10-Q 1 d269001d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 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   ☒    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  ☒    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  
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  ☒.

As of November 3, 2016 there were 25,850,788 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 

 


Table of Contents

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

         PAGE  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Consolidated Financial Statements (unaudited)

  
 

Consolidated Statements of Financial Condition as of September 30, 2016 (unaudited) and December 31, 2015

     13   
 

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

     14   
 

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

     15   
 

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

     16   
 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 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

     42   

Item 1A.

 

Risk Factors

     42   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     42   

Item 3.

 

Defaults Upon Senior Securities

     42   

Item 4.

 

Mine Safety Disclosures

     42   

Item 5.

 

Other Information

     42   

Item 6.

 

Exhibits

     42   

Signatures

     43   

 


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)   September 30, 2016     June 30, 2016     September 30, 2015  

SELECTED FINANCIAL CONDITION DATA:

     

Total assets

  $ 4,151,017      $ 4,047,493      $ 2,557,898   

Loans receivable, net

    3,028,696        3,130,046        1,938,972   

Deposits

    3,324,681        3,206,262        1,967,771   

Stockholders’ equity

    417,244        409,258        234,688   

SELECTED OPERATING DATA:

     

Net interest income

    33,935        30,014        19,575   

Provision for loan losses

    888        662        300   

Other income

    5,896        4,883        4,152   

Operating expenses

    25,026        28,646        16,147   

Net income

    9,128        3,661        4,698   

Diluted earnings per share

    0.35        0.16        0.28   

SELECTED FINANCIAL RATIOS:

     

Stockholders’ equity per share

    16.14        15.89        13.58   

Tangible stockholders’ equity per share (1)

    13.42        13.14        13.46   

Cash dividend per share

    0.13        0.13        0.13   

Stockholders’ equity to total assets

    10.05     10.11     9.18

Tangible stockholders’ equity to total tangible assets (1)

    8.50        8.51        9.10   

Return on average assets (2) (3)

    0.88        0.40        0.74   

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

    8.77        3.79        7.96   

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

    10.58        4.32        8.02   

Net interest rate spread

    3.49        3.47        3.13   

Net interest margin

    3.56        3.57        3.24   

Operating expenses to average assets (2) (3)

    2.43        3.16        2.54   

Efficiency ratio (3)

    62.83        82.09        68.05   

ASSET QUALITY:

     

Non-performing loans

  $ 16,507      $ 15,330      $ 24,394   

Non-performing assets

    25,614        25,121        27,656   

Allowance for loan losses as a percent of total loans receivable

    0.51     0.53     0.85

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

    94.61        108.79        68.21   

Non-performing loans as a percent of total loans receivable

    0.54        0.48        1.24   

Non-performing assets as a percent of total assets

    0.62        0.62        1.08   

Wealth Management

     

Assets under administration

  $ 221,612      $ 221,277      $ 205,087   

 

(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 $1.3 million, or $1.1 million, net of tax benefit, for the quarter ended September 30, 2016; $7.2 million, or $5.0 million, net of tax benefit, for the quarter ended June 30, 2016; and $1.0 million, or $714,000, net of tax benefit, for the quarter ended September 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 unemployment rates in the first nine months of 2016 decreased compared to prior year levels, while measures of inflation remain subdued.

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 total assets, $1.2 billion in loans, and $1.2 billion in deposits. Cape’s core systems were integrated on October 15, 2016, providing for the realization of additional cost savings entering the first quarter of 2017.

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

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 the Company 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, $1.0 billion in total assets, $807 million in total deposits and $791 million in net loans at June 30, 2016. The transaction is expected to close on November 30, 2016 subject to certain conditions, including approval by stockholders of each company and customary closing conditions. The Company received the approval of the Office of the Comptroller of the Currency on October 27, 2016.

Risk management activities related to recent acquisitions included selling 63 residential loans with a carrying value of $4.4 million and 72 SBA loans with a carrying value of $8.4 million, which represented the entire SBA portfolio. One additional pool of 58 higher risk commercial loans, with an unpaid balance of $22.7 million, was designated as held for sale with a targeted closing in the fourth quarter.

Net income for the three months ended September 30, 2016, was $9.1 million, or $0.35 per diluted share, as compared to net income of $4.7 million, or $0.28 per diluted share, for the corresponding prior year period. Net income for the three months ended September 30, 2016 and 2015 includes merger related expenses of $1.3 million and $1.0 million, respectively, which reduced diluted earnings per share by $0.05 and $0.04, respectively. Excluding merger expenses, 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 September 30, 2016 increased to $33.9 million, as compared to $19.6 million for the corresponding prior year period reflecting an increase in interest-earning assets and a higher net interest margin primarily due to the Cape acquisition.

Other income increased to $5.9 million for the three months ended September 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 $1.3 million to total other income. Operating expenses, excluding merger related expenses, increased $8.6 million for the three months ended September 30, 2016, as compared to the same prior year period primarily due to the operations of Cape and Colonial American Bank (“Colonial American”) (acquired July 31, 2015), which added $7.9 million to operating expenses, as well as the Bank’s investment in commercial lending and the impact of opening new branches.

 

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Table of Contents

The Company remains well-capitalized with a tangible common equity ratio of 8.50% at September 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 September 30, 2016.

The Company increased the quarterly per share dividend by 15%, from $0.13 to $0.15. The dividend is payable on November 18, 2016 to stockholders of record at the close of business on November 7, 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 nine months ended September 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,  
     SEPTEMBER 30, 2016     SEPTEMBER 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

   $ 168,045      $ 139         0.33   $ 55,047      $ 17         0.12

Securities(1) and FHLB stock

     533,809        2,561         1.91        468,707        1,977         1.67   

Loans receivable, net(2):

              

Commercial

     1,723,520        20,970         4.84        885,769        9,980         4.47   

Residential

     1,118,435        10,874         3.87        810,103        7,939         3.89   

Home equity

     255,919        2,745         4.27        193,483        2,050         4.20   

Other

     1,163        18         6.16        513        7         5.41   

Allowance for loan loss net of deferred loan fees

     (13,346     —           —          (14,410     —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loans receivable, net

     3,085,691        34,607         4.46        1,875,458        19,976         4.23   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     3,787,545        37,307         3.92        2,399,212        21,970         3.63   
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest-earning assets

     316,290             122,269        
  

 

 

        

 

 

      

Total assets

   $ 4,103,835           $ 2,521,481        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Interest-bearing checking

   $ 1,425,350        583         0.16      $ 870,115        291         0.13   

Money market

     386,490        295         0.30        142,063        65         0.18   

Savings

     488,749        49         0.04        306,928        27         0.03   

Time deposits

     477,496        1,156         0.96        244,325        779         1.26   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

     2,778,085        2,083         0.30        1,563,431        1,162         0.29   

Securities sold under agreements to repurchase

     68,540        24         0.14        78,516        30         0.15   

FHLB advances

     264,213        1,067         1.61        249,623        998         1.59   

Other borrowings

     26,207        198         3.01        27,500        205         2.96   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     3,137,045        3,372         0.43        1,919,070        2,395         0.50   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest-bearing deposits

