Stock to Watch: OceanFirst Financial Corp. (NASDAQ: OCFC)

Carolyn Scherer

RED BANK, N.J, February 12, 2020 – Shares of OceanFirst Financial Corp. (NASDAQ: OCFC) lost -0.32% to $23.46. The stock traded total volume of 96.276K shares lower than the average volume of 204.50K shares.

OceanFirst Financial Corp. (NASDAQ: OCFC) reported net income of $25.00M, or $0.49 per diluted share, for the three months ended September 30, 2019, as compared to $24.10M, or $0.50 per diluted share, for the corresponding prior year period. For the nine months ended September 30, 2019, net income was $65.10M, or $1.28 per diluted share, as compared to $45.20M, or $0.95 per diluted share, for the corresponding prior year period.

Net income for the three months ended September 30, 2019, was $25.00M, or $0.49 per diluted share, as compared to $24.10M, or $0.50 per diluted share, for the corresponding prior year period. Net income for the nine months ended September 30, 2019, was $65.10M, or $1.28 per diluted share, as compared to $45.20M, or $0.95 per diluted share, for the corresponding prior year period. Net income for the three months ended September 30, 2019 included merger related expenses, branch consolidation expenses, and non-recurring professional fees which decreased net income, net of tax benefit, by $2.60M.  Net income for the nine months ended September 30, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer, which decreased net income, net of tax benefit, by $14.00M. Net income for the three and nine months ended September 30, 2018 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $1.60M and $22.90M, respectively. Excluding these items, net income for the three and nine months ended September 30, 2019 increased over the same prior year periods, primarily due to the acquisition of Capital Bank.

Net interest income for the three and nine months ended September 30, 2019 increased to $63.40M and $192.60M, respectively, as compared to $61.50M and $178.70M, respectively, for the same prior year periods, reflecting an increase in interest-earning assets. Average interest-earning assets increased by $436.60M and $594.20M for the three and nine months ended September 30, 2019, respectively, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2019 were favorably impacted by $363.10M and $346.00M, respectively, of interest-earning assets acquired from Capital Bank. Average loans receivable, net, increased by $474.20M and $603.60M for the three and nine months ended September 30, 2019, respectively, as compared to the same prior year periods. The increases attributable to the acquisition of Capital Bank were $269.60M and $251.80M, respectively. The net interest margin for the three and nine months ended September 30, 2019 decreased to 3.55% and 3.66%, respectively, from 3.67% and 3.71%, respectively, for the same prior year periods. For the three and nine months ended September 30, 2019, the cost of average interest-bearing liabilities increased to 0.98% and 0.95%, respectively, from 0.74% and 0.66%, respectively, in the corresponding prior year periods. The total cost of deposits (including non-interest bearing deposits) was 0.62% and 0.60% for the three and nine months ended September 30, 2019, respectively, as compared to 0.39% and 0.36%, respectively, in the same prior year periods.

Net interest income for the three months ended September 30, 2019, decreased by $1.40M, as compared to the prior linked quarter, as average interest-earning assets decreased by $7.40M. The net interest margin decreased to 3.55% for the quarter ended September 30, 2019, as compared to 3.66% for the prior linked quarter. The decrease was primarily due to decreases in purchase accounting accretion of six basis points and prepayment fees of three basis points. Excluding these items, the net interest margin decreased two basis points.  The total cost of deposits (including non-interest bearing deposits) was 0.62% for the both the three months ended September 30, 2019 and June 30, 2019.

For the three and nine months ended September 30, 2019, the provision for loan losses was $305,000 and $1.30M, respectively, as compared to $907,000 and $3.00M, respectively, for the corresponding prior year period, and $356,000 in the prior linked quarter. Net loan recoveries were $196,000 and net loan charge-offs were $1.20M for the three and nine months ended September 30, 2019, respectively, as compared to net loan charge-offs of $777,000 and $1.90M, respectively, in the corresponding prior year periods, and net loan charge-offs of $926,000 in the prior linked quarter. Non-performing loans totaled $17.50M at September 30, 2019, as compared to $17.80M at June 30, 2019 and $19.20M at September 30, 2018.

For the three and nine months ended September 30, 2019, other income increased to $11.50M and $30.90M, respectively, as compared to $8.30M and $26.10M, respectively, for the corresponding prior year periods. The increases were partly due to the impact of the Capital Bank acquisition, which added $435,000 and $991,000 to other income for the three and nine months ended September 30, 2019, respectively, as compared to the same prior year periods. Excluding the Capital Bank acquisition, the increase in other income for the three months ended September 30, 2019 was primarily due to a decrease in the loss from real estate operations of $1.50M and an increase in derivative fee income of $1.50M, as compared to the three months ended September 30, 2018. Excluding the Capital Bank acquisition, the increase in other income for the nine months ended September 30, 2019 was primarily due to a decrease in the loss from real estate operations of $2.70M, an increase in derivative fee income of $2.50M, and an increase in bankcard services of $679,000, partially offset by decreases in fees and service charges of $1.30M, and rental income of $820,000 received primarily for January and February 2018 on the Company’s executive office.

