10-Q 1 d236440d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

 

¨ 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 4, 2016 there were 25,839,744 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, 2016 (unaudited) and December 31, 2015

     13   
  

Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2016 and 2015

     14   
  

Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2016 and 2015

     15   
  

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2016 and 2015

     16   
  

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and 2015

     17   
  

Notes to Unaudited Consolidated Financial Statements

     19   

Item 2.

  

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

     1   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     10   

Item 4.

  

Controls and Procedures

     12   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     40   

Item 1A.

  

Risk Factors

     40   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3.

  

Defaults Upon Senior Securities

     41   

Item 4.

  

Mine Safety Disclosures

     41   

Item 5.

  

Other Information

     41   

Item 6.

  

Exhibits

     41   

Signatures

     41   


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

 

FINANCIAL SUMMARY   At or for the Quarters Ended  
(dollars in thousands, except per share amounts)   June 30, 2016     March 31, 2016     June 30, 2015  

SELECTED FINANCIAL CONDITION DATA:

     

Total assets

  $ 4,047,493      $ 2,588,447      $ 2,395,100   

Loans receivable, net

    3,130,046        1,996,993        1,772,879   

Deposits

    3,206,262        1,971,360        1,761,675   

Stockholders’ equity

    409,258        241,076        221,535   

SELECTED OPERATING DATA:

     

Net interest income

    30,014        20,559        18,433   

Provision for loan losses

    662        563        300   

Other income

    4,883        3,376        4,171   

Operating expenses

    28,646        16,716        14,392   

Net income

    3,661        4,205        5,133   

Diluted earnings per share

    0.16        0.25        0.31   

SELECTED FINANCIAL RATIOS:

     

Stockholders’ equity per share

    15.89        13.89        13.25   

Tangible stockholders’ equity per share (1)

    13.14        13.75        13.25   

Cash dividend per share

    0.13        0.13        0.13   

Stockholders’ equity to total assets

    10.11     9.31     9.25

Tangible stockholders’ equity to total tangible assets (1)

    8.51        9.23        9.25   

Return on average assets (2) (3)

    0.40        0.65        0.86   

Return on average stockholders’ equity (2) (3)

    3.77        7.01        9.29   

Return on average tangible stockholders’ equity (1) (2) (3)

    4.30        7.07        9.29   

Net interest rate spread

    3.46        3.23        3.15   

Net interest margin

    3.55        3.32        3.23   

Operating expenses to average assets (2) (3)

    3.14        2.57        2.40   

Efficiency ratio (3)

    82.09        69.84        63.67   

ASSET QUALITY:

     

Non-performing loans

  $ 15,330      $ 16,193      $ 20,905   

Non-performing assets

    25,121        25,222        24,262   

Allowance for loan losses as a percent of total loans receivable

    0.53     0.80     0.92

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

    108.79        100.13        79.09   

Non-performing loans as a percent of total loans receivable

    0.48        0.80        1.16   

Non-performing assets as a percent of total assets

    0.62        0.97        1.01   

Wealth Management

     

Assets under administration

  $ 221,277      $ 203,723      $ 216,533   

 

(1) Tangible stockholders’ equity is calculated by excluding intangible assets relating to goodwill and core deposit intangible.
(2) Ratios are annualized.
(3) Performance ratios include the adverse impact of merger related expenses of $7.2 million, or $5.0 million, net of tax benefit, for the quarter ended June 30, 2016; $1.4 million, or $1.2 million, net of tax benefit, for the quarter ended March 31, 2016; and $184,000, or $151,000, net of tax benefit, for the quarter ended June 30, 2015.

 

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Table of Contents

Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank headquartered in Ocean County, New Jersey, serving business and retail customers in the central and southern New Jersey region. The term “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, deposit accounts, the sale of investment products, loan originations, 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 has mitigated the adverse impact of low absolute levels of interest rates by growing commercial loans, resulting in a shift in asset mix from lower-yielding securities into higher-yielding loans. Based upon current economic conditions, characterized by moderate growth and low inflation, interest rates may remain at, or close to, historically low levels with increases in the Federal funds rate expected to be gradual. The continuation of the low interest rate environment may have an adverse impact on the Company’s net interest margin in future periods.

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 U.S. economy, which expanded moderately in 2015 and continues to show modest growth again in 2016. Labor market conditions improved as the national and local unemployment rates in the first half of 2016 both decreased compared to prior year levels, while measures of inflation remain subdued.

Highlights of the Company’s financial results and corporate activities for the three months ended June 30, 2016 were as follows:

On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”), valued at $195 million. The acquisition added 22 new branches, $1.5 billion in assets, $1.2 billion in loans, and $1.2 billion in deposits. The Company anticipates that core system integration and rebranding will occur in October 2016, providing for the realization of additional cost savings entering the first quarter of 2017.

On July 13, 2016, the Company announced it had entered into a definitive agreement and plan of merger pursuant to which Ocean Shore Holding Company (“Ocean Shore”), the holding company and parent of Ocean City Home Bank, will merge with and into OceanFirst in a transaction valued at approximately $145.6 million. Ocean City Home Bank is one of southern New Jersey’s oldest and largest community banks with 11 branches, $1.1 billion in assets, $818 million in total deposits and $796 million in gross loans. The transaction is subject to customary regulatory and stockholder approvals.

Net income for the three months ended June 30, 2016, was $3.7 million, or $0.16 per diluted share, as compared to net income of $5.1 million, or $0.31 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2016 includes merger related expenses of $7.2 million. In connection with the Cape acquisition, the Bank deleveraged the combined balance sheet through the sale of lower-yielding securities and the prepayment of existing term borrowings in order to improve the net interest margin, reduce interest rate sensitivity, and increase capital ratios. The implementation of this strategy resulted in an expense of $136,000 relating to the prepayment of Federal Home Loan Bank (“FHLB”) borrowings and a loss of $12,000 on the sale of investment securities available-for-sale (the “deleveraging” costs). The after-tax impact of merger related expenses and deleveraging costs was $5.0 million which reduced diluted earnings per share by $0.22. Excluding these items, diluted earnings per share increased over the prior year period due to higher net interest income and other income, partly offset by higher operating expenses and provision for loan losses.

Net interest income for the three months ended June 30, 2016 increased to $30.0 million, as compared to $18.4 million for the corresponding prior year period reflecting an increase in interest-earning assets and a higher net interest margin due to the Cape acquisition.

Other income increased to $4.9 million for the three months ended June 30, 2016, as compared to $4.2 million for the same prior year period. The increase was primarily due to the impact of the Cape acquisition which added $951,000 to total other income. Operating expenses, excluding merger related expenses, increased $7.2 million for the three months ended June 30, 2016, as compared to the same prior year period primarily due to the operations of Cape and Colonial American Bank (acquired July 31, 2015), the investment in commercial lending and the impact of operating new branches.

 

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The Company remains well-capitalized with a tangible common equity ratio of 8.51% at June 30, 2016. 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. No shares were repurchased during the quarter, and 244,804 shares remained available for repurchase at June 30, 2016.

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 tables set forth certain information relating to the Company for the three and six months ended June 30, 2016 and 2015. 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, 2016     JUNE 30, 2015  
    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

  $ 40,567      $ 41        0.40   $ 28,636      $ 6        0.08

Securities (1) and FHLB stock

    571,463        2,579        1.81        490,760        2,022        1.65   

Loans receivable, net (2):

           

Commercial

    1,471,159        17,783        4.84        790,055        8,759        4.43   

Residential

    1,076,557        10,225        3.80        791,603        7,799        3.94   

Home equity

    236,937        2,498        4.22        194,250        1,982        4.08   

Other

    1,011        15        5.93        436        8        7.00   

Allowance for loan loss net of deferred loan fees

    (13,146     —          —          (13,349     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    2,772,518        30,521        4.40        1,762,995        18,548        4.21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    3,384,548        33,141        3.92        2,282,391        20,576        3.61   
   

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-earning assets

    262,554            112,445       
 

 

 

       

 

 

     

Total assets

  $ 3,647,102          $ 2,394,836       
 

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing checking

  $ 1,166,298        503        0.17      $ 845,876        187        0.09   

Money market

    298,530        180        0.24        122,668        26        0.08   

Savings

    434,438        41        0.04        305,173        25        0.03   

Time deposits

    417,301        1,047        1.00        212,160        729        1.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    2,316,567        1,771        0.31        1,485,877        967        0.26   

Securities sold under agreements to repurchase

    76,907        26        0.14        67,873        22        0.13   

FHLB advances

    287,171        1,201        1.67        270,431        952        1.41   

Other borrowings

    22,500        129        2.29        27,500        202        2.94   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    2,703,145        3,127        0.46        1,851,681        2,143        0.46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest-bearing deposits

