UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
For the quarterly period ended June 30, 2016
For the transition period from to
Commission file number 001-11713
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x.
As of August 4, 2016 there were 25,839,744 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.
INDEX TO FORM 10-Q
Item 1.
Consolidated Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of June 30, 2016 (unaudited) and December 31, 2015
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2016 and 2015
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2016 and 2015
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and 2015
Notes to Unaudited Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans receivable, net
Deposits
Stockholders’ equity
SELECTED OPERATING DATA:
Net interest income
Provision for loan losses
Other income
Operating expenses
Net income
Diluted earnings per share
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per share
Tangible stockholders’ equity per share (1)
Cash dividend per share
Stockholders’ equity to total assets
Tangible stockholders’ equity to total tangible assets (1)
Return on average assets (2) (3)
Return on average stockholders’ equity (2) (3)
Return on average tangible stockholders’ equity (1) (2) (3)
Net interest rate spread
Net interest margin
Operating expenses to average assets (2) (3)
Efficiency ratio (3)
ASSET QUALITY:
Non-performing loans
Non-performing assets
Allowance for loan losses as a percent of total loans receivable
Allowance for loan losses as a percent of total non-performing loans
Non-performing loans as a percent of total loans receivable
Non-performing assets as a percent of total assets
Wealth Management
Assets under administration
1
Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank (the “Bank”), a community bank headquartered in Ocean County, New Jersey, serving business and retail customers in the central and southern New Jersey region. The term “Company” refers to OceanFirst Financial Corp., OceanFirst Bank and all of the Bank’s subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, wealth management, deposit accounts, the sale of investment products, loan originations, loan sales, and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, Federal deposit insurance, data processing and general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.
Interest-earning assets, both loans and securities, are generally priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are generally priced against shorter-term indices. The Company has mitigated the adverse impact of low absolute levels of interest rates by growing commercial loans, resulting in a shift in asset mix from lower-yielding securities into higher-yielding loans. Based upon current economic conditions, characterized by moderate growth and low inflation, interest rates may remain at, or close to, historically low levels with increases in the Federal funds rate expected to be gradual. The continuation of the low interest rate environment may have an adverse impact on the Company’s net interest margin in future periods.
In addition to the interest rate environment, the Company’s results are affected by economic conditions. Recent economic indicators point to some improvement in the U.S. economy, which expanded moderately in 2015 and continues to show modest growth again in 2016. Labor market conditions improved as the national and local unemployment rates in the first half of 2016 both decreased compared to prior year levels, while measures of inflation remain subdued.
Highlights of the Company’s financial results and corporate activities for the three months ended June 30, 2016 were as follows:
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”), valued at $195 million. The acquisition added 22 new branches, $1.5 billion in assets, $1.2 billion in loans, and $1.2 billion in deposits. The Company anticipates that core system integration and rebranding will occur in October 2016, providing for the realization of additional cost savings entering the first quarter of 2017.
On July 13, 2016, the Company announced it had entered into a definitive agreement and plan of merger pursuant to which Ocean Shore Holding Company (“Ocean Shore”), the holding company and parent of Ocean City Home Bank, will merge with and into OceanFirst in a transaction valued at approximately $145.6 million. Ocean City Home Bank is one of southern New Jersey’s oldest and largest community banks with 11 branches, $1.1 billion in assets, $818 million in total deposits and $796 million in gross loans. The transaction is subject to customary regulatory and stockholder approvals.
Net income for the three months ended June 30, 2016, was $3.7 million, or $0.16 per diluted share, as compared to net income of $5.1 million, or $0.31 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2016 includes merger related expenses of $7.2 million. In connection with the Cape acquisition, the Bank deleveraged the combined balance sheet through the sale of lower-yielding securities and the prepayment of existing term borrowings in order to improve the net interest margin, reduce interest rate sensitivity, and increase capital ratios. The implementation of this strategy resulted in an expense of $136,000 relating to the prepayment of Federal Home Loan Bank (“FHLB”) borrowings and a loss of $12,000 on the sale of investment securities available-for-sale (the “deleveraging” costs). The after-tax impact of merger related expenses and deleveraging costs was $5.0 million which reduced diluted earnings per share by $0.22. Excluding these items, diluted earnings per share increased over the prior year period due to higher net interest income and other income, partly offset by higher operating expenses and provision for loan losses.
Net interest income for the three months ended June 30, 2016 increased to $30.0 million, as compared to $18.4 million for the corresponding prior year period reflecting an increase in interest-earning assets and a higher net interest margin due to the Cape acquisition.
Other income increased to $4.9 million for the three months ended June 30, 2016, as compared to $4.2 million for the same prior year period. The increase was primarily due to the impact of the Cape acquisition which added $951,000 to total other income. Operating expenses, excluding merger related expenses, increased $7.2 million for the three months ended June 30, 2016, as compared to the same prior year period primarily due to the operations of Cape and Colonial American Bank (acquired July 31, 2015), the investment in commercial lending and the impact of operating new branches.
2
The Company remains well-capitalized with a tangible common equity ratio of 8.51% at June 30, 2016. On July 24, 2014, the Company announced the authorization of the Board of Directors to repurchase up to 5% of the Company’s outstanding common stock, or 867,923 shares. No shares were repurchased during the quarter, and 244,804 shares remained available for repurchase at June 30, 2016.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.
The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2016 and 2015. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.
