Form 10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2010

 

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

For the transition period from              to             

Commission file number 001-11713

OceanFirst Financial Corp.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3412577
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
975 Hooper Avenue, Toms River, NJ   08754-2009
(Address of principal executive offices)   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO   ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ¨    NO   ¨.

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO   x.

As of November 3, 2010, there were 18,822,556 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

 

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

          PAGE  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Consolidated Financial Statements (Unaudited)   
   Consolidated Statements of Financial Condition as of September 30, 2010 (unaudited) and December 31, 2009      1   
   Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2010 and 2009      2   
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended September 30, 2010 and 2009      3   
   Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009      4   
   Notes to Unaudited Consolidated Financial Statements      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      22   

Item 4.

   Controls and Procedures      22   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      23   

Item 1A.

   Risk Factors      23   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      23   

Item 3.

   Defaults Upon Senior Securities      23   

Item 4.

   Removed and Reserved      23   

Item 5.

   Other Information      23   

Item 6.

   Exhibits      23   

Signatures

     24   


Table of Contents

 

OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

     September 30,
2010
    December 31,
2009
 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 29,632      $ 23,016   

Investment securities available for sale

     68,919        37,267   

Federal Home Loan Bank of New York stock, at cost

     17,425        19,434   

Mortgage-backed securities available for sale

     343,410        213,622   

Loans receivable, net

     1,665,997        1,629,284   

Mortgage loans held for sale

     4,086        5,658   

Interest and dividends receivable

     7,085        6,059   

Real estate owned, net

     2,242        2,613   

Premises and equipment, net

     21,843        22,088   

Servicing asset

     5,661        6,515   

Bank Owned Life Insurance

     40,594        39,970   

Other assets

     18,484        24,502   
                

Total assets

   $ 2,225,378      $ 2,030,028   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

   $ 1,623,516      $ 1,364,199   

Securities sold under agreements to repurchase with retail customers

     70,874        64,573   

Federal Home Loan Bank advances

     280,000        333,000   

Other borrowings

     27,500        27,500   

Due to brokers

     3,456        40,684   

Advances by borrowers for taxes and insurance

     7,782        7,453   

Other liabilities

     12,821        9,083   
                

Total liabilities

     2,025,949        1,846,492   
                

Stockholders’ equity:

    

Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, no shares issued at September 30, 2010 and December 31, 2009

     —          —     

Common stock, $.01 par value, 55,000,000 shares authorized, 33,566,772 shares issued and 18,822,556 and 18,821,956 shares outstanding at September 30, 2010 and December 31, 2009, respectively

     336        336   

Additional paid-in capital

     260,435        260,130   

Retained earnings

     171,085        163,063   

Accumulated other comprehensive loss

     (3,413     (10,753

Less: Unallocated common stock held by Employee Stock Ownership Plan

     (4,557     (4,776

Treasury stock, 14,744,216 and 14,744,816 shares at September 30, 2010 and December 31, 2009, respectively

     (224,457     (224,464

Common stock acquired by Deferred Compensation Plan

     951        986   

Deferred Compensation Plan Liability

     (951     (986
                

Total stockholders’ equity

     199,429        183,536   
                

Total liabilities and stockholders’ equity

   $ 2,225,378      $ 2,030,028   
                

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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Table of Contents

 

OceanFirst Financial Corp.

Consolidated Statements of Income

(dollars in thousands, except per share amounts)

 

     For the three months
ended September 30,
     For the nine months
ended September 30,
 
     2010     2009      2010     2009  
     (Unaudited)      (Unaudited)  

Interest income:

         

Loans

   $ 22,314      $ 22,618       $ 66,524      $ 68,581   

Mortgage-backed securities

     2,976        817         8,923        2,458   

Investment securities and other

     438        406         1,164        1,408   
                                 

Total interest income

     25,728        23,841         76,611        72,447   
                                 

Interest expense:

         

Deposits

     3,781        4,263         10,693        14,136   

Borrowed funds

     2,379        2,876         7,683        9,794   
                                 

Total interest expense

     6,160        7,139         18,376        23,930   
                                 

Net interest income

     19,568        16,702         58,235        48,517   

Provision for loan losses

     1,600        1,500         6,000        3,500   
                                 

Net interest income after provision for loan losses

     17,968        15,202         52,235        45,017   
                                 

Other income:

         

Loan servicing income (loss)

     72        119         231        (102

Fees and service charges

     2,760        2,700         8,117        7,804   

Net gain on sales of loans and securities available for sale

     1,210        1,094         2,215        3,119   

Net (loss) gain from other real estate operations

     (45     67         (408     71   

Income from Bank Owned Life Insurance

     220        202         624        634   

Other

     2        363         6        368   
                                 

Total other income

     4,219        4,545         10,785        11,894   
                                 

Operating expenses:

         

Compensation

     7,326        6,216         20,907        17,781   

Occupancy

     1,325        1,398         4,117        4,687   

Equipment

     568        478         1,581        1,428   

Marketing

     514        467         1,341        1,171   

Federal deposit insurance

     663        605         1,983        2,512   

Data processing

     858        812         2,521        2,506   

Legal

     279        236         843        1,086   

Check card processing

     311        287         937        792   

Accounting and audit

     143        135         465        466   

General and administrative

     1,773        1,719         5,027        4,948   
                                 

Total operating expenses

     13,760        12,353         39,722        37,377   
                                 

Income before provision for income taxes

     8,427        7,394         23,298        19,534   

Provision for income taxes

     3,189        2,860         8,704        7,448   
                                 

Net income

     5,238        4,534         14,594        12,086   

Dividends on preferred stock and warrant accretion

     —          537         —          1,539   
                                 

Net income available to common stockholders

   $ 5,238      $ 3,997       $ 14,594      $ 10,547   
                                 

Basic earnings per share

   $ 0.29      $ 0.34       $ 0.80      $ 0.90   
                                 

Diluted earnings per share

   $ 0.29      $ 0.34       $ 0.80      $ 0.90   
                                 

Average basic shares outstanding

     18,146        11,724         18,137        11,710   
                                 

Average diluted shares outstanding

     18,194        11,772         18,186        11,758   
                                 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Consolidated Statements of

Changes in Stockholders’ Equity (Unaudited)

(in thousands, except per share amounts)

 

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

Balance at December 31, 2008

   $ —         $ 272       $ 204,298      $ 160,267      $ (14,462   $ (5,069   $ (225,523   $ 981      $ (981   $ 119,783   
                            

Comprehensive income:

                      

Net income

     —           —           —          12,086        —          —          —          —          —          12,086   

Other comprehensive income:

                      

Unrealized gain on securities (net of tax expense $2,264)

     —           —           —          —          3,278        —          —          —          —          3,278   
                            

Total comprehensive income

                         15,364   
                            

Proceeds from issuance of preferred stock and warrants

     36,921         —           1,342        —          —          —          —          —          —          38,263   

Accretion of discount on preferred stock

     179         —           —          (179     —          —          —          —          —          —     

Treasury stock allocated to restricted stock plan

     —           —           (695     (221     —          —          916        —          —          —     

Stock awards

     —           —           524        —          —          —          —          —          —          524   

Allocation of ESOP stock

     —           —           —          —          —          220        —          —          —          220   

