OceanFirst Financial Corp. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A., a regional bank serving New Jersey and metropolitan areas of Philadelphia, New York, Baltimore and Boston. Results primarily depend on net interest income from lending, investments, deposits and borrowings, supplemented by fees and other non-interest income. This unaudited filing covers the three months ended March 31, 2023, with comparisons to March 31, 2022 and December 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable Period or Prior Period |
|---|---|---|
| Total assets | $13.56 billion | $13.10 billion at December 31, 2022; $12.16 billion at March 31, 2022 |
| Net loans, after allowance | $9.99 billion | $9.87 billion at December 31, 2022; $9.07 billion at March 31, 2022 |
| Deposits | $9.99 billion | $9.68 billion at December 31, 2022; $10.06 billion at March 31, 2022 |
| Net interest income | $98.8 million | $84.2 million in Q1 2022; $106.5 million in Q4 2022 |
| Provision for credit losses | $3.0 million | $1.9 million in Q1 2022 |
| Other income | $2.1 million | $8.9 million in Q1 2022 |
| Operating expenses | $61.3 million | $57.5 million in Q1 2022 |
| Net income available to common stockholders | $26.9 million | $24.8 million in Q1 2022; $52.3 million in Q4 2022 |
| Diluted earnings per share | $0.46 | $0.42 in Q1 2022; $0.89 in Q4 2022 |
| Net interest margin | 3.34% | 3.18% in Q1 2022; 3.64% in Q4 2022 |
| Return on average assets | 0.82% | 0.84% in Q1 2022; 1.62% in Q4 2022 |
| Return on average equity | 6.77% | 6.57% in Q1 2022; 13.25% in Q4 2022 |
| Stockholders’ equity | $1.61 billion, or 11.88% of assets | $1.59 billion, or 12.10%, at December 31, 2022 |
Cash Flow, Liquidity, Debt and Capital
- Operating activities generated $24.4 million of cash, compared with $57.6 million in Q1 2022.
- Investing activities used $146.6 million, primarily reflecting $120.5 million of net loan growth and purchases of debt securities.
- Financing activities provided $450.5 million, including a $318.0 million increase in deposits and $135.4 million of net FHLB advances.
- Cash and due from banks increased by $328.2 million to $496.2 million. Management reported $3.6 billion of total available liquidity and funding capacity from multiple sources.
- The loans-to-deposits ratio was 100.5%, down from 102.5% at December 31, 2022.
- Total borrowed funds were $1.61 billion, including $1.35 billion of FHLB advances. The Company had no overnight FHLB borrowings and no borrowings from the Federal Reserve discount window or Bank Term Funding Program at March 31, 2023.
- Estimated adjusted uninsured deposits were $1.9 billion, or 19% of total deposits. Management stated that liquidity and funding capacity represented 192% of those deposits.
- The Company and Bank satisfied applicable regulatory capital requirements and were well-capitalized under prompt corrective action regulations. The Bank’s common equity Tier 1 ratio was 11.01% and total capital ratio was 11.63%.
Material Changes Versus Prior Comparable Period
- Net interest income increased 17% year over year to $98.8 million. Interest income benefited from loan growth and higher asset yields, while interest expense increased sharply as deposit and borrowing costs rose.
- Average interest-earning assets increased to $12.01 billion from $10.73 billion, and the yield increased to 4.68% from 3.43%. The cost of interest-bearing liabilities increased to 1.76% from 0.35%.
- Average loans increased by approximately $1.13 billion, primarily from commercial loan growth. Total loans at quarter-end increased 1.2% from December 31, 2022.
- Other income declined to $2.1 million from $8.9 million, primarily because of losses on equity investments and sales of investments, lower commercial loan swap income and lower bankcard services revenue following the Durbin amendment. Title-related fees from the Trident acquisition partly offset the decline.
- Operating expenses increased 6.6% to $61.3 million. Increases included Trident-related costs, compensation and benefits, and professional fees related to profitability and efficiency initiatives. Merger-related and branch-consolidation costs were substantially lower than in Q1 2022.
- Net income available to common stockholders increased 8.6% year over year, despite $5.8 million of after-tax expense from merger-related and branch-consolidation items, equity investment losses and investment-sale losses.
- Non-performing loans declined to $22.4 million, or 0.22% of total loans, from $26.9 million, or 0.30%, at March 31, 2022. The allowance for loan credit losses increased to $60.2 million, or 0.60% of total loans, from $50.6 million, or 0.56%.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No quantitative earnings or financial guidance was provided. Management stated that first-quarter results are not necessarily indicative of full-year 2023 results.
- Following recent bank failures, management increased on-balance-sheet liquidity, expanded and tested contingency funding sources, pledged assets to the Federal Reserve discount window and BTFP, refreshed liquidity and capital stress tests, and reviewed its securities portfolio.
- The Company sold positions in two financial institutions considered adversely affected or higher risk. The transactions produced a $4.0 million after-tax loss, comprising losses on equity investments and investment sales. Management concluded that no further impairment existed in the remaining securities portfolio.
- The securities portfolio had $139.3 million of aggregate unrealized losses at March 31, 2023. Management stated that the securities were not impaired because issuers continued to make contractual payments and the losses primarily reflected market interest-rate and credit conditions rather than deterioration in credit quality.
- Commercial real estate investor exposure is a key credit risk. Special mention assets declined, but substandard assets increased to $86.8 million from $50.8 million at December 31, 2022, primarily due to migration and downgrades of certain commercial real estate investor loans.
- The Bank received a “Needs to Improve” Community Reinvestment Act rating related to a Fair Housing Act violation. The rating restricts certain mergers, acquisitions and branch expansion and removes expedited processing for certain applications until a subsequent OCC examination produces a higher rating. The next examination is expected in 2024.
- Key forward-looking risks include deposit outflows, uninsured-deposit concentrations, liquidity access, higher funding costs, interest-rate volatility, unrealized securities losses, commercial real estate performance, economic recession, regulatory changes, competition, cybersecurity and integration of acquired operations.
- The Board declared a $0.20 per share common dividend and a $0.4375 per depositary share preferred dividend after quarter-end. No common shares were repurchased during the quarter.
Most Important Facts for Investors to Verify
- Whether deposit stability continues and whether brokered and retail time deposits remain elevated as funding costs change.
- Whether the 3.34% net interest margin can be sustained as deposit and wholesale funding costs continue to reprice.
- Trends in commercial real estate investor loans, substandard assets, non-performing loans and the allowance for credit losses.
- The liquidity impact of the 100.5% loans-to-deposits ratio, $1.35 billion of FHLB advances and $1.9 billion of estimated adjusted uninsured deposits.
- Potential capital effects if unrealized securities losses are realized or if liquidity needs require securities sales.
- Progress toward remediation of the CRA “Needs to Improve” rating and the effect on expansionary activities.
- The recurring versus nonrecurring nature of the $5.8 million after-tax unusual-item impact and the benefits of profitability and efficiency initiatives.