10-Q 1 d754787d10q.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, 2014

 

¨ 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, 2014 there were 17,143,993 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, 2014 (unaudited) and December 31, 2013

     10   
 

Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2014 and 2013

     11   
 

Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2014 and 2013

     12   
 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2014 and 2013

     13   
 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013

     14   
 

Notes to Unaudited Consolidated Financial Statements

     16   
Item 2.  

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

     1   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     9   
Item 4.  

Controls and Procedures

     9   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     33   
Item 1A.  

Risk Factors

     34   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     34   
Item 3.  

Defaults Upon Senior Securities

     34   
Item 4.  

Mine Safety Disclosures

     34   
Item 5.  

Other Information

     34   
Item 6.  

Exhibits

     34   

Signatures

     35   


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, 2014     March 31, 2014     June 30, 2013  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,329,141      $ 2,281,711      $ 2,305,664   

Loans receivable, net

     1,631,819        1,570,969        1,505,680   

Deposits

     1,705,510        1,720,131        1,703,746   

Stockholders’ equity

     215,841        216,190        216,278   

SELECTED OPERATING DATA:

      

Net interest income

     18,159        18,065        17,544   

Provision for loan losses

     275        530        800   

Other income

     4,847        3,855        4,617   

Operating expenses

     14,847        14,120        13,600   

Net income

     5,117        4,707        4,987   

Diluted earnings per share

     0.30        0.28        0.29   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     12.59        12.45        12.29   

Cash dividend per share

     0.12        0.12        0.12   

Stockholders’ equity to total assets

     9.27     9.47     9.38

Return on average assets (1)

     0.90        0.83        0.87   

Return on average stockholders’ equity (1)

     9.45        8.72        9.06   

Average interest rate spread

     3.28        3.31        3.13   

Net interest margin

     3.35        3.36        3.21   

Operating expenses to average assets (1)

     2.60        2.49        2.36   

Efficiency ratio

     64.54        64.42        61.37   

ASSET QUALITY:

      

Non-performing loans

   $ 40,699      $ 45,321      $ 45,900   

Non-performing assets

     45,667        49,778        49,320   

Allowance for loan losses as a percent of total loans receivable

     1.26     1.31     1.36

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

     51.44        46.19        45.36   

Non-performing loans as a percent of total loans receivable

     2.44        2.83        3.00   

Non-performing assets as a percent of total assets

     1.96        2.18        2.14   

Wealth Management

      

Assets under administration

   $ 229,289      $ 216,508      $ 175,846   

 

(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 bankcard services, wealth management services, deposit accounts, the sale of investment products, loan originations, loan servicing, loan sales, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance, data processing 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. The Company’s net interest margin has expanded over the past year as the Company has succeeded in growing commercial loans resulting in a shift in asset mix from lower-yielding short-term investments and securities into higher-yielding loans. The net interest margin also benefited from the prepayment of $159.0 million of Federal Home Loan Bank (“FHLB”) advances in the fourth quarter of 2013 and from the rising interest rate environment in 2013 which steepened the yield curve, slowed loan refinance activity and improved yields on newly originated loans and investments. Based upon current economic conditions, the Federal Reserve has indicated that it anticipates that short-term interest rates will remain at current levels for a considerable time, especially if projected inflation continues to run below the 2% longer-run goal, and provided that longer-term inflation expectations remain well-anchored. Additionally, the Federal Reserve has decided to taper its monthly bond buying program, with further reductions expected throughout 2014. The increase in longer-term rates and related reduction in loan refinance activity has caused a decrease in the Company’s loan sale volume and therefore lower income from the net gain on the sale of loans.

In addition to the interest rate environment, the Company’s results are affected by economic conditions. Recent economic indicators point to some improvement in the economy, which expanded modestly in 2013 and is expected to show growth for the remainder of 2014. Labor market conditions improved as the national and local unemployment rates in the first half of 2014 both decreased over prior year levels. Despite these signs, the economic recovery remains weak.

Highlights of the Company’s financial results for the three and six months ended June 30, 2014 were as follows:

Total assets increased to $2.329 billion at June 30, 2014, from $2.250 billion at December 31, 2013. Loans receivable, net increased $90.4 million at June 30, 2014, as compared to December 31, 2013 primarily due to growth in commercial loans of $62.8 million and in residential construction loans, net of loans in process, which increased $11.6 million.

Net income for the three months ended June 30, 2014 was $5.1 million, or $0.30 per diluted share, as compared to net income of $5.0 million, or $0.29 per diluted share for the corresponding prior year period. Net income benefited from higher net interest income, lower provision for loan losses and higher other income, partly offset by higher operating expenses. Additionally earnings per share benefited from a reduction in average shares outstanding.

Net interest income for the three months ended June 30, 2014 increased to $18.2 million, as compared to $17.5 million in the same prior year period, reflecting a higher net interest margin partly offset by lower interest-earning assets. The net interest margin increased to 3.35% for the three months ended June 30, 2014, as compared to 3.21% for the corresponding prior year period.

The provision for loan losses was $275,000 for the three months ended June 30, 2014, as compared to $800,000 in the same prior year period primarily due to a reduction in net charge-offs and lower non-performing loans.

Other income increased to $4.8 million for the three months ended June 30, 2014 as compared to $4.6 million in the same prior year period. The increase was due to higher fees and service charges, gain on sale of investment securities and wealth management revenue partially offset by lower gain on sales of loans. Operating expenses increased $1.2 million primarily due to personnel additions in revenue producing areas and higher marketing costs related to promotional campaigns to attract retail checking accounts and incent bankcard usage. Additionally, operating expenses for the three months ended June 30, 2014 includes $196,000 in non-recurring severance related expenses due to the Company’s strategic decision to improve efficiency in the residential mortgage loan area. The related personnel reduction is expected to lower compensation and benefits expense by $650,000 annually.

The Company remains well-capitalized with a tangible common equity ratio of 9.27%. On July 24, 2014, the Company announced the completion of its 2012 common stock repurchase program and the subsequent authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares.

Return on average stockholders’ equity was 9.45% for the three months ended June 30, 2014, as compared to 9.06% for the corresponding prior year period.

 

2


Table of Contents

Analysis of Net Interest Income

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

The following table sets forth certain information relating to the Company for the three and six months ended June 30, 2014 and 2013. 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,  
     2014     2013  
     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

   $ 26,563       $ 4         0.06   $ 36,601       $ 19         0.21

Securities (1) and FHLB stock

     552,851         2,364         1.71        648,697         2,714         1.67   

Loans receivable, net (2)

     1,588,815         17,530         4.41        1,500,980         17,428         4.64   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,168,229         19,898         3.67        2,186,278         20,161         3.69   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     118,551              119,416         
  

 

 

         

 

 

       

Total assets

   $ 2,286,780            $ 2,305,694         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,257,291         247         0.08      $ 1,318,230         438         0.13   

Time deposits

     215,148         739         1.37        215,917         737         1.37   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,472,439         986         0.27        1,534,147         1,175         0.31   

Borrowed funds

     330,933         753         0.91        326,720         1,442         1.77   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,803,372         1,739         0.39        1,860,867         2,617         0.56   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     252,395              208,915         

Non-interest-bearing liabilities

     14,530              15,719         
  

 

 

         

 

 

       

Total liabilities

     2,070,297              2,085,501         

Stockholders’ equity

     216,483              220,193         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,286,780            $ 2,305,694         
  

 

 

         

 

 

       

Net interest income

      $ 18,159            $ 17,544      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.28           3.13
        

 

 

         

 

 

 

Net interest margin (4)

           3.35           3.21
        

 

 

         

 

 

 

 

     FOR THE SIX MONTHS ENDED JUNE 30,  
     2014     2013  
     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

   $ 27,940       $ 10         0.07   $ 61,140       $ 45         0.15

Securities (1) and FHLB stock

     557,573         4,857         1.74        607,178         5,077         1.67   

Loans receivable, net (2)

     1,573,135         34,776         4.42        1,512,501         35,091         4.64   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,158,648         39,643         3.67        2,180,819         40,213         3.69   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     117,212              118,786         
  

 

 

         

 

 

       

Total assets

   $ 2,275,860            $ 2,299,605         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,289,760         610         0.09      $ 1,324,466         1,003         0.15   

