UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31,June 30, 2009

 

¨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 May 7,August 5, 2009, there were 12,369,54312,371,768 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


OceanFirst Financial Corp.

INDEX TO FORM 10-Q

 

      PAGE
PART II..  FINANCIAL INFORMATION  
Item 1.  Consolidated Financial Statements (Unaudited)  
  Consolidated Statements of Financial Condition as of March 31,June 30, 2009 and December 31, 2008  1
  Consolidated Statements of Income for the three and six months ended March 31,June 30, 2009 and 2008  2
  Consolidated Statements of Changes in Stockholders’ Equity for the threesix months ended March 31,June 30, 2009 and 2008  3
  Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2009 and 2008  4
  Notes to Unaudited Consolidated Financial Statements  6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  1013
Item 3.  Quantitative and Qualitative Disclosures About Market Risk  1519
Item 4.  Controls and Procedures  1620
PART II.  OTHER INFORMATION  
Item 1.  Legal Proceedings  1720
Item 1A.  Risk Factors  1720
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  1722
Item 3.  Defaults Upon Senior Securities  1722
Item 4.  Submission of Matters to a Vote of Security Holders  1722
Item 5.  ��Other Information  1722
Item 6.  Exhibits  1822
Signatures  1923


OceanFirst Financial Corp.

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

 

  March 31,
2009
 December 31,
2008
   June 30,
2009
 December 31,
2008
 
  (Unaudited)     (Unaudited)   

ASSETS

      

Cash and due from banks

  $23,769  $18,475   $22,423   $18,475  

Investment securities available for sale

   27,557   34,364    31,890    34,364  

Federal Home Loan Bank of New York stock, at cost

   19,031   20,910    16,188    20,910  

Mortgage-backed securities available for sale

   97,271   40,801    89,436    40,801  

Loans receivable, net

   1,650,133   1,648,378    1,643,704    1,648,378  

Mortgage loans held for sale

   1,787   3,903    13,475    3,903  

Interest and dividends receivable

   6,576   6,298    6,411    6,298  

Real estate owned, net

   1,457   1,141    1,348    1,141  

Premises and equipment, net

   20,988   21,336    21,216    21,336  

Servicing asset

   6,735   7,229    6,817    7,229  

Bank Owned Life Insurance

   39,365   39,135    39,566    39,135  

Other assets

   19,064   15,976    17,111    15,976  
              

Total assets

  $1,913,733  $1,857,946   $1,909,585   $1,857,946  
              

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Deposits

  $1,313,470  $1,274,132   $1,364,570   $1,274,132  

Securities sold under agreements to repurchase with retail customers

   73,054   62,422    77,246    62,422  

Federal Home Loan Bank advances

   320,000   359,900    258,000    359,900  

Other borrowings

   27,500   27,500    27,500    27,500  

Advances by borrowers for taxes and insurance

   8,491   7,581    8,716    7,581  

Other liabilities

   13,020   6,628    11,644    6,628  
              

Total liabilities

   1,755,535   1,738,163    1,747,676    1,738,163  
              

Stockholders’ equity:

      

Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, 38,263 shares issued at March 31, 2009

   37,225   —   

Common stock, $.01 par value, 55,000,000 shares authorized, 27,177,372 shares issued and 12,364,573 shares outstanding at March 31, 2009 and December 31, 2008

   272   272 

Preferred stock, $.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, 38,263 shares issued at June 30, 2009

   37,285    —    

Common stock, $.01 par value, 55,000,000 shares authorized, 27,177,372 shares issued and 12,371,768 and 12,364,573 shares outstanding at June 30, 2009 and December 31, 2008, respectively

   272    272  

Additional paid-in capital

   205,819   204,298    205,949    204,298  

Retained earnings

   161,409   160,267    162,088    160,267  

Accumulated other comprehensive loss

   (16,009)  (14,462)   (13,356  (14,462

Less: Unallocated common stock held by Employee Stock Ownership Plan

   (4,995)  (5,069)   (4,923  (5,069

Treasury stock, 14,812,799 shares at March 31, 2009 and December 31, 2008

   (225,523)  (225,523)

Treasury stock, 14,805,604 and 14,812,799 shares at June 30, 2009 and December 31, 2008, respectively

   (225,406  (225,523

Common stock acquired by Deferred Compensation Plan

   970   981    970    981  

Deferred Compensation Plan Liability

   (970)  (981)   (970  (981
              

Total stockholders’ equity

   158,198   119,783    161,909    119,783  
              

Total liabilities and stockholders’ equity

  $1,913,733  $1,857,946   $1,909,585   $1,857,946  
              

See accompanying Notes to Unaudited Consolidated Financial Statements.

OceanFirst Financial Corp.

Consolidated Statements of Income

(in thousands, except per share amounts)

 

  For the three months
ended March 31,
   For the three months
ended June 30,
 For the six months
ended June 30,
 
  2009 2008   2009  2008 2009 2008 
  (Unaudited)   (Unaudited) (Unaudited) 

Interest income:

         

Loans

  $23,172  $25,003   $22,791  $24,103   $45,963   $49,105  

Mortgage-backed securities

   768   611    873   573    1,641    1,184  

Investment securities and other

   450   1,908    552   991    1,002    2,900  
                    

Total interest income

   24,390   27,522    24,216   25,667    48,606    53,189  
                    

Interest expense:

         

Deposits

   5,096   7,864    4,777   6,707    9,873    14,571  

Borrowed funds

   3,632   5,423    3,285   4,698    6,918    10,120  
                    

Total interest expense

   8,728   13,287    8,062   11,405    16,791    24,691  
                    

Net interest income

   15,662   14,235    16,154   14,262    31,815    28,498  

Provision for loan losses

   800   375    1,200   400    2,000    775  
                    

Net interest income after provision for loan losses

   14,862   13,860    14,954   13,862    29,815    27,723  
                    

Other income:

         

Loan servicing (loss) income

   (230)  90    9   81    (221  172  

Fees and service charges

   2,518   2,767    2,585   2,900    5,103    5,668  

Net gain on sales of loans and securities available for sale

   673   597 

Net loss from other real estate operations

   (1)  (21)

Net gain (loss) on sales of loans and securities available for sale

   1,352   (718  2,025    (122

Net gain from other real estate operations

   6   39    5    18  

Income from Bank Owned Life Insurance

   231   334    201   309    431    642  

Other

   3   3    2   9    6    11  
                    

Total other income

   3,194   3,770    4,155   2,620    7,349    6,389  
                    

Operating expenses:

         

Compensation and employee benefits

   5,828   5,935    5,738   5,806    11,565    11,740  

Occupancy

   1,474   1,201    1,814   1,195    3,289    2,396  

Equipment

   449   511    501   454    950    965  

Marketing

   324   393    380   453    704    847  

Federal deposit insurance

   502   309    1,405   341    1,907    651  

Data processing

   835   849    858   748    1,693    1,597  

Legal

   577   547    520   524    1,097    1,072  

Check card processing

   251   251    254   247    505    499  

Accounting and audit

   160   259    171   290    331    539  

General and administrative

   1,384   1,379    1,599   1,310    2,982    2,697  
                    

Total operating expenses

   11,784   11,634    13,240   11,368    25,023    23,003  
                    

Income before provision for income taxes

   6,272   5,996    5,869   5,114    12,141    11,109  

Provision for income taxes

   2,319   1,990    2,270   1,579    4,589    3,568  
                    

Net income

   3,953   4,006    3,599   3,535    7,552    7,541  

Dividends on preferred stock and warrant accretion

   458   —      538   —      996    —    
                    

Net income available to common stockholders

  $3,495  $4,006   $3,061  $3,535   $6,556   $7,541  
                    

Basic earnings per share

  $0.30  $0.34   $0.26  $0.30   $0.56   $0.65  
                    

Diluted earnings per share

  $0.30  $0.34   $0.26  $0.30   $0.56   $0.64  
                    

Average basic shares outstanding

   11,696   11,653    11,710   11,666    11,703    11,653  
                    

Average diluted shares outstanding

   11,743   11,706    11,757   11,740    11,750    11,709  
                    

See accompanying Notes to Unaudited Consolidated Financial Statements.

