OceanFirst Financial Corp. — Form 10-Q Summary
Business Context and Reporting Period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving business and retail customers in central New Jersey. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, with comparisons to the same 2014 periods and to December 31, 2014 for financial condition.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net income | $5.1 million | $5.1 million | $10.4 million | $9.8 million |
| Diluted EPS | $0.31 | $0.30 | $0.63 | $0.58 |
| Net interest income | $18.4 million | $18.2 million | $36.6 million | $36.2 million |
| Other income | $4.2 million | $4.8 million | $8.2 million | $8.7 million |
| Operating expenses | $14.4 million | $14.8 million | $28.1 million | $28.9 million |
| Provision for loan losses | $0.3 million | $0.3 million | $0.7 million | $0.8 million |
| Net interest margin | 3.23% | 3.35% | 3.23% | 3.36% |
- Total assets were $2.395 billion at June 30, 2015, up from $2.357 billion at December 31, 2014.
- Net loans were $1.773 billion, an increase of $84.0 million from year-end, primarily from $75.6 million of commercial-loan growth.
- Deposits were $1.762 billion, up $41.5 million from year-end, including a $53.5 million increase in business deposits and a $48.2 million increase in non-interest-bearing deposits.
- Stockholders’ equity was $221.5 million, representing 9.25% of total assets. Return on average assets was 0.86%, and return on average equity was 9.29%.
- Cash and due from banks totaled $40.4 million. The holding company separately held $20.9 million in cash.
- Total Federal Home Loan Bank borrowings were $295.6 million, including $67.3 million of overnight borrowings.
- Six-month operating cash flow was $15.8 million; investing activities used $40.3 million and financing activities provided $28.7 million. Cash increased by $4.2 million during the period.
- The quarterly cash dividend was $0.13 per share. The company repurchased 259,940 shares during the first six months for $4.5 million.
Material Changes Versus Prior Comparable Period
- Quarterly net income was essentially unchanged, while six-month net income increased 5.8% to $10.4 million.
- Net interest income increased modestly because average interest-earning assets grew, particularly loans. The benefit was partly offset by margin compression from 3.35% to 3.23% in the quarter and from 3.36% to 3.23% for the six months.
- Interest expense increased as the company extended borrowings into higher-cost, longer-term maturities. The weighted average maturity of term borrowings increased from 1.3 years at December 31, 2013 to 3.3 years at June 30, 2015.
- Other income declined primarily because the prior-year periods included $348,000 of gains on sales of investment securities, while 2015 included no such gains. Loan servicing income also declined following the sale of servicing rights, although related operating expenses decreased comparably.
- Operating expenses declined despite $184,000 of second-quarter and $234,000 of six-month merger-related expenses. Lower compensation and marketing costs were the principal contributors.
- Net charge-offs declined to $185,000 in the second quarter and $458,000 for the six months, compared with $273,000 and $799,000, respectively, in the prior-year periods.
- Non-performing loans increased from $18.3 million at year-end to $20.9 million, and non-performing assets increased from $23.0 million to $24.3 million. Non-performing loans as a percentage of loans rose to 1.16% from 1.06%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects interest rates to remain at or near historically low levels, with gradual Federal funds rate increases. Continued low rates could further pressure net interest margin.
- Management is shifting the asset mix from lower-yielding securities toward higher-yielding commercial loans to mitigate margin pressure, while using longer-term borrowings to manage interest-rate risk.
- The one-year cumulative interest-sensitivity gap was negative 1.00% of interest-earning assets at June 30, 2015, compared with negative 2.73% at year-end 2014.
- The allowance for loan losses was $16.5 million, or 0.92% of total loans. Commercial real estate represented 69.8% of non-performing loans. Special Mention loans increased to $29.8 million from $19.0 million at year-end.
- Undrawn lines of credit totaled $297.0 million, commitments to originate loans totaled $93.5 million, and commitments to sell loans totaled $6.1 million. Management stated that sufficient funds were available for current commitments.
- Time deposits scheduled to mature within one year totaled $114.5 million. The company maintains a contingency funding plan and performs quarterly liquidity stress testing.
- The Bank exceeded regulatory capital requirements and was considered well-capitalized. Reported ratios included a 9.12% Tier 1 leverage ratio, 12.76% Common Equity Tier 1 ratio, and 13.73% total capital ratio.
- Merger-related expenses were $153,000 net of tax for the quarter and $190,000 net of tax for the six months.
- After quarter-end, on July 31, 2015, the company completed the $11.9 million all-stock acquisition of Colonial American Bank, which had $143.2 million of assets, $125.8 million of loans, and $127.5 million of deposits at June 30. The Bank also agreed to purchase a Toms River branch with $24.6 million of deposits, including $20.2 million of core deposits.
- Management identified interest rates, economic conditions, unemployment, real estate values, regulatory changes, loan and securities portfolio quality, deposit flows, competition, and market demand as significant risks. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether commercial-loan growth can continue without a disproportionate increase in non-performing loans, criticized assets, or credit-loss provisions.
- The effect of sustained low interest rates and higher-cost borrowings on net interest margin and earnings.
- The integration costs, financial contribution, and capital impact of the Colonial American Bank acquisition and the planned branch acquisition.
- The composition and performance of the $29.8 million of Special Mention loans and the $34.5 million of Substandard loans.
- The company’s continued ability to fund dividends through bank subsidiary distributions, particularly because regulatory approval for future distributions may be restricted.
- The realizability of the $9.97 million of unrealized losses on held-to-maturity securities, including $7.75 million related to corporate debt securities.