OceanFirst Financial Corp. 2017 Form 10-K 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. The filing covers the fiscal year ended December 31, 2017, with quarterly data for the fourth quarter. The Bank operated 46 full-service customer facilities, three deposit production facilities, wealth-management operations, and commercial loan offices. Its primary activities are gathering retail, business, and municipal deposits and investing in commercial real estate, commercial, residential mortgage, consumer loans, and securities.
At December 31, 2017, the Company reported $5.416 billion of assets and $601.9 million of stockholders’ equity. The Bank and Company exceeded applicable regulatory capital requirements and the Bank met the criteria to be “well-capitalized.”
Financial performance and key metrics
| Metric | 2017 | 2016 | Change or comment |
|---|---|---|---|
| Total assets | $5.416 billion | $5.167 billion | Increased $249.1 million |
| Loans receivable, net | $3.966 billion | $3.803 billion | Increased $162.3 million |
| Deposits | $4.343 billion | $4.188 billion | Increased $155.0 million |
| Net interest income | $169.2 million | $120.3 million | Increased $49.0 million |
| Other income | $27.1 million | $20.4 million | Increased $6.7 million |
| Net income | $42.5 million | $23.0 million | Increased $19.4 million |
| Diluted earnings per share | $1.28 | $0.98 | Increased $0.30 |
| Net interest margin | 3.50% | 3.47% | Increased 3 basis points |
| Return on average assets | 0.80% | 0.62% | Improved |
| Return on average equity | 7.20% | 6.08% | Improved |
| Efficiency ratio | 64.46% | 73.11% | Improved |
| Net cash from operating activities | $80.1 million | $33.4 million | Improved substantially |
Fourth-quarter 2017 net income was $10.0 million, or $0.30 diluted earnings per share, compared with $6.1 million, or $0.22 per diluted share, in the fourth quarter of 2016. Fourth-quarter net interest income was $42.5 million, and the provision for loan losses was $1.4 million.
Commercial real estate, multifamily, land, and commercial and industrial loans totaled approximately $1.945 billion, or 48.9% of total loans. One-to-four-family residential loans totaled $1.749 billion, or 44.0% of total loans. The loan-to-deposit ratio was 91.3%, and the core deposit ratio was 86.0%.
Debt, liquidity, capital, and asset quality
- Borrowings totaled $424.9 million, including $288.7 million of Federal Home Loan Bank advances, $79.7 million of securities sold under agreements to repurchase, and $56.5 million of other borrowings.
- Parent-company cash was $33.8 million at year-end. The Bank maintained a detailed contingency funding plan and reported significant liquidity under stress scenarios.
- Outstanding commitments included $88.9 million of commitments to originate loans and $522.4 million of unused credit lines, including $315.4 million for commercial borrowers.
- The Company’s tangible common equity to tangible assets ratio was 8.42%. Company regulatory ratios included an 8.87% Tier 1 leverage ratio, 12.15% common equity Tier 1 ratio, and 13.96% total capital ratio.
- Non-performing loans increased to $20.9 million from $13.6 million, and non-performing assets increased to $29.1 million from $23.4 million. Non-performing assets were 0.54% of total assets.
- The allowance for loan losses was $15.7 million, or 0.40% of total loans, unchanged as a percentage from 2016. Net charge-offs were $3.9 million, and the provision for loan losses was $4.4 million.
- Classified assets included $60.7 million of Substandard assets and no assets classified as Doubtful or Loss. Special Mention assets totaled $25.5 million.
Material changes versus the prior comparable period
- Net income rose 84% year over year, primarily reflecting the full-year contribution from the 2016 Cape Bancorp and Ocean Shore acquisitions, higher average interest-earning assets, and increased fee income.
- Average interest-earning assets increased by $1.370 billion. Interest income increased to $188.8 million from $133.4 million, while interest expense increased to $19.6 million from $13.2 million.
- Other income increased 32.6% to $27.1 million. Bankcard services revenue increased to $7.0 million, and fees and service charges increased to $15.1 million.
- Operating expenses increased to $126.5 million from $102.9 million. The 2017 amount included $8.3 million of merger-related expenses and $6.2 million of branch-consolidation expenses.
- Commercial loan balances increased $123.1 million, or 6.8%, during 2017. Total loans increased 4.2%, while deposits increased 3.7%.
- Cash and due from banks declined $191.8 million as liquidity was deployed into loans and securities. Investing activities used $455.2 million, principally for loan growth, securities purchases, and premises and equipment.
- The annual cash dividend increased to $0.60 per share from $0.54. No common shares were repurchased during 2017, leaving approximately 1.8 million shares available under repurchase authorizations.
Guidance, outlook, management commentary, risks, and unusual items
Management expected several Federal funds rate increases in 2018 and anticipated an effective tax rate of approximately 19% in 2018, excluding non-deductible merger-related expenses. Management intended to reinvest part of the Tax Cuts and Jobs Act benefit in employee compensation and stock-based programs.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21% beginning in 2018. OceanFirst recorded $3.6 million of additional 2017 tax expense from remeasuring deferred tax assets and liabilities. The Company also adopted ASU 2016-09, which reduced 2017 tax expense by $1.8 million.
The Company completed its acquisition of Sun Bancorp on January 31, 2018, after the reporting date. The transaction value was approximately $474.9 million and added approximately $2.1 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.
Management planned to consolidate 17 branches in the second quarter of 2018, in addition to 15 branch consolidations completed in 2017, and to consolidate operating facilities into two primary locations. The Red Bank administrative office was expected to be occupied in April 2018.
- Primary credit risks include the concentration of lending in New Jersey real estate, continued growth in commercial lending, deteriorating local economic or property conditions, natural disasters and flooding, and prolonged foreclosure timelines.
- Interest-rate risk could reduce earnings if deposit and borrowing costs rise faster than asset yields. The Company’s one-year cumulative interest-rate gap was positive 4.62% at year-end, but the analysis depends on uncertain prepayment and deposit-behavior assumptions.
- Future credit losses could exceed the allowance, particularly because $46.988 million of impaired loans had no specific allowance at year-end and non-performing loans increased during 2017.
- The Company held $150.5 million of goodwill and could incur an impairment charge if economic, industry, market, or operating conditions deteriorate.
- Unrealized losses existed on securities, including $3.9 million of unrealized losses on corporate debt securities with losses lasting more than one year. Management concluded the losses were temporary and recorded no other-than-temporary impairment.
- Future regulatory, consumer-protection, cybersecurity, technology, deposit-competition, and tax-law changes could increase costs or reduce revenue. The Company also faces higher regulatory requirements as assets approach the $10 billion threshold.
- Management and the independent auditor reported effective internal control over financial reporting. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess the integration, expense synergies, credit marks, goodwill, and dilution resulting from the January 2018 Sun Bancorp acquisition.
- Track commercial real estate concentration, non-performing loans, impaired loans, criticized assets, charge-offs, and allowance adequacy.
- Compare future net interest margin performance with deposit-cost increases and Federal Reserve rate movements.
- Reconcile reported earnings with the $13.7 million after-tax impact of 2017 merger, branch-consolidation, stock-award, and Tax Reform items.
- Review liquidity against $424.9 million of borrowings, $308.2 million of time deposits maturing within one year, and $522.4 million of unused credit commitments.
- Verify the expected 2018 effective tax rate of approximately 19% and the financial effects of the 21% federal corporate tax rate.
- Monitor branch consolidation execution, customer retention, technology investment, cybersecurity controls, and operating-cost trends.
- Review the potential effect of CECL adoption, which management expected to increase credit-loss allowances, particularly for longer-duration loans, although the amount was not yet determinable.