ESOP adjustment

     —           —           96        —          —          —          —          —          —          96   

Cash dividend - $0.60 per share

     —           —           —          (7,061     —          —          —          —          —          (7,061

Cash dividend on preferred stock

     245         —           —          (1,355     —          —          —          —          —          (1,110

Exercise of stock options

     —           —           —          (50     —          —          143        —          —          93   
                                                                                  

Balance at September 30, 2009

   $ 37,345       $ 272       $ 205,565      $ 163,487      $ (11,184   $ (4,849   $ (224,464   $ 981      $ (981   $ 166,172   
                                                                                  

Balance at December 31, 2009

   $ —         $ 336       $ 260,130      $ 163,063      $ (10,753   $ (4,776   $ (224,464   $ 986      $ (986   $ 183,536   
                            

Comprehensive income:

                      

Net income

     —           —           —          14,594        —          —          —          —          —          14,594   

Other comprehensive income:

                      

Unrealized gain on securities (net of tax expense $4,961)

     —           —           —          —          7,340        —          —          —          —          7,340   
                            

Total comprehensive income

                         21,934   
                            

Expenses of common stock offering

     —           —           (109     —          —          —          —          —          —          (109

Tax expense of stock plans

     —           —           (23     —          —          —          —          —          —          (23

Stock awards

     —           —           781        —          —          —          —          —          —          781   

Redemption of warrants

     —           —           (431     —          —          —          —          —          —          (431

Allocation of ESOP stock

     —           —           —          —          —          219        —          —          —          219   

ESOP adjustment

     —           —           87        —          —          —          —          —          —          87   

Cash dividend $0.36 per share

     —           —           —          (6,572     —          —          —          —          —          (6,572

Exercise of stock options

     —           —           —          —          —          —          7        —          —          7   

Sale of stock for the deferred compensation plan

     —           —           —          —          —          —          —          (35     35        —     
                                                                                  

Balance at September 30, 2010

   $ —         $ 336       $ 260,435      $ 171,085      $ (3,413   $ (4,557   $ (224,457   $ 951      $ (951   $ 199,429   
                                                                                  

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

     For the nine months
ended September 30,
 
     2010     2009  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 14,594      $ 12,086   
                

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

    

Depreciation and amortization of premises and equipment

     1,604        1,469   

Allocation of ESOP stock

     219        220   

ESOP adjustment

     87        96   

Stock awards

     781        524   

Amortization and impairment of servicing asset

     1,500        1,856   

Net premium amortization in excess of discount accretion on securities

     1,101        429   

Net amortization of deferred costs and discounts on loans

     690        705   

Provision for loan losses

     6,000        3,500   

Net gain on sale of real estate owned

     (77     (166

Recovery from reserve for repurchased loans

     —          (245

Net gain on sales of loans and securities

     (2,215     (2,874

Net loss on sale of fixed assets

     —          6   

Proceeds from sales of mortgage loans held for sale

     101,911        194,302   

Mortgage loans originated for sale

     (98,770     (193,858

Increase in value of Bank Owned Life Insurance

     (624     (633

Increase in interest and dividends receivable

     (1,026     (114

Decrease (increase) in other assets

     1,057        (878

Increase in other liabilities

     3,738        3,720   
                

Total adjustments

     15,976        8,059   
                

Net cash provided by operating activities

     30,570        20,145   
                

Cash flows from investing activities:

    

Net (increase) decrease in loans receivable

     (44,048     20,675   

Purchase of investment securities available for sale

     (26,663     —     

Proceeds from sale of investment securities available for sale

     1,300        1,973   

Purchase of mortgage-backed securities available for sale

     (203,481     (59,468

Principal repayments on mortgage-backed securities available for sale

     41,376        18,852   

Decrease in Federal Home Loan Bank of New York stock

     2,009        6,032   

Proceeds from sales of real estate owned

     1,093        1,402   

Real estate owned acquired

     —          (332

Purchases of premises and equipment

     (1,359     (1,365
                

Net cash used in investing activities

     (229,773     (12,231
                

Continued

 

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Table of Contents

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

 

 

     For the nine months
ended September 30,
 
     2010     2009  
     (Unaudited)  

Cash flows from financing activities:

    

Increase in deposits

   $ 259,317      $ 83,777   

Decrease in short-term borrowings

     (100,699     (48,826

Proceeds from Federal Home Loan Bank advances

     139,000        28,000   

Repayments of Federal Home Loan Bank advances

     (85,000     (98,000

Increase in advances by borrowers for taxes and insurance

     329        242   

Exercise of stock options

     7        93   

Dividends paid – common stock

     (6,572     (7,061

Dividends paid – preferred stock

     —          (1,110

Redemption of warrants

     (431     —     

Tax expense of stock plans

     (23     —     

Proceeds from issuance of preferred stock and warrants

     —          38,263   

Expenses of common stock offering

     (109     —     
                

Net cash provided by (used in) financing activities

     205,819        (4,622
                

Net increase in cash and due from banks

     6,616        3,292   

Cash and due from banks at beginning of period

     23,016        18,475   
                

Cash and due from banks at end of period

   $ 29,632      $ 21,767   
                

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period for:

    

Interest

   $ 18,458      $ 24,449   

Income taxes

     7,753        6,868   

Non-cash activities:

    

Transfer of loans receivable to real estate owned

     645        967   
                

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”), and its wholly-owned subsidiaries, Columbia Home Loans, LLC (“Columbia”), OceanFirst REIT Holdings, Inc., OceanFirst Services, LLC and 975 Holdings, LLC. 975 Holdings, LLC was established in the second quarter of 2010 as a wholly-owned service corporation of the Bank for the purpose of taking legal possession of collateral repossessed as a result of commercial loan workout, foreclosure, judicial decree or court order for resale to third parties. The operations of Columbia were shuttered in late 2007.

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations that may be expected for all of 2010. 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, 2009.

Note 2. Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

Weighted average shares issued net of Treasury shares

     18,823        12,387        18,822        12,374   

Less: Unallocated ESOP shares

     (545     (579     (553     (588

Unallocated incentive award shares and shares held by deferred compensation plan

     (132     (84     (132     (76
                                

Average basic shares outstanding

     18,146        11,724        18,137        11,710   

Add: Effect of dilutive securities:

        

Stock options

     —          1        —          1   

Incentive awards and shares held by deferred compensation plan

     48        47        49        47   
                                

Average diluted shares outstanding

     18,194        11,772        18,186        11,758   
                                

For the three months ended September 30, 2010 and 2009, antidilutive stock options of 1,876,000 and 1,639,000, respectively, were excluded from earnings per share calculations. For the nine months ended September 30, 2010 and 2009, antidilutive stock options of 1,852,000 and 1,623,000, respectively, were excluded from earnings per share calculations.