Time deposits

     215,427         1,472         1.37        218,544         1,498         1.37   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,505,187         2,082         0.28        1,543,010         2,501         0.32   

Borrowed funds

     307,227         1,337         0.87        323,202         2,979         1.84   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,812,414         3,419         0.38        1,866,212         5,480         0.59   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     231,631              196,990         

Non-interest-bearing liabilities

     15,604              16,279         
  

 

 

         

 

 

       

Total liabilities

     2,059,649              2,079,481         

Stockholders’ equity

     216,211              220,124         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,275,860            $ 2,299,605         
  

 

 

         

 

 

       

Net interest income

      $ 36,224            $ 34,733      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.29           3.10
        

 

 

         

 

 

 

Net interest margin (4)

           3.36           3.19
        

 

 

         

 

 

 

 

(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, 2014 and December 31, 2013

Total assets increased by $79.4 million to $2.329 billion at June 30, 2014, from $2.250 billion at December 31, 2013. Securities, in the aggregate, decreased by $28.7 million, to $510.7 million at June 30, 2014, as compared to $539.4 million at December 31, 2013. Loans receivable, net, increased by $90.4 million, an annualized growth rate of 11.7%, to $1.632 billion at June 30, 2014 from $1.541 billion at December 31, 2013, primarily due to growth in commercial loans of $62.8 million and in residential construction loans, net of loans in process, which increased $11.6 million. Additionally, on June 30, 2014, the Company purchased a pool of performing, locally originated, one-to-four family, non-conforming mortgage loans for $20.6 million. The growth in commercial loans was primarily due to the strategic expansion of the commercial lending group and the successful recruitment of several experienced commercial lenders.

Deposits decreased by $41.3 million, to $1.706 billion at June 30, 2014, from $1.747 billion at December 31, 2013, despite strong growth in retail and business checking accounts. All of the decrease was related to a reduction in government deposits. Non-interest bearing deposit accounts increased $63.6 million during the first half of 2014 due to a revised fee and product structure. To fund loan growth and deposit outflows, FHLB advances increased $130.0 million, to $305.0 million at June 30, 2014, from $175.0 million at December 31, 2013.

Stockholders’ equity increased to $215.8 million at June 30, 2014, as compared to $214.4 million at December 31, 2013. Net income for the period was offset by the repurchase of 301,766 shares of common stock for $5.0 million (average cost per share of $16.64) and the cash dividends on common stock of $4.1 million. At June 30, 2014, there were no shares available for repurchase under the stock repurchase program adopted in the fourth quarter of 2012, although 867,923 shares are available for repurchase under the new repurchase program announced on July 24, 2014.

Comparison of Operating Results for the Three and Six months Ended June 30, 2014 and June 30, 2013

General

Net income for the three months ended June 30, 2014 increased to $5.1 million, or $0.30 per diluted share, as compared to net income of $5.0 million, or $0.29 per diluted share for the corresponding prior year period. Net income for the six months ended June 30, 2014 increased to $9.8 million, or $0.58 per diluted share, as compared to net income of $9.4 million, or $0.55 per diluted share for the corresponding prior year period. The increases were primarily due to higher net interest income, a reduction in the provision for loan losses and higher other income, partly offset by higher operating expenses. Additionally, earnings per share benefited from a reduction in average shares outstanding.

Interest Income

Interest income for the three and six months ended June 30, 2014 was $19.9 million and $39.6 million, respectively, as compared to $20.2 million and $40.2 million for the corresponding prior year periods. The yield on interest-earning assets declined to 3.67% for both the three and six months ended June 30, 2014, as compared to 3.69% for both the three and six months ended June 30, 2013. Average interest-earning assets decreased by $18.0 million and $22.2 million, respectively, for the three and six months ended June 30, 2014, as compared to the same prior year periods as excess liquidity was allowed to run-off. Despite the two basis point decline, the asset yield benefited from a shift in the mix of interest-earning assets as average loans receivable, net increased $87.8 million and $60.6 million, respectively, for the three and six months ended June 30, 2014, while average interest-earning securities decreased $95.8 million and $49.6 million, respectively, as compared to the same prior year periods.

Interest Expense

Interest expense for the three and six months ended June 30, 2014 was $1.7 million and $3.4 million, respectively, as compared to $2.6 million and $5.5 million, respectively, in the corresponding prior year periods. The cost of interest-bearing liabilities decreased to 0.39% and 0.38%, respectively, for the three and six months ended June 30, 2014, as compared to 0.56% and 0.59%, respectively, in the same prior year periods. The decrease was partly due to the prepayment of $159.0 million of FHLB advances with a weighted average cost of 2.31% in the fourth quarter of 2013. Average interest-bearing liabilities decreased by $57.5 million and $53.8 million, respectively, for the three and six months ended June 30, 2014 primarily due to a decline in average interest-bearing deposits of $61.7 million and $37.8 million, respectively. This interest-bearing funding was partly replaced by an increase of $43.5 million and $34.6 million, respectively, in average non-interest-bearing deposits for the three and six months ended June 30, 2014, as compared to the same prior year periods.

Net Interest Income

Net interest income for the three and six months ended June 30, 2014 increased to $18.2 million and $36.2 million, respectively, as compared to $17.5 million and $34.7 million, respectively, in the same prior year periods, reflecting a higher net interest margin partly offset by lower interest-earning assets. The net interest margin increased to 3.35% and 3.36%, respectively, for the three and six months ended June 30, 2014, from 3.21% and 3.19%, respectively, in the same prior year periods primarily due to a reduction in the cost of average interest-bearing liabilities.

 

4


Table of Contents

Provision for Loan Losses

For the three and six months ended June 30, 2014, the provision for loan losses was $275,000 and $805,000, respectively, as compared to $800,000 and $1.9 million, respectively, for the corresponding prior year periods. The decreases for the three and six months ended June 30, 2014 were primarily due to reductions in net charge-offs of $201,000 and $791,000, respectively, as compared to the same prior year periods. Non-performing loans decreased $4.7 million at June 30, 2014, as compared to December 31, 2013, and by $5.2 million, as compared to June 30, 2013.

Other Income

For the three and six months ended June 30, 2014, other income increased to $4.8 million and $8.7 million, respectively, as compared to $4.6 million and $7.9 million, respectively, in the same prior year periods. For the three and six months ended June 30, 2014, wealth management revenue increased $80,000 and $193,000, respectively, as compared to the same prior year periods, partly due to an increase in assets under administration to $229.3 million at June 30, 2014 from $175.8 million at June 30, 2013. For the three and six months ended June 30, 2014, fees and service charges increased $467,000 and $578,000, respectively, as compared to the same prior year periods primarily due to higher deposit fees from a revised fee and product structure. For the three and six months ended June 30, 2014, the net gain on the sale of loans amounted to $219,000 and $351,000, respectively, as compared to $735,000 and $561,000, respectively, in the same prior year periods. The gain on the sale of loans for the six months ended June 30, 2013 was adversely impacted by a provision of $975,000 added to the reserve for repurchased loans and loss sharing obligations, as compared to no provision in the current period. The prior year provision was related to loans sold to the FHLB as part of its Mortgage Partnership Finance program. Compared to prior periods, the gain on sale of loans was adversely impacted by decreases in the gain-on-sale margin and reductions in loans sold to $10.9 million and $21.2 million, respectively, for the three and six months ended June 30, 2014, as compared to $32.3 million and $69.1 million, respectively, for the corresponding prior year periods, as increasing longer-term interest rates reduced one-to-four family loan refinance activity. For both the three and six months ended June 30, 2014, the Company recognized a gain of $348,000 on the sale of equity securities, as compared to a gain of $42,000 in the corresponding prior year periods.

Operating Expenses

Operating expenses amounted to $14.8 million and $29.0 million, respectively, for the three and six months ended June 30, 2014, as compared to $13.6 million and $26.2 million, respectively, in the same prior year periods. Compensation and employee benefits expense increased $1.1 million and $2.2 million, respectively, for the three and six months ended June 30, 2014, as compared to the same prior year periods, primarily due to personnel additions in revenue producing areas. Additionally, compensation and employee benefits expense for the three and six months ended June 30, 2014 includes $196,000 in non-recurring severance related expenses due to the Company’s strategic decision to improve efficiency in the residential mortgage loan area. The related personnel reduction is expected to lower compensation and benefits expense by $650,000 annually. Marketing expenses increased $163,000 and $445,000, respectively, as compared to the same prior year periods, primarily due to promotional campaigns to attract retail checking accounts and incent bankcard usage. These increases were partly offset by reductions in professional fees of $180,000 and $416,000, respectively, for the three and six months ended June 30, 2014, as compared to the corresponding prior year periods.

