OceanFirst Financial Corp. 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. The unaudited report covers the quarter ended March 31, 2020, with comparisons to March 31, 2019 and December 31, 2019 where applicable.
Results include the Two River Bancorp and Country Bank Holding Company acquisitions completed January 1, 2020. These transactions added approximately $2.0 billion of assets, $1.6 billion of loans and $1.6 billion of deposits at closing.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total assets | $10.489 billion | $8.093 billion | 29.6% increase |
| Loans receivable, net | $7.914 billion | $5.969 billion | 32.6% increase |
| Deposits | $7.892 billion | $6.290 billion | 25.5% increase |
| Stockholders’ equity | $1.410 billion | $1.127 billion | 25.1% increase |
| Net interest income | $79.645 million | $64.388 million | 23.7% increase |
| Credit loss expense | $9.969 million | $0.620 million | Substantial increase |
| Other income | $13.697 million | $9.512 million | 44.0% increase |
| Operating expenses | $62.796 million | $47.271 million | 32.8% increase |
| Net income | $16.533 million | $21.173 million | 22.0% decrease |
| Diluted earnings per share | $0.27 | $0.42 | Decrease |
Net interest margin declined to 3.52% from 3.78%, while the net interest rate spread declined to 3.29% from 3.59%. The efficiency ratio increased to 67.28% from 63.97%. Return on average assets was 0.64%, compared with 1.10%, and return on average stockholders’ equity was 4.70%, compared with 7.82%.
Operating cash flow was $63.7 million, compared with $38.1 million in the prior-year quarter. Investing activities used $85.1 million, principally reflecting loan growth, while financing activities provided $195.4 million, including net FHLB advance proceeds. Cash and restricted cash totaled $307.2 million at March 31, 2020.
FHLB advances totaled $825.8 million, compared with $519.3 million at December 31, 2019. The loan-to-deposit ratio was 100.27%. The Company held $23.5 million of cash at the holding-company level and had $1.036 billion of debt obligations.
The allowance for credit losses increased to $29.6 million, or 0.37% of total loans, from $16.9 million, or 0.27%, at December 31, 2019. Non-performing loans were $16.3 million, or 0.21% of total loans, and non-performing assets were $16.7 million, or 0.16% of total assets.
The Bank remained well-capitalized. At March 31, 2020, the Bank’s common equity Tier 1 ratio was 11.76%, Tier 1 capital ratio was 11.76%, total capital ratio was 12.18%, and Tier 1 leverage ratio was 9.53%. Tangible common equity to tangible assets was 8.85%, compared with 9.71% at December 31, 2019.
Material Changes Versus Comparable Periods
- Acquisitions materially expanded the balance sheet and increased average interest-earning assets, loans and deposits.
- Net interest income increased because of balance-sheet growth, but the margin compressed due partly to higher deposit and funding costs and lower asset yields.
- Credit loss expense increased to $10.0 million from $0.6 million, reflecting adoption of the CECL model and the expected economic effects of COVID-19.
- Operating expenses increased by $15.5 million. The quarter included $11.1 million of merger-related and branch-consolidation expenses, compared with $5.4 million in the prior-year quarter.
- Excluding merger, branch-consolidation and acquisition-related credit-loss items, management stated that earnings increased year over year, primarily because of the Two River and Country Bank acquisitions.
- The Company adopted ASU 2016-13 on January 1, 2020. The adoption reduced retained earnings by approximately $4,000 net of tax and changed the measurement of credit losses to a lifetime expected-loss model.
- The Company repurchased 648,851 shares at a weighted-average price of $22.83 before suspending repurchases on February 28, 2020 because of the COVID-19 pandemic.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It expected to complete the integration of Two River and eliminate eight duplicate branches in May 2020, with five additional branch consolidations planned. Management expects future cost savings from these actions, but the filing does not provide a quantified savings estimate.
COVID-19 adversely affected first-quarter results, with an estimated $7.2 million increase in credit loss expense and $1.0 million increase in operating expenses. Through May 3, 2020, borrowers had requested payment deferrals on loans with $1.2 billion of principal outstanding. Under CARES Act guidance, qualifying modified loans were not classified as TDRs or reported as past due during the deferral period.
Through May 3, 2020, the Bank had received more than 3,100 Paycheck Protection Program applications, obtained conditional SBA approval for $491 million, disbursed $403 million and expected approximately $17 million of processing-fee income. Funding was expected from excess Federal Reserve cash, short-term FHLB advances and the Federal Reserve PPPLF.
Key risks include deterioration in borrower repayment capacity, higher future credit losses, declining collateral values, deposit instability, liquidity pressure, lower interest rates and margin compression, operational and compliance risks associated with the Paycheck Protection Program, cybersecurity and fraud exposure, and challenges integrating acquired operations. The full financial impact of COVID-19 remained uncertain.
Goodwill was $500.1 million at March 31, 2020. Management concluded that no impairment existed at quarter-end but noted that further COVID-19-related deterioration could trigger a future impairment charge. Such a charge would not affect tangible common equity or regulatory capital.
Subsequent to quarter-end, the Company issued $125 million of 5.25% fixed-to-floating subordinated notes due 2030, with the offering closing May 1, 2020. It also announced a planned offering of 2.2 million depositary shares representing interests in Series A preferred stock, with settlement expected May 7, 2020.
The Board declared a quarterly common-stock dividend of $0.17 per share, payable May 15, 2020. Future dividends depend partly on permitted capital distributions from the Bank and could be constrained by regulation or adverse operating conditions.
Most Important Facts for Investors to Verify
- Whether COVID-19 payment deferrals and the $1.2 billion affected loan balance result in materially higher delinquencies, charge-offs or CECL provisions.
- The performance and risk concentration of the expanded commercial real estate and commercial loan portfolios.
- Progress toward integrating Two River and Country Bank, closing branches and realizing expected cost savings.
- The sustainability of the 3.52% net interest margin amid low interest rates, higher deposit costs and a 100.27% loan-to-deposit ratio.
- Liquidity capacity, FHLB and other borrowing levels, deposit trends, and the effect of funding future PPP loans.
- Whether goodwill or other acquisition-related assets require impairment charges as economic conditions evolve.
- The effect of the subordinated debt and planned preferred-stock offering on capital, leverage, interest expense and dividends.
- Future regulatory, compliance and operational costs associated with PPP participation and pandemic-related borrower relief.