     521,088             354,411        

Non-interest-bearing liabilities

     31,536             13,827        
  

 

 

        

 

 

      

Total liabilities

     3,689,669             2,287,308        

Stockholders’ equity

     414,166             234,173        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 4,103,835           $ 2,521,481        
  

 

 

        

 

 

      

Net interest income

     $ 33,935           $ 19,575      
    

 

 

        

 

 

    

Net interest rate spread(3)

          3.49          3.13
       

 

 

        

 

 

 

Net interest margin(4)

          3.56          3.24
       

 

 

        

 

 

 

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

          0.25          0.24
       

 

 

        

 

 

 

 

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Table of Contents
     FOR THE NINE MONTHS ENDED,  
     SEPTEMBER 30, 2016     SEPTEMBER 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

   $ 86,007      $ 209         0.32   $ 37,409      $ 29         0.10

Securities(1) and FHLB stock

     517,051        7,149         1.85        489,671        6,133         1.67   

Loans receivable, net(2):

              

Commercial

     1,390,196        49,750         4.78        805,961        27,034         4.50   

Residential

     1,009,012        29,139         3.86        793,512        23,469         3.95   

Home equity

     228,172        7,233         4.23        194,743        6,027         4.14   

Other

     893        41         6.13        461        23         6.67   

Allowance for loan loss net of deferred loan fees

     (13,379     —           —          (13,654     —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loans receivable, net

     2,614,894        86,163         4.40        1,781,023        56,553         4.25   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     3,217,952        93,521         3.88        2,308,103        62,715         3.63   
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest-earning assets

     236,399             115,577        
  

 

 

        

 

 

      

Total assets

   $ 3,454,351           $ 2,423,680        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Interest-bearing checking

   $ 1,181,110        1,391         0.16      $ 864,054        673         0.10   

Money market

     280,836        546         0.26        122,038        111         0.12   

Savings

     413,388        117         0.04        304,799        75         0.03   

Time deposits

     386,505        3,071         1.06        220,827        2,225         1.35   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

     2,261,839        5,125         0.30        1,511,718        3,084         0.27   

Securities sold under agreements to repurchase

     76,289        78         0.14        71,054        73         0.14   

FHLB advances

     272,405        3,351         1.64        254,189        2,810         1.48   

Other borrowings

     23,846        459         2.57        27,500        607         2.95   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,634,379        9,013         0.46        1,864,461        6,574         0.47   
    

 

 

    

 

 

     

 

 

    

 

 

 

Non-interest-bearing deposits

     448,459             319,797        

Non-interest-bearing liabilities

     23,650             14,407        
  

 

 

        

 

 

      

Total liabilities

     3,106,488             2,198,665        

Stockholders’ equity

     347,863             225,015        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,454,351           $ 2,423,680        
  

 

 

        

 

 

      

Net interest income

     $ 84,508           $ 56,141      
    

 

 

        

 

 

    

Net interest rate spread(3)

          3.42          3.16
       

 

 

        

 

 

 

Net interest margin(4)

          3.51          3.25
       

 

 

        

 

 

 

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

          0.25          0.23
       

 

 

        

 

 

 

 

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

 

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Table of Contents

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

Total assets increased by $1.558 billion to $4.151 billion at September 30, 2016, from $2.593 billion at December 31, 2015 primarily as a result of the Cape acquisition. Cash, due from banks and interest-bearing deposits increased by $267.6 million, to $311.6 million at September 30, 2016, from $43.9 million at December 31, 2015. The increase was primarily due to third quarter cash flows relating to deposit growth, the issuance of subordinated notes and the reduction in loans receivable. Loans receivable, net, increased by $1.058 billion, to $3.029 billion at September 30, 2016, from $1.971 million at December 31, 2015. Excluding the Cape acquisition, loans receivable net, decreased $99.8 million, partly due to the sale and pending sale, of $30.7 million in higher risk loans. As part of the acquisitions of Cape and Colonial American, and the purchase of an existing retail branch in the Toms River market in the first quarter of 2016, at September 30, 2016, the Company had outstanding goodwill of $66.5 million and core deposit intangibles of $3.7 million.

Deposits increased by $1.408 billion, to $3.325 billion at September 30, 2016, from $1.917 billion 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. Excluding the Cape acquisition, deposits increased $159.6 million, while core deposits (all deposits excluding time deposits) increased $178.4 million. The loan-to-deposit ratio at September 30, 2016 was 91.1%, as compared to 102.8% at December 31, 2015. The deposit growth funded a decrease in Federal Home Loan Bank (“FHLB”) advances of $73.3 million, to $251.1 million at September 30, 2016, from $324.4 million at December 31, 2015. The increase in other borrowings relates to the September 2016 issuance of $35.0 million in subordinated notes at an initial rate of 5.125% and a stated maturity of September 30, 2026.

Stockholders’ equity increased to $417.2 million at September 30, 2016, as compared to $238.4 million at December 31, 2015. The acquisition of Cape added $165.9 million to stockholders’ equity. At September 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 $13.42 at September 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 nine months ended September 30, 2016 and September 30, 2015

General

On July 31, 2015, the Company completed its acquisition of Colonial American, which added $142.4 million to assets, $121.2 million to loans, and $123.3 million to deposits. Colonial American’s results of operations are included in the consolidated results for the three and nine months ended September 30, 2016, however in 2015, Colonial American is only included in the results of operations for the period from August 1, 2015 through September 30, 2015.

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 September 30, 2016 are included in the consolidated results for the three and nine months ended September 30, 2016, but are excluded from the results of operations for the corresponding prior year periods.

Net income for the three months ended September 30, 2016 was $9.1 million, or $0.35 per diluted share, as compared to net income of $4.7 million, or $0.28 per diluted share for the corresponding prior year period. Net income for the nine months ended September 30, 2016 was $17.0 million, or $0.77 per diluted share, as compared to net income of $15.1 million, or $0.90 per diluted share, for the corresponding prior year period. Net income for the three and nine months ended September 30, 2016 includes merger related expenses of $1.3 million, and $9.9 million, respectively, as compared to merger related expenses of $1.0 million and $1.3 million, respectively, for the same prior year periods. 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 a second quarter expense of $136,000 relating to the prepayment of FHLB advances 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 the deleveraging costs reduced diluted earnings per share by $0.05 and $0.34 for the three and nine months ended September 30, 2016, respectively, and by $0.04 and $0.06 for the three and nine months ended September 30, 2015, 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.

