OceanFirst Financial Corp. 2016 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, 2016. Results include Cape Bancorp from its May 2, 2016 acquisition and Colonial American Bank for the full 2016 periods.
The Cape acquisition, valued at approximately $196.4 million, added approximately $1.5 billion of assets, $1.2 billion of loans and $1.2 billion of deposits. Cape’s core systems were integrated on October 15, 2016, with additional cost savings expected beginning in the first quarter of 2017.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net interest income | $33.9 million | $19.6 million | $84.5 million | $56.1 million |
| Provision for loan losses | $0.9 million | $0.3 million | $2.1 million | $1.0 million |
| Other income | $5.9 million | $4.2 million | $14.2 million | $12.3 million |
| Operating expenses | $25.0 million | $16.1 million | $70.4 million | $44.3 million |
| Net income | $9.1 million | $4.7 million | $17.0 million | $15.1 million |
| Diluted EPS | $0.35 | $0.28 | $0.77 | $0.90 |
| Net interest margin | 3.56% | 3.24% | 3.51% | 3.25% |
| Efficiency ratio | 62.83% | 68.05% | Not clearly provided | Not clearly provided |
- Return on average assets was 0.88% in Q3 2016, compared with 0.74% in Q3 2015; return on average equity was 8.77%, compared with 7.96%.
- At September 30, 2016, total assets were $4.151 billion, net loans were $3.029 billion, deposits were $3.325 billion and stockholders’ equity was $417.2 million.
- Net cash provided by operating activities for the first nine months was $45.9 million. Investing activities provided $255.4 million, primarily from loan reductions, securities sales and maturities; financing activities used $33.6 million.
- FHLB advances were $251.1 million, other borrowings were $56.4 million, and the Company issued $35.0 million of subordinated notes in September 2016 at an initial rate of 5.125%, maturing September 30, 2026.
- Cash and due from banks totaled $311.6 million at September 30, 2016. The Company held $46.8 million of cash at the holding-company level.
- The loan-to-deposit ratio was 91.1%, compared with 102.8% at December 31, 2015.
- The Company and Bank exceeded regulatory capital requirements and were considered well-capitalized. The Company’s tangible common equity ratio was 8.50%.
Material changes versus comparable periods
- Q3 net income increased 94% year over year, while nine-month net income increased 13%. However, nine-month diluted EPS declined because of the substantial increase in shares issued in the Cape acquisition and merger-related costs.
- Net interest income increased primarily from the larger balance sheet, higher-yielding commercial loans, purchase-accounting accretion and the Cape acquisition. Purchase-accounting accretion contributed $1.6 million in Q3 and $3.1 million year to date.
- Other income increased primarily because Cape contributed $1.3 million in Q3 and $2.2 million year to date.
- Operating expenses increased $8.9 million in Q3 and $26.1 million year to date, driven by Cape and Colonial American operations, new branches, commercial-lending investments and merger-related activity.
- Merger-related expenses were $1.3 million in Q3 and $9.9 million year to date, compared with $1.0 million and $1.3 million in the comparable 2015 periods. These expenses reduced Q3 and nine-month 2016 diluted EPS by approximately $0.05 and $0.34, respectively, together with the reported deleveraging costs.
- Net charge-offs increased to $1.9 million in Q3 and $3.2 million year to date, compared with $0.2 million and $0.7 million. The increase primarily reflected charge-offs on loans sold or designated for sale.
- Non-performing loans declined to $16.5 million from $18.3 million at December 31, 2015, and non-performing assets were $25.6 million, or 0.62% of assets.
Guidance, outlook, risks and unusual items
- Management expected interest rates to remain historically low, with gradual Federal funds rate increases. Prolonged low rates could pressure future net interest margin, although the Company was shifting its asset mix toward higher-yielding commercial loans.
- The Company agreed to acquire Ocean Shore Holding Company in a transaction valued at approximately $145.6 million. Closing was expected on November 30, 2016, subject to stockholder and customary closing conditions; OCC approval was received October 27, 2016.
- The Company sold 63 residential loans with a $4.4 million carrying value and 72 SBA loans with an $8.4 million carrying value. A pool of 58 higher-risk commercial loans with a $22.7 million unpaid balance was held for sale, with a targeted fourth-quarter sale.
- A $7.0 million hotel, golf and banquet facility was included in OREO and was subject to a sales process. OREO operations produced a $0.8 million loss in the first nine months.
- Outstanding undrawn credit lines were $486.2 million, commitments to originate loans were $109.3 million, and commitments to sell loans were $10.1 million. Management stated that liquidity was sufficient for current commitments and that stress testing indicated significant liquidity.
- Key risks include interest-rate changes, economic and real-estate conditions in New Jersey, credit quality, deposit flows, competition, regulatory changes, acquisition integration and the ability of the Bank to distribute dividends to the holding company.
- The Bank did not pay dividends to the holding company in the second or third quarters to retain capital after the Cape acquisition. Restrictions on future Bank dividends could affect the holding company’s ability to pay dividends or meet debt obligations.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective.
Most important facts for investors to verify
- Whether the Ocean Shore transaction closed on the expected date and the final consideration, purchase accounting and integration costs.
- Whether Cape integration produces the anticipated cost savings beginning in the first quarter of 2017.
- The sustainability of the 3.56% quarterly net interest margin after purchase-accounting accretion declines and interest rates change.
- Credit performance of the expanded commercial real-estate portfolio, including $42.7 million of substandard commercial loans and the $22.7 million higher-risk loan pool held for sale.
- Future charge-offs, allowance adequacy and the impact of adopting the current expected credit loss standard.
- Holding-company liquidity, Bank dividend capacity, subordinated-note obligations and the sustainability of the increased quarterly dividend of $0.15 per share.