Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2015

 

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

For the transition period from                      to                     

Commission file number 001-11713

 

 

OceanFirst Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3412577

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

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

 

 

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

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

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

 

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

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

As of August 3, 2015 there were 17,382,730 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

          PAGE  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Consolidated Financial Statements (unaudited)   
   Consolidated Statements of Financial Condition as of June 30, 2015 (unaudited) and December 31, 2014      11   
   Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2015 and 2014      12   
   Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2015 and 2014      13   
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2015 and 2014      14   
   Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2015 and 2014      15   
   Notes to Unaudited Consolidated Financial Statements      17   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      1   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      9   

Item 4.

   Controls and Procedures      10   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      33   

Item 1A.

   Risk Factors      33   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      33   

Item 3.

   Defaults Upon Senior Securities      33   

Item 4.

   Mine Safety Disclosures      33   

Item 5.

   Other Information      33   

Item 6.

   Exhibits      33   

Signatures

     34   


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

 

FINANCIAL SUMMARY    At or for the Quarter Ended  
(dollars in thousands, except per share amounts)    June 30, 2015     March 31, 2015     June 30, 2014  

SELECTED FINANCIAL CONDITION DATA:

      

Total assets

   $ 2,395,100      $ 2,384,141      $ 2,329,141   

Loans receivable, net

     1,772,879        1,736,825        1,631,819   

Deposits

     1,761,675        1,800,926        1,705,510   

Stockholders’ equity

     221,535        220,302        215,841   

SELECTED OPERATING DATA:

      

Net interest income

     18,433        18,133        18,159   

Provision for loan losses

     300        375        275   

Other income

     4,171        3,986        4,830   

Operating expenses

     14,392        13,738        14,830   

Net income

     5,133        5,262        5,117   

Diluted earnings per share

     0.31        0.32        0.30   

SELECTED FINANCIAL RATIOS:

      

Stockholders’ equity per common share

     13.25        13.06        12.59   

Cash dividend per share

     0.13        0.13        0.12   

Stockholders’ equity to total assets

     9.25     9.24     9.27

Return on average assets (1)

     0.86        0.89        0.90   

Return on average stockholders’ equity (1)

     9.29        9.58        9.45   

Net interest rate spread

     3.15        3.15        3.28   

Net interest margin

     3.23        3.24        3.35   

Operating expenses to average assets (1)

     2.40        2.34        2.59   

Efficiency ratio

     63.67        62.11        64.51   

ASSET QUALITY:

      

Non-performing loans

   $ 20,905      $ 19,406      $ 40,699   

Non-performing assets

     24,262        23,241        45,667   

Allowance for loan losses as a percent of total loans receivable

     0.92     0.93     1.26

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

     79.09        84.61        51.44   

Non-performing loans as a percent of total loans receivable

     1.16        1.09        2.44   

Non-performing assets as a percent of total assets

     1.01        0.97        1.96   

Wealth Management

      

Assets under administration

   $ 216,533      $ 217,831      $ 229,289   

(1)    Ratios are annualized

      

 

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Table of Contents

Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank headquartered in Ocean County, New Jersey, serving business and retail customers in the central 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’s net interest margin has contracted over recent periods primarily due to the low absolute levels of interest rates. Over the past 18 months, the Company has also extended its borrowed funds into higher-cost, longer-term maturities to better manage interest rate risk. The Company has partly mitigated the adverse impact of these items 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 2014 and continues to show modest growth again in 2015. Labor market conditions improved as the national and local unemployment rates in the first half of 2015 both decreased compared to prior year levels, while measures of inflation remain subdued.

Highlights of the Company’s financial results and corporate activities for the three and six months ended June 30, 2015 were as follows:

The acquisition of Colonial American Bank (“Colonial”), as previously disclosed on February 25, 2015, closed on July 31, 2015 in an all stock transaction valued at $11.9 million. Colonial operates two full service banking centers in Middletown and Shrewsbury, New Jersey with total assets of $143.2 million as of June 30, 2015.

A commercial loan production office was opened in Mercer County in the first quarter of 2015 to better serve the broader central New Jersey market area. Additionally, at the end of the quarter the Bank opened a new branch in Long Branch, New Jersey at Pier Village. The Bank expects to open an additional branch in Jackson Township in the third quarter. Both branches will be operated by universal bankers and the Jackson branch will employ advanced technology in the form of interactive teller machines, resulting in a cost efficient staffing model. Finally, on July 31, 2015, the Bank executed an agreement to purchase an existing retail branch with core deposits (all deposits except time deposits) of $20.2 million located in the Toms River market.

Total assets increased to $2.395 billion at June 30, 2015, from $2.357 billion at December 31, 2014. Loans receivable, net increased $84.0 million at June 30, 2015, as compared to December 31, 2014 primarily due to growth in commercial loans of $75.6 million. Deposits increased by $41.5 million at June 30, 2015, as compared to December 31, 2014. The increase included $53.5 million of business deposits, demonstrating the value of relationship based lending.

Net income for the three months ended June 30, 2015, was $5.1 million, or $0.31 per diluted share, as compared to net income of $5.1 million, or $0.30 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2015 includes non-recurring merger related expenses, net of tax benefit, of $153,000. The increase in diluted earnings per share over the prior year period was primarily due to lower operating expenses, higher net interest income and a reduction in average shares outstanding, partly offset by a reduction in other income.

Net interest income for the three months ended June 30, 2015 increased to $18.4 million, as compared to $18.2 million for the corresponding prior year period reflecting an increase in interest-earning assets of $114.2 million, partly offset by a lower net interest margin. The net interest margin decreased to 3.23% for the three months ended June 30, 2015, as compared to 3.35% for the corresponding prior year period.

Other income decreased to $4.2 million for the three months ended June 30, 2015, as compared to $4.8 million in same prior year period. The decrease was primarily due to a recognized gain on sale of equity securities of $348,000 in the prior year period compared to no gain in the current period, lower fees and service charges and lower loan servicing income. The decrease in loan servicing income was due to the sale of servicing rights on a majority of residential mortgage loans serviced for the Federal agencies and was accompanied by a comparable decrease in operating expenses. Operating expenses decreased $438,000 for the three months ended June 30, 2015, as compared to the same prior year period despite the inclusion of $184,000 in non-recurring merger related expenses. The decrease in operating expense was due to lower compensation and marketing expenses.

 

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The Company remains well-capitalized with a tangible common equity ratio of 9.25% at June 30, 2015. 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. At June 30, 2015, there were 358,458 shares available for repurchase.

Return on average stockholders’ equity was 9.29% for the quarter ended June 30, 2015, as compared to 9.45% for the corresponding prior year period.

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 sets forth certain information relating to the Company for the three and six months ended June 30, 2015 and 2014. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.