 

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Interest Income

Interest income for the three months and nine months ended September 30, 2016 increased to $37.3 million and $93.5 million, respectively, as compared to $22.0 million and $62.7 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1,388.3 million and $909.8 million, respectively, for the three and nine months ended September 30, 2016, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2016, were favorably impacted by $1,233.7 million and $776.7 million, respectively, as a result of the interest-earning assets acquired from Cape and Colonial American (“Acquisition Transactions”). Average loans receivable, net, increased $1,210.2 million and $833.9 million, respectively, for the three and nine months ended September 30, 2016, as compared to the same prior year periods. The increases in average loans receivable, net, attributable to the Acquisition Transactions were $1,198.7 million and $723.9 million for the three and nine months ended September 30, 2016, respectively. The yield on average interest-earning assets increased to 3.92% and 3.88%, respectively, for the three and nine months ended September 30, 2016, as compared to 3.63%, in both corresponding prior year periods. The yields on average interest-earning assets for the three and nine months ended September 30, 2016 benefited from the accretion of purchase accounting adjustments, 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 at the expense of lower-yielding securities.

Interest Expense

Interest expense for the three and nine months ended September 30, 2016 was $3.4 million and $9.0 million, respectively, as compared to $2.4 million and $6.6 million, respectively, in the corresponding prior year periods. The cost of average interest-bearing liabilities decreased to 0.43% and 0.46%, respectively, for the three and nine months ended September 30, 2016, as compared to 0.50% and 0.47%, respectively, for the prior year periods benefiting from the change in mix to lower-cost deposits from higher-cost borrowings. The total cost of deposits (including non-interest-bearing deposits) was 0.25% for both the three and nine months ended September 30, 2016, as compared to 0.24% and 0.23% for the corresponding prior year periods.

Net Interest Income

Net interest income for the three and nine months ended September 30, 2016 increased to $33.9 million and $84.5 million, respectively, as compared to $19.6 million and $56.1 million, respectively, in the corresponding prior year periods, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased $1,388.3 million and $909.8 million, respectively, for the three and nine months ended September 30, 2016, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2016, were favorably impacted by $1,233.7 million and $776.7 million, respectively, as a result of the interest-earning assets from the Acquisition Transactions. The net interest margin increased to 3.56% and 3.51%, respectively, for the three and nine months ended September 30, 2016, as compared to 3.24% and 3.25%, respectively, for the three and nine months ended September 30, 2015. Included in net interest income for the three and nine months ended September 30, 2016, is $1.6 million and $3.1 million, respectively, of net accretion of purchase accounting adjustments, as compared to $140,000 for both the corresponding prior year periods.

Provision for Loan Losses

For the three and nine months ended September 30, 2016, the provision for loan losses was $888,000 and $2.1 million, respectively, as compared to $300,000 and $975,000, respectively, for the corresponding prior year periods. Net charge-offs were $1.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2016, as compared to net charge-offs of $196,000 and $654,000, respectively, in the corresponding prior year periods. The increase in net charge-offs for the three and nine months ended September 30, 2016 was primarily due to third quarter charge-offs of $1.6 million on loans sold or held for sale at September 30, 2016, and to a lesser extent, first quarter charge-offs of $886,000 on two non-performing commercial loans. Of the $1.6 million in third quarter charge-offs, $1.1 million was related to a pool of higher risk commercial loans designated as held for sale at September 30, 2016 with an unpaid principal balance of $22.7 million and with a specific allocation in the allowance for loan losses of $916,000. This pool of loans is expected to be sold in the fourth quarter. Non-performing loans decreased to $16.5 million at September 30, 2016, as compared to $18.3 million at December 31, 2015. The non-performing loan amount at September 30, 2016 includes $3.2 million of loans held for sale which have been marked down to fair value.

Other Income

For the three and nine months ended September 30, 2016, other income increased to $5.9 million and $14.2 million, respectively, as compared to $4.2 million and $12.3 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 $1.3 million and $2.2 million to total other income for the three and nine months ended September 30, 2016, respectively, as compared to the same prior year periods. Excluding Cape, other income increased $452,000 for the three months ended September 30, 2016, and decreased $396,000 for the nine months ended September 30, 2016, as compared to the same prior year periods. For the three and nine months ended September 30, 2016, other income included a gain of $125,000 and a loss of $292,000, respectively, attributable to the operations of a hotel, golf and banquet facility acquired as

 

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Other Real Estate Owned (“OREO”) in the fourth quarter of 2015. The Bank is currently engaged in a sales process with qualified buyers for this property. The results for the nine months ended September 30, 2016 included no gains on the sale of loan servicing, as compared to $111,000 in the prior year period.

Operating Expenses

Operating expenses increased to $25.0 million and $70.4 million, respectively, for the three and nine months ended September 30, 2016, as compared to $16.1 million and $44.3 million, respectively, in the same prior year periods. Operating expenses for the three and nine months ended September 30, 2016 include $1.3 million and $9.9 million, respectively, in merger related expenses, as compared to merger related expenses of $1.0 million and $1.3 million, respectively, in the prior year periods. Excluding merger related expenses, the increases in operating expenses over the prior year were primarily due to the operations of Cape and Colonial American, which added $7.9 million and $13.7 million for the quarter and year-to-date, respectively; the investment in commercial lending which added expenses of $21,000 and $822,000 for the quarter and year-to-date, respectively; the addition of new branches which added expenses of $269,000 and $991,000 for the quarter and year-to-date, respectively; and the FHLB advance prepayment fee of $136,000.

Provision for Income Taxes

The provision for income taxes was $4.8 million and $9.2 million, respectively, for the three and nine months ended September 30, 2016, as compared to $2.6 million and $8.1 million, respectively, for the same prior year periods. The effective tax rate was 34.4% and 35.0%, respectively, for the three and nine months ended September 30, 2016 as compared to 35.5% and 34.9%, respectively, for the same prior year periods. The variances in the effective tax rate were primarily due to the timing of non-deductible merger related expenses.

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 September 30, 2016, the Company had no 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 $251.1 million and $324.4 million, respectively, at September 30, 2016 and December 31, 2015.

The Company’s cash needs for the nine months ended September 30, 2016 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and the sale of higher risk loans, proceeds from maturities and calls of investment securities, proceeds from sale of available-for-sale securities, deposit growth and the issuance of subordinated notes. The cash was principally utilized for loan originations, the purchase of loans receivable, and to reduce borrowings. The Company’s cash needs for the nine months ended September 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 September 30, 2016, outstanding undrawn lines of credit totaled $486.2 million; outstanding commitments to originate loans totaled $109.3 million; and outstanding commitments to sell loans totaled $10.1 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $258.1 million at September 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.

 

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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 nine months ended September 30, 2016, the Company did not repurchase any shares of common stock as compared to repurchases of 373,594 shares at a cost of $6.5 million for the nine months ended September 30, 2015. At September 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 nine months of 2016 were $8.8 million, as compared to $6.5 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Cape and Colonial American acquisitions. On October 19, 2016, the Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15) per common share, an increase of $0.02 from the linked quarter. The dividend is payable on November 18, 2016 to stockholders of record at the close of business on November 7, 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 debt. In September 2016, the Company issued $35.0 million in subordinated notes at an initial rate of 5.125% and a stated maturity of September 30, 2026. 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 nine months ended September 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 dividends during the second and third quarters 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 September 30, 2016, OceanFirst Financial Corp. held $46.8 million in cash.