    529,230            307,528       

Non-interest-bearing liabilities

    26,033            14,707       
 

 

 

       

 

 

     

Total liabilities

    3,258,408            2,173,916       

Stockholders’ equity

    388,694            220,920       
 

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 3,647,102          $ 2,394,836       
 

 

 

       

 

 

     

Net interest income

    $ 30,014          $ 18,433     
   

 

 

       

 

 

   

Net interest rate spread (3)

        3.46         3.15
     

 

 

       

 

 

 

Net interest margin (4)

        3.55         3.23
     

 

 

       

 

 

 

Total cost of deposits (including non-interest-bearing deposits)

        0.25         0.22
     

 

 

       

 

 

 

 

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Table of Contents
    FOR THE SIX MONTHS ENDED,  
    JUNE 30, 2016     JUNE 30, 2015  
    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

  $ 44,533      $ 70        0.31   $ 28,443      $ 11        0.08

Securities (1) and FHLB stock

    508,590        4,588        1.80        500,326        4,157        1.66   

Loans receivable, net (2):

           

Commercial

    1,221,604        28,780        4.71        765,396        17,059        4.46   

Residential

    954,059        18,265        3.83        785,079        15,530        3.96   

Home equity

    214,146        4,488        4.19        195,384        3,973        4.07   

Other

    756        23        6.08        434        15        6.91   

Allowance for loan loss net of deferred loan fees

    (13,396     —          —          (13,269     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    2,377,169        51,556        4.34        1,733,024        36,577        4.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    2,930,292        56,214        3.84        2,261,793        40,745        3.60   
   

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-earning assets

    195,768            112,176       
 

 

 

       

 

 

     

Total assets

  $ 3,126,060          $ 2,373,969       
 

 

 

       

 

 

     

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing checking

  $ 1,033,091        808        0.16      $ 859,312        382        0.09   

Money market

    227,428        250        0.22        111,860        46        0.08   

Savings

    375,293        67        0.04        303,717        49        0.03   

Time deposits

    340,511        1,917        1.13        208,324        1,444        1.39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,976,323        3,042        0.31        1,483,213        1,921        0.26   

Securities sold under agreements to repurchase

    80,207        54        0.13        67,260        43        0.13   

FHLB advances

    276,547        2,284        1.65        256,511        1,812        1.41   

Other borrowings

    22,500        261        2.32        27,500        402        2.92   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    2,355,577        5,641        0.48        1,834,484        4,179        0.46   
   

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-bearing deposits

    436,300            302,490       

Non-interest-bearing liabilities

    19,836            14,701       
 

 

 

       

 

 

     

Total liabilities

    2,811,713            2,151,675       

Stockholders’ equity

    314,347            222,294       
 

 

 

       

 

 

     

Total liabilities and stockholders equity

  $ 3,126,060          $ 2,373,969       
 

 

 

       

 

 

     

Net interest income

    $ 50,573          $ 36,566     
   

 

 

       

 

 

   

Net interest rate spread (3)

        3.36         3.14
     

 

 

       

 

 

 

Net interest margin (4)

        3.45         3.23
     

 

 

       

 

 

 

Total cost of deposits (including non-interest bearing deposits)

        0.25         0.22
     

 

 

       

 

 

 

 

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

 

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Table of Contents

Comparison of Financial Condition at June 30, 2016 and December 31, 2015

Total assets increased by $1,454 million to $4,047 million at June 30, 2016, from $2,593 million at December 31, 2015 as a result of the Cape acquisition. Loans receivable, net, increased by $1,159 million, to $3,130 million at June 30, 2016, from $1,971 million at December 31, 2015. Excluding the Cape acquisition, loans receivable net, increased $2.4 million. As part of the acquisition of Cape, Colonial American Bank (“Colonial”) and the purchase of an existing retail branch in the Toms River market in the first quarter of 2016, the Company has outstanding goodwill and core deposit intangible at June 30, 2016 of $67.1 million and $3.9 million, respectively.

Deposits increased by $1,290 million, to $3,206 million at June 30, 2016, from $1,917 million at December 31, 2015, including deposits of $1,248 million acquired from Cape and $17.0 million acquired through the purchase of an existing retail branch located in the Toms River market. The loan-to-deposit ratio at June 30, 2016 was 97.6%, as compared to 102.8% at December 31, 2015. The deposit growth partly funded a decrease in FHLB advances of $11.8 million, to $312.6 million at June 30, 2016, from $324.4 million at December 31, 2015.

Stockholders’ equity increased to $409.3 million at June 30, 2016, as compared to $238.4 million at December 31, 2015. The acquisition of Cape added $165.9 million to stockholder’s equity. At June 30, 2016, there were 244,804 shares available for repurchase under the stock repurchase program adopted in July of 2014. Tangible stockholders’ equity per common share decreased to $13.14 at June 30, 2016, as compared to $13.67 at December 31, 2015 due to the addition of intangible assets in the Cape acquisition.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2016 and June 30, 2015

General

On July 31, 2015, the Company completed its acquisition of Colonial which added $142.4 million to assets, $121.2 million to loans, and $123.3 million to deposits. Colonial’s results of operations are included in the consolidated results for the three and six months ended June 30, 2016, but are excluded from the results of operations for the corresponding prior year periods.

On May 2, 2016, the Company completed its acquisition of Cape, which added $1.5 billion to assets, $1.2 billion to loans and $1.2 billion to deposits. Cape’s results of operations from May 2, 2016 through June 30, 2016 are included in the consolidated results for the three and six months ended June 30, 2016, but are excluded from the results of operations for the corresponding prior year periods.

Net income for the three months ended June 30, 2016 was $3.7 million, or $0.16 per diluted share, as compared to net income of $5.1 million, or $0.31 per diluted share for the corresponding prior year period. Net income for the six months ended June 30, 2016 was $7.9 million, or $0.39 per diluted share, as compared to net income of $10.4 million, or $0.63 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2016 includes merger related expenses of $7.2 million, and $8.6 million, respectively. Additionally, net income for the three and six months ended June 30, 2016, includes a Federal Home Loan Bank prepayment fee of $136,000, and a loss on the sale of investment securities available-for-sale of $12,000. The after-tax impact of merger related expenses and the deleveraging costs reduced diluted earnings per share by $0.22 and $0.29 for the three and six months ended June 30, 2016, respectively. Excluding the merger, related expenses and the deleveraging costs, diluted earnings per share increased over the prior year periods due to higher net interest income and other income, partly offset by higher operating expenses and provision for loan losses.

Interest Income

Interest income for the three months and six months ended June 30, 2016 increased to $33.1 million and $56.2 million, respectively, as compared to $20.6 million and $40.7 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1,102 million and $668.5 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods benefiting from the interest-earning assets acquired from Cape and Colonial which averaged $980.2 million and $545.6 million, respectively, for the three and six months ended June 30, 2016. Average loans receivable, net, increased $1,009 million and $644.1 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods. The increases attributable to Cape and Colonial were $866.4 million and $483.9 million, respectively. The yield on average interest-earning assets increased to 3.92% and 3.84%, respectively, for the three and six months ended June 30, 2016, as compared to 3.61% and 3.60%, respectively, for the same prior year periods. The yields on average interest-earning assets for the three and six months ended June 30, 2016 benefited from the accretion of purchase accounting adjustments for Cape and Colonial, the higher-yielding interest-earning assets acquired from Cape and the change in the average balance sheet mix in favor of higher-yielding loans receivable over lower-yielding investment securities.

 

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Interest Expense

Interest expense for the three and six months ended June 30, 2016 was $3.1 million and $5.6 million, respectively, as compared to $2.1 million and $4.2 million, respectively, in the corresponding prior year periods. The cost of average interest-bearing liabilities at 0.46% for the three months ended June 30, 2016, was unchanged as compared to the prior year period. For the six months ended June 30, 2016, the cost of average interest-bearing liabilities increased to 0.48%, from 0.46%, in the prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.25% for both the three and six months ended June 30, 2016, as compared to 0.22% for both prior year periods.

Net Interest Income

Net interest income for the three and six months ended June 30, 2016 increased to $30.0 million and $50.6 million, respectively, as compared to $18.4 million and $36.6 million, respectively, in the same prior year periods, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased $1,102 million and $668.5 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods. The three and six months ended June 30, 2016 were favorably impacted by the interest-earning assets acquired from Cape and Colonial, which averaged $980.2 and $545.6 million, respectively. The net interest margin increased to 3.55% and 3.45%, respectively, for the three and six months ended June 30, 2016 as compared to 3.23% for both prior year periods. Included in net interest income for the three and six months ended June 30, 2016, is $1.3 million and $1.4 million, respectively, of net accretion of purchase accounting adjustments from Cape and Colonial.