 

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Note 3. Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at September 30, 2010 and December 31, 2009 are as follows (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

September 30, 2010

          

U.S. agency obligations

   $ 21,193       $ 24       $ (2   $ 21,215   

State and municipal obligations

     8,216         7         (26     8,197   

Corporate debt securities

     55,000         —           (15,786     39,214   

Equity investments

     370         —           (77     293   
                                  
   $ 84,779       $ 31       $ (15,891   $ 68,919   
                                  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

December 31, 2009

          

U.S. agency obligations

   $ 301       $ 5       $ —        $ 306   

State and municipal obligations

     300         —           —          300   

Corporate debt securities

     55,000         —           (18,631     36,369   

Equity investments

     370         —           (78     292   
                                  
   $ 55,971       $ 5       $ (18,709   $ 37,267   
                                  

There were no realized gains or losses on the sale of investment securities available for sale for the three and nine months ended September 30, 2010. For the nine months ended September 30, 2009, the Company realized a loss on investment securities available for sale of $4,000. There were no realized gains or losses on the sale of investment securities available for sale for the three months ended September 30, 2009.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at September 30, 2010 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2010, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $39.2 million, respectively, were callable prior to the maturity date.

 

     Amortized
Cost
     Estimated
Market
Value
 

September 30, 2010

     

Less than one year

   $ 300       $ 300   

Due after one year through five years

     29,109         29,112   

Due after five years through ten years

     —           —     

Due after ten years

     55,000         39,214   
                 
   $ 84,409       $ 68,626   
                 

 

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The estimated market value and unrealized loss for investment securities available for sale at September 30, 2010 and December 31, 2009 segregated by the duration of the unrealized loss are as follows (in thousands):

 

     Less than 12 months     12 months or longer     Total  
     Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

September 30, 2010

               

U.S. Agency obligations

   $ 5,118       $ (2   $ —         $ —        $ 5,118       $ (2

State and Municipal obligations

     3,876         (26     —           —          3,876         (26

Corporate debt securities

     —           —          39,214         (15,786     39,214         (15,786

Equity investments

     —           —          293         (77     293         (77
                                                   
   $ 8,994       $ (28   $ 39,507       $ (15,863   $ 48,501       $ (15,891
                                                   
     Less than 12 months     12 months or longer     Total  
     Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
 

December 31, 2009

               

Corporate debt securities

   $ —         $ —        $ 36,369       $ (18,631   $ 36,369       $ (18,631

Equity investments

     292         (78     —           —          292         (78
                                                   
   $ 292       $ (78   $ 36,369       $ (18,631   $ 36,661       $ (18,709
                                                   

At September 30, 2010, the amortized cost, estimated market value and credit rating of the individual corporate debt securities in an unrealized loss position for greater than one year are as follows (in thousands):

 

Security Description

   Amortized
Cost
     Estimated
Market
Value
     Credit  Rating
Moody’s/S&P
 

BankAmerica Capital

   $ 15,000       $ 10,545         Baa3/BB   

Chase Capital

     10,000         7,600         A2/BBB+   

Wells Fargo Capital

     5,000         3,743         Baa1/A-   

Huntington Capital

     5,000         2,825         Ba1/B   

Keycorp Capital

     5,000         3,199         Baa3/BB   

PNC Capital

     5,000         3,827         Baa2/BBB   

State Street Capital

     5,000         3,847         A3/BBB+   

SunTrust Capital

     5,000         3,628         Baa3/BB   
                    
   $ 55,000       $ 39,214      
                    

At September 30, 2010, the market value of each corporate debt security was below cost. The portfolio consisted of eleven $5.0 million issues spread between eight issuers due to consolidation. The corporate debt securities are issued by financial institutions with credit ratings ranging from a high of A2 to a low of B as rated by either Moody’s or Standard & Poor’s. These floating-rate corporate debt securities were purchased during the period May 1998 to September 1998 and have paid coupon interest continuously since issuance. Floating-rate corporate debt securities such as these pay a fixed interest rate spread over LIBOR. Following the purchase of these securities, the required spread increased for these types of securities causing a decline in the market price. The Company concluded that these available for sale securities were only temporarily impaired at September 30, 2010. In concluding that the impairments were only temporary, the Company considered several factors in its analysis. Although some credit ratings declined since December 31, 2009, the estimated market value for most securities improved over the prior year end. Additionally, 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 were also considered well-capitalized under regulatory guidelines and each issuer was able to raise capital during 2009. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements for the foreseeable future. Furthermore, although these investment securities are available for sale, 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. The Company has historically not actively sold investment securities.

Due to the reasons noted above, specifically the improved valuation of the corporate securities, the capital position of the issuers, and the uninterrupted payment of all contractually due interest, management has determined that only a temporary impairment existed at September 30, 2010.

 

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Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at September 30, 2010 and December 31, 2009 are as follows (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

September 30, 2010

          

FHLMC

   $ 8,303       $ 416       $ —        $ 8,719   

FNMA

     323,942         9,500         —          333,442   

GNMA

     1,075         174         —          1,249   
                                  
   $ 333,320       $ 10,090       $ —        $ 343,410   
                                  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Market
Value
 

December 31, 2009

          

FHLMC

   $ 12,423       $ 442       $ —        $ 12,865   

FNMA

     199,381         1,517         (1,485     199,413   

GNMA

     1,185         159         —          1,344   
                                  
   $ 212,989       $ 2,118       $ (1,485   $ 213,622   
                                  

There were no gains or losses realized on the sale of mortgage-backed securities available for sale for the three and nine months ended September 30, 2010 and 2009.

The contractual maturities of mortgage-backed securities available for sale vary; however, the effective lives are expected to be shorter than the contractual maturity date due to principal prepayments.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at December 31, 2009, segregated by the duration of the unrealized loss are as follows (in thousands). There were no unrealized losses at September 30, 2010.

 

     Less than 12 months     12 months or longer      Total  
     Estimated
Market
Value
     Unrealized
Losses
    Estimated
Market
Value
     Unrealized
Losses
     Estimated
Market
Value
     Unrealized
Losses
 

December 31, 2009

                

FNMA

   $ 95,655       $ (1,485   $ —         $ —         $ 95,655       $ (1,485
                                                    

The mortgage-backed securities are issued and guaranteed by FNMA, a corporation which is chartered by the United States Government and whose debt obligations are typically rated AAA by one of the internationally-recognized credit rating services. FNMA has been under the conservatorship of the Federal Housing Financial Agency since September 8, 2008. The conservatorship has no specified termination date. Also, FNMA has entered into a Stock Purchase Agreement, which following the issuance of Senior Preferred Stock and Warrants to the United States Treasury, provides FNMA funding commitments from the United States Treasury. 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 market value of the mortgage-backed securities. Although these mortgage-backed securities are available for sale, the Company does not intend to sell these securities before recovery of their amortized cost. As a result, the Company concluded that these available for sale securities were only temporarily impaired.

 

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Note 5. Loans Receivable, Net

Loans receivable, net at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

 

     September 30, 2010     December 31, 2009  

Real estate:

    

One-to-four family

   $ 960,557      $ 954,736   

Commercial real estate, multi family and land

     426,390        396,883   

Construction

     13,135        9,241   

Consumer

     211,035        217,290   

Commercial

     76,877        70,214   
                

Total loans

     1,687,994        1,648,364   

Loans in process

     (4,220     (3,466

Deferred origination costs, net

     4,902        4,767   

Allowance for loan losses

     (18,593     (14,723
                

Total loans, net

     1,670,083        1,634,942   

Less: Mortgage loans held for sale

     4,086        5,658   
                

Loans receivable, net

   $ 1,665,997      $ 1,629,284   
                

An analysis of the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

Balance at beginning of period

   $ 17,146      $ 12,758      $ 14,723      $ 11,665   

Provision charged to operations

     1,600        1,500        6,000        3,500   

Charge-offs

     (183     (578     (2,272     (1,492

Recoveries

     30        —          142        7   
                                

Balance at end of period

   $ 18,593      $ 13,680      $ 18,593      $ 13,680   
                                

Note 6. Reserve for Repurchased Loans

An analysis of the reserve for repurchased loans for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands). The reserve is included in other liabilities in the accompanying statements of financial condition.