Assets
Interest-earning assets:
Interest-earning deposits and short-term investments
Securities (1) and FHLB stock
Loans receivable, net (2):
Commercial
Residential
Home equity
Other
Allowance for loan loss net of deferred loan fees
Total loans
Total interest-earning assets
Non-interest-earning assets
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing checking
Money market
Savings
Time deposits
Total
Securities sold under agreements to repurchase
FHLB advances
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing deposits
Non-interest-bearing liabilities
Total liabilities
Total liabilities and stockholders’ equity
Net interest rate spread (3)
Net interest margin (4)
Total cost of deposits (including non-interest-bearing deposits)
3
Total liabilities and stockholders equity
Total cost of deposits (including non-interest bearing deposits)
4
Comparison of Financial Condition at June 30, 2016 and December 31, 2015
Total assets increased by $1,454 million to $4,047 million at June 30, 2016, from $2,593 million at December 31, 2015 as a result of the Cape acquisition. Loans receivable, net, increased by $1,159 million, to $3,130 million at June 30, 2016, from $1,971 million at December 31, 2015. Excluding the Cape acquisition, loans receivable net, increased $2.4 million. As part of the acquisition of Cape, Colonial American Bank (“Colonial”) and the purchase of an existing retail branch in the Toms River market in the first quarter of 2016, the Company has outstanding goodwill and core deposit intangible at June 30, 2016 of $67.1 million and $3.9 million, respectively.
Deposits increased by $1,290 million, to $3,206 million at June 30, 2016, from $1,917 million at December 31, 2015, including deposits of $1,248 million acquired from Cape and $17.0 million acquired through the purchase of an existing retail branch located in the Toms River market. The loan-to-deposit ratio at June 30, 2016 was 97.6%, as compared to 102.8% at December 31, 2015. The deposit growth partly funded a decrease in FHLB advances of $11.8 million, to $312.6 million at June 30, 2016, from $324.4 million at December 31, 2015.
Stockholders’ equity increased to $409.3 million at June 30, 2016, as compared to $238.4 million at December 31, 2015. The acquisition of Cape added $165.9 million to stockholder’s equity. At June 30, 2016, there were 244,804 shares available for repurchase under the stock repurchase program adopted in July of 2014. Tangible stockholders’ equity per common share decreased to $13.14 at June 30, 2016, as compared to $13.67 at December 31, 2015 due to the addition of intangible assets in the Cape acquisition.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2016 and June 30, 2015
General
On July 31, 2015, the Company completed its acquisition of Colonial which added $142.4 million to assets, $121.2 million to loans, and $123.3 million to deposits. Colonial’s results of operations are included in the consolidated results for the three and six months ended June 30, 2016, but are excluded from the results of operations for the corresponding prior year periods.
On May 2, 2016, the Company completed its acquisition of Cape, which added $1.5 billion to assets, $1.2 billion to loans and $1.2 billion to deposits. Cape’s results of operations from May 2, 2016 through June 30, 2016 are included in the consolidated results for the three and six months ended June 30, 2016, but are excluded from the results of operations for the corresponding prior year periods.
Net income for the three months ended June 30, 2016 was $3.7 million, or $0.16 per diluted share, as compared to net income of $5.1 million, or $0.31 per diluted share for the corresponding prior year period. Net income for the six months ended June 30, 2016 was $7.9 million, or $0.39 per diluted share, as compared to net income of $10.4 million, or $0.63 per diluted share, for the corresponding prior year period. Net income for the three and six months ended June 30, 2016 includes merger related expenses of $7.2 million, and $8.6 million, respectively. Additionally, net income for the three and six months ended June 30, 2016, includes a Federal Home Loan Bank prepayment fee of $136,000, and a loss on the sale of investment securities available-for-sale of $12,000. The after-tax impact of merger related expenses and the deleveraging costs reduced diluted earnings per share by $0.22 and $0.29 for the three and six months ended June 30, 2016, respectively. Excluding the merger, related expenses and the deleveraging costs, diluted earnings per share increased over the prior year periods due to higher net interest income and other income, partly offset by higher operating expenses and provision for loan losses.
Interest Income
Interest income for the three months and six months ended June 30, 2016 increased to $33.1 million and $56.2 million, respectively, as compared to $20.6 million and $40.7 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1,102 million and $668.5 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods benefiting from the interest-earning assets acquired from Cape and Colonial which averaged $980.2 million and $545.6 million, respectively, for the three and six months ended June 30, 2016. Average loans receivable, net, increased $1,009 million and $644.1 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods. The increases attributable to Cape and Colonial were $866.4 million and $483.9 million, respectively. The yield on average interest-earning assets increased to 3.92% and 3.84%, respectively, for the three and six months ended June 30, 2016, as compared to 3.61% and 3.60%, respectively, for the same prior year periods. The yields on average interest-earning assets for the three and six months ended June 30, 2016 benefited from the accretion of purchase accounting adjustments for Cape and Colonial, the higher-yielding interest-earning assets acquired from Cape and the change in the average balance sheet mix in favor of higher-yielding loans receivable over lower-yielding investment securities.
5
Interest Expense
Interest expense for the three and six months ended June 30, 2016 was $3.1 million and $5.6 million, respectively, as compared to $2.1 million and $4.2 million, respectively, in the corresponding prior year periods. The cost of average interest-bearing liabilities at 0.46% for the three months ended June 30, 2016, was unchanged as compared to the prior year period. For the six months ended June 30, 2016, the cost of average interest-bearing liabilities increased to 0.48%, from 0.46%, in the prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.25% for both the three and six months ended June 30, 2016, as compared to 0.22% for both prior year periods.
