OceanFirst Financial Corp. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving central and southern New Jersey. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared primarily with the same 2015 periods and December 31, 2015 balances.
The May 2, 2016 acquisition of Cape Bancorp materially increased the scale of the Company, adding approximately $1.5 billion of assets, $1.2 billion of loans, $1.2 billion of deposits and 22 branches. Cape results are included from May 2, 2016. The Company also completed a Toms River branch acquisition in March 2016 and included Colonial American Bank results following its July 2015 acquisition.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $30.0 million | $18.4 million | $50.6 million | $36.6 million |
| Provision for loan losses | $0.7 million | $0.3 million | $1.2 million | $0.7 million |
| Other income | $4.9 million | $4.2 million | $8.3 million | $8.2 million |
| Operating expenses | $28.6 million | $14.4 million | $45.4 million | $28.1 million |
| Net income | $3.7 million | $5.1 million | $7.9 million | $10.4 million |
| Diluted EPS | $0.16 | $0.31 | $0.39 | $0.63 |
| Net interest margin | 3.55% | 3.23% | 3.45% | 3.23% |
| Efficiency ratio | 82.09% | 63.67% | Not clearly provided | Not clearly provided |
- Total assets were $4.05 billion at June 30, 2016, versus $2.59 billion at December 31, 2015.
- Net loans were $3.13 billion, versus $1.97 billion at year-end 2015; excluding the Cape acquisition, loan growth was approximately $2.4 million.
- Deposits were $3.21 billion, versus $1.92 billion at year-end 2015. The loan-to-deposit ratio improved to 97.6% from 102.8%.
- Stockholders’ equity increased to $409.3 million from $238.4 million, including $165.9 million attributable to the Cape acquisition. Tangible common equity to assets was 8.51%.
- Cash flows provided by operating activities were $16.1 million for the first six months of 2016. Investing activities provided $128.8 million, while financing activities used $122.6 million. Cash and due from banks ended at $66.2 million.
- Total FHLB borrowings were $312.6 million at June 30, 2016, compared with $324.4 million at December 31, 2015. The Company held $15.3 million of holding-company cash.
- The Company and Bank exceeded all regulatory capital requirements and were considered well-capitalized. OceanFirst Financial Corp. reported a 11.47% common equity Tier 1 ratio and 12.34% total capital ratio; OceanFirst Bank reported 11.18% and 11.76%, respectively.
Material changes versus comparable periods
- Q2 net interest income increased 62.8% year over year, primarily because of the larger balance sheet from Cape and Colonial and a higher net interest margin. Purchase-accounting accretion contributed $1.3 million in Q2.
- Other income increased 17.1% in Q2, with Cape contributing approximately $951,000. Excluding Cape, other income declined because of higher losses from other real estate operations and the absence of gains on loan-servicing sales.
- Operating expenses doubled year over year, largely because of $7.2 million of Cape merger expenses, acquired operations, commercial-lending investments and new branch costs. Excluding merger expenses, expenses still increased materially.
- Net income declined 28.7% in Q2 and 24.3% year to date. Merger-related expenses and deleveraging costs reduced Q2 diluted EPS by approximately $0.22 and year-to-date diluted EPS by approximately $0.29. Excluding these items, management stated that diluted EPS increased year over year.
- The Company incurred a $136,000 FHLB borrowing prepayment fee and a $12,000 loss on the sale of available-for-sale securities as part of its post-acquisition deleveraging strategy.
- Non-performing loans declined to $15.3 million from $18.3 million at December 31, 2015, and non-performing assets declined to $25.1 million from $27.1 million. However, six-month net charge-offs increased to $1.3 million from $458,000, primarily because of two commercial-loan charge-offs in the first quarter.
Outlook, commentary, risks and unusual items
Management described the economic environment as one of moderate growth, low inflation and historically low interest rates, with expected Federal funds rate increases likely to be gradual. The Company cautioned that continued low rates could pressure future net interest margin. It also stated that integration and rebranding of Cape were expected in October 2016, with additional cost savings expected beginning in the first quarter of 2017.
On July 13, 2016, the Company announced an agreement to acquire Ocean Shore Holding Company, parent of Ocean City Home Bank, in a transaction valued at approximately $145.6 million. The transaction was expected to close in the first quarter of 2017, subject to regulatory and stockholder approvals. Ocean City Home Bank had 11 branches, approximately $1.1 billion of assets, $818 million of deposits and $796 million of gross loans.
- Key risks include acquisition integration, customer and employee retention, expense control, operational scalability, regulatory capital requirements and the ability to raise additional capital if needed.
- Additional risks include interest-rate changes, economic and real-estate conditions in New Jersey, unemployment, deposit competition, loan demand, credit quality, regulatory changes and monetary policy.
- Outstanding undrawn lines of credit totaled $485.8 million; commitments to originate loans totaled $85.0 million; and commitments to sell loans totaled $12.4 million.
- Time deposits maturing within one year totaled $283.9 million. Management expected a significant portion to remain with the Company and stated that liquidity stress tests indicated significant liquidity under all scenarios.
- The Company was attempting to sell a hotel, golf and banquet facility included in other real estate owned; the property contributed to higher other-real-estate operating losses.
- Goodwill and core deposit intangible balances were $67.1 million and $3.9 million, respectively, at June 30, 2016. Acquisition accounting remained subject to measurement-period adjustments.
- No material legal proceedings were reported. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of the 3.55% quarterly net interest margin after purchase-accounting accretion and the planned Cape integration.
- Track whether merger expenses decline as expected and whether projected Cape cost savings begin in the first quarter of 2017.
- Assess credit quality in the substantially expanded commercial and residential loan portfolios, including charge-offs, delinquency trends, PCI loans and the allowance methodology.
- Confirm regulatory and stockholder approvals, consideration and closing timing for the proposed Ocean Shore acquisition.
- Monitor tangible common equity, goodwill, capital ratios and liquidity as additional acquisitions are completed.
- Evaluate deposit retention, FHLB borrowing levels, time-deposit maturities and the Company’s ability to fund commitments and maintain the $0.13 quarterly dividend.