OceanFirst Financial Corp. 2019 Form 10-K Summary
Business context and reporting period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A., a community bank serving central and southern New Jersey and the metropolitan areas of New York City and Philadelphia. The filing covers the fiscal year ended December 31, 2019. The company generated substantially all of its business through the Bank, primarily from commercial real estate, commercial and industrial, residential mortgage, consumer lending, deposits, securities and fee-based services.
At December 31, 2019, the Company reported $8.25 billion of assets, $1.15 billion of stockholders’ equity, $6.21 billion of net loans and $6.33 billion of deposits. The Bank operated 56 full-service customer facilities, 5 deposit production facilities and commercial loan production offices.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $88.6 million | $71.9 million | +23.1% |
| Diluted EPS | $1.75 | $1.51 | +15.9% |
| Net interest income | $256.0 million | $240.5 million | +6.4% |
| Other income | $42.2 million | $34.8 million | +21.1% |
| Provision for loan losses | $1.6 million | $3.5 million | Lower |
| Operating expenses | $189.1 million | $186.3 million | +1.5% |
| Return on average assets | 1.10% | 0.98% | Improved |
| Return on average equity | 7.84% | 7.31% | Improved |
| Net interest margin | 3.62% | 3.71% | Down 9 basis points |
| Efficiency ratio | 63.44% | 67.68% | Improved |
Interest income rose to $308.8 million from $276.7 million, reflecting growth in average interest-earning assets and loans. Interest expense increased to $52.8 million from $36.2 million as deposit and borrowing costs increased. The total cost of deposits rose to 0.61% from 0.39%.
Cash flow provided by operating activities was $100.2 million, compared with $92.6 million in 2018. Investing activities used $172.1 million, principally because of loan growth, securities purchases and $47.0 million placed in escrow for the January 2020 acquisitions. Financing activities provided $82.8 million. Year-end cash and restricted cash totaled $133.2 million.
Loans increased 11.3% to $6.215 billion, while deposits increased 8.8% to $6.329 billion. Commercial real estate, multifamily and land loans represented 49.7% of total loans; residential real estate loans represented 37.3%. The loan-to-deposit ratio increased to 98.1% from 96.0%.
Total borrowings were $687.8 million, including $519.3 million of FHLB advances, $71.7 million of securities sold under agreements to repurchase and $96.8 million of other borrowings. The Company held $33.3 million of parent-company cash at year-end.
Asset quality remained favorable overall. Non-performing loans were $17.8 million, or 0.29% of loans, compared with $17.4 million, or 0.31%, in 2018. Non-performing assets were $18.1 million, or 0.22% of assets. The allowance for loan losses was $16.9 million, or 0.27% of loans, and net charge-offs were $1.4 million, or 0.02% of average net loans.
The Company and Bank exceeded applicable regulatory capital requirements. The Bank’s year-end common equity Tier 1 ratio was 12.98%, Tier 1 risk-based capital ratio was 12.98%, total risk-based capital ratio was 13.29% and leverage ratio was 10.03%. The Bank was classified as well-capitalized.
Material changes versus the prior comparable period
- Capital Bank of New Jersey was acquired on January 31, 2019, adding approximately $494.7 million of assets, $307.8 million of loans and $449.0 million of deposits. Capital Bank contributed results for February through December 2019.
- Net income increased $16.6 million, although 2019 included $10.5 million of merger-related expenses and $9.1 million of branch-consolidation expenses. Management stated that specified unusual items reduced 2019 net income by $16.3 million after tax, compared with a $22.2 million after-tax reduction in 2018.
- Net interest income increased, but the net interest margin declined because funding costs rose faster than asset yields.
- Other income benefited from a $4.6 million increase in derivative fee income, lower losses from real estate operations and the Capital Bank acquisition. Bankcard services revenue increased to $10.3 million; reported interchange-fee revenue was $9.5 million.
- The Company repurchased 1.1 million shares for $26.1 million and paid $34.2 million in dividends. The annual dividend increased to $0.68 per share from $0.62.
- Management remediated the material weakness in information-technology general controls reported for 2018. Management and KPMG concluded that internal control over financial reporting was effective at December 31, 2019.
- The Company adopted the new lease standard in 2019, recognizing approximately $20.2 million of right-of-use assets and $20.8 million of lease liabilities at year-end.
Guidance, outlook, commentary and risks
No formal earnings or revenue guidance is provided in the filing. Management emphasizes prudent commercial-loan and core-deposit growth, expansion of fee-based services, digital banking investment, branch rationalization and opportunistic acquisitions.
On January 1, 2020, the Company completed the acquisitions of Two River Bancorp and Country Bank. These transactions added approximately $1.9 billion of assets, $1.55 billion of loans and $1.60 billion of deposits, bringing consolidated assets to approximately $10.2 billion, loans to $7.8 billion and deposits to $7.9 billion. The acquisitions also caused the Bank to exceed the $10 billion asset threshold, increasing exposure to CFPB examination authority, higher regulatory and compliance costs and reduced debit-card interchange fees. Management expects at least 13 branch consolidations in 2020.
Key risks include concentration in New Jersey and surrounding real estate markets, the growing commercial real estate portfolio, higher funding costs and interest-rate sensitivity, deposit competition, acquisition integration, potential credit losses on acquired loans, cybersecurity and third-party technology risks, regulatory changes, the transition from incurred-loss accounting to CECL, LIBOR replacement, goodwill impairment and natural disasters affecting coastal markets. The filing also identifies the coronavirus outbreak beginning in early 2020 as a potential material risk, although its effect could not yet be determined.
At year-end, the Company had $327.7 million of commitments to originate loans and $784.6 million of unused credit lines. The reserve for repurchased loans and loss-sharing obligations was $1.1 million, with no outstanding loan repurchase requests. Management believes liquidity is sufficient under normal conditions and reports that stress testing indicated significant liquidity.
Most important facts for investors to verify
- Whether the Two River and Country Bank integrations achieve projected growth and cost benefits without weakening credit quality or regulatory capital.
- The effect of crossing the $10 billion asset threshold on CFPB oversight, FDIC premiums, compliance expense and debit-card interchange revenue.
- Changes in the net interest margin as deposit costs, FHLB funding and other borrowing costs evolve.
- Credit performance of the 56.1% of loans classified as commercial real estate, multifamily, land, commercial and industrial loans, including acquired portfolios.
- The quantitative impact of CECL adoption, which management stated could not yet be reasonably estimated at the filing date.
- The sustainability of dividends and share repurchases, given reliance on capital distributions from the Bank and regulatory limitations.
- Potential losses from interest-rate movements, LIBOR replacement, securities valuation, goodwill impairment, loan repurchase obligations and off-balance-sheet commitments.
- Whether the remediation of prior-year IT control weaknesses remains effective as operations expand following the 2020 acquisitions.