OCFC

Business Context and Reporting Period

Company: OceanFirst Financial Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company operates as a financial holding company for OceanFirst Bank, providing banking and financial services. The reporting period reflects the impact of the U.S. Treasury's Capital Purchase Program (TARP), a pending merger with Central Jersey Bancorp, and a challenging economic environment affecting loan performance.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income available to common stockholders increased to $4.00 million for the quarter (from $3.72 million in 2008) but decreased to $10.55 million for the nine-month period (from $11.26 million in 2008). Diluted EPS for the nine months declined to $0.90 from $0.96.
• Net Interest Income: Increased significantly due to a lower cost of funds. Net interest margin improved to 3.73% for the quarter and 3.59% for the nine months, compared to 3.30% and 3.20% in the prior year periods, respectively.
• Asset Composition: Mortgage-backed securities available for sale more than doubled to $83.0 million (from $40.8 million) due to the investment of TARP proceeds. Loans receivable decreased by $25.8 million year-over-year.
• Capital Structure: Stockholders' equity increased to $166.2 million from $119.8 million at year-end 2008, primarily driven by the issuance of $38.3 million in Preferred Stock under the TARP Capital Purchase Program.
• Asset Quality: Non-performing loans increased to $23.5 million (from $12.5 million in 2008), leading to a higher provision for loan losses ($3.5 million for the nine months vs. $1.2 million prior year).

Guidance, Outlook, and Risks

• Merger Activity: The Company received shareholder approval on October 1, 2009, to merge with Central Jersey Bancorp. The transaction is expected to close by year-end 2009, subject to regulatory approval. Merger-related costs of $582,000 were expensed in the nine-month period.
• TARP Repurchase: The Company notified the OTS of its intent to repurchase the TARP Preferred Stock. On November 3, 2009, the Company closed a public offering of common stock raising approximately $54.0 million, intended to fund the repurchase of the Preferred Stock and warrants.
• Regulatory Risks: The Company faces potential regulatory changes under the Administration's Financial Regulatory Reform Plan, including the possible elimination of the Federal thrift charter and the creation of a new National Bank Supervisor. Additionally, increased FDIC deposit insurance assessments (including a special assessment of $869,000) are impacting operating expenses.
• Legal Proceedings: Class action lawsuits were filed regarding the Central Jersey merger. One plaintiff voluntarily dismissed their action; the remaining plaintiff intends to amend their complaint. The Company intends to vigorously defend against these claims.
• Asset Quality Risks: The Company holds $30.0 million in corporate debt securities that have been downgraded to below investment grade, though management considers them temporarily impaired. Non-performing assets remain elevated due to the weak housing market.

Investor Verification Checklist

• Merger Closing: Verify the consummation of the Central Jersey Bancorp merger and any associated regulatory conditions.
• TARP Exit Strategy: Confirm the successful repurchase of the TARP Preferred Stock and Warrants using proceeds from the November 2009 common stock offering.
• Asset Quality Trends: Monitor the trajectory of non-performing loans and the adequacy of the allowance for loan losses, particularly regarding the $30 million portfolio of downgraded corporate debt securities.
• Regulatory Capital: Assess the impact of potential regulatory reforms (elimination of thrift charter) on the Company's capital requirements and operational structure.
• FDIC Assessments: Review the impact of ongoing and future FDIC special assessments on net income and liquidity.