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   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, 2007

  $—    $272  $203,532  $154,929  $(3,211) $(5,360) $(225,856) $1,307  $(1,307) $124,306   $—    $272  $203,532   $154,929   $(3,211 $(5,360 $(225,856 $1,307   $(1,307 $124,306  
                              

Comprehensive income:

                          

Net income

   —     —     —     4,006   —     —     —     —     —     4,006    —     —     —      7,541    —      —      —      —      —      7,541  

Other comprehensive loss:

   —                          

Unrealized loss on securities (net of tax benefit $1,641)

   —     —     —     —     (3,047)  —     —     —     —     (3,047)

Unrealized loss on securities (net of tax benefit $2,263)

   —     —     —      —      (4,204  —      —      —      —      (4,204

Reclassification adjustment for losses included in net income (net of tax benefit $399)

   —     —     —      —      742    —      —      —      —      742  
                              

Total comprehensive income

              959               4,079  
                              

Stock awards

   —     —     131   —     —     —     —     —     —     131    —     —     281    —      —      —      —      —      —      281  

Treasury stock allocated to restricted stock plan

   —     —     (172)  (24)  —     —     196   —     —     —      —     —     (172  (24  —      —      196    —      —      —    

Allocation of ESOP stock

   —     —     —     —     —     73   —     —     —     73    —     —     —      —      —      146    —      —      —      146  

ESOP adjustment

     —     66   —     —     —     —     —     —     66    —     —     158    —      —      —      —      —      —      158  

Cash dividend - $.20 per share

     —     —     (2,339)  —     —     —     —     —     (2,339)

Cash dividend - $0.40 per share

   —     —     —      (4,682  —      —      —      —      —      (4,682

Exercise of stock options

     —     —     (35)  —     —     92   —     —     57    —     —     —      (36  —      —      137    —      —      101  

Sale of stock for the deferred compensation plan

   —     —     —     —     —     —     —     (797)  797   —      —     —     —      —      —      —      —      (329  329    —    
                                                              

Balance at March 31, 2008

  $—    $272  $203,557  $156,537  $(6,258) $(5,287) $(225,568) $510  $(510) $123,253 

Balance at June 30, 2008

  $—    $272  $203,799   $157,728   $(6,673 $(5,214 $(225,523 $978   $(978 $124,389  
                                                              

Balance at December 31, 2008

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

Comprehensive income:

                          

Net income

   —     —     —     3,953   —     —     —     —     —     3,953    —     —     —      7,552    —      —      —      —      —      7,552  

Other comprehensive loss:

             

Unrealized loss on securities (net of tax benefit $1,068)

   —     —     —     —     (1,547)  —     —     —     —     (1,547)

Other comprehensive income:

             

Unrealized loss on securities (net of tax benefit $764)

   —     —     —      —      1,106    —      —      —      —      1,106  
                              

Total comprehensive income

              2,406               8,658  
                              

Proceeds from issuance of preferred stock and warrants

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

Accretion of discount on preferred stock

   60   —     —     (60)  —     —     —     —     —     —      119   —     —      (119  —      —      —      —      —      —    

Treasury stock allocated to restricted stock plan

   —     —     (63  (13  —      —      76    —      —      —    

Stock awards

   —     —     149   —     —     —     —     —     —     149    —     —     311    —      —      —      —      —      —      311  

Allocation of ESOP stock

   —     —     —     —     —     74   —     —     —     74    —     —     —      —      —      146    —      —      —      146  

ESOP adjustment

   —     —     30   —     —     —     —     —     —     30    —     —     61    —      —      —      —      —      —      61  

Cash dividend - $.20 per share

   —     —     —     (2,353)  —     —     —     —     —     (2,353)

Cash dividend - $0.40 per share

   —     —     —      (4,707  —      —      —      —      —      (4,707

Cash dividend on preferred stock

   244   —     —     (398)  —     —     —     —     —     (154)   245   —     —      (877  —      —      —      —      —      (632

Exercise of stock options

   —     —     —      (15  —      —      41    —      —      26  

Sale of stock for the deferred compensation plan

   —     —     —     —     —     —     —     (11)  11   —      —     —     —      —      —      —      —      (11  11    —    
                                                              

Balance at March 31, 2009

  $37,225  $272  $205,819  $161,409  $(16,009) $(4,995) $(225,523) $970  $(970) $158,198 

Balance at June 30, 2009

  $37,285  $272  $205,949   $162,088   $(13,356 $(4,923 $(225,406 $970   $(970 $161,909  
                                                              

See accompanying Notes to Unaudited Consolidated Financial Statements.

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows

(dollars in thousands)

 

  For the three months
ended March 31,
   For the six months
ended June 30,
 
  2009 2008   2009 2008 
  (Unaudited)   (Unaudited) 

Cash flows from operating activities:

      

Net income

  $3,953  $4,006   $7,552   $7,541  
              

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

      

Depreciation and amortization of premises and equipment

   488   414    972    832  

Amortization of ESOP

   74   73    146    146  

ESOP adjustment

   30   66    61    158  

Stock awards

   149   131    311    281  

Amortization and impairment of servicing asset

   816   551    1,387    1,099  

Net premium amortization in excess of discount accretion on securities

   96   10    281    15  

Net amortization of deferred costs and discounts on loans

   113   156    442    423  

Provision for loan losses

   800   375    2,000    775  

Net gain on sale of real estate owned

   (22)  —      (45  (60

Other than temporary impairment on investment securities available for sale

   —      1,141  

Recovery from reserve for repurchased loans

   (34)  (161)   (245  (161

Net gain on sales of loans and securities

   (639)  (436)   (1,780  (858

Loans repurchased

   —     (222)

Proceeds from sales of mortgage loans held for sale

   48,794   28,435    132,163    59,603  

Mortgage loans originated for sale

   (46,357)  (26,643)   (140,926  (59,890

Increase in value of Bank Owned Life Insurance

   (231)  (334)   (431  (642

(Increase) decrease in interest and dividends receivable

   (278)  290    (113  362  

Increase in other assets

   (651)  (655)   (529  (552

Increase in other liabilities

   6,426   7,702    5,261    2,088  
              

Total adjustments

   9,574   9,752    (1,045  4,760  
              

Net cash provided by operating activities

   13,527   13,758    6,507    12,301  
              

Cash flows from investing activities:

      

Net (increase) decrease in loans receivable

   (3,077)  18,165 

Net decrease in loans receivable

   1,491    40,546  

Loans repurchased

   —     (408)   —      (408

Proceeds from maturities or calls of investment securities available for sale

   —      300  

Proceeds from sale of investment securities available for sale

   1,823   122    1,823    122  

Purchases of investment securities available for sale

   —     (633)   —      (937

Purchases of mortgage-backed securities available for sale

   (59,468)  —      (59,468  —    

Principal payments on mortgage-backed securities available for sale

   3,899   4,244    11,699    7,509  

Decrease in Federal Home Loan Bank of New York stock

   1,879   1,314    4,722    3,560  

Proceeds from sales of real estate owned

   115   —      579    251  

Purchases of premises and equipment

   (140)  (1,106)   (852  (2,726
              

Net cash (used in) provided by investing activities

   (54,969)  21,698    (40,006  48,217  
              

Continued

OceanFirst Financial Corp.

Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

 

  For the three months
ended March 31,
   For the six months
ended June 30,
 
  2009 2008   2009 2008 
  (Unaudited)   (Unaudited) 

Cash flows from financing activities:

      

Increase (decrease) in deposits

  $39,338  $(2,981)

Increase in deposits

  $90,438   $15,516  

Decrease in short-term borrowings

   (11,268)  (28,242)   (52,076  (46,072

Repayments of securities sold under agreements to repurchase with the Federal Home Loan Bank

   —     (12,000)   —      (12,000

Proceeds from Federal Home Loan Bank advances

   12,000   37,000    28,000    47,000  

Repayments of Federal Home Loan Bank advances

   (30,000)  (23,000)   (63,000  (61,000

Proceeds from other borrowings

   —      525  

Increase in advances by borrowers for taxes and insurance

   910   1,230    1,135    1,293  

Exercise of stock options

   —     57    26    101  

Dividends paid – common stock

   (2,353)  (2,339)   (4,707  (4,682

Dividends paid – preferred stock

   (154)  —      (632  —    

Proceeds from issuance of preferred stock and warrant

   38,263   —      38,263    —    
              

Net cash provided by (used in) financing activities

   46,736   (30,275)   37,447    (59,319
              

Net increase in cash and due from banks

   5,294   5,181    3,948    1,199  

Cash and due from banks at beginning of period

   18,475   27,547    18,475    27,547  
              

Cash and due from banks at end of period

  $23,769  $32,728   $22,423   $28,746  
              

Supplemental Disclosure of Cash Flow Information:

   

Supplemental Disclosure of Cash Flow

   

Information:

   

Cash paid during the period for:

      

Interest

  $8,858  $13,412   $17,133   $25,034  

Income taxes

   7   20    4,868    2,120  

Non cash activities:

      

Transfer of loans receivable to real estate owned

   409   495    741    935  
              

See accompanying Notes to Unaudited Consolidated Financial Statements.

OceanFirst Financial Corp.

Notes To Unaudited Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

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., and OceanFirst Services, LLC. 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 six months ended March 31,June 30, 2009 are not necessarily indicative of the results of operations that may be expected for all of 2009.

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, 2008.

Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three and six months ended March 31,June 30, 2009 and 2008 (in thousands):

 

  Three months ended
March 31,
   Three months ended
June 30,
 Six months ended
June 30,
 
  2009 2008   2009 2008 2009 2008 

Weighted average shares issued net of Treasury shares

  12,365  12,351   12,369   12,363   12,366   12,357  

Less: Unallocated ESOP shares

  (597) (631)  (588 (623 (592 (627

Unallocated incentive award shares and shares held by deferred compensation plan

  (72) (67)  (71 (74 (71 (77
                    

Average basic shares outstanding

  11,696  11,653   11,710   11,666   11,703   11,653  

Add: Effect of dilutive securities:

        

Stock options

  —    42   1   28   1   6  

Incentive awards and shares held by deferred compensation plan

  47  11   46   46   46   50  
                    

Average diluted shares outstanding

  11,743  11,706   11,757   11,740   11,750   11,709  
                    

For the three months ended March 31,June 30, 2009 and 2008, 1,595,0001,644,000 and 1,402,000,1,201,000, respectively, antidilutive stock options were excluded from earnings per share calculations. For the six months ended June 30, 2009 and 2008, 1,620,000 and 1,301,000, respectively, antidilutive stock options were excluded from earnings per share calculations.

Comprehensive Income

For the three month periods ended March 31,June 30, 2009 and 2008, total comprehensive income, representing net income plus or minus the change in unrealized gains or losses on securities available for sale amounted to $2,406,000$6,252,000 and $959,000,$3,120,000, respectively. For the six month periods ended June 30, 2009 and 2008, total comprehensive income amounted to $8,658,000 and $4,079,000, respectively.

Note 2. Acquisition

On May 27, 2009, the Company announced the signing of an agreement and plan of merger with Central Jersey Bancorp (“Central Jersey”), pursuant to which Central Jersey will merge with and into the Company in an all stock transaction. Under the terms of the agreement, Central Jersey common stockholders will receive 0.50 shares of the Company’s common stock for each common share of Central Jersey. The Company expects to consummate the transaction by year-end subject to customary closing conditions, including regulatory and shareholder approvals.

Note 3. Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at June 30, 2009 and December 31, 2008 are as follows (in thousands):

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Market
Estimated
Value
June 30, 2009       

U. S. agency obligations

  $302  $8  $—     $310

State and municipal obligations

   150   —     —      150

Corporate debt securities

   55,000   —     (23,799  31,201

Equity investments

   370   —     (141  229
                
  $55,822  $8  $(23,940 $31,890
                
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Market
Value
December 31, 2008       

U. S. agency obligations

  $302  $12  $—     $314

State and municipal obligations

   150   —     —      150

Corporate debt securities

   55,000   —     (23,314  31,686

Equity investments

   2,196   25   (7  2,214
                
  $57,648  $37  $(23,321 $34,364
                

There were no realized gains on the sale of investment securities available for sale for the three and six months ended June 30, 2009. For the three and six months ended June 30, 2008, the Company realized gains on the sale of investment securities available for sale of $0 and $122,000. There were no realized losses on the sale of investment securities available for sale for the three and six months ended June 30, 2009. For the three and six months ended June 30, 2008 the Company recognized an other than temporary impairment loss of $1.1 million on investment securities available for sale.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at June 30, 2009 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2009, investment securities available for sale with an amortized cost and estimated market value of $55.0 million and $31.2 million, respectively, were callable prior to the maturity date.

   Amortized
Cost
  Estimated
Market
Value
June 30, 2009    

Less than one year

  $452  $460

Due after one year through five years

   —     —  

Due after five years through ten years

   —     —  

Due after ten years

   55,000   31,201
        
  $55,452  $31,661
        

The estimated market value and unrealized loss for investment securities available for sale at June 30, 2009 and December 31, 2008 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
 
June 30, 2009          

Corporate debt securities

  $—    $—     $31,201  $(23,799 $31,201  $(23,799

Equity investments

   229   (141  —     —      229   (141
                         
  $229  $(141 $31,201  $(23,799 $31,430  $(23,940
                         
   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, 2008          

Corporate debt securities

  $—    $—     $31,686  $(23,314 $31,686  $(23,314

Equity investments

   1,819   (7  —     —      1,819   (7
                         
  $1,819  $(7 $31,686  $(23,314 $33,505  $(23,321
                         

At June 30, 2009 the market value of each corporate debt security was below cost. The portfolio consisted of eleven $5.0 million issues spread between eight issuers. The corporate debt securities are issued by other financial institutions. During 2009, six of the issues, totaling $30.0 million, experienced credit rating downgrades to below investment grade status. Despite the downgrades, all of the financial institutions were considered well-capitalized and continue to make interest payments under the terms of the debt securities. No interest payments have been deferred. Based upon management’s analysis, the financial institutions have the ability to meet debt service requirements for the foreseeable future. These floating rate securities were purchased during the period May 1998 to September 1998 and have paid coupon interest continuously since issuance. Floating rate 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. In addition, the market for these types of securities has become increasingly illiquid and volatile. 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. As a result, the Company concluded that available for sale securities were only temporarily impaired at June 30, 2009.

Note 4. Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at June 30, 2009 and December 31, 2008 are as follows (in thousands):

   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Market
Value
June 30, 2009       

FHLMC

  $15,663  $327  $(1 $15,989

FNMA

   71,120   906   (22  72,004

GNMA

   1,301   142   —      1,443
                
  $88,084  $1,375  $(23 $89,436
                
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Market
Value
December 31, 2008       

FHLMC

  $9,593  $114  $(20 $9,687

FNMA

   29,597   171   (139  29,629

GNMA

   1,407   78   —      1,485
                
  $40,597  $363  $(159 $40,801
                

There were no gains or losses realized on the sale of mortgage-backed securities available for sale for the three and six months ended June 30, 2009 and 2008.

The contractual maturities of mortgage-backed securities available for sale generally exceed 20 years; however, the effective lives are expected to be shorter due to principal prepayments.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at June 30, 2009 and December 31, 2008, 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
 
June 30, 2009          

FHLMC

  $299  $(1 $—    $—     $299  $(1

FNMA

   6,845   (19  214   (3  7,059   (22
                         
  $7,144  $(20 $214  $(3 $7,358  $(23
                         
   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, 2008          

FHLMC

  $1,105  $(10 $455  $(10 $1,560  $(20

FNMA

   5,133   (68  5,894   (71  11,027   (139
                         
  $6,238  $(78 $6,349  $(81 $12,587  $(159
                         

The mortgage-backed securities are issued and guaranteed by either FHLMC or FNMA, corporations which are chartered by the United States Government and whose debt obligations are typically rated AAA by one of the internationally recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the mortgage-backed securities. Although these mortgage-backed 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. As a result, the Company concluded that available for sale securities were only temporarily impaired at June 30, 2009.

Note 2.5. Loans Receivable, Net

Loans receivable, net at March 31,June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

 

  March 31, 2009 December 31, 2008   June 30, 2009 December 31, 2008 

Real estate:

      

One-to-four family

  $1,031,724  $1,039,375   $1,012,013   $1,039,375  

Commercial real estate, multi-family and land

   336,218   329,844    364,475    329,844  

Construction

   12,660   10,561    10,150    10,561  

Consumer

   222,184   222,797    218,784    222,797  

Commercial

   60,088   59,760    62,112    59,760  
              

Total loans

   1,662,874   1,662,337    1,667,534    1,662,337  

Loans in process

   (4,074)  (3,586)   (2,602  (3,586

Deferred origination costs, net

   5,139   5,195    5,005    5,195  

Allowance for loan losses

   (12,019)  (11,665)   (12,758  (11,665
              

Total loans, net

   1,651,920   1,652,281    1,657,179    1,652,281  

Less: Mortgage loans held for sale

   1,787   3,903    13,475    3,903  
              

Loans receivable, net

  $1,650,133  $1,648,378   $1,643,704   $1,648,378  
              

An analysis of the allowance for loan losses for the three and six months ended March 31,June 30, 2009 and 2008 is as follows (in thousands):

 

  Three months ended
March 31,
   Three months ended
June 30,
 Six months ended
June 30,
 
  2009 2008   2009 2008 2009 2008 

Balance at beginning of period

  $11,665  $10,468   $12,019   $10,739   $11,665   $10,468  

Provision charged to operations

   800   375    1,200    400    2,000    775  

Charge-offs

   (452)  (317)   (461  (220  (914  (537

Recoveries

   6   213    —      —      7    213  
                    

Balance at end of period

  $12,019  $10,739   $12,758   $10,919   $12,758   $10,919  
                    

Note 3.6. Reserve for Repurchased Loans

An analysis of the reserve for repurchased loans for the three and six months ended March 31,June 30, 2009 and 2008 is as follows (in thousands). The reserve is included in other liabilities in the accompanying statements of financial condition.

 

  Three months ended
March 31,
   Three months
ended June 30,
 Six months ended
June 30,
 
  2009 2008   2009 2008 2009 2008 

Balance at beginning of period

  $1,143  $2,398   $1,109   $1,713   $1,143   $2,398  

Recoveries

   (34)  (161)   (211  —      (245  (161

Loss on loans repurchased

   —     (524)   (63  (8  (63  (532
                    

Balance at end of period

  $1,109  $1,713   $835   $1,705   $835   $1,705  
                    

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 March 31,June 30, 2009, there was one unresolvedwere no loan repurchase requests outstanding, although one request outstandingwas received subsequent to June 30, 2009 which the Company is contesting. This request was also outstanding at December 31, 2008.evaluating.

