OceanFirst Financial Corp. 2017 Q3 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 nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods and to December 31, 2016 for balance-sheet data.
Recent acquisitions of Cape Bancorp and Ocean Shore materially expanded the Company’s balance sheet and contributed to year-over-year operating growth. The Company also had a pending agreement to acquire Sun Bancorp, subject to OCC approval and other closing conditions.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Net interest income | $43.1 million | $33.9 million | $126.7 million | $84.5 million |
| Provision for loan losses | $1.2 million | $0.9 million | $3.0 million | $2.1 million |
| Other income | $7.4 million | $5.9 million | $20.3 million | $14.2 million |
| Operating expenses | $30.7 million | $25.0 million | $98.8 million | $70.4 million |
| Net income | $12.8 million | $9.1 million | $32.5 million | $17.0 million |
| Diluted earnings per share | $0.39 | $0.35 | $0.98 | $0.77 |
- Total assets were $5.384 billion at September 30, 2017, up from $5.167 billion at December 31, 2016.
- Net loans were $3.870 billion, compared with $3.803 billion at year-end 2016.
- Deposits were $4.350 billion, an increase of $162.5 million from December 31, 2016. The loan-to-deposit ratio was 89.0%.
- Stockholders’ equity was $596.3 million, compared with $572.0 million at year-end 2016. Tangible common equity to assets was 8.39%.
- Q3 net interest margin was 3.50%, compared with 3.56% in Q3 2016; the nine-month margin was 3.54%, compared with 3.51%.
- The Q3 efficiency ratio was 60.96%, compared with 62.83% in the prior-year quarter, and included merger-related and branch-consolidation expenses.
- The quarterly cash dividend was $0.15 per share. Dividends paid during the first nine months totaled $14.4 million.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $62.7 million for the first nine months of 2017, compared with $45.9 million in the prior-year period.
- Investing activities used $273.6 million, primarily reflecting purchases of investment and mortgage-backed securities, loan purchases and loan growth.
- Financing activities provided $164.8 million, including deposit growth and increased borrowings, partially offset by dividends.
- Cash and due from banks declined to $255.3 million from $301.4 million at December 31, 2016.
- Total FHLB borrowings were $259.2 million at September 30, 2017; the Company had no outstanding overnight FHLB borrowings at the reporting date.
- Management stated that the Bank maintained significant liquidity under its stress scenarios and expected sufficient funds to meet normal commitments.
- Outstanding undrawn credit lines totaled $550.5 million and commitments to originate loans totaled $111.5 million.
- The Company and Bank exceeded applicable regulatory capital requirements and the Bank remained “well-capitalized” under prompt corrective action regulations.
Material Changes Versus Prior Comparable Period
- Q3 net income increased 40% to $12.8 million, while diluted EPS increased to $0.39 from $0.35. Nine-month net income increased to $32.5 million from $17.0 million.
- Net interest income increased primarily because acquisitions expanded interest-earning assets. Average interest-earning assets increased by $1.086 billion in Q3 and $1.574 billion for the first nine months.
- Other income increased to $7.4 million in Q3 and $20.3 million for the first nine months, principally due to acquired operations and higher deposit-related fees.
- Operating expenses increased because of the larger acquired platform and merger and branch-consolidation activity. Q3 expenses included $3.2 million of such costs; nine-month expenses included $13.2 million.
- Q3 and nine-month results also reflected the adoption of ASU 2016-09, which reduced income-tax expense by $158,000 and $1.7 million, respectively.
- Fifteen branches were consolidated during the first nine months, and related premises were written down or classified as held for sale.
- Non-performing loans were $15.1 million, up from $13.6 million at December 31, 2016 but down from $16.3 million at June 30, 2017. Non-performing loans were 0.39% of total loans.
- The allowance for loan losses was $16.6 million, or 0.42% of total loans, compared with $15.2 million, or 0.40%, at year-end 2016. Net charge-offs were $1.6 million for the first nine months, below the $3.2 million prior-year level.
Guidance, Outlook, Risks and Unusual Items
- The Company expected to close the approximately $487 million Sun Bancorp transaction in January 2018, subject to OCC approval and customary conditions, with full branch and core-system integration anticipated in Q2 2018.
- Sun had approximately $2.2 billion of assets, $1.6 billion of loans and $1.7 billion of deposits at September 30, 2017. The transaction was expected to result in former Sun shareholders owning approximately 32% of the combined Company.
- Key merger risks include delayed or denied regulatory approval, imposed conditions, integration costs, loss of customers or employees, disruption of operations, failure to achieve expected synergies and potential termination fees of $17.045 million.
- The Company disclosed a November 1, 2017 purchase of a Red Bank, New Jersey office building for $42.5 million for back-office consolidation; occupancy was expected in the first half of 2018.
- Interest-rate risk remained material. The one-year cumulative interest-sensitivity gap was negative 4.38% at September 30, 2017, within policy limits. Rising funding costs, deposit competition and changes in market rates could pressure margins.
- Management identified risks from economic and real-estate conditions, unemployment, loan and investment portfolio quality, deposit flows, competition, regulatory changes, natural disasters, prepayments and acquisition integration.
- ASU 2016-13, the current expected credit loss standard, is expected to increase the allowance for loan losses, particularly for longer-duration loans, although the amount was not determinable at filing.
- There were no material legal proceedings reported. The filing described shareholder litigation related to the Sun transaction and a memorandum of understanding to resolve the named plaintiffs’ individual claims.
Important Facts to Verify
- Whether OCC approval was obtained and whether the Sun Bancorp acquisition closed on the expected timetable.
- The actual purchase accounting, funding mix, dilution and integration costs associated with the Sun transaction.
- Whether deposit costs and other funding costs continue to rise faster than loan and securities yields.
- Trends in commercial real-estate concentrations, non-performing loans, impaired loans, troubled debt restructurings and the allowance for loan losses.
- The effect of branch consolidation, the Red Bank office acquisition and continuing merger-related expenses on future operating efficiency.
- The eventual impact of the CECL standard on credit reserves, retained earnings and regulatory capital.
- The Company’s ability to maintain dividends through distributions from the Bank, particularly if regulatory or capital constraints arise.