Provision for Loan Losses

For the three and six months ended June 30, 2016, the provision for loan losses was $662,000 and $1.2 million, respectively, as compared to $300,000 and $675,000, respectively, for the corresponding prior year periods. Net charge-offs were $198,000 and $1.3 million, respectively, for the three and six months ended June 30, 2016, as compared to net charge-offs of $185,000 and $458,000, respectively, in the corresponding prior year periods. The increase in net charge-offs for the six months ended June 30, 2016 was primarily due to first quarter charge-offs of $886,000 on two non-performing commercial loans. Non-performing loans decreased to $15.3 million at June 30, 2016, as compared to $16.2 million at December 31, 2015.

Other Income

For the three and six months ended June 30, 2016, other income increased to $4.9 million and $8.3 million, respectively, as compared to $4.2 million and $8.2 million, respectively, in the same prior year periods. The increases from the prior periods were primarily due to the impact of the Cape acquisition which added $951,000 to total other income for the three and six months ended June 30, 2016, as compared to the same prior year periods. Excluding Cape, other income decreased $238,000 and $848,000, respectively, as compared to the same prior year periods. The decreases, excluding Cape, were partly due to higher net losses from other real estate operations of $196,000 and $623,000, respectively, as compared to the prior year periods. The losses were predominately due to the seasonal operations of the hotel, golf and banquet facility acquired as other real estate owned in the fourth quarter of 2015. The Bank is currently engaged in a sales process with qualified buyers for the disposition of this property. The results for the three and six months ended June 30, 2016 included no gains on sale of loan servicing, as compared to $30,000 and $111,000, respectively, in the same prior year periods.

Operating Expenses

Operating expenses increased to $28.6 million and $45.4 million, respectively, for the three and six months ended June 30, 2016, as compared to $14.4 million and $28.1 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2016 include $7.2 million and $8.6 million, respectively, in merger related expenses relating to the acquisition of Cape, as compared to merger related expenses of $184,000 and $234,000, respectively, in the prior year periods relating to the acquisition of Colonial. Excluding merger related expenses, the increases in operating expenses over the prior year were primarily due to the operations of Cape and Colonial, which added $5.3 million and $5.8 million for the quarter and year-to-date, respectively; the investment in commercial lending which added expenses of $339,000 and $780,000 for the quarter and year-to-date, respectively; the impact of new branches which added expenses of $391,000 and $722,000 for the quarter and year-to-date, respectively; and the FHLB prepayment fee of $136,000.

Provision for Income Taxes

The provision for income taxes was $1.9 million and $4.4 million, respectively, for the three and six months ended June 30, 2016, as compared to $2.8 million and $5.5 million, respectively, for the corresponding prior year periods. The effective tax was 34.5% and 35.8%, respectively, for the three and six months ended June 30, 2016, as compared to 35.1% and 34.7%, respectively, for prior year periods. The variances in the effective tax rate were primarily due to the timing of non-deductible merger related expenses.

 

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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.

At June 30, 2016, the Company had $61.0 million in outstanding overnight borrowings from the FHLB as compared to $82.0 million outstanding at December 31, 2015. The Company utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including the overnight borrowings, of $312.6 million and $324.4 million, respectively, at June 30, 2016 and December 31, 2015.

The Company’s cash needs for the six months ended June 30, 2016 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 and calls of investment securities, proceeds from sale of available–for-sale securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, and to reduce borrowings. The Company’s cash needs for the six months ended June 30, 2015 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 deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of investment securities and to reduce FHLB borrowings.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2016, outstanding undrawn lines of credit totaled $485.8 million; outstanding commitments to originate loans totaled $85.0 million; and outstanding commitments to sell loans totaled $12.4 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 $283.9 million at June 30, 2016. Based upon historical experience management estimates that a significant portion of such time 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 are 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 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, 2016, the Company did not repurchase any shares of common stock compared with repurchases of 259,940 shares at a cost of $4.5 million for the six months ended June 30, 2015. At June 30, 2016, there were 244,804 shares available to be repurchased under the stock repurchase program authorized in July of 2014.

Cash dividends on common stock declared and paid during the first six months of 2016 were $5.5 million, as compared to $4.3 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Cape and Colonial acquisitions. On July 20, 2016, the Board of Directors declared a quarterly cash dividend of thirteen cents ($0.13) per common share. The dividend is payable on August 19, 2016 to stockholders of record at the close of business on August 8, 2016.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary and the issuance of preferred and common stock and long-term debt. At December 31, 2015, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment of $12.0 million in dividends from the Bank to the Company over the next three quarters of 2016, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises. For the six months ended June 30, 2016, the Company received a dividend payment of $4.0 million from the Bank and $8.0 million remained to be paid. The Bank elected not to pay a dividend during the second quarter of 2016 in order to retain capital subsequent to the Cape acquisition. 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, 2016, OceanFirst Financial Corp. held $15.3 million in cash.

 

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As of June 30, 2016, the Company and the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

OceanFirst Financial Corp.

   Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tier 1 capital (to average assets)

   $ 353,886         9.95 %(1)    $ 142,263         4.00

Common equity Tier 1 (to risk-weighted assets)

     345,105         11.47        135,342         4.50   

Tier 1 capital (to risk-weighted assets)

     353,886         11.77        180,456         6.00   

Total capital (to risk-weighted assets)

     371,221         12.34        240,608         8.00   

 

OceanFirst Bank

   Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tier 1 capital (to average assets)

   $ 336,059         9.45 %(1)    $ 142,257         4.00

Common equity Tier 1 (to risk-weighted assets)

     336,059         11.18        135,241         4.50   

Tier 1 capital (to risk-weighted assets)

     336,059         11.18        180,322         6.00   

Total capital (to risk-weighted assets)

     353,394         11.76        240,429         8.00   

 

(1) Tier 1 capital ratios are calculated based on outstanding capital at the end of the quarter divided by average assets for the quarter. The average assets for the quarter exclude the assets acquired from Cape for the period from April 1, 2016 through May 1, 2016. The Tier 1 capital ratios for the Company and the Bank based on total assets as of the end of the period is 8.91% and 8.47%, respectively.

The Company and the Bank are considered “well-capitalized” under the Prompt Corrective Action Regulations.

At June 30, 2016, the Company maintained tangible common equity of $338.3 million, for a tangible common equity to assets ratio of 8.51%.

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 $12.4 million at June 30, 2016.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2016 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 402,776       $ 130,734       $ 123,916       $ 125,626       $ 22,500   

Commitments to Fund Undrawn Lines of Credit

              

Commercial

     259,075         259,075         —           —           —     

Consumer

     226,719         226,719         —           —           —     

Commitments to Originate Loans

     85,011         85,011         —           —           —     

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.

 

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Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and other real estate owned. 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,
2016
    December 31,
2015
 
    (dollars in thousands)  

Non-performing loans:

   

Commercial and industrial

  $ 964      $ 123   

Commercial real estate – owner occupied

    4,363        7,684   

Commercial real estate - investor

    1,675        3,112   

Residential mortgage

    7,102        5,779   

Home equity loans and lines

    1,226        1,574   

Other consumer

    —          2   
 

 

 

   

 

 

 

Total non-performing loans

    15,330        18,274   

Other real estate owned

    9,791        8,827   
 

 

 

   

 

 

 

Total non-performing assets

  $ 25,121      $ 27,101   
 

 

 

   

 

 

 

Purchased credit impaired (“PCI”) loans

  $ 9,673      $ 461   
 

 

 

   

 

 

 

Delinquent loans 30-89 days

  $ 15,643      $ 9,087   
 

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

    0.53     0.84

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

    108.79        91.51   

Non-performing loans as a percent of total loans receivable

    0.48        0.91   

Non-performing assets as a percent of total assets

    0.62        1.05   

The Company’s non-performing loans totaled $15.3 million at June 30, 2016, as compared to $18.3 million at December 31, 2015. Included in the non-performing loans total at June 30, 2016 was $3.0 million of troubled debt restructured loans, as compared to $4.9 million of troubled debt restructured loans at December 31, 2015. Non-performing loans are concentrated in residential mortgage, which comprise 46.3% of the total at June 30, 2016. The decrease in commercial real estate – owner occupied was primarily due to payoffs and loans returning to accrual status. Non-performing loans do not include $9.7 million of purchased credit impaired loans acquired from Cape and Colonial. At June 30, 2016, the allowance for loan losses totaled $16.7 million, or 0.53% of total loans, as compared to $16.7 million, or 0.84% of total loans at December 31, 2015. These ratios exclude existing fair value credit marks of $27.3 million at June 30, 2016 on the Cape and Colonial loans and $2.2 million at December 31, 2015 on the Colonial loans. These loans were acquired at fair value with no related allowances for loan losses. Other real estate owned includes $7.0 million relating to the hotel, golf and banquet facility located in New Jersey which the Company acquired in the fourth quarter of 2015.