Note 4.7. Deposits

The major types of deposits at March 31,June 30, 2009 and December 31, 2008 were as follows (in thousands):

 

  March 31, 2009  December 31, 2008  June 30, 2009  December 31, 2008

Type of Account

        

Non-interest-bearing

  $110,412  $97,278  $112,047  $97,278

Interest-bearing checking

   540,793   517,334   589,144   517,334

Money market deposit

   88,545   84,928   92,604   84,928

Savings

   218,664   207,224   224,082   207,224

Time deposits

   355,056   367,368   346,693   367,368
            

Total deposits

  $1,313,470  $1,274,132  $1,364,570  $1,274,132
            

Note 5.8. Recent Accounting Pronouncements

In June 2008, the Emergency Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued EITF 03-6-1 which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of EITF 03-6-1 did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued the following three Staff Positions:

 

Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The objective of an other-than-temporaryother than temporary impairment analysis under existing U.S. Generally Accepted Accounting Principles (“GAAP”) is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held to maturity or available for sale) should recognize a loss in earnings when the investment is impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis. The FASB Staff Position (“FSP”) amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of equity securities.

 

Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair“Fair Value Measurements,Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.

 

Staff Position No. FAS 107-1 and APBAccounting Principles Board (“APB”) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim“Interim Financial Reporting,Reporting”, to require those disclosures in summarized financial information at interim reporting periods.

All of the FSPs are effective for interim and annual reporting periods after June 15, 2009. The Company is evaluating the impactadoption of the FSPs did not have a material impact on the Company’s financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events.” SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted SFAS No. 165 during the second quarter of 2009. In accordance with SFAS No. 165, the Company evaluated subsequent events through the date its financial statements.statements are filed. The adoption of this standard did not have an impact on the Company’s financial position, results of operations, and earnings per share.

Note 6.9. Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value as of March 31,June 30, 2009 and December 31, 2008, 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:   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)
  Total Fair
Value
  Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
  Significant
Other Observable
Inputs

(Level 2)
  Significant
Unobservable
Inputs

(Level 3)

March 31, 2009

        

June 30, 2009

        

Items measured on a recurring basis:

        

Investment securities available for sale

  $27,557  $546  $27,011  $—    $31,890  $539  $31,351  $—  

Mortgage-backed securities available for sale

   97,271   —     97,271   —     89,436   —     89,436   —  

Items measured on a non-recurring basis:

        

Real estate owned

   1,457   —     —     1,457   830   —     —     830

Servicing asset

   6,735   —     —     6,735

Loans measured for impairment based on the fair value of the underlying collateral in accordance with SFAS No.114

   493   —     —     493   389   —     —     389

December 31, 2008

                

Investment securities available for sale

   34,364   709   33,655   —     34,364   709   33,655   —  

Mortgage-backed securities available for sale

   40,801   —     40,801   —     40,801   —     40,801   —  

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).

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

The fair value of investment and mortgage-backed securities is estimated based on bid quotations received from securities dealers, if available. If a quoted market price was not available, fair value was estimated using quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

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.

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 June 30, 2009 and December 31, 2008 are presented in the following tables (in thousands).

   Book Value  Fair Value

June 30, 2009

    

Financial Assets:

    

Cash and due from banks

  $22,423  $22,423

Investment securities available for sale

   31,890   31,890

Mortgage-backed securities available for sale

   89,436   89,436

Federal Home Loan Bank of New York stock

   16,188   16,188

Loans receivable and mortgage loans held for sale

   1,657,179   1,640,894

Financial Liabilities:

    

Deposits

   1,364,570   1,366,862

Borrowed funds

   362,746   365,377
        
   Book Value  Fair Value

December 31, 2008

    

Financial Assets:

    

Cash and due from banks

  $18,475  $18,475

Investment securities available for sale

   34,364   34,364

Mortgage-backed securities available for sale

   40,801   40,801

Federal Home Loan Bank of New York stock

   20,910   20,910

Loans receivable and mortgage loans held for sale

   1,652,281   1,644,004

Financial Liabilities:

    

Deposits

   1,274,132   1,277,248

Borrowed funds

   449,822   456,365
        

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 no 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 measured atthat 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 on a non-recurring basis wereestimates and have not significant as of March 31, 2009.been considered in the estimates.

Note 7.11. Issuance of Preferred Stock

On January 16, 2009, (the “Closing Date”) as part of the U.S. Department of the Treasury (the “Treasury”) Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement (“Letter Agreement”) and a Securities Purchase Agreement – Standard Terms attached thereto (“Securities Purchase Agreement”) with the Treasury, pursuant to which the Company agreed to issue and sell, and the Treasury agreed to purchase, (i)38,263 shares (the “Preferred Shares”) of the Company’s Fixed Rate Cumulative PerpetualPreferred Stock, Series A (the “Preferred Shares”), having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant (the “Warrant”) to purchase up to 380,853 shares of the Company’s common stock, $0.01 par value (“Common Stock”), at an exercise price of $15.07 per share, for an aggregate purchase price of $38,263,000$38.3 million in cash.

Cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but will be paid only if, as and when declared by the Company’s Board of Directors. The Preferred Shares have no maturity date and rank senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. Notwithstanding any provision in the Securities Purchase Agreement, the American Recovery and Reinvestment Act of 2009 (“ARRA”) permits the Company, with the approval of the Secretary of the Treasury after consultation with the Office

of Thrift Supervision (“OTS”), to repurchase the preferred sharesPreferred Shares without regard to whether the Company has raised gross proceeds from a Qualified Equity Offering or any other source and without regard to any waiting period. In the event the Company would repurchase the preferred shares,Preferred Shares, the Company may also repurchase the warrantsWarrants at the fair market value as determined by the Board of Directors in reliance on an opinion of a nationally recognized investment banking firm. In the event the Treasury does not accept such fair market value as determined by the Board, either party may submit to an appraisal procedure as set forth in the Securities Purchase Agreement. The Securities Purchase Agreement, pursuant to which the Preferred Shares and Warrant were sold, contains limitations on the payment of dividends on the Common Stock (including with respect to the payment of cash dividends in excess of $.20$0.20 per share, which was the amount of the last regular dividend declared by the Company prior to October 14, 2008). There are additional limitations on the Company’s ability to repurchase its common stock and repurchase or redeem its trust preferred securities, and the Company is subjected to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”) and the ARRA. The Securities Purchase Agreement and all related documents may be amended unilaterally by the Treasury to the extent required to comply with any changes in applicable federalFederal statutes after the execution thereof.

Of the $38,263,000$38.3 million in issuance proceeds, $36,921,000$36.9 million and $1,342,000$1.3 million were allocated to the Preferred Shares and the Warrant, respectively, based upon their relative fair values as of the Closing Date. The resulting discount of $1,342,000$1.3 million is accreted by a charge to retained earnings over a five year estimated life.

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, 2008 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, 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. PoliciesJudgments regarding securities impairment and 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,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.

On January 16, 2009, the Company received $38.3 million in proceeds from the issuance of preferred stockPreferred Shares and warrantsWarrants to the U.S. Treasury under the Capital Purchase Program. Proceeds from the preferred stockPreferred Shares were supplemented with Federal Home Loan BankFHLB borrowings and the combined amount was initially invested in mortgage-backed securities and bank-originatedBank-originated loans. Future cashCash flows generated by the Company as a result of the preferred stockPreferred Shares investment are expected to becurrently invested in additional bank-originatedBank-originated loans. The initial investment strategy was designed to effectively eliminate earnings dilution from the preferred stockPreferred Shares dividend and warrantWarrant accretion. The addition of preferred stockPreferred Shares to the Company’s total stockholder equity increased the Company’s tangible equity to assets ratio to 8.3%8.5% at March 31,June 30, 2009 from 6.5% at December 31, 2008.

