OceanFirst Financial Corp. Announces Second Quarter Earnings and Financial Results

RED BANK, N.J., July 23, 2020 (GLOBE NEWSWIRE) — OceanFirst Financial Corp. (NASDAQ:“OCFC”), (the “Company”), the holding company for OceanFirst Bank N.A. (the “Bank”), today announced that net income was $18.6 million, or $0.31 per diluted share, for the three months ended June 30, 2020, as compared to $19.0 million, or $0.37 per diluted share, for the corresponding prior year period. For the six months ended June 30, 2020, net income was $35.2 million, or $0.58 per diluted share, as compared to $40.2 million, or $0.79 per diluted share, for the corresponding prior year period.
The results of operations for the three months ended June 30, 2020 include merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $3.0 million. Results of operations for the six months ended June 30, 2020 include  merger related expenses, branch consolidation expenses, and the Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”) opening credit loss expense under the Current Expected Credit Loss (“CECL”) model, which decreased net income, net of tax benefit, by $13.4 million. Excluding these items, core earnings for the three and six months ended June 30, 2020 were $21.6 million, or $0.36 per diluted share, and $48.6 million, or $0.81 per diluted share, respectively. (Please refer to the Non-GAAP Reconciliation table at the end of this document for details on the earnings impact of merger related, branch consolidation, and the Two River and Country Bank opening credit loss expenses). The quarter and year to date results were also impacted by the COVID-19 outbreak, through both higher credit loss expense and increased operating expense.
Highlights for the quarter are described below:Loans & Deposits: Drove record loan and deposit growth, including quarterly originations of $975 million, which included $504 million of Paycheck Protection Program (“PPP”) loans and total loan growth of $450 million after loan sales of $110 million. Deposits increased by $1.076 billion, driven by deposits from PPP borrowers of $504 million, ordinary course growth of $291 million, and short-term brokered deposits of $281 million.Capital: Bolstered a strong balance sheet with the addition of $181 million of subordinated notes and non-cumulative perpetual preferred stock. The increased capital further strengthened resources available to the Bank while credit metrics, including delinquencies, forbearances, and net charge-offs all evidenced significant positive trends.Operating Expenses: Improved operating leverage with the consolidation of thirteen branch locations, eight of which were driven by the completed integration of the Two River acquisition bringing the total number of branches consolidated over the past four years to 53. These consolidations increased the average branch size to $145 million and will help reduce operating expenses beginning in the third quarter.COVID-19: The Company’s second quarter results were adversely impacted by the COVID-19 pandemic, including an elevated credit loss provision of $9.6 million and an additional $1.1 million in operating expense.Chairman and Chief Executive Officer, Christopher D. Maher, commented on the Company’s results, “The second quarter results included strong loan and deposit growth as we continued to serve our communities at a very difficult time. We facilitated $504 million in PPP loans, assisting local businesses and supporting 57,000 jobs.” Mr. Maher added, “The continuing national health crisis may weigh on results in future quarters, but we are exceptionally proud of our customers in New Jersey, New York, and Pennsylvania, who have worked with public health experts to bring the local epidemic under control and to begin a responsible and sustainable restart of our regional economy. The second quarter capital raise and the integration of the Two River acquisition have placed our Company in an advantageous position to face the future.”
The Company announced that the Company’s Board of Directors declared its ninety-fourth consecutive quarterly cash dividend on common stock. The dividend, related to the three months ended June 30, 2020, of $0.17 per share will be paid on August 14, 2020 to stockholders of record on August 3, 2020.Results of Operations
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”) and its results of operations are included in the consolidated results for the three and six months ended June 30, 2020, but are excluded from the results of operations for the period from January 1, 2019 to January 31, 2019.
On January 1, 2020, the Company completed its acquisitions of Two River and Country Bank and their respective results of operations from January 1, 2020 through June 30, 2020 are included in the consolidated results for the three and six months ended June 30, 2020, but are not included in the results of operations for the corresponding prior year periods.