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010      2009     2010     2009  

Balance at beginning of period

   $ 809       $ 835      $ 819      $ 1,143   

Recoveries

     —           —          —          (245

Loss on loans repurchased

     —           (16     (10     (79
                                 

Balance at end of period

   $ 809       $ 819      $ 809      $ 819   
                                 

The reserve for repurchased loans was established to provide for expected losses related to outstanding loan repurchase requests and additional repurchase requests which may be received on loans previously sold to investors. In establishing the reserve for repurchased loans, the Company considered all types of sold loans. At September 30, 2010, there were two outstanding loan repurchase requests on loans with a total principal balance of $325,000. One of these requests, with a principal balance of $203,000, was resolved subsequent to September 30, 2010 with no loss. There are also seven claims from one loan investor totaling $2.8 million that the Company believes are covered by a settlement agreement and release between Columbia and the loan investor executed in August 2007. The Company has vigorously contested these claims and believes there are valid defenses, including the settlement and release agreement.

 

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Note 7. Deposits

The major types of deposits at September 30, 2010 and December 31, 2009 were as follows (in thousands):

 

     September 30, 2010      December 31, 2009  

Type of Account

     

Non-interest-bearing

   $ 138,563       $ 107,721   

Interest-bearing checking

     844,458         615,347   

Money market deposit

     107,086         96,886   

Savings

     246,214         232,081   

Time deposits

     287,195         312,164   
                 

Total deposits

   $ 1,623,516       $ 1,364,199   
                 

Note 8. Recent Accounting Pronouncements

Accounting Standards Certification (“ASC”) 810, Consolidation, replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable-interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable-interest entity that most significantly effect the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement was effective January 1, 2010 and did not have a significant effect on the Company’s consolidated financial statements.

ASC 860, Transfers and Servicing, improves the information a reporting entity provides in its financial statements about a transfer of financial assets, including the effect of a transfer on an entity’s financial position, financial performance and cash flows and the transferor’s continuing involvement in the transferred assets. ASC 860 eliminates the concept of a qualifying, special-purpose entity and changes the guidance for evaluation for consolidation. This pronouncement was effective January 1, 2010 and did not have a significant effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2010-06 under ASC 820 requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. Specifically, the update requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for such transfers. A reporting entity is required to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using Level 3 inputs. In addition, the update clarifies the following requirements of the existing disclosure: (i) for the purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets; and (ii) a reporting entity is required to include disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. The amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures of purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The new guidance did not have a significant impact on the Company’s consolidated financial statements other than additional disclosures.

Accounting Standards Update 2010-20, amends ASC 310 (Receivables) to require significant new disclosures about the credit quality of financial receivables/loans and the allowance for credit losses. The objective of the new disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables, and (2) the entity’s assessment of that risk in estimating its allowance for credit losses, as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance (either by portfolio segment or by class of financing receivables). The required disclosures include, among other things, a rollforward of the allowance for credit losses by portfolio segment, as well as information about credit quality indicators and modified, impaired, non-accrual and past due loans. The disclosures related to period-end information (e.g., credit-quality information and the ending financing receivables balance segregated by impairment method) will be required in all interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Company). Disclosures of activity that occurs during a reporting period (e.g., loan modifications and the rollforward of the allowance for credit losses by portfolio segment) will be required in interim or annual periods beginning on or after December 15, 2010 (January 1, 2011 for the Company).

 

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Note 9. Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

       Fair Value Measurements at Reporting Date Using:  
     Total Fair
Value
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other  Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

September 30, 2010

           

Items measured on a recurring basis:

           

Investment securities available for sale:

           

U.S. Agency obligations

   $ 21,215       $ 21,215       $ —         $ —     

State and municipal obligations

     8,197         —           8,197         —     

Corporate debt securities

     39,214         —           39,214         —     

Equity investments

     293         293         —           —     

Mortgage-backed securities available for sale

     343,410         —           343,410         —     

Items measured on a non-recurring basis:

           

Real estate owned

     306         —           —           306   

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

     2,962         —           —           2,962   

 

            Fair Value Measurements at Reporting Date Using:  
     Total Fair
Value
     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other  Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

December 31, 2009

           

Items measured on a recurring basis:

           

Investment securities available for sale:

           

Corporate debt securities

   $ 36,369       $ —         $ 36,369       $ —     

Other securities

     898         598         300         —     

Mortgage-backed securities available for sale

     213,622         —           213,622         —     

Items measured on a non-recurring basis:

           

Real estate owned

     2,613         —           —           2,613   

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

     499         —           —           499   

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).

Transfers between levels are recognized at the end of the reporting period. Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. Most of the Company’s investment and mortgage-backed securities 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 quotation 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.

The Company utilizes third party pricing services to obtain estimated market values for its corporate bonds. Management’s policy is to obtain and review all available documentation from the third party pricing service relating to their market and 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 valuation inputs. Based on the Company’s review of available documentation and discussions with the third party pricing service, management concluded that Level 2 inputs were utilized. The significant observable inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities and observations of equity and credit default swap curves related to the issuer.

 

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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.

Note 10. Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for the Company’s financial instruments.

Cash and Due from Banks

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

Investments and Mortgage-Backed Securities

Most of the Company’s investment and mortgage-backed securities 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.

Federal Home Loan Bank of New York Stock

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

Loans

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

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

Deposits

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

Borrowed Funds

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

Commitments to Extend Credit and Sell Loans

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The estimated fair values of the Bank’s significant financial instruments as of September 30, 2010 and December 31, 2009 are presented in the following tables (in thousands).

 

     Book Value      Fair Value  

September 30, 2010

     

Financial Assets:

     

Cash and due from banks

   $ 29,632       $ 29,632   

Investment securities available for sale

     68,919         68,919   

Mortgage-backed securities available for sale

     343,410         343,410   

Federal Home Loan Bank of New York stock

     17,425         17,425   

Loans receivable and mortgage loans held for sale

     1,670,083         1,682,270   

Financial Liabilities:

     

Deposits

     1,623,516         1,630,117   

Borrowed funds

     378,374         385,191   
                 

 

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Table of Contents

 

     Book Value      Fair Value  

December 31, 2009

     

Financial Assets:

     

Cash and due from banks

   $ 23,016       $ 23,016   

Investment securities available for sale

     37,267         37,267   

Mortgage-backed securities available for sale

     213,622         213,622   

Federal Home Loan Bank of New York stock

     19,434         19,434   

Loans receivable and mortgage loans held for sale

     1,634,942         1,628,898   

Financial Liabilities:

     

Deposits

     1,364,199         1,366,206   

Borrowed funds

     425,073         427,061   
                 

Limitations

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

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

 

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

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses, the reserve for repurchased loans and the valuation of Mortgage Servicing Rights and judgments regarding securities impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.

