. For the three months ended June 30, 2013, there was no provision for repurchased loans and loss sharing obligations as compared to $100,000 in the same prior year period. (Refer to Note 6. Reserve for Repurchased Loans and Loss Sharing Obligations.) Finally, for both the three and six months ended June 30, 2013, the net gain on sales of investment securities available for sale decreased to $42,000 from $226,000 in the same prior year periods.

Operating Expenses

Operating expenses increased to $13.7 million and $26.4 million, respectively, for the three and six months ended June 30, 2013, as compared to $12.9 million and $25.8 million for the corresponding prior year periods. Compensation and employee benefits expense for the three and six months ended June 30, 2013 was adversely impacted by recruiting costs and by the decrease in mortgage loan closings from the prior year levels. Lower loan closings in the current periods decreased deferred loan expense, net of sales commissions to mortgage loan representatives, which is reflected as an increase in compensation expense. Compensation and employee benefits expense benefited from a reduction in incentive plan expense of $226,000 and $605,000, respectively, for the three and six months ended June 30, 2013 as compared to the same prior year periods. Professional fees for the three and six months ended June 30, 2013 were adversely impacted by $175,000 in non-recurring professional fees.

 

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Provision for Income Taxes

Income tax expense was $2.8 million and $5.2 million, respectively, for the three and six months ended June 30, 2013, as compared to $3.0 million and $6.1 million for the same prior year periods. The effective tax rate was 35.7% and 35.4% for the three and six months ended June 30, 2013 as compared to 35.8% and 35.7%, respectively, in the same prior year periods.

Liquidity and Capital Resources

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

At June 30, 2013, the Company had $80.4 million of overnight borrowings from the FHLB compared to none at December 31, 2012. The Company periodically utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings of $269.4 million and $225.0 million, respectively, at June 30, 2013 and December 31, 2012.

The Company’s cash needs for the six months ended June 30, 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 and short-term borrowings. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and to fund deposit outflows. The Company’s cash needs for the six months ended June 30, 2012 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and proceeds from maturities of investment securities. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and to 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 June 30, 2013, outstanding commitments to originate loans totaled $106.8 million; outstanding unused lines of credit totaled $244.4 million; and outstanding commitments to sell loans totaled $7.5 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 $130.2 million at June 30, 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 six months ended June 30, 2013, the Company repurchased 314,961 shares of common stock at a total cost of $4.5 million compared with repurchases of 513,737 shares at a cost of $7.3 million for the six months ended June 30, 2012. At June 30, 2013, there were 519,823 shares remaining to be repurchased under the existing stock repurchase program.

Cash dividends on common stock declared and paid during the first six months of 2013 were $4.2 million, as compared to $4.3 million in the same prior year period. On July 17, 2013, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on August 9, 2013, to stockholders of record at the close of business on July 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 six months ended June 30, 2013, the Company received a dividend payment of $8.0 million from the Bank. At June 30, 2013, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment of $4.0 million in dividends from the Bank to the Holding Company over the next quarter, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises during the period. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At June 30, 2013, OceanFirst Financial Corp. held $17.1 million in cash and $6.9 million in investment securities available for sale.

 

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As of June 30, 2013, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible capital

   $ 218,068         9.43   $ 34,671         1.50

Core capital

     218,068         9.43        92,456         4.00   

Tier 1 risk-based capital

     218,068         14.94        58,403         4.00   

Total risk-based capital

     236,351         16.19        116,807         8.00   

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

In July 2013 the Federal banking agencies adopted a new capital rule which implements higher minimum capital requirements for all banking institutions. The rule becomes effective on January 1, 2015 with a transition period through January 1, 2019. The Bank is currently in compliance with the new capital requirements.

At June 30, 2013, the Company maintained tangible common equity of $216.3 million, for a tangible common equity to assets ratio of 9.38%.