 

     FOR THE THREE MONTHS ENDED JUNE 30,  
     2015     2014  
     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

   $ 28,636       $ 6         0.08   $ 26,563       $ 4         0.06

Securities (1) and FHLB stock

     490,760         2,022         1.65        552,851         2,364         1.71   

Loans receivable, net (2)

     1,762,995         18,548         4.21        1,588,815         17,530         4.41   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,282,391         20,576         3.61        2,168,229         19,898         3.67   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     112,445              118,551         
  

 

 

         

 

 

       

Total assets

   $ 2,394,836            $ 2,286,780         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,273,717         238         0.07      $ 1,257,291         247         0.08   

Time deposits

     212,160         729         1.37        215,148         739         1.37   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,485,877         967         0.26        1,472,439         986         0.27   

Borrowed funds

     365,804         1,176         1.29        330,933         753         0.91   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,851,681         2,143         0.46        1,803,372         1,739         0.39   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     307,528              252,395         

Non-interest-bearing liabilities

     14,707              14,530         
  

 

 

         

 

 

       

Total liabilities

     2,173,916              2,070,297         

Stockholders’ equity

     220,920              216,483         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,394,836            $ 2,286,780         
  

 

 

         

 

 

       

Net interest income

      $ 18,433            $ 18,159      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.15           3.28
        

 

 

         

 

 

 

Net interest margin (4)

           3.23           3.35
        

 

 

         

 

 

 

 

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Table of Contents
     FOR THE SIX MONTHS ENDED JUNE 30,  
     2015     2014  
     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

   $ 28,443       $ 11         0.08   $ 27,940       $ 10         0.07

Securities (1) and FHLB stock

     500,326         4,157         1.66        557,573         4,857         1.74   

Loans receivable, net (2)

     1,733,024         36,577         4.22        1,573,135         34,776         4.42   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,261,793         40,745         3.60        2,158,648         39,643         3.67   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     112,176              117,212         
  

 

 

         

 

 

       

Total assets

   $ 2,373,969            $ 2,275,860         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,276,265         477         0.07      $ 1,289,760         610         0.09   

Time deposits

     208,882         1,445         1.38        215,427         1,472         1.37   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     1,485,147         1,922         0.26        1,505,187         2,082         0.28   

Borrowed funds

     351,272         2,257         1.29        307,227         1,337         0.87   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,836,419         4,179         0.46        1,812,414         3,419         0.38   
     

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing deposits

     302,490              231,631         

Non-interest-bearing liabilities

     14,701              15,604         
  

 

 

         

 

 

       

Total liabilities

     2,153,610              2,059,649         

Stockholders’ equity

     220,359              216,211         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,373,969            $ 2,275,860         
  

 

 

         

 

 

       

Net interest income

      $ 36,566            $ 36,224      
     

 

 

         

 

 

    

Net interest rate spread (3)

           3.14           3.29
        

 

 

         

 

 

 

Net interest margin (4)

           3.23           3.36
        

 

 

         

 

 

 

 

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

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

Total assets increased by $38.4 million to $2.395 billion at June 30, 2015, from $2.357 billion at December 31, 2014. Securities, in the aggregate, decreased by $44.6 million, to $444.7 million at June 30, 2015, as compared to $489.2 million at December 31, 2014. Loans receivable, net, increased by $84.0 million, an annualized growth rate of 10.0%, to $1.773 billion at June 30, 2015 from $1.689 billion at December 31, 2014, primarily due to growth in commercial loans of $75.6 million and the purchase of a pool of performing, locally-originated, one-to-four family, non-conforming mortgage loans for $7.2 million.

Deposits increased by $41.5 million, to $1.762 billion at June 30, 2015, from $1.720 billion at December 31, 2014, which included growth of $48.2 million in non interest-bearing deposits. As part of the deposit growth, business deposits increased $53.5 million, demonstrating the value of relationship based lending. The deposit growth funded a decrease in FHLB advances of $9.6 million, to $295.6 million at June 30, 2015, from $305.2 million at December 31, 2014.

Stockholders’ equity increased to $221.5 million at June 30, 2015, as compared to $218.3 million at December 31, 2014. Net income for the period was partly offset by the repurchase of 259,940 shares of common stock for $4.5 million (average cost per share of $17.13) and the cash dividend on common stock of $4.3 million. At June 30, 2015, there were 358,458 shares available for repurchase under the stock repurchase program adopted in July of 2014.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2015 and June 30, 2014

General

Net income for the three months ended June 30, 2015 was $5.1 million, or $0.31 per diluted share, as compared to net income of $5.1 million, or $0.30 per diluted share for the corresponding prior year period. Net income for the six months ended June 30, 2015 increased to $10.4 million, or $0.63 per diluted share, as compared to net income of $9.8 million, or $0.58 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2015 includes non-recurring merger related expenses, net of tax benefit, of $153,000 and $190,000, respectively. The increases in diluted earnings per share over the previous year periods were primarily due to lower operating expenses, higher net interest income, and a reduction in average shares outstanding, partly offset by a reduction in other income.

Interest Income

Interest income for the three and six months ended June 30, 2015 increased to $20.6 million and $40.7 million, respectively, as compared to $19.9 million and $39.6 million, respectively, for the corresponding prior year periods. The yield on interest-earning assets declined to 3.61% and 3.60%, respectively, for the three and six months ended June 30, 2015, from 3.67% for

 

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both the same prior year periods. The asset yield benefited from a shift in the mix of interest-earning assets as average loans receivable, net, increased $174.2 million and $159.9 million, respectively, for the three and six months ended June 30, 2015, while average interest-earning securities decreased $62.1 million and $57.2 million, respectively, as compared to the same prior year periods.

Interest Expense

Interest expense for the three and six months ended June 30, 2015 was $2.1 million and $4.2 million, respectively, as compared to $1.7 million and $3.4 million, respectively, in the corresponding prior year periods. The cost of average interest-bearing liabilities increased to 0.46% for both the three and six months ended June 30, 2015, as compared to 0.39% and 0.38% in the same prior year periods as the Company extended its borrowed funds into higher-cost, longer-term maturities to better manage the Company’s interest rate risk. Since December 31, 2013, the Bank extended $178.3 million of short-term funding into 3-5 year maturities, extending the weighted average maturity of term borrowings from 1.3 years to 3.3 years at June 30, 2015. Partially offsetting the increase in the cost of borrowed funds, the total cost of deposits (including non-interest bearing deposits) decreased to 0.22% for the six months ended June 30, 2015, as compared to 0.24% for the corresponding prior year period.

Net Interest Income

Net interest income for the three and six months ended June 30, 2015 increased to $18.4 million and $36.6 million, respectively, as compared to $18.2 million and $36.2 million, respectively, in the same prior year periods, reflecting an increase in interest-earning assets, partly offset by a lower net interest margin. Average interest-earning assets increased $114.2 million and $103.1 million, respectively, for the three and six months ended June 30, 2015, as compared to the same prior year periods. The net interest margin decreased to 3.23% for both the three and six months ended June 30, 2015, from 3.35% and 3.36%, respectively, for the same prior year periods.

Provision for Loan Losses

For the three and six months ended June 30, 2015, the provision for loan losses was $300,000 and $675,000, respectively, as compared to $275,000 and $805,000, respectively, for the corresponding prior year periods. Net charge-offs decreased to $185,000 and $458,000, respectively, for the three and six months ended June 30, 2015, as compared to net charge-offs of $273,000 and $799,000 in the corresponding prior year periods. The provisions exceeded net charge-offs for both the three and six months ended June 30, 2015 to account for loan growth.

Other Income

For the three and six months ended June 30, 2015, other income decreased to $4.2 million, and $8.2 million, respectively, as compared to $4.8 million and $8.7 million, respectively, in the same prior year periods. In the fourth quarter of 2014, the Company sold the servicing rights on a majority of the residential mortgage loans serviced by the Company for the Federal agencies, recognizing a gain of $408,000. Smaller, supplemental sales occurred in 2015 resulting in gains of $30,000 in the second quarter and $111,000 for the six months ended June 30, 2015. The sale of loan servicing caused a decrease of $167,000 and $343,000 in loan servicing income for the three and six months ended June 30, 2015, respectively, as compared to the same prior year periods but also reduced operating expenses by a similar amount. For both the three and six months ended June 30, 2014 the Company recognized a gain of $348,000 on the sale of equity securities, as compared to no gains in the current year periods.