Summary

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 loan sales, loan servicing, loan originations, merchant credit card services, deposit accounts, the sale of alternative investments, trust and asset management services and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, data processing, federal deposit insurance 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.

Throughout 2009, and continuing into 2010, short-term interest rates remained low and the interest rate yield curve was unusually steep. The interest rate environment has generally had a positive impact on the Company’s results of operations and net interest margin. 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. More recently, however, longer-term interest rates have decreased and the interest rate yield curve has flattened. The change in the yield curve may adversely impact the Company’s results of operations and net interest margin in future periods. The overall economy remains weak with continued high unemployment coupled with concern surrounding the housing market. These economic conditions have had an adverse impact on the Company’s results of operations as non-performing loans and the provision for loan losses have increased.

 

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Highlights of the Company’s operating results were as follows:

Total assets increased to $2,225.4 million at September 30, 2010, an increase from $2,030.0 million at December 31, 2009. Loans receivable, net increased by $36.7 million to $1,666.0 million at September 30, 2010, from $1,629.3 million at December 31, 2009, primarily due to increased commercial and commercial real estate lending. Investment and mortgage-backed securities increased by $161.4 million to $412.3 million at September 30, 2010, from $250.9 million at December 31, 2009.

The increase in assets was funded by increased deposits, which grew to $1,623.5 million at September 30, 2010, from $1,364.2 million at December 31, 2009. Core deposits, defined as all deposits excluding time deposits, grew $284.3 million, exceeding total deposit growth of $259.3 million. Growing core deposits remains one of the Company’s primary goals. Also, as a result of the increase in deposits, Federal Home Loan Bank advances were repaid and decreased to $280.0 million at September 30, 2010, from $333.0 million at December 31, 2009.

Net income available to common stockholders for the three months ended September 30, 2010 was $5.2 million or $0.29 per diluted share, as compared to net income available to common stockholders of $4.0 million, or $0.34 per diluted share, for the corresponding prior year period. For the nine months ended September 30, 2010, net income available to common stockholders was $14.6 million or $0.80 per diluted share, as compared to net income available to common stockholders of $10.5 million or $0.90 per diluted share for the corresponding prior year period. For both the three and nine months ended September 30, 2010 diluted earnings per share reflects the higher number of average diluted shares outstanding from the issuance of additional common shares in November 2009.

Net interest income for the three and nine months ended September 30, 2010 increased to $19.6 million and $58.2 million, respectively, as compared to $16.7 million and $48.5 million, respectively, in the same prior year periods, reflecting greater interest-earning assets and, for the nine months ended September 30, 2010, a higher net interest margin. The net interest margin increased to 3.75% for the nine months ended September 30, 2010 from 3.59% in the same prior year period partly due to the low interest rate environment.

The provision for loan losses increased to $1.6 million and $6.0 million, respectively, for the three and nine months ended September 30, 2010, as compared to $1.5 million and $3.5 million, respectively, for the corresponding prior year periods. The provision for loan losses compares favorably with net loan charge-offs of $153,000 and $2.1 million, respectively, for the three and nine months ended September 30, 2010. The Company’s non-performing loans totaled $33.8 million at September 30, 2010, an increase from $28.3 million at December 31, 2009, with the largest increase of $2.6 million attributable to one-to-four family mortgage loans. The overall increase is reflective of the weak economic environment in the Company’s lending area.

The Company remains well-capitalized with a tangible common equity ratio of 8.96%.

Return on average stockholder’s equity was 10.71% and 10.30%, respectively, for the three and nine months ended September 30, 2010, as compared to 11.22% and 10.28% for the corresponding prior year periods.

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.

 

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The following table sets forth certain information relating to the Company for the three and nine months ended September 30, 2010 and 2009. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees which are considered adjustments to yields.

 

     FOR THE THREE MONTHS ENDED SEPTEMBER 30,  
     2010     2009  
     AVERAGE
BALANCE
     INTEREST      AVERAGE
YIELD/

COST
    AVERAGE
BALANCE
     INTEREST      AVERAGE
YIELD/

COST
 
     (dollars in thousands)  

Assets

                

Interest-earning assets:

                

Interest-earning deposits and short-term investments

   $ 6,300       $ 4         .25   $ —         $ —           —  

Investment securities (1)

     59,692         156         1.05        55,763         167         1.20   

FHLB stock

     17,869         278         6.22        15,168         239         6.30   

Mortgage-backed securities (1)

     344,579         2,976         3.45        85,279         817         3.83   

Loans receivable, net (2)

     1,670,590         22,314         5.34        1,636,541         22,618         5.53   
                                                    

Total interest-earning assets

     2,099,030         25,728         4.90        1,792,751         23,841         5.32   
                                        

Non-interest-earning assets

     118,312              93,544         
                            

Total assets

   $ 2,217,342            $ 1,886,295         
                            

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,180,155         2,365         .80      $ 924,360         2,356         1.02   

Time deposits

     296,579         1,416         1.91        335,073         1,907         2.28   
                                                    

Total

     1,476,734         3,781         1.02        1,259,433         4,263         1.35   

Borrowed funds

     391,169         2,379         2.43        335,242         2,876         3.43   
                                                    

Total interest-bearing liabilities

     1,867,903         6,160         1.32        1,594,675         7,139         1.79   
                                        

Non-interest-bearing deposits

     137,595              113,879         

Non-interest-bearing liabilities

     16,253              16,150         
                            

Total liabilities

     2,021,751              1,724,704         

Stockholders’ equity

     195,591              161,591         
                            

Total liabilities and stockholders’ equity

   $ 2,217,342            $ 1,886,295         
                            

Net interest income

      $ 19,568            $ 16,702      
                            

Net interest rate spread (3)

           3.58           3.53
                            

Net interest margin (4)

           3.73           3.73
                            

 

     FOR THE NINE MONTHS ENDED SEPTEMBER 30,  
     2010     2009  
     AVERAGE
BALANCE
     INTEREST      AVERAGE
YIELD/
COST
    AVERAGE
BALANCE
     INTEREST      AVERAGE
YIELD/

COST
 
     (dollars in thousands)  

Assets

                

Interest-earning assets:

                

Interest-earning deposits and short-term investments

   $ 2,685       $ 5         .25   $ —         $ —           —  

Investment securities (1)

     57,226         423         .99        55,906         756         1.80   

FHLB stock

     22,091         736         4.44        17,115         652         5.08   

Mortgage-backed securities (1)

     337,515         8,923         3.52        85,027         2,458         3.85   

Loans receivable, net (2)

     1,648,991         66,524         5.38        1,646,232         68,581         5.55   
                                                    

Total interest-earning assets

     2,068,508         76,611         4.94        1,804,280         72,447         5.35   
                                        

Non-interest-earning assets

     111,795              88,477         
                            

Total assets

   $ 2,180,303            $ 1,892,757         
                            

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Transaction deposits

   $ 1,059,780         6,412         .81      $ 885,408         7,513         1.13   

Time deposits

     302,627         4,281         1.89        349,514         6,623         2.53   
                                                    

Total

     1,362,407         10,693         1.05        1,234,922         14,136         1.53   

Borrowed funds

     485,731         7,683         2.11        373,833         9,794         3.49   
                                                    

Total interest-bearing liabilities

     1,848,138         18,376         1.33        1,608,755         23,930         1.98   
                                        

Non-interest-bearing deposits

     125,953              110,379         

Non-interest-bearing liabilities

     17,208              16,917         
                            

Total liabilities

     1,991,299              1,736,051         

Stockholders’ equity

     189,004              156,706         
                            

Total liabilities and stockholders’ equity

   $ 2,180,303            $ 1,892,757         
                            

Net interest income

      $ 58,235            $ 48,517      
                            

Net interest rate spread (3)

           3.61           3.37
                            

Net interest margin (4)

           3.75           3.59
                            

 

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

 

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Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Total assets at September 30, 2010 were $2.225 billion, an increase of $195.4 million, or 9.6%, compared to $2.030 billion at December 31, 2009.

