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. This unaudited Form 10-Q covers the three and six months ended June 30, 2018.
The results include Sun Bancorp, Inc. from its January 31, 2018 acquisition date. Sun added approximately $2.0 billion of assets, $1.5 billion of loans and $1.6 billion of deposits. The Bank also converted to a national bank charter and the Company became a bank holding company effective January 31, 2018.
Financial Highlights
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $61.4 million | $42.2 million | $117.2 million | $83.7 million |
| Provision for loan losses | $0.7 million | $1.2 million | $2.1 million | $1.9 million |
| Other income | $8.9 million | $7.0 million | $17.8 million | $13.0 million |
| Operating expenses | $50.9 million | $37.1 million | $107.7 million | $68.1 million |
| Net income | $15.7 million | $7.7 million | $21.1 million | $19.7 million |
| Diluted earnings per share | $0.32 | $0.23 | $0.45 | $0.59 |
Net interest margin was 3.70% for both the quarter and year-to-date period, compared with 3.57% and 3.56%, respectively, in the prior-year periods. The quarter's net interest margin included $3.0 million of purchase-accounting accretion from the Sun acquisition; year-to-date accretion was $5.3 million.
- Total assets were $7.737 billion at June 30, 2018, compared with $5.416 billion at December 31, 2017.
- Net loans were $5.553 billion, up from $3.966 billion at year-end 2017. Commercial loans represented $3.123 billion and consumer loans represented $2.426 billion, before other loan adjustments.
- Deposits were $5.819 billion, up from $4.343 billion at December 31, 2017. The loan-to-deposit ratio was 95.42%.
- Stockholders’ equity was $1.013 billion, compared with $601.9 million at year-end 2017. Tangible common equity to assets was 8.87%.
- Return on average assets was 0.84% and return on average equity was 6.23% for the quarter. These ratios include merger-related and branch-consolidation costs.
- The quarterly cash dividend was $0.15 per share. The Board declared the same dividend for payment on August 17, 2018.
Cash Flow, Debt and Liquidity
- For the six months ended June 30, 2018, operating activities provided $34.2 million of cash, investing activities used $21.6 million, and financing activities provided $132.2 million.
- Cash and due from banks increased to $254.5 million from $109.6 million at December 31, 2017.
- Federal Home Loan Bank advances totaled $674.2 million, including $373.0 million of overnight borrowings, compared with $288.7 million at year-end 2017.
- Total debt obligations were $835.8 million, including $514.8 million due within one year.
- Undrawn lines of credit totaled $856.8 million and commitments to originate loans totaled $239.7 million. Management stated that sufficient funds were available for current commitments and that liquidity remained significant under stress scenarios.
- The holding company held $28.9 million in cash. Its ability to pay dividends and meet obligations depends substantially on capital distributions from the Bank, which may be restricted by regulation.
Material Changes Versus Comparable Periods
- Second-quarter net income increased 104% year over year, while six-month net income increased 7%. Six-month diluted EPS declined to $0.45 from $0.59 because the share count increased substantially following the Sun acquisition.
- Second-quarter net interest income increased 46%, and six-month net interest income increased 40%, primarily from the larger interest-earning asset base and higher margin following the acquisition.
- Other income increased 27% for the quarter and 37% year to date, with Sun contributing $2.3 million and $3.7 million, respectively.
- Operating expenses increased 37% for the quarter and 58% year to date. The 2018 periods included $8.4 million and $26.7 million of merger-related and branch-consolidation expenses, compared with $8.6 million and $10.1 million in the prior-year periods.
- Excluding merger and branch-consolidation costs, expense growth was principally attributable to Sun. Management expects future savings from completing the integration, including the consolidation of 17 branches and elimination of duplicate operating systems.
- Non-performing loans declined to $18.1 million, or 0.33% of loans, from $20.9 million, or 0.52%, at December 31, 2017. Non-performing assets declined to $26.0 million, or 0.34% of assets.
- The allowance for loan losses was $16.7 million, or 0.30% of loans, compared with $15.7 million, or 0.40%, at year-end. Acquired loans also carried $37.7 million of fair-value credit marks.
Outlook, Risks and Unusual Items
Management did not provide specific earnings or revenue guidance. It expects integration of Sun and branch consolidation to generate cost savings in future periods. The substantial loan pipeline was $239.7 million at June 30, 2018.
- Key risks include interest-rate changes, deposit competition and outflows, loan and securities prepayments, economic and real-estate conditions, credit quality, regulatory changes and the successful integration of acquired operations.
- The Company reported a positive one-year interest-rate sensitivity gap of 5.27% of interest-earning assets, within policy limits. Modeling assumptions may not reflect actual repricing behavior.
- New Jersey legislation enacted in 2018 may increase state income tax expense through a temporary corporate surtax, combined filing requirements and limits on dividend deductions. The full effect was not yet determinable.
- The Company recognized a $500,000 write-down related to a hotel, golf and banquet facility and reported a $1.0 million second-quarter loss from other real estate operations.
- Future adoption of the current expected credit loss standard is expected to increase the allowance for loan losses, particularly for longer-duration loans, but the amount was not determinable.
- The filing reported no material legal proceedings, and management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether anticipated Sun integration savings materialize and offset the higher recurring expense base.
- The sustainability of the 3.70% net interest margin as deposit and borrowing costs increase.
- The effect of the 95.42% loan-to-deposit ratio and higher FHLB borrowings on liquidity and funding costs.
- Credit performance of the expanded commercial real estate portfolio, including special mention and substandard loans.
- The eventual impact of New Jersey tax legislation and the expected CECL allowance increase.
- The amount and timing of purchase-accounting accretion from Sun loans, which supported reported margin and earnings.
- The effect of increased shares outstanding on per-share earnings and capital returns.