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 $7.5 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2013 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 367,941       $ 216,441       $ 119,000       $ 10,000       $ 22,500   

Commitments to Originate Loans

     106,781         106,781         —           —           —     

Commitments to Fund Unused Lines of Credit

     244,386         244,386         —           —           —     

Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

 

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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.

 

     June 30,
2013
     December 31,
2012
 
     (dollars in thousands)  

Non-performing loans:

     

Real estate – one-to-four family

   $ 28,445       $ 26,521   

Commercial real estate

     11,864         11,567   

Consumer

     5,195         4,540   

Commercial

     396         746   
  

 

 

    

 

 

 

Total non-performing loans

     45,900         43,374   

OREO, net

     3,420         3,210   
  

 

 

    

 

 

 

Total non-performing assets

   $ 49,320       $ 46,584   
  

 

 

    

 

 

 

Delinquent loans 30-89 days

   $ 15,660       $ 11,437  (1) 
  

 

 

    

 

 

 

 

(1) Excludes $16.5 million of loans impacted by superstorm Sandy for which the Bank had granted a temporary payment plan.

 

Allowance for loan losses as a percent of total loans receivable

     1.36     1.32

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

     45.36        47.29   

Non-performing loans as a percent of total loans receivable

     3.00        2.80   

Non-performing assets as a percent of total assets

     2.14        2.05   

The Company’s non-performing loans increased $2.5 million at June 30, 2013, as compared to December 31, 2012 due to the impact of superstorm Sandy which has caused substantial disruption in the Bank’s market area since October 29, 2012. The Bank increased its allowance for loan losses at December 31, 2012 by $1.8 million in expectation of potential losses from increasing levels of non-performing loans for borrowers impacted by superstorm Sandy. The Bank previously identified loans totaling $30.1 million which were adversely impacted by the storm, of which $3.7 million were 90 days or more delinquent at June 30, 2013.

Included in the non-performing loan total at June 30, 2013 was $19.5 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 62.0% of the total. At June 30, 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 79% 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 June 30, 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 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.

The largest non-performing loan relationship consists of several credits to a single borrower operating a marina, with an aggregate balance of $6.2 million. The loans are criticized due to weak, 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 of the commercial real estate performed in May 2011 values the 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 classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):

 

     June 30,
2013
     December 31,
2012
 

Loans and other assets excluding investment securities:

     

Special Mention

   $ 8,812       $ 6,245   

Substandard

     66,761         65,039   

Doubtful

     946         1,081   

Investment securities:

     

Substandard

     —           25,000   

The largest Special Mention loan at June 30, 2013 is a commercial real estate mortgage to a local builder for $1.7 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 $6.2 million noted above. The largest Doubtful asset with a balance of

 

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$901,000 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2013, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

 

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At June 30, 2013, the Company’s one-year gap was negative 3.89% as compared to positive 0.90% at December 31, 2012. The change from December 31, 2012 was due to the investment of excess short-term liquidity, a temporary increase in short-term funding through FHLB advances, and an expected slowdown in prepayments from loans and mortgage-backed securities.

 

At June 30, 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

   $ 13,788      $ —        $ —        $ —        $ —        $ 13,788   

Investment securities

     64,190        41,292        85,165        38,612        7,178        236,437   

FHLB stock

     —          —          —          —          18,890        18,890   

Mortgage-backed securities

     59,784        50,150        112,768        88,347        80,028        391,077   

Loans receivable (2)

     311,397        376,667        405,095        182,525        249,660        1,525,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     449,159        468,109        603,028        309,484        355,756        2,185,536   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     23,030        9,676        21,321        16,128        52,683        122,838   

Savings accounts

     61,742        25,131        49,994        37,840        117,816        292,523   

Interest-bearing checking accounts

     454,410        59,109        109,996        90,044        142,651        856,210   

Time deposits

     48,860        81,293        45,027        30,300        6,716        212,196   

FHLB advances

     95,400        50,000        114,000        10,000        —          269,400   

Securities sold under agreements to repurchase

     71,041        —          —          —          —          71,041   

Other borrowings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     776,983        225,209        345,338        184,312        319,866        1,851,708   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (327,824   $ 242,900      $ 257,690      $ 125,172      $ 35,890      $ 333,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (327,824   $ (84,924   $ 172,766      $ 297,938      $ 333,828      $ 333,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (15.00 )%      (3.89 )%      7.90     13,63     15.27     15.27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in net portfolio value (“NPV”) and net interest income under varying rate shocks as of June 30, 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.