Investment securities available for sale increased to $68.9 million at September 30, 2010, as compared to $37.3 million at December 31, 2009, due to purchases of government agency and municipal securities, as the Company invested part of the funds received from strong deposit flows. Mortgage-backed securities available for sale increased to $343.4 million at September 30, 2010, as compared to $213.6 million at December 31, 2009, primarily due to purchases of $162.8 million, all of which were issued by U.S. government sponsored enterprises.

Loans receivable, net increased by $36.7 million, or 2.3%, to a balance of $1.666 billion at September 30, 2010, as compared to a balance of $1.629 billion at December 31, 2009. The growth was concentrated in commercial real estate and commercial loans, which together increased a total of $36.2 million or 7.7%.

The increase in assets was funded by increased deposits which grew $259.3 million, or 19.0%, to $1.624 billion at September 30, 2010, from $1.364 billion at December 31, 2009. Core deposits, defined as all deposits excluding time deposits, increased $284.3 million partly offset by a $25.0 million decrease in time deposits as the Bank continued to moderate its pricing for this product. Also, as a result of the increase in deposits, Federal Home Loan Bank advances decreased by $53.0 million to $280.0 million at September 30, 2010, as compared to $333.0 million at December 31, 2009.

Stockholders’ equity at September 30, 2010 increased by 8.7%, to $199.4 million, as compared to $183.5 million at December 31, 2009, primarily due to net income and a reduction in accumulated other comprehensive loss partly offset by the cash dividend on common stock.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2010 and September 30, 2009

General

Net income available to common stockholders for the three months ended September 30, 2010 was $5.2 million, as compared to net income available to common stockholders of $4.0 million for the corresponding prior year period, an increase of $1.2 million, or 31.0%. For the nine months ended September 30, 2010, net income available to common stockholders was $14.6 million, as compared to net income available to common stockholders of $10.5 million for the corresponding prior year period, an increase of $4.1 million, or 38.4%. On a per share basis net income per diluted share was $0.29 and $0.80 for the three and nine months ended September 30, 2010, respectively, as compared to $0.34 and $0.90 for the corresponding prior year periods. For both the three and nine months ended September 30, 2010, the decrease in diluted earnings per share reflects the higher number of average diluted shares outstanding from the issuance of additional common shares in November 2009.

Interest Income

Interest income for the three and nine months ended September 30, 2010 was $25.7 million and $76.6 million, respectively, as compared to $23.8 million and $72.4 million, respectively, for the three and nine months ended September 30, 2009. The yield on interest-earning assets declined to 4.90% and 4.94% for the three and nine months ended September 30, 2010, as compared to 5.32% and 5.35%, respectively, for the same prior year periods. Average interest-earning assets increased by $306.3 million and $264.2 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same prior year periods. The increase was primarily in average mortgage-backed securities which increased $259.3 million and $252.5 million, respectively, for the three and nine months ended September 30, 2010.

Interest Expense

Interest expense for the three and nine months ended September 30, 2010 was $6.2 million and $18.4 million, respectively, compared to $7.1 million and $23.9 million, respectively, for the three and nine months ended September 30, 2009. The cost of interest-bearing liabilities decreased to 1.32% and 1.33%, respectively, for the three and nine months ended September 30, 2010, as compared to 1.79% and 1.98%, respectively, in the same prior year periods. Average interest-bearing liabilities increased by $273.2 million and $239.4 million, respectively, for the three and nine months ended September 30, 2010, as compared to the same prior year periods. The increase was primarily in average transaction deposits which increased $255.8 million and $174.4 million, respectively, and average borrowed funds which increased $55.9 million and $111.9 million, respectively, partly offset by a decrease in average time deposits of $38.5 million and $46.9 million, respectively. The increase in average borrowings and average transaction deposits were used to fund the increase in average investment and mortgage-backed securities.

 

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Net Interest Income

Net interest income for the three and nine months ended September 30, 2010 increased 17.2% and 20.0% to $19.6 million and $58.2 million, respectively, as compared to $16.7 million and $48.5 million, respectively, in the same prior year periods reflecting higher levels of interest-earning assets. Additionally, the net interest margin increased to 3.75% for the nine months ended September 30, 2010, from 3.59% in the same prior year period partly due to the low interest rate environment.

Provision for Loan Losses

For the three and nine months ended September 30, 2010, the provision for loan losses was $1.6 million and $6.0 million, respectively, compared to $1.5 million and $3.5 million, respectively, in the same prior year periods primarily due to the increase in non-performing loans and partially due to higher loan balances and continued economic stress. Non-performing loans increased $5.5 million, or 19.3%, at September 30, 2010 to $33.8 million from $28.3 million at December 31, 2009 primarily due to delinquencies and sub-par financial performance under the continued high unemployment and difficult economic environment. Net charge-offs for the nine months ended September 30, 2010 were $2.1 million, as compared to $1.5 million in the same prior year period. Net charge-offs for the nine months ended September 30, 2010 included $1.2 million relating to loans originated by Columbia, the Company’s mortgage banking subsidiary which was shuttered in 2007.

Other Income

Other income decreased to $4.2 million and $10.8 million, respectively, for the three and nine months ended September 30, 2010, as compared to $4.5 million and $11.9 million, respectively, in the same prior year periods. Loan servicing income (loss) increased to income of $231,000 for the nine months ended September 30, 2010 from a loss of $102,000 in the same prior year period due to an impairment to the loan servicing asset of $263,000 recognized in the first quarter of 2009. Fees and service charges increased to $2.8 million and $8.1 million, respectively, for the three and nine months ended September 30, 2010, as compared to $2.7 million and $7.8 million for the corresponding prior year periods. The increase was due to higher fees from merchant services, commercial checking accounts and trust services partly offset by a reduction in private mortgage insurance (“PMI”) fee income. This reduction in PMI fee income resulted from a charge of $203,000 for the three and nine months ended September 30, 2010 related to several rescission claims. The net gain on sales of loans increased to $1.2 million for the three months ended September 30, 2010, as compared to $1.1 million for the corresponding prior year period. Although loan sales volume decreased from the prior year period, the gain on sale margin was very strong, resulting in the overall increase in gain on sale of loans for the three months ended September 30, 2010. The net gain on the sale of loans sold decreased to $2.2 million, as compared to $3.1 million for the corresponding prior year period due to a decline in the volume of loans sold. The net loss from other real estate operations was $408,000 for the nine months ended September 30, 2010, as compared to a gain of $71,000 in the same prior year period due to current period write-downs in the value of properties previously acquired. Other income decreased $361,000 and $362,000, respectively, for the three and nine months ended September 30, 2010, as compared to the same prior year periods due to the third quarter 2009 recovery of $367,000 in borrower escrow funds at Columbia.