Provision for Income Taxes

The provision for income taxes was $2.8 million and $5.3 million, respectively, for the three and six months ended June 30, 2014, as compared to $2.8 million and $5.2 million, respectively, for the same prior year periods. The effective tax rate was 35.1% and 35.2%, respectively, for the three and six months ended June 30, 2014, as compared to 35.7% and 35.4% 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, 2014 the Company had $85.0 million in outstanding overnight borrowings from the FHLB compared to $35.0 million outstanding at December 31, 2013. The Company periodically utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including the overnight borrowings, of $305.0 million and $175.0 million, respectively, at June 30, 2014 and December 31, 2013.

The Company’s cash needs for the six months ended June 30, 2014 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 increased total 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, 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.

 

5


Table of Contents

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2014, outstanding undrawn lines of credit totaled $282.9 million; outstanding commitments to originate loans totaled $100.7 million; and outstanding commitments to sell loans totaled $15.3 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 $122.2 million at June 30, 2014. 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 common 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, 2014, the Company repurchased 301,766 shares of common stock at a total cost of $5.0 million, compared with repurchases of 314,961 shares at a cost of $4.5 million for the six months ended June 30, 2013. At June 30, 2014, there were no shares remaining to be repurchased under the repurchase program adopted in the fourth quarter of 2012. On July 24, 2014, the Company announced the completion of its 2012 common stock repurchase program and the subsequent authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares.

Cash dividends on common stock declared and paid during the first six months of 2014 were $4.1 million, as compared to $4.2 million in the same prior year period. On July 24, 2014, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on August 15, 2014 to stockholders of record at the close of business on August 4, 2014.

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. In December 2013, as part of its capital plan, the Company submitted notice to the Federal Reserve Bank of Philadelphia requesting a total payment of $16.0 million in dividends from the Bank to the Holding Company over the next four quarters (including the fourth quarter of 2013). The Federal Reserve did not object to the payments, although it reserved the right to revoke the approval at any time if a safety and soundness concern arises throughout the period. For the six months ended June 30, 2014, the Company received a dividend payment of $8.0 million from the Bank and $4.0 million remained to be paid over the next quarter. 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, 2014, OceanFirst Financial Corp. held $16.3 million in cash and $7.2 million in investment securities available-for-sale.

As of June 30, 2014, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tangible

   $ 220,587         9.45   $ 35,006         1.50

Tier 1 leverage

     220,587         9.45        93,350         4.00   

Tier 1 risk-based

     220,587         14.22        62,053         4.00   

Total risk-based

     239,998         15.47        124,106         8.00   

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

In July 2013 the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real

 

6


Table of Contents

property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional constraints will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

At June 30, 2014, the Company maintained tangible common equity of $215.8 million, for a tangible common equity to assets ratio of 9.27%.

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 undrawn lines of credit and commitments to extend credit. The Company also has outstanding commitments to sell loans amounting to $15.3 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2014 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 394,841       $ 197,341       $ 35,000       $ 140,000       $ 22,500   

Commitments to Fund Undrawn Lines of Credit

     282,915         282,915         —           —           —     

Commitments to Originate Loans

     100,741         100,741         —           —           —     

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

Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and other real estate owned. 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,
2014
    December 31,
2013
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate – one-to-four family

   $ 25,313      $ 28,213   

Commercial real estate

     12,094        12,304   

Consumer

     3,128        4,328   

Commercial and industrial

     164        515   
  

 

 

   

 

 

 

Total non-performing loans

     40,699        45,360   

Other real estate owned

     4,968        4,345   
  

 

 

   

 

 

 

Total non-performing assets

   $ 45,667      $ 49,705   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 8,923      $ 9,147   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     1.26     1.33

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

     51.44        46.14   

Non-performing loans as a percent of total loans receivable

     2.44        2.88   

Non-performing assets as a percent of total assets

     1.96        2.21   

Included in the non-performing loan total at June 30, 2014 was $7.0 million of troubled debt restructured loans, as compared to $9.7 million of troubled debt restructured loans at December 31, 2013. Non-performing loans are concentrated in one-to-four family loans, which comprise 62.2% of the total at June 30, 2014. At June 30, 2014, the

 

7


Table of Contents

average weighted loan-to-value ratio of non-performing one-to-four family loans, after any related charge-offs, was 73% using recently 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. The Company’s non-performing loans remain at elevated levels partly due to the protracted foreclosure process in the State of New Jersey. This 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 two commercial real estate loans to a hotel, golf and banquet facility for $6.5 million, criticized due to delinquent payments, continual losses and covenant violations. The most recent appraisal values the real estate collateral, which is currently marketed for sale, at $7.4 million, net of past due real estate taxes.

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

 

     June 30,
2014
     December 31,
2013
 

Loans and other assets excluding investment securities:

  

Special Mention

   $ 9,142       $ 5,843   

Substandard

     63,618         66,246   

Doubtful

     —           859   

The largest Special Mention loan at June 30, 2014 is a $4.6 million commercial real estate loan to a single borrower operating several fitness/health club facilities. The borrower has filed Chapter XI bankruptcy relating to another bank’s legal proceedings on an unrelated property. The borrower is current as to payments and the loan is well collateralized. The largest Substandard loan relationship consists of the two non-performing commercial real estate loans mentioned above.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 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 loss sharing obligations, 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, future natural disasters and increases to flood insurance premiums, 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, 2013 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 2013 Form 10-K and Item 1A, Risk Factors, of this 10-Q.

 

8


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2014, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At June 30, 2014, the Company’s one-year gap was negative 5.0% as compared to negative 10.8% at December 31, 2013. The change from December 31, 2013 was primarily due to the term extension of new and existing FHLB Advances.

 

At June 30, 2014

   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

   $ 1,753      $ —        $ —        $ —        $ —        $ 1,753   

Investment securities

     71,355        35,635        69,645        6,376        7,582        190,593   

Mortgage-backed securities

     44,923        34,663        84,779        74,682        92,721        331,768   

FHLB stock

     —          —          —          —          20,246        20,246   

Loans receivable (2)

     288,636        341,132        421,131        295,664        304,031        1,650,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     406,667        411,430        575,555        376,722        424,580        2,194,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     18,715        10,655        23,574        17,939        36,482        107,365   

Savings accounts

     64,406        25,152        49,975        37,862        117,738        295,133   

Interest-bearing checking accounts

     406,289        56,222        105,614        86,180        162,780        817,085   

Time deposits

     44,882        77,302        52,450        37,383        2,702        214,719   

FHLB advances

     115,941        22,848        37,788        128,423        —          305,000   

Securities sold under agreements to repurchase and other borrowings

     84,841        —          5,000        —          —          89,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     735,074        192,179        274,401        307,787        319,702        1,829,143   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (328,407   $ 219,251      $ 301,154      $ 68,935      $ 104,878      $ 365,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (328,407   $ (109,156   $ 191,998      $ 260,933      $ 365,811      $ 365,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (14.96 )%      (4.97 )%      8.75     11.89     16.67     16.67
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 economic value of equity (“EVE”) and net interest income under varying rate shocks as of June 30, 2014 and December 31, 2013. 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 2013 Form 10-K.