Net income for the three months ended June 30, 2020 was $18.6 million, or $0.31 per diluted share, as compared to $19.0 million, or $0.37 per diluted share, for the corresponding prior year period. Net income for the six months ended June 30, 2020 was $35.2 million, or $0.58 per diluted share, as compared to $40.2 million, or $0.79 per diluted share, for the corresponding prior year period. Net income for the three months ended June 30, 2020 included merger related and branch consolidation expenses, which decreased net income, net of tax benefit, by $3.0 million. Net income for the six months ended June 30, 2020 included merger related expenses, branch consolidation expenses, and the Two River and Country Bank opening credit loss expense under the CECL model, which decreased net income, net of tax benefit, by $13.4 million. Net income for the three and six months ended June 30, 2019 included merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, which decreased net income, net of tax benefit, by $7.0 million and $11.4 million, respectively. Excluding these items, net income for the three and six months ended June 30, 2020 was $21.6 million and $48.6 million, respectively, a decrease from $26.0 million and $51.6 million for the same prior year periods, respectively, primarily due to the adverse impact of the COVID-19 outbreak.
Net interest income for the three and six months ended June 30, 2020 increased to $78.7 million, and $158.3 million, as compared to $64.8 million and $129.2 million for the same prior year periods, respectively, reflecting an increase in interest-earning assets, partly offset by a reduction in net interest margin. Average interest-earning assets increased by $2.684 billion and $2.435 billion for the three and six months ended June 30, 2020, respectively, as compared to the same prior year periods. The averages for the three and six months ended June 30, 2020 were favorably impacted by $1.815 billion and $1.793 billion, respectively, of interest-earning assets acquired from Two River and Country Bank and $373.7 million and $186.8 million, respectively, of PPP loans. Average loans receivable, net, increased by $2.347 billion and $2.215 billion for the three and six months ended June 30, 2020, respectively, as compared to the same prior year periods. The increases attributable to the acquisitions of Two River and Country Bank for the three and six months ended June 30, 2020 were $1.606 billion and $1.581 billion, respectively. The net interest margin for the three and six months ended June 30, 2020 decreased to 3.24% and 3.37%, respectively, from 3.66% and 3.72%, respectively, for the same prior year periods. The compression in net interest margin is primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn. For the three months ended June 30, 2020, the cost of average interest-bearing liabilities decreased to 0.92% from 0.98% in the corresponding prior year period. For the six months ended June 30, 2020, the cost of average interest-bearing liabilities increased to 0.98% from 0.94%, in the corresponding prior year period. The total cost of deposits (including non-interest bearing deposits) was 0.57% and 0.63% for the three and six months ended June 30, 2020, respectively, as compared to 0.62% and 0.60%, respectively, in the same prior year periods.
Net interest income for the three months ended June 30, 2020, decreased by $1.0 million, as compared to the prior linked quarter, as the net interest margin decreased to 3.24% as compared to 3.52% for the prior linked quarter. The yield on average interest-earning assets decreased to 3.94% from 4.34% in the prior linked quarter, primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn. The total cost of deposits (including non-interest bearing deposits) was 0.57% for the three months ended June 30, 2020, as compared to 0.70% for the three months ended March 31, 2020. The decrease in total cost of deposits is primarily due to the repricing of deposits acquired from Two River and Country Bank and the growth in business deposits relating to PPP originations.