Operating Expenses

Operating expenses were $13.8 million and $39.7 million, respectively, for the three and nine months ended September 30, 2010, an increase of 11.4% and 6.3% from $12.4 million and $37.4 million, respectively, for the corresponding prior year periods primarily a result of increased compensation expense, partially offset by decreases in occupancy and for the nine months ended September 30, 2010, a decrease in federal deposit insurance. Compensation and employee benefits costs increased due to higher incentive compensation, salary and stock plan expense. For the nine months ended September 30, 2010, the increase was also due to the reduction in the number of mortgage loan closings from prior year levels, resulting in decreased deferred loan origination expense in the current year which results in an increase to compensation expense. Occupancy expense decreased $570,000 for the nine months ended September 30, 2010, as compared to the corresponding prior year period due to a $556,000 charge in the second quarter of 2009 relating to the termination of all remaining lease obligations of Columbia. Federal deposit insurance expense decreased by $529,000 for the nine months ended September 30, 2010, as compared to the corresponding prior year period due to a special assessment of $869,000 in the second quarter of 2009. General and administrative expense for the three and nine months ended September 30, 2010 included $413,000 and $582,000, respectively, of costs related to the Company’s announced, but subsequently terminated, merger with Central Jersey Bancorp. For the three and nine months ended September 30, 2010, the reduction in merger related expenses was partly offset by higher loan related expenses. Although loan closings have decreased from prior year levels, the marginal cost to originate each loan in the current regulatory and economic environment has increased and the Company has also incurred increased costs relating to loan applications which may not result in a closed loan.

 

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Provision for Income Taxes

Income tax expense was $3.2 million and $8.7 million, respectively, for the three and nine months ended September 30, 2010, as compared to an expense of $2.9 million and $7.4 million, respectively, for the same prior year periods. The effective tax rate decreased slightly to 37.8% and 37.4%, respectively, for the three and nine months ended September 30, 2010, as compared to 38.7% and 38.1%, respectively, in the same prior periods.

Dividends on Preferred Stock and Warrant Accretion

Dividends on preferred stock and warrant accretion totaled $537,000 and $1.5 million, respectively, for the three and nine months ended September 30, 2009, as compared to no amounts in the current year periods. The preferred stock was redeemed on December 30, 2009 and the related warrant was repurchased on February 3, 2010. The warrant repurchase had no effect on net income available to common stockholders for the nine months ended September 30, 2010.

Liquidity and Capital Resources

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

At September 30, 2010, the Company had outstanding overnight borrowings from the FHLB of $30.0 million, as compared to $87.0 million in overnight borrowings at December 31, 2009. The Company utilizes the overnight borrowings to fund short-term liquidity needs. The Company had total FHLB borrowings, including overnight borrowings, of $280.0 million at September 30, 2010, a decrease from $333.0 million at December 31, 2009.

The Company’s cash needs for the nine months ended September 30, 2010 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale and increased deposits. The cash was principally utilized for loan originations, the purchase of investment and mortgage-backed securities and the repayment of FHLB borrowings. For the nine months ended September 30, 2009, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from the sale of mortgage loans held for sale, increased deposits and the issuance of preferred stock. The cash provided was principally used for loan originations, the purchase of mortgage-backed securities and to reduce borrowings.

In the normal course of business, the Company routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At September 30, 2010, outstanding commitments to originate loans totaled $88.7 million; outstanding unused lines of credit totaled $212.2 million; and outstanding commitments to sell loans totaled $50.1 million. The Company expects to have sufficient funds available to meet current commitments arising in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $171.5 million at September 30, 2010. Based upon historical experience management estimates that a significant portion of such deposits will remain with the Company.

Cash dividends on common stock declared and paid by OceanFirst Financial Corp. during the first nine months of 2010 were $6.6 million as compared to $7.1 million in the same prior year period. On October 21, 2010, the Board of Directors declared a quarterly cash dividend of twelve cents ($0.12) per common share. The dividend is payable on November 12, 2010 to stockholders of record at the close of business on November 1, 2010.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the banking subsidiary and the issuance of preferred and common stock, long-term debt and trust preferred securities. For the first nine months of 2010, OceanFirst Financial Corp. received no dividend payments from OceanFirst Bank. OceanFirst Financial Corp.’s ability to continue to pay dividends will be partly dependent upon capital distributions from OceanFirst Bank which may be adversely affected by capital constraints imposed by the Office of Thrift Supervision (“OTS”). Pursuant to OTS regulations, a notice is required to be filed with the OTS prior to the Bank paying a dividend to OceanFirst Financial Corp. The OTS could object to a proposed capital distribution by any institution, which would otherwise be permitted by regulation, if the OTS determines that such distribution would constitute an unsafe and unsound practice. The Company cannot predict whether the OTS may object to any future notices or fail to approve any future applications to pay a dividend to OceanFirst Financial Corp. At September 30, 2010, OceanFirst Financial Corp. held $22.8 million in cash and $293,000 in investment securities available for sale.

 

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At September 30, 2010, the Bank exceeded all of its regulatory capital requirements with tangible capital of $199.7 million, or 9.0% of total adjusted assets, which is above the required level of $33.4 million or 1.5%; core capital of $199.7 million or 9.0% of total adjusted assets, which is above the required level of $89.2 million, or 4.0% and risk-based capital of $212.3 million, or 14.9% of risk-weighted assets, which is above the required level of $113.8 million or 8.0%. The Bank is considered a “well-capitalized” institution under the OTS’ Prompt Corrective Action Regulations.

At September 30, 2010, the Company maintained tangible common equity of $199.4 million, for a tangible common equity to assets ratio of 8.96%.

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 unused lines of credit and commitments to extend credit. The Company also has outstanding commitments to sell loans amounting to $50.1 million.

The following table shows the contractual obligations of the Company by expected payment period as of September 30, 2010 (in thousands):

 

Contractual Obligation

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

Debt Obligations

   $ 378,374       $ 154,874       $ 102,000       $ 94,000       $ 27,500   

Commitments to Originate Loans

     88,728         88,728         —           —           —     

Commitments to Fund Unused Lines of Credit

     212,206         212,206         —           —           —     

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

Non-Performing Assets

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

 

     September 30,
2010
    December 31,
2009
 
     (dollars in thousands)  

Non-performing loans:

  

Real estate – one-to-four family

   $ 21,776      $ 19,142   

Commercial real estate

     6,822        5,152   

Construction

     368        368   

Consumer

     4,132        3,031   

Commercial

     674        627   
                

Total non-performing loans

     33,772        28,320   

REO, net

     2,242        2,613   
                

Total non-performing assets

   $ 36,014      $ 30,933   
                

Delinquent loans 30-89 days

   $ 18,376      $ 15,528   
                

Allowance for loan losses as a percent of total loans receivable

     1.10     .89

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

     55.05        51.99   

Non-performing loans as a percent of total loans receivable

     2.00        1.72   

Non-performing assets as a percent of total assets

     1.62        1.52   

 