 

     June 30, 2014     December 31, 2013  
     Economic Value of Equity           Net Interest Income     Economic Value of Equity           Net Interest Income  

Change in Interest Rates in

Basis Points (Rate Shock)

  

Amount

   

% Change

   

EVE

Ratio

   

Amount

   

% Change

   

Amount

   

% Change

   

EVE

Ratio

   

Amount

   

% Change

 
(dollars in thousands)                                                             

300

   $ 251,351        (12.4 )%      11.5   $ 63,794        (8.9 )%    $ 249,034        (15.4 )%      11.8   $ 58,521        (14.6 )% 

200

     266,945        (7.0     11.9        66,566        (4.9     267,316        (9.2     12.4        62,558        (8.7

100

     280,240        (2.4     12.2        68,458        (2.2     282,633        (4.0     12.8        65,691        (4.2

Static

     287,017        —          12.2        70,028        —          294,381        —          13.0        68,554        —     

(100)

     285,543        (0.5     11.9        67,461        (3.7     299,481        1.7        12.9        66,487        (3.0

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, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

9


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     June 30,
2014
    December 31,
2013
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 43,817      $ 33,958   

Securities available-for-sale, at estimated fair value

     32,303        43,836   

Securities held-to-maturity, net (estimated fair value of $485,124 at June 30, 2014 and $495,082 at December 31, 2013)

     478,389        495,599   

Federal Home Loan Bank of New York stock, at cost

     20,246        14,518   

Loans receivable, net

     1,631,819        1,541,460   

Mortgage loans held for sale

     1,295        785   

Interest and dividends receivable

     5,317        5,380   

Other real estate owned

     4,968        4,345   

Premises and equipment, net

     24,430        23,684   

Servicing asset

     3,772        4,178   

Bank Owned Life Insurance

     55,286        54,571   

Deferred tax asset

     15,417        15,239   

Other assets

     12,082        12,158   
  

 

 

   

 

 

 

Total assets

   $ 2,329,141      $ 2,249,711   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 1,705,510      $ 1,746,763   

Securities sold under agreements to repurchase with retail customers

     62,341        68,304   

Federal Home Loan Bank advances

     305,000        175,000   

Other borrowings

     27,500        27,500   

Advances by borrowers for taxes and insurance

     6,896        6,471   

Other liabilities

     6,053        11,323   
  

 

 

   

 

 

 

Total liabilities

     2,113,300        2,035,361   
  

 

 

   

 

 

 

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 17,144,693 and 17,387,049 shares outstanding at June 30, 2014 and December 31, 2013, respectively

     336        336   

Additional paid-in capital

     264,592        263,319   

Retained earnings

     211,819        206,201   

Accumulated other comprehensive loss

     (6,902     (6,619

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (3,458     (3,616

Treasury stock, 16,422,079 and 16,179,723 shares at June 30, 2014 and December 31, 2013, respectively

     (250,546     (245,271

Common stock acquired by Deferred Compensation Plan

     (315     (665

Deferred Compensation Plan Liability

     315        665   
  

 

 

   

 

 

 

Total stockholders’ equity

     215,841        214,350   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,329,141      $ 2,249,711   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

10


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended June 30,
     For the six months
ended June 30,
 
     2014     2013      2014     2013  
     (unaudited)      (unaudited)  

Interest income:

         

Loans

   $ 17,530      $ 17,428       $ 34,776      $ 35,091   

Mortgage-backed securities

     1,731        2,026         3,494        3,675   

Investment securities and other

     637        707         1,373        1,447   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     19,898        20,161         39,643        40,213   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

    

Deposits

     986        1,175         2,082        2,501   

Borrowed funds

     753        1,442         1,337        2,979   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     1,739        2,617         3,419        5,480   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     18,159        17,544         36,224        34,733   

Provision for loan losses

     275        800         805        1,900   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     17,884        16,744         35,419        32,833   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other income:

    

Bankcard services revenue

     897        921         1,689        1,731   

Wealth management revenue

     608        528         1,148        955   

Fees and service charges

     2,278        1,811         4,134        3,556   

Loan servicing income

     226        172         454        328   

Net gain on sales of investment securities available-for-sale

     348        42         348        42   

Net gain on sales of loans available-for-sale

     219        735         351        561   

Net (loss) gain from other real estate operations

     (107     74         (139     77   

Income from Bank Owned Life Insurance

     377        332         715        647   

Other

     1        2         2        18   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other income

     4,847        4,617         8,702        7,915   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating expenses:

    

Compensation and employee benefits

     8,131        7,039         15,816        13,617   

Occupancy

     1,364        1,376         2,828        2,739   

Equipment

     768        690         1,524        1,328   

Marketing

     610        447         1,142        697   

Federal deposit insurance

     538        536         1,083        1,060   

Data processing

     987        962         2,057        1,935   

Check card processing

     494        423         940        834   

Professional fees

     523        703         898        1,314   

Other operating expense

     1,432        1,424         2,679        2,630   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     14,847        13,600         28,967        26,154   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     7,884        7,761         15,154        14,594   

Provision for income taxes

     2,767        2,774         5,330        5,170   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,117      $ 4,987       $ 9,824      $ 9,424   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share

   $ 0.31      $ 0.29       $ 0.58      $ 0.55   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per share

   $ 0.30      $ 0.29       $ 0.58      $ 0.55   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average basic shares outstanding

     16,740        17,105         16,812        17,194   
  

 

 

   

 

 

    

 

 

   

 

 

 

Average diluted shares outstanding

     16,822        17,144         16,946        17,233   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

11


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2014     2013     2014     2013  
     (unaudited)     (unaudited)  

Net income

   $ 5,117      $ 4,987      $ 9,824      $ 9,424   

Other comprehensive income:

        

Unrealized loss on securities (net of tax benefit of $209 and $286 in 2014 and $3,900 and $3,361 in 2013)

     (303     (5,646     (414     (4,866

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $125 and $233 in 2014)

     181        —          337        —     

Reclassification adjustment for gains included in net income (net of tax expense of $142 in 2014 and $17 in 2013)

     (206     (25     (206     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 4,789      $ (684   $ 9,541      $ 4,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

12


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders’ Equity (Unaudited)

(in thousands, except per share amounts)

 

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

Balance at December 31, 2012

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

Net income

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

Other comprehensive income, net of tax

    —          —          —          —          (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   

Purchase 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  $ —        $ 336      $ 263,319      $ 206,201      $ (6,619   $ (3,616   $ (245,271   $ (665   $ 665      $ 214,350   

Net income

    —          —          —          9,824        —          —          —          —          —          9,824   

Other comprehensive income, net of tax

    —          —          —          —          (283     —          —          —          —          (283

Tax benefit of stock plans

    —          —          50        —          —          —          —          —          —          50   

Stock awards

    —          —          429        —          —          —          —          —          —          429   

Treasury stock allocated to restricted stock plan

    —          —          661        (97     —          —          (564     —          —          —     

Purchased 301,766 shares of common stock

    —          —          —          —          —          —          (5,020     —          —          (5,020

Allocation of ESOP stock

    —          —          133        —          —          158        —          —          —          291   

Cash dividend $0.24 per share

    —          —          —          (4,065     —          —          —          —          —          (4,065

Exercise of stock options

    —          —          —          (44     —          —          309        —          —          265   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          350        (350     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ —        $ 336      $ 264,592      $ 211,819      $ (6,902   $ (3,458   $ (250,546   $ (315   $ 315      $ 215,841   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

13


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2014     2013  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 9,824      $ 9,424   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     1,412        1,406   

Allocation of ESOP stock

     291        242   

Stock awards

     429        328   

Amortization of servicing asset

     594        752   

Net premium amortization in excess of discount accretion on securities

     1,472        1,912   

Net amortization of deferred costs and discounts on loans

     35        301   

Provision for loan losses

     805        1,900   

Provision for repurchased loans and loss sharing obligations

     —          975   

Net gain on sale of other real estate owned

     (44     (157

Net gain on sales of investment securities available-for-sale

     (348     (42

Net gain on sales of loans

     (351     (1,536

Proceeds from sales of mortgage loans held for sale

     21,368        69,067   

Mortgage loans originated for sale

     (21,715     (64,228

Increase in value of Bank Owned Life Insurance

     (715     (647

Decrease (increase) in interest and dividends receivable

     63        (334

Increase in other assets

     93        884   

Decrease in other liabilities

     (5,271     (171
  

 

 

   

 

 

 

Total adjustments

     (1,882     10,652   
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,942        20,076   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net (increase) decrease in loans receivable