Net Interest Income
Net interest income for the three and six months ended June 30, 2016 increased to $30.0 million and $50.6 million, respectively, as compared to $18.4 million and $36.6 million, respectively, in the same prior year periods, reflecting an increase in interest-earning assets and a higher net interest margin. Average interest-earning assets increased $1,102 million and $668.5 million, respectively, for the three and six months ended June 30, 2016, as compared to the same prior year periods. The three and six months ended June 30, 2016 were favorably impacted by the interest-earning assets acquired from Cape and Colonial, which averaged $980.2 and $545.6 million, respectively. The net interest margin increased to 3.55% and 3.45%, respectively, for the three and six months ended June 30, 2016 as compared to 3.23% for both prior year periods. Included in net interest income for the three and six months ended June 30, 2016, is $1.3 million and $1.4 million, respectively, of net accretion of purchase accounting adjustments from Cape and Colonial.
Provision for Loan Losses
For the three and six months ended June 30, 2016, the provision for loan losses was $662,000 and $1.2 million, respectively, as compared to $300,000 and $675,000, respectively, for the corresponding prior year periods. Net charge-offs were $198,000 and $1.3 million, respectively, for the three and six months ended June 30, 2016, as compared to net charge-offs of $185,000 and $458,000, respectively, in the corresponding prior year periods. The increase in net charge-offs for the six months ended June 30, 2016 was primarily due to first quarter charge-offs of $886,000 on two non-performing commercial loans. Non-performing loans decreased to $15.3 million at June 30, 2016, as compared to $16.2 million at December 31, 2015.
Other Income
For the three and six months ended June 30, 2016, other income increased to $4.9 million and $8.3 million, respectively, as compared to $4.2 million and $8.2 million, respectively, in the same prior year periods. The increases from the prior periods were primarily due to the impact of the Cape acquisition which added $951,000 to total other income for the three and six months ended June 30, 2016, as compared to the same prior year periods. Excluding Cape, other income decreased $238,000 and $848,000, respectively, as compared to the same prior year periods. The decreases, excluding Cape, were partly due to higher net losses from other real estate operations of $196,000 and $623,000, respectively, as compared to the prior year periods. The losses were predominately due to the seasonal operations of the hotel, golf and banquet facility acquired as other real estate owned in the fourth quarter of 2015. The Bank is currently engaged in a sales process with qualified buyers for the disposition of this property. The results for the three and six months ended June 30, 2016 included no gains on sale of loan servicing, as compared to $30,000 and $111,000, respectively, in the same prior year periods.
Operating Expenses
Operating expenses increased to $28.6 million and $45.4 million, respectively, for the three and six months ended June 30, 2016, as compared to $14.4 million and $28.1 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2016 include $7.2 million and $8.6 million, respectively, in merger related expenses relating to the acquisition of Cape, as compared to merger related expenses of $184,000 and $234,000, respectively, in the prior year periods relating to the acquisition of Colonial. Excluding merger related expenses, the increases in operating expenses over the prior year were primarily due to the operations of Cape and Colonial, which added $5.3 million and $5.8 million for the quarter and year-to-date, respectively; the investment in commercial lending which added expenses of $339,000 and $780,000 for the quarter and year-to-date, respectively; the impact of new branches which added expenses of $391,000 and $722,000 for the quarter and year-to-date, respectively; and the FHLB prepayment fee of $136,000.
Provision for Income Taxes
The provision for income taxes was $1.9 million and $4.4 million, respectively, for the three and six months ended June 30, 2016, as compared to $2.8 million and $5.5 million, respectively, for the corresponding prior year periods. The effective tax was 34.5% and 35.8%, respectively, for the three and six months ended June 30, 2016, as compared to 35.1% and 34.7%, respectively, for prior year periods. The variances in the effective tax rate were primarily due to the timing of non-deductible merger related expenses.
6
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, FHLB and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises.
At June 30, 2016, the Company had $61.0 million in outstanding overnight borrowings from the FHLB as compared to $82.0 million outstanding at December 31, 2015. The Company utilizes overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including the overnight borrowings, of $312.6 million and $324.4 million, respectively, at June 30, 2016 and December 31, 2015.
The Company’s cash needs for the six months ended June 30, 2016 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, proceeds from maturities and calls of investment securities, proceeds from sale of available–for-sale securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, and to reduce borrowings. The Company’s cash needs for the six months ended June 30, 2015 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, proceeds from maturities of investment securities and deposit growth. The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of investment securities and to reduce FHLB borrowings.
In the normal course of business, the Company routinely enters into various off-balance-sheet commitments. At June 30, 2016, outstanding undrawn lines of credit totaled $485.8 million; outstanding commitments to originate loans totaled $85.0 million; and outstanding commitments to sell loans totaled $12.4 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.
Time deposits scheduled to mature in one year or less totaled $283.9 million at June 30, 2016. Based upon historical experience management estimates that a significant portion of such time deposits will remain with the Company.
The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank continues to maintain significant liquidity under all stress scenarios.
Under the Company’s common stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the six months ended June 30, 2016, the Company did not repurchase any shares of common stock compared with repurchases of 259,940 shares at a cost of $4.5 million for the six months ended June 30, 2015. At June 30, 2016, there were 244,804 shares available to be repurchased under the stock repurchase program authorized in July of 2014.