As of September 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)

   $ 362,891         8.89   $ 163,294         4.00

Common equity Tier 1 (to risk-weighted assets)

     353,600         12.10        149,754         5.125 (1) 

Tier 1 capital (to risk-weighted assets)

     362,891         12.42        175,322         6.00   

Total capital (to risk-weighted assets)

     414,135         14.17        233,762         8.00   

 

OceanFirst Bank

   Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tier 1 capital (to average assets)

   $ 347,394         8.54   $ 162,728         4.00

Common equity Tier 1 (to risk-weighted assets)

     347,394         11.90        149,576         5.125 (1) 

Tier 1 capital (to risk-weighted assets)

     347,394         11.90        175,114         6.00   

Total capital (to risk-weighted assets)

     363,638         12.46        233,485         8.00   

 

(1) Includes capital conservation buffer.

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

At September 30, 2016, the Company maintained tangible common equity of $347.0 million, for a tangible common equity to assets ratio of 8.50%.

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 $10.1 million at September 30, 2016.

 

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

 

Contractual Obligations

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

Debt Obligations

   $ 376,623       $ 70,991       $ 139,232       $ 110,000       $ 56,400   

Commitments to Fund Undrawn Lines of Credit

              

Commercial

     280,490         280,490         —           —           —     

Consumer

     205,725         205,725         —           —           —     

Commitments to Originate Loans

     109,327         109,327         —           —           —     

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

Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets consisting of non-performing loans and OREO. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.

 

     September 30,     December 31,  
     2016     2015  
     (dollars in thousands)  

Non-performing loans:

    

Commercial and industrial

   $ 1,152      $ 123   

Commercial real estate – owner occupied

     5,213        7,684   

Commercial real estate – investor

     1,675        3,112   

Residential mortgage

     7,017        5,779   

Home equity loans and lines

     1,450        1,574   

Other consumer

     —          2   
  

 

 

   

 

 

 

Total non-performing loans

     16,507        18,274   

Other real estate owned

     9,107        8,827   
  

 

 

   

 

 

 

Total non-performing assets

   $ 25,614      $ 27,101   
  

 

 

   

 

 

 

Purchased credit impaired loans (“PCI”)

   $ 5,836      $ 461   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 8,553      $ 9,087   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     0.51     0.84

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

     94.61        91.51   

Non-performing loans as a percent of total loans receivable

     0.54        0.91   

Non-performing assets as a percent of total assets

     0.62        1.05   

The Company’s non-performing loans totaled $16.5 million at September 30, 2016, as compared to $18.3 million at December 31, 2015. Included in the non-performing loans total at September 30, 2016 was $3.5 million of troubled debt restructured (“TDR”) loans, as compared to $4.9 million of TDR loans at December 31, 2015. 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 $5.8 million of PCI loans acquired from Cape and Colonial American. At September 30, 2016, the allowance for loan losses totaled $15.6 million, or 0.51% 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 $17.1 million at September 30, 2016 on the Cape and Colonial American loans and $2.2 million at December 31, 2015 on the Colonial American loans. These loans were acquired at fair value with no related allowances for loan losses. OREO 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.

 

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

 

     September 30,      December 31,  
     2016      2015  

Special Mention

   $ 36,684       $ 23,087   

Substandard

     64,466         33,258   

The increase in substandard and special mention loans is primarily a result of the re-grading of the Cape loan portfolio using the Bank’s risk rating scale. The classification downgrades are consistent with the Company’s due diligence findings prior to the acquisition and reflective of the credit mark at the time of acquisition. 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 $7.8 million facility to a marina that is well secured by the marina and related commercial and residential real estate.

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 September 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 September 30, 2016, the Company’s one-year gap was positive 1.32% as compared to negative 1.71% at December 31, 2015.

 

At September 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

   $ 271,497      $ —        $ —        $ —        $ —        $ 271,497   

Investment securities

     66,286        9,358        15,328        29,777        27,756        148,505   

Mortgage-backed securities

     33,190        57,483        106,022        73,176        64,249        334,120   

FHLB stock

     —          —          —          —          18,289        18,289   

Loans receivable(2)

     511,087        637,859        934,328        571,853        385,779        3,040,906   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     882,060        704,700        1,055,678        674,806        496,073        3,813,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     222,100        9,406        43,170        39,027        86,351        400,054   

Savings accounts

     113,518        22,197        113,866        97,687        141,905        489,173   

Interest-bearing checking accounts

     776,542        38,725        158,018        135,083        342,715        1,451,083   

Time deposits

     80,142        180,473        135,240        72,624        2,935        471,414   

FHLB advances

     475        1,438        139,232        110,000        —          251,145   

Securities sold under agreements to repurchase and other borrowings

     91,577        —          —          —          33,900        125,477   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     1,284,354        252,239        589,526        454,421        607,806        3,188,346   

Interest sensitivity gap(3)

   $ (402,294   $ 452,461      $ 466,152      $ 220,385      $ (111,733   $ 624,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (402,294   $ 50,167      $ 516,319      $ 736,704      $ 624,971      $ 624,971   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (10.55 )%      1.32     13.54     19.32     16.39     16.39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 IRR as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of September 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.

 

    September 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

  $ 492,191        0.0     12.6   $ 123,470        0.2   $ 286,152        (9.0 )%      11.8   $ 74,186        (9.3 )% 

200

    504,221        2.5        12.6        124,531        1.0        303,359        (3.5     12.2        77,638        (5.1

100

    504,875        2.6        12.3        124,529        1.0        313,886        (0.2     12.3        80,160        (2.0

Static

    492,068        —          11.8        123,282        —          314,366        —          12.0        81,821        —     

(100)

    432,799        (12.0     10.2        118,217        (4.1     300,080        (4.5     11.3        78,138        (4.5

The decrease in interest rate sensitivity in a rising interest rate scenario at September 30, 2016, as compared to December 31, 2015, is primarily due to the increase in interest-earning deposits of $252.4 million.