 

    June 30, 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

  $ 241,218        (12.6 )%      11.2   $ 64,306        (5.8 )%    $ 248,847        (2.0 )%      11.5   $ 64,291        (4.3 )% 

200

    256,619        (7.1     11.6        66,530        (2.5     260,055        2.4        11.7        66,484        (1.0

100

    268,433        (2.8     11.8        67,680        (0.8     263,429        3.7        11.6        67,311        0.2   

Static

    276,085        —          11.9        68,254        —          254,020        —          11.0        67,163        —     

(100)

    275,932        (0.1     11.6        64,299        (5.8     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 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     June 30,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 42,377      $ 62,544   

Investment securities available for sale

     226,753        213,593   

Federal Home Loan Bank of New York stock, at cost

     18,890        17,061   

Mortgage-backed securities available for sale

     392,575        333,857   

Loans receivable, net

     1,505,680        1,523,200   

Mortgage loans held for sale

     2,815        6,746   

Interest and dividends receivable

     6,310        5,976   

Other real estate owned, net

     3,420        3,210   

Premises and equipment, net

     23,019        22,233   

Servicing asset

     4,443        4,568   

Bank Owned Life Insurance

     53,814        53,167   

Other assets

     25,568        23,073   
  

 

 

   

 

 

 

Total assets

   $ 2,305,664      $ 2,269,228   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 1,703,746      $ 1,719,671   

Securities sold under agreements to repurchase with retail customers

     71,041        60,791   

Federal Home Loan Bank advances

     269,400        225,000   

Other borrowings

     27,500        27,500   

Advances by borrowers for taxes and insurance

     7,807        7,386   

Other liabilities

     9,892        9,088   
  

 

 

   

 

 

 

Total liabilities

     2,089,386        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 17,602,816 and 17,894,929 shares outstanding at June 30, 2013 and December 31, 2012, respectively

     336        336   

Additional paid-in capital

     262,871        262,704   

Retained earnings

     203,380        198,109   

Accumulated other comprehensive (loss) gain

     (4,842     49   

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (3,760     (3,904

Treasury stock, 15,963,956 and 15,671,843 shares at June 30, 2013 and December 31, 2012, respectively

     (241,707     (237,502

Common stock acquired by Deferred Compensation Plan

     (656     (647

Deferred Compensation Plan Liability

     656        647   
  

 

 

   

 

 

 

Total stockholders’ equity

     216,278        219,792   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,305,664      $ 2,269,228   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2013      2012     2013      2012  
     (Unaudited)     (Unaudited)  

Interest income:

          

Loans

   $ 17,428       $ 19,121      $ 35,091       $ 38,927   

Mortgage-backed securities

     2,026         2,235        3,675         4,553   

Investment securities and other

     707         693        1,447         1,432   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     20,161         22,049        40,213         44,912   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits

     1,175         2,035        2,501         4,053   

Borrowed funds

     1,442         1,624        2,979         3,364   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     2,617         3,659        5,480         7,417   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     17,544         18,390        34,733         37,495   

Provision for loan losses

     800         1,700        1,900         3,400   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     16,744         16,690        32,833         34,095   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other income:

          

Loan servicing income

     172         141        328         279   

Trust and asset management revenue

     528         369        955         703   

Fees and service charges

     2,856         2,613        5,522         5,223   

Net gain on sales of investment securities available for sale

     42         226        42         226   

Net gain on sales of loans available for sale

     735         947        561         1,918   

Net gain (loss) from other real estate operations

     74         (47     77         (98

Income from Bank Owned Life Insurance

     332         295        647         601   

Other

     2         1        18         3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other income