Cash dividends on common stock declared and paid during the first six months of 2016 were $5.5 million, as compared to $4.3 million in the same prior year period. The increase in dividends was a result of the additional shares issued in the Cape and Colonial acquisitions. On July 20, 2016, the Board of Directors declared a quarterly cash dividend of thirteen cents ($0.13) per common share. The dividend is payable on August 19, 2016 to stockholders of record at the close of business on August 8, 2016.
The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary and the issuance of preferred and common stock and long-term debt. At December 31, 2015, the Company had received notice from the Federal Reserve Bank of Philadelphia that it does not object to the payment of $12.0 million in dividends from the Bank to the Company over the next three quarters of 2016, although the Federal Reserve Bank reserved the right to revoke the approval at any time if a safety and soundness concern arises. For the six months ended June 30, 2016, the Company received a dividend payment of $4.0 million from the Bank and $8.0 million remained to be paid. The Bank elected not to pay a dividend during the second quarter of 2016 in order to retain capital subsequent to the Cape acquisition. The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital constraints imposed by the applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If the Bank is unable to pay dividends to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid, or be able to meet current debt obligations. At June 30, 2016, OceanFirst Financial Corp. held $15.3 million in cash.
7
As of June 30, 2016, the Company and the Bank exceeded all regulatory capital requirements as follows (in thousands):
Tier 1 capital (to average assets)
Common equity Tier 1 (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
OceanFirst Bank
The Company and the Bank are considered “well-capitalized” under the Prompt Corrective Action Regulations.
At June 30, 2016, the Company maintained tangible common equity of $338.3 million, for a tangible common equity to assets ratio of 8.51%.
Off-Balance-Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. The Company also has outstanding commitments to sell loans amounting to $12.4 million at June 30, 2016.
The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2016 (in thousands):
Contractual Obligation
Debt Obligations
Commitments to Fund Undrawn Lines of Credit
Consumer
Commitments to Originate Loans
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.
8
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.
Non-performing loans:
Commercial and industrial
Commercial real estate – owner occupied
Commercial real estate - investor
Residential mortgage
Home equity loans and lines
Other consumer
Total non-performing loans
Other real estate owned
Total non-performing assets
Purchased credit impaired (“PCI”) loans
Delinquent loans 30-89 days
The Company’s non-performing loans totaled $15.3 million at June 30, 2016, as compared to $18.3 million at December 31, 2015. Included in the non-performing loans total at June 30, 2016 was $3.0 million of troubled debt restructured loans, as compared to $4.9 million of troubled debt restructured loans at December 31, 2015. Non-performing loans are concentrated in residential mortgage, which comprise 46.3% of the total at June 30, 2016. The decrease in commercial real estate – owner occupied was primarily due to payoffs and loans returning to accrual status. Non-performing loans do not include $9.7 million of purchased credit impaired loans acquired from Cape and Colonial. At June 30, 2016, the allowance for loan losses totaled $16.7 million, or 0.53% of total loans, as compared to $16.7 million, or 0.84% of total loans at December 31, 2015. These ratios exclude existing fair value credit marks of $27.3 million at June 30, 2016 on the Cape and Colonial loans and $2.2 million at December 31, 2015 on the Colonial loans. These loans were acquired at fair value with no related allowances for loan losses. Other real estate owned includes $7.0 million relating to the hotel, golf and banquet facility located in New Jersey which the Company acquired in the fourth quarter of 2015.
The Company classifies loans and other assets in accordance with regulatory guidelines as follows (in thousands):
Special Mention
Substandard
The largest Substandard loan relationship is comprised of several credit facilities to a marina with an aggregate balance of $5.2 million. The loans are well collateralized by commercial and residential real estate, all business assets and also carry a personal guarantee. The largest Special Mention loan is a $2.7 million commercial real estate loan that is well secured by an industrial building and property.
9
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or fair value. Policies with respect to the methodology used to determine the allowance for loan losses and judgments regarding securities and goodwill impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. Goodwill will be evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Further description of the risks and uncertainties to the business are included in Item 1, Business, and Item 1A, Risk Factors, of the Company’s 2015 Form 10-K and Item 1A, Risk Factors, of this 10-Q.
The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2016, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.
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At June 30, 2016, the Company’s one-year gap was positive 0.71% as compared to negative 1.71% at December 31, 2015.
At June 30, 2016
Interest-earning assets: (1)
Investment securities
Mortgage-backed securities
FHLB stock
Loans receivable (2)
Money market deposit accounts
Savings accounts
Interest-bearing checking accounts
Securities sold under agreements to repurchase and other borrowings
Interest sensitivity gap (3)
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap as a percent of total interest-earning assets
Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in economic value of equity (“EVE”) and net interest income under varying rate shocks as of June 30, 2016 and December 31, 2015. All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2015 Form 10-K.
