Kevin Dobbs isa senior reporter and columnist. The views and opinions expressed in this piecerepresent those of the author or his sources and not necessarily those of S&PGlobal Market Intelligence.
OceanFirst FinancialCorp.'splanned acquisition ofOcean Shore Holding Co.in southern New Jersey would push the lender over the $5 billion asset mark andput it at a size where it can most effectively manage regulatory costs and maximizeefficiency, the company's chief executive said.
"Itputs us in the sweet spot for community banks," Toms River, N.J.-based OceanFirst President and CEO Christopher Maher said in an interview shortly after announcing thenearly $146 million deal to acquire Ocean City, N.J.-based Ocean Shore Holdingon July 13.
At around $5 billion, Maher said, banking companies have largeenough asset bases over which to spread out compliance costs that have soared inrecent years, as well as technology, insurance and various other expenses that haveweighed heavily on the bottom lines of smaller banks. At the same time, OceanFirstwill stay well below the $10 billion asset threshold, a point at which lenders facegreater regulatory scrutiny and new compliance hurdles.
Investors have bought into this thinking. The three-year stock-priceperformance of the SNL U.S. Bank Index of institutions between $5 billion and $10billion in assets is up nearly 40%. That is more than 4x better than the performanceof the broader SNL U.S. Bank Index.
OceanFirst in May closed a more than $200 million of Cape Bancorp Inc., also in southern New Jersey. That deal,coupled with the Ocean Shore purchase, slated to close late this year or early in2017, would push OceanFirst to about $5.3 billionin assets, or roughly double the level at which it started in 2016.
After closing the Ocean Shore deal, OceanFirst estimatedin a deal presentationthat it would have an efficiency ratio of about 53%, a notable improvement fromthe 63% level at which the company operated last year.
Excluding deal charges, OceanFirst estimated the Ocean Shore acquisition wouldbe 1.5% accretive to 2017 earnings and 5.4% accretive to 2018 earnings, when costsavings would be fully phased in. The buyer projected savings of 53% of Ocean Shore's noninterest expenses. Maher said such savings would come in part from theclosing of between five and seven overlapping branches, as well as via trims intechnology, compliance and other departments where there are redundancies.
The purchase price is 132.4% of Ocean Shore's tangible book value. Maher labeled that a "rational" price,noting that it compares favorably with recent deals in the region. SNL valuations for bank and thrift targets in the Mid-Atlanticregion between July 13, 2015, and the same date this year averaged 140.89% of tangible book.
OceanFirstestimated that the Ocean Shore deal woulddilute its tangible book value per common share by 3.1% at closing. It projectedan earnback period of roughly 3.7 years using the "crossover" method.Investors have tended to favor earnbacks of shorter than four years.
Maher also emphasized that Ocean Shore has solid credit qualityand a low-cost deposit base. Such deposits could fuel future gains in profitabilityif interest rates rise. Lenders that can depend upon inexpensive deposits to fundloans often can boost rates higher on the loans they make than on the deposits theyhold, expanding the margin between the two and pushing the gains to the bottom line.
"Ithink that is the real key opportunity here," FIG Partners analyst David Bishopsaid in an interview.
Bishopnoted that with the Ocean Shore deal, OceanFirstis doubling down on southern New Jersey, which it entered with the Cape Bancorpacquisition. Some investors, he said, might have concerns about that play, giventhat the region is home to the challenged Atlantic City, a gambling and tourismmarket that has not recovered in full from the last recession.
But Bishopalso pointed out that both OceanFirst and OceanShore have limited exposure to Atlantic City. In the deal presentation, OceanFirst said only 1.5% of the pro forma company's lending book would consist of direct loans to AtlanticCity. Indirect loans, such as those to casino workers, would make up just 0.5%.
Maher said in the interview that southern New Jersey overall isheavily populated and ripe with bank customers, and geographically, it meshes seamlesslywith OceanFirst'scentral New Jersey operation. He said that, in central and southern New Jersey,there are about 3.5 million people and some $90 billion in deposits, putting thearea on par with entire state of Connecticut.
"Wethink there is a lot more to southern New Jersey than Atlantic City," Maher added during a call with analysts to discuss thedeal.