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

 

     June 30,
2016
     December 31,
2015
 

Special Mention

   $ 13,729       $ 23,087   

Substandard

     42,382         33,258   

The largest Substandard loan relationship is comprised of several credit facilities to a marina with an aggregate balance of $5.2 million. The loans are well collateralized by commercial and residential real estate, all business assets and also carry a personal guarantee. The largest Special Mention loan is a $2.7 million commercial real estate loan that is well secured by an industrial building and property.

 

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Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 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 methodology used to determine the allowance for loan losses and judgments regarding securities and goodwill 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. Goodwill will be evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. 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 Litigation 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, 2015 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 2015 Form 10-K and Item 1A, Risk Factors, of this 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2016, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

 

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At June 30, 2016, the Company’s one-year gap was positive 0.71% as compared to negative 1.71% at December 31, 2015.

 

At June 30, 2016

  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

  $ 22,971      $ —        $ —        $ —        $ —        $ 22,971   

Investment securities

    81,773        14,185        16,692        38,947        28,920        180,517   

Mortgage-backed securities

    32,582        58,054        107,828        79,278        77,825        355,567   

FHLB stock

    —          —          —          —          21,128        21,128   

Loans receivable (2)

    572,999        608,248        945,871        586,957        434,518        3,148,593   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    710,325        680,487        1,070,391        705,182        562,391        3,728,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

           

Money market deposit accounts

    197,018        9,191        40,618        36,566        83,549        366,942   

Savings accounts

    99,977        26,736        116,286        99,693        146,440        489,132   

Interest-bearing checking accounts

    555,501        38,864        153,659        130,547        431,719        1,310,290   

Time deposits

    90,763        193,161        123,133        74,896        3,236        485,189   

FHLB advances

    61,629        1,432        123,916        125,626        —          312,603   

Securities sold under agreements to repurchase and other borrowings

    90,173        —          —          —          —          90,173   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    1,095,061        269,384        557,612        467,328        664,944        3,054,329   

Interest sensitivity gap (3)

  $ (384,736   $ 411,103      $ 512,779      $ 237,854      $ (102,553   $ 674,447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

  $ (384,736   $ 26,367      $ 539,146      $ 777,000      $ 674,447      $ 674,447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (10.32 )%      0.71     14.46     20.84     18.09     18.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2016 and December 31, 2015. 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 2015 Form 10-K.

 

    June 30, 2016     December 31, 2015  
    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

  $ 456,021        (5.3 )%      12.0   $ 120,753        (5.8 )%    $ 286,152        (9.0 )%      11.8   $ 74,186        (9.3 )% 

200

    476,817        (1.0     12.2        124,237        (3.1     303,359        (3.5     12.2        77,638        (5.1

100

    486,254        1.0        12.2        126,700        (1.2     313,886        (0.2     12.3        80,160        (2.0

Static

    481,588        —          11.8        128,193        —          314,366        —          12.0        81,821        —     

(100)

    428,505        (11.0     10.3        124,078        (3.2     300,080        (4.5     11.3        78,138        (4.5

 

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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, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     June 30,
2016
    December 31,
2015
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 66,222      $ 43,946   

Securities available-for-sale, at estimated fair value

     12,509        29,902   

Securities held-to-maturity, net (estimated fair value of $520,971 at June 30, 2016 and $397,763 at December 31, 2015)

     513,721        394,813   

Federal Home Loan Bank of New York stock, at cost

     21,128        19,978   

Loans receivable, net

     3,130,046        1,970,703   

Mortgage loans held for sale

     5,310        2,697   

Interest and dividends receivable

     10,143        5,860   

Other real estate owned

     9,791        8,827   

Premises and equipment, net

     49,392        28,419   

Servicing asset

     664        589   

Bank Owned Life Insurance

     105,929        57,549   

Deferred tax asset

     37,052        16,807   

Other assets

     14,581        10,900   

Core deposit intangible

     3,903        256   

Goodwill

     67,102        1,822   
  

 

 

   

 

 

 

Total assets

   $ 4,047,493      $ 2,593,068   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 3,206,262      $ 1,916,678   

Securities sold under agreements to repurchase with retail customers

     67,673        75,872   

Federal Home Loan Bank advances

     312,603        324,385   

Other borrowings

     22,500        22,500   

Advances by borrowers for taxes and insurance

     9,828        7,121   

Other liabilities

     19,369        8,066   
  

 

 

   

 

 

 

Total liabilities

     3,638,235        2,354,622   
  

 

 

   

 

 

 

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 25,748,898 and 17,286,557 shares outstanding at June 30, 2016 and December 31, 2015, respectively

     336        336   

Additional paid-in capital

     308,460        269,757   

Retained earnings

     230,895        229,140   

Accumulated other comprehensive loss

     (5,798     (6,241

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (2,903     (3,045

Treasury stock, 7,817,874 and 16,280,215 shares at June 30, 2016 and December 31, 2015, respectively

     (121,732     (251,501

Common stock acquired by Deferred Compensation Plan

     (308     (314

Deferred Compensation Plan Liability

     308        314   
  

 

 

   

 

 

 

Total stockholders’ equity

     409,258        238,446   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,047,493      $ 2,593,068   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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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,
 
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  

Interest income:

        

Loans

   $ 30,521      $ 18,548      $ 51,556      $ 36,577   

Mortgage-backed securities

     1,708        1,519        3,123        3,142   

Investment securities and other

     912        509        1,535        1,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     33,141        20,576        56,214      $ 40,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,771        967        3,042        1,922   

Borrowed funds

     1,356        1,176        2,599        2,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,127        2,143        5,641        4,179   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     30,014        18,433        50,573        36,566   

Provision for loan losses

     662        300        1,225        675   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     29,352        18,133        49,348        35,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

        

Bankcard services revenue

     1,211        899        2,062        1,682   

Wealth management revenue

     621        629        1,171        1,157   

Fees and service charges

     2,502        2,059        4,319        3,949   

Loan servicing income

     95        59        151        111   

Net loss on sale of investment securities available-for-sale

     (12     —          (12     —     

Net gain on sale of loan servicing

     —          30        —          111   

Net gain on sales of loans available-for-sale

     170        185        349        377   

Net loss from other real estate operations

     (313     (72     (719     (51

Income from Bank Owned Life Insurance

     542        364        861        810   

Other

     67        18        77        11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     4,883        4,171        8,259        8,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Compensation and employee benefits

     11,432        7,700        19,898        15,239   

Occupancy

     2,011        1,242        3,637        2,696   

Equipment

     1,184        813        2,153        1,611   

Marketing

     543        415        794        689   

Federal deposit insurance

     723        506        1,252        1,004   

Data processing

     1,881        1,101        3,146        2,189   

Check card processing

     505        423        925        898   

Professional fees

     700        539        1,198        934   

Other operating expense

     2,217        1,469        3,493        2,636   

Federal Home Loan Bank prepayment fee

     136        —          136        —     

Amortization of core deposit intangible

     125        —          138        —     

Merger related expenses

     7,189        184        8,591        234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     28,646        14,392        45,361        28,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     5,589        7,912        12,246        15,918   

Provision for income taxes

     1,928        2,779        4,380        5,523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,661      $ 5,133      $ 7,866        10,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.16      $ 0.31      $ 0.40      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.16      $ 0.31      $ 0.39      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     22,478        16,401        19,694        16,433   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     22,880        16,593        19,996        16,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended June 30,
     For the six months
ended June 30,
 
     2016     2015      2016     2015  
     (Unaudited)      (Unaudited)  

Net income

   $ 3,661      $ 5,133       $ 7,866      $ 10,395   

Other comprehensive income:

         

Unrealized (loss) gain on securities (net of tax benefit of $(34) and tax expense of $37 in 2016, and net of tax expense of $1 and $98 in 2015, respectively)

     (49     2         53        141   

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $128 and $277 in 2016 and $138 and $263 in 2015, respectively)