 

11


Table of Contents
Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

12


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     September 30,     December 31,  
     2016     2015  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 311,583      $ 43,946   

Securities available-for-sale, at estimated fair value

     2,497        29,902   

Securities held-to-maturity, net (estimated fair value of $478,727 at September 30, 2016 and $397,763 at December 31, 2015)

     470,642        394,813   

Federal Home Loan Bank of New York stock, at cost

     18,289        19,978   

Loans receivable, net

     3,028,696        1,970,703   

Loans held for sale

     21,679        2,697   

Interest and dividends receivable

     9,396        5,860   

Other real estate owned

     9,107        8,827   

Premises and equipment, net

     51,243        28,419   

Servicing asset

     259        589   

Bank Owned Life Insurance

     106,433        57,549   

Deferred tax asset

     39,391        16,807   

Other assets

     11,543        10,900   

Core deposit intangible

     3,722        256   

Goodwill

     66,537        1,822   
  

 

 

   

 

 

 

Total assets

   $ 4,151,017      $ 2,593,068   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 3,324,681      $ 1,916,678   

Securities sold under agreements to repurchase with retail customers

     69,078        75,872   

Federal Home Loan Bank advances

     251,146        324,385   

Other borrowings

     56,399        22,500   

Advances by borrowers for taxes and insurance

     8,287        7,121   

Other liabilities

     24,182        8,066   
  

 

 

   

 

 

 

Total liabilities

     3,733,773        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 25,850,956 and 17,286,557 shares outstanding at September 30, 2016 and December 31, 2015, respectively

     336        336   

Additional paid-in capital

     308,979        269,757   

Retained earnings

     236,472        229,140   

Accumulated other comprehensive loss

     (5,611     (6,241

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (2,832     (3,045

Treasury stock, 7,715,816 and 16,280,215 shares at September 30, 2016 and
December 31, 2015, respectively

     (120,100     (251,501

Common stock acquired by Deferred Compensation Plan

     (310     (314

Deferred Compensation Plan Liability

     310        314   
  

 

 

   

 

 

 

Total stockholders’ equity

     417,244        238,446   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,151,017      $ 2,593,068   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

13


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended September 30,
    For the nine months
ended September 30,
 
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  

Interest income:

        

Loans

   $ 34,607      $ 19,976      $ 86,163      $ 56,553   

Mortgage-backed securities

     1,700        1,460        4,823        4,602   

Investment securities and other

     1,000        534        2,535        1,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     37,307        21,970        93,521      $ 62,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     2,083        1,162        5,125        3,084   

Borrowed funds

     1,289        1,233        3,888        3,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,372        2,395        9,013        6,574   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     33,935        19,575        84,508        56,141   

Provision for loan losses

     888        300        2,113        975   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     33,047        19,275        82,395        55,166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

        

Bankcard services revenue

     1,347        929        3,409        2,611   

Wealth management revenue

     608        501        1,779        1,657   

Fees and service charges

     2,916        2,091        7,235        6,042   

Loan servicing income

     26        75        177        186   

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

     —          —          (12     —     

Net gain on sale of loan servicing

     —          —          —          111   

Net gain on sales of loans available-for-sale

     347        260        696        637   

Net loss from other real estate operations

     (63     (59     (782     (111

Income from Bank Owned Life Insurance

     659        348        1,520        1,158   

Other

     56        7        133        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     5,896        4,152        14,155        12,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Compensation and employee benefits

     13,558        8,269        33,456        23,508   

Occupancy

     2,315        1,508        5,952        4,204   

Equipment

     1,452        951        3,605        2,562   

Marketing

     479        398        1,273        1,087   

Federal deposit insurance

     743        541        1,995        1,545   

Data processing

     2,140        1,193        5,286        3,382   

Check card processing

     623        490        1,548        1,388   

Professional fees

     681        390        1,879        1,324   

Other operating expense

     1,543        1,369        5,036        4,005   

Federal Home Loan Bank prepayment fee

     —          —          136        —     

Amortization of core deposit intangible

     181        8        319        8   

Merger related expenses

     1,311        1,030        9,902        1,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,026        16,147        70,387        44,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     13,917        7,280        26,163        23,198   

Provision for income taxes

     4,789        2,582        9,169        8,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,128      $ 4,698      $ 16,994      $ 15,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.36      $ 0.28      $ 0.79      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.35      $ 0.28      $ 0.77      $ 0.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     25,435        16,733        21,624        16,522   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     25,889        16,953        21,990        16,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

14


Table of Contents

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended September 30,
     For the nine months
ended September 30,
 
     2016     2015      2016     2015  
     (Unaudited)      (Unaudited)  

Net income

   $ 9,128      $ 4,698       $ 16,994      $ 15,093   

Other comprehensive income:

         

Unrealized (loss) gain on securities (net of tax benefit of $27 and tax expense of $10 in 2016, and net of tax expense of $27 and $125 in 2015, respectively)

     (39     40         14        181   

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $153 and $431 in 2016 and $152 and $415 in 2015, respectively)

     221        221         623        602   

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

     —          —           (7     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 9,310      $ 4,959       $ 17,624      $ 15,876   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

15


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders’ Equity (Unaudited)

(in thousands, except per share amounts)

Nine months ended September 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

    —          —          —          15,093        —          —          —          —          —          15,093   

Other comprehensive income, net of tax

    —          —          —          —          783        —          —          —          —          783   

Tax benefit of stock plans

    —          —          13        —          —          —          —          —          —          13   

Stock awards

    —          —          985        —          —          —          —          —          —          985   

Treasury stock allocated to restricted stock plan

    —          —          1,215        (142     —          —          (1,073     —          —          —     

Issued 660,998 treasury shares to finance

acquisition

    —          —          1,633        —          —          —          10,185        —          —          11,818   

Purchased 373,594 shares of common stock

    —          —          —          —          —          —          (6,457     —          —          (6,457

Allocation of ESOP stock

    —          —          226        —          —          214        —          —          —          440   

Cash dividend $0.39 per share

    —          —          —          (6,496     —          —          —          —          —          (6,496

Exercise of stock options

    —          —          —          (54     —          —          304        —          —          250   

Purchase of stock for the deferred compensation plan

    —          —          —          —          —          —          —          (7     7        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

  $ —        $ 336      $ 269,332      $ 226,115      $ (6,326   $ (3,116   $ (251,653   $ (311   $ 311      $ 234,688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

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

Net income

    —          —          —          16,994        —          —          —          —          —          16,994   

Other comprehensive income, net of tax

    —          —          —          —          630        —          —          —          —          630   

Tax expense of stock plans

    —          —          (228     —          —          —          —          —          —          (228

Stock awards

    —          —          1,181        —          —          —          —          —          —          1,181   

Treasury stock allocated to restricted stock plan

    —          —          1,081        (109     —          —          (972     —          —          —     

Issued 8,282,296 treasury shares to finance

acquisition

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

Allocation of ESOP stock

    —          —          248        —          —          213        —          —          —          461   

Cash dividend $0.39 per share

    —          —          —          (8,789     —          —          —          —          —          (8,789

Exercise of stock options

    —          —          —          (764     —          —          3,412        —          —          2,648   

Sale of stock for the deferred compensation plan

    —          —          —          —          —          —          —          4        (4     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

  $ —        $ 336      $ 308,979      $ 236,472      $ (5,611   $ (2,832   $ (120,100   $ (310   $ 310      $ 417,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

16


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the nine months
ended September 30,
 
     2016     2015  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 16,994      $ 15,093   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     3,441        2,370   