     (72,377     13,823   

Purchase of loans receivable

     (20,574     —     

Purchase of investment securities available-for-sale

     (651     (27,088

Purchase of mortgage-backed securities available-for-sale

     —          (127,582

Purchase of mortgage-backed securities held-to-maturity

     (10,134     —     

Purchase of investment securities held-to-maturity

     (5,003     —     

Proceeds from maturities of investment securities available-for-sale

     10,000        —     

Proceeds from the sale of investment securities available-for-sale

     1,402        603   

Proceeds from maturities of investment securities held-to-maturity

     4,350        13,176   

Principal repayments on mortgage-backed securities available-for-sale

     —          58,874   

Principal repayments on mortgage-backed securities held-to-maturity

     27,178        —     

Increase in Federal Home Loan Bank of New York stock

     (5,728     (1,829

Proceeds from sales of other real estate owned

     1,173        1,443   

Purchases of premises and equipment

     (2,158     (2,192
  

 

 

   

 

 

 

Net cash used in investing activities

     (72,522     (70,772
  

 

 

   

 

 

 

 

 

Continued

 

14


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

 

     For the six months
ended June 30,
 
     2014     2013  
     (Unaudited)  

Cash flows from financing activities:

    

Decrease in deposits

   $ (41,253   $ (15,925

(Decrease) increase in short-term borrowings

     (5,963     90,650   

Proceeds from Federal Home Loan Bank advances

     190,000        10,000   

Repayments of Federal Home Loan Bank advances

     (60,000     (46,000

Increase in advances by borrowers for taxes and insurance

     425        421   

Exercise of stock options

     265        46   

Purchase of treasury stock

     (5,020     (4,512

Dividends paid

     (4,065     (4,151

Tax benefit of stock plans

     50        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     74,439        30,529   
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     9,859        (20,167

Cash and due from banks at beginning of period

     33,958        62,544   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 43,817      $ 42,377   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 3,229      $ 5,528   

Income taxes

     6,601        5,461   

Non-cash activities:

    

Loans charged-off, net

     799        1,590   

Transfer of loans receivable to other real estate owned

     1,752        1,496   

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

15


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, OceanFirst REIT Holdings, Inc., OceanFirst Services, LLC, 975 Holdings, LLC and Columbia Home Loans, LLC (“Columbia”). The operations of Columbia were shuttered in 2007 and the company is now in dissolution.

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, 2014 are not necessarily indicative of the results of operations that may be expected for all of 2014. 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, 2013.

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, 2014 and 2013 (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Weighted average shares issued net of Treasury shares

     17,258        17,649        17,327        17,740   

Less: Unallocated ESOP shares

     (416     (450     (420     (455

Unallocated incentive award shares and shares held by deferred compensation plan

     (102     (94     (95     (91
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     16,740        17,105        16,812        17,194   

Add: Effect of dilutive securities:

        

Stock options

     61        —          109        —     

Shares held by deferred compensation plan

     21        39        25        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     16,822        17,144        16,946        17,233   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2014 and 2013, antidilutive stock options of 914,000 and 1,149,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2014 and 2013, antidilutive stock options of 756,000 and 1,129,000, respectively, were excluded from earnings per share calculations.

 

16


Table of Contents

Note 3. Securities

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013 are as follows (in thousands):

 

     At June 30, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

Available-for-sale:

          

Investment securities:

          

U.S. agency obligations

   $ 25,045       $ 49       $ —        $ 25,094   

Equity investments

     6,355         875         (21     7,209   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 31,400       $ 924       $ (21   $ 32,303   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Investment securities:

          

U.S. agency obligations

   $ 86,900       $ 181       $ (57   $ 87,024   

State and municipal obligations

     17,293         55         (8     17,340   

Corporate debt securities

     55,000         —           (7,910     47,090   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

     159,193         236         (7,975     151,454   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

FHLMC

     143,496         607         (2,218     141,885   

FNMA

     187,596         5,136         (1,758     190,974   

GNMA

     676         135         —          811   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     331,768         5,878         (3,976     333,670   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 490,961       $ 6,114       $ (11,951   $ 485,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 522,361       $ 7,038       $ (11,972   $ 517,427   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     At December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

Available-for-sale:

          

Investment securities:

          

U.S. agency obligations

   $ 35,128       $ 161       $ —        $ 35,289   

Equity investments

     6,757         1,790         —          8,547   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 41,885       $ 1,951       $ —        $ 43,836   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

          

Investment securities:

          

U.S. agency obligations

   $ 82,406       $ 153       $ (144   $ 82,415   

State and municipal obligations

     21,784         36         (35     21,785   

Corporate debt securities

     55,000         —           (10,750     44,250   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

     159,190         189         (10,929     148,450   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

FHLMC

     148,759         447         (4,552     144,654   

FNMA

     200,070         4,659         (3,607     201,122   

GNMA

     721         135         —          856   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     349,550         5,241         (8,159     346,632   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 508,740       $ 5,430       $ (19,088   $ 495,082   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 550,625       $ 7,381       $ (19,088   $ 538,918   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


Table of Contents

During the third quarter 2013 the Bank transferred $536.0 million of previously-designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the held-to-maturity investment securities at June 30, 2014 is as follows (in thousands):

 

Amortized cost

   $ 490,961   

Net loss on date of transfer from available-for-sale

     (13,347

Amortization of net unrealized loss

     775   
  

 

 

 

Carrying value

   $ 478,389   
  

 

 

 

Net realized gains on the sale of securities for both the three and six months ended June 30, 2014 and 2013 were $348,000 and $42,000, respectively.

The amortized cost and estimated fair value of investment securities, excluding equity investments, at June 30, 2014 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, 2014, corporate debt securities with an amortized cost and estimated fair value of $55.0 million and $47.1 million, respectively, were callable prior to the maturity date.

 

June 30, 2014

   Amortized
Cost
     Estimated
Fair Value
 

Less than one year

   $ 51,990       $ 52,106   

Due after one year through five years

     76,021         76,126   

Due after five years through ten years

     1,227         1,226   

Due after ten years

     55,000         47,090   
  

 

 

    

 

 

 
   $ 184,238       $ 176,548   
  

 

 

    

 

 

 

Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.

The estimated fair value and unrealized loss of securities available-for-sale and held-to-maturity at June 30, 2014 and December 31, 2013, segregated by the duration of the unrealized loss, are as follows (in thousands):

 

     At June 30, 2014  
     Less than 12 months     12 months or longer     Total  
     Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
 

Available-for-sale:

               

Investment securities:

               

Equity investments

   $ 1,032       $ (21   $ —         $ —        $ 1,032       $ (21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Investment securities:

               

U.S. agency obligations

   $ —         $ —        $ 20,446       $ (57   $ 20,446       $ (57

State and municipal obligations

     1,037         (1     2,047         (7     3,084         (8

Corporate debt securities

     —           —          47,090         (7,910     47,090         (7,910
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     1,037         (1     69,583         (7,974     70,620         (7,975
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     104,591         (2,218     —           —          104,591         (2,218

FNMA

     69,656         (1,758     —           —          69,656         (1,758
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     174,247         (3,976     —           —          174,247         (3,976
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 175,284       $ (3,977   $ 69,583       $ (7,974   $ 244,867       $ (11,951
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $ 176,316       $ (3,998   $ 69,583       $ (7,974   $ 245,899       $ (11,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

18


Table of Contents
     At December 31, 2013  
     Less than 12 months     12 months or longer     Total  
     Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
 

Held-to-maturity:

               

Investment securities:

               

U.S. agency obligations

   $ 35,747       $ (144   $ —         $ —        $ 35,747       $ (144

State and municipal obligations

     3,526         (31     1,153         (4     4,679         (35

Corporate debt securities

     —           —          44,250         (10,750     44,250         (10,750
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     39,273         (175     45,403         (10,754     84,676         (10,929
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     122,365         (4,552     —           —          122,365         (4,552

FNMA

     84,467         (3,607     —           —          84,467         (3,607
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     206,832         (8,159     —           —          206,832         (8,159
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 246,105       $ (8,334   $ 45,403       $ (10,754   $ 291,508       $ (19,088
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2014, the amortized cost, estimated fair 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
Fair Value
     Credit Rating
Moody’s/S&P

BankAmerica Capital

   $ 15,000       $ 12,750       Ba1/BB+

Chase Capital

     10,000         8,740       Baa2/BBB

Wells Fargo Capital

     5,000         4,300       A3/A-

Huntington Capital

     5,000         4,175       Baa3/BB+

Keycorp Capital

     5,000         4,250       Baa3/BBB-

PNC Capital

     5,000         4,300       Baa2/BBB

State Street Capital

     5,000         4,300       A3/BBB+

SunTrust Capital

     5,000         4,275       Baa3/BB+
  

 

 

    

 

 

    
   $ 55,000       $ 47,090      
  

 

 

    

 

 

    

At June 30, 2014, the estimated fair value of each corporate debt security was below cost. However, the estimated fair value of the corporate debt securities increased as compared to December 31, 2013. The corporate debt securities are issued by other financial institutions with credit ratings ranging from a high of A3 to a low of Ba1 as rated by one of the internationally-recognized credit rating services. These floating-rate securities were purchased in 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 corporate debt securities were only temporarily impaired at June 30, 2014. 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 are also considered well-capitalized. 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, 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 has not utilized the securities portfolio as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.