     186        199         402        381   

Reclassification adjustment for losses included in net income (net of tax benefit of $5 in 2016)

     (12     —           (12     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 3,786      $ 5,334       $ 8,309      $ 10,917   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders Equity (Unaudited)

(in thousands, except per share amounts)

Three months ended June 30, 2016 and 2015

 

    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, 2014

  $ —        $ 336      $ 265,260      $ 217,714      $ (7,109   $ (3,330   $ (254,612   $ (304   $ 304      $ 218,259   

Net income

    —          —          —          10,395        —          —          —          —          —          10,395   

Other comprehensive income, net of tax

    —          —          —          —          522        —          —          —          —          522   

Tax benefit of stock plans

    —          —          8        —          —          —          —          —          —          8   

Stock awards

    —          —          638        —          —          —          —          —          —          638   

Treasury stock allocated to restricted stock plan

    —          —          1,197        (139     —          —          (1,058     —          —          —     

Purchased 259,940 shares of common stock

    —          —          —          —          —          —          (4,452     —          —          (4,452

Allocation of ESOP stock

    —          —          145        —          —          143        —          —          —          288   

Cash dividend $0.26 per share

    —          —          —          (4,288     —          —          —          —          —          (4,288

Exercise of stock options

    —          —          —          (38     —          —          203        —          —          165   

Purchase of stock for the deferred compensation plan

    —          —          —          —          —          —          —          (5     5        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

  $ —        $ 336      $ 267,248      $ 223,644      $ (6,587   $ (3,187   $ (259,919   $ (309   $ 309      $ 221,535   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ —        $ 336      $ 269,757      $ 229,140      $ (6,241   $ (3,045   $ (251,501   $ (314   $ 314      $ 238,446   

Net income

    —          —          —          7,866        —          —          —          —          —          7,866   

Other comprehensive income, net of tax

    —          —          —          —          443        —          —          —          —          443   

Tax expense of stock plans

    —          —          (260     —          —          —          —          —          —          (260

Stock awards

    —          —          756        —          —          —          —          —          —          756   

Treasury stock allocated to restricted stock plan

    —          —          1,108        (114     —          —          (994     —          —          —     

Issued 8,282,296 treasury shares to finance acquisition

    —          —          36,940        —          —          —          128,961        —          —          165,901   

Allocation of ESOP stock

    —          —          159        —          —          142        —          —          —          301   

Cash dividend $0.26 per share

    —          —          —          (5,481     —          —          —          —          —          (5,481

Exercise of stock options

    —          —          —          (516     —          —          1,802        —          —          1,286   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          6        (6     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

  $ —        $ 336      $ 308,460      $ 230,895      $ (5,798   $ (2,903   $ (121,732   $ (308   $ 308      $ 409,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2016     2015  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 7,866      $ 10,395   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     2,131        1,504   

Allocation of ESOP stock

     301        288   

Stock awards

     756        638   

Amortization of servicing asset

     87        214   

Net premium amortization in excess of discount accretion on securities

     849        1,140   

Net amortization of deferred costs and discounts on loans

     26        70   

Amortization of core deposit intangible

     138        —     

Net accretion/amortization of purchase accounting adjustments

     (1,431     —     

Provision for loan losses

     1,225        675   

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

     145        (112

Net loss on sales of available-for-sale securities

     12        —     

Net gain on sales of loans

     (349     (377

Proceeds from sales of mortgage loans held for sale

     19,555        28,144   

Mortgage loans originated for sale

     (21,819     (25,020

Proceeds from Bank Owned Life Insurance

     155        —     

Increase in value of Bank Owned Life Insurance

     (861     (810

Increase in interest and dividends receivable

     (756     (44

Decrease in other assets

     8,928        1,311   

Increase (decrease) in other liabilities

     (857     (2,205
  

 

 

   

 

 

 

Total adjustments

     8,235        5,416   
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,101        15,811   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net increase in loans receivable

     9,648        (77,571

Purchase of loans receivable

     (12,942     (7,186

Purchase of investment securities available-for-sale

     —          (9,973

Proceeds from maturities and calls of investment securities held-to-maturity

     19,635        23,285   

Proceeds from sales of securities available-for-sale

     59,211        —     

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

     31,037        30,997   

Decrease in Federal Home Loan Bank of New York stock

     5,632        430   

Proceeds from sales of other real estate owned

     1,714        1,398   

Purchases of premises and equipment

     (1,381     (1,697

Cash received, net of cash consideration paid for acquisition

     (477     —     

Cash acquired, net of cash paid for branch acquisition

     16,727        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     128,804        (40,317
  

 

 

   

 

 

 

 

Continued

 

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OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2016     2015  
     (Unaudited)  

Cash flows from financing activities:

    

Increase in deposits

   $ 24,496      $ 41,540   

Decrease in short-term borrowings

     (116,400     (40,747

Proceeds from Federal Home Loan Bank advances

     55,000        35,000   

Repayments of Federal Home Loan Bank advances

     (73,048     —     

Repayments of other borrowings

     (10,000     —     

Increase in advances by borrowers for taxes and insurance

     1,778        1,522   

Exercise of stock options

     1,286        165   

Purchase of treasury stock

     —          (4,452

Dividends paid

     (5,481     (4,288

Tax (expense) benefit of stock plans

     (260     8   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (122,629     28,748   
  

 

 

   

 

 

 

Net increase in cash and due from banks

     22,276        4,242   

Cash and due from banks at beginning of period

     43,946        36,117   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 66,222      $ 40,359   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 5,507      $ 4,137   

Income taxes

     4,664        762   

Non-cash activities:

    

Accretion of unrealized loss on securities reclassified to held-to-maturity

     679        644   

Loans charged-off, net

     1,269        458   

Transfer of loans receivable to other real estate owned

     888        —     
  

 

 

   

 

 

 

Acquisition:

    

Non-cash assets acquired:

    

Securities

     212,156        —     

Federal Home Loan Bank of New York stock

     6,782        —     

Loans

     1,156,980        —     

Premises & equipment

     21,723        —     

Other real estate owned

     1,935        —     

Deferred tax asset

     22,054        —     

Other assets

     61,793        —     

Goodwill and other intangible assets, net

     68,739        —     
  

 

 

   

 

 

 

Total non-cash assets acquired

   $ 1,552,162      $ —     
  

 

 

   

 

 

 

Liabilities assumed:

    

Deposits

     1,248,367        —     

Federal Home Loan Bank advances

     124,466        —     

Other liabilities

     12,951        —     
  

 

 

   

 

 

 

Total liabilities assumed

   $ 1,385,784      $ —     
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its subsidiaries.

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, 2016 are not necessarily indicative of the results of operations that may be expected for all of 2016. 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, 2015.

Note 2. Business Combinations

Branch Acquisition

On March 11, 2016, the Company completed its acquisition of an existing retail branch in the Toms River market. Under the terms of the Purchase and Assumption Agreement dated July 31, 2015, the Company paid a deposit premium of $340,000, equal to 2.50% of core deposits; i.e., all deposits other than time deposits, government deposits, and fiduciary accounts. Up to 1.0% of the deposit premium was contingent on the core deposit balance seventy-five days after closing.

The branch acquisition was accounted for using the purchase method of accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date as additional information regarding the acquisition date fair values becomes available.

The following table presents the assets acquired and liabilities assumed as of March 11, 2016 and their initial fair value estimates (in thousands).

