OceanFirst Financial Corporation: A Community Bank Gem Cheaper Than Wells Fargo

Source: Company

OceanFirst Financial Corporation (NASDAQ: OCFC  ) is a regional bank that, due to its size, is easily passed over by investors looking for interesting community banks with strong deposit franchises and a high dividend yield.

Though the bank does not even achieve a market capitalization of $300 million, OceanFirst Financial should be on every investors radar: The bank is deploying a lot of money for the benefit of shareholders through both dividends and share repurchases and should continue to profit from a healthy deposit business and solid loan portfolio growth.

Given its low market capitalization, OceanFirst Financial largely flies under the radar, but it is an attractively valued community bank nonetheless with more potential to press ahead in the coming years.

Background
OceanFirst Financial's trading history dates back to 1902 when it was founded as a small savings and loan institution in New Jersey. Fast forward a century and the bank has developed a respectable presence in its home state with a focus on residential mortgage loans, commercial real estate loans, real estate construction and consumer loans.

With 23 offices and total assets of $2.3 billion assets, OceanFirst Financial is a pure-play New Jersey community bank play with upside potential that will largely come from its core deposit and loan business.


Source: OceanFirst Financial Investor Presentation May 2014

Strong deposit franchise
Community banks largely derive their value from deep customer relationships in their respective local communities. As such, it is often not surprising that small regional banks outperform large banks such as Bank of America (NYSE: BAC  ) or Wells Fargo (NYSE: WFC  ) in terms of deposit market share.

In the case of OceanFirst Financial, the bank has more than a 10% deposit market share in its key operating theater of Ocean County in New Jersey and ranks just behind Wells Fargo.

Source: OceanFirst Financial Investor Presentation May 2014

One of the most distinguishing characteristics of OceanFirst Financial, however, is not even its strong deposit franchise, but its focus on shareholder remuneration.

Capital deployment
OceanFirst Financial funnels substantial amounts of capital back to shareholders for such a small community bank.

Source: OceanFirst Financial Investor Presentation May 2014

The bank currently pays investors $0.12 per share quarterly which translates into a forward dividend yield of roughly 3%. Compare this against dividend yields of 0.26% for Bank of America and 2.70% for Wells Fargo and you'll see that OceanFirst Financial's remuneration policy is very competitive and holds up to comparison with the largest banks in the country.

OceanFirst Financial just declared its 70th consecutive quarterly dividend and exhibits a 40% payout ratio, which allows the bank to balance the need for organic growth investments with sensible shareholder remuneration.

The bank also supplements its dividends by share repurchases, but it has made clear in its second quarter conference call, that it continues to conduct stock buybacks on an opportunistic basis.

Profitability
OceanFirst Financial's profitability has been decent with return on equity regularly in the high single digits.

Source: OceanFirst Financial Investor Presentation May 2014

In each of the last five full financial years, OceanFirst Financial has achieved a return on equity of at least eight percent and a return on assets of at least 0.80%, but I generally see a lot more upside potential for the bank's profitability over the next couple of years as its asset quality continues to improve and loan growth kicks into high gear.

Commercial lending particularly could turbocharge OceanFirst Financial's earnings and its valuation going forward.

The New Jersey bank currently trades at 1.31x book value compared to 1.68x for Wells Fargo and 0.74x for litigation-weary Bank of America. Wells Fargo is also one of the few large-cap banking institutions, that trades at a premium to book value.

The Foolish Bottom Line
OceanFirst Financial has a strong deposit franchise, a focus on shareholder remuneration with a competitive dividend yield of 3% and high profitability which has potential to grow as loan demand kicks into high gear.

From a valuation perspective, OceanFirst Financial is cheaper than Wells Fargo, but should equally benefit from the same cyclical tailwinds in its loan business.

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