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. 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 fair value of the mortgage-backed securities. 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 securities were only temporarily impaired at June 30, 2014.

 

19


Table of Contents

Note 4. Loans Receivable, Net

Loans receivable, net at June 30, 2014 and December 31, 2013 consisted of the following (in thousands):

 

     June 30,
2014
    December 31,
2013
 

Real estate:

    

One-to-four family

   $ 765,466      $ 750,585   

Commercial real estate, multi family and land

     577,061        528,945   

Residential construction

     46,092        30,821   

Consumer

     201,839        200,683   

Commercial and industrial

     75,215        60,545   
  

 

 

   

 

 

 

Total loans

     1,665,673        1,571,579   

Loans in process

     (16,374     (12,715

Deferred origination costs, net

     3,456        3,526   

Allowance for loan losses

     (20,936     (20,930
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,631,819      $ 1,541,460   
  

 

 

   

 

 

 

At June 30, 2014 and December 31, 2013, loans in the amount of $40,699,000 and $45,360,000, 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, 2014, the impaired loan portfolio totaled $42,382,000 for which there was a specific allocation in the allowance for loan losses of $4,069,000. At December 31, 2013, the impaired loan portfolio totaled $39,903,000 for which there was a specific allocation in the allowance for loan losses of $3,647,000. The average balance of impaired loans for the three and six months ended June 30, 2014 was $42,835,000 and $42,402,000, respectively, and $37,549,000 and $38,228,000, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Balance at beginning of period

   $ 20,934      $ 20,494      $ 20,930      $ 20,510   

Provision charged to operations

     275        800        805        1,900   

Charge-offs

     (419     (938     (1,158     (2,299

Recoveries

     146        464        359        709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 20,936      $ 20,820      $ 20,936      $ 20,820   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 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, 2014 and December 31, 2013 (in thousands):

 

     Residential
Real Estate
    Commercial
Real Estate
    Consumer     Commercial
and Industrial
    Unallocated      Total  

For the three months ended June 30, 2014

             

Allowance for loan losses:

         

Balance at beginning of period

   $ 4,290      $ 11,413      $ 1,369      $ 1,044      $ 2,818       $ 20,934   

Provision (benefit) charged to operations

     207        (337     80        128        197         275   

Charge-offs

     (205     —          (204     (10     —           (419

Recoveries

     105        1        39        1        —           146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 4,397      $ 11,077      $ 1,284      $ 1,163      $ 3,015       $ 20,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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 six months ended June 30, 2014

         

Allowance for loan losses:

         

Balance at beginning of period

   $ 4,859      $ 10,371      $ 1,360      $ 1,383      $ 2,957       $ 20,930   

Provision (benefit) charged to operations

     25        697        196        (171     58         805   

Charge-offs

     (795     —          (313     (50     —           (1,158

Recoveries

     308        9        41        1        —           359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 4,397      $ 11,077      $ 1,284      $ 1,163      $ 3,015       $ 20,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2014

         

Allowance for loan losses:

         

Ending allowance balance attributed to loans:

         

Individually evaluated for impairment

   $ 131      $ 3,493      $ 445      $ —        $ —         $ 4,069   

Collectively evaluated for impairment

     4,266        7,584        839        1,163        3,015         16,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total ending allowance balance

   $ 4,397      $ 11,077      $ 1,284      $ 1,163      $ 3,015       $ 20,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

21


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

Loans:

                 

Loans individually evaluated for impairment

   $ 18,856       $ 20,885       $ 2,365       $ 276       $ —         $ 42,382   

Loans collectively evaluated for impairment

     792,702         556,176         199,474         74,939         —           1,623,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 811,558       $ 577,061       $ 201,839       $ 75,215       $ —         $ 1,665,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

   $ 2       $ 3,612       $ 33       $ —         $ —         $ 3,647   

Collectively evaluated for impairment

     4,857         6,759         1,327         1,383         2,957         17,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,859       $ 10,371       $ 1,360       $ 1,383       $ 2,957       $ 20,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 18,192       $ 17,643       $ 2,961       $ 1,107       $ —         $ 39,903   

Loans collectively evaluated for impairment

     763,214         511,302         197,722         59,438         —           1,531,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 781,406       $ 528,945       $ 200,683       $ 60,545       $ —         $ 1,571,579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

A summary of impaired loans at June 30, 2014 and December 31, 2013 is as follows (in thousands):

 

     June 30,      December 31,  
     2014      2013  

Impaired loans with no allocated allowance for loan losses

   $ 27,588       $ 24,457   

Impaired loans with allocated allowance for loan losses

     14,794         15,446   
  

 

 

    

 

 

 
   $ 42,382       $ 39,903   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 4,069       $ 3,647   
  

 

 

    

 

 

 

At June 30, 2014, impaired loans include troubled debt restructuring loans of $30,047,000 of which $23,000,000 were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2013, impaired loans include troubled debt restructuring loans of $31,119,000 of which $21,456,000 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, 2014 and December 31, 2013 and for the three months ended June 30, 2014 and 2013 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of June 30, 2014

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 9,591       $ 8,819       $ —     

Originated by mortgage company

     7,952         7,567         —     

Originated by mortgage company – non-prime

     1,616         1,215         —     

Commercial real estate:

        

Commercial

     8,093         8,009         —     

Construction and land

     —           —           —     

Consumer

     2,231         1,702         —     

Commercial and industrial

     276         276         —     
  

 

 

    

 

 

    

 

 

 
   $ 29,759       $ 27,588       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 862       $ 862       $ 106   

Originated by mortgage company

     393         393         25   

Originated by mortgage company – non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     12,591         12,572         3,417   

Construction and land

     304         304         76   

Consumer

     663         663         445   

Commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 14,813       $ 14,794       $ 4,069   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2013

        

With no related allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 10,537       $ 9,885       $ —     

Originated by mortgage company

     7,762         7,387         —     

Originated by mortgage company – non-prime

     1,260         858         —     

Commercial real estate:

        

Commercial

     2,303         2,292         —     

Construction and land

     —           —           —     

Consumer

     3,435         2,928         —     

Commercial and industrial

     1,107         1,107         —     
  

 

 

    

 

 

    

 

 

 
   $ 26,404       $ 24,457       $ —     
  

 

 

    

 

 

    

 

 

 

 

23


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

With an allowance recorded:

        

Residential real estate:

        

Originated by Bank

   $ 62       $ 62       $ 2   

Originated by mortgage company

     —           —           —     

Originated by mortgage company – non-prime

     —           —           —     

Commercial real estate:

        

Commercial

     15,128         15,042         3,389   

Construction and land

     309         309         223   

Consumer

     33         33         33   

Commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 15,532       $ 15,446       $ 3,647   
  

 

 

    

 

 

    

 

 

 

 

     Three months ended June 30,  
     2014      2013  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 9,049       $ 101       $ 10,983       $ 86   

Originated by mortgage company

     7,555         65         6,774         57   

Originated by mortgage company – non-prime

     1,103         3         2,194         5   

Commercial real estate:

           

Commercial

     8,046         20         2,749         34   

Construction and land

     —           —           —           —     

Consumer

     2,141         20         2,792         21   

Commercial and industrial

     276         3         286         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,170       $ 212       $ 25,778       $ 206   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 865       $ 8       $ 824       $ 11   

Originated by mortgage company

     394         7         776         9   

Originated by mortgage company – non-prime

     —           —           —           —     

Commercial real estate:

