Ink barely dry on two deals, OceanFirst chief scouting another

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OceanFirst Financial in Toms River, N.J., on the heels of two bank acquisitions, could pursue more deals as its nears a key regulatory threshold.

The $8 billion-asset company recently agreed to buy Two River Bancorp in Tinton Falls, N.J., and Country Bank Holding in New York. Those deals will push OceanFirst to within a hair of $10 billion in assets, where it will face caps on interchange fees.

While idling below $11 billion in assets "is not a great place to be," said Christopher Maher, OceanFirst’s chairman and CEO, he says he is under no pressure to line up the next deal, noting that the company has until early 2021 to tack on "an acquisition of size."

Lawmakers also removed the stress-testing requirement for banks that hit $10 billion in assets, making the threshold less cumbersome for OceanFirst.

Still, OceanFirst has been scouting targets in Philadelphia, and Maher said M&A talks have intensified across the industry in the last six months.

"I think folks are feeling the multiyear pressure of the yield curve — and they're concerned about where credit conditions might go in the future," Maher added.

OceanFirst has been relying heavily on loan generation in New York and Philadelphia to offset margin pressure tied to rising deposit pricing. Despite those efforts, the company's net interest margin compressed by 7 basis points in the second quarter from a year earlier, to 3.66%.

OceanFirst's next deal may not come until late 2020, said Russell Gunther, an analyst at D.A. Davidson. Potential targets should have at least $2 billion in assets and could be based around Philadelphia.

"That would make sense in terms of diversifying their taxable income given how inhospitable New Jersey is," he said. (New Jersey has one of the nation's highest tax rates.)

Gunther wouldn't rule out a merger of equals, perhaps with the $9.9 billion-asset Provident Financial Services in Iselin, N.J., noting that the companies will have similar asset sizes when OceanFirst buys Two River and Country Bank.

Chris Martin, Provident's president and CEO, declined to discuss his company's M&A plans or OceanFirst's acquisition model.

"We're generating positive returns for our stockholders and value to our customers and do not see any change to our strategic direction," Martin said.

By acquiring Country Bank, OceanFirst is solidifying a footprint that stretches from New York to Philadelphia, Joe Gladue, an analyst at Alden Securities, wrote in an Aug. 12 note to clients.

"Although competition is fierce in both markets, completion of this strategy will offer OceanFirst significant opportunities for growth in attractive markets," Gladue added. "It will also make the franchise attractive for larger banks looking to grow in one or both of the anchor markets."

OceanFirst, which has a loan production office in New York, is following a path to the Big Apple blazed by other New Jersey banks, including ConnectOne Bancorp in Englewood Cliffs and Investors Bancorp in Short Hills. Investors Bancorp recently agreed to buy Gold Coast Bancorp in Islandia, N.Y.

OceanFirst will gain $592 million in loans and five branches around New York when the Country Bank deal closes. Though it probably will not open more branches, OceanFirst could expand in the city with another acquisition, Maher said.

Maher said it was necessary to have a physical presence in New York so it wouldn't appear the bank was "parachuting" into the city. "The more important aspect was to step into long-term, high-quality commercial relationships that we think can help build our brand," he said.

While New York is "hypercompetitive," Maher said, Country Bank has distinguished itself with its prompt responsiveness to clients.

"Probably more than any other market I know, being able to give an answer quickly and clearly — and do what you promised you were going to do — is highly valued in New York," Maher said.

Gunther said he likes Maher's "small ball" M&A strategy, adding that taking on a handful of branches was a smart move because OceanFirst's commercial focus does not require a big branch presence. Rather, the company will initially focus on commercial real estate, eventually adding more commercial-and-industrial loans.

"There's no sexy, niche lending vertical that they anticipate rolling out," Gunther said. "This is very much plain-vanilla blocking and tackling."

Another acquisition could help OceanFirst counter interchange revenue loss resulting from the Durbin amendment, by cutting costs and generating more revenue.

The Durbin amendment would likely cost OceanFirst about $5 million in annual pretax revenue if it crossed the $10 billion mark in assets today, though Maher said banks are already dealing with lower revenue because of a shift in consumer spending patterns.

OceanFirst has also been preparing for more regulatory oversight.

In September 2017 the company hired Grace Vallacchi, a former official with the Office of the Comptroller of the Currency, as its chief risk officer, with the task of building a risk management team. Maher said during OceanFirst's recent earnings call that the company was in good shape, though it may fill one more compliance position.

The bottom line for Maher is that OceanFirst is in a good position even if it is unable to find the right acquisition.

"We're fully prepared to run this company without any M&A," he said during the earnings call. "With the metropolitan areas and the pipelines there, we think we've got a great outlook for organic growth and we're perfectly happy to just grow organically if that's the way things work out."

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