Change in Interest Rates inBasis Points (Rate Shock)
300
200
100
Static
(100)
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The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Consolidated Statements of Financial Condition
(dollars in thousands, except per share amounts)
Cash and due from banks
Securities available-for-sale, at estimated fair value
Securities held-to-maturity, net (estimated fair value of $520,971 at June 30, 2016 and $397,763 at December 31, 2015)
Federal Home Loan Bank of New York stock, at cost
Mortgage loans held for sale
Interest and dividends receivable
Premises and equipment, net
Servicing asset
Bank Owned Life Insurance
Deferred tax asset
Other assets
Core deposit intangible
Goodwill
Securities sold under agreements to repurchase with retail customers
Federal Home Loan Bank advances
Advances by borrowers for taxes and insurance
Other liabilities
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, no shares issued
Common stock, $.01 par value, 55,000,000 shares authorized, 33,566,772 shares issued and 25,748,898 and 17,286,557 shares outstanding at June 30, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Unallocated common stock held by Employee Stock Ownership Plan
Treasury stock, 7,817,874 and 16,280,215 shares at June 30, 2016 and December 31, 2015, respectively
Common stock acquired by Deferred Compensation Plan
Deferred Compensation Plan Liability
Total stockholders’ equity
See accompanying Notes to Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Interest income:
Loans
Investment securities and other
Total interest income
Interest expense:
Borrowed funds
Total interest expense
Net interest income after provision for loan losses
Other income:
Bankcard services revenue
Wealth management revenue
Fees and service charges
Loan servicing income
Net loss on sale of investment securities available-for-sale
Net gain on sale of loan servicing
Net gain on sales of loans available-for-sale
Net loss from other real estate operations
Income from Bank Owned Life Insurance
Total other income
Operating expenses:
Compensation and employee benefits
Occupancy
Equipment
Marketing
Federal deposit insurance
Data processing
Check card processing
Professional fees
Other operating expense
Federal Home Loan Bank prepayment fee
Amortization of core deposit intangible
Merger related expenses
Total operating expenses
Income before provision for income taxes
Provision for income taxes
Basic earnings per share
Average basic shares outstanding
Average diluted shares outstanding
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income:
Unrealized (loss) gain on securities (net of tax benefit of $(34) and tax expense of $37 in 2016, and net of tax expense of $1 and $98 in 2015, respectively)
Accretion of unrealized loss on securities reclassified to held-to-maturity (net of tax expense of $128 and $277 in 2016 and $138 and $263 in 2015, respectively)
Reclassification adjustment for losses included in net income (net of tax benefit of $5 in 2016)
Total comprehensive income
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Consolidated Statements of
Changes in Stockholders’ Equity (Unaudited)
Three months ended June 30, 2016 and 2015
Balance at December 31, 2014
Other comprehensive income, net of tax
Tax benefit of stock plans
Stock awards
Treasury stock allocated to restricted stock plan
Purchased 259,940 shares of common stock
Allocation of ESOP stock
Cash dividend $0.26 per share
Exercise of stock options
Purchase of stock for the deferred compensation plan
Balance at June 30, 2015
Balance at December 31, 2015
Tax expense of stock plans
Issued 8,282,296 treasury shares to finance acquisition
Sale of stock for the deferred compensation plan
Balance at June 30, 2016
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Consolidated Statements of Cash Flows
(dollars in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
Amortization of servicing asset
Net premium amortization in excess of discount accretion on securities
Net amortization of deferred costs and discounts on loans
Net accretion/amortization of purchase accounting adjustments
Net loss (gain) on sale of other real estate owned
Net loss on sales of available-for-sale securities
Net gain on sales of loans
Proceeds from sales of mortgage loans held for sale
Mortgage loans originated for sale
Proceeds from Bank Owned Life Insurance
Increase in value of Bank Owned Life Insurance
Increase in interest and dividends receivable
Decrease in other assets
Increase (decrease) in other liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Net increase in loans receivable
Purchase of loans receivable
Purchase of investment securities available-for-sale
Proceeds from maturities and calls of investment securities held-to-maturity
Proceeds from sales of securities available-for-sale
Principal repayments on mortgage-backed securities held-to-maturity
Decrease in Federal Home Loan Bank of New York stock
Proceeds from sales of other real estate owned
Purchases of premises and equipment
Cash received, net of cash consideration paid for acquisition
Cash acquired, net of cash paid for branch acquisition
Net cash provided by (used in) investing activities
Continued
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Consolidated Statements of Cash Flows (Continued)
Cash flows from financing activities:
Increase in deposits
Decrease in short-term borrowings
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Repayments of other borrowings
Increase in advances by borrowers for taxes and insurance
Purchase of treasury stock
Dividends paid
Tax (expense) benefit of stock plans
Net cash (used in) provided by financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes
Non-cash activities:
Accretion of unrealized loss on securities reclassified to held-to-maturity
Loans charged-off, net
Transfer of loans receivable to other real estate owned
Acquisition:
Non-cash assets acquired:
Securities
Federal Home Loan Bank of New York stock
Premises & equipment
Goodwill and other intangible assets, net
Total non-cash assets acquired
Liabilities assumed:
Total liabilities assumed
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Notes To Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its subsidiaries.
The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations that may be expected for all of 2016. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2015.
Note 2. Business Combinations
Branch Acquisition
On March 11, 2016, the Company completed its acquisition of an existing retail branch in the Toms River market. Under the terms of the Purchase and Assumption Agreement dated July 31, 2015, the Company paid a deposit premium of $340,000, equal to 2.50% of core deposits; i.e., all deposits other than time deposits, government deposits, and fiduciary accounts. Up to 1.0% of the deposit premium was contingent on the core deposit balance seventy-five days after closing.
The branch acquisition was accounted for using the purchase method of accounting. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date as additional information regarding the acquisition date fair values becomes available.