 

     Book Value      Fair Value
Adjustment
     Fair Value  

Assets Acquired

        

Cash and cash equivalents

   $ 16,727       $ —         $ 16,727   

Loans

     9         —           9   

Other assets

     15         —           15   

Core deposit intangible

     —           66         66   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 16,751       $ 66       $ 16,817   
  

 

 

    

 

 

    

 

 

 

Liabilities Assumed

        

Deposits

   $ 16,953       $ 4       $ 16,957   

Other liabilities

     138         —           138   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

   $ 17,091       $ 4       $ 17,095   
  

 

 

    

 

 

    

 

 

 

Goodwill

         $ 278   
        

 

 

 

 

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Table of Contents

Cape Bancorp Acquisition

On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”), which after purchase accounting adjustments added $1.5 billion to assets, $1.2 billion to loans, and $1.2 billion to deposits. Total consideration paid for Cape was $196.4 million, including cash consideration of $30.5 million. Cape was merged with and into the Company’s subsidiary, OceanFirst Bank, as of the date of acquisition.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Cape, net of total consideration paid (in thousands):

 

    At May 2, 2016  
(in thousands)   Cape
Book Value
    Purchase
Accounting Adjustments
    Estimated
Fair Value
 

Total Purchase Price:

      $ 196,403   
     

 

 

 

Assets acquired:

     

Cash and cash equivalents

  $ 30,025      $ —        $ 30,025   

Securities and Federal Home Loan Bank Stock

    218,577        361        218,938   

Loans:

    1,169,568          1,156,980   

Specific credit fair value on credit impaired loans

    —          (7,256     —     

General credit fair value

    —          (19,069     —     

Interest rate fair value

    —          1,982        —     

Reverse allowance for loan losses

    —          9,931        —     

Reverse net deferred fees, premiums and discounts

    —          1,824        —     

Premises and equipment

    27,972        (6,249     21,723   

Other real estate owned

    2,343        (408     1,935   

Deferred tax asset

    9,407        12,647        22,054   

Other assets

    61,793        —          61,793   

Core deposit intangible

    831        2,887        3,718   
 

 

 

   

 

 

   

 

 

 

Total assets acquired

    1,520,516        (3,350     1,517,166   
 

 

 

   

 

 

   

 

 

 

Liabilities assumed:

     

Deposits

    (1,247,688     (679 )(a)       (1,248,367

Borrowings

    (123,587     (879     (124,466

Other liabilities

    (7,611     (5,340 )(b)      (12,951
 

 

 

   

 

 

   

 

 

 

Total liabilities assumed

    (1,378,886     (6,898     (1,385,784
 

 

 

   

 

 

   

 

 

 

Net assets acquired

  $ 141,630      $ (10,248     131,382   
 

 

 

   

 

 

   

 

 

 

Goodwill recorded in the merger

      $ 65,021   
     

 

 

 

The following provides an explanation of certain fair value adjustments in the above table:

 

(a) Represents fair value adjustment on time deposits of $1,024, net of reversal of prior acquisition purchase accounting adjustments of $346.
(b) Represents accrued liability related to the Pension Plan.

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.

 

20


Table of Contents

Supplemental Pro Forma Financial Information

The following table presents financial information regarding the former Cape operations included in the Consolidated Statements of Income from the date of the acquisition (May 2, 2016) through June 30, 2016. In addition, the table provides unaudited condensed pro forma financial information assuming the Cape acquisition had been completed as of January 1, 2016 for the six months ended June 30, 2016 and as of January 1, 2015 for the six months ended June 30, 2015. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings or the impact of conforming certain accounting policies of the acquired company to the Company’s policies that may have occurred as a result of the integration and consolidation of Cape’s operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects.

 

     Cape
Actual from
May 2, 2016 to
June 30, 2016
     Pro forma
Six months
ended
June 30, 2016
     Pro forma
Six months
ended
June 30, 2015
 
          (in thousands)                     

Net interest income

   $ 9,493       $ 67,439       $ 60,331   

Provision for loan losses

     100         2,441         2,888   

Non-interest income

     951         10,490         17,066   

Non-interest expense

     4,872         63,350         47,691   

Net income

   $ 3,675       $ 6,113       $ 19,502   

Earnings per share:

        

Fully diluted

      $ 0.24       $ 0.78   

Fair Value Measurement of Assets Assumed and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Cape acquisition were as follows. Refer to Note 10, Fair Value Measurements, for a discussion of the fair value hierarchy.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

Loans

The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.

To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.

The general credit fair value adjustment was calculated using a two part general credit fair value analysis; 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.

 

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Table of Contents

To calculate the specific credit fair value adjustment the Company reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting these criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Premises and Equipment

Fair values are based upon appraisals from independent third parties. In addition to owned properties Cape has 8 properties subject to lease agreements.

Deposits and Core Deposit Premium

Core deposit premium represents the value assigned to non-interest bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs.

Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.

Borrowings

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

Note 3. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

         Three months ended      Six months ended  
         June 30,      June 30,  
         2016      2015      2016      2015  

Weighted average shares issued net of Treasury shares

     22,861         16,811         20,083         16,856   

Less:

 

Unallocated ESOP shares

     (349      (382      (353      (386
 

Unallocated incentive award shares and shares held by deferred

compensation plan

     (34      (28      (36      (37
    

 

 

    

 

 

    

 

 

    

 

 

 

Average basic shares outstanding

     22,478         16,401         19,694         16,433   

Add:

 

Effect of dilutive securities:

           
 

Stock options

     382         20         282         20   
 

Shares held by deferred compensation plan

     20         172         20         160   
    

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding

     22,880         16,593         19,996         16,613   
    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2016 and 2015, antidilutive stock options of 1,310,000 and 839,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2016 and 2015, antidilutive stock options of 1,317,000 and 744,000, respectively, were excluded from earnings per share calculations.

 

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Table of Contents

Note 4. Securities

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2016 and December 31, 2015 are as follows (in thousands):

 

         At June 30, 2016      
       Amortized  
Cost
     Gross
  Unrealized  
Gains
     Gross
  Unrealized  
Losses
       Estimated  
Fair
Value
 

Available-for-sale:

           

Investment securities:

           

U.S. agency obligations

   $ 12,494       $ 18       $ (3    $ 12,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

Investment securities:

           

U.S. agency obligations

   $ 44,981       $ 460       $ —         $ 45,441   

State and municipal obligations

     38,197         252         (2      38,447   

Corporate debt securities

     76,143         199         (9,595      66,747   

Other investments

     8,702         66         —           8,768   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     168,023         977         (9,597      159,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

FHLMC

     145,664         1,641         (168      147,137   

FNMA

     189,368         4,428         (104      193,692   

GNMA

     10,973         183         —           11,156   

Other mortgage-backed securities

     9,562         21         —           9,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     355,567         6,273         (272      361,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 523,590       $ 7,250       $ (9,869    $ 520,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 536,084       $ 7,268       $ (9,872    $ 533,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
       Amortized  
Cost
     Gross
  Unrealized  
Gains
     Gross
  Unrealized  
Losses
       Estimated  
Fair
Value
 

Available-for-sale:

           

Investment securities:

           

U.S. agency obligations

   $ 29,906       $ 23       $ (27    $ 29,902   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

Investment securities:

           

U.S. agency obligations

   $ 55,178       $ 87       $ (59    $ 55,206   

State and municipal obligations

     13,311         18         (3      13,326   

Corporate debt securities

     56,000         —           (8,527      47,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     124,489         105         (8,589      116,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

FHLMC

     120,116         364         (1,489      118,991   

FNMA

     160,254         3,039         (1,123      162,170   

GNMA

     502         95         —           597   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     280,872         3,498         (2,612      281,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 405,361       $ 3,603       $ (11,201    $ 397,763   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 435,267       $ 3,626       $ (11,228    $ 427,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2016 and December 31, 2015 are as follows (in thousands):

 

     June 30,
2016
     December 31,
2015
 

Amortized cost

   $ 523,590       $ 405,361   

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

     (13,347      (13,347

Accretion of net unrealized loss on securities reclassified as held-to-maturity

     3,478         2,799   
  

 

 

    

 

 

 

Carrying value

   $ 513,721       $ 394,813   
  

 

 

    

 

 

 

There were $75,000 in realized gains and $87,000 in realized losses on the sale of available-for-sale securities for the three and six months ended June 30, 2016, respectively. There were no realized gains or losses on the sale of securities for the three and six months ended June 30, 2015.

The amortized cost and estimated fair value of investment securities at June 30, 2016 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, 2016, corporate debt securities with an amortized cost of $67.6 million and estimated fair value of $58.1 million were callable prior to the maturity date.

 

June 30, 2016

   Amortized
Cost
     Estimated
Fair Value
 

Less than one year

   $ 36,969       $ 37,025   

Due after one year through five years

     59,628         60,241   

Due after five years through ten years

     20,218         20,471   

Due after ten years

     63,702         54,175   
  

 

 

    

 

 

 
   $ 180,517       $ 171,912   
  

 

 

    

 

 

 

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.

