OCEANFIRST FINANCIAL CORP annual report, FY2013

OceanFirst Financial Corp. 2013 Form 10-K Summary

Business context and reporting period

OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community-oriented savings bank serving Ocean, Monmouth, and Middlesex counties in New Jersey. The Bank primarily attracts deposits and invests in residential mortgages, commercial real estate, consumer, construction, and commercial loans. This filing covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012 and 2011. The fourth quarter of 2013 was also included in the selected quarterly data.

Year-end assets: $2.250 billion; stockholders’ equity: $214.4 million.
Branch network: administrative office and 22 additional full-service offices, plus a trust and asset management office.
The Bank opened a Financial Solutions Center in Red Bank, New Jersey, in April 2013.

Financial performance and condition

Metric	2013	2012
Net income	$16.3 million	$20.0 million
Diluted earnings per share	$0.95	$1.12
Net interest income	$70.5 million	$73.5 million
Net interest margin	3.24%	3.37%
Other income	$17.0 million	$18.2 million
Operating expenses	$59.8 million	$52.9 million
Provision for loan losses	$2.8 million	$7.9 million
Return on average assets	0.71%	0.87%
Return on average equity	7.51%	9.15%

Fourth-quarter 2013 net income was $1.9 million, or $0.11 diluted EPS, compared with $4.0 million and $0.23 diluted EPS in the fourth quarter of 2012. Fourth-quarter results included the branch consolidation charge and the FHLB advance prepayment costs.
Net cash provided by operating activities was $35.5 million. Investing activities used $31.4 million and financing activities used $32.6 million. Cash and due from banks ended at $34.0 million.
Net loans receivable increased to $1.541 billion from $1.523 billion. Total loans were $1.572 billion, consisting primarily of one-to-four-family residential loans of $751.4 million and commercial real estate, multifamily, and land loans of $528.9 million.
Commercial loans, including commercial real estate and commercial and industrial loans, represented 37.5% of total loans at year-end and increased by $56.4 million, or 10.6%, during 2013.
Deposits increased to $1.747 billion from $1.720 billion, with core deposits increasing by $35.4 million. The core deposit ratio was 87.5%.
Borrowings included $175.0 million of FHLB advances, $68.3 million of securities sold under repurchase agreements, and $27.5 million of other borrowings.
The Bank remained well-capitalized, with a 9.66% Tier 1 leverage ratio, a 14.72% Tier 1 risk-based capital ratio, and a 15.97% total risk-based capital ratio. The Company’s tangible common equity-to-assets ratio was 9.53%.

Material changes versus the prior comparable period

Net income declined 18.4%, while diluted EPS declined from $1.12 to $0.95. The decline reflected lower net interest income and other income, higher operating expenses, and a less favorable asset mix.
Interest income declined $7.5 million as the average yield on interest-earning assets fell to 3.68% from 4.02%. Interest expense declined $4.5 million as funding costs fell to 0.52% from 0.75%.
The net interest margin declined for the full year but improved to 3.38% in the fourth quarter from 3.20% in the third quarter and 3.29% in the fourth quarter of 2012.
The provision for loan losses fell from $7.9 million to $2.8 million. Net charge-offs decreased to $2.4 million from $5.6 million.
Other income declined $1.2 million, primarily because the net gain on loan sales fell to $1.2 million from $4.0 million as higher long-term interest rates reduced refinancing and loan-sale activity. Trust and asset management and Bankcard revenues increased.
Operating expenses rose $6.9 million. The increase included a $4.3 million FHLB advance prepayment fee and a $579,000 branch consolidation charge.
Non-performing loans increased to $45.4 million from $43.4 million, and non-performing assets increased to $49.7 million from $46.6 million. However, excluding loans affected by Superstorm Sandy, non-performing loans decreased by $1.1 million.
The allowance for loan losses increased to $20.9 million, or 1.33% of total loans, from $20.5 million, or 1.32%.
The Company transferred $536.0 million of securities from available-for-sale to held-to-maturity, reducing future exposure of stockholders’ equity to changes in market values. The transferred securities had an unrealized loss of approximately $13.3 million at the transfer date.
The Company repurchased 533,018 shares for $8.1 million and paid $8.2 million in common dividends. The annual dividend remained $0.48 per share.

Guidance, outlook, commentary, risks, and unusual items

Management expected loan-sale income in subsequent periods to remain below comparable prior-year levels because higher long-term interest rates reduced refinancing activity.
The Company expects the FHLB restructuring to improve future net interest income and margin and reduce sensitivity to future rate increases as short-term advances are replaced with deposits and longer-term borrowings.
Branch consolidations are expected to reduce annual operating expenses by approximately $797,000, net of estimated lost revenue.
The Bank’s strategy emphasizes commercial loan growth, core deposit growth, and expansion of fee-based businesses such as trust and asset management and Bankcard services. Management recognized that commercial lending entails higher credit risk than residential mortgage lending.
Liquidity was supported by deposit growth, loan and securities repayments, loan-sale proceeds, FHLB borrowing capacity, and other credit lines. Management stated that the Bank maintained significant liquidity under stress scenarios.
At year-end, outstanding commitments to originate loans were $80.4 million, unused lines of credit were $305.9 million, and commitments to sell loans were $21.7 million.
The Company had approval from the Federal Reserve Bank of Philadelphia for up to $12.0 million of Bank dividends to the holding company during the first three quarters of 2014, subject to possible revocation based on safety and soundness concerns.
Key risks include concentration in coastal New Jersey real estate, further economic or property-value deterioration, future storms and flood-insurance increases, interest-rate and deposit competition, commercial real estate and construction exposure, prolonged New Jersey foreclosure timelines, regulatory changes under Dodd-Frank and Basel III, mortgage repurchase claims, securities impairment, mortgage servicing-rights valuation, and cybersecurity or system failures.
Corporate debt securities had an amortized cost of $55.0 million and fair value of $44.3 million. Management concluded the unrealized losses were temporary, but a deterioration in issuer credit quality or liquidity could require impairment charges.
The reserve for repurchased loans and loss-sharing obligations was $1.5 million. Management identified maximum remaining loss exposure on FHLB-sold loans of $2.4 million and stated that the reserve reflected expected losses.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control over financial reporting.

Most important facts for an investor to verify

Whether commercial real estate, construction, and other commercial loan growth continues without a corresponding increase in non-performing assets or credit-loss provisions.
Whether the improvement in fourth-quarter net interest margin persists after the FHLB advance restructuring and as interest rates change.
Actual trends in non-performing loans, classified assets, foreclosure resolutions, collateral values, and the adequacy of the $20.9 million loan-loss allowance.
Deposit growth and the replacement of short-term FHLB funding with stable deposits or longer-term advances.
Future mortgage loan-sale volume, servicing-rights valuations, and repurchase claims or FHLB loss-sharing losses.
The fair value and credit performance of the $55.0 million corporate debt securities portfolio and other securities transferred to held-to-maturity.
Whether the planned $797,000 annual branch-consolidation savings are realized and whether the Red Bank Financial Solutions Center and other growth initiatives generate adequate returns.
The holding company’s ability to continue dividends and share repurchases, including the Bank’s regulatory capacity to upstream dividends.
The effect of the January 2014 Qualified Mortgage and Ability-to-Repay rules, Basel III implementation, flood-insurance changes, and other regulatory requirements on costs, loan volume, and credit risk.