For the three and six months ended June 30, 2020, the credit loss expense was $9.6 million and $19.6 million, respectively, as compared to $356,000 and $976,000, respectively, for the corresponding prior year periods, and $10.0 million in the prior linked quarter. Net loan recoveries were $232,000 for the quarter and net loan charge-offs were $922,000 for the six months ended June 30, 2020, as compared to net loan charge-offs of $926,000 and $1.4 million in the corresponding prior year periods, and $1.2 million in the prior linked quarter. The prior linked quarter included $949,000 in charge-offs on the sale of higher risk residential loans. Non-performing loans totaled $21.0 million at June 30, 2020, as compared to $16.3 million at March 31, 2020 and $17.8 million at June 30, 2019. Credit expense for the three and six months ended June 30, 2020 was significantly influenced by economic conditions related to the COVID-19 outbreak and estimates of how those conditions may impact the Company’s customers. As a result of the COVID-19 outbreak, loans under forbearance totaled $1.5 billion at June 30, 2020. The forbearance pool is expected to decrease substantially as borrowers are beginning to return to monthly payments. As of July 15, 2020, borrowers with balances totaling $650 million have indicated to the Bank that they will return to regular monthly payments. Due to the U.S. government guarantee on PPP loans, there is no credit allowance on these loans. Refer to exhibits filed with the earnings release on Form 8-K for detailed information on credit loss expense and loans under forbearance agreements.
For the three and six months ended June 30, 2020, other income increased to $11.4 million and $25.1 million, respectively, as compared to $9.9 million and $19.4 million, respectively, for the corresponding prior year periods. Excluding the Two River and Country Bank acquisitions which added $692,000, the increase in other income for the three months ended June 30, 2020 was due to an increase in commercial loan swap income of $1.9 million, and an increase in the net gain on sales of loans of $619,000, partially offset by lower fees and service charges of $1.7 million, as compared to the corresponding prior year period. For the six months ended June 30, 2020, excluding the Two River and Country Bank acquisitions which added $1.4 million, the increase in other income was due to the increase in commercial swap income of $5.5 million, and an increase in the net gain on sales of loans of $733,000, partially offset by decreases in fees and service charges of $1.8 million.  The waiver of certain fees during the COVID-19 pandemic may continue to suppress deposit fee income for the remainder of the public health crisis.
For the three months ended June 30, 2020, other income decreased by $2.3 million, as compared to the prior linked quarter. The decrease was primarily due to lower fees and service charges of $1.6 million and lower commercial loan swap income of $1.6 million, partially offset by an increase in the net gain on sale of loans of $583,000.
Operating expenses increased to $55.9 million and $118.7 million for the three and six months ended June 30, 2020, respectively, as compared to $50.9 million and $98.2 million, respectively, in the same prior year periods. Operating expenses for the three and six months ended June 30, 2020 included $3.9 million and $15.1 million, respectively, of merger related and branch consolidation expenses, as compared to $8.9 million and $14.3 million of merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, respectively, in the same prior year periods. Excluding the impact of merger related expenses, branch consolidation expenses, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year was due to the Two River and Country Bank acquisitions, which added $7.6 million and $16.1 million, respectively, for the three and six months ended June 30, 2020. The remaining increase in operating expenses for the three months ended June 30, 2020 was primarily due to a Federal Home Loan Bank (“FHLB”) prepayment penalty fee of $924,000 and expenses related to COVID-19 of $1.1 million. The increase in operating expenses for the six months ended June 30, 2020 was primarily due to a FHLB prepayment penalty fee of $924,000 and expenses related to COVID-19 of $2.1 million.
For the three months ended June 30, 2020, operating expenses increased by $324,000, as compared to the prior linked quarter, excluding merger related and branch consolidation expenses. The increase was due to a FHLB prepayment penalty fee of $924,000.
The provision for income taxes was $5.9 million and $9.9 million for the three and six months ended June 30, 2020, respectively, as compared to $4.5 million and $9.3 million, respectively, for the same prior year periods. The effective tax rate was 24.0% and 22.0% for the three and six months ended June 30, 2020, respectively, as compared to 19.0% and 18.8%, respectively, for the same prior year periods. The higher effective tax rate in the current year period is primarily due to the impact of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank.