In late 2008, short-term interest rates declined and the interest rate yield curve steepened. The lower interest rateThis environment has generally had a positive impact on the Bank’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. There has also been a continued weakening of the overall economy coupled with concern surrounding the housing market. These conditions have had an adverse impact on the Bank’s results of operations as non-performing loans and the provision for loan losses have increased.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth certain information relating to the Company for the three and six months ended March 31,June 30, 2009 and 2008. 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 MARCH 31,   FOR THE THREE MONTHS ENDED JUNE 30, 
  2009 2008   2009 2008 
  AVERAGE
BALANCE
  INTEREST  AVERAGE
YIELD/

COST
 AVERAGE
BALANCE
  INTEREST  AVERAGE
YIELD/

COST
   AVERAGE
BALANCE
  INTEREST  AVERAGE
YIELD/

COST
 AVERAGE
BALANCE
  INTEREST  AVERAGE
YIELD/

COST
 
  (Dollars in thousands)   (Dollars in thousands) 

Assets

                      

Interest-earning assets:

                      

Interest-earning deposits and short-term investments

  $—    $—    —  % $7,967  $61  3.06%  $—    $—    —   $17,843  $81  1.82

Investment securities (1)

   56,136   301  2.14   62,617   1,366  8.73    55,822   288  2.06    63,245   484  3.06  

FHLB stock

   19,102   149  3.12   21,974   481  8.76    17,117   264  6.17    19,862   426  8.58  

Mortgage-backed securities (1)

   76,492   768  4.02   52,599   611  4.65    93,215   873  3.75    48,408   573  4.73  

Loans receivable, net (2)

   1,652,110   23,172  5.61   1,670,071   25,003  5.99    1,650,217   22,791  5.52    1,654,792   24,103  5.83  
                                      

Total interest-earning assets

   1,803,840   24,390  5.41   1,815,228   27,522  6.06    1,816,371   24,216  5.33    1,804,150   25,667  5.69  
                                  

Non-interest-earning assets

   85,853      95,146       85,951      92,239    
                          

Total assets

  $1,889,693     $1,910,374      $1,902,322     $1,896,389    
                          

Liabilities and Stockholders’ Equity

                      

Interest-bearing liabilities:

                      

Transaction deposits

  $844,953   2,653  1.26  $740,380   3,290  1.78   $885,946   2,504  1.13   $777,350   3,053  1.57  

Time deposits

   360,136   2,443  2.71   443,418   4,574  4.13    353,608   2,273  2.57    423,120   3,654  3.45  
                                      

Total

   1,205,089   5,096  1.69   1,183,798   7,864  2.66    1,239,554   4,777  1.54    1,200,470   6,707  2.23  

Borrowed funds

   411,199   3,632  3.53   482,503   5,423  4.50    375,891   3,285  3.50    443,202   4,698  4.24  
                                      

Total interest-bearing liabilities

   1,616,288   8,728  2.16   1,666,301   13,287  3.19    1,615,445   8,062  2.00    1,643,672   11,405  2.78  
                                  

Non-interest-bearing deposits

   105,363      104,437       111,895      112,730    

Non-interest-bearing liabilities

   16,944      16,143       17,668      17,156    
                          

Total liabilities

   1,738,595      1,786,881       1,745,008      1,773,558    

Stockholders’ equity

   151,098      123,493       157,314      122,831    
                          

Total liabilities and stockholders’ equity

  $1,889,693     $1,910,374      $1,902,322     $1,896,389    
                          

Net interest income

    $15,662     $14,235      $16,154     $14,262  
                          

Net interest rate spread (3)

      3.25%     2.87%      3.33     2.91
                              

Net interest margin (4)

      3.47%     3.14%      3.56     3.16
                              

   FOR THE SIX MONTHS ENDED JUNE 30, 
   2009  2008 
   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

  $—    $—    —   $11,634  $142  2.44

Investment securities (1)

   55,978   589  2.10    62,931   1,851  5.88  

FHLB stock

   18,104   413  4.56    20,918   907  8.67  

Mortgage-backed securities (1)

   84,899   1,641  3.87    50,503   1,184  4.69  

Loans receivable, net (2)

   1,651,158   45,963  5.57    1,662,431   49,105  5.91  
                       

Total interest-earning assets

   1,810,139   48,606  5.37    1,808,417   53,189  5.88  
                   

Non-interest-earning assets

   85,903      94,964    
               

Total assets

  $1,896,042     $1,903,381    
               

Liabilities and Stockholders’ Equity

           

Interest-bearing liabilities:

           

Transaction deposits

  $865,581   5,157  1.19   $758,864   6,344  1.67  

Time deposits

   356,854   4,716  2.64    433,269   8,227  3.80  
                       

Total

   1,222,435   9,873  1.62    1,192,133   14,571  2.44  

Borrowed funds

   393,447   6,918  3.52    462,853   10,120  4.37  
                       

Total interest-bearing liabilities

   1,615,882   16,791  2.08    1,654,986   24,691  2.98  
                   

Non-interest-bearing deposits

   108,629      108,584    

Non-interest-bearing liabilities

   17,308      16,649    
               

Total liabilities

   1,741,819      1,780,219    

Stockholders’ equity

   154,223      123,162    
               

Total liabilities and stockholders’ equity

  $1,896,042     $1,903,381    
               

Net interest income

    $31,815     $28,498  
               

Net interest rate spread (3)

      3.29     2.90
               

Net interest margin (4)

      3.52     3.15
               

 

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

Comparison of Financial Condition at March 31,June 30, 2009 and December 31, 2008

Total assets at March 31,June 30, 2009 were $1.914$1.910 billion, an increase of $55.8$51.6 million, compared to $1.858 billion at December 31, 2008.

Mortgage-backed securities available for sale increased to $97.3$89.4 million at March 31,June 30, 2009 as compared to $40.8 million at December 31, 2008 primarily due to the $38.3 million investment of preferred stockPreferred Shares proceeds from the Treasury’s Capital Purchase Plan.Program.

Loans receivable, net increaseddecreased by $1.8$4.7 million to a balance of $1.650$1.644 billion at March 31,June 30, 2009, compared to a balance of $1.648 billion at December 31, 2008 primarily related to growth2008. Growth in commercial real estate loans of $6.4$34.6 million and construction of $2.1 million partlywas offset by a decline in one-to-four family mortgage loans due to increased prepayments and the Bank’s ongoing strategy to sell mostlonger-term, fixed-rate newly-originated one-to-four family mortgage loans. Originations of mortgage loans held for sale increased to $140.9 million for the six months ended June 30, 2009 as compared to $59.9 million for the same prior year period. Mortgage loans held for sale increased to $13.5 million at June 30, 2009 from $3.9 million at December 31, 2008 due to an increase in longer-term, fixed-rate one-to-four family mortgage loans which the Bank sells.

Deposit balances increased $39.3$90.4 million to $1.313$1.365 billion at March 31,June 30, 2009 from $1.274 billion at December 31, 2008. Core deposits, defined as all deposits excluding time deposits, increased $51.7$111.1 million partly offset by a $12.3$20.7 million decrease in time deposits as the Bank continued to moderate its pricing for this product. Federal Home Loan Banktime deposits. FHLB advances decreased by $39.9$101.9 million to $320.0$258.0 million at March 31,June 30, 2009 as compared to $359.9 million at December 31, 2008 primarily due to the increase in deposits as a funding source.deposits.

Stockholders’ equity at March 31,June 30, 2009 increased to $158.2$161.9 million as compared to $119.8 million at December 31, 2008 primarily due to the issuance of $38.3 million of preferred stock.Preferred Shares.

Comparison of Operating Results for the Three and Six Months Ended March 31,June 30, 2009 and March 31,June 30, 2008

General

Net income available to common stockholders for the three months ended March 31,June 30, 2009 was $3.5$3.1 million or $.30$.26 per diluted share, as compared to net income available to common stockholders of $4.0$3.5 million, or $.34$.30 per diluted share, for the corresponding prior year period. For the six months ended June 30, 2009, net income available to common stockholders was $6.6 million or $.56 per diluted share, as compared to net income available to common stockholders of $7.5 million or $.64 per diluted share for the corresponding prior year period.

Interest Income

Interest income for the three and six months ended March 31,June 30, 2009 was $24.4$24.2 million and $48.6 million, respectively, as compared to $27.5$25.7 million and $53.2 million, respectively, for the three and six months ended March 31,June 30, 2008. The yield on interest-earning assets declined to 5.41%5.33% and 5.37%, respectively, for the three and six months ended March 31,June 30, 2009, as compared to 6.06%5.69% and 5.88%, respectively, for the same prior year period.periods. The asset yield for the prior year quartersix months ended June 30, 2008 benefited from $633,000 of income relating to an equity investment which was sold by the end of 2008. Additionally, averageAverage interest-earning assets decreasedincreased by $11.4$12.2 million and $1.7 million, respectively, for the three and six months ended March 31,June 30, 2009, as compared to the same prior year period.periods. The decreaseincrease was in average loans receivable which declined $18.0 million, as well as average interest-earning deposits and average investment securities. These decreases were partly offset by an increase of $23.9 million in average mortgage-backed securities which rose $44.8 million and $34.4 million for the three and six months ended June 30, 2009, respectively, due to the investment of the preferred stock proceeds.Preferred Shares proceeds from the Treasury’s Capital Purchase Program.

Interest Expense

Interest expense for the three and six months ended March 31,June 30, 2009 was $8.7$8.1 million and $16.8 million, respectively, compared to $13.3$11.4 million and $24.7 million, respectively, for the three and six months ended March 31,June 30, 2008. The cost of interest-bearing liabilities decreased to 2.16%2.00% and 2.08%, respectively, for the three and six months ended March 31,June 30, 2009, as compared to 3.19%2.78% and 2.98%, respectively, in the same prior year period.periods. Additionally, average interest-bearing liabilities decreased by $50.0$28.2 million and $39.1 million, respectively, for the three and six months ended March 31,June 30, 2009, as compared to the same prior year period.periods. Average borrowed funds decreased $71.3$67.3 million and $69.4 million, respectively, for the three and six months ended June 30, 2009 due to an increase in average deposits and average stockholder’s equity as funding sources. The increase in average stockholder’s equity was related to the preferred stock proceeds.issuance of Preferred Shares.