           

Commercial

     12,417         26         8,908         76   

Construction and land

     304         —           472         —     

Consumer

     685         11         791         9   

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,665       $ 52       $ 11,771       $ 105   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents
     Six months ended June 30,  
     2014      2013  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 9,141       $ 184       $ 11,276       $ 176   

Originated by mortgage company

     7,486         127         6,761         127   

Originated by mortgage company – non-prime

     981         6         2,221         8   

Commercial real estate:

           

Commercial

     7,526         70         2,699         65   

Construction and land

     —           —           —           —     

Consumer

     2,161         41         2,830         40   

Commercial and industrial

     277         5         287         5   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,572       $ 433       $ 26,074       $ 421   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate:

           

Originated by Bank

   $ 869       $ 18       $ 826       $ 21   

Originated by mortgage company

     395         13         779         20   

Originated by mortgage company – non-prime

     —           —           —           —     

Commercial real estate:

           

Commercial

     12,584         63         9,250         157   

Construction and land

     304         —           472         —     

Consumer

     678         21         827         24   

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,830       $ 115       $ 12,154       $ 222   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the recorded investment in non-accrual loans by class of loans as of June 30, 2014 and December 31, 2013 (in thousands):

 

     June 30,
2014
     December 31,
2013
 

Residential real estate:

     

Originated by Bank

   $ 13,669       $ 16,145   

Originated by mortgage company

     10,462         10,589   

Originated by mortgage company – non-prime

     1,182         1,479   

Commercial real estate:

     

Commercial

     11,790         11,995   

Construction and land

     304         309   

Consumer

     3,128         4,328   

Commercial and industrial

     164         515   
  

 

 

    

 

 

 
   $ 40,699       $ 45,360   
  

 

 

    

 

 

 

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

 

25


Table of Contents

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 and December 31, 2013 by class of loans (in thousands):

 

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

June 30, 2014

                 

Residential real estate:

                 

Originated by Bank

   $ 7,851       $ 1,528       $ 11,628       $ 21,007       $ 656,085       $ 677,092   

Originated by mortgage company

     90         —           9,796         9,886         75,959         85,845   

Originated by mortgage company – non-prime

     —           —           1,242         1,242         1,287         2,529   

Residential construction

     —           —           —           —           46,092         46,092   

Commercial real estate:

                 

Commercial

     483         —           11,790         12,273         526,811         539,084   

Construction and land

     —           —           304         304         37,673         37,977   

Consumer

     442         504         3,072         4,018         197,821         201,839   

Commercial and industrial

     —           —           164         164         75,051         75,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,866       $ 2,032       $ 37,996       $ 48,894       $ 1,616,779       $ 1,665,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Residential real estate:

                 

Originated by Bank

   $ 6,102       $ 2,526       $ 13,800       $ 22,428       $ 632,653       $ 655,081   

Originated by mortgage Company

     202         108         10,031         10,341         82,544         92,885   

Originated by mortgage company – non-prime

     —           —           1,465         1,465         1,153         2,618   

Residential construction

     195         —           —           195         30,626         30,821   

Commercial real estate:

                 

Commercial

     985         849         9,217         11,051         491,817         502,868   

Construction and land

     —           —           309         309         25,769         26,078   

Consumer

     864         298         4,219         5,381         195,302         200,683   

Commercial and industrial

     —           —           515         515         60,030         60,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,348       $ 3,781       $ 39,556       $ 51,685       $ 1,519,894       $ 1,571,579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

 

26


Table of Contents

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. Loans not rated are included in groups of homogeneous loans. As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

June 30, 2014

              

Commercial real estate:

              

Commercial

   $ 503,785       $ 5,057       $ 30,242       $ —         $ 539,084   

Construction and land

     36,714         —           1,263         —           37,977   

Commercial and industrial

     74,336         518         361         —           75,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 614,835       $ 5,575       $ 31,866       $ —         $ 652,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Commercial real estate:

              

Commercial

   $ 471,435       $ —         $ 30,576       $ 857       $ 502,868   

Construction and land

     25,018         —           1,059         —           26,077   

Commercial and industrial

     59,089         1,070         386         —           60,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 555,542       $ 1,070       $ 32,021       $ 857       $ 589,490   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2014 and December 31, 2013 (in thousands):

 

     Residential Real Estate  
     Originated
by Bank
     Originated
by mortgage
company
     Originated by
mortgage
company –
non-prime
     Residential
construction
     Consumer  

June 30, 2014

              

Performing

   $ 663,423       $ 75,383       $ 1,347       $ 46,092       $ 198,711   

Non-performing

     13,669         10,462         1,182         —           3,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 677,092       $ 85,845       $ 2,529       $ 46,092       $ 201,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Performing

   $ 638,936       $ 82,296       $ 1,139       $ 30,821       $ 196,355   

Non-performing

     16,145         10,589         1,479         —           4,328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 655,081       $ 92,885       $ 2,618       $ 30,821       $ 200,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the capitalization of past due amounts. Included in the non-accrual loan total at June 30, 2014 and December 31, 2013 were $7,047,000 and $9,663,000, respectively, of troubled debt restructurings. At June 30, 2014 and December 31, 2013, the Company has allocated $1,521,000 and $1,816,000, respectively, of specific reserves to loans which are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at June 30, 2014 and December 31, 2013, which totaled $23,000,000 and $21,456,000, respectively. Troubled debt restructurings with six months of performance are considered in the allowance for loan losses similar to other performing loans. Troubled debt restructurings which are non-accrual or classified are considered in the allowance for loan losses similar to other non-accrual or classified loans.

 

27


Table of Contents

The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2014 and 2013, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

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

Three months ended June 30, 2014

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by mortgage company – non-prime

     1       $ 358       $ 358   

Consumer

     3         93         97   
     Number of Loans      Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

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

Six months ended June 30, 2014

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     2       $ 337       $ 263   

Originated by mortgage company

     1         187         184   

Originated by mortgage company – non-prime

     1         358         358   

Consumer

     5         168         171   
     Number of Loans      Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

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

Three months ended June 30, 2013

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     3       $ 628       $ 628   

Consumer

     1         12         12   
     Number of Loans      Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

     2         492      
     Number of Loans      Pre-modification
Recorded Investment
     Post-modification
Recorded Investment
 

Six months ended June 30, 2013

        

Troubled Debt Restructurings:

        

Residential real estate:

        

Originated by Bank

     3       $ 628       $ 628   

Consumer

     5         97         89   
     Number of Loans      Recorded Investment         

Troubled Debt Restructurings

        

Which Subsequently Defaulted:

     2         492      

 

28


Table of Contents

Note 5. Reserve for Repurchased Loans and Loss Sharing Obligations

An analysis of the reserve for repurchased loans and loss sharing obligations for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands). The reserve is included in other liabilities in the accompanying statements of financial condition.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014     2013      2014     2013  

Balance at beginning of period

   $ 1,468      $ 1,688       $ 1,468      $ 1,203   

Provision charged to operations

     —          —           —          975   

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

     (163     —           (163     (695

Recoveries

     —          —           —          205   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

   $ 1,305      $ 1,688       $ 1,305      $ 1,688   
  

 

 

   

 

 

    

 

 

   

 

 

 

The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to repurchase requests which may be received on residential mortgage loans previously sold to investors and other loss sharing obligations. The Company prepares a comprehensive analysis of the adequacy of the reserve for repurchased loans and loss sharing obligations at each quarter-end. The reserve includes a specific loss estimate on the outstanding loan repurchase requests based on the estimated fair value of the underlying collateral modified by the likelihood of loss which is estimated based on historical experience. The reserve also includes a general loss estimate based on an estimate of loans likely to be returned for repurchase and the estimated loss on those loans. Finally, the reserve also includes an estimate of the Bank’s obligation under a loss sharing arrangement with the Federal Home Loan Bank (“FHLB”) relating to loans sold into their Mortgage Partnership Finance (“MPF”) program. Under this program, the Bank and the FHLB share credit risk for loans sold. The first loss position, equal to 1% of the aggregate amount of the loan pool, is absorbed by the FHLB through a reduction in credit enhancement fees paid to the Bank. The second loss position, generally covering the next 1.5% to 4.0% of the aggregate loan pool, is absorbed by the Bank. Loan losses above the combination of these two thresholds are fully absorbed by the FHLB. In establishing the reserve, the Company considered recent and historical experience, product type and volume of loan sales and the general economic environment.

