OceanFirst Financial in Red Bank, N.J., was among a handful of banking companies that took aggressive steps to stay ahead of coronavirus-related credit shocks — and CEO Chris Maher is hoping the effort pays off in 2021.
The $11.7 billion-asset OceanFirst recently sold $81 million of loans at a nearly 20% discount in a move that contributed to a large third-quarter loss. Most banks have so far opted to hold onto their loans as they come out of their initial deferral periods.
While the effort spooked investors — OceanFirst’s stock fell by 11% in the week after it reported the loss — Maher, who is also the company’s chairman, said it was the right thing to do to clear the decks so his team could take advantage of opportunities next year. He has made it clear that one possibility is pursuit of a merger of equals.
“No question we were out ahead of the pack,” Maher said of the loan sale and quarterly loss.
“We are absolutely open to anything that will create a path to greater shareholder value,” he added. “Scale and tech matter. We all see it. If we find a like-minded strategic partner, potentially of a similar size, we will explore it and see if we could get it done.”
While OceanFirst’s shares have recovered from the recent shock, Maher must still prove to investors that his aggressive moves were the right ones to gain enough leverage for a potential merger. For that reason, he is one of American Banker’s community bankers to watch in 2021.
To be sure, OceanFirst isn’t the only bank to take aggressive action on credit. Hancock Whitney in New Orleans reported a sizable loss in the second quarter after deciding to sell most of its energy loans.
But it has been Maher’s comments about pursuing an MOE that have drawn more attention to OceanFirst. It shouldn’t be a big surprise, though, since the company had developed a reputation as a serial acquirer before the pandemic. It bought two banks in January.
Maher said community banks must become even more efficient to free up the funds to invest in digital services and cybersecurity so they can compete with bigger lenders — a need that has been highlighted by the ongoing pandemic.
A merger with an institution of roughly the same size would help OceanFirst meet that challenge at a time when relatively weak valuations are precluding midsize banks from making more traditional acquisitions.
Maher’s reasoning is sound since an MOE would let two banks essentially swap shares in a low-premium deal, said Scott Carmelitano, banking and capital markets deals leader at PwC. That factor could lead to more deals of like-sized banks. Doing so would free the new company up to make long-term investments.
Mergers of equals “will play an important role as banks strive for critical mass,” Carmelitano said. “To do digital well, it’s very expensive. From that perspective, scale becomes hugely important.”
For OceanFirst, Maher said he is looking for profitable banks with operations outside its current footprint, which stretches from Philadelphia to New York. A deal is more likely in the second half of the year.
“Our operating assumption is that it will take until around Memorial Day to get enough people vaccinated to end this and bring on a new normal,” Maher said. “We hope to see a brisk pick-up in activity from there — with pent-up demand unleashed and increased opportunities” for organic growth and consolidation.
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