Allocation of ESOP stock

     461        440   

Stock awards

     1,181        985   

Amortization of servicing asset

     125        276   

Net premium amortization in excess of discount accretion on securities

     1,295        1,583   

Net amortization of deferred costs and discounts on loans

     (117     86   

Amortization of core deposit intangible

     319        8   

Net accretion/amortization of purchase accounting adjustments

     (3,068     (140

Provision for loan losses

     2,113        975   

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

     208        (84

Net loss on sale of fixed assets

     38        —     

Net loss on sales of available-for-sale securities

     12        —     

Net gain on sales of loans

     (696     (637

Proceeds from sales of mortgage loans held for sale

     37,687        42,787   

Mortgage loans originated for sale

     (25,079     (40,255

Increase in value of Bank Owned Life Insurance

     (1,520     (1,158

Increase in interest and dividends receivable

     (24     (50

Decrease in other assets

     8,464        1,858   

Increase (decrease) in other liabilities

     4,072        (2,624
  

 

 

   

 

 

 

Total adjustments

     28,912        6,420   
  

 

 

   

 

 

 

Net cash provided by operating activities

     45,906        21,513   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease (increase) in loans receivable

     68,358        (107,776

Proceeds from sale of high risk loans

     12,797        —     

Purchase of loans receivable

     (12,942     (22,054

Purchase of investment securities held-to-maturity

     (2,030     (9,973

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

     53,552        35,861   

Proceeds from sales of securities available-for-sale

     59,870        —     

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

     52,110        46,791   

Proceeds from Bank Owned Life Insurance

     310        —     

Decrease in Federal Home Loan Bank of New York stock

     8,471        3,514   

Proceeds from sales of other real estate owned

     3,193        1,722   

Purchases of premises and equipment

     (4,580     (3,076

Cash (received) acquired, net of cash consideration paid for acquisition

     (477     3,703   

Cash acquired, net of cash paid for branch acquisition

     16,727        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     255,359        (51,288
  

 

 

   

 

 

 

 

Continued

 

17


Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the nine months
ended September 30,
 
     2016     2015  
     (Unaudited)  

Cash flows from financing activities:

    

Increase in deposits

   $ 143,104      $ 124,290   

Decrease in short-term borrowings

     (175,821     (107,619

Proceeds from Federal Home Loan Bank advances

     55,000        40,000   

Net proceeds from issuance of subordinated notes

     33,899        —     

Repayments of Federal Home Loan Bank advances

     (73,678     (1,232

Repayments of other borrowings

     (10,000     —     

Increase in advances by borrowers for taxes and insurance

     237        1,485   

Exercise of stock options

     2,648        250   

Purchase of treasury stock

     —          (6,457

Dividends paid

     (8,789     (6,496

Tax (expense) benefit of stock plans

     (228     13   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (33,628     44,234   
  

 

 

   

 

 

 

Net increase in cash and due from banks

     267,637        14,459   

Cash and due from banks at beginning of period

     43,946        36,117   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 311,583      $ 50,576   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 8,932      $ 6,629   

Income taxes

     7,064        7,862   

Non-cash activities:

    

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

     1,054        1,017   

Loans charged-off, net

     1,949        654   

Transfer of loans receivable to other real estate owned

     1,667        —     
  

 

 

   

 

 

 

Acquisition:

    

Non-cash assets acquired:

    

Securities

   $ 212,156      $ 6,758   

Federal Home Loan Bank of New York stock

     6,782        314   

Loans

     1,157,753        121,196   

Premises & equipment

     21,723        —     

Other real estate owned

     1,996        257   

Deferred tax asset

     21,664        3,244   

Other assets

     61,793        8,509   

Goodwill and other intangible assets, net

     68,179        2,122   
  

 

 

   

 

 

 

Total non-cash assets acquired

   $ 1,552,046      $ 142,400   
  

 

 

   

 

 

 

Liabilities assumed:

    

Deposits

   $ 1,248,367      $ 123,346   

Federal Home Loan Bank advances

     124,466        6,800   

Other liabilities

     12,835        309   
  

 

 

   

 

 

 

Total liabilities assumed

   $ 1,385,668      $ 130,455   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

18


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 nine months ended September 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 the 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   
        

 

 

 

 

 

19


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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 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           1,157,753   

Specific credit fair value on credit impaired loans

     —           (4,925     —     

General credit fair value

     —           (20,533     —     

Interest rate fair value

     —           1,888        —     

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         (347     1,996   

Deferred tax asset

     9,407         12,257        21,664   

Other assets

     61,793         —          61,793   

Core deposit intangible

     831         2,887        3,718   
  

 

 

    

 

 

   

 

 

 

Total assets acquired

     1,520,516         (2,906     1,517,610   
  

 

 

    

 

 

   

 

 

 

Liabilities assumed:

       

Deposits

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

Borrowings

     (123,587      (879     (124,466

Other liabilities

     (7,611      (5,224 )(A)      (12,835
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

     (1,378,886      (6,782     (1,385,668
  

 

 

    

 

 

   

 

 

 

Net assets acquired

   $ 141,630       $ (9,688     131,942   
  

 

 

    

 

 

   

 

 

 

Goodwill recorded in the merger

        $ 64,461   
       

 

 

 

 

(A) 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 becomes 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

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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 September 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 nine months ended September 30, 2016, and as of January 1, 2015, for the nine months ended September 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.

 

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

Net interest income

   $ 22,715       $ 101,107       $ 93,467   

Provision for loan losses

     250         3,329         3,650   

Non-interest income

     2,242         16,386         23,546   

Non-interest expense

     12,316         88,376         73,565   

Net income

   $ 8,310       $ 15,067       $ 28,070   

Earnings per share:

        

Fully diluted

      $ 0.59       $ 1.12   

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 9, 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.

 

21


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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 operated eight 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 nine months ended September 30, 2016 and 2015 (in thousands):

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Weighted average shares issued net of Treasury shares

     25,823         17,146         22,010         16,954   

Less:Unallocated ESOP shares

     (340      (374      (348      (382

Unallocated incentive award shares and shares held by deferred compensation plan

     (48      (39      (38      (50
  

 

 

    

 

 

    

 

 

    

 

 

 

Average basic shares outstanding

     25,435         16,733         21,624         16,522   

Add: Effect of dilutive securities:

           

Stock options

     434         200         347         204   

Shares held by deferred compensation plan

     20         20         19         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding

     25,889         16,953         21,990         16,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2016 and 2015, antidilutive stock options of 914,000 and 1,064,000, respectively, were excluded from earnings per share calculations. For the nine months ended September 30, 2016 and 2015, antidilutive stock options of 1,132,000 and 740,000, respectively, were excluded from earnings per share calculations.

 

22


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Note 4. Securities

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

 

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

Available-for-sale:

           

Investment securities:

           

U.S. agency obligations

   $ 2,489       $ 8       $ —         $ 2,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

Investment securities:

           

U.S. agency obligations

   $ 24,958       $ 344       $ —         $ 25,302   

State and municipal obligations

     36,198         123         (23      36,298   

Corporate debt securities

     76,129         254         (7,107      69,276   

Other investments

     8,731         42         (5      8,768   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     146,016         763         (7,135      139,644   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

FHLMC

     136,934         1,370         (272      138,032   

FNMA

     177,693         3,865         (179      181,379   

GNMA

     10,389         146         (7      10,528   

Other mortgage-backed securities

     9,104         40         —           9,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     334,120         5,421         (458      339,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 480,136       $ 6,184       $ (7,593    $ 478,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 482,625       $ 6,192       $ (7,593    $ 481,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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 September 30, 2016 and December 31, 2015 are as follows (in thousands):

 

     September 30,
2016
     December 31,
2015
 

Amortized cost

   $ 480,136       $ 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

     3,853         2,799   
  

 

 

    

 

 

 

Carrying value

   $ 470,642       $ 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 nine months ended September 30, 2016. There were no realized gains or losses for the three months ended September 30, 2016. There were no realized gains or losses on the sale of securities for the three and nine months ended September 30, 2015.

