OCEANFIRST FINANCIAL CORP quarterly report, Q2 FY2014

OceanFirst Financial Corp. 10-Q Summary

Business Context and Reporting Period

OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving Ocean and Monmouth Counties, New Jersey. The unaudited filing covers the quarter and six months ended June 30, 2014, with comparisons to June 30, 2013 and December 31, 2013.

Key Financial Metrics

Metric	Three Months Ended June 30, 2014	Comparable 2013 Period	Six Months Ended June 30, 2014	Comparable 2013 Period
Net income	$5.1 million	$5.0 million	$9.8 million	$9.4 million
Diluted EPS	$0.30	$0.29	$0.58	$0.55
Net interest income	$18.2 million	$17.5 million	$36.2 million	$34.7 million
Provision for loan losses	$275 thousand	$800 thousand	$805 thousand	$1.9 million
Other income	$4.8 million	$4.6 million	$8.7 million	$7.9 million
Operating expenses	$14.8 million	$13.6 million	$29.0 million	$26.2 million

Total assets were $2.329 billion at June 30, 2014, up $79.4 million from December 31, 2013.
Net loans were $1.632 billion, up $90.4 million from year-end, driven primarily by $62.8 million of commercial loan growth and an $11.6 million increase in residential construction loans. The Company also purchased a $20.6 million pool of performing local non-conforming mortgage loans.
Deposits were $1.706 billion, down $41.3 million from year-end, primarily because of lower government deposits. Non-interest-bearing deposits increased $63.6 million.
Federal Home Loan Bank advances increased $130.0 million to $305.0 million to fund loan growth and deposit outflows.
Net interest margin increased to 3.35% for the quarter and 3.36% for the six-month period, compared with 3.21% and 3.19%, respectively, in 2013.
Return on average assets was 0.90% and return on average equity was 9.45% for the quarter. The efficiency ratio was 64.54%.
Stockholders’ equity was $215.8 million, representing 9.27% of total assets. The Bank remained well-capitalized, with a total risk-based capital ratio of 15.47% and a Tier 1 leverage ratio of 9.45%.
Assets under wealth-management administration increased to $229.3 million from $175.8 million a year earlier.

Cash Flow, Debt and Liquidity

For the first six months of 2014, operating activities provided $7.9 million of cash, investing activities used $72.5 million, and financing activities provided $74.4 million.
Cash and due from banks increased $9.9 million to $43.8 million during the first six months.
At June 30, 2014, the holding company had $16.3 million of cash and $7.2 million of investment securities available-for-sale.
Outstanding undrawn lines of credit totaled $282.9 million, commitments to originate loans totaled $100.7 million, and commitments to sell loans totaled $15.3 million.
Debt obligations totaled $394.8 million, including $305.0 million of FHLB advances and $27.5 million of other borrowings.
Management stated that sufficient funds were available for current commitments and that the Bank maintained significant liquidity under its stress scenarios.

Material Changes Versus Prior Comparable Period

Quarterly net income increased 2.6%, while six-month net income increased 4.2%.
Net interest income increased 3.5% for the quarter and 4.3% year to date, primarily from a wider net interest margin and lower funding costs.
Interest expense declined substantially because of lower funding costs, including the prior-year benefit from the prepayment of $159.0 million of higher-cost FHLB advances in the fourth quarter of 2013.
The loan-loss provision declined because of lower net charge-offs and lower non-performing loans.
Operating expenses increased 9.2% for the quarter and 10.7% year to date, primarily from personnel additions in revenue-producing areas and increased marketing costs.
Loan-sale gains declined as higher long-term interest rates reduced refinancing activity. Loans sold were $10.9 million for the quarter and $21.2 million year to date, versus $32.3 million and $69.1 million, respectively, in the prior-year periods.
Non-performing loans declined to $40.7 million from $45.4 million at year-end and $45.9 million a year earlier. Non-performing assets were $45.7 million, or 1.96% of assets.
The Company repurchased 301,766 shares for $5.0 million during the first six months. On July 24, 2014, the Board authorized repurchases of up to 867,923 additional shares, or 5% of outstanding common stock.

Outlook, Commentary, Risks and Unusual Items

Management reported that commercial loan expansion and a shift from lower-yielding securities and short-term investments to loans supported margin expansion.
The Federal Reserve expected short-term rates to remain low for a considerable period while continuing to taper its bond-buying program. The filing does not provide formal earnings or revenue guidance.
Higher long-term rates have reduced mortgage refinancing, loan-sale volume and gain-on-sale income. The filing states that the economic recovery remained weak despite improving employment indicators.
Second-quarter operating expenses included $196,000 of non-recurring severance costs related to restructuring the residential mortgage operation. The personnel reduction was expected to reduce annual compensation expense by approximately $650,000.
Non-performing loans remained elevated partly because of New Jersey’s protracted foreclosure process. The largest non-performing relationship was $6.5 million of hotel, golf and banquet-facility commercial real estate loans, supported by collateral valued at $7.4 million.
The Company held $55.0 million of corporate debt securities with an estimated fair value of $47.1 million. Management concluded the unrealized loss was temporary and expected full principal recovery.
Key risks include interest-rate changes, economic and unemployment conditions, real-estate values, deposit flows, competition, loan portfolio quality, regulatory changes, prepayments and demand for financial services.
The Bank exceeded all regulatory capital requirements. New Basel III-related capital rules were scheduled to become effective for the Bank on January 1, 2015, with the capital conservation buffer phased in beginning in 2016.
The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.

Important Facts for Investors to Verify

Whether commercial loan growth and increased FHLB borrowings can be sustained without weakening asset quality or liquidity.
Whether non-performing assets and criticized commercial real estate exposures continue to decline, particularly the $6.5 million hotel-related relationship.
Whether the allowance for loan losses remains adequate as the loan portfolio expands; the allowance was 1.26% of total loans and 51.44% of non-performing loans.
Whether margin expansion persists if short-term rates remain low or funding costs increase.
The recurring earnings impact of higher personnel and marketing expenses after the $196,000 severance charge and planned annual cost reduction.
The effect of reduced mortgage refinancing and loan-sale activity on future non-interest income.
The holding company’s dependence on dividends from the Bank to fund corporate dividends and other obligations; regulatory approval may be revoked if safety-and-soundness concerns arise.
The impact of the new share-repurchase authorization, quarterly $0.12 dividend, and upcoming Basel III capital requirements on capital deployment.