 

24


Table of Contents

The estimated fair value and unrealized loss of securities available-for-sale and held-to-maturity at June 30, 2016 and December 31, 2015, segregated by the duration of the unrealized loss, are as follows (in thousands):

 

     At June 30, 2016  
     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:

               

U.S. agency obligations

   $ 4,002         (3     —           —        $ 4,002       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Investment securities:

               

State and municipal obligations

   $ 1,076         (1   $ 275       $ (1   $ 1,351       $ (2

Corporate debt securities

     2,543         (1     45,406         (9,594     47,949         (9,595
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     3,619         (2     45,681         (9,595     49,300         (9,597
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     1,834         (1     30,978         (167     32,812         (168

FNMA

     4,259         (3     10,312         (101     14,571         (104
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     6,093         (4     41,290         (268     47,383         (272
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 9,712       $ (6   $ 86,971       $ (9,863   $ 96,683       $ (9,869
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $   13,714       $ (9   $   86,971       $ (9,863   $ 100,685       $ (9,872
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     At December 31, 2015  
     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:

               

U.S. agency obligations

   $ 14,937       $ (27   $ —         $ —        $ 14,937       $ (27
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Investment securities:

               

U.S. agency obligations

   $ 30,175       $ (43   $ 5,023       $ (16   $ 35,198       $ (59

State and municipal obligations

     2,857         (2     639         (1     3,496         (3

Corporate debt securities

     —           —          46,473         (8,527     46,473         (8,527
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     33,032         (45     52,135         (8,544     85,167         (8,589
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     35,816         (200     53,604         (1,289     89,420         (1,489

FNMA

     44,004         (434     23,318         (689     67,322         (1,123
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     79,820         (634     76,922         (1,978     156,742         (2,612
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 112,852       $ (679   $ 129,057       $ (10,522   $ 241,909       $ (11,201
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $ 127,789       $ (706   $ 129,057       $ (10,522   $ 256,846       $ (11,228
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

25


Table of Contents

At June 30, 2016, 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       $ 12,350         Ba1/BB+   

Chase Capital

     10,000         8,400         Baa2/BBB-   

Wells Fargo Capital

     5,000         4,213         A1/BBB+   

Huntington Capital

     5,000         3,800         Baa2/BB   

Keycorp Capital

     5,000         4,019         Baa2/BB+   

PNC Capital

     5,000         4,400         Baa1/BBB-   

State Street Capital

     5,000         4,262         A3/BBB   

SunTrust Capital

     5,000         3,962         Baa3/BB+   
  

 

 

    

 

 

    
   $ 55,000       $ 45,406      
  

 

 

    

 

 

    

At June 30, 2016, the estimated fair value of each of the above corporate debt securities was below cost. However, the estimated fair value of the corporate debt securities has steadily increased over the past several years. The corporate debt securities are issued by other financial institutions with credit ratings ranging from a high of A1 to a low of BB 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 interest rate 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, 2016. 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. Interest rate spreads have now 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. Historically, the Company has not utilized securities sales 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, 2016.

 

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Table of Contents

Note 5. Loans Receivable, Net

Loans receivable, net at June 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

     June 30,
2016
     December 31,
2015
 

Commercial:

     

Commercial and industrial

   $ 218,472       $ 144,538   

Commercial real estate – owner occupied

     522,634         307,509   

Commercial real estate - investor

     1,009,510         510,725   
  

 

 

    

 

 

 

Total commercial

     1,750,616         962,772   
  

 

 

    

 

 

 

Consumer:

     

Residential mortgage

     1,088,431         791,249   

Residential construction

     48,266         50,757   

Home equity loans and lines

     258,188         192,368   

Other consumer

     1,228         792   
  

 

 

    

 

 

 

Total consumer

     1,396,113         1,035,166   
  

 

 

    

 

 

 

Total loans

     3,146,729         1,997,938   

Purchased credit impaired (“PCI”) loans

     9,673         461   

Loans in process

     (13,119      (14,206

Deferred origination costs, net

     3,441         3,232   

Allowance for loan losses

     (16,678      (16,722
  

 

 

    

 

 

 

Total loans, net

   $ 3,130,046       $ 1,970,703   
  

 

 

    

 

 

 

At June 30, 2016 and December 31, 2015, loans in the amount of $15.3 million and $18.3 million, 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 recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of foreclosure amounted to $4.2 million at June 30, 2016. The amount of foreclosed residential real estate property held by the Company was $1.3 million at June 30, 2016.

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, 2016, the impaired loan portfolio totaled $34.1 million for which there was a specific allocation in the allowance for loan losses of $645,000. At December 31, 2015, the impaired loan portfolio totaled $38.4 million for which there was a specific allocation in the allowance for loan losses of $1.3 million. The average balance of impaired loans for the three and six months ended June 30, 2016 was $34.2 million and $34.4 million, respectively and $42.6 and $39.8, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands):

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Balance at beginning of period

   $ 16,214       $ 16,419       $ 16,722       $ 16,317   

Provision charged to operations

     662         300         1,225         675   

Charge-offs

     (223      (331      (1,395      (689

Recoveries

     25         146         126         231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 16,678       $ 16,534       $ 16,678       $ 16,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):

 

    Residential
Real Estate
    Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Investor
    Consumer     Commercial
and Industrial
    Unallocated     Total  

For the three months ended June 30, 2016

             

Allowance for loan losses:

             

Balance at beginning of period

  $ 6,555      $ 2,363      $ 4,302      $ 1,081      $ 1,380      $ 533      $ 16,214   

Provision (benefit) charged to operations

    (480     390        410        70        (127     399        662   

Charge-offs

    (74     (42     —          (63     (44     —          (223

Recoveries

    5        —          1        19        —          —          25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 6,006      $ 2,711      $ 4,713      $ 1,107      $ 1,209      $ 932      $ 16,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2015

             

Allowance for loan losses:

             

Balance at beginning of period

  $ 4,206      $ 3,745      $ 5,555      $ 1,063      $ 767      $ 1,083      $ 16,419   

Provision (benefit) charged to operations

    (608     (14     (51     81        918        (26     300   

Charge-offs

    (68     (15     —          (248     —          —          (331

Recoveries

    80        —          9        56        1        —          146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 3,610      $ 3,716      $ 5,513      $ 952      $ 1,686      $ 1,057      $ 16,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2016

             

Allowance for loan losses:

             

Balance at beginning of period

  $ 6,590      $ 2,292      $ 4,873      $ 1,095      $ 1,639      $ 233      $ 16,722   

Provision (benefit) charged to operations

    (491     1,429        (170     30        (272     699        1,225   

Charge-offs

    (152     (1,010     —          (66     (167     —          (1,395

Recoveries

    59        —          10        48        9        —          126   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 6,006      $ 2,711      $ 4,713      $ 1,107      $ 1,209      $ 932      $ 16,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2015

             

Allowance for loan losses:

             

Balance at beginning of period

  $ 4,291      $ 3,627      $ 5,308      $ 1,146      $ 863      $ 1,082      $ 16,317   

Provision (benefit) charged to operations

    (682     104        284        175        819        (25     675   

Charge-offs

    (123     (15     (88     (463     —          —          (689

Recoveries

    124        —          9        94        4        —          231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 3,610      $ 3,716      $ 5,513      $ 952      $ 1,686      $ 1,057      $ 16,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2016

             

Allowance for loan losses:

             

Ending allowance balance attributed to loans:

             

Individually evaluated for impairment

  $ 72      $ 337      $ 186      $ 50      $ —        $ —        $ 645   

Collectively evaluated for impairment

    5,934        2,374        4,527        1,057        1,209        932        16,033   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $        6,006      $     2,711      $        4,713      $     1,107      $     1,209      $ 932      $      16,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
                                                                                                                                    
                                           

Loans:

             

Loans individually evaluated for impairment

  $ 13,269      $ 17,291      $ 1,175      $ 2,107      $ 269      $ —        $ 34,111   

Loans collectively evaluated for impairment

    1,123,428        505,343        1,008,335        257,309        218,203        —          3,112,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 1,136,697      $ 522,634      $ 1,009,510      $ 259,416      $ 218,472      $ —        $ 3,146,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

             

Allowance for loan losses:

             

Ending allowance balance attributed to loans:

             

Individually evaluated for impairment

  $ 31      $ 544      $ 287      $ 43      $ 434      $ —        $ 1,339   

Collectively evaluated for impairment

    6,559        1,748        4,586        1,052        1,205        233        15,383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 6,590      $ 2,292      $ 4,873      $ 1,095      $ 1,639      $    233      $ 16,722   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Loans individually evaluated for impairment

  $ 13,165      $ 18,964      $ 2,686      $ 2,307      $ 1,250      $ —        $ 38,372   

Loans collectively evaluated for impairment

    828,841        288,545        508,039        190,853        143,288        —          1,959,566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 842,006      $ 307,509      $ 510,725      $ 193,160      $ 144,538      $ —        $ 1,997,938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

A summary of impaired loans at June 30, 2016 and December 31, 2015 is as follows, excluding PCI loans (in thousands):

 

     June 30,      December 31,  
     2016      2015  

Impaired loans with no allocated allowance for loan losses

   $ 30,827       $ 35,177   

Impaired loans with allocated allowance for loan losses

     3,284         3,195   
  

 

 

    

 

 

 
   $ 34,111       $ 38,372   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 645       $ 1,339   
  

 

 

    

 

 

 

At June 30, 2016, impaired loans include troubled debt restructuring loans of $31.2 million of which $28.2 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2015, impaired loans include troubled debt restructuring loans of $31.3 million of which $26.3 million were performing in accordance with their restructured terms and were accruing interest.