The amortized cost and estimated fair value of investment securities at September 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 September 30, 2016, corporate debt securities with an amortized cost of $60.5 million and estimated fair value of $53.5 million were callable prior to the maturity date.

 

September 30, 2016

   Amortized
Cost
     Estimated
Fair Value
 

Less than one year

   $ 16,654       $ 16,671   

Due after one year through five years

     49,095         49,584   

Due after five years through ten years

     19,025         19,223   

Due after ten years

     55,000         47,895   
  

 

 

    

 

 

 
   $ 139,774       $ 133,373   
  

 

 

    

 

 

 

Other investments which consist of two open-end funds are excluded from the above table since there are no contractual maturity dates. Mortgage-backed securities are excluded from the above table since their effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.

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

 

24


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     At September 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
 
               

Held-to-maturity:

               

Investment securities:

               

State and municipal obligations

   $ 12,117         (22   $ 277       $ (1   $ 12,394       $ (23

Corporate debt securities

     4,003         (2     47,895         (7,105     51,898         (7,107

Other investments

     868         (5     —           —          868         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     16,988         (29     48,172         (7,106     65,160         (7,135
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     10,791         (20     29,101         (252     39,892         (272

FNMA

     18,847         (47     9,717         (132     28,564         (179

GNMA

     1,466         (7     —           —          1,466         (7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     31,104         (74     38,818         (384     69,922         (458
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 48,092       $ (103   $ 86,990       $ (7,490   $ 135,082       $ (7,593
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At September 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       $ 12,950         Ba1/BB+   

Chase Capital

     10,000         8,788         Baa2/BBB-   

Wells Fargo Capital

     5,000         4,350         A1/BBB+   

Huntington Capital

     5,000         4,225         Baa2/BB   

Keycorp Capital

     5,000         4,188         Baa2/BB+   

PNC Capital

     5,000         4,700         Baa1/BBB-   

State Street Capital

     5,000         4,500         A3/BBB   

SunTrust Capital

     5,000         4,194         Baa3/BB+   
  

 

 

    

 

 

    
   $ 55,000       $ 47,895      
  

 

 

    

 

 

    

 

25


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

At September 30, 2016, the estimated fair value of each of the above corporate debt securities was below cost. However, the estimated fair value of these corporate debt securities has steadily increased over the past several years. These 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 corporate debt securities were purchased in 1998 and have paid coupon interest continuously since issuance. Floating-rate corporate 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 these corporate debt securities were only temporarily impaired at September 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 September 30, 2016.

Note 5. Loans Receivable, Net

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

 

     September 30,
2016
     December 31,
2015
 

Commercial:

     

Commercial and industrial

   $ 182,767       $ 144,538   

Commercial real estate – owner occupied

     491,118         307,509   

Commercial real estate – investor

     1,014,611         510,725   
  

 

 

    

 

 

 

Total commercial

     1,688,496         962,772   
  

 

 

    

 

 

 

Consumer:

     

Residential mortgage

     1,061,029         791,249   

Residential construction

     46,813         50,757   

Home equity loans and lines

     251,304         192,368   

Other consumer

     1,270         792   
  

 

 

    

 

 

 

Total consumer

     1,360,416         1,035,166   
  

 

 

    

 

 

 
     3,048,912         1,997,938   

Purchased credit impaired (“PCI”) loans

     5,836         461   
  

 

 

    

 

 

 

Total Loans

     3,054,748         1,998,399   

Loans in process

     (13,842      (14,206

Deferred origination costs, net

     3,407         3,232   

Allowance for loan losses

     (15,617      (16,722
  

 

 

    

 

 

 

Total loans, net

   $ 3,028,696       $ 1,970,703   
  

 

 

    

 

 

 

 

26


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

At September 30, 2016 and December 31, 2015, loans in the amount of $16.5 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 $3.7 million at September 30, 2016. The amount of foreclosed residential real estate property held by the Company was $1.8 million at September 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 September 30, 2016, the impaired loan portfolio totaled $34.9 million for which there was a specific allocation in the allowance for loan losses of $269,000. 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 nine months ended September 30, 2016 was $34.5 million and $34.3 million, respectively, and $46.2 million and $40.9 million, respectively, for the same prior year periods.

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

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2016      2015      2016      2015  

Balance at beginning of period

   $ 16,678       $ 16,534       $ 16,722       $ 16,317   

Provision charged to operations

     888         300         2,113         975   

Charge-offs

     (2,116      (211      (3,511      (900

Recoveries

     167         15         293         246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 15,617       $ 16,638       $ 15,617       $ 16,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

The following table presents an analysis of the allowance for loan losses for the three and nine months ended September 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 September 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 September 30, 2016

             

Allowance for loan losses:

             

Balance at beginning of period

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

Provision (benefit) charged to operations

    (376     (168     104        (130     1,949        (491     888   

Charge-offs

    (167     —          —          (80     (1,869     —          (2,116

Recoveries

    6        —          —          —          161        —          167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 5,469      $ 2,543      $ 4,817      $ 897      $ 1,450      $ 441      $ 15,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2015

             

Allowance for loan losses:

             

Balance at beginning of period

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

Provision (benefit) charged to operations

    1,602        (421     (471     73        (101     (382     300   

Charge-offs

    (51     —          —          (101     (59     —          (211

Recoveries

    —          —          10        3        2        —          15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 5,161      $ 3,295      $ 5,052      $ 927      $ 1,528      $ 675      $ 16,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 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

    (867     1,261        (56     (98     1,665        208        2,113   

Charge-offs

    (319     (1,010     —          (146     (2,036     —          (3,511

Recoveries

    65        —          —          46        182        —          293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 5,469      $ 2,543      $ 4,817      $ 897      $ 1,450      $ 441      $ 15,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 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

    920        (332     (172     249        717        (407     975   

Charge-offs

    (174     —          (103     (564     (59     —          (900

Recoveries

    124        —          19        96        7        —          246   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 5,161      $ 3,295      $ 5,052      $ 927      $ 1,528      $ 675      $ 16,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2016

             

Allowance for loan losses:

             

Ending allowance balance attributed to loans:

             

Individually evaluated for impairment

  $ 30      $ —        $ 239      $ —        $ —        $ —        $ 269   

Collectively evaluated for impairment

    5,439        2,543        4,578        897        1,450        441        15,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 5,469      $ 2,543      $ 4,817      $ 897      $ 1,450      $ 441      $ 15,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Loans individually evaluated for impairment