     4,741         4,545        8,150         8,855   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses:

          

Compensation and employee benefits

     7,039         6,794        13,617         13,631   

Occupancy

     1,376         1,314        2,739         2,618   

Equipment

     690         635        1,328         1,230   

Marketing

     447         435        697         780   

Federal deposit insurance

     536         522        1,060         1,054   

Data processing

     962         881        1,935         1,824   

Check card processing

     423         337        834         636   

Professional fees

     703         526        1,314         1,178   

Other operating expense

     1,548         1,423        2,865         2,856   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     13,724         12,867        26,389         25,807   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     7,761         8,368        14,594         17,143   

Provision for income taxes

     2,774         2,995        5,170         6,123   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 4,987       $ 5,373      $ 9,424       $ 11,020   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share

   $ 0.29       $ 0.30      $ 0.55       $ 0.61   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share

   $ 0.29       $ 0.30      $ 0.55       $ 0.61   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average basic shares outstanding

     17,105         17,889        17,194         17,977   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average diluted shares outstanding

     17,144         17,930        17,233         18,018   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

12


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)  

Net income

   $ 4,987      $ 5,373      $ 9,424      $ 11,020   

Other comprehensive income:

        

Unrealized (loss) gain on securities (net of tax benefit of $3,900 and $3,361 in 2013 and tax expense of $343 and $1,346 in 2012)

     (5,646     586        (4,866     1,950   

Reclassification adjustment for gains included in net income (net of tax expense of $17 in 2013 and $92 in 2012)

     (25     (134     (25     (134
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (684   $ 5,825      $ 4,533      $ 12,836   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders’ Equity (Unaudited)

(in thousands, except per share amounts)

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Gain (Loss)
    Employee
Stock
Ownership
Plan
    Treasury
Stock
    Common
Stock
Acquired by
Deferred
Compensation
Plan
    Deferred
Compensation
Plan Liability
    Total  

Balance at December 31, 2011

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

Net income

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

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

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

Tax expense of stock plans

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

Stock awards

    —          —          362        —          —          —          —          —          —          362   

Treasury stock allocated to restricted stock plan

    —          —          (282     42        —          —          240        —          —          —     

Purchased 513,737 shares of common stock

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

Allocation of ESOP stock

    —          —          97        —          —          144        —          —          —          241   

Cash dividend $0.24 per share

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

Exercise of stock options

    —          —          —          (9     —          —          215        —          —          206   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          187        (187     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

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

Net income

    —          —          —          9,424        —          —          —          —          —          9,424   

Unrealized loss on securities (net of tax benefit $3,378)

    —          —          —          —          (4,891     —          —          —          —          (4,891

Stock awards

    —          —          328        —          —          —          —          —          —          328   

Treasury stock allocated to restricted stock plan

    —          —          (259     4        —          —          255        —          —          —     

Purchased 314,961 shares of common stock

    —          —          —          —          —          —          (4,512     —          —          (4,512

Allocation of ESOP stock

    —          —          98        —          —          144        —          —          —          242   

Cash dividend $0.24 per share

    —          —          —          (4,151     —          —          —          —          —          (4,151

Exercise of stock options

    —          —          —          (6     —          —          52        —          —          46   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          (9     9        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ —        $ 336      $ 262,871      $ 203,380      $ (4,842   $ (3,760   $ (241,707   $ (656   $ 656      $ 216,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

14


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2013     2012  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 9,424      $ 11,020   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     1,406        1,286   

