OceanFirst Financial Corp. — FY2016 Form 10-K Summary
Business context and reporting period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community-oriented savings bank serving Central and Southern New Jersey, with commercial lending activity extending into the Philadelphia area. The filing covers the fiscal year ended December 31, 2016; comparative information is provided for 2015 and 2014. The company operated 61 full-service customer facilities at year-end.
2016 results include the May 2, 2016 acquisition of Cape Bancorp and the November 30, 2016 acquisition of Ocean Shore Holding Company, as well as a March 2016 retail branch acquisition. Accordingly, period-over-period comparisons are materially affected by acquisition timing.
Financial condition and operating metrics
| Metric | FY2016 / Dec. 31, 2016 | FY2015 / Dec. 31, 2015 |
|---|---|---|
| Total assets | $5.167 billion | $2.593 billion |
| Loans receivable, net | $3.803 billion | $1.971 billion |
| Deposits | $4.188 billion | $1.917 billion |
| Stockholders’ equity | $572.0 million | $238.4 million |
| Net interest income | $120.3 million | $76.8 million |
| Net income | $23.0 million | $20.3 million |
| Diluted earnings per share | $0.98 | $1.21 |
| Net interest margin | 3.47% | 3.28% |
| Return on average assets | 0.62% | 0.82% |
| Return on average equity | 6.08% | 8.92% |
| Efficiency ratio | 73.11% | 65.17% |
| Non-performing assets / total assets | 0.45% | 1.05% |
- Interest income increased to $133.4 million from $85.9 million, while interest expense increased to $13.2 million from $9.0 million.
- Other income increased to $20.4 million from $16.4 million. Bankcard services revenue was $4.8 million, wealth management revenue was $2.3 million and fees and service charges were $10.5 million.
- Operating expenses were $102.9 million, including $16.5 million of merger-related expenses. Excluding merger-related expenses, the company reported operating expenses of approximately $86.3 million.
- The provision for loan losses was $2.6 million, compared with $1.3 million in 2015. Net charge-offs were $4.2 million, including $2.1 million associated with sales of under-performing loans.
- Cash provided by operating activities was $32.8 million. The filing reports net cash used in investing activities of $271.7 million and net cash used in financing activities of $47.1 million; cash and due from banks increased by $257.4 million to $301.4 million.
- Borrowings totaled $377.0 million, consisting primarily of $250.5 million of FHLB advances, $69.9 million of repurchase agreements and $56.6 million of other borrowings. The company issued $35.0 million of subordinated notes in September 2016 at an initial all-in cost of 5.45%, maturing September 30, 2026.
- The loan-to-deposit ratio was 90.8%, down from 102.8%. Management stated that liquidity remained significant under its stress scenarios. Outstanding commitments included $131.7 million to originate loans and $495.6 million of unused credit lines.
- The Bank remained well-capitalized, with a 12.67% common equity Tier 1 ratio, a 12.67% Tier 1 risk-based capital ratio and a 13.12% total risk-based capital ratio. Tangible common equity to assets was 8.30%.
Material changes versus the prior comparable period
- Acquisitions drove most of the balance-sheet expansion. Cape added approximately $1.5 billion of assets, $1.2 billion of loans and $1.2 billion of deposits; Ocean Shore added approximately $996 million of assets, $774 million of loans and $875 million of deposits.
- Loans increased 93.5% to $3.831 billion before related adjustments, with commercial real estate, multifamily and land loans rising to $1.669 billion, or 43.6% of total loans. Commercial loans represented 47.6% of total loans when commercial real estate and commercial and industrial loans are combined.
- Deposits increased $2.271 billion, including $2.140 billion from acquisitions and the branch purchase. Excluding acquired deposits, deposits increased $130.7 million and core deposits increased $169.7 million.
- Net income increased 13.4%, but diluted EPS declined because of merger-related costs, a significantly higher share count and acquisition-related effects. Management stated that merger-related expenses reduced 2016 diluted EPS by $0.50.
- Credit quality improved in reported ratios: non-performing loans declined to $13.6 million from $18.3 million, and non-performing assets declined to 0.45% of assets from 1.05%. However, classified assets increased to $70.5 million of substandard assets and $111,000 of doubtful assets, versus $33.3 million of substandard assets in 2015.
- The allowance for loan losses declined to $15.2 million, or 0.40% of total loans, from $16.7 million, or 0.84%. Management attributed the lower ratio primarily to acquired loans recorded at fair value with separate credit marks totaling $26.0 million at year-end.
- Annual cash dividends increased to $0.54 per share from $0.52. The company repurchased 90,000 shares for $1.9 million, with 154,804 shares remaining under the authorization.
Guidance, outlook, commentary, risks and unusual items
- Management plans to focus on integrating the recent acquisitions, reducing non-interest expenses and pursuing organic growth, while continuing to evaluate opportunistic acquisitions.
- In January 2017, management announced plans to consolidate ten legacy Cape and Ocean Shore branches by mid-2017, with expected annualized cost savings of $3.6 million. Additional Central New Jersey branch consolidations were expected by year-end 2017.
- Because of higher market interest rates and reduced refinancing activity, management expected to retain most 30-year fixed-rate mortgage originations in 2017 to replace anticipated residential-loan repayments.
- The company’s one-year interest-rate sensitivity gap was negative 3.47%. Management cautioned that rising rates could increase funding costs faster than asset yields, while rate changes could also affect loan demand, borrower repayment capacity, securities values and prepayment rates.
- Major risks include concentration in Central and Southern New Jersey real estate, increased commercial lending exposure, coastal storms and flooding, lengthy New Jersey foreclosure timelines, acquisition integration, goodwill impairment, regulatory and consumer-protection changes, cybersecurity and third-party technology risks, competition for deposits and loans, and potential limitations on dividends from the Bank to the holding company.
- The company maintained $145.1 million of goodwill and $10.9 million of core deposit intangibles at year-end. Management concluded that goodwill was not impaired in its 2016 assessment.
- The company maintained reserves of $846,000 for potential mortgage-loan repurchase and FHLB loss-sharing obligations and reported no outstanding loan repurchase requests. Management stated that routine legal proceedings were immaterial.
- The company expects adoption of the CECL credit-loss standard to increase the allowance for loan losses, particularly for longer-duration portfolios, but stated that the amount of the impact cannot yet be determined.
Most important facts for investors to verify
- Separate acquisition-driven growth from organic growth when evaluating revenue, loans, deposits and expenses.
- Assess recurring earnings after excluding $16.5 million of merger-related expenses and the $136,000 FHLB advance prepayment fee.
- Review the sustainability of the 3.47% net interest margin, including purchase-accounting accretion of $4.5 million and sensitivity to higher deposit and borrowing costs.
- Monitor commercial real estate and commercial-loan concentrations, classified assets, credit marks on acquired loans and the allowance methodology.
- Evaluate whether planned branch consolidations produce the anticipated $3.6 million of annualized savings without material customer attrition.
- Confirm holding-company liquidity and dividend capacity, given that the Bank elected not to pay dividends after the first quarter of 2016 to retain capital.
- Review the effect of CECL adoption, goodwill testing, acquisition measurement-period adjustments and any future regulatory-capital implications.