OceanFirst Financial Corp. — Q1 2019 Form 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 areas of Philadelphia and New York City. This unaudited report covers the three months ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018.
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey, adding approximately $494.2 million of assets, $307.0 million of loans and $449.0 million of deposits. Capital Bank results were included from February 1, 2019. Management expected full integration and duplicate branch elimination in June 2019, with future cost savings.
Key financial metrics
| Metric | March 31, 2019 / Q1 2019 | Comparable period |
|---|---|---|
| Total assets | $8.093 billion | $7.516 billion at December 31, 2018; $7.495 billion at March 31, 2018 |
| Loans receivable, net | $5.969 billion | $5.579 billion at December 31, 2018; $5.414 billion at March 31, 2018 |
| Deposits | $6.290 billion | $5.815 billion at December 31, 2018; $5.907 billion at March 31, 2018 |
| Net interest income | $64.4 million | $55.7 million in Q1 2018 |
| Provision for loan losses | $0.6 million | $1.4 million in Q1 2018 |
| Other income | $9.5 million | $8.9 million in Q1 2018 |
| Operating expenses | $47.3 million | $56.8 million in Q1 2018 |
| Net income | $21.2 million | $5.4 million in Q1 2018 |
| Diluted EPS | $0.42 | $0.12 in Q1 2018 |
| Net interest margin | 3.78% | 3.73% in Q1 2018; 3.71% in Q4 2018 |
| Return on average assets | 1.10% | 0.32% in Q1 2018 |
| Return on average equity | 7.82% | 2.54% in Q1 2018 |
| Efficiency ratio | 63.97% | 87.92% in Q1 2018 |
| Cash dividend per share | $0.17 | $0.15 in Q1 2018 |
Profitability, cash flow, debt and liquidity
- Net interest income increased 15.6% year over year, supported by larger interest-earning assets, loan growth, Federal Reserve rate increases and $521,000 of purchase-accounting accretion from Capital Bank. The net interest margin expanded to 3.78%.
- Interest expense rose to $12.0 million from $7.1 million as average interest-bearing liabilities increased and their cost rose to 0.90% from 0.59%. Total deposit cost increased to 0.57% from 0.33%.
- Net cash provided by operating activities was $38.1 million, compared with $7.7 million in Q1 2018. Net cash provided by investing activities was $8.6 million, while financing activities used $13.5 million. Cash and due from banks plus restricted cash ended at $155.5 million.
- FHLB advances totaled $418.0 million at March 31, 2019, including $153.0 million of overnight borrowings. Total debt obligations were $583.8 million, including other borrowings and FHLB advances.
- The loan-to-deposit ratio was 94.9%, compared with 96.0% at December 31, 2018. Time deposits of $461.1 million were scheduled to mature within one year.
- Management stated that the Company maintained significant liquidity under stress scenarios and expected sufficient funds to meet ordinary-course commitments. Outstanding undrawn lines of credit were $784.0 million and commitments to originate loans were $190.6 million.
- The Bank exceeded applicable regulatory capital requirements and was well-capitalized. The Company reported tangible common equity of $733.4 million and a tangible common equity-to-tangible assets ratio of 9.53%.
Material changes versus prior periods
- Total assets increased $576.8 million from December 31, 2018, principally from the Capital Bank acquisition. Loans increased $389.6 million and deposits increased $475.9 million, largely reflecting acquired balances.
- Goodwill increased to $375.1 million from $338.4 million, and core deposit intangible assets increased to $18.6 million from $17.0 million, due primarily to the acquisition.
- Net income increased substantially year over year because of the Capital Bank acquisition, the Sun Bancorp integration and lower merger-related costs.
- Operating expenses included $5.4 million of merger-related and branch-consolidation expenses, compared with $18.3 million in Q1 2018. Excluding these items, expenses increased primarily because of Capital Bank, professional fees and compensation.
- Credit quality weakened modestly from year-end: non-performing loans increased to $20.9 million from $17.4 million, and non-performing assets increased to $22.5 million from $18.8 million. The allowance for loan losses was $16.7 million, or 0.28% of total loans.
- Net loan charge-offs were $492,000, compared with $275,000 in Q1 2018. Purchased credit-impaired loans increased to $16.3 million from $8.9 million at year-end.
- The Company adopted the new lease standard on January 1, 2019, recognizing a $20.6 million operating lease right-of-use asset and a $20.7 million operating lease liability.
Guidance, outlook, risks and unusual items
- Management anticipated completion of Capital Bank integration and elimination of duplicate branches in June 2019, with cost savings expected in subsequent periods. No quantified earnings or cost-savings guidance was provided.
- Management warned that future results depend on interest rates, economic and employment conditions, real estate values, deposit flows, loan demand, competition, regulation, portfolio credit quality and successful integration of acquired operations.
- The Company’s one-year cumulative interest-sensitivity gap was positive 4.21%, within policy limits. Interest-rate sensitivity remains material because deposit costs, loan yields, prepayments and repricing may not move uniformly.
- The Company expects the CECL credit-loss standard, effective for it after December 15, 2019, may increase loan-loss allowances, particularly for longer-duration loans, and may result in an allowance for certain debt securities. The amount of any impact was not determinable.
- Disclosure controls and procedures were not effective at March 31, 2019 because of previously disclosed material weaknesses in internal control over financial reporting. Management expected remediation to be completed during 2019, subject to sufficient operating and testing periods.
- The Company reported no material legal proceedings and no material changes to its previously disclosed risk factors.
- The Company declared a $0.17 quarterly dividend payable May 17, 2019. Its ability to pay dividends depends substantially on capital distributions from the Bank, which could be restricted by regulators.
Most important facts for investors to verify
- Whether Capital Bank integration and branch consolidation were completed as planned and whether anticipated cost savings were realized.
- The level and composition of deposit costs, loan growth and net interest margin as interest-rate conditions change.
- Trends in non-performing loans, troubled debt restructurings, purchased credit-impaired loans, charge-offs and allowance coverage.
- The eventual capital and earnings impact of CECL adoption.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- Liquidity, deposit retention, FHLB borrowing needs and the Company’s ability to maintain dividends if Bank-level distributions are restricted.
- The filing does not provide a quantified full-year earnings forecast or a clear quantified estimate of future merger-related savings.