OceanFirst Financial Corp. — 2016 Q1 Form 10-Q Summary
Business Context and Reporting Period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank, a community bank serving central New Jersey business and retail customers. This unaudited report covers the three months ended March 31, 2016, with comparisons to March 31, 2015 and December 31, 2015.
The quarter included the full operating results of Colonial American Bank, acquired in July 2015. OceanFirst also acquired a Toms River retail branch on March 11, 2016. The announced acquisition of Cape Bancorp, valued at approximately $195 million, closed on May 2, 2016 and therefore was not reflected in the March 31 balance sheet.
Financial Performance and Condition
| Metric | Q1 2016 | Comparable / Prior Period |
|---|---|---|
| Total assets | $2.588 billion | $2.593 billion at Dec. 31, 2015; $2.384 billion at Mar. 31, 2015 |
| Loans receivable, net | $1.997 billion | $1.971 billion at Dec. 31, 2015; $1.737 billion at Mar. 31, 2015 |
| Deposits | $1.971 billion | $1.917 billion at Dec. 31, 2015; $1.801 billion at Mar. 31, 2015 |
| Net interest income | $20.6 million | $18.1 million in Q1 2015 |
| Provision for loan losses | $563,000 | $375,000 in Q1 2015 |
| Other income | $3.4 million | $4.0 million in Q1 2015 |
| Operating expenses | $16.7 million | $13.7 million in Q1 2015 |
| Net income | $4.2 million | $5.3 million in Q1 2015 |
| Diluted EPS | $0.25 | $0.32 in Q1 2015 |
| Net interest margin | 3.32% | 3.24% in Q1 2015 |
| Return on average assets | 0.65% | 0.89% in Q1 2015 |
| Return on average equity | 7.01% | 9.58% in Q1 2015 |
Net interest income rose 13.4% year over year as average interest-earning assets increased by $234.3 million, supported by Colonial and continued loan growth. Commercial loans increased $23.6 million from year-end 2015, while securities declined $19.0 million as the asset mix shifted toward higher-yielding loans.
Operating expenses included $1.4 million of non-recurring Cape merger expenses, or approximately $1.2 million after tax. Excluding these expenses, diluted EPS was equal to the prior-year period. Excluding merger costs, operating expenses increased primarily from Colonial operations, commercial-lending investments and new branches.
Cash provided by operating activities was $8.0 million, compared with $4.6 million in Q1 2015. Investing activities provided $11.2 million, principally reflecting cash acquired in the branch acquisition, while financing activities used $28.9 million as the Company reduced short-term borrowings. Cash and due from banks declined to $34.3 million from $43.9 million at year-end.
Debt, Liquidity, Capital and Asset Quality
- Federal Home Loan Bank advances declined to $251.9 million from $324.4 million at December 31, 2015; the Company had no overnight FHLB borrowings at March 31, 2016.
- OceanFirst Financial Corp. held $17.6 million in holding-company cash. Management stated that liquidity was sufficient under stress scenarios and expected to meet normal commitments.
- At March 31, 2016, outstanding undrawn credit lines were $302.4 million, loan-origination commitments were $94.2 million and loan-sale commitments were $6.4 million.
- The Company and Bank exceeded regulatory capital requirements and were considered well-capitalized. The Company’s tangible common equity-to-assets ratio was 9.23%.
- Non-performing loans declined to $16.2 million from $18.3 million at year-end, and non-performing assets declined to $25.2 million from $27.1 million. Non-performing loans were 0.80% of total loans and non-performing assets were 0.97% of total assets.
- Net charge-offs increased to $1.1 million from $273,000 in Q1 2015, including $886,000 related to two non-performing commercial loans. The allowance for loan losses was $16.2 million, or 0.80% of loans.
- Other real estate owned totaled $9.0 million, including approximately $7.0 million for a hotel, golf and banquet facility acquired in late 2015.
Material Changes, Outlook and Risks
- The Cape Bancorp acquisition closed May 2, 2016 and added approximately $1.6 billion of assets, $1.2 billion of loans, $1.1 billion of deposits and 22 full-service banking offices plus five loan offices. Integration, purchase accounting and post-closing performance are significant items to monitor.
- Management expects interest rates to remain historically low, with Federal funds rate increases gradual. The Company cautioned that continued low rates could pressure future net interest margins.
- The Company extended portions of its funding into higher-cost, longer-term maturities; the weighted average maturity of term borrowings increased to 2.9 years from 1.3 years since December 2013. This may limit flexibility and increase funding costs if rates remain low.
- The hotel, golf and banquet facility generated seasonal losses within other real estate operations. Management was finalizing a sale agreement with an expected mid-year closing; the filing does not provide a confirmed closing date or proceeds.
- Primary risks include interest-rate changes, economic and unemployment conditions, New Jersey real estate values, credit quality, deposit flows, competition, regulatory changes, loan prepayments and the effects of the Cape transaction.
- The Board declared a quarterly dividend of $0.13 per share payable May 20, 2016. Future dividends depend substantially on permissible capital distributions from the Bank.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Most Important Facts for Investors to Verify
- Post-closing results, integration costs, purchase accounting adjustments and deposit and loan retention following the Cape Bancorp acquisition.
- Whether loan growth, particularly commercial lending, can offset margin pressure from low rates and higher funding costs.
- Trends in charge-offs, non-performing residential loans, commercial credit exposure and the adequacy of the allowance for loan losses.
- The timing and economics of the planned sale of the hotel, golf and banquet facility and any resulting gains or losses.
- Liquidity and holding-company cash available for dividends, debt obligations and acquisition-related needs.
- The effect of the expanded share count and acquisition financing on tangible book value, capital ratios and future diluted EPS.