Operating Expenses

Operating expenses decreased to $14.4 million and $28.1 million, respectively, for the three and six months ended June 30, 2015, as compared to $14.8 million and $28.9 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2015 include $184,000 and $234,000, respectively, in non-recurring merger related expenses. Compensation and employee benefits expense decreased $431,000 and $577,000, respectively, as compared to the same prior year periods. The prior year periods included $196,000 in severance related expenses due to the Company’s strategic decision to improve efficiency in the residential mortgage loan area. Marketing expense decreased $195,000 and $453,000, respectively, for the three and six months ended June 30, 2015, as compared to the same prior year periods, due to the timing of promotions and a significant campaign in the prior year period.

Provision for Income Taxes

The provision for income taxes was $2.8 million and $5.5 million, respectively, for the three and six months ended June 30, 2015, as compared to $2.8 million and $5.3 million, respectively, for the corresponding prior year periods. The effective tax rate was 35.1% and 34.7%, respectively, for the three and six months ended June 30, 2015, as compared to 35.1% and 35.2%, respectively, in the same prior year periods.

 

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Liquidity and Capital Resources

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

At June 30, 2015, the Company had $67.3 million in outstanding overnight borrowings from the FHLB compared to $111.0 million outstanding at December 31, 2014. The Company utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including the overnight borrowings, of $295.6 million and $305.2 million, respectively, at June 30, 2015 and December 31, 2014.

The Company’s cash needs for the six months ended June 30, 2015 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, proceeds from maturities of investment securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of investment securities and to reduce borrowings. The Company’s cash needs for the six months ended June 30, 2014 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sales of mortgage loans held for sale, proceeds from maturities of investment securities and increased total borrowings. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and to fund deposit outflows.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2015, outstanding undrawn lines of credit totaled $297.0 million; outstanding commitments to originate loans totaled $93.5 million; and outstanding commitments to sell loans totaled $6.1 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 $114.5 million at June 30, 2015. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.

The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which is reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios.

Under the Company’s common stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the six months ended June 30, 2015, the Company repurchased 259,940 shares of common stock at a total cost of $4.5 million, compared with repurchases of 301,766 shares at a cost of $5.0 million for the six months ended June 30, 2014. At June 30, 2015, there were 358,458 shares available to be repurchased under the stock repurchase program adopted in July of 2014.

Cash dividends on common stock declared and paid during the first six months of 2015 were $4.3 million, as compared to $4.1 million in the same prior year period. On July 23, 2015, the Board of Directors declared a quarterly cash dividend of thirteen cents ($0.13) per common share. The dividend is payable on August 14, 2015 to stockholders of record at the close of business on August 3, 2015.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary and the issuance of preferred and common stock and long-term debt. At December 31, 2014 the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payments of $12.0 million in dividends from the Bank to the Company over the first three quarters of 2015, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises. For the six months ended June 30, 2015, the Company received a dividend payment of $8.0 million from the Bank and $4.0 million remained to be paid over the next quarter. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At June 30, 2015, OceanFirst Financial Corp. held $20.9 million in cash.

 

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As of June 30, 2015, the Bank exceeded all regulatory capital requirements as follows (in thousands):

 

     Actual     Required  
     Amount      Ratio     Amount      Ratio  

Tier 1 leverage

   $ 217,537         9.12   $ 95,370         4.00

Common Equity Tier 1

     217,537         12.76        76,742         4.50   

Tier 1 Capital

     217,537         12.76        102,323         6.00   

Total Capital

     234,121         13.73        136,431         8.00   

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

In July 2013, the Federal Deposit Insurance Corporation and the other Federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule and regulatory capital requirements only pertain to the Bank and not the Holding Company. Among other things, the rule established a new Common Equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 Capital to risk-weighted assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new Common Equity Tier 1 capital requirement is intended to measure the financial strength of the Bank by comparing its core equity (equity capital plus disclosed reserves) to its risk-weighted assets. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Bank has exercised its opt-out. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests, including investments in the capital of unconsolidated financial institutions. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of Common Equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

At June 30, 2015, the Company maintained tangible common equity of $221.5 million, for a tangible common equity to assets ratio of 9.25%.

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 $6.1 million.

The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2015 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 394,803       $ 150,857       $ 88,844       $ 132,602       $ 22,500   

Commitments to Fund Undrawn Lines of Credit

     296,965         296,965         —           —           —     

Commitments to Originate Loans

     93,526         93,526         —           —           —     

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. The commitments to fund undrawn lines of credit primarily relate to commercial loans ($175.5 million), consumer loans ($105.4 million) and construction loans ($16.1 million) at June 30, 2015.

 

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Non-Performing Assets

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

 

     June 30,
2015
    December 31,
2014
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate – one-to-four family

   $ 4,288      $ 3,115   

Commercial real estate

     14,601        12,758   

Consumer

     1,901        1,877   

Commercial and industrial

     115        557   
  

 

 

   

 

 

 

Total non-performing loans

     20,905        18,307   

Other real estate owned

     3,357        4,664   
  

 

 

   

 

 

 

Total non-performing assets

   $ 24,262      $ 22,971   
  

 

 

   

 

 

 

Delinquent loans 30-89 days

   $ 7,258      $ 8,960   
  

 

 

   

 

 

 

Allowance for loan losses as a percent of total loans receivable

     0.92     0.95

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

     79.09        89.13   

Non-performing loans as a percent of total loans receivable

     1.16        1.06   

Non-performing assets as a percent of total assets

     1.01        0.97   

Included in the non-performing loan total at June 30, 2015 was $3.8 million of troubled debt restructured loans, as compared to $2.0 million of troubled debt restructured loans at December 31, 2014. The increase was primarily due to one restructured commercial real estate loan which was previously performing. Non-performing loans are concentrated in commercial real estate, which comprise 69.8% of the total at June 30, 2015.

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

 

     June 30,
2015
     December 31,
2014
 

Special Mention

   $ 29,819       $ 19,017   

Substandard

     34,455         34,937   

The largest non-performing and Substandard loan relationship consists of two commercial real estate loans to a hotel, golf and banquet facility located in New Jersey for $6.3 million, criticized due to delinquent payments, continual losses and covenant violations. The largest Special Mention loan relationship consists of a commercial real estate loan and several smaller lines of credit to a moving and storage company totaling $4.9 million and is classified due to recent operating losses. The loan was initially classified during the second quarter of 2015.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses, the reserve for repurchased loans and loss sharing obligations, and judgments regarding securities impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar

 

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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, 2014 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 2014 Form 10-K and Item 1A, Risk Factors, of this 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2015, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.

At June 30, 2015, the Company’s one-year gap was negative 1.00% as compared to negative 2.73% at December 31, 2014.