Financial Condition
Total assets increased by $3.099 billion, to $11.345 billion at June 30, 2020, from $8.246 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.031 billion to total assets. Cash and due from banks increased by $600.5 million, to $721.0 million at June 30, 2020, from $120.5 million at December 31, 2019, due to the Company’s decision to build liquidity during the economic downturn and the cash received from the issuance of subordinated notes and non-cumulative perpetual preferred stock as described below. Loans receivable, net of allowance for credit losses, increased by $2.128 billion, to $8.335 billion at June 30, 2020, from $6.208 billion at December 31, 2019, due to acquired loans from Two River and Country Bank of $1.558 billion coupled with strong organic loan growth. As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $501.5 million at June 30, 2020, from $374.6 million at December 31, 2019 and the core deposit intangible increased to $26.7 million, from $15.6 million. Other assets increased by $57.1 million to $226.6 million at June 30, 2020, from $169.5 million at December 31, 2019, primarily due to the increase in swap positions.
Deposits increased by $2.639 billion, to $8.968 billion at June 30, 2020, from $6.329 billion at December 31, 2019, primarily due to acquired deposits from Two River and Country Bank of $1.594 billion. The loan-to-deposit ratio at June 30, 2020 was 93.4%, as compared to 98.2% at December 31, 2019. The deposit growth funded a decrease in FHLB advances of $175.9 million to $343.4 million at June 30, 2020, from $519.3 million at December 31, 2019. The increase in other borrowings of $150.0 million to $246.8 million at June 30, 2020, from $96.8 million at December 31, 2019, primarily resulted from the May 2020 issuance of $125.0 million in subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030.  Other liabilities increased by $76.0 million to $138.5 million  at June 30, 2020, from $62.6 million at December 31, 2019, primarily due to the increase in swap positions.
Stockholders’ equity increased to $1.476 billion at June 30, 2020, as compared to $1.153 billion at December 31, 2019. The acquisitions of Two River and Country Bank added $261.4 million to stockholders’ equity. During the three months ended June 30, 2020, the Company raised $55.7 million from the issuance of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share. Under the Company’s stock repurchase program, there were 2,019,145 shares available for repurchase at June 30, 2020. The Company suspended its repurchase activity on February 28, 2020.  For the six months ended June 30, 2020, the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of $22.83. Tangible common stockholders’ equity per common share increased to $14.79 at June 30, 2020, as compared to $14.62 at March 31, 2020.
Asset Quality
The Company’s non-performing loans increased to $21.0 million at June 30, 2020, as compared to $17.8 million at December 31, 2019. Non-performing loans do not include $61.7 million of purchased with credit deterioration (“PCD”) loans acquired in the Two River, Country Bank, Capital Bank, Sun Bancorp, Inc. (“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 $248,000 at June 30, 2020, as compared to $264,000 at December 31, 2019. At June 30, 2020, the Company had outstanding loans under forbearance of $1.5 billion.  As of July 15, 2020, customers with balances totaling $650 million have indicated to the Bank that they will return to regular monthly payments. Refer to exhibits filed with the earnings release on Form 8-K for detailed information on credit loss expense and loans subject to forbearance.
At June 30, 2020, the Company’s allowance for credit losses was 0.46% of total loans, an increase from 0.27% at December 31, 2019. The allowance for credit losses as a percentage of total non-performing loans was 183.0% at June 30, 2020, as compared to 94.4% at December 31, 2019.
Explanation of Non-GAAP Financial Measures
Reported amounts are presented in accordance with generally accepted accounting principles in the United States (“GAAP”).  The Company’s management believes that the supplemental non-GAAP information, which consists of reported net income excluding merger related expenses, branch consolidation expenses, Two River and Country Bank opening credit loss expense under the CECL model, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code, which can vary from period to period, provides a better comparison of period to period operating performance. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors.  These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Please refer to Non-GAAP Reconciliation table at the end of this document for details on the earnings impact of these items.