The following table presents the assets acquired and liabilities assumed as of March 11, 2016 and their initial fair value estimates (in thousands).
Assets Acquired
Cash and cash equivalents
Total assets acquired
Liabilities Assumed
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Cape Bancorp Acquisition
On May 2, 2016, the Company completed its acquisition of Cape Bancorp, Inc. (“Cape”), which after purchase accounting adjustments added $1.5 billion to assets, $1.2 billion to loans, and $1.2 billion to deposits. Total consideration paid for Cape was $196.4 million, including cash consideration of $30.5 million. Cape was merged with and into the Company’s subsidiary, OceanFirst Bank, as of the date of acquisition.
The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the fair value of the net assets acquired has been recorded as goodwill.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Cape, net of total consideration paid (in thousands):
Total Purchase Price:
Assets acquired:
Securities and Federal Home Loan Bank Stock
Loans:
Specific credit fair value on credit impaired loans
General credit fair value
Interest rate fair value
Reverse allowance for loan losses
Reverse net deferred fees, premiums and discounts
Premises and equipment
Borrowings
Net assets acquired
Goodwill recorded in the merger
The following provides an explanation of certain fair value adjustments in the above table:
The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required.
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Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former Cape operations included in the Consolidated Statements of Income from the date of the acquisition (May 2, 2016) through June 30, 2016. In addition, the table provides unaudited condensed pro forma financial information assuming the Cape acquisition had been completed as of January 1, 2016 for the six months ended June 30, 2016 and as of January 1, 2015 for the six months ended June 30, 2015. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings or the impact of conforming certain accounting policies of the acquired company to the Company’s policies that may have occurred as a result of the integration and consolidation of Cape’s operations. The pro forma information shown reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other intangibles; and related income tax effects.
Non-interest income
Non-interest expense
Earnings per share:
Fully diluted
Fair Value Measurement of Assets Assumed and Liabilities Assumed
The methods used to determine the fair value of the assets acquired and liabilities assumed in the Cape acquisition were as follows. Refer to Note 10, Fair Value Measurements, for a discussion of the fair value hierarchy.
The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.
The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate loan fair value analysis; 2) general credit fair value adjustment; and 3) specific credit fair value adjustment.
To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by Company management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment.
The general credit fair value adjustment was calculated using a two part general credit fair value analysis; 1) expected lifetime losses and 2) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.
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To calculate the specific credit fair value adjustment the Company reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting these criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.
Premises and Equipment
Fair values are based upon appraisals from independent third parties. In addition to owned properties Cape has 8 properties subject to lease agreements.
Deposits and Core Deposit Premium
Core deposit premium represents the value assigned to non-interest bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisition. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and is valued utilizing Level 2 inputs.
Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits represents the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.
Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.
Note 3. Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015 (in thousands):
Weighted average shares issued net of Treasury shares
Less:
Unallocated ESOP shares
Unallocated incentive award shares and shares held by deferred
compensation plan
Add:
Effect of dilutive securities:
Stock options
Shares held by deferred compensation plan
For the three months ended June 30, 2016 and 2015, antidilutive stock options of 1,310,000 and 839,000, respectively, were excluded from earnings per share calculations. For the six months ended June 30, 2016 and 2015, antidilutive stock options of 1,317,000 and 744,000, respectively, were excluded from earnings per share calculations.
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Note 4. Securities
The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2016 and December 31, 2015 are as follows (in thousands):
Available-for-sale:
Investment securities:
U.S. agency obligations
Held-to-maturity:
State and municipal obligations
Corporate debt securities
Other investments
Total investment securities
Mortgage-backed securities:
FHLMC
FNMA
GNMA
Other mortgage-backed securities
Total mortgage-backed securities
Total held-to-maturity
Total securities
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During the third quarter 2013, the Bank transferred $536.0 million of previously designated available-for-sale securities to a held-to-maturity designation at estimated fair value. The securities transferred had an unrealized net loss of $13.3 million at the time of transfer which continues to be reflected in accumulated other comprehensive loss on the consolidated balance sheet, net of subsequent amortization, which is being recognized over the life of the securities. The carrying value of the held-to-maturity investment securities at June 30, 2016 and December 31, 2015 are as follows (in thousands):
Amortized cost
Net loss on date of transfer from available-for-sale
Accretion of net unrealized loss on securities reclassified as held-to-maturity
Carrying value
There were $75,000 in realized gains and $87,000 in realized losses on the sale of available-for-sale securities for the three and six months ended June 30, 2016, respectively. There were no realized gains or losses on the sale of securities for the three and six months ended June 30, 2015.
The amortized cost and estimated fair value of investment securities at June 30, 2016 by contractual maturity are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2016, corporate debt securities with an amortized cost of $67.6 million and estimated fair value of $58.1 million were callable prior to the maturity date.
June 30, 2016
Less than one year
Due after one year through five years
Due after five years through ten years
Due after ten years
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.
