OceanFirst Financial Corp. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving central New Jersey.
Business Context and Reporting Period
- The Company completed its acquisition of Colonial American Bank on July 31, 2015. Colonial contributed approximately $142.4 million of assets, $121.2 million of loans, and $123.3 million of deposits; its August and September results are included in the third quarter.
- The Company continued expanding commercial lending and opened a new branch in Jackson Township. It also agreed to acquire a Toms River retail branch with $24.6 million of deposits, expected to close in the first quarter of 2016.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Net interest income | $19.6 million | $18.1 million | Up $1.5 million |
| Provision for loan losses | $0.3 million | $1.0 million | Down $0.7 million |
| Other income | $4.2 million | $5.3 million | Down $1.1 million |
| Operating expenses | $16.1 million | $14.4 million | Up $1.7 million |
| Net income | $4.7 million | $5.2 million | Down $0.5 million |
| Diluted EPS | $0.28 | $0.31 | Down $0.03 |
| Net interest margin | 3.26% | 3.27% | Down 1 basis point |
| Return on average assets | 0.75% | 0.88% | Down 13 basis points |
| Return on average equity | 8.02% | 9.50% | Down 148 basis points |
| Balance Sheet Metric | September 30, 2015 | December 31, 2014 |
|---|---|---|
| Total assets | $2.558 billion | $2.357 billion |
| Net loans receivable | $1.939 billion | $1.689 billion |
| Deposits | $1.968 billion | $1.720 billion |
| Stockholders’ equity | $234.7 million | $218.3 million |
| FHLB advances | $233.0 million | $305.2 million |
| Tangible equity-to-assets ratio | 9.10% | Not clearly provided |
For the nine months ended September 30, 2015, net income was $15.1 million, or $0.90 diluted EPS, compared with $15.0 million, or $0.89 diluted EPS, in the prior-year period. Net cash provided by operating activities was $21.7 million, compared with $15.0 million in the prior-year period. Investing activities used $51.4 million, primarily because of loan growth, while financing activities provided $44.2 million, primarily from deposit growth.
Material Changes Versus Prior Comparable Period
- Net interest income increased because average interest-earning assets grew, particularly loans. Average net loans increased by $243.8 million in the quarter and $188.2 million year to date, while securities declined.
- The net interest margin was broadly stable in the quarter but declined year to date to 3.24% from 3.33%, partly reflecting fair-value adjustments from the Colonial acquisition.
- Net charge-offs fell to $196,000 in the quarter and $654,000 year to date, compared with $5.6 million and $6.4 million, respectively, in the prior-year periods. The 2014 figures included significant charge-offs related to a bulk sale of non-performing residential mortgage loans.
- Other income declined primarily because the prior-year periods included gains on sales of equity securities and because loan servicing income decreased following the sale of servicing rights.
- Operating expenses included $1.0 million of third-quarter merger-related expenses and $1.3 million year to date. Excluding these expenses, quarterly operating expenses increased because of personnel additions, the Colonial acquisition, and new branches.
- Commercial loans excluding Colonial increased $106.9 million from year-end 2014, an annualized growth rate of 19.4%. Deposits excluding Colonial also increased, including $60.7 million of business deposits.
Asset Quality, Debt, Liquidity, and Capital
- Non-performing loans were $24.4 million, or 1.24% of loans, compared with $18.3 million, or 1.06%, at December 31, 2014. Non-performing assets were $27.7 million, or 1.08% of assets.
- Commercial real estate represented 69.9% of non-performing loans. The allowance for loan losses was $16.6 million, or 0.85% of loans, compared with 0.95% at year-end; the lower ratio primarily reflected acquired Colonial loans recorded at fair value without a corresponding allowance.
- The Company had $338.5 million of contractual debt obligations, $302.6 million of undrawn credit lines, and $120.7 million of commitments to originate loans. Management stated that sufficient funds were available for normal-course commitments.
- Cash and due from banks totaled $50.6 million at September 30, 2015. The Company had no overnight FHLB borrowings at quarter-end and maintained total FHLB borrowings of $233.0 million.
- The Bank exceeded all regulatory capital requirements and remained well-capitalized. Reported ratios included an 8.91% Tier 1 leverage ratio, 12.67% Common Equity Tier 1 ratio, and 13.60% total capital ratio.
Outlook, Management Commentary, Risks, and Unusual Items
- Management expected economic growth to remain moderate, with low inflation and gradual increases in the Federal funds rate. It cautioned that persistently low interest rates could pressure the net interest margin.
- The Company is exposed to interest-rate risk, economic conditions, unemployment, local real estate values, competition, deposit flows, regulatory changes, and loan portfolio quality. The one-year cumulative interest-rate gap was negative 0.59% at September 30, 2015, improved from negative 2.73% at December 31, 2014.
- The largest criticized relationship consisted of two commercial real estate loans totaling $6.2 million secured by a New Jersey hotel, golf, and banquet facility. The bankruptcy court approved the Bank taking possession of the collateral in the fourth quarter; the loans were expected to be reclassified to other real estate owned and other assets.
- The Company identified no material legal proceedings and reported no material changes to previously disclosed risk factors.
- Merger-related expenses reduced third-quarter net income by $714,000 after tax and diluted EPS by $0.04; the nine-month impact was $904,000 after tax and $0.06 per diluted share.
- The Board declared a quarterly cash dividend of $0.13 per share payable November 13, 2015. The Company repurchased 373,594 shares for $6.5 million during the first nine months and had 244,804 shares remaining under its repurchase authorization.
Investor Verification Checklist
- Verify the final accounting for the Colonial acquisition, including goodwill, core deposit intangible, acquired loan marks, and any measurement-period adjustments.
- Monitor commercial real estate concentrations, non-performing loans, troubled debt restructurings, criticized assets, and the collateral recovery identified for the $6.2 million hotel-related relationship.
- Assess whether loan and deposit growth can offset funding-cost increases and continued pressure from a low-rate environment.
- Reconcile reported earnings with and without the non-recurring merger expenses and determine the sustainable operating expense run rate after integration.
- Evaluate liquidity, FHLB borrowing maturities, undrawn lending commitments, and the holding company’s reliance on bank dividends to fund dividends and obligations.