Net Interest Income

Net interest income for the three and six months ended March 31,June 30, 2009 increased to $15.7$16.2 million and $31.8 million, respectively, as compared to $14.2$14.3 million and $28.5 million, respectively, in the same prior year periodperiods reflecting a higher net interest margin partly offset by lowerand higher levels of interest-earning assets. The net interest margin increased to 3.47%3.56% and 3.52%, respectively, for the three and six months ended March 31,June 30, 2009 from 3.14%3.16% and 3.15%, respectively, in the same prior year period.periods.

Provision for Loan Losses

For the three and six months ended March 31,June 30, 2009, the provision for loan losses was $800,000$1.2 million and $2.0 million, respectively, compared to $375,000$400,000 and $775,000, respectively, in the same prior year period.periods. Non-performing loans increased $9.2$6.5 million at March 31,June 30, 2009 to $19.7$20.9 million from $10.5$14.4 million at March 31,June 30, 2008. Loans receivable, net increaseddecreased modestly during the first threesix months of 2009 while net charge-offs for the three and six months ended March 31,June 30, 2009 were $446,000,$461,000 and $907,000 respectively, as compared to $104,000$220,000 and $324,000, respectively, in the same prior year period.periods. Net charge-offs for the three and six months ended March 31,June 30, 2009 included $366,000$269,000 and $635,000, respectively, relating to subprime loans originated by Columbia Home Loans, LLC, the Company’s mortgage banking subsidiary which has since been shuttered. The increase in the provision for loan losses was primarily due to the increase in non-performing loans.loans and net charge-offs.

Other Income

Other income decreasedincreased to $3.2$4.2 million and $7.3 million, respectively, for the three and six months ended March 31,June 30, 2009 as compared to $3.8$2.6 million and $6.4 million, respectively, in the same prior year period.periods. Loan servicing income (loss) income decreased to a loss of $230,000$221,000 for the threesix months ended March 31,June 30, 2009 from income of $90,000$172,000 for the threesix months ended March 31,June 30, 2008 due to an impairment to the loan servicing asset of $263,000.$263,000 recognized in the first quarter of 2009. The net gain (loss) on sales of loans and securities available for sale was $673,000$1.4 million and $2.0 million, respectively, for the three and six months ended March 31,June 30, 2009 as compared to $597,000losses of $718,000 and $122,000, respectively, for the three and six months ended March 31,June 30, 2008. For the three and six months ended March 31,June 30, 2009 the net gain on the sales of loans includes a reversal of the provision for repurchased loans of $34,000$211,000 and $245,000, respectively, as compared to a reversal of $0 and $161,000, respectively for the three and six months ended March 31,June 30, 2008. For the three months ended March 31, 2008 the net gain on the sales of loans and securities available for sale includes a $122,000 gain on the redemption of shares relating to the Company’s share of the Visa initial public offering. Fees and service charges decreased to $2.5$2.6 million and $5.1 million, respectively, for the quarterthree and six months ended March 31,June 30, 2009 as compared to $2.8$2.9 million and $5.7 million, respectively, for the corresponding prior year periodperiods primarily due to a decrease in trust and investment service revenue. Income from Bank Owned Life Insurance decreased by $103,000$108,000 and $211,000, respectively, for the three and six months ended March 31,June 30, 2009 as compared to the same prior year periodperiods due to a decline in the crediting rate in the lower interest rate environment.

Operating Expenses

Operating expenses amountedincreased to $11.8$13.2 million and $25.0 million, respectively, for the three and six months ended March 31,June 30, 2009, as compared to $11.6$11.4 million and $23.0 million, respectively, for the corresponding prior year period.periods. Federal deposit insurance increased to $1.4 million and $1.9 million, respectively, for the three and six months ended June 30, 2009, as compared to $341,000 and $651,000, respectively, in the same prior year periods due to a special assessment of $869,000 for the three and six months ended June 30, 2009 and an increase in the assessment rate for FDIC deposit insurance effective January 1, 2009. Occupancy expense was adversely affected by a second quarter charge of $556,000 relating to all future lease obligations of Columbia Home Loans, LLC, the Company’s mortgage banking subsidiary which was shuttered in the fourth quarter of 2007. In light of the economic downturn and weak real estate market, the Company no longer expects to be able to sublet the vacant office space. Therefore, the entire remaining lease obligation was recognized in the second quarter of 2009. General and administrative expense include $169,000 of costs related to the Company’s previously announced merger with Central Jersey Bancorp. Under FASB 141R these costs are expensed in the period incurred and are likely to be significant during the second half of 2009. Operating expenses for the three and six months ended March 31,June 30, 2009 also include costs relating to the opening of two new branches in the latter part of 2008. Federal deposit insurance increased to $502,000 for the three months ended March 31, 2009, as compared to $309,000 in the same prior year period due to an increase in the assessment rate for FDIC deposit insurance.

Provision for Income Taxes

Income tax expense was $2.3 million and $4.6 million, respectively, for the three and six months ended March 31,June 30, 2009, as compared to an expense of $2.0$1.6 million and $3.6 million, respectively, for the same prior year period.periods. The effective tax rate increased to 37.0%38.7% and 37.8%, respectively, for the three and six months ended March 31,June 30, 2009 as compared to 33.2%30.9% and 32.1%, respectively, in the same prior periodperiods primarily due to an increase in the state tax rate.expense.

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, Federal Home Loan Bank (“FHLB”)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 March 31,June 30, 2009, the Company had outstanding overnight borrowings from the FHLB of $62.0$17.0 million as compared to $83.9 million in overnight borrowings at December 31, 2008. The Company utilizes the overnight line to fund short-term liquidity needs. The Company had total FHLB borrowings, including overnight borrowings, of $320.0$258.0 million at March 31,June 30, 2009, a decrease from $359.9 million at December 31, 2008.

The Company’s cash needs for the threesix months ended March 31,June 30, 2009 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.Preferred Shares. The cash was principally utilized for loan originations, the purchase of mortgage-backed securities and to reduce borrowings. For the threesix months ended March 31,June 30, 2008, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, and proceeds from the sale of mortgage loans held for sale.sale and increased deposits. The cash provided was principally used for loan originations and to fund deposit outflows and reduce Federal Home Loan BankFHLB 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 March 31,June 30, 2009, outstanding commitments to originate loans totaled $67.9$69.1 million; outstanding unused lines of credit totaled $196.7$204.5 million; and outstanding commitments to sell loans totaled $27.1$35.0 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 $273.8$260.1 million at March 31,June 30, 2009. 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 threesix months of 2009 were $2.4$4.7 million, as compared to $2.3 million inunchanged from the same prior year period. On April 22,July 21, 2009, the Board of Directors declared a quarterly cash dividend of twenty cents ($.20)0.20) per common share. The dividend is payable on May 15,August 14, 2009 to stockholders of record at the close of business on May 1,August 3, 2009. Cash dividends on preferred stockPreferred Shares declared and paid during the threesix months ended March 31,June 30, 2009 were $154,000.$632,000. On April 22,July 21, 2009 the Board of Directors declared a quarterly cash dividend of $12.50 per preferred sharePreferred Share for an aggregate payment of $478,000. The dividend is payable on MayAugust 15, 2009 to stockholders of record at the close of business on April 30,July 31, 2009.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the banking subsidiary, short-term borrowings and the issuance of preferred stock,Preferred Shares, long-term debt and trust preferred securities. On January 16, 2009, the Company received $38.3 million in proceeds from the issuance of preferred stockPreferred Shares and warrants.Warrants. The Company invested $19.1 million of the proceeds into the Bank and retained the remaining proceeds. For the first threesix months of 2009, OceanFirst Financial Corp. received no$3.6 million in 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”).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. If the Company requires dividends from theThe Bank to meet its liquidity needs, it will file the requiredfiled a capital distribution notice with the OTS; however,OTS of its intention to make quarterly capital distributions of $3.6 million each throughout 2009 to OceanFirst Financial Corp. The OTS did not object to the payment of these dividends as long as the Bank remains well-capitalized after each capital distribution. Additionally, if the Bank incurs an other than temporary impairment charge relating to its investment securities so that the total proposed capital distribution exceeds net income for the year to date, plus retained net income for the preceding two years, then the Bank must submit an application requesting approval of the OTS for the remaining unpaid capital distributions. The Company cannot predict whether the OTS willmay object to any future notices or fail to approve the Bank’s requestany future applications to pay a dividend to OceanFirst Financial Corp. The OTS has recently indicated that it does not object to the Bank’s notice for a $3.6 million capital distribution to the Company. At March 31,June 30, 2009, OceanFirst Financial Corp. held $19.1 million in cash and $235,000$229,000 in investment securities available for sale. Additionally, OceanFirst Financial Corp. has an available line of credit for up to $4.0$2.0 million, all of which was available at March 31,June 30, 2009.