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The estimated fair value and unrealized loss of securities available-for-sale and held-to-maturity at June 30, 2016 and December 31, 2015, segregated by the duration of the unrealized loss, are as follows (in thousands):
25
At June 30, 2016, the amortized cost, estimated fair value and credit rating of the individual corporate debt securities in an unrealized loss position for greater than one year are as follows (in thousands):
Security Description
BankAmerica Capital
Chase Capital
Wells Fargo Capital
Huntington Capital
Keycorp Capital
PNC Capital
State Street Capital
SunTrust Capital
At June 30, 2016, the estimated fair value of each of the above corporate debt securities was below cost. However, the estimated fair value of the corporate debt securities has steadily increased over the past several years. The corporate debt securities are issued by other financial institutions with credit ratings ranging from a high of A1 to a low of BB as rated by one of the internationally-recognized credit rating services. These floating-rate securities were purchased in 1998 and have paid coupon interest continuously since issuance. Floating-rate debt securities such as these pay a fixed interest rate spread over 90-day LIBOR. Following the purchase of these securities, the required interest rate spread increased for these types of securities causing a decline in the market price. The Company concluded that unrealized losses on corporate debt securities were only temporarily impaired at June 30, 2016. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. The Company noted that each issuer made all the contractually due payments when required. There were no defaults on principal or interest payments and no interest payments were deferred. All of the financial institutions are also considered well-capitalized. Interest rate spreads have now decreased for these types of securities and market prices have improved. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements over the life of the security. Furthermore, the Company does not have the intent to sell these securities and it is more likely than not that the Company will not be required to sell the securities. The Company has held the securities continuously since 1998 and expects to receive its full principal at maturity in 2028 or prior if called by the issuer. Historically, the Company has not utilized securities sales as a source of liquidity. The Company’s long range liquidity plans indicate adequate sources of liquidity outside the securities portfolio.
The mortgage-backed securities are issued and guaranteed by either the Federal Home Loan Mortgage Corporation (“FHLMC”) or Federal National Mortgage Association (“FNMA”), corporations which are chartered by the United States Government and whose debt obligations are typically rated AA+ by one of the internationally-recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated fair value of the mortgage-backed securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost. As a result, the Company concluded that these securities were only temporarily impaired at June 30, 2016.
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Note 5. Loans Receivable, Net
Loans receivable, net at June 30, 2016 and December 31, 2015 consisted of the following (in thousands):
Commercial:
Total commercial
Consumer:
Residential construction
Total consumer
Loans in process
Deferred origination costs, net
Allowance for loan losses
Total loans, net
At June 30, 2016 and December 31, 2015, loans in the amount of $15.3 million and $18.3 million, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.
The recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of foreclosure amounted to $4.2 million at June 30, 2016. The amount of foreclosed residential real estate property held by the Company was $1.3 million at June 30, 2016.
The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At June 30, 2016, the impaired loan portfolio totaled $34.1 million for which there was a specific allocation in the allowance for loan losses of $645,000. At December 31, 2015, the impaired loan portfolio totaled $38.4 million for which there was a specific allocation in the allowance for loan losses of $1.3 million. The average balance of impaired loans for the three and six months ended June 30, 2016 was $34.2 million and $34.4 million, respectively and $42.6 and $39.8, respectively, for the same prior year periods.
An analysis of the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands):
Balance at beginning of period
Provision charged to operations
Charge-offs
Recoveries
Balance at end of period
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The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):
For the three months ended June 30, 2016
Allowance for loan losses:
Provision (benefit) charged to operations
For the three months ended June 30, 2015
For the six months ended June 30, 2016
For the six months ended June 30, 2015
Ending allowance balance attributed to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
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Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Total ending loan balance
December 31, 2015
29
A summary of impaired loans at June 30, 2016 and December 31, 2015 is as follows, excluding PCI loans (in thousands):
Impaired loans with no allocated allowance for loan losses
Impaired loans with allocated allowance for loan losses
Amount of the allowance for loan losses allocated
At June 30, 2016, impaired loans include troubled debt restructuring loans of $31.2 million of which $28.2 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2015, impaired loans include troubled debt restructuring loans of $31.3 million of which $26.3 million were performing in accordance with their restructured terms and were accruing interest.
The summary of loans individually evaluated for impairment by loan portfolio segment as of June 30, 2016 and December 31, 2015 and for the three months ended June 30, 2016 and 2015 is as follows, excluding PCI loans (in thousands):
As of June 30, 2016
With no related allowance recorded:
Residential real estate
Commercial real estate - owner occupied
With an allowance recorded:
As of December 31, 2015
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The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of June 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):
31
The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by loan portfolio segment, excluding PCI loans (in thousands):
The Company categorizes all commercial and commercial real estate loans, except for small business loans, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.
Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Pass. Loans not meeting the criteria above that are analyzed individually as part of the above described process.
As of June 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment is as follows, excluding PCI loans (in thousands):
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For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):
Performing
Non-performing
The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Included in the non-accrual loan total at June 30, 2016 and December 31, 2015 were $3.0 million and $4.9 million, respectively, of troubled debt restructurings. At June 30, 2016 and December 31, 2015, the Company has allocated $459,000 and $262,000, respectively, of specific reserves to loans that are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at June 30, 2016 and December 31, 2015, which totaled $28.2 million and $26.3 million, respectively. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.
The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2016 and 2015, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2016 and 2015, (dollars in thousands):
Three months ended June 30, 2016
Troubled Debt Restructurings:
Troubled Debt Restructurings
Which Subsequently Defaulted:
Six months ended June 30, 2016
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Three months ended June 30, 2015
Six months ended June 30, 2015
Commercial real estate – investor
As part of the Cape and Colonial acquisitions PCI loans were acquired at a discount primarily due to deteriorated credit quality. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.