Conference Call
As previously announced, the Company will host an earnings conference call on Friday, July 24, 2020 at 11:00 a.m. Eastern Time.  The direct dial number for the call is (888) 338-7143.  For those unable to participate in the conference call, a replay will be available.  To access the replay, dial (877) 344-7529, Replay Conference Number 10145712 from one hour after the end of the call until October 30, 2020. The conference call, as well as the replay, are also available (listen-only) by internet webcast at www.oceanfirst.com in the Investor Relations section.
OceanFirst Financial Corp.’s subsidiary, OceanFirst Bank N.A., founded in 1902, is a $11.3 billion regional bank operating throughout New Jersey, metropolitan Philadelphia and metropolitan New York City.  OceanFirst Bank delivers commercial and residential financing solutions, trust and asset management and deposit services and is one of the largest and oldest community-based financial institutions headquartered in New Jersey.
OceanFirst Financial Corp.’s press releases are available by visiting us at www.oceanfirst.com.Forward-Looking Statements
In addition to historical information, this news release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: the impact of the COVID-19 pandemic on our operations and financial results and those of our customers, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines and the Bank’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, under Item 1A – Risk Factors and elsewhere, and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.Company Contact:Michael J. Fitzpatrick
Chief Financial Officer
OceanFirst Financial Corp.
Tel:  (732) 240-4500, ext. 7506
Email: Mfitzpatrick@oceanfirst.com 
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)OceanFirst Financial Corp.
SELECTED LOAN AND DEPOSIT DATA
(dollars in thousands)
(1) Loan pipeline includes loans approved but not funded.
(2) Excludes loans originated through the Paycheck Protection Program of $504 million.
(3) Excludes the sale of under-performing commercial loans of $4.9 million for the three months ended June 30, 2020, under-performing residential loans of $4.0 million and commercial loans of $5.1 million for the three months ended March 31, 2020, small business administration loans of $3.5 million for the three months ended September 30, 2019 and under-performing residential loans of $2.9 million for the three months ended June 30, 2019.OceanFirst Financial Corp.
ASSET QUALITY
(dollars in thousands)(1) PCD loans are not included in non-performing loans or delinquent loans totals.
(2) The loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American were recorded at fair value.  The net credit mark on these loans, not reflected in the allowance for credit losses, was $35,439, $38,272, $30,260, $32,768, and $36,026 at June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, and June 30, 2019, respectively.(1) Included in net loan charge-offs for the three months ended March 31, 2020 and June 30, 2019 are $949 and $429, respectively, relating to under-performing loans sold.
*   Not MeaningfulOceanFirst Financial Corp.
ANALYSIS OF NET INTEREST INCOME
(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for credit losses.
(2) Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated credit loss allowances and includes loans held for sale and non-performing loans.
(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.OceanFirst Financial Corp.
SELECTED QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)



(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Performance ratios for each period include merger related expenses, branch consolidation expenses, opening credit loss expense, non-recurring professional fees, compensation expense due to the retirement of an executive officer, the reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code. Refer to Other Items – Non-GAAP Reconciliation for impact of these items.
(3) Tangible common stockholders’ equity and tangible assets exclude intangible assets relating to goodwill and core deposit intangible. Tangible common stockholders’ equity also excludes preferred equity.
(4) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.OceanFirst Financial Corp.
OTHER ITEMS
 (dollars in thousands, except per share amounts)NON-GAAP RECONCILIATION

COMPUTATION OF TOTAL TANGIBLE EQUITY TO TOTAL TANGIBLE ASSETSCOMPUTATION OF TOTAL TANGIBLE COMMON EQUITY TO TOTAL TANGIBLE ASSETS
ACQUISITION DATE – FAIR VALUE BALANCE SHEETThe following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of the total consideration paid (in thousands):The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to recorded carrying values may be required.The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of the total consideration paid (in thousands):The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to recorded carrying values may be required.