Allocation of ESOP stock

     242        241   

Stock awards

     328        362   

Amortization of servicing asset

     752        814   

Net premium amortization in excess of discount accretion on securities

     1,912        1,580   

Net amortization of deferred costs and discounts on loans

     301        447   

Provision for loan losses

     1,900        3,400   

Provision for repurchased loans and loss sharing obligations

     975        250   

Net gain on sale of other real estate owned

     (157     (25

Net gain on sales of investment securities available for sale

     (42     (226

Net gain on sales of loans

     (1,536     (2,168

Proceeds from sales of mortgage loans held for sale

     69,067        87,492   

Mortgage loans originated for sale

     (64,228     (82,447

Proceeds from Bank Owned Life Insurance

     —          158   

Increase in value of Bank Owned Life Insurance

     (647     (601

Increase in interest and dividends receivable

     (334     (27

Decrease in other assets

     884        545   

(Decrease) increase in other liabilities

     (171     2,339   
  

 

 

   

 

 

 

Total adjustments

     10,652        13,420   
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,076        24,440   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in loans receivable

     13,823        8,107   

Purchase of investment securities available for sale

     (27,088     (41,617

Purchase of mortgage-backed securities available for sale

     (127,582     (74,371

Principal repayments on mortgage-backed securities available for sale

     58,874        58,095   

Proceeds from maturities of investment securities available for sale

     13,176        12,521   

Proceeds from sale of investment securities available for sale

     603        1,221   

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

     (1,829     124   

Proceeds from sales of other real estate owned

     1,443        690   

Purchases of premises and equipment

     (2,192     (1,421
  

 

 

   

 

 

 

Net cash used in investing activities

     (70,772     (36,651
  

 

 

   

 

 

 

 

Continued

15


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2013     2012  
     (Unaudited)  

Cash flows from financing activities:

    

(Decrease) increase in deposits

   $ (15,925   $ 2,293   

Increase in short-term borrowings

     90,650        23,298   

Proceeds from Federal Home Loan Bank advances

     10,000        —     

Repayments of Federal Home Loan Bank advances

     (46,000     (41,000

Increase in advances by borrowers for taxes and insurance

     421        1,457   

Exercise of stock options

     46        206   

Purchase of treasury stock

     (4,512     (7,314

Dividends paid

     (4,151     (4,342

Tax expense of stock plans

     —          (2
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     30,529        (25,404
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (20,167     (37,615

Cash and due from banks at beginning of period

     62,544        77,527   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 42,377      $ 39,912   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 5,528      $ 7,537   

Income taxes

     5,461        5,818   

Non-cash activities:

    

Loans charged-off, net

     1,590        3,973   

Transfer of loans receivable to other real estate owned

     1,496        2,130   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

16


Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

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

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and six months ended June 30, 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 and six months ended June 30, 2013 and 2012 (in thousands):

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Weighted average shares issued net of Treasury shares

     17,649        18,468        17,740        18,560   

Less: Unallocated ESOP shares

     (450     (484     (455     (489

Unallocated incentive award shares and shares held by deferred compensation plan

     (94     (95     (91     (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     17,105        17,889        17,194        17,977   

Add:  Effect of dilutive securities:

        

Shares held by deferred compensation plan

     39        41        39        41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     17,144        17,930        17,233        18,018   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2013 and 2012, antidilutive stock options of 1,149,000 and 1,975,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2013 and 2012, antidilutive stock options of 1,129,000 and 2,009,000, 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 June 30, 2013 and December 31, 2012 are as follows (in thousands):

 

June 30, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

U.S. agency obligations

   $ 148,199       $ 479       $ (376   $ 148,302   

State and municipal obligations

     27,047         14         (116     26,945   

Corporate debt securities

     55,000         —           (10,438     44,562   

Equity investments

     6,191         781         (28     6,944   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 236,437       $ 1,274       $ (10,958   $ 226,753   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


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   
  

 

 

    

 

 

    

 

 

   

 

 

 

Realized gains on the sale of investment securities available for sale were $42,000 and $226,000, respectively, for the three and six months ended June 30, 2013 and 2012.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at June 30, 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 June 30, 2013, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $44.6 million, respectively, were callable prior to the maturity date.

