OceanFirst Financial Corp. — 2014 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2014. OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving Ocean and Monmouth Counties, New Jersey. The interim financial statements are unaudited.
Financial performance and condition
| Metric | March 31, 2014 | Comparable period or date |
|---|---|---|
| Total assets | $2.282 billion | $2.250 billion at December 31, 2013; $2.304 billion at March 31, 2013 |
| Loans receivable, net | $1.571 billion | $1.541 billion at December 31, 2013; $1.501 billion at March 31, 2013 |
| Deposits | $1.720 billion | $1.747 billion at December 31, 2013; $1.740 billion at March 31, 2013 |
| Stockholders’ equity | $216.2 million | $214.4 million at December 31, 2013; $219.6 million at March 31, 2013 |
| Net interest income | $18.1 million | $17.2 million in first-quarter 2013 |
| Net income | $4.7 million | $4.4 million in first-quarter 2013 |
| Diluted EPS | $0.28 | $0.26 in first-quarter 2013 |
| Net interest margin | 3.36% | 3.16% in first-quarter 2013 |
| Return on average assets | 0.83% | 0.77% in first-quarter 2013 |
| Return on average equity | 8.72% | 8.06% in first-quarter 2013 |
| Operating expenses | $14.3 million | $12.7 million in first-quarter 2013 |
Cash flow, debt and liquidity
- Operating activities provided $5.7 million of cash, compared with $12.6 million in the prior-year quarter.
- Investing activities used $30.2 million, primarily reflecting a $30.7 million increase in loans receivable and purchases of securities.
- Financing activities provided $27.3 million, including $60.0 million of FHLB advance proceeds, partly offset by $20.0 million of repayments and a $26.6 million decline in deposits.
- Cash and due from banks increased to $36.7 million from $34.0 million at year-end 2013.
- Total FHLB borrowings increased to $232.3 million from $175.0 million, including $92.3 million of overnight borrowings. Total debt obligations were $326.0 million.
- Management stated that the Company maintained sufficient liquidity, supported by borrowing capacity, a contingency funding plan and quarterly liquidity stress testing.
- Outstanding undrawn lines of credit totaled $287.3 million, loan-origination commitments totaled $83.4 million, and commitments to sell loans totaled $20.5 million.
- The Bank was reported as well-capitalized, with a 9.59% tangible capital ratio, 9.59% Tier 1 leverage ratio, 14.58% Tier 1 risk-based ratio and 15.83% total risk-based capital ratio.
Material changes versus prior comparable periods
- Loans grew $29.5 million from December 31, 2013, or an annualized 7.7%, primarily from $27.5 million of commercial-loan growth and $5.8 million of residential construction-loan growth.
- Deposits declined $26.6 million from year-end despite growth in retail and business checking accounts; the funding gap was supplemented with higher FHLB borrowings.
- Net interest income increased $876,000 year over year. The margin benefited from lower funding costs, the prior-year shift toward higher-yielding commercial loans and the fourth-quarter 2013 prepayment of $159.0 million of higher-cost FHLB advances.
- The provision for loan losses declined to $530,000 from $1.1 million, primarily because net charge-offs decreased by $590,000.
- Other income increased to $4.0 million from $3.4 million. Wealth-management revenue benefited from assets under administration increasing to $216.5 million from $176.8 million.
- Loan-sale volume declined to $10.3 million from $36.8 million as higher long-term interest rates reduced refinancing activity. Excluding the prior-year provision for repurchased loans, the gain on loan sales decreased $669,000.
- Operating expenses increased $1.6 million, driven by personnel additions in revenue-producing areas, a checking-account and bankcard marketing campaign, and $180,000 of snow-removal costs.
- The Company repurchased 88,000 shares for $1.5 million during the quarter and paid $2.0 million in dividends. The Board subsequently declared another quarterly dividend of $0.12 per share.
Asset quality, outlook and risks
- Non-performing loans were $45.3 million, or 2.83% of total loans, compared with $45.4 million and 2.88% at December 31, 2013. Non-performing assets were $49.8 million, or 2.18% of total assets.
- The allowance for loan losses was $20.9 million, equal to 1.31% of total loans and 46.19% of non-performing loans. Troubled debt restructurings included $10.2 million of non-accrual loans and $21.4 million of accruing restructured loans.
- Management identified the prolonged New Jersey foreclosure process, commercial real estate exposures and several criticized borrower relationships as continuing asset-quality considerations. The largest non-performing relationship was a $6.2 million hotel, golf and banquet facility exposure.
- The reserve for repurchased loans and loss-sharing obligations remained $1.5 million. Five disputed repurchase requests involved loans with an aggregate principal balance of $1.2 million.
- Management expected adequate liquidity for normal commitments, but future holding-company dividends depend substantially on capital distributions from the Bank and regulatory approval. An inability to receive those distributions could affect future dividends and debt obligations.
- The Company did not provide formal earnings or revenue guidance. Management cited interest rates, economic conditions, unemployment, real estate values, deposit flows, competition, loan demand, prepayments, regulation and credit quality as significant uncertainties.
- The Company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2014.
Investor verification checklist
- Verify whether commercial-loan growth and checking-account acquisition translated into sustainable deposit growth without continued reliance on higher-cost or short-term borrowings.
- Monitor net interest margin sensitivity to the Federal Reserve’s policy path, longer-term rates, deposit repricing and the Company’s negative one-year interest-sensitivity gap of 11.5%.
- Review trends in non-performing loans, criticized commercial real estate exposures, troubled debt restructurings, collateral values and charge-offs.
- Assess the sustainability of the $0.12 quarterly dividend against holding-company liquidity, regulatory capital distributions and debt obligations.
- Evaluate whether lower mortgage refinancing and loan-sale volumes continue to reduce fee income.
- Review the $10.0 million unrealized loss on certain long-held corporate debt securities and the assumptions supporting management’s conclusion that the impairment was temporary.