OceanFirst Financial Corp. — 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A., a regional bank serving New Jersey and the metropolitan Philadelphia and New York City markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the same periods in 2017 and to December 31, 2017 for balance-sheet data.
The January 31, 2018 acquisition of Sun Bancorp materially expanded the Company. Sun contributed approximately $2.0 billion of assets, $1.5 billion of loans and $1.6 billion of deposits; its results are included from February 1, 2018 onward. The Bank also converted to a national bank charter effective January 31, 2018.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net interest income | $61.5 million | $43.1 million | $178.7 million | $126.7 million |
| Provision for loan losses | $0.9 million | $1.2 million | $3.0 million | $3.0 million |
| Other income | $8.3 million | $7.4 million | $26.1 million | $20.3 million |
| Operating expenses | $39.5 million | $30.7 million | $147.3 million | $98.8 million |
| Net income | $24.1 million | $12.8 million | $45.2 million | $32.5 million |
| Diluted EPS | $0.50 | $0.39 | $0.95 | $0.98 |
| Net interest margin | 3.64% | 3.50% | 3.68% | 3.54% |
- Total assets were $7.563 billion at September 30, 2018, up from $5.416 billion at December 31, 2017.
- Net loans were $5.544 billion, compared with $3.966 billion at year-end 2017. Deposits were $5.854 billion, compared with $4.343 billion.
- Stockholders’ equity increased to $1.030 billion from $601.9 million, primarily reflecting the Sun acquisition. Tangible common equity to tangible assets was 9.35%.
- Q3 return on average assets was 1.26%, return on average stockholders’ equity was 9.36%, and the efficiency ratio was 56.65%, including merger-related and branch-consolidation costs.
- Operating cash flow for the first nine months was $62.2 million. Investing activities provided $38.0 million, while financing activities used $60.7 million. Cash and due from banks ended at $148.4 million, or $149.1 million including restricted cash.
- FHLB advances totaled $456.8 million, including $171.0 million of overnight borrowings. The loan-to-deposit ratio was 94.7%.
Material Changes Versus Comparable Periods
- Net interest income increased 42.8% in Q3 and 41.0% for the nine-month period, driven primarily by the larger balance sheet from Sun and higher net interest margins. Sun purchase-accounting accretion contributed $2.8 million in Q3 and $8.2 million year to date.
- Net income increased 87.8% in Q3 and 39.0% year to date. However, 2018 included $1.6 million of after-tax merger and branch-consolidation expenses in Q3 and $22.9 million year to date, compared with $2.1 million and $8.6 million, respectively, in 2017.
- Operating expenses rose due to the Sun acquisition and integration costs. Excluding merger and branch-consolidation expenses, Sun added approximately $8.2 million of Q3 operating expenses and $27.5 million for the nine-month period.
- Other income benefited from Sun but was partly offset by a $2.0 million increase in real-estate-operation losses during Q3, including a $0.9 million write-down of a hotel, golf and banquet facility.
- The effective tax rate declined to 18.0% in Q3 and 17.1% year to date from 30.8% and 28.0%, respectively, primarily reflecting the Tax Cuts and Jobs Act.
Asset Quality, Capital, Liquidity and Debt
- Non-performing loans were $19.2 million, or 0.35% of total loans, versus $20.9 million, or 0.52%, at December 31, 2017. Non-performing assets were $25.5 million, or 0.34% of total assets.
- The allowance for loan losses was $16.8 million, or 0.30% of total loans. The Company also reported $34.4 million of fair-value credit marks on acquired loans, which are excluded from the allowance ratio.
- Net loan charge-offs were $0.8 million in Q3 and $1.9 million year to date. Purchased credit-impaired loans totaled $9.7 million.
- The Bank exceeded applicable regulatory capital requirements and satisfied the “well-capitalized” criteria. At September 30, 2018, the Bank’s total capital ratio was 13.51%, common equity Tier 1 ratio was 13.17%, and Tier 1 leverage ratio was 9.58%.
- Outstanding undrawn lines of credit totaled $835.2 million and commitments to originate loans totaled $213.4 million. Debt obligations totaled $617.3 million, with $318.7 million due within one year.
- Management stated that liquidity was sufficient under its stress scenarios and expected available funds to meet normal-course commitments. Time deposits of $452.4 million were scheduled to mature within one year.
Outlook, Commentary, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management emphasized the benefits of Sun’s expanded funding base, loan portfolio and expense-integration opportunities.
- On October 25, 2018, the Company announced an agreement to acquire Capital Bank of New Jersey. Closing was expected in the first quarter of 2019, subject to stockholder and regulatory approvals and other customary conditions. Capital Bank was described as having a 0.46% average deposit cost and a 70.0% loan-to-deposit ratio.
- The Board declared a quarterly cash dividend of $0.17 per share, payable November 16, 2018. Future holding-company dividends depend substantially on capital distributions from the Bank and could be constrained by regulatory requirements.
- Key risks include interest-rate movements, deposit pricing and competition, economic and real-estate conditions, credit quality, integration of acquired operations, regulatory changes, deposit flows and the availability of liquidity.
- New Jersey legislation imposes a temporary corporate surtax and requires combined tax filing beginning in 2019; management stated that the legislation had not affected 2018 deferred tax assets or state tax expense but could increase future tax expense.
- The Company expects adoption of the CECL credit-loss standard to increase the allowance for loan losses, particularly for longer-duration loans, but the amount was not determinable at the filing date.
- The Company had no material legal proceedings, reported effective disclosure controls, and identified no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Separate recurring earnings from Sun acquisition effects, purchase-accounting accretion and merger or branch-consolidation expenses.
- Assess whether the 94.7% loan-to-deposit ratio and increased FHLB borrowings remain appropriate as loan growth continues.
- Monitor commercial real-estate exposure, special-mention and substandard loans, non-performing loans and the adequacy of the allowance after CECL adoption.
- Review the terms, regulatory approvals, integration costs and expected financial impact of the proposed Capital Bank acquisition.
- Reconcile the filing’s quarterly dividend disclosures and confirm the sustainability of dividends given reliance on Bank-level capital distributions.
- Evaluate the effect of rising deposit and borrowing costs on the net interest margin, including the eventual reduction of Sun purchase-accounting accretion.