The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Cape at May 2, 2016 and Colonial at July 31, 2015 (in thousands):
Contractually required principal and interest
Contractual cash flows not expected to be collected (non-accretable discount)
Expected cash flows to be collected at acquisition
Interest component of expected cash flows (accretable yield)
Fair value of acquired loans
The following table summarizes the changes in accretable yield for PCI loans during the three and six months ended June 30, 2016 (in thousands):
Beginning balance
Acquisition
Accretion
Reclassification from non-accretable difference
Ending balance
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Note 6. Reserve for Repurchased Loans and Loss Sharing Obligations
The reserve for repurchased loans and loss sharing obligations was $986,000 at June 30, 2016, unchanged from December 31, 2015, compared to $1,032,000 at June 30, 2015, unchanged from December 31, 2014. 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, 2016, and December 31, 2015, there were no outstanding loan repurchase requests.
Note 7. Deposits
The major types of deposits at June 30, 2016 and December 31, 2015 were as follows (in thousands):
Type of Account
Non-interest-bearing
Money market deposit
Total deposits
Included in time deposits at June 30, 2016 and December 31, 2015, is $208.3 million and $119.6 million, respectively, in deposits of $100,000 and over.
Note 8. Recent Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations, Simplifying the Accounting for Measurement – Period Adjustments.” The amendments in this Update apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. In these cases, the acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update are effective for fiscal years beginning after December 15, 2015 including interim periods within those fiscal years. The adoption of this Update did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”. The main objective in developing this new ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more useful information. The update requires equity investments to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a quantitative assessment to identify impairment. The amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Financial assets and financial liabilities are to be presented separately by measurement category and the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this update is not expected to have a material impact on the Company‘s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, with early adoption permitted. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.
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In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718).” The objective of the Update is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
Note 9. 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 value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or the most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability and developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability and developed based on the best information available in the circumstances. In that regard, a fair value hierarchy has been established for valuation inputs that 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, 2016. 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.
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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 2 inputs. In general, fair value is based upon quoted market prices, where available. Most of the Company’s available-for-sale 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.
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.
The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
Items measured on a recurring basis:
Investment securities available-for-sale:
Items measured on a non-recurring basis:
Loans measured for impairment based on the fair value of the underlying collateral
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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 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 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. 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.
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.
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, 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, interest-bearing checking accounts, money market accounts and saving 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.
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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
The book value and estimated fair value of the Bank’s significant financial instruments not recorded at fair value as of June 30, 2016 and December 31, 2015 are presented in the following tables (in thousands):
Financial Assets:
Securities held-to-maturity
Loans receivable, net and mortgage loans held for sale
Financial Liabilities:
Deposits other than time deposits
Federal Home Loan Bank advances and other borrowings
Loans receivable and mortgage loans held for sale
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.
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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 10. Subsequent Event
On July 13, 2016, the Company announced an agreement to acquire Ocean Shore Holding Co. (“Ocean Shore”), headquartered in Ocean City, New Jersey, in a transaction valued at approximately $145.6 million. Under the terms of the agreement, Ocean Shore stockholders will be entitled to receive $4.35 in cash and 0.9667 shares of OceanFirst common stock, for each share of Ocean Shore common stock. The transaction is expected to close in the first quarter of 2017, subject to certain conditions, including approval by stockholders of each company, receipt of all required regulatory approvals and customary closing conditions. Ocean City operates eleven banking offices throughout Cape May and Atlantic counties in New Jersey.
PART II. OTHER INFORMATION
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.
For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2015 Form 10-K. There were no material changes to risk factors relevant to the Company’s operations since December 31, 2015 except for the following:
The Company has grown and will continue to grow substantially through acquisitions. To be successful as a larger institution, the Company must successfully integrate the operations and retain the customers of acquired institutions, attract and retain the management required to successfully manage larger operations, and control costs.
Since February 25, 2015, the Company has entered into agreements to acquire Colonial, Cape and Ocean Shore. The acquisitions of Colonial and Cape have been consummated, and the acquisition of Ocean Shore is expected to close in the first quarter of 2017. Primarily as a result of the three acquisitions, the assets of the Company will have increased by 116%, from $2.4 billion at December 31, 2014 to pro forma total assets as of June 30, 2016 of $5.1 billion (assuming the acquisition of Ocean Shore).
Future results of operations will depend in large part on the Company’s ability to successfully integrate the operations of the three acquired institutions and retain the customers of those institutions. If the Company is unable to successfully manage the integration of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, the Company’s results of operations may be adversely affected.
In addition, to successfully manage substantial growth, the Company may need to increase non-interest expenses through additional personnel, leasehold and data processing costs, among others. In order to successfully manage growth, the Company may need to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee the Company’s operations. No assurance can be given that the Company will be successful in this strategy.
The Company may not be able to successfully manage its business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on its ability to continue to attract, hire and retain skilled employees. Success will also depend on the ability of officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage employees.
Finally, substantial growth may stress regulatory capital levels, and may require the Company to raise additional capital. No assurance can be given that the Company will be able to raise any required capital, or that it will be able to raise capital on terms that are beneficial to shareholders.
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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, 2016 is as follows:
Period
April 1, through
April 30, 2016
May 1, 2016 through
May 31, 2016
June 1, 2016 through
Not Applicable
Exhibits:
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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.
/s/ Christopher D. Maher
/s/ Michael J. Fitzpatrick
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Exhibit Index
Exhibit
Description
Page
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