 

At June 30, 2015

   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

   $ 7,071      $ —        $ —        $ —        $ —        $ 7,071   

Investment securities

     67,565        21,473        65,520        6,423        340        161,321   

Mortgage-backed securities

     38,304        33,340        80,609        69,665        72,552        294,470   

FHLB stock

     —          —          —          —          18,740        18,740   

Loans receivable (2)

     312,657        389,610        463,580        340,789        281,001        1,787,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     425,597        444,423        609,709        416,877        372,633        2,269,239   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Money market deposit accounts

     14,377        10,259        22,731        17,335        58,315        123,017   

Savings accounts

     64,858        27,020        52,072        39,413        122,716        306,079   

Interest-bearing checking accounts

     438,990        49,364        93,711        76,216        136,029        794,310   

Time deposits

     33,419        81,101        41,035        53,441        1,098        210,094   

FHLB advances

     67,764        6,406        88,844        132,602        —          295,616   

Securities sold under agreements to repurchase and other borrowings

     94,187        5,000        —          —          —          99,187   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     713,595        179,150        298,393        319,007        318,158        1,828,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap (3)

   $ (287,998   $ 265,273      $ 311,316      $ 97,870      $ 54,475      $ 440,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (287,998   $ (22,725   $ 288,591      $ 386,461      $ 440,936      $ 440,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (12.69 )%      (1.00 )%      12.72     17.03     19.43     19.43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of June 30, 2015 and December 31, 2014. 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 2014 Form 10-K.

 

     June 30, 2015     December 31, 2014  

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

   $ 241,378         (14.9 )%      10.8   $ 70,754         (3.0 )%    $ 242,356         (12.9 )%      11.0   $ 68,025         (4.8 )% 

200

     261,863         (7.6     11.4        72,366         (0.8     260,338         (6.4     11.5        70,013         (2.0

100

     276,579         (2.4     11.7        72,948         —          272,499         (2.1     11.7        70,992         (0.6

Static

     283,482         —          11.8        72,919         —          278,222         —          11.7        71,420         —     

(100)

     279,669         (1.3     11.3        69,086         (5.3     275,644         (0.9     11.3        67,779         (5.1

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     June 30,
2015
    December 31,
2014
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 40,359      $ 36,117   

Securities available-for-sale, at estimated fair value

     30,030        19,804   

Securities held-to-maturity, net (estimated fair value of $420,409 at June 30, 2015 and $474,215 at December 31, 2014)

     414,625        469,417   

Federal Home Loan Bank of New York stock, at cost

     18,740        19,170   

Loans receivable, net

     1,772,879        1,688,846   

Mortgage loans held for sale

     1,454        4,201   

Interest and dividends receivable

     5,550        5,506   

Other real estate owned

     3,357        4,664   

Premises and equipment, net

     24,931        24,738   

Servicing asset

     487        701   

Bank Owned Life Insurance

     56,858        56,048   

Deferred tax asset

     15,234        15,594   

Other assets

     10,596        11,908   
  

 

 

   

 

 

 

Total assets

   $ 2,395,100      $ 2,356,714   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

   $ 1,761,675      $ 1,720,135   

Securities sold under agreements to repurchase with retail customers

     71,687        67,812   

Federal Home Loan Bank advances

     295,616        305,238   

Other borrowings

     27,500        27,500   

Advances by borrowers for taxes and insurance

     7,845        6,323   

Other liabilities

     9,242        11,447   
  

 

 

   

 

 

 

Total liabilities

     2,173,565        2,138,455   
  

 

 

   

 

 

 

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 16,722,632 and 16,901,653 shares outstanding at June 30, 2015 and December 31, 2014, respectively

     336        336   

Additional paid-in capital

     267,248        265,260   

Retained earnings

     223,644        217,714   

Accumulated other comprehensive loss

     (6,587     (7,109

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (3,187     (3,330

Treasury stock, 16,844,140 and 16,665,119 shares at June 30, 2015 and December 31, 2014, respectively

     (259,919     (254,612

Common stock acquired by Deferred Compensation Plan

     (309     (304

Deferred Compensation Plan Liability

     309        304   
  

 

 

   

 

 

 

Total stockholders’ equity

     221,535        218,259   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,395,100      $ 2,356,714   
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)  

Interest income:

        

Loans

   $ 18,548      $ 17,530      $ 36,577      $ 34,776   

Mortgage-backed securities

     1,519        1,731        3,142        3,494   

Investment securities and other

     509        637        1,026        1,373   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     20,576        19,898        40,745        39,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     967        986        1,922        2,082   

Borrowed funds

     1,176        753        2,257        1,337   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,143        1,739        4,179        3,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     18,433        18,159        36,566        36,224   

Provision for loan losses

     300        275        675        805   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     18,133        17,884        35,891        35,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income:

        

Bankcard services revenue

     899        897        1,682        1,689   

Wealth management revenue

     629        608        1,157        1,148   

Fees and service charges

     2,059        2,261        3,949        4,104   

Loan servicing income

     59        226        111        454   

Net gain on sale of loan servicing

     30        —           111        —     

Net gain on sales of loans available-for-sale

     185        219        377        351   

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

     —          348        —          348   

Net loss from other real estate operations

     (72     (107     (51     (139

Income from Bank Owned Life Insurance

     364        377        810        715   

Other

     18        1        11        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     4,171        4,830        8,157        8,672   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Compensation and employee benefits

     7,700        8,131        15,239        15,816   

Occupancy

     1,242        1,364        2,696        2,828   

Equipment

     813        768        1,611        1,524   

Marketing

     415        610        689        1,142   

Federal deposit insurance

     506        538        1,004        1,083   

Data processing

     1,101        987        2,189        2,057   

Check card processing

     423        494        898        940   

Professional fees

     539        523        934        898   

Other operating expense

     1,469        1,415        2,636        2,649   

Merger related expenses

     184        —          234        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     14,392        14,830        28,130        28,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     7,912        7,884        15,918        15,154   

Provision for income taxes

     2,779        2,767        5,523        5,330   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,133      $ 5,117      $ 10,395      $ 9,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.31      $ 0.31      $ 0.63      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.31      $ 0.30      $ 0.63      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average basic shares outstanding

     16,401        16,740        16,433        16,812   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average diluted shares outstanding

     16,593        16,822        16,613        16,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     For the three months
ended June 30,
    For the six months
ended June 30,
 
     2015      2014     2015      2014  
     (Unaudited)     (Unaudited)  

Net income

   $ 5,133       $ 5,117      $ 10,395       $ 9,824   

Other comprehensive income:

          

Unrealized gain (loss) on securities (net of tax expense of $1 and $98 in 2015 and tax benefit of $209 and $286 in 2014)

     2         (303     141         (414

Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $138 and $263 in 2015 and $125 and $233 in 2014, respectively)

     199         181        381         337   

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

     —           (206     —           (206
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 5,334       $ 4,789      $ 10,917       $ 9,541   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders’ Equity (Unaudited)

(in thousands, except per share amounts)

Six Months Ended June 30, 2015 and 2014

 

     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, 2013

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

Net income

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

Other comprehensive income, net of tax

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

Tax benefit of stock plans

     —           —           50         —          —          —          —          —          —          50   

Stock awards

     —           —           429         —          —          —          —          —          —          429   

Treasury stock allocated to restricted stock plan

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

Purchased 301,766 shares of common stock

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

Allocation of ESOP stock

     —           —           133         —          —          158        —          —          —          291   

Cash dividend $0.24 per share

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

Exercise of stock options

     —           —           —           (44     —          —          309        —          —          265   

Sale of stock for the deferred

compensation plan

     —           —           —           —          —          —          —          350        (350     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

Net income

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

Other comprehensive income, net of tax

     —           —           —           —          522        —          —          —          —          522   

Tax benefit of stock plans

     —           —           8         —          —          —          —          —          —          8   

Stock awards

     —           —           638         —          —          —          —          —          —          638   

Treasury stock allocated to restricted stock plan

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

Purchased 259,940 shares of common stock

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

Allocation of ESOP stock

     —           —           145         —          —          143        —          —          —          288   

Cash dividend $0.26 per share

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

Exercise of stock options

     —           —           —           (38     —          —          203        —          —          165   

