Business Context and Reporting Period
OceanFirst Financial Corp. is a Delaware savings and loan holding company operating primarily through OceanFirst Bank, a community-oriented institution serving Ocean, Monmouth and Middlesex Counties in New Jersey. The Bank gathers deposits and invests primarily in residential mortgage, commercial real estate, consumer and commercial loans, as well as mortgage-backed and other investment securities.
This Form 10-K covers the fiscal year ended December 31, 2011, with comparative information for 2010 and 2009. The filing was audited by KPMG, which issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Financial Performance, Capital and Liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets | $2.302 billion | $2.251 billion |
| Loans receivable, net | $1.563 billion | $1.661 billion |
| Deposits | $1.706 billion | $1.664 billion |
| Stockholders’ equity | $216.8 million | $201.3 million |
| Net interest income | $77.3 million | $77.1 million |
| Net income | $20.7 million | $20.4 million |
| Diluted earnings per share | $1.14 | $1.12 |
| Net interest margin | 3.59% | 3.69% |
| Return on average assets | 0.91% | 0.93% |
| Return on average equity | 9.88% | 10.62% |
| Efficiency ratio | 56.86% | 58.04% |
- Interest income declined to $95.4 million from $101.4 million, reflecting lower asset yields, refinancing activity and a shift from loans toward lower-yielding deposits and securities.
- Interest expense fell to $18.1 million from $24.3 million as deposit and borrowing costs declined. This largely offset the reduction in interest income and kept net interest income broadly stable.
- The provision for loan losses was $7.8 million, compared with $8.0 million in 2010. Net charge-offs increased to $9.2 million from $3.0 million, primarily reflecting a revised real-estate charge-off policy.
- Other income was essentially unchanged at $15.3 million. Lower loan-sale gains were offset by higher fees, servicing income and Bank-owned life insurance income; the Company also recorded a $148,000 other-than-temporary impairment loss on equity securities.
- Operating expenses decreased 1.8% to $52.7 million, contributing to the improved efficiency ratio.
- Net cash provided by operating activities was $17.6 million. Investing activities used $3.4 million, while financing activities provided $31.9 million, producing a $46.1 million increase in cash and due from banks to $77.5 million.
- Borrowed funds totaled $359.6 million at year-end, including $266.0 million of Federal Home Loan Bank advances, $66.1 million of securities sold under agreements to repurchase and $27.5 million of other borrowings.
- The Bank remained well-capitalized, with a 9.41% tangible and core capital ratio, a 15.42% Tier 1 risk-based capital ratio and a 16.40% total risk-based capital ratio. The Company reported a 9.42% tangible common equity-to-assets ratio.
Material Changes Versus the Prior Comparable Period
- Total assets increased 2.3%, while net loans declined 5.9% because of weak demand, accelerated prepayments and sales of newly originated long-term fixed-rate mortgages.
- Investment securities available for sale increased 79.8% to $165.3 million, and mortgage-backed securities increased to $364.9 million from $341.2 million.
- Deposits increased 2.5% to $1.706 billion. Core deposits increased by $58.3 million, while time deposits declined by $16.2 million; core deposits represented 84.2% of total deposits at year-end.
- Non-performing loans increased to $44.0 million, or 2.77% of total loans, from $37.5 million, or 2.23%. Non-performing assets rose to $46.0 million, or 2.00% of total assets, from $39.8 million.
- Troubled debt restructurings included in non-accrual loans increased to $14.5 million from $3.3 million. The increase was driven partly by a $6.4 million commercial real estate relationship added during the second quarter.
- The allowance for loan losses declined to $18.2 million from $19.7 million, or 1.15% of loans versus 1.17%. The allowance covered 41.42% of non-performing loans, compared with 52.48% in 2010.
- In the fourth quarter, the Company changed its charge-off policy for problem real-estate loans and recorded $5.7 million of additional charge-offs. Management stated that these losses had previously been reflected in specific valuation reserves and therefore did not affect 2011 provision expense or net income.
- The Company repurchased 165,154 shares for $2.1 million under a program authorizing repurchases of up to 942,306 shares. The annual common dividend remained $0.48 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected the low-interest-rate environment to continue beyond 2012 and indicated that this would place further pressure on net interest margin and net interest income. The Bank planned to continue emphasizing core deposits, commercial lending and fee-based products, and expected to open another branch in Jackson, New Jersey, in late 2012 or early 2013.
- Credit risk remains concentrated geographically and by collateral type: approximately 97.1% of loans were secured by real estate, with most borrowers located in Ocean and Monmouth Counties. Local home values had declined approximately 19% from their 2006 peak, and local unemployment remained elevated.
- Further declines in real estate values, higher unemployment or a weaker local economy could increase delinquencies, charge-offs and required loan-loss provisions.
- The Bank’s commercial real estate, multi-family, land and commercial business loans totaled approximately $506.6 million, or 31.9% of total loans, and generally carry greater credit risk than traditional residential mortgage loans.
- The Bank had a negative one-year interest-sensitivity gap of 0.03% of interest-earning assets. Management noted that actual results could differ materially from modeled interest-rate sensitivity because of assumptions regarding prepayments, deposit lives and repricing behavior.
- The available-for-sale securities portfolio included $55.0 million of corporate debt securities with a market value of $39.4 million. Management considered the unrealized losses temporary, but a deterioration in issuer credit quality or liquidity could result in future impairment charges.
- The Bank had $76.9 million of commitments to originate loans, $228.8 million of unused credit lines and $34.8 million of commitments to sell loans. Four disputed loan repurchase requests related to loans with $1.2 million of principal were outstanding; the repurchase reserve was $705,000.
- Management reported sufficient liquidity under stress scenarios. However, the Company’s ability to pay dividends and meet holding-company obligations depends significantly on capital distributions from the Bank, which require regulatory approval and could be restricted.
- Dodd-Frank implementation, the transition from OTS oversight to OCC and Federal Reserve oversight, and evolving consumer-protection requirements could increase compliance costs and affect revenue or interest expense.
Most Important Facts for an Investor to Verify
- Whether non-performing loans, troubled debt restructurings and local real-estate exposure continue to rise after December 31, 2011.
- Whether the $18.2 million allowance for loan losses remains adequate, particularly relative to commercial real estate collateral values and foreclosure timelines.
- Subsequent performance and valuation of the $55.0 million corporate debt securities portfolio carried at $39.4 million fair value.
- Actual trends in net interest margin, loan demand, mortgage prepayments and deposit pricing in the continuing low-rate environment.
- Regulatory approval and sustainability of Bank-to-holding-company dividends, the $0.12 quarterly dividend declared in January 2012, and remaining share repurchase capacity.
- Potential losses from mortgage-loan repurchase claims, unused credit commitments and other off-balance-sheet obligations.