The summary of loans individually evaluated for impairment by loan portfolio segment as of June 30, 2016 and December 31, 2015 and for the three months ended June 30, 2016 and 2015 is as follows, excluding PCI loans (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of June 30, 2016

        

With no related allowance recorded:

        

Residential real estate

   $ 13,088       $ 12,635       $ —     

Commercial real estate - owner occupied

     15,680         15,653         —     

Commercial real estate - investor

     312         279      

Consumer

     2,460         1,991         —     

Commercial and industrial

     269         269         —     
  

 

 

    

 

 

    

 

 

 
   $ 31,809       $ 30,827       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate

   $ 665       $ 634       $ 72   

Commercial real estate - owner occupied

     1,532         1,638         337   

Commercial real estate - investor

     896         896         186   

Consumer

     162         116         50   

Commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 3,255       $ 3,284       $ 645   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2015

        

With no related allowance recorded:

        

Residential real estate

   $ 13,431       $ 13,056       $ —     

Commercial real estate - owner occupied

     18,742         18,688         —     

Commercial real estate - investor

     498         466      

Consumer

     2,577         2,264         —     

Commercial and industrial

     703         703         —     
  

 

 

    

 

 

    

 

 

 
   $ 35,951       $ 35,177       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate

   $ 109       $ 109       $ 31   

Commercial real estate - owner occupied

     276         276         544   

Commercial real estate - investor

     2,171         2,220         287   

Consumer

     81         43         43   

Commercial and industrial

     547         547         434   
  

 

 

    

 

 

    

 

 

 
   $ 3,184       $ 3,195       $ 1,339   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Three months ended June 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 12,852       $ 135       $ 13,724       $ 144   

Commercial real estate - owner occupied

     15,711         154         14,729         97   

Commercial real estate - investor

     282         5         453         —     

Consumer

     1,948         29         2,255         30   

Commercial and industrial

     270         —           707         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,063       $ 323       $ 31,868       $ 271   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 635       $ 9       $ 263       $ 3   

Commercial real estate - owner occupied

     1,637         —           8,371         11   

Commercial real estate - investor

     726         —           1,716         8   

Consumer

     115         —           —           —     

Commercial and industrial

     —           —           366         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,113       $ 9       $ 10,716       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 12,948       $ 258       $ 12,775       $ 294   

Commercial real estate - owner occupied

     15,778         287         13,155         169   

Commercial real estate - investor

     314         7         471         —     

Consumer

     2,059         58         2,201         59   

Commercial and industrial

     270         —           709         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,369       $ 610       $ 29,311       $ 522   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 636       $ 15       $ 262       $ 6   

Commercial real estate - owner occupied

     1,624         —           8,419         10   

Commercial real estate - investor

     684         —           1,589         32   

Consumer

     100         3         —           —     

Commercial and industrial

     —           —           183         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,044       $ 18       $ 10,453       $ 50   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of June 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):

 

     June 30, 2016      December 31, 2015  

Residential real estate

   $ 7,102       $ 5,779   

Commercial real estate - owner occupied

     4,363         7,684   

Commercial real estate - investor

     1,675         3,112   

Consumer

     1,226         1,576   

Commercial and industrial

     964         123   
  

 

 

    

 

 

 
   $ 15,330       $ 18,274   
  

 

 

    

 

 

 

 

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Table of Contents

The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by loan portfolio segment, excluding PCI 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, 2016

                 

Residential real estate

   $ 8,123       $ 2,263       $ 4,968       $ 15,354       $ 1,121,343       $ 1,136,697   

Commercial real estate - owner occupied

     554         —           6,103         6,657         515,977         522,634   

Commercial real estate - investor

     4,249         —           640         4,889         1,004,621         1,009,510   

Consumer

     1,290         425         1,105         2,820         256,596         259,416   

Commercial and industrial

     —           498         245         743         217,729         218,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,216       $ 3,186       $ 13,061       $ 30,463       $ 3,116,266       $ 3,146,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                 

Residential real estate

   $ 4,075       $ 2,716       $ 3,168       $ 9,959       $ 832,047         842,006   

Commercial real estate - owner occupied

     80         —           7,684         7,764         299,745         307,509   

Commercial real estate - investor

     217         1,208         2,649         4,074         506,651         510,725   

Consumer

     1,661         115         1,248         3,024         190,136         193,160   

Commercial and industrial

     8         —           360         368         144,170         144,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,041       $ 4,039       $ 15,109       $ 25,189       $ 1,972,749       $ 1,997,938   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. 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.

Pass. Loans not meeting the criteria above that are analyzed individually as part of the above described process.

As of June 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment is as follows, excluding PCI loans (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

June 30, 2016

              

Commercial real estate - owner occupied

   $ 503,466       $ 5,342         13,826       $ —         $ 522,634   

Commercial real estate - investor

     998,395         —           11,115         —           1,009,510   

Commercial and industrial

     216,398         1,130         944         —           218,472   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,718,259       $ 6,472       $ 25,885       $ —         $ 1,750,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

              

Commercial real estate - owner occupied

   $ 288,701       $ 1,803       $ 17,005       $ —         $ 307,509   

Commercial real estate - investor

     494,664         10,267         5,794         —           510,725   

Commercial and industrial

     142,387         787         1,364         —           144,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 925,752       $ 12,857       $ 24,163       $ —         $ 962,772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

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, 2016 and December 31, 2015, excluding PCI loans (in thousands):

 

     Residential Real Estate  
     Residential      Consumer  

June 30, 2016

     

Performing

   $ 1,129,595       $ 258,190   

Non-performing

     7,102         1,226   
  

 

 

    

 

 

 
   $ 1,136,697       $ 259,416   
  

 

 

    

 

 

 

December 31, 2015

     

Performing

   $ 836,227       $ 191,584   

Non-performing

     5,779         1,576   
  

 

 

    

 

 

 
   $ 842,006       $ 193,160   
  

 

 

    

 

 

 

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, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Included in the non-accrual loan total at June 30, 2016 and December 31, 2015 were $3.0 million and $4.9 million, respectively, of troubled debt restructurings. At June 30, 2016 and December 31, 2015, the Company has allocated $459,000 and $262,000, respectively, of specific reserves to loans that 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, 2016 and December 31, 2015, which totaled $28.2 million and $26.3 million, respectively. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.

The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2016 and 2015, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2016 and 2015, (dollars in thousands):

 

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

Three months ended June 30, 2016

        

Troubled Debt Restructurings:

        

Residential real estate

     1       $ 29       $ 29   

Consumer

     2         63         63   

 

     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, 2016

        

Troubled Debt Restructurings:

        

Residential real estate

     2       $ 219       $ 218   

Commercial real estate - investor

     1         256         270   

Consumer

     2         63         63   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

33


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

Three months ended June 30, 2015

        

Troubled Debt Restructurings:

        

Residential real estate

     2       $ 268       $ 231   

Commercial real estate – owner occupied

     1         3,939         3,939   

Consumer

     4         259         243   

 

     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, 2015

        

Troubled Debt Restructurings:

        

Residential real estate

     4       $ 517       $ 480   

Commercial real estate – investor

     3         6,033         5,944   

Consumer

     8         395         379   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

As part of the Cape and Colonial acquisitions PCI loans were acquired at a discount primarily due to deteriorated credit quality. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Cape at May 2, 2016 and Colonial at July 31, 2015 (in thousands):

 

     Cape
May 2, 2016
     Colonial
July 31, 2015
 

Contractually required principal and interest

   $ 18,979       $ 3,263   

Contractual cash flows not expected to be collected (non-accretable discount)

     (13,283      (2,012
  

 

 

    

 

 

 

Expected cash flows to be collected at acquisition

     5,696         1,251   

Interest component of expected cash flows (accretable yield)

     (1,040      (220
  

 

 

    

 

 

 

Fair value of acquired loans

   $ 4,656       $ 1,031   
  

 

 

    

 

 

 

The following table summarizes the changes in accretable yield for PCI loans during the three and six months ended June 30, 2016 (in thousands):

 

     Three months ended
June 30, 2016
     Six months ended
June 30, 2016
 

Beginning balance

   $ 66       $ 75   

Acquisition

     1,040         1,040   

Accretion

     (95      (104