Purchase of stock for the deferred

compensation plan

     —           —           —           —          —          —          —          (5     5        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the six months
ended June 30,
 
     2015     2014  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 10,395      $ 9,824   
  

 

 

   

 

 

 

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

    

Depreciation and amortization of premises and equipment

     1,504        1,412   

Allocation of ESOP stock

     288        291   

Stock awards

     638        429   

Amortization of servicing asset

     214        594   

Net premium amortization in excess of discount accretion on securities

     1,140        1,472   

Net amortization of deferred costs and discounts on loans

     70        35   

Provision for loan losses

     675        805   

Net gain on sale of other real estate owned

     (112     (44

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

     —          (348

Net gain on sales of loans

     (377     (351

Proceeds from sales of mortgage loans held for sale

     28,144        21,368   

Mortgage loans originated for sale

     (25,020     (21,715

Increase in value of Bank Owned Life Insurance

     (810     (715

(Increase) decrease in interest and dividends receivable

     (44     63   

Decrease in other assets

     1,311        93   

Decrease in other liabilities

     (2,205     (5,271
  

 

 

   

 

 

 

Total adjustments

     5,416        (1,882
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,811        7,942   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net increase in loans receivable

     (77,571     (72,377

Purchase of loans receivable

     (7,186     (20,574

Purchase of investment securities available-for-sale

     (9,973     (651

Purchase of mortgage-backed securities held-to-maturity

     —          (10,134

Purchase of investment-backed securities held-to-maturity

     —          (5,003

Proceeds from maturities of investment securities available-for-sale

     —          10,000   

Proceeds from sale of investment securities available-for-sale

     —          1,402   

Proceeds from maturities of investment securities held-to-maturity

     23,285        4,350   

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

     30,997        27,178   

Decrease (increase) in Federal Home Loan Bank of New York stock

     430        (5,728

Proceeds from sales of other real estate owned

     1,398        1,173   

Purchases of premises and equipment

     (1,697     (2,158
  

 

 

   

 

 

 

Net cash used in investing activities

     (40,317     (72,522
  

 

 

   

 

 

 

 

Continued

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

     For the six months ended
June 30,
 
     2015     2014  
     (Unaudited)  

Cash flows from financing activities:

    

Increase (decrease) in deposits

   $ 41,540      $ (41,253

Decrease in short-term borrowings

     (40,747     (5,963

Proceeds from Federal Home Loan Bank advances

     35,000        190,000   

Repayments of Federal Home Loan Bank advances

     —          (60,000

Increase in advances by borrowers for taxes and insurance

     1,522        425   

Exercise of stock options

     165        265   

Purchase of treasury stock

     (4,452     (5,020

Dividends paid

     (4,288     (4,065

Tax benefit of stock plans

     8        50   
  

 

 

   

 

 

 

Net cash provided by financing activities

     28,748        74,439   
  

 

 

   

 

 

 

Net increase in cash and due from banks

     4,242        9,859   

Cash and due from banks at beginning of period

     36,117        33,958   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 40,359      $ 43,817   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 4,137      $ 3,229   

Income taxes

     762        6,601   

Non-cash activities:

    

Loans charged-off, net

     458        799   

Transfer of loans receivable to other real estate owned

     —          1,752   

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its wholly-owned subsidiaries, OceanFirst REIT Holdings, Inc., OceanFirst Services, LLC and 975 Holdings, LLC.

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results of operations that may be expected for all of 2015. 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, 2014.

Note 2. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Weighted average shares issued net of Treasury shares

     16,811         17,258         16,856         17,327   

Less: Unallocated ESOP shares

     (382      (416      (386      (420

Unallocated incentive award shares and shares held by deferred compensation plan

     (28      (102      (37      (95
  

 

 

    

 

 

    

 

 

    

 

 

 

Average basic shares outstanding

     16,401         16,740         16,433         16,812   

Add: Effect of dilutive securities:

           

Stock options

     20         61         20         109   

Shares held by deferred compensation plan

     172         21         160         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted shares outstanding

     16,593         16,822         16,613         16,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2015 and 2014, antidilutive stock options of 838,794 and 914,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2015 and 2014, antidilutive stock options of 744,143 and 756,000, respectively, were excluded from earnings per share calculations

 

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Table of Contents

Note 3. Securities

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 are as follows (in thousands):

 

     At June 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Available-for-sale:

           

Investment securities:

           

U.S. agency obligations

   $ 29,887       $ 143       $ —         $ 30,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

Investment securities:

           

U.S. agency obligations

   $ 65,467       $ 135       $ (2    $ 65,600   

State and municipal obligations

     10,967         15         (9      10,973   

Corporate debt securities

     55,000         —           (7,750      47,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     131,434         150         (7,761      123,823   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

FHLMC

     128,701         565         (1,280      127,986   

FNMA

     165,220         3,669         (931      167,958   

GNMA

     549         93         —           642   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     294,470         4,327         (2,211      296,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 425,904       $ 4,477       $ (9,972    $ 420,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 455,791       $ 4,620       $ (9,972    $ 450,439   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Available-for-sale:

           

Investment securities:

           

U.S. agency obligations

   $ 19,900       $ —         $ (96    $ 19,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity:

           

Investment securities:

           

U.S. agency obligations

   $ 86,394       $ 97       $ (50    $ 86,441   

State and municipal obligations

     13,829         25         (8      13,846   

Corporate debt securities

     55,000         —           (9 750      45,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     155,223         122         (9,808      145,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

FHLMC

     141,494         609         (1,659      140,444   

FNMA

     184,003         4,674         (1,182      187,495   

GNMA

     620         119         —           739   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     326,117         5,402         (2,841      328,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 481,340       $ 5,524       $ (12,649    $ 474,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 501,240       $ 5,524       $ (12,745    $ 494,019   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

During the third quarter 2013, the Bank transferred $536.0 million of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the held-to-maturity investment securities at June 30, 2015 and December 31, 2014 are as follows (in thousands):

 

     June 30,
2015
     December 31,
2014
 

Amortized cost

   $ 425,904       $ 481,340   

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

     2,068         1,424   
  

 

 

    

 

 

 

Carrying value

   $ 414,625       $ 469,417   
  

 

 

    

 

 

 

There were no realized gains or losses on the sale of securities for the three and six months ended June 30, 2015. Net realized gains on the sale of securities for both the three and six months ended June 30, 2014 were $348,000.

The amortized cost and estimated fair value of investment securities at June 30, 2015 by contractual maturity are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2015, corporate debt securities with an amortized cost and estimated fair value of $55.0 million and $47.3 million, respectively, were callable prior to the maturity date.

