OceanFirst Financial Corp. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2015. OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving central New Jersey. The interim financial statements are unaudited.
Business Context and Financial Position
- Total assets were $2.384 billion, up from $2.357 billion at December 31, 2014 and $2.282 billion at March 31, 2014.
- Net loans were $1.737 billion, including a $48.0 million quarterly increase primarily from $41.3 million of commercial-loan growth.
- Deposits were $1.801 billion, up $80.8 million during the quarter, including $73.7 million of core deposits.
- Stockholders’ equity was $220.3 million, compared with $218.3 million at year-end 2014.
- The company opened a commercial loan production office in Mercer County and expected to open a Jackson Township branch late in the second quarter of 2015.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net interest income | $18.133 million | $18.065 million | +$68 thousand |
| Provision for loan losses | $375 thousand | $530 thousand | Down $155 thousand |
| Other income | $3.986 million | $3.842 million | +$144 thousand |
| Operating expenses | $13.738 million | $14.107 million | Down $369 thousand |
| Income before taxes | $8.006 million | $7.270 million | +$736 thousand |
| Net income | $5.262 million | $4.707 million | +11.8% |
| Diluted EPS | $0.32 | $0.28 | +$0.04 |
| Net interest margin | 3.24% | 3.36% | Down 12 basis points |
| Return on average assets | 0.89% | 0.83% | Improved |
| Return on average equity | 9.58% | 8.72% | Improved |
| Efficiency ratio | 62.11% | 64.39% | Improved |
Interest income increased to $20.169 million from $19.745 million as average interest-earning assets grew $92.0 million, led by a $145.4 million increase in average loans. This benefit was partly offset by lower asset yields and higher borrowing costs. Average interest-bearing liability cost increased to 0.45% from 0.37%, primarily because the company extended borrowings into higher-cost, longer-term maturities.
Cash Flow, Debt, Liquidity and Capital
- Net cash provided by operating activities was $4.6 million; investing activities used $29.6 million; financing activities provided $23.7 million.
- Cash and due from banks ended at $34.8 million, compared with $36.1 million at December 31, 2014. The holding company separately held $22.2 million in cash.
- Total Federal Home Loan Bank borrowings declined to $251.8 million from $305.2 million, while overnight FHLB borrowings declined to $38.0 million from $111.0 million.
- Outstanding undrawn lines of credit were $299.1 million, commitments to originate loans were $89.3 million, and commitments to sell loans were $14.5 million.
- The Bank remained well-capitalized: Tier 1 leverage was 9.69%, Common Equity Tier 1 was 13.82%, Tier 1 risk-based capital was 13.82%, and total risk-based capital was 14.82%.
- The company repurchased 110,143 shares for $1.9 million and paid $2.1 million in dividends. The quarterly dividend was increased to $0.13 per share, payable May 15, 2015.
Asset Quality and Unusual Items
- Non-performing loans increased to $19.4 million from $18.3 million at year-end 2014 but declined substantially from $45.3 million a year earlier.
- Non-performing assets were $23.2 million, or 0.97% of total assets, compared with 2.18% a year earlier.
- Non-performing loans as a percentage of total loans were 1.09%, compared with 2.83% in the prior-year quarter. Commercial real estate represented 67.9% of non-performing loans.
- The allowance for loan losses was $16.4 million, or 0.93% of total loans, compared with 1.31% at March 31, 2014. Net charge-offs declined to $273 thousand from $526 thousand.
- Other income included an $81 thousand gain from a supplemental sale of mortgage servicing rights and a $61 thousand year-over-year increase in gains on loan sales. Loan servicing income declined $176 thousand following the prior-quarter sale of most Federal-agency residential servicing rights.
- Operating expenses included $50 thousand of non-recurring merger-related costs associated with the pending Colonial American Bank acquisition.
- The company held corporate debt securities with an estimated fair value of $46.2 million versus amortized cost of $55.0 million. Management concluded the unrealized losses were temporary and expected full principal recovery.
Merger, Outlook and Risks
On February 25, 2015, the company announced an all-stock agreement to merge Colonial American Bank into OceanFirst Bank, valued at approximately $11.3 million when announced. Colonial had $143.7 million of assets at December 31, 2014. The transaction remained subject to regulatory and shareholder approval.
Management expected moderate economic growth, low inflation and gradual increases in the Federal funds rate. The company stated that a prolonged low-interest-rate environment could further pressure net interest margin. Commercial-loan growth and a shift from lower-yielding securities to higher-yielding loans partially mitigated this pressure.
Key risks include interest-rate movements, economic and employment conditions in New Jersey, real estate values, loan and investment portfolio quality, deposit flows, competition, regulatory and legislative changes, prepayments, demand for financial services, natural disasters and flood-insurance costs. The company also warned that restrictions on dividends from the Bank could impair the holding company’s ability to pay dividends or meet debt obligations. The Federal Reserve had approved up to $12.0 million of Bank dividends over three quarters of 2015, subject to revocation; $4.0 million had been received during the quarter.
Management concluded that disclosure controls and procedures were effective as of March 31, 2015, with no material changes to internal control over financial reporting.
Investor Verification Items
- Verify completion timing, regulatory approval and shareholder approval for the Colonial American Bank merger.
- Monitor net interest margin, funding costs and the impact of any Federal funds rate changes.
- Assess whether commercial-loan growth is sustained without deterioration in underwriting or concentration risk.
- Track non-performing loans, delinquency trends, criticized commercial real estate exposures and allowance coverage.
- Review the credit performance and valuation of the $55.0 million corporate debt securities portfolio.
- Confirm the Bank’s ability to distribute dividends to the holding company and support future shareholder dividends and debt obligations.
- Evaluate liquidity against $299.1 million of undrawn credit commitments, $89.3 million of loan-origination commitments and scheduled debt maturities.