OceanFirst Financial Corp. 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. The unaudited filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods and December 31, 2021 balances.
Financial Performance and Condition
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $96.0 million | $77.1 million | $271.0 million | $224.8 million |
| Credit loss expense/(benefit) | $1.0 million | $(3.2) million | $4.1 million | $(10.3) million |
| Other income | $15.2 million | $9.9 million | $31.5 million | $42.5 million |
| Operating expenses | $59.0 million | $58.7 million | $175.2 million | $162.0 million |
| Net income available to common stockholders | $37.6 million | $23.2 million | $90.3 million | $84.4 million |
| Diluted EPS | $0.64 | $0.39 | $1.53 | $1.41 |
- Total assets were $12.68 billion at September 30, 2022, up from $11.74 billion at December 31, 2021.
- Net loans were $9.67 billion, compared with $8.58 billion at year-end 2021. Quarterly loan growth was $293.9 million, supported by $543.8 million of originations.
- Deposits were $9.96 billion, up $226.7 million from year-end 2021. Time deposits increased to $1.40 billion, including $828.7 million of brokered deposits, from $775.0 million and $25.0 million, respectively.
- The loan-to-deposit ratio increased to 97.6% from 88.6% at December 31, 2021.
- Net interest margin increased to 3.36% from 2.93% in the prior-year quarter; the net interest rate spread increased to 3.19% from 2.80%.
- Return on average assets was 1.19% and return on average stockholders’ equity was 9.68% for the quarter. The efficiency ratio was 53.10%.
- Stockholders’ equity was $1.54 billion, or 12.14% of total assets. Accumulated other comprehensive loss increased to $38.5 million, primarily from unrealized losses on debt securities caused by higher interest rates.
- The allowance for loan credit losses was $53.5 million, or 0.55% of total loans. Non-performing loans were $21.5 million, or 0.22% of loans, versus $25.5 million and 0.30% at year-end 2021.
- The Bank and Company exceeded applicable regulatory capital requirements and the Bank remained “well-capitalized.” The Bank’s total risk-based capital ratio was 11.55%, and its common equity Tier 1 ratio was 10.98%.
Cash Flow, Debt and Liquidity
- For the nine months ended September 30, 2022, operating activities provided $210.0 million of cash, investing activities used $909.2 million, and financing activities provided $645.1 million. Cash and due from banks plus restricted cash decreased by $54.1 million to $170.7 million.
- Total borrowed funds were $805.4 million at September 30, 2022, compared with $347.9 million at December 31, 2021. FHLB advances totaled $514.2 million, including $500.0 million of short-term advances and $14.2 million of overnight borrowings.
- The Company held $38.2 million of cash at the holding-company level and received $50.0 million of dividends from the Bank during the first nine months.
- Outstanding commitments to originate loans were $439.5 million, and undrawn lines of credit totaled $1.72 billion. Debt obligations totaled $805.4 million, including $1.8 million of finance lease obligations.
- Management stated that the Company and Bank maintained adequate liquidity under tested stress scenarios and expected sufficient funds to meet current commitments in the normal course.
- The Company repurchased 373,223 shares for $7.4 million during the first nine months and had 2,934,438 shares available under its repurchase authorization at September 30, 2022. No shares were repurchased in the third quarter.
Material Changes Versus Comparable Periods
- Quarterly net income available to common stockholders increased 62.4% to $37.6 million, while diluted EPS increased to $0.64 from $0.39. Nine-month net income increased 7.0% to $90.3 million.
- Net interest income benefited from loan growth, redeployment of excess cash into loans and securities, and higher asset yields in the rising-rate environment. The benefit was partly offset by higher funding costs and lower prepayment fees.
- Credit loss expense shifted from a $3.2 million benefit in Q3 2021 to $1.0 million of expense in Q3 2022, reflecting loan growth, slower prepayments and more uncertain macroeconomic forecasts related to rates, inflation and global economic conditions.
- Other income increased in the quarter because of a $3.4 million equity-investment gain and $3.3 million of title-related fees from Trident. For the nine months, other income declined because of a $7.5 million equity-investment loss compared with an $8.4 million gain in 2021, as well as lower loan-sale and bankcard revenue.
- Effective July 1, 2022, the Durbin amendment reduced bankcard services revenue by approximately $1.7 million in the quarter and contributed to a $2.3 million nine-month decline in that revenue category.
- Operating expenses rose to $175.2 million for the first nine months, driven by the Trident acquisition, commercial-banking expansion, employee compensation, core-system conversion costs, and higher regulatory assessments.
- Loans increased substantially, while debt securities declined by $209.4 million from year-end, primarily because of maturities, repayments and the effects of higher interest rates.
Outlook, Commentary, Risks and Unusual Items
- The filing provides no formal earnings or financial guidance. Management described the Company as strategically positioned to absorb lower debit-card interchange income while continuing to grow earnings.
- On April 1, 2022, the Company acquired a 60% controlling interest in Trident Abstract Title Agency, LLC for $7.1 million, recording $5.8 million of goodwill. Trident contributed $7.8 million of title-