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Included in the non-performing loan total at September 30, 2010 was a single troubled debt restructured loan of $41,000, as compared to $1.6 million of troubled debt restructured loans at December 31, 2009. The non-performing loan total includes $653,000 of repurchased one-to-four family and consumer loans and $2.5 million of one-to-four family and consumer loans previously held for sale, which were written down to their fair market value in a prior period. Non-performing loans are concentrated in one-to-four family loans which comprise 64.5% of the total. At September 30, 2010, the average weighted loan-to-value ratio of non-performing one-to-four family loans was 75% using appraisal values at time of origination and 100% using updated appraisal values. Included in the allowance for loan losses is a specific allowance for the difference between the Company’s recorded investment in the loan and the fair value of the collateral, less estimated disposal costs. At September 30, 2010, the average weighted loan-to-value ratio of the total one-to-four family loan portfolio was 58% using appraisal values at time of origination. Based upon available market data, home values in the Company’s primary market area have declined by approximately 15% from the peak of the market, however, more recently home values appear to have stabilized. There can be no assurance that home values will not decline further, possibly resulting in losses to the Company. The largest non-performing loan is a one-to-four family loan for $3.5 million which is secured by a first mortgage on a property with a recent appraised value of $3.8 million.

The Company also classifies loans in accordance with regulatory guidelines. At September 30, 2010, the Company had $14.1 million designated as Special Mention, $56.1 million classified as Substandard and $1.5 million classified as Doubtful, as compared to $12.0 million, $41.4 million and $33,000, respectively, at December 31, 2009. The largest Special Mention loan at September 30, 2010 is comprised of two credit facilities to a large real estate agency with an aggregate balance of $2.7 million which was current as to payments, but criticized due to poor operating results. The largest Substandard loan relationship is comprised of several credit facilities to a building supply company with an aggregate balance of $9.1 million, which was current as to payments, but criticized due to poor operating results. The loans are well-secured by commercial real estate and other business assets. The largest Doubtful loan is a loan for $2.6 million of which $1.5 million is classified as Doubtful and $1.1 million is classified as Substandard. The loan is delinquent and the borrower has filed for bankruptcy protection. The loan is secured by commercial real estate and also carries a personal guarantee. The Company has established an $800,000 specific reserve for this loan. In addition to loan classifications, the Company classified investment securities with an amortized cost of $30.0 million and a carrying value of $20.2 million as Substandard, which represents the amount of investment securities with a credit rating below investment grade from one of the internationally-recognized credit rating services.

At September 30, 2010, the Bank was holding subprime loans with a gross principal balance of $1.9 million and a carrying value, net of write-downs and lower of cost or market adjustment, of $1.5 million, and ALT-A loans with a gross principal balance of $3.5 million and a carrying value, net of write-downs and lower of cost or market adjustment, of $3.4 million. These loans were all originated by Columbia prior to its shuttering in 2007.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions. 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 the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, 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, 2009 (the “2009 Form 10-K”) and its subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on 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 2009 Form 10-K and Item 1A of this Form 10-Q.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2010, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. At September 30, 2010, the Company’s one-year gap was positive 0.34% as compared to negative 0.04% at December 31, 2009.

 

At September 30, 2010

   3 Months
Or Less
    More than
3 Months to
1 Year
    More than
1 Year to
3 Years
    More than
3 Years to
5 Years
    More than
5 Years
    Total  
(dollars in thousands)                                     

Interest-earning assets: (1)

            

Interest-earning deposits and short-term investments

   $ 13,386      $ —        $ —        $ —        $ —        $ 13,386   

Investment securities

     55,300        —          22,420        6,689        370        84,779   

FHLB stock

     —          —          —          —          17,425        17,425   

Mortgage-backed securities

     16,513        47,017        106,402        83,989        79,399        333,320   

Loans receivable (2)

     288,443        474,757        554,523        212,930        153,121        1,683,774   
                                                

Total interest-earning assets

     373,642        521,774        683,345        303,608        250,315        2,132,684   
                                                

Interest-bearing liabilities:

            

Money market deposit accounts

     4,831        14,608        38,954        48,693        —          107,086   

Savings accounts

     12,945        33,324        88,864        111,081        —          246,214   

Interest-bearing checking accounts

     411,716        61,797        164,792        206,153        —          844,458   

Time deposits

     50,711        120,825        63,776        22,444        29,439        287,195   

FHLB advances

     30,000        54,000        102,000        94,000        —          280,000   

Securities sold under agreements to repurchase

     70,874        —          —          —          —          70,874   

Other borrowings

     22,500        —          —          —          5,000        27,500   
                                                

Total interest-bearing liabilities

     603,577        284,554        458,386        482,371        34,439        1,863,327   
                                                

Interest sensitivity gap (3)

   $ (229,935   $ 237,220      $ 224,959      $ (178,763   $ 215,876      $ 269,357   
                                                

Cumulative interest sensitivity gap

   $ (229,935   $ 7,285      $ 232,244      $ 53,481      $ 269,357      $ 269,357   
                                                

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

     (10.78 )%      0.34     10.89     2.51     12.63     12.63

 

(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
(3) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in net portfolio value (“NPV”) and net interest income under varying rate shocks as of September 30, 2010 and December 31, 2009. 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 Company’s Annual Report for the year ended December 31, 2009.

 

     September 30, 2010     December 31, 2009  
     Net Portfolio Value           Net Interest
Income
    Net Portfolio Value           Net Interest
Income
 

Change in Interest Rates in Basis Points

(Rate Shock)

   Amount      %
Change
    NPV
Ratio
    Amount      %
Change
    Amount      %
Change
    NPV
Ratio
    Amount      %
Change
 
(dollars in thousands)                                                                 

200

   $ 197,303         (10.8 )%      9.2   $ 74,525         (4.6 )%    $ 192,771         (12.6 )%      9.9   $ 68,804         (7.0 )% 

100

     216,030         (2.4     9.8        76,688         (1.8     209,887         (4.8     10.6        71,779         (3.0

Static

     221,232         —          9.9        78,126         —          220,452         —          10.9        74,004         —     

(100)

     211,353         (4.5     9.3        74,628         (4.5     216,497         (1.8     10.5        70,661         (4.5

(200)

     230,198         4.1        10.1        69,948         (10.5     206,585         (6.3     10.1        65,067         (12.1

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) 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 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

 

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principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, there were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2009 Form 10-K and Part II, Item 1A, “Risk Factors” in the Company’s June 30, 2010 Quarterly Report on Form 10-Q. There were no material changes to risk factors relevant to the Company’s operations since the June 30, 2010 Form 10-Q.

 

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

Not Applicable

 

Item 3. Defaults Upon Senior Securities

Not Applicable

 

Item 4. Removed and Reserved

 

Item 5. Other Information

Not Applicable

 

Item 6. Exhibits

Exhibits:

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0    Certifications pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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.

 

        OceanFirst Financial Corp.
    Registrant

DATE: November 9, 2010

   

/s/ John R. Garbarino

    John R. Garbarino
   

Chairman of the Board and

Chief Executive Officer

DATE: November 9, 2010

   

/s/ Michael J. Fitzpatrick

    Michael J. Fitzpatrick
    Executive Vice President and Chief Financial Officer

 

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Exhibit Index

 

Exhibit

  

Description

   Page  
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      26   
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      27   
32.0    Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002      28   

 

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