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 business and retail customers in 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, 2019, with comparisons to June 30, 2018 and, for financial condition, December 31, 2018.
The January 31, 2019 acquisition of Capital Bank of New Jersey contributed approximately $494.7 million of assets, $307.7 million of loans and $449.0 million of deposits. Capital Bank results are included from February 1, 2019.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Net interest income | $64.8 million | $129.2 million |
| Provision for loan losses | $0.4 million | $1.0 million |
| Other income | $9.9 million | $19.4 million |
| Operating expenses | $50.9 million | $98.2 million |
| Net income | $19.0 million | $40.2 million |
| Diluted earnings per share | $0.37 | $0.79 |
| Net interest margin | 3.66% | 3.72% |
| Return on average assets | 0.94% | Not separately provided in the filing text |
| Return on average equity | 6.73% | Not separately provided in the filing text |
At June 30, 2019, total assets were $8.029 billion, net loans were $5.944 billion, deposits were $6.187 billion and stockholders’ equity was $1.137 billion. The loan-to-deposit ratio was 96.06%. Tangible common equity to tangible assets was 9.76%.
Six-month net cash provided by operating activities was $59.5 million and net cash provided by investing activities was $70.5 million. Financing activities used $97.4 million, primarily reflecting deposit decreases, debt repayments, dividends and treasury-stock purchases. Cash and due from banks plus restricted cash ended at $154.9 million.
FHLB advances totaled $453.6 million, including $234.0 million of overnight borrowings. Contractual debt obligations totaled $612.3 million. Outstanding undrawn lines of credit were $802.9 million and commitments to originate loans were $297.8 million.
Material Changes Versus Comparable Periods
- Second-quarter net income increased to $19.0 million from $15.7 million; six-month net income increased to $40.2 million from $21.1 million. Diluted EPS increased from $0.32 to $0.37 for the quarter and from $0.45 to $0.79 for the six months.
- Net interest income increased from $61.4 million to $64.8 million for the quarter and from $117.2 million to $129.2 million for the six months, primarily due to growth in interest-earning assets and the Capital Bank acquisition.
- Net interest margin declined to 3.66% for the quarter from 3.73% in the prior-year quarter and to 3.72% for the six months from 3.73%, as funding costs increased. Total deposit cost rose to 0.62% from 0.35% for the quarter and to 0.60% from 0.34% for the six months.
- The provision for loan losses declined to $0.4 million from $0.7 million for the quarter and to $1.0 million from $2.1 million for the six months.
- Operating expenses were essentially unchanged for the quarter and declined for the six months, although 2019 included significant merger, branch-consolidation and executive-retirement costs. Reported 2019 net income was reduced by $7.0 million for the quarter and $11.4 million for the six months after tax; comparable 2018 reductions were $6.7 million and $21.3 million.
- Assets increased $512.9 million from year-end, loans increased $364.7 million and deposits increased $372.9 million, primarily due to Capital Bank.
- The Company repurchased 149,860 shares during the quarter and 309,167 shares during the six months. The quarterly dividend was increased to $0.17 per share from $0.15 in the comparable 2018 quarter.
Credit Quality, Capital and Liquidity
Non-performing loans were $17.8 million, or 0.30% of total loans, and non-performing assets were $18.7 million, or 0.23% of total assets. The allowance for loan losses was $16.1 million, or 0.27% of total loans. Net loan charge-offs were $0.9 million in the quarter and $1.4 million for the six months. Troubled debt restructurings included in non-accrual loans increased to $6.8 million from $3.6 million at year-end.
The Bank remained well-capitalized under prompt corrective action standards. At June 30, 2019, Bank capital ratios included a 10.15% Tier 1 leverage ratio, 13.54% common equity Tier 1 ratio and 13.84% total capital ratio. OceanFirst Financial Corp. had a 12.35% common equity Tier 1 ratio and 14.36% total capital ratio.
Management stated that liquidity remained significant under its stress scenarios and expected sufficient funds to meet ordinary-course commitments. The Company held $15.0 million of cash at the parent-company level. Future dividends depend substantially on capital distributions from the Bank and applicable regulatory permissions.
Guidance, Outlook, Risks and Unusual Items
- Management reported a record loan pipeline of $297.8 million and $43.6 million of closed loans associated with expansion into the New York City and greater Philadelphia markets.
- Capital Bank operating-system integration was completed in June. Management expected cost savings in the second half of 2019.
- Three branches were consolidated in June, with four additional consolidations planned for the third quarter. The Company stated that 40 branches had been consolidated over the prior three years.
- The filing provides no formal quantitative earnings or revenue guidance.
- The Company adopted the new lease standard on January 1, 2019, recognizing a $20.6 million right-of-use asset and a $20.7 million lease liability at adoption.
- Management expects the forthcoming CECL credit-loss standard may increase the allowance for loan losses, particularly for longer-duration portfolios, but stated that the amount cannot yet be determined.
- Disclosure controls and procedures were not effective at June 30, 2019 because of previously disclosed material weaknesses in internal control over financial reporting. Management expected remediation to be completed during 2019.
- Key risks include interest-rate changes, deposit competition and outflows, credit and real-estate performance, regulatory changes, acquisition integration, market conditions and the transition away from LIBOR. The Company identified LIBOR reform as an additional material risk factor.
- Unrealized losses on certain debt securities totaled $6.5 million. Management concluded the securities were temporarily impaired and did not intend, or expect to be required, to sell them before recovery.
Investor Verification Priorities
- Verify the progress and realized savings from Capital Bank integration, including the timing and amount of expected cost reductions.
- Monitor deposit pricing, deposit balances, the 96.06% loan-to-deposit ratio and reliance on overnight FHLB borrowings.
- Assess whether the lower net interest margin continues as funding costs rise.
- Review trends in non-performing loans, troubled debt restructurings, special-mention loans and commercial real-estate exposure.
- Confirm remediation of the disclosed material weaknesses in internal control over financial reporting.
- Evaluate the eventual CECL allowance impact and the Company’s preparedness for LIBOR replacement.
- Reconcile reported earnings with merger, branch-consolidation and executive-retirement expenses when assessing recurring profitability.
- Review the sustainability of dividends and share repurchases in light of parent-company liquidity and regulatory limits on Bank capital distributions.