 

June 30, 2015

   Amortized
Cost
     Estimated
Fair Value
 

Less than one year

   $ 34,038       $ 34,076   

Due after one year through five years

     71,943         72,189   

Due after five years through ten years

     340         338   

Due after ten years

     55,000         47,250   
  

 

 

    

 

 

 
   $ 161,321       $ 153,853   
  

 

 

    

 

 

 

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

The estimated fair value and unrealized loss of securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014, segregated by the duration of the unrealized loss, are as follows (in thousands):

 

     At June 30, 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
 

Held-to-maturity:

               

Investment securities:

               

U.S. agency obligations

   $ —         $ —        $ 5,059       $ (2   $ 5,059       $ (2

State and municipal obligations

     1,746         (5     1,029         (4     2,775         (9

Corporate debt securities

     —           —          47,250         (7,750     47,250         (7,750
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     1,746         (5     53,338         (7,756     55,084         (7,761
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     9,832         (10     74,779         (1,270     84,611         (1,280

FNMA

     22,040         (119     38,438         (812     60,478         (931
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     31,872         (129     113,217         (2,082     145,089         (2,211
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 33,618       $ (134   $ 166,555       $ (9,838   $ 200,173       $ (9,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $ 33,618       $ (134   $ 166,555       $ (9,838   $ 200,173       $ (9,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     At December 31, 2014  
     Less than 12 months     12 months or longer     Total  
     Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
    Estimated
Fair
Value
     Unrealized
Losses
 

Available-for-sale:

               

Investment securities:

               

U.S. agency obligations

   $ 19,804       $ (96   $ —         $ —        $ 19,804       $ (96
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

               

Investment securities:

               

U.S. agency obligations

   $ 15,134       $ (9   $ 25,409       $ (41   $ 40,543       $ (50

State and municipal obligations

     947         (1     1,827         (7     2,774         (8

Corporate debt securities

     —           —          45,250         (9,750     45,250         (9,750
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     16,081         (10     72,486         (9,798     88,567         (9,808
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mortgage-backed securities:

               

FHLMC

     9,155         (34     96,975         (1,625     106,130         (1,659

FNMA

     —           —          64,932         (1,182     64,932         (1,182
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     9,155         (34     161,907         (2,807     171,062         (2,841
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 25,236       $ (44   $ 234,393       $ (12,605   $ 259,629       $ (12,649
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities

   $ 45,040       $ (140   $ 234,393       $ (12,605   $ 279,433       $ (12,745
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2015, 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       $ 13,006       Ba1/BB

Chase Capital

     10,000         8,625       Baa2/BBB-

Wells Fargo Capital

     5,000         4,344       A1/BBB+

Huntington Capital

     5,000         4,025       Baa2/BB

Keycorp Capital

     5,000         4,225       Baa2/BB+

PNC Capital

     5,000         4,450       Baa1/BBB-

State Street Capital

     5,000         4,338       A3/BBB

SunTrust Capital

     5,000         4,237       Baa3/BB+
  

 

 

    

 

 

    
   $ 55,000       $ 47,250      
  

 

 

    

 

 

    

At June 30, 2015, the estimated fair value of each corporate debt security was below cost. However, the estimated fair value of the corporate debt securities increased as compared to December 31, 2014. The corporate debt securities are issued by other financial institutions with credit ratings ranging from a high of A1 to a low of BB as rated by one of the internationally-recognized credit rating services. These floating-rate securities were purchased in 1998 and have paid coupon interest continuously since issuance. Floating-rate debt securities such as these pay a fixed interest rate spread over 90-day LIBOR. Following the purchase of these securities, the required spread increased for these types of securities causing a decline in the market price. The Company concluded that unrealized losses on corporate debt securities were only temporarily impaired at June 30, 2015. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments and no interest payments were deferred. All of the financial institutions are also considered well-capitalized. Credit spreads have decreased for these types of securities and market prices have improved. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not have the intent to sell these securities and it is more likely than not that the Company will not be required to sell the securities. The Company has held the securities continuously since 1998 and expects to receive its full principal at maturity in 2028 or prior if called by the issuer. The Company has historically not actively sold investment securities and has not utilized the securities portfolio as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.

The mortgage-backed securities are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”) or Federal National Mortgage Association (“FNMA”), corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were only temporarily impaired at June 30, 2015.

 

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Table of Contents

Note 4. Loans Receivable, Net

Loans receivable, net at June 30, 2015 and December 31, 2014 consisted of the following (in thousands):

 

     June 30, 2015      December 31, 2014  

Real estate:

     

One-to-four family

   $ 747,962       $ 737,889   

Commercial real estate, multi family and land

     698,286         649,951   

Residential construction

     52,428         47,552   

Consumer

     192,351         199,349   

Commercial and industrial

     111,229         83,946   
  

 

 

    

 

 

 

Total loans

     1,802,256         1,718,687   

Loans in process

     (16,073      (16,731

Deferred origination costs, net

     3,230         3,207   

Allowance for loan losses

     (16,534      (16,317
  

 

 

    

 

 

 

Loans receivable, net

   $ 1,772,879       $ 1,688,846   
  

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, loans in the amount of $20,905,000 and $18,307,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of foreclosure amounted to $3,320,000 at June 30, 2015. The amount of foreclosed residential real estate property held by the Company was $3,313,000 at June 30, 2015.

The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At June 30, 2015, the impaired loan portfolio totaled $43,558,000 for which there was a specific allocation in the allowance for loan losses of $2,106,000. At December 31, 2014, the impaired loan portfolio totaled $36,979,000 for which there was a specific allocation in the allowance for loan losses of $2,161,000. The average balance of impaired loans for the three and six months ended June 30, 2015 was $42,584,000 and $39,764,000, respectively and $42,835,000 and $42,402,000 respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2015 and 2014 is as follows (in thousands):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Balance at beginning of period

   $ 16,419       $ 20,934       $ 16,317       $ 20,930   

Provision charged to operations

     300         275         675         805   

Charge-offs

     (331      (419      (689      (1,158

Recoveries

     146         146         231         359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 16,534       $ 20,936       $ 16,534       $ 20,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

The following table presents an analysis of the allowance for loan losses for the three months ended June 30, 2015 and 2014 and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014 (in thousands):

 

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

For the three months ended June 30, 2015

            

Allowance for loan losses:

            

Balance at beginning of period

   $ 4,206      $ 9,300      $ 1,063      $ 767      $ 1,083      $ 16,419   

Provision (benefit) charged to operations

     (608     (65     81        918        (26     300   

Charge-offs

     (68     (15     (248     —          —          (331

Recoveries

     80        9        56        1        —          146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,610      $ 9,229      $ 952      $ 1,686      $ 1,057      $ 16,534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2014

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     207        (337     80        128        197        275   

Charge-offs

     (205     —          (204     (10     —          (419

Recoveries

     105        1        39        1        —          146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2015

            

Allowance for loan losses:

            

Balance at beginning of period

   $ 4,291      $ 8,935      $ 1,146      $ 863      $ 1,082      $ 16,317   

Provision (benefit) charged to operations

     (682     388        175        819        (25     675   

Charge-offs

     (123     (103     (463     —          —          (689

Recoveries

     124        9        94        4        —          231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,610      $ 9,229      $ 952      $ 1,686      $ 1,057      $ 16,534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2014

            

Allowance for loan losses:

            

Balance at beginning of period

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

Provision (benefit) charged to operations

     25        697        196        (171     58        805   

Charge-offs

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

Recoveries

     308        9        41        1        —          359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2015

            

Allowance for loan losses:

            

Ending allowance balance attributed to loans:

            

Individually evaluated for impairment

   $ 33      $ 1,721      $ —        $ 320      $ —        $ 2,074   

Collectively evaluated for impairment

     3,577        7,508        952        1,366        1,057        14,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,610      $ 9,229      $ 952      $ 1,686      $ 1,057      $ 16,534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

            

Loans individually evaluated for impairment

   $ 12,935      $ 27,045      $ 2,328      $ 1,250      $ —        $ 43,558   

Loans collectively evaluated for impairment

     787,455        671,241        190,023        109,979        —          1,758,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

   $ 800,390      $ 698,286      $ 192,351      $ 111,229      $ —        $ 1,802,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

December 31, 2014

                 

Allowance for loan losses:

                 

Ending allowance balance attributed to loans:

                 

