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 New Jersey and the metropolitan areas of Philadelphia and New York City. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Results include the January 1, 2020 acquisitions of Two River Bancorp and Country Bank Holding Company, which added approximately $2.6 billion of assets, $1.9 billion of loans and $2.0 billion of deposits over the preceding two years.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net interest income | $78.7 million | $64.8 million | $158.3 million | $129.2 million |
| Credit loss expense | $9.6 million | $0.4 million | $19.6 million | $1.0 million |
| Other income | $11.4 million | $9.9 million | $25.1 million | $19.4 million |
| Operating expenses | $55.9 million | $50.9 million | $118.7 million | $98.2 million |
| Net income | $18.6 million | $19.0 million | $35.2 million | $40.2 million |
| Diluted EPS | $0.31 | $0.37 | $0.58 | $0.79 |
| Net interest margin | 3.24% | 3.66% | 3.37% | 3.72% |
| Return on average assets | 0.67% | 0.94% | Not separately provided | Not separately provided |
Total assets were $11.35 billion at June 30, 2020, compared with $8.25 billion at December 31, 2019. Net loans were $8.34 billion, deposits were $8.97 billion and stockholders’ equity was $1.48 billion. The loan-to-deposit ratio was 93.4%.
Cash flow from operating activities was $81.3 million for the first six months of 2020. Investing activities used $454.2 million, primarily reflecting a $650.8 million net increase in loans. Financing activities provided $1.019 billion, driven mainly by deposit growth, subordinated note proceeds and preferred stock issuance. Cash and due from banks ended at $721.0 million, while cash, due from banks and restricted cash totaled $779.3 million.
In May 2020, the Company issued $125.0 million of subordinated notes with an initial interest rate of 5.25% and a May 15, 2030 maturity. It also issued approximately $55.9 million of 7.0% fixed-to-floating, non-cumulative perpetual preferred stock. FHLB advances totaled $343.4 million and other borrowings totaled $246.8 million at quarter end.
The Bank remained well-capitalized. Its June 30, 2020 total capital ratio was 12.33%, common equity Tier 1 ratio was 11.86% and Tier 1 leverage ratio was 8.86%. The Company’s tangible equity-to-tangible assets ratio was 8.77%, compared with 9.71% at December 31, 2019.
Material Changes Versus Comparable Periods
- Net income declined 1.8% in the quarter and 12.4% for the first six months, while diluted EPS declined because of lower earnings and substantially higher average shares following acquisitions.
- Net interest income increased 21.3% in the quarter and 22.5% year to date, primarily from the acquired loan portfolios and balance-sheet growth. Net interest margin compressed 42 basis points in the quarter because of lower market rates, low-yielding PPP loans and excess liquidity.
- Credit loss expense increased sharply to $9.6 million in the quarter and $19.6 million year to date, compared with $356,000 and $976,000, respectively, in the prior-year periods.
- The allowance for credit losses increased to $38.5 million, or 0.46% of total loans, from $16.9 million, or 0.27%, at December 31, 2019. The Company adopted the CECL model on January 1, 2020.
- Loans increased $2.13 billion and deposits increased $2.64 billion from December 31, 2019, reflecting acquisitions, PPP-related balances and organic growth.
- Other income increased to $11.4 million in the quarter, helped by commercial loan swap income and loan-sale gains, while fees and service charges declined during the pandemic.
- Operating expenses included $3.9 million of merger-related and branch-consolidation costs in the quarter and $15.1 million year to date. The Company consolidated 13 branches during the quarter and has consolidated 53 branches over four years.
- The Company suspended common stock repurchases on February 28, 2020. It repurchased 648,851 shares during the first six months, but none during the second quarter.
COVID-19, Outlook, Risks and Unusual Items
COVID-19 adversely affected second-quarter results through elevated credit loss expense of $9.6 million and $1.1 million of incremental operating expense. The Company provided borrower payment relief under programs allowing generally 90-day deferrals, potentially extendable for another 90 days. Loans under forbearance totaled approximately $1.5 billion at June 30, 2020; borrowers representing $650 million had indicated by July 15 that they expected to resume regular payments in the third quarter.
The Company originated $975 million of loans during the quarter, including $504 million of PPP loans. Through July 15, 2020, it had recorded $17.7 million of deferred PPP processing fees to be recognized over the lives of the loans.
Non-performing loans were $21.0 million, or 0.25% of total loans, and non-performing assets were $21.3 million, or 0.19% of total assets. Special mention and substandard loans increased to $66.4 million and $106.3 million, respectively, partly because of risk-rating reviews of the acquired portfolios. Loans under COVID-related forbearance were not classified as TDRs or reported as past due when eligible under the CARES Act guidance.
Management stated that liquidity remained significant under stress scenarios. At June 30, 2020, outstanding undrawn lines of credit totaled $1.031 billion and commitments to originate loans totaled $359.2 million. Contractual debt obligations totaled $743.1 million. The Company expects sufficient funds to meet commitments in the normal course, but its ability to pay dividends depends substantially on receiving capital distributions from the Bank and satisfying regulatory requirements.
The Company declared a $0.17 per common share quarterly dividend and a $0.4764 dividend per Series A depositary share. It concluded that no goodwill impairment triggering event had occurred; goodwill was $501.5 million at June 30, 2020.
Principal risks include the uncertain duration and economic effects of COVID-19, additional borrower defaults, higher credit losses, collateral-value declines, liquidity and deposit volatility, prolonged low interest rates and further margin compression, regulatory changes, PPP compliance and operational risks, cyber and payment fraud risk, acquisition integration, and potential restrictions on capital distributions. No material legal proceedings were reported.
Important Facts for Investors to Verify
- Whether borrowers in the $1.5 billion forbearance pool resume payments as expected and whether additional deferrals lead to higher delinquencies, charge-offs or credit loss provisions.
- The sustainability of the $504 million PPP portfolio, the timing of forgiveness and recognition of the $17.7 million of deferred processing fees.
- Future net interest margin performance under prolonged low rates, elevated liquidity and PPP loan runoff.
- Allowance adequacy under the CECL model, including the effect of updated economic forecasts and acquired-loan credit marks.
- Integration progress and expected cost savings from the Two River and Country Bank acquisitions and branch consolidations.
- Compliance with regulatory capital requirements and the Bank’s ability to upstream dividends to the holding company.
- Future use of the suspended share repurchase authorization and continued common and preferred dividend payments.