At March 31,June 30, 2009, the Bank exceeded all of its regulatory capital requirements with tangible capital of $176.2$176.9 million, or 9.1% of total adjusted assets, which is above the required level of $29.1$29.0 million or 1.5%; core capital of $176.2$176.9 million or 9.1% of total adjusted assets, which is above the required level of $77.6$77.4 million, or 4.0%; and risk-based capital of $185.7$186.4 million, or 14.3%14.1% of risk-weighted assets, which is above the required level of $104.2$105.7 million or 8.0%. The Bank is considered a “well-capitalized” institution under the Office of Thrift Supervision’sOTS’ Prompt Corrective Action Regulations.

At March 31,June 30, 2009, the Company maintained tangible equity of $158.2$161.9 million, for a tangible equity to assets ratio of 8.3%8.5%, and tangible common equity of $119.9$124.6 million, for a tangible common equity to assets ratio of 6.4%6.5%.

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 consumer lines of credit and commitments to extend credit. The Company also has outstanding commitments to sell loans amounting to $27.1$35.0 million.

The following table shows the contractual obligations of the Company by expected payment period as of March 31,June 30, 2009 (in thousands):

 

Contractual Obligation

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

Debt Obligations

  $393,054  $238,054  $135,000  $20,000  $—  

Commitments to Originate Loans

   67,943   67,943   —     —     —  

Commitments to Fund Unused Lines of Credit

   196,714   196,714   —     —     —  

Debt obligations include borrowings from the FHLB, securities sold under agreements to repurchase and other borrowings. The borrowings have defined terms and, under certain circumstances, $15.0 million of the borrowings from the FHLB are callable at the option of the lender and $27.5 million of the other borrowings are callable at the option of the Company.

Contractual Obligation

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

Debt Obligations

  $362,746  $184,246  $120,000  $31,000  $27,500

Commitments to Originate Loans

   69,100   69,100   —     —     —  

Commitments to Fund Unused Lines of Credit

   204,542   204,542   —     —     —  

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-accrual 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.

 

  March 31,
2009
 December 31,
2008
   June 30,
2009
 December 31,
2008
 
  (dollars in thousands)   (dollars in thousands) 

Non-performing loans:

      

Real estate – one-to-four family

  $9,850  $8,696   $12,290   $8,696  

Commercial real estate

   6,797   5,527    5,361    5,527  

Construction

   67   —      67    —    

Consumer

   2,084   1,435    2,517    1,435  

Commercial

   904   385    702    385  
              

Total non-performing loans

   19,702   16,043    20,937    16,043  

REO, net

   1,457   1,141    1,348    1,141  
              

Total non-performing assets

  $21,159  $17,184   $22,285   $17,184  
              

Allowance for loan losses as a percent of total loans receivable

   .72%  .70%   .77  .70

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

   61.00   72.71    60.94    72.71  

Non-performing loans as a percent of total loans receivable

   1.18   .97    1.26    .97  

Non-performing assets as a percent of total assets

   1.11   .92    1.17    .92  

The non-performing loan total includes $910,000$911,000 of repurchased one-to-four family and consumer loans and $2.9$3.1 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. The two largest commercial non-performing loan relationships became non-performing in 2008 and total $4.0totaled $2.5 million. The first loan relationship totals $2.1 million andlargest of the two is secured by commercial real estate collateral under a contract of sale. The second loan relationship totals $1.9 million and isboth relationships are well secured by commercial real estate collateral. The Company also classifies loans in accordance with regulatory guidelines. At March 31,June 30, 2009, the Company had $6.9$7.6 million designated as Special Mention, $26.7$35.1 million classified as Substandard and $32,000$34,000 classified as Doubtful as compared to $9.0 million, $17.2 million and $14,300, respectively, at December 31, 2008. The largest Special Mention loan relationship at March 31,June 30, 2009 is comprised of two loansseveral credit facilities totaling $3.2$3.4 million to a leasing company

which is current on payments but was criticized due to declining revenue. The loan is secured by commercial real estate, auto titles, other business assets and personal guarantees. The largest Substandard loan relationship at March 31,June 30, 2009 is comprised of several credit facilities to a large real estate agencybuilding supply company with an aggregate balance of $3.3$4.0 million which was current as to payments, but criticized due to declining revenue and poor operating results. The loans are securedwell-secured by commercial real estate and the personal guarantee of the principals.other business assets. In addition to loan classifications, the Company classified investment securities with an amortized cost of $25.0$30.0 million and a carrying value of $10.2$15.5 million as Substandard, which represents the amount of investment securities with a credit rating below investment grade byfrom one of the internationally-recognized credit rating services. At March 31,June 30, 2009, the Bank was holding subprime loans with a gross principal balance of $3.0 million and a carrying value, net of reserves and lower of cost or market adjustment, of $1.9 million, and ALT-A loans with a gross principal balance of $5.6 million and a carrying value, net of reserves and lower of cost or market adjustment, of $4.9 million.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements 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,” 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 should be considered in evaluating forward-looking statements and undue reliance should not be placed on statements. The Company does not undertake - 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 2008 Form 10-K.

 

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 March 31,June 30, 2009 which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. At March 31,June 30, 2009, the Company’s one-year gap was negative 1.59%1.70% as compared to negative 7.58%5.72% at December 31, 2008.

At March 31, 2009

  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 

At June 30, 2009

  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

  $5,745  $—    $—    $—    $—    $5,745   $7,305   $—     $—     $—     $—     $7,305  

Investment securities

   55,000   150   302   —     370   55,822    55,000    452    —      —      370    55,822  

FHLB stock

   —     —     —     —     19,031   19,031    —      —      —      —      16,188    16,188  

Mortgage-backed securities

   11,869   24,322   26,685   22,700   10,494   96,070    12,773    20,026    17,385    25,803    12,098    88,085  

Loans receivable (2)

   284,929   468,574   572,919   210,451   121,927   1,658,800    286,285    419,439    552,654    235,597    170,957    1,664,932  
                                      

Total interest-earning assets

   357,543   493,046   599,906   233,151   151,822   1,835,468    361,363    439,917    570,039    261,400    199,613    1,832,332  
                                      

Interest-bearing liabilities:

              

Money market deposit accounts

   4,025   12,075   32,198   40,247   —     88,545    4,209    12,628    33,674    42,093    —      92,604  

Savings accounts

   9,895   30,659   79,160   98,950   —     218,664    10,122    31,761    80,977    101,222    —      224,082  

Interest-bearing checking accounts

   246,873   41,972   111,925   140,023   —     540,793    259,737    47,039    125,438    156,930    —      589,144  

Time deposits

   113,516   160,251   44,237   25,973   11,079   355,056    115,040    145,101    52,985    19,990    13,577    346,693  

FHLB advances

   95,000   70,000   135,000   20,000   —     320,000    52,000    55,000    120,000    31,000    —      258,000  

Securities sold under agreements to repurchase

   73,054   —     —     —     —     73,054    77,246    —      —      —      —      77,246  

Other borrowings

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

Total interest-bearing liabilities

   564,863   314,957   402,520   325,193   16,079   1,623,612    540,854    291,529    413,074    351,235    18,577    1,615,269  
                                      

Interest sensitivity gap (3)

  $(207,320) $178,089  $197,386  $(92,042) $135,743  $211,856   $(179,491 $148,388   $156,965   $(89,835 $181,036   $217,063  
                                      

Cumulative interest sensitivity gap

  $(207,320) $(29,231) $168,155  $76,113  $211,856  $211,856   $(179,491 $(31,103 $125,862   $36,027   $217,063   $217,063  
                                      

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

   (11.30)%  (1.59)%  9.16%  4.15%  11.54%  11.54%   (9.80)%   (1.70)%   6.87  1.97  11.85  11.85

 

(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 March 31,June 30, 2009 and December 31, 2008. 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, 2008. The increase in NPV in the static case at March 31,June 30, 2009 when compared to the previous quarter-endDecember 31, 2008 was primarily a result of the preferred stockPreferred Shares issuance.

   June 30, 2009  December 31, 2008 
   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

  $163,281  (12.8)%  9.0 $65,603  (4.9)%  $106,833  (21.5)%  6.0 $55,909  (8.8)% 

100

   178,343  (4.8 9.6    67,631  (2.0  126,459  (7.0 7.0    59,031  (3.8

Static

   187,334  —     9.9    69,007  —      136,020  —     7.4    61,331  —    

(100)

   183,647  (2.0 9.5    66,563  (3.5  136,226  0.2   7.2    59,363  (3.2

(200)

   183,311  (2.1 9.5    61,844  (10.4  129,958  (4.5 6.9    56,937  (7.2

 

   March 31, 2009  December 31, 2008 
   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

  163,366  (11.5)% 8.9% 62,476  (6.0)% $106,833  (21.5)% 6.0% $55,909  (8.8)%

100

  178,957  (3.1) 9.6  65,036  (2.1)  126,459  (7.0) 7.0   59,031  (3.8)

Static

  184,598  —    9.7  66,456  —     136,020  —    7.4   61,331  —   

(100)

  179,784  (2.6) 9.3  63,703  (4.1)  136,226  0.2  7.2   59,363  (3.2)

(200)

  173,122  (6.2) 9.0  59,737  (10.1)  129,958  (4.5) 6.9   56,937  (7.2)

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 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 March 31,June 30, 2009 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

TheWith the following exception, 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.

