Business Context and Reporting Period
Company: OceanFirst Financial Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company is a savings and loan holding company operating primarily through its subsidiary, OceanFirst Bank. The reporting period reflects the impact of the U.S. Treasury's Troubled Asset Relief Program (TARP) Capital Purchase Program, the shuttering of its mortgage banking subsidiary (Columbia Home Loans, LLC), and a pending merger agreement with Central Jersey Bancorp.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income | $7.55 million | $7.54 million |
| Net Income Available to Common Stockholders | $6.56 million | $7.54 million |
| Diluted EPS (Common) | $0.56 | $0.64 |
| Total Assets | $1.91 billion | $1.90 billion (Dec 31, 2008) |
| Net Interest Income | $31.82 million | $28.50 million |
| Net Interest Margin | 3.52% | 3.15% |
| Provision for Loan Losses | $2.00 million | $0.78 million |
| Operating Expenses | $25.02 million | $23.00 million |
| Stockholders' Equity | $161.91 million | $119.78 million (Dec 31, 2008) |
| Cash and Due from Banks | $22.42 million | $18.48 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Capital Structure: Stockholders' equity increased by approximately $42.1 million compared to December 31, 2008, primarily driven by the issuance of $38.3 million in Preferred Stock and Warrants to the U.S. Treasury under the TARP Capital Purchase Program in January 2009.
- Asset Composition: Mortgage-backed securities available for sale more than doubled to $89.4 million (from $40.8 million) as proceeds from the TARP issuance were invested. Conversely, FHLB advances decreased by $101.9 million to $258.0 million due to increased deposit balances.
- Loan Portfolio: Total loans receivable, net, decreased slightly by $4.7 million to $1.644 billion. Commercial real estate loans grew by $34.6 million, offset by declines in one-to-four family mortgages due to prepayments and a strategy to sell fixed-rate loans.
- Non-Performing Assets: Non-performing loans increased to $20.9 million (from $14.4 million in the prior year), and total non-performing assets rose to $22.3 million. This increase drove a higher provision for loan losses.
- Operating Expenses: Expenses rose $2.0 million year-over-year. Significant contributors included a $556,000 charge for the remaining lease obligations of the shuttered Columbia Home Loans subsidiary and an $869,000 special FDIC assessment.
Guidance, Outlook, Risks, and Unusual Items
- Merger Activity: On May 27, 2009, the Company signed an agreement to merge with Central Jersey Bancorp in an all-stock transaction. The deal is expected to close by year-end, subject to regulatory and shareholder approval. Legal proceedings have been filed by Central Jersey shareholders challenging the merger.
- Regulatory Risks: The Company faces potential regulatory changes under the Administration's Financial Regulatory Reform Plan, which may eliminate the federal thrift charter and create a new National Bank Supervisor. Additionally, the Company is subject to executive compensation limitations and dividend restrictions under the TARP agreement.
- Unusual Items:
- FDIC Assessment: A special assessment of $869,000 was recorded in Q2 2009. The FDIC has indicated a probable additional assessment later in 2009.
- Subprime Exposure: The Company holds subprime loans with a carrying value of $1.9 million and ALT-A loans with a carrying value of $4.9 million. Net charge-offs included $635,000 related to subprime loans originated by the shuttered Columbia subsidiary.
- Security Impairments: Corporate debt securities with an amortized cost of $55.0 million are trading at a significant unrealized loss ($23.8 million) due to credit rating downgrades and illiquidity. Management deems these impairments temporary.
- Dividends: The Board declared a quarterly common dividend of $0.20 per share (payable August 14, 2009) and a preferred dividend of $12.50 per share. Future common dividends are restricted by TARP terms to $0.20 per share unless approved by the Treasury.
Investor Verification Checklist
- TARP Compliance: Verify adherence to TARP restrictions on executive compensation and common stock dividends ($0.20 cap).
- Merger Status: Monitor the progress of the Central Jersey Bancorp merger and the outcome of the pending shareholder class-action lawsuits.
- Asset Quality: Review the trajectory of non-performing loans and the adequacy of the allowance for loan losses (currently 0.77% of total loans) given the economic downturn.
- Security Valuation: Assess the risk of the $55 million corporate debt portfolio being reclassified as "other-than-temporarily impaired" if issuers default or liquidity worsens.
- Regulatory Capital: Confirm the Bank's "well-capitalized" status remains intact under potential new regulatory frameworks proposed by the Administration.