  $ 13,753      $ 17,116      $ 1,180      $ 2,589      $ 269      $ —        $ 34,907   

Loans collectively evaluated for impairment

    1,094,089        474,002        1,013,431        249,985        182,498        —          3,014,005   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 1,107,842      $ 491,118      $ 1,014,611      $ 252,574      $ 182,767      $ —        $ 3,048,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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

 

     September 30,      December 31,  
     2016      2015  

Impaired loans with no allocated allowance for loan losses

   $ 33,905       $ 35,177   

Impaired loans with allocated allowance for loan losses

     1,002         3,195   
  

 

 

    

 

 

 
   $ 34,907       $ 38,372   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 269       $ 1,339   
  

 

 

    

 

 

 

At September 30, 2016, impaired loans included troubled debt restructured (“TDR”) loans of $29.9 million, of which $26.4 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 included TDR 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 September 30, 2016, and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015, is as follows, excluding PCI loans (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of September 30, 2016

        

With no related allowance recorded:

        

Residential real estate

   $ 14,155       $ 13,647       $ —     

Commercial real estate – owner occupied

     17,119         17,116         —     

Commercial real estate – investor

     309         284      

Consumer

     3,132         2,589         —     

Commercial and industrial

     269         269         —     
  

 

 

    

 

 

    

 

 

 
   $ 34,984       $ 33,905       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate

   $ 107       $ 106       $ 30   

Commercial real estate – owner occupied

     —           —           —     

Commercial real estate – investor

     896         896         239   

Consumer

     —           —           —     

Commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 1,003       $ 1,002       $ 269   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     Three months ended September 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 13,451       $ 171       $ 12,580       $ 141   

Commercial real estate – owner occupied

     17,198         119         17,472         84   

Commercial real estate – investor

     281         3         428         —     

Consumer

     2,340         44         2,266         28   

Commercial and industrial

     269         —           734         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,539       $ 337       $ 33,480       $ 256   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 107       $ 1       $ 260       $ 2   

Commercial real estate – owner occupied

     —           —           9,995         —     

Commercial real estate – investor

     896         —           640         —     

Consumer

     —           —           85         —     

Commercial and industrial

     —           —           547         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,003       $ 1       $ 11,527       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended September 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 13,326       $ 437       $ 12,634       $ 434   

Commercial real estate – owner occupied

     17,333         406         14,230         269   

Commercial real estate – investor

     303         9         451         —     

Consumer

     2,220         105         2,222         87   

Commercial and industrial

     270         —           717         9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,452       $ 957       $ 30,254       $ 799   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 108       $ 3       $ 261       $ 8   

Commercial real estate – owner occupied

     —           —           9,512         11   

Commercial real estate – investor

     755         —           641         —     

Consumer

     —           —           28         1   

Commercial and industrial

     —           —           304         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 863       $ 3       $ 10,746       $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30, 2016      December 31, 2015  

Residential real estate

   $ 7,017       $ 5,779   

Commercial real estate – owner occupied

     5,213         7,684   

Commercial real estate – investor

     1,675         3,112   

Consumer

     1,450         1,576   

Commercial and industrial

     1,152         123   
  

 

 

    

 

 

 
   $ 16,507       $ 18,274   
  

 

 

    

 

 

 

 

31


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

The following table presents the aging of the recorded investment in past due loans as of September 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  

September 30, 2016

                 

Residential real estate

   $ 4,880       $ 2,054       $ 5,543       $ 12,477       $ 1,095,365       $ 1,107,842   

Commercial real estate – owner occupied

     —           60         5,213         5,273         485,845         491,118   

Commercial real estate – investor

     —           —           1,675         1,675         1,012,936         1,014,611   

Consumer

     985         267         1,443         2,695         249,879         252,574   

Commercial and industrial

     96         1,203         1,152         2,451         180,316         182,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,961       $ 3,584       $ 15,026       $ 24,571       $ 3,024,341       $ 3,048,912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

32


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

As of September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment follows, excluding PCI loans (in thousands). The increase in substandard and special mention loans is primarily a result of the re-grading of the Cape loan portfolio using the Bank’s risk rating scale. The classification downgrades are consistent with the Company’s due diligence findings prior to the acquisition and reflective of the credit mark at the time of acquisition.

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

September 30, 2016

              

Commercial real estate – owner occupied

   $ 449,297       $ 14,404       $ 27,417       $ —         $ 491,118   

Commercial real estate – investor

     992,247         7,756         14,608         —           1,014,611   

Commercial and industrial

     179,900         2,203         664         —           182,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,621,444         24,363         42,689       $ —         $ 1,688,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):

 

     Residential Real Estate  
     Residential      Consumer  

September 30, 2016

     

Performing

   $ 1,100,825       $ 251,124   

Non-performing

     7,017         1,450   
  

 

 

    

 

 

 
   $ 1,107,842       $ 252,574   
  

 

 

    

 

 

 

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 September 30, 2016 and December 31, 2015 were $3.5 million and $4.9 million, respectively, of troubled debt restructurings. At September 30, 2016 and December 31, 2015, the Company has allocated $30,000 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 September 30, 2016 and December 31, 2015, which totaled $26.4 million and $26.3 million, respectively. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.

 

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Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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

 

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

Three months ended September 30, 2016

        

Troubled Debt Restructurings:

        

Residential real estate

     1       $ 455       $ 455   

Consumer

     1         602         602   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Nine months ended September 30, 2016

        

Troubled Debt Restructurings:

        

Residential real estate

     3       $ 674       $ 673   

Commercial real estate – investor

     1         256         270   

Consumer

     3         665         665   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Three months ended September 30, 2015

        

Troubled Debt Restructurings:

        

Commercial real estate – owner occupied

     1       $ 63       $ 63   

Consumer

     1         207         170   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Nine months ended September 30, 2015

        

Troubled Debt Restructurings:

        

Residential real estate

     4       $ 509       $ 472   

Commercial real estate – investor

     4         6,095         5,944   

Consumer

     9         599         547   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

As part of the Cape and Colonial American 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.

 

34


Table of Contents

OceanFirst Financial Corp.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

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 American at July 31, 2015 (in thousands):

 

     Cape
May 2, 2016
     Colonial American
July 31, 2015
 

Contractually required principal and interest

   $ 21,345       $ 3,263   

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

     (12,387      (1,854
  

 

 

    

 

 

 

Expected cash flows to be collected at acquisition

     8,958         1,409   

Interest component of expected cash flows (accretable yield)

     (576      (109
  

 

 

    

 

 

 

Fair value of acquired loans

   $ 8,382       $ 1,300   
  

 

 

    

 

 

 

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

 

     Three months ended
September 30, 2016
     Nine months ended
September 30, 2016
 

Beginning balance

   $ 503       $ 75   

Acquisition

     —           576   

Accretion

     (196      (344

Reclassification from non-accretable difference

     —           —