Individually evaluated for impairment

   $ 88       $ 1,741       $ 332       $ —         $ —         $ 2,161   

Collectively evaluated for impairment

     4,203         7,194         814         863         1,082         14,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,291       $ 8,935       $ 1,146       $ 863       $ 1,082       $ 16,317   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 12,879       $ 21,165       $ 2,221       $ 714       $ —         $ 36,979   

Loans collectively evaluated for impairment

     772,562         628,786         197,128         83,232         —           1,681,708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 785,441       $ 649,951       $ 199,349       $ 83,946       $ —         $ 1,718,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

A summary of impaired loans at June 30, 2015 and December 31, 2014 is as follows (in thousands):

 

     June 30,
2015
     December 31,
2014
 

Impaired loans with no allocated allowance for loan losses

   $ 32,218       $ 26,487   

Impaired loans with allocated allowance for loan losses

     11,340         10,492   
  

 

 

    

 

 

 
   $ 43,558       $ 36,979   
  

 

 

    

 

 

 

Amount of the allowance for loan losses allocated

   $ 2,106       $ 2,161   
  

 

 

    

 

 

 

At June 30, 2015, impaired loans include troubled debt restructuring loans of $31,450,000 of which $27,618,000 were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2014, impaired loans include troubled debt restructuring loans of $23,493,000 of which $21,462,000 were performing in accordance with their restructured terms and were accruing interest.

The summary of loans individually evaluated for impairment by loan portfolio segment as of June 30, 2015 and December 31, 2014 and for the three months ended June 30, 2015 and 2014 follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

As of June 30, 2015

        

With no related allowance recorded:

        

Residential real estate

   $ 13,094       $ 12,674       $ —     

Commercial real estate

     16,591         16,513         —     

Consumer

     2,813         2,328         —     

Commercial and industrial

     703         703         —     
  

 

 

    

 

 

    

 

 

 
   $ 33,201       $ 32,218       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate

   $ 295       $ 261       $ 65   

Commercial real estate

     10,592         10,532         1,721   

Consumer

     —           —           —     

Commercial and industrial

     547         547         320   
  

 

 

    

 

 

    

 

 

 
   $ 11,434       $ 11,340       $ 2,106   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2014

        

With no related allowance recorded:

        

Residential real estate

   $ 12,351       $ 11,931       $ —     

Commercial real estate

     12,174         12,142         —     

Consumer

     2,243         1,700         —     

Commercial and industrial

     714         714         —     
  

 

 

    

 

 

    

 

 

 
   $ 27,482       $ 26,487       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential real estate

   $ 948       $ 948       $ 88   

Commercial real estate

     9,023         9,023         1,741   

Consumer

     521         521         332   

Commercial and industrial

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 10,492       $ 10,492       $ 2,161   
  

 

 

    

 

 

    

 

 

 

 

24


Table of Contents
     Three months ended June 30,  
     2015      2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 13,724       $ 144       $ 17,707       $ 169   

Commercial real estate

     15,182         97         8,046         20   

Consumer

     2,255         30         2,141         20   

Commercial and industrial

     707         —           276         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,868       $ 271       $ 28,170       $ 212   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 263       $ 3       $ 1,259       $ 15   

Commercial real estate

     10,087         19         12,721         26   

Consumer

     —           —           685         11   

Commercial and industrial

     366         2         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,716       $ 24       $ 14,665       $ 52   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30,  
     2015      2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Residential real estate

   $ 12,775       $ 294       $ 17,608       $ 317   

Commercial real estate

     13,626         169         7,526         70   

Consumer

     2,201         59         2,161         41   

Commercial and industrial

     709         —           277         5   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,311       $ 522       $ 27,572       $ 433   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Residential real estate

   $ 262       $ 6       $ 1,264       $ 31   

Commercial real estate

     10,008         42         12,888         63   

Consumer

     —           —           678         21   

Commercial and industrial

     183         2         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,453       $ 50       $ 14,830       $ 115   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of June 30, 2015 and December 31, 2014 (in thousands):

 

     June 30, 2015      December 31, 2014  

Residential real estate

   $ 4,288       $ 3,115   

Commercial real estate

     14,601         12,758   

Consumer

     1,901         1,877   

Commercial and industrial

     115         557   
  

 

 

    

 

 

 
   $ 20,905       $ 18,307   
  

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 by loan portfolio segment (in thousands):

 

25


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

June 30, 2015

                 

Residential real estate

   $ 4,797       $ 1,846       $ 3,204       $ 9,847       $ 790,543       $ 800,390   

Commercial real estate

     1,374         —           14,601         15,975         682,311         698,286   

Consumer

     263         323         1,608         2,194         190,157         192,351   

Commercial and industrial

     —           —           115         115         111,114         111,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,434       $ 2,169       $ 19,528       $ 28,131       $ 1,774,125       $ 1,802,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                 

Residential real estate

   $ 7,365       $ 1,695       $ 1,619       $ 10,679       $ 774,762       $ 785,441   

Commercial real estate

     119         —           12,758         12,877         637,074         649,951   

Consumer

     845         232         1,833         2,910         196,439         199,349   

Commercial and industrial

     —           —           557         557         83,389         83,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,329       $ 1,927       $ 16,767       $ 27,023       $ 1,691,664       $ 1,718,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment is as follows (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

June 30, 2015

              

Commercial real estate

   $ 650,776       $ 24,264       $ 23,246       $ —         $ 698,286   

Commercial and industrial

     106,551         1,867         2,811         —           111,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 757,327       $ 26,131       $ 26,057       $ —         $ 809,515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

              

Commercial real estate

   $ 611,987       $ 12,684       $ 25,280       $ —         $ 649,951   

Commercial and industrial

     82,693         173         1,080         —           83,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 694,680       $ 12,857       $ 26,360       $ —         $ 733,897   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For residential, consumer and small business loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2015 and December 31, 2014 (in thousands):

 

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Table of Contents
     Residential Real Estate  
     Residential      Consumer  

June 30, 2105

     

Performing

   $ 796,102       $ 190,450   

Non-performing

     4,288         1,901   
  

 

 

    

 

 

 
   $ 800,390       $ 192,351   
  

 

 

    

 

 

 

December 31, 2014

     

Performing

   $ 782,326       $ 197,472   

Non-performing

     3,115         1,877   
  

 

 

    

 

 

 
   $ 785,441       $ 199,349   
  

 

 

    

 

 

 

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Included in the non-accrual loan total at June 30, 2015 and December 31, 2014 were $3,832,000 and $2,031,000, respectively, of troubled debt restructurings. At June 30, 2015 and December 31, 2014, the Company has allocated $482,000 and $419,000, respectively, of specific reserves to loans that are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at June 30, 2015 and December 31, 2014, which totaled $27,618,000 and $21,462,000, respectively. In the second quarter of 2015, the Bank restructured a commercial real estate loan with an outstanding balance of $3.9 million by extending the term and lowering the monthly repayment amount. The interest rate was unchanged. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.

