OceanFirst Financial Corp. — 2013 First-Quarter Form 10-Q
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 filing covers the unaudited three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012 and, for balance-sheet items, December 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net interest income | $17.2 million | $19.1 million | Down $1.9 million |
| Provision for loan losses | $1.1 million | $1.7 million | Down $0.6 million |
| Other income | $3.4 million | $4.3 million | Down $0.9 million |
| Operating expenses | $12.7 million | $12.9 million | Down $0.3 million |
| Income before taxes | $6.8 million | $8.8 million | Down $1.9 million |
| Net income | $4.4 million | $5.6 million | Down $1.2 million |
| Diluted EPS | $0.26 | $0.31 | Down $0.05 |
| Net interest margin | 3.16% | 3.52% | Down 36 basis points |
| Return on average assets | 0.77% | 0.99% | Down 22 basis points |
| Return on average equity | 8.06% | 10.38% | Down 232 basis points |
Financial Condition, Liquidity and Capital
- Total assets increased to $2.304 billion at March 31, 2013, from $2.269 billion at December 31, 2012. Mortgage-backed securities increased $49.3 million to $383.1 million, while net loans declined $21.8 million to $1.501 billion.
- Deposits increased $20.6 million to $1.740 billion, driven by growth in non-interest-bearing and savings deposits. Time deposits declined $8.9 million.
- Stockholders’ equity was $219.6 million, or 9.53% of total assets. The Bank exceeded all regulatory capital requirements and remained well-capitalized, with total risk-based capital of 16.29% versus an 8.00% requirement.
- Cash and due from banks increased to $71.4 million. Net cash provided by operating activities was $12.6 million, while investing activities used $29.8 million and financing activities provided $26.0 million. Cash increased $8.8 million during the quarter.
- Federal Home Loan Bank advances totaled $225.0 million, and other borrowings totaled $27.5 million. The Company reported no overnight FHLB borrowings at quarter-end.
- Outstanding commitments included $59.7 million to originate loans, $243.5 million of unused lines of credit and $11.7 million of commitments to sell loans.
- The Company repurchased 254,340 shares for $3.6 million and paid $2.1 million in cash dividends. The quarterly dividend remained $0.12 per share, with 580,444 shares remaining under the repurchase authorization at March 31, 2013.
Material Changes and Asset Quality
- Net interest income declined because average asset yields fell and the asset mix shifted from higher-yielding loans toward lower-yielding short-term investments and securities. Average loan balances declined $41.8 million year over year.
- Interest expense declined to $2.9 million from $3.8 million, reflecting lower deposit and borrowing costs and reduced average borrowed funds.
- Other income declined primarily because the gain on loan sales became a $174,000 loss. The Company added $975,000 to its reserve for repurchased loans and loss-sharing obligations, compared with $150,000 in the prior-year quarter.
- Effective January 1, 2013, $166,000 of reverse-mortgage origination income was reclassified to fees and service charges because the Bank no longer closes these loans in its own name.
- Non-performing loans increased to $47.4 million from $43.4 million at December 31, 2012, and non-performing assets increased to $50.3 million from $46.6 million. The increase was principally related to loans affected by Superstorm Sandy and had been anticipated and provided for in the fourth quarter of 2012.
- Non-performing loans represented 3.11% of total loans, compared with 2.80% at year-end 2012. The allowance for loan losses was $20.5 million, or 1.34% of total loans.
- The reserve for repurchased loans and loss-sharing obligations increased to $1.7 million. The Bank recognized its first MPF-program losses, including a $245,000 realized loss and an additional $875,000 provision. Maximum remaining exposure on loans sold to the FHLB was $1.8 million.
Outlook, Risks and Unusual Items
- Management expects the low-interest-rate environment to continue beyond 2013, with further pressure on net interest margin. The Federal Reserve had indicated that rates could remain at then-current levels through mid-2015.
- Key risks include interest-rate changes, loan and mortgage-backed-security prepayments, weak economic and employment conditions, New Jersey real-estate values, deposit competition and flows, loan demand, regulatory changes and portfolio credit quality.
- Non-performing assets remain elevated partly because of New Jersey’s extended foreclosure process, which delays resolution through collateral sales.
- The Company determined that unrealized losses on corporate debt securities and mortgage-backed securities were temporary impairments. Corporate debt securities had an estimated market value of $45.1 million versus $55.0 million of amortized cost, including $9.9 million of unrealized losses.
- The Company received $4.0 million in dividends from the Bank during the quarter. The Federal Reserve did not object to up to $8.0 million of additional Bank dividends to the holding company over the following two quarters, subject to revocation for safety-and-soundness concerns.
- Management stated that liquidity remained sufficient under its stress scenarios. However, the holding company’s ability to sustain dividends depends substantially on receiving regulatory-permitted distributions from the Bank.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter. No material legal proceedings or changes to reported risk factors were disclosed.
Investor Verification Items
- Verify whether net interest margin continues to contract as loan refinancing, prepayments and securities growth persist.
- Track non-performing loans, Superstorm Sandy-related delinquencies, troubled debt restructurings and the allowance coverage ratio.
- Review future additions to the repurchased-loan reserve and losses under the FHLB MPF loss-sharing arrangement.
- Assess the sustainability of the $0.12 quarterly dividend in light of holding-company liquidity and regulatory limits on Bank dividends.
- Monitor the $55.0 million corporate debt securities portfolio, its $9.9 million unrealized loss and management’s temporary-impairment conclusion.
- Reconcile future loan growth, deposit trends, mortgage-backed-security purchases and FHLB borrowing levels with liquidity and interest-rate-risk disclosures.