On June 8, 2009, and July 15, 2009, purported class action complaints were filed against the Company, Central Jersey and each director of Central Jersey (except that Robert S. Vuono was not named in the second class action complaint) in the Superior Court of New Jersey in Ocean County. The actions were brought by two separate alleged shareholders of Central Jersey, each on behalf of himself and all others similarly situated. The complaints allege, among other things, that the directors of Central Jersey are in breach of their fiduciary duties to shareholders in connection with Central Jersey’s entry into the merger agreement with the Company. The complaints also allege that the Company and Central Jersey knowingly assisted the Central Jersey directors’ alleged breaches of fiduciary duty in connection with the proposed merger.

The complaints seek, among other things, damages and injunctive relief to enjoin the Company, Central Jersey and Central Jersey’s directors from consummating the transactions contemplated under the merger agreement, along with attorneys’ fees and costs. The Company and Central Jersey believe that the allegations in the complaints are without merit and intend to vigorously defend against the claims and causes of action asserted in these legal matters.

Item 1A.Risk Factors

For a summary of risk factors relevant to the Company, see Part I, Item 1A, “Risk Factors,” in the 2008 Annual Report on Form 10-K. There were no other material changes inAdditional risk factors relevant to the Company’s operations since December 31, 2008.2008 include the following:

The issuance of any securities under the recently filed “Shelf” Registration will have an impact on the shareholders of the Company. The Company recently filed a “Shelf” Registration Statement on Form S-3 with the SEC which allows the Company to issue up to $80.0 million of common stock, preferred stock, debt securities or warrants, or a combination thereof. The Board of Directors of the Company is authorized to issue the securities registered under the Shelf Registration Statement at any time, or from time to time, without the approval of the shareholders of the Company. If the Board of Directors determines to issue shares of common stock under the Shelf Registration Statement, the Board of Directors is authorized to issue such shares at such prices as determined by the Board of Directors. Shareholders of the Company do not have preemptive rights and, therefore, if the Board of Directors determines to issue common stock, the current shareholders will not have the right to subscribe for shares in an amount necessary to maintain their current percentage ownership. Consequently, the issuance of common stock may result in a dilution in the percentage ownership of the Company by current shareholders.

If the Board of Directors determines to issue preferred stock under the Shelf Registration Statement, the Board of Directors is authorized by the Certificate of Incorporation to issue such shares at such prices and in such series, and to establish designations, powers, preferences and rights of such shares, as well as the limitations, qualifications and restrictions. Generally, preferred shares have a preference over common shares in the payment of dividends and upon liquidation.

The Board of Directors may also issue, pursuant to the Shelf Registration Statement, senior or subordinated debt securities at such rates and with such terms and conditions as determined by the Board of Directors. These securities will rank senior to the Company’s preferred or common stock upon liquidation of the Company.

The Shelf Registration Statement also registered warrants to purchase common stock, preferred stock and debt securities.

The Board of Directors has not determined to issue any securities under the Shelf Registration Statement. The Board may consider current economic conditions, regulatory requirements, liquidity needs and other matters when determining if and when to issue such securities. Further, the Board of Directors are authorized to determine the use of proceeds of such securities issuance, which may include future growth opportunities, general corporate purposes or repayment of Preferred Shares and repurchase of the Warrants issued to the U.S. Treasury pursuant to the Capital Purchase Program.

The Bank’s Federal thrift charter may be eliminated under the Administration’s Financial Regulatory Reform Plan. The administration has proposed the creation of a new federal government agency, the National Bank Supervisor (“NBS”) that would charter and supervise all federally chartered depository institutions, and all federal branches and agencies of foreign banks. It is proposed that the NBS take over the responsibilities of the Office of the Comptroller of the Currency, which currently charters and supervises nationally chartered banks, and the responsibility for the institutions currently supervised by the OTS, which supervises federally chartered thrift and thrift holding companies, such as the Bank and the Company. In addition, under the administration’s proposal, the thrift charter, under which the Bank is organized, would be eliminated. If the administration’s proposal is finalized, the Bank may be subject to a new charter mandated by the NBS. There is no assurance as to how this new charter, or the supervision by the NBS, will affect the Bank’s operations going forward.

The elimination of the OTS, as proposed by the administration, also would result in a new regulatory authority for the Company. Such authority may impose restrictions which are the same as, or similar to, those made applicable to bank holding companies by the Board of Governors of the Federal Reserve System, including a holding company consolidated capital requirement. Currently, as a savings and loan holding company supervised by the OTS, the Company is not subject to a holding company consolidated capital requirement. The Company expects that if it were to become subject to a consolidated capital requirement, it would meet the current requirement to be categorized as “well-capitalized” on a pro forma basis.

The administration’s proposal also includes the creation of a new federal agency designed to enforce consumer protection laws. The Consumer Financial Protection Agency (“CFPA”) would have authority to protect consumers of financial products and services and to regulate all providers (bank and non-bank) of such services. The CFPA would be authorized to adopt rules for all providers of consumer financial services, supervise and examine such institutions for compliance and enforce compliance through orders, fines and penalties. The rules of the CFPA would serve as a “floor” and individual states would be permitted to adopt and enforce stronger consumer protection laws. If adopted as proposed, the Company could become subject to multiple laws affecting its provision of home loans and other credit services to consumers, which may substantially increase the cost of providing such services.

It is unknown at this time whether the administration’s proposal for regulatory reform will be adopted and, if so, the final form of such proposal, and what the full impact on the Company may be.

There is no guaranty that the Company will be able to continue to pay a dividend or, if continued, will be able to pay a dividend at the current rate. The Board of Directors of the Company determines at its discretion if, when and the amount of dividends that may be paid on the common stock. In making such determination, the Board of Directors take into account various factors including economic conditions, earnings, liquidity needs, the financial condition of the Company, applicable state law, regulatory requirements and other factors deemed relevant by the Board of Directors. Although the Company has a history of paying a quarterly dividend on its common stock, there is no guaranty that such dividends will continue to be paid in the future, particularly in the event of changes in those factors which may affect the Board of Directors’ determination to pay a dividend.

Any future FDIC insurance premiums will adversely impact earnings. On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment is payable on September 30, 2009. The Company recorded an expense of $869,000 during the quarter ended June 30, 2009, to reflect the special assessment. The final rule permits the FDIC’s Board of Directors to levy up to two additional special assessments of up to five basis points each during 2009 if the FDIC estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the FDIC’s Board of Directors believes would adversely affect public confidence or to a level that will be close to or below zero. The FDIC has publicly announced that it is probable that it will levy an additional special assessment of up to five basis points later in 2009, the amount and timing of which are currently uncertain. Any further special assessments that the FDIC levies will be recorded as an expense during the appropriate period.

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

Not Applicable

 

Item 3.Defaults Upon Senior Securities

Not Applicable

 

Item 4.Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders was held on May 7, 2009. The following directors were elected for terms of three years: John W. Chadwick, Carl Feltz, Jr. and Diane F. Rhine. The following proposals were voted on by the stockholders:Not Applicable

 

Proposal

  For  Against  Withheld/Abstain  Broker Non-Votes

1)      Election of Directors

        

John W. Chadwick

  10,963,323  —    375,121  —  

Carl Feltz, Jr.

  10,851,257  —    487,187  —  

Diane F. Rhine

  10,860,379  —    478,065  —  

2)      Ratification of the appointment of KPMG LLP as independent registered public accounting firm of the Company for the fiscal year ending December 31, 2009.

  10,883,778  413,923  40,743  —  

3)      Non-binding approval of the compensation of the Company’s Senior Executive Officers as determined by the Human Resources/Compensation Committee.

  10,284,694  870,504  183,246  —  

Item 5.Other Information

Not Applicable

Item 6.Exhibits

Exhibits:

 

3.1

  Certificate of Incorporation of OceanFirst Financial Corp.*

3.2

  Bylaws of OceanFirst Financial Corp.**

4.0

  Stock Certificate of OceanFirst Financial Corp.*

31.1

  Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer

31.2

  Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer

32.0

  Section 1350 Certifications

 

*Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996, as amended, Registration No. 33-80123.
**Incorporated herein by reference into this document from the Exhibit to Form 10-K, Annual Report, filed on March 25, 2003.

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: May 11,August 10, 2009  

/s/ John R. Garbarino

  John R. Garbarino
  Chairman of the Board, President
  and Chief Executive Officer
DATE: May 11,August 10, 2009  

/s/ Michael J. Fitzpatrick

  Michael J. Fitzpatrick
  Executive Vice President and
  Chief Financial Officer

Exhibit Index

 

Exhibit

  

Description

  Page  

Description

  Page

31.1

  Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer  21  Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer  25

31.2

  Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer  22  Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer  26

32.0

  Section 1350 Certifications  23  Section 1350 Certifications  27

 

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