For the three months ended September 30, 2019, other income increased by $1.70M, as compared to the prior linked quarter. The increase was primarily due to an increase in derivative fee income of $1.50M.

Operating expenses increased to $43.40M and decreased to $141.50M for the three and nine months ended September 30, 2019, respectively, as compared to $39.50M and $147.30M, respectively, in the same prior year periods. Operating expenses for the three months ended September 30, 2019 included $3.20M of merger related expenses, branch consolidation expenses, and non-recurring professional fees. Operating expenses for the nine months ended September 30, 2019 included $17.50M of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer, as compared to $2.00M and $28.80M, respectively, of merger related and branch consolidation expenses, in the same prior year periods. Excluding the impact of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year was due to the Capital Bank acquisition, which added $1.20M and $4.50M for the three and nine months ended September 30, 2019, respectively. Excluding the Capital Bank acquisition, the increase in operating expenses for the three months ended September 30, 2019 over the prior year period was primarily due to increases in check card processing of $803,000, professional fees of $759,000, and compensation and employee benefits expense of $550,000, partially offset by decreases in Federal Deposit Insurance Company (“FDIC”) expense of $643,000, primarily as a result of assessment credits awarded by the FDIC to banks with consolidated assets less than $100B, and marketing expenses of $459,000. Excluding the Capital Bank acquisition, the remaining increase in operating expenses, for the nine months ended September 30, 2019 from the prior year period, was primarily due to increases in check card processing of $1.40M, professional fees of $1.10M, and other operation expenses of $976,000, partially offset by decreases in compensation and employee benefits expense of $1.30M, and FDIC expense of $1.00M.

The provision for income taxes was $6.30M and $15.60M for the three and nine months ended September 30, 2019, respectively, as compared to $5.30M and $9.30M, respectively, for the same prior year periods. The effective tax rate was 20.2% and 19.3% for the three and nine months ended September 30, 2019, respectively, as compared to 18.0% and 17.1%, respectively, for the same prior year periods. The lower effective tax rates in the prior year periods were primarily due to larger tax benefits from employee stock option exercises and an increase in state taxes due to revisions in the New Jersey tax code.

Financial Condition:

Total assets increased by $619.00M, to $8.1350B at September 30, 2019, from $7.5160B at December 31, 2018, primarily as a result of the acquisition of Capital Bank, which added $494.70M to total assets. Loans receivable, net, increased by $502.70M, to $6.0820B at September 30, 2019, from $5.5790B at December 31, 2018, due to acquired loans of $307.80M. As part of the acquisition of Capital Bank, the Company’s goodwill balance increased to $374.50M at September 30, 2019, from $338.40M at December 31, 2018. The core deposit intangible decreased to $16.60M, from $17.00M at December 31, 2018 due to amortization of core deposit intangible, partially offset by the increase from the acquisition of Capital Bank.

Deposits increased by $406.30M, to $6.2210B at September 30, 2019, from $5.8150B at December 31, 2018, primarily due to acquired deposits of $449.00M. The loan-to-deposit ratio at September 30, 2019 was 97.8%, as compared to 96.0% at December 31, 2018.

Stockholders’ equity increased to $1.1450B at September 30, 2019, as compared to $1.0390B at December 31, 2018. The acquisition of Capital Bank added $76.40M to stockholders’ equity. At September 30, 2019, there were 508,986 shares available for repurchase under the Company’s stock repurchase program. For the nine months ended September 30, 2019, the Company repurchased 786,567 shares under the repurchase program at a weighted average cost of $22.95. Tangible stockholders’ equity per common share increased to $14.86 at September 30, 2019, as compared to $14.26 at December 31, 2018.

Asset Quality:

The Company’s non-performing loans increased to $17.50M at September 30, 2019, as compared to $17.40M at December 31, 2018.  Non-performing loans do not include $13.30M of purchased credit-impaired (“PCI”) loans acquired in the Capital Bank, Sun, Ocean Shore Holding Co. (“Ocean Shore”), Cape Bancorp, Inc. (“Cape”), and Colonial American Bank (“Colonial American”) acquisitions (“Acquisition Transactions”). The Company’s other real estate owned totaled $294,000 at September 30, 2019, as compared to $1.40M at December 31, 2018.

OCFC has the market capitalization of $1.43B and its EPS growth ratio for the past five years was 9.10%. The return on assets ratio of the Company was 1.10% while its return on investment ratio stands at 19.50%. Price to sales ratio was 4.65 while 62.30% of the stock was owned by institutional investors.

Carolyn Scherer

Carolyn Scherer

I am Carolyn Scherer I give “Tech Business Week” an insight into the most recent news hitting the “Financial” sector in Wall Street. I have been an independent financial adviser for over 11 years in the city and in recent years turned my experience in finance and passion for journalism into a full time role. I perform analysis of Companies and publicize valuable information for shareholder community. Address: 924 Heritage Road Visalia, CA 93291, USA Phone: (+1) 559-735-0405 Email: Carolynscherer@techbusinessweek.com