 

            Estimated  
     Amortized      Market  

June 30, 2013

   Cost      Value  

Less than one year

   $ 50,482       $ 50,711   

Due after one year through five years

     123,777         123,585   

Due after five years through ten years

     987         951   

Due after ten years

     55,000         44,562   
  

 

 

    

 

 

 
   $ 230,246       $ 219,809   
  

 

 

    

 

 

 

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

June 30, 2013

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

U.S. agency obligations

   $ 56,007       $ (376   $ —         $ —        $ 56,007       $ (376

State and municipal obligations

     11,978         (114     1,183         (2     13,161         (116

Corporate debt securities

     —           —          44,562         (10,438     44,562         (10,438

Equity investments

     609         (28     —           —          609         (28
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 68,594       $ (518   $ 45,745       $ (10,440   $ 114,339       $ (10,958
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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 June 30, 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       $ 11,875       Ba2/BB+

Chase Capital

     10,000         8,112       Baa2/BBB

Wells Fargo Capital

     5,000         4,125       A3/A-

Huntington Capital

     5,000         3,950       Baa3/BB+

Keycorp Capital

     5,000         4,050       Baa3/BBB-

PNC Capital

     5,000         4,100       Baa2/BBB

State Street Capital

     5,000         4,200       A3/BBB+

SunTrust Capital

     5,000         4,150       Baa3/BB+
  

 

 

    

 

 

    
   $ 55,000       $ 44,562      
  

 

 

    

 

 

    

At June 30, 2013, the market value of each corporate debt security was below cost. However, the estimated market value of the corporate debt securities portfolio increased as compared to December 31, 2012. 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 June 30, 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 significantly since the lows reached in the second half of 2008.

Due to the reasons noted above, especially the continuing restoration of the capital markets, the improved valuation of the corporate securities portfolio from the 2008 lows, the capital position of the issuers and the uninterrupted payment of all contractually due interest, management has determined that only a temporary impairment existed at June 30, 2013.

Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at June 30, 2013 and December 31, 2012 are as follows (in thousands):

 

June 30, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

FHLMC

   $ 162,588       $ 623       $ (2,354   $ 160,857   

FNMA

     227,718         5,230         (2,175     230,773   

GNMA

     771         174         —          945   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 391,077       $ 6,027       $ (4,529   $ 392,575   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 and six months ended June 30, 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 June 30, 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  

June 30, 2013

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

FHLMC

   $ 125,115       $ (2,352   $ 3,222       $ (2   $ 128,337       $ (2,354

FNMA

     78,980         (2,175     —           —          78,980         (2,175
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 204,095       $ (4,527   $ 3,222       $ (2   $ 207,317       $ (4,529
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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 the Federal Home Loan Mortgage Corporation (“FHLMC”) or Federal National Mortgage Association (“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 these available for sale securities were only temporarily impaired at June 30, 2013.

 

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Note 5. Loans Receivable, Net

Loans receivable, net at June 30, 2013 and December 31, 2012 consisted of the following (in thousands):

 

                                                             
     June 30, 2013     December 31, 2012  

Real estate:

    

One-to-four family

   $ 776,858      $ 802,959   

Commercial real estate, multi family and land

     477,600        475,155   

Residential construction

     12,879        9,013   

Consumer

     192,325        198,143   

Commercial

     66,924        57,967   
  

 

 

   

 

 

 

Total loans

     1,526,586        1,543,237   

Loans in process

     (4,057     (3,639

Deferred origination costs, net

     3,971        4,112   

Allowance for loan losses

     (20,820     (20,510
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,505,680      $ 1,523,200   
  

 

 

   

 

 

 

At June 30, 2013 and December 31, 2012, loans in the amount of $45,900,000 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 June 30, 2013, the impaired loan portfolio totaled $37,099,000 for which there was a specific allocation in the allowance for loan losses of $3,436,000. 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 and six months ended June 30, 2013 was $37,549,000 and $38,228,000, respectively and $29,369,000 and $28,843,000, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three months ended June 30, 2013 and 2012 is as follows (in thousands):

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Balance at beginning of period