The reserve for repurchased loans and loss sharing obligations was $1.3 million at June 30, 2014, a $163,000 decrease from December 31, 2013 due to incurred losses of $143,000 relating to the FHLB loan sales and a settlement of $20,000 with one investor relating to existing repurchase requests. The reserve was $1.7 million at June 30, 2013, a $485,000 increase from December 31, 2012 due to a provision of $100,000 for repurchase requests, an additional provision of $875,000 relating to loans sold to the FHLB, incurred losses of $245,000 relating to the FHLB loan sales, a comprehensive settlement of $450,000 with one investor relating to existing and anticipated loan repurchase requests, and recoveries of $205,000 of previously charged-off amounts.

At June 30, 2014, there was one outstanding loan repurchase request on a loan with a total principal balance of $252,000, a reduction from five outstanding loan repurchase requests on loans with a total principal balance of $1.2 million at December 31, 2013.

Note 6. Deposits

The major types of deposits at June 30, 2014 and December 31, 2013 were as follows (in thousands):

 

Type of Account

   June 30, 2014      December 31, 2013  

Non-interest-bearing

   $ 271,208       $ 207,608   

Interest-bearing checking

     817,085         913,753   

Money market deposit

     107,365         116,947   

Savings

     295,133         290,512   

Time deposits

     214,719         217,943   
  

 

 

    

 

 

 

Total deposits

   $ 1,705,510       $ 1,746,763   
  

 

 

    

 

 

 

Included in time deposits at June 30, 2014 and December 31, 2013, is $65,168,000 and $64,380,000, respectively, in deposits of $100,000 and over.

Note 7. Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” which applies to all creditors who obtain physical possession of

 

29


Table of Contents

residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The amendments in this update clarify when an in substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in ASU 2014-04 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

Note 8. Fair Value Measurements

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

The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the three and six months ended June 30, 2014. The fair value hierarchy is as follows:

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

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

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

Assets and Liabilities Measured at Fair Value

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

Securities Available-For-Sale

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

 

30


Table of Contents

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

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

Other Real Estate Owned and Impaired Loans

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

The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

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

June 30, 2014

           

Items measured on a recurring basis:

           

Investment securities available-for-sale:

           

U.S. agency obligations

   $ 25,094       $ —         $ 25,094       $ —     

Equity investments

     7,209         7,209         —           —     

Items measured on a non-recurring basis:

           

Other real estate owned

     4,968         —           —           4,968   

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

     14,794         —           —           14,794   
       Fair Value Measurements at Reporting Date Using:  
     Total Fair
Value
     Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  

December 31, 2013

           

Items measured on a recurring basis:

           

Investment securities available-for-sale:

           

U.S. agency obligations

   $ 35,289       $ —         $ 35,289       $ —     

Equity investments

     8,547         8,547         —           —     

Items measured on a non-recurring basis:

           

Other real estate owned

     4,345         —           —           4,345   

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

     15,446         —           —           15,446   

Assets and Liabilities Disclosed at Fair Value

A description of the valuation methodologies used for assets and liabilities disclosed at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

Cash and Due from Banks

For cash and due from banks, the carrying amount approximates fair value.

Securities Held-to-Maturity

Securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these securities to maturity. The Company determines the fair value of the securities utilizing Level 1, Level 2 and infrequently Level 3 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third party pricing

 

31


Table of Contents

vendors or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities, but comparing the securities to benchmark or comparable securities.

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

The Company utilizes third party pricing services to obtain market values for its corporate bonds. Management’s policy is to obtain and review all available documentation from the third party pricing service relating to their market value determinations, including their methodology and summary of inputs. Management reviews this documentation, makes inquiries of the third party pricing service and makes a determination as to the level of the valuation inputs. Based on the Company’s review of the available documentation from the third party pricing service, management concluded that Level 2 inputs were utilized for all securities except for certain state and municipal obligations known as bond anticipation notes (“BANs”) where management utilized Level 3 inputs. In the case of the Level 2 securities, the significant observable inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, other market information and observations of equity and credit default swap curves related to the issuer. Management based its fair value estimate of the BANs on the local nature of the issuing entities, the short-term life of the security and current market conditions.

Federal Home Loan Bank of New York Stock

The fair value for Federal Home Loan Bank of New York stock is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment based upon the outstanding balance of mortgage related assets and outstanding borrowings.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, construction, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.

Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms. Fair values estimated in this manner do not fully incorporate an exit price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Deposits Other than Time Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts are, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported.

Time Deposits

The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase with Retail Customers

Fair value approximates the carrying amount as these borrowings are payable on demand and the interest rate adjusts monthly.

Borrowed Funds

Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

 

32


Table of Contents

The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of June 30, 2014 and December 31, 2013 are presented in the following tables (in thousands):

 

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

June 30, 2014

           

Financial Assets:

           

Cash and due from banks

   $ 43,817       $ 43,817       $ —         $ —     

Securities held-to-maturity

     478,389         —           484,524         600   

Federal Home Loan Bank of New York stock

     20,246         —           —           20,246   

Loans receivable and mortgage loans held for sale

     1,633,114         —           —           1,652,659   

Financial Liabilities:

           

Deposits other than time deposits

     1,490,791         —           1,490,791         —     

Time deposits

     214,719         —           216,988         —     

Securities sold under agreements to repurchase with retail customers

     62,341         62,341         —           —     

Federal Home Loan Bank advances and other borrowings

     332,500         —           332,380         —     
            Fair Value Measurements at Reporting Date Using:  
     Book
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

December 31, 2013

           

Financial Assets:

           

Cash and due from banks

   $ 33,958       $ 33,958       $ —         $ —     

Securities held-to-maturity

     495,599         —           493,432         1,650   

Federal Home Loan Bank of New York stock

     14,518         —           —           14,518   

Loans receivable and mortgage loans held for sale

     1,542,245         —           —           1,561,208   

Financial Liabilities:

           

Deposits other than time deposits

     1,528,820         —           1,528,820         —     

Time deposits

     217,943         —           220,409         —     

Securities sold under agreements to repurchase with retail customers

     68,304         68,304         —           —     

Federal Home Loan Bank advances and other borrowings

     202,500         —           201,393         —     

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a limited market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other significant unobservable inputs. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to routine legal proceedings within the normal course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.

 

33


Table of Contents

Item 1A. Risk Factors

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2013 Form 10-K. There were no material changes to risk factors relevant to the Company’s operations since December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 27, 2012, the Company announced its intention to repurchase up to 901,002 shares or 5% of its outstanding common stock, which was completed during the second quarter of 2014. On July 24, 2014, the Company announced the authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares. Information regarding the Company’s common stock repurchases for the three month period ended June 30, 2014 is as follows:

 

Period

   Total
Number of
Shares
Purchased
     Average Price
Paid per
Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
 

April 1, 2014 through April 30, 2014

     3,799       $ 16.27         3,799         209,967   

May 1, 2014 through May 31, 2014

     159,967         16.48         159,967         50,000   

June 1, 2014 through June 30, 2014

     50,000         15.99         50,000         0   

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Exhibits:

 

10.30

   Amended and Restated Employment Agreement between Christopher D. Maher and OceanFirst Financial Corp. dated April 23, 2014. (1)

10.31

   Amended and Restated Employment Agreement between Christopher D. Maher and OceanFirst Bank dated April 23, 2014. (1)

31.1

   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.0

   Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002

101.0

   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

(1) Incorporated herein by reference from Exhibit to Form 8-K filed on April 25, 2014.

 

34


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

OceanFirst Financial Corp.

    Registrant
DATE: August 8, 2014    

/s/ John R. Garbarino

    John R. Garbarino
    Chairman of the Board and Chief Executive Officer
DATE: August 8, 2014    

/s/ Michael J. Fitzpatrick

    Michael J. Fitzpatrick
    Executive Vice President and Chief Financial Officer

 

35


Table of Contents

Exhibit Index

 

Exhibit

  

Description

  

Page

 
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      37   
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      38   
  32.0    Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002      39   
101.0    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.   

 

36