The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2015 and 2014, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2015 and 2014 (dollars in thousands):

 

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

Three months ended June 30, 2015

        

Troubled Debt Restructurings:

        

Residential real estate

   2    $ 268       $ 231   

Commercial real estate

   1      3,939         3,939   

Consumer

   4      259         243   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Six months ended June 30, 2015

        

Troubled Debt Restructurings:

        

Residential real estate

   4    $ 517       $ 480   

Commercial real estate

   3      6,033         5,944   

Consumer

   8      395         379   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Three months ended June 30, 2014

        

Troubled Debt Restructurings:

        

Residential real estate

   1    $ 358       $ 358   

Consumer

   3      93         97   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

 

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

Six months ended June 30, 2014

        

Troubled Debt Restructurings:

        

Residential real estate

     4       $ 882       $ 805   

Consumer

     5         168         171   

 

     Number of Loans      Recorded Investment  

Troubled Debt Restructurings

     

Which Subsequently Defaulted:

     None         None   

Note 5. Reserve for Repurchased Loans and Loss Sharing Obligations

The reserve for repurchased loans and loss sharing obligations was $1.0 million at June 30, 2015, unchanged from December 31, 2014 and was $1.3 million at June 30, 2014 a decrease of $163,000 from December 31, 2013 due to realized losses. The reserve for repurchased loans and loss sharing obligations was established to provide for expected losses related to repurchase requests which may be received on residential mortgage loans previously sold to investors and other loss sharing obligations. The reserve is included in other liabilities in the accompanying statements of financial condition.

At June 30, 2015, and December 31, 2014, there were no outstanding loan repurchase requests.

Note 6. Deposits

The major types of deposits at June 30, 2015 and December 31, 2014 were as follows (in thousands):

 

Type of Account

   June 30, 2015      December 31, 2014  

Non-interest-bearing

   $ 328,175       $ 279,944   

Interest-bearing checking

     794,310         836,120   

Money market deposit

     123,017         95,663   

Savings

     306,079         301,190   

Time deposits

     210,094         207,218   
  

 

 

    

 

 

 

Total deposits

   $ 1,761,675       $ 1,720,135   
  

 

 

    

 

 

 

Included in time deposits at June 30, 2015 and December 31, 2014, is $73,900,000 and $64,416,000, respectively, in deposits of $100,000 and over.

Note 7. Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” which applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The amendments in this update clarify when an in-substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in ASU 2014-04 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this standard in the first quarter of 2015 did not to have a material impact on the Company’s consolidated financial statements.

Note 8. Fair Value Measurements

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

 

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The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Movements within the fair value hierarchy are recognized at the end of the applicable reporting period. There were no transfers between the levels of the fair value hierarchy for the three and six months ended June 30, 2015. The fair value hierarchy is as follows:

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

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

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

Assets and Liabilities Measured at Fair Value

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

Securities Available-For-Sale

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

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

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

Other Real Estate Owned and Impaired Loans

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

 

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Table of Contents

The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

            Fair Value Measurements at Reporting Date Using:  

June 30, 2015

   Total Fair
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Items measured on a recurring basis:

           

Investment securities available-for-sale:

           

U.S. agency obligations

   $ 30,030       $ —         $ 30,030       $ —     

Items measured on a non-recurring basis:

           

Other real estate owned

     3,357         —           —           3,357   

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

     13,093         —           —           13,093   

 

            Fair Value Measurements at Reporting Date Using:  

December 31, 2014

   Total Fair
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Items measured on a recurring basis:

           

Investment securities available-for-sale:

           

U.S. agency obligations

   $ 19,804       $ —         $ 19,804       $ —     

Items measured on a non-recurring basis:

           

Other real estate owned

     4,664         —           —           4,664   

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

     11,675         —           —           11,675   

Assets and Liabilities Disclosed at Fair Value

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

Cash and Due from Banks

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

Securities Held-to-Maturity

Securities classified as held-to-maturity are carried at amortized cost, as the Company has the positive intent and ability to hold these securities to maturity. The Company determines the fair value of the securities utilizing Level 1, Level 2 and infrequently Level 3 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s investment and mortgage-backed securities, however, are fixed income instruments that are not quoted on an exchange, but are bought and sold in active markets. Prices for these instruments are obtained through third party pricing vendors or security industry sources that actively participate in the buying and selling of securities. Prices obtained from these sources include market quotations and matrix pricing. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities, but comparing the securities to benchmark or comparable securities.

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

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

 

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Table of Contents

Federal Home Loan Bank of New York Stock

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

Loans

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

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

Deposits Other than Time Deposits

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

Time Deposits

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

Securities Sold Under Agreements to Repurchase with Retail Customers

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

Borrowed Funds

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

The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of June 30, 2015 and December 31, 2014 are presented in the following tables (in thousands):

 

            Fair Value Measurements at Reporting Date Using:  

June 30, 2105

   Book
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Financial Assets:

           

Cash and due from banks

   $ 40,359       $ 40,359       $ —         $ —     

Securities held-to-maturity

     414,625         —           420,409         —     

Federal Home Loan Bank of New York stock

     18,740         —           —           18,740   

Loans receivable and mortgage loans held for sale

     1,774,333         —           —           1,785,437   

Financial Liabilities:

           

Deposits other than time deposits

     1,551,581         —           1,551,581         —     

Time deposits

     210,094         —           211,369         —     

Securities sold under agreements to repurchase with retail customers

     71,687         71,687         —           —     

Federal Home Loan Bank advances and other borrowings

     323,116         —           323,536         —     

 

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Table of Contents
            Fair Value Measurements at Reporting Date Using:  

December 31, 2014

   Book
Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

Financial Assets:

           

Cash and due from banks

   $ 36,117       $ 36,117       $ —         $ —     

Securities held-to-maturity

     469,417         —           474,215         —     

Federal Home Loan Bank of New York stock

     19,170         —           —           19,170   

Loans receivable and mortgage loans held for sale

     1,693,047         —           —           1,709,819   

Financial Liabilities:

           

Deposits other than time deposits

     1,512,917         —           1,512,917         —     

Time deposits

     207,218         —           208,651         —     

Securities sold under agreements to repurchase with retail customers

     67,812         67,812         —           —     

Federal Home Loan Bank advances and other borrowings

     332,738         —           332,432         —     

Limitations

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

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

Note 9. Subsequent Events

On July 31, 2015 the Company closed on the acquisition of Colonial American Bank (“Colonial”) headquartered in Middletown, New Jersey, in an all stock transaction valued at approximately $11.9 million. Each outstanding share of Colonial common stock and preferred stock was exchanged for 0.3658 shares of the Company’s common stock for a total issuance of 660,098 shares.

Colonial operates two full service banking offices in Middletown and Shrewsbury, New Jersey with total assets of $143.2 million, including $125.8 million in total loans and $127.5 million in total deposits as of June 30, 2015. The combined institution will have 26 offices serving the central New Jersey market.

Additionally, on July 31, 2015, the Bank executed an agreement to purchase an existing retail branch with total deposits of $24.6 million and core deposits of $20.2 million located in the Toms River market.

 

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Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2014 Form 10-K. There were no material changes to risk factors relevant to the Company’s operations since December 31, 2014.

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

On July 24, 2014, the Company announced the authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares. Information regarding the Company’s common stock repurchases for the three month period ended June 30, 2015 is as follows:

 

Period

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

April 1 through

April 30, 2015

     0       $ 0         0         0   

May 1, 2015 through

May 31, 2015

     104,317         17.10         104,317         403,938   

June 1, 2015 through

June 30, 2015

     45,480         17.30         45,480         358,458   

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Exhibits:

 

  
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.0    Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002
101.0    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

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Table of Contents

SIGNATURES

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

 

 

OceanFirst Financial Corp.

  Registrant
DATE: August 7, 2015  

/s/ Christopher D. Maher

  Christopher D. Maher
  President and Chief Executive Officer
DATE: August 7, 2015  

/s/ Michael J. Fitzpatrick

  Michael J. Fitzpatrick
  Executive Vice President and Chief Financial Officer

 

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Table of Contents

Exhibit Index

 

Exhibit

  

Description

  

Page

 
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      36   
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      37   
  32.0    Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002      38   
101.0    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.   

 

35