   $ 20,494      $ 18,241      $ 20,510      $ 18,230   

Provision charged to operations

     800        1,700        1,900        3,400   

Charge-offs

     (938     (2,542     (2,299     (4,342

Recoveries

     464        258        709        369   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 20,820      $ 17,657      $ 20,820      $ 17,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 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 June 30, 2013 and December 31, 2012 (in thousands):

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial     Unallocated     Total  

For the three months ended June 30, 2013

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     19        463        (13     (2     333        800   

Charge-offs

     (739     —          (199     —          —          (938

Recoveries

     435        25        3        1        —          464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,900      $ 9,774      $ 1,939      $ 1,093      $ 3,114      $ 20,820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

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

Charge-offs

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

Recoveries

     172        81        2        3        —          258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 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

     849        787        (107     (23     394        1,900   

Charge-offs

     (1,689     —          (375     (235     —          (2,299

Recoveries

     499        50        157        3        —          709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,900      $ 9,774      $ 1,939      $ 1,093      $ 3,114      $ 20,820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2012

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

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

Charge-offs

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

Recoveries

     201        155        8        5        —          369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

June 30, 2013

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

   $ 194       $ 2,757       $ 485       $ —         $ —         $ 3,436   

Collectively evaluated for impairment

     4,706         7,705         1,454         406         3,113         17,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,900       $ 10,462       $ 1,939       $ 406       $ 3,113       $ 20,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 21,000       $ 12,375       $ 3,440       $ 284       $ —         $ 37,099   

Loans collectively evaluated for impairment

     768,737         465,225         188,885         66,640         —           1,489,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 789,737       $ 477,600       $ 192,325       $ 66,924       $ —         $ 1,526,586   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

A summary of impaired loans at June 30, 2013 and December 31, 2012 is as follows (in thousands):

 

                                             
     June 30,     December 31,  
     2013     2012  

Impaired loans with no allocated allowance for loan losses

   $ 25,312      $ 25,513   

Impaired loans with allocated allowance for loan losses

     11,787        12,033   
  

 

 

   

 

 

 
   $ 37,099      $ 37,546   
  

 

 

   

 

 

 

Amount of the allowance for loan losses allocated

   $ 3,436      $ 2,554   
  

 

 

   

 

 

 

At June 30, 2013, impaired loans include troubled debt restructuring loans of $34,758,000 of which $15,292,000 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 June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of June 30, 2013

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 11,586       $ 11,052       $ —     

Originated by mortgage company

     6,526         6,160         —     

Originated by mortgage company – non-prime

     2,774         2,190         —     

Commercial real estate:

        

Commercial

     3,001         2,977         —     

Construction and land

     —           —           —     

Consumer

     2,996         2,649         —     

Commercial

     284         284         —     
  

 

 

    

 

 

    

 

 

 
   $ 27,167       $ 25,312       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 824       $ 824       $ 127   

Originated by mortgage company

     791         774         67   

Originated by mortgage company – non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     9,100         8,926         2,555   

Construction and land

     472         472         202   

Consumer

     791         791         485   

Commercial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 11,978       $ 11,787       $ 3,436   
  

 

 

    

 

 

    

 

 

 

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 June 30,  
     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

   $ 10,983       $ 86       $ 8,653       $ 96   

Originated by mortgage company

     6,774         57         5,079         55   

Originated by mortgage company – non-prime

     2,194         5         2,256         1   

Commercial real estate:

           

Commercial

     2,749         34         1,730         24   

Construction and land

     —           —           —           —     

Consumer

     2,792         21         714         9   

Commercial

     286         3         295         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,778       $ 206       $ 18,727       $ 188   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 824       $ 11       $ 1,055       $ 6   

Originated by mortgage company

     776         9         —           —     

Originated by mortgage company – non-prime

     —           —           401         —     

Commercial real estate:

           

Commercial

     8,908         76         9,055         99   

Construction and land

     472         —           —           —     

Consumer

     791         9