OceanFirst Financial Corp. — 3Q 2014 Form 10-Q Summary
Business context and reporting period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving Ocean, Monmouth and Middlesex Counties in New Jersey. The unaudited report covers the three and nine months ended September 30, 2014, with comparisons to the corresponding 2013 periods and December 31, 2013 balance-sheet data.
Key financial metrics
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Net interest income | $18.1 million | $17.5 million | $54.3 million | $52.3 million |
| Net income | $5.2 million | $5.0 million | $15.0 million | $14.4 million |
| Diluted earnings per share | $0.31 | $0.29 | $0.89 | $0.84 |
| Net interest margin | 3.27% | 3.20% | 3.33% | 3.19% |
| Other income | $5.3 million | $4.4 million | $14.0 million | $12.4 million |
| Operating expenses | $14.4 million | $13.7 million | $43.4 million | $39.8 million |
| Provision for loan losses | $1.0 million | $0.7 million | $1.8 million | $2.6 million |
At September 30, 2014, total assets were $2.309 billion, net loans were $1.632 billion, deposits were $1.781 billion and stockholders’ equity was $218.7 million. Loans increased $90.6 million from December 31, 2013, primarily from $90.0 million of commercial-loan growth. Deposits increased $34.5 million, while FHLB advances increased $30.2 million to $205.2 million.
For the nine months, operating cash flow was $15.0 million, investing cash flow was negative $68.1 million and financing cash flow was $46.8 million. Cash and due from banks declined $6.3 million to $27.7 million. The company reported $294.2 million of debt obligations, including FHLB advances, securities sold under repurchase agreements and other borrowings.
The Bank exceeded all regulatory capital requirements and was considered well-capitalized. Reported capital ratios included a 9.57% tangible ratio, 9.57% Tier 1 leverage ratio, 14.25% Tier 1 risk-based ratio and 15.30% total risk-based ratio. The company’s tangible common equity-to-assets ratio was 9.47%.
Material changes versus comparable periods
- Third-quarter net income increased 4.0% to $5.2 million; nine-month net income increased 4.1% to $15.0 million.
- Net interest income increased 3.2% in the quarter and 3.9% year to date, supported by a higher net interest margin and lower funding costs.
- Interest expense declined substantially, reflecting lower-cost funding and the 2013 prepayment of $159.0 million of higher-cost FHLB advances.
- Other income increased primarily because of higher securities-sale gains, improved fees and service charges, and lower third-quarter losses from other real estate operations. Loan-sale gains declined as mortgage refinancing and loan-sale volumes decreased.
- Operating expenses rose 5.8% in the quarter and 9.1% year to date, largely from personnel additions in revenue-producing areas and higher professional fees. Year-to-date compensation included $196,000 of non-recurring severance costs.
- Asset quality improved materially. Non-performing loans declined to $18.4 million from $45.4 million at December 31, 2013, and non-performing assets declined to $24.9 million from $49.7 million. The allowance for loan losses declined to $16.3 million from $20.9 million.
Guidance, outlook, risks and unusual items
- On September 30, 2014, the company sold non-performing residential mortgage loans with a $23.1 million carrying value for $18.7 million of net cash consideration. The transaction produced a $5.0 million charge-off through the allowance and is expected to reduce credit risk, foreclosure expenses, overhead and FDIC insurance costs.
- Management stated that the Federal Reserve expected short-term rates to remain low for a considerable period. Lower long-term rates could pressure future margins, while higher rates had already reduced refinancing activity and loan-sale income.
- On October 31, 2014, the company sold servicing rights on approximately $562 million of Fannie Mae and Freddie Mac single-family mortgage loans. Management expected an approximately $500,000 fourth-quarter net gain and a modest 2015 earnings benefit from expense reductions.
- The quarterly dividend was increased from $0.12 to $0.13 per share in October 2014. The company also had 835,059 shares remaining under its authorized repurchase program at September 30.
- Liquidity included $23.6 million of holding-company cash and $633,000 of available-for-sale securities. Outstanding undrawn lines of credit were $290.3 million, commitments to originate loans were $86.2 million and commitments to sell loans were $5.6 million. Management reported sufficient liquidity and significant liquidity under stress scenarios.
- Key risks include interest-rate changes, economic and unemployment conditions, local real-estate values, credit quality, deposit flows, competition, regulatory changes, loan prepayments and mortgage-servicing or repurchase obligations.
- The loan portfolio remained concentrated in commercial real estate. Non-performing loans included $12.7 million of commercial real estate loans, and the company identified a $6.5 million hotel, golf and banquet-facility relationship as its largest non-performing and substandard exposure.
Most important facts for investors to verify
- Whether commercial-loan growth and the shift away from securities can be sustained without increasing credit losses or margin volatility.
- The durability of the reported improvement in non-performing loans following the bulk sale and the adequacy of the reduced allowance for loan losses.
- The effect of the mortgage-servicing-rights sale on recurring fee income, operating expenses and 2015 earnings.
- Exposure to the $55.0 million portfolio of corporate debt securities carried at a $48.0 million estimated fair value, including the reported $7.0 million unrealized loss.
- Future funding costs and net interest margin sensitivity as FHLB borrowings mature or reprice and as market interest rates change.
- The company’s ability to maintain dividends and repurchases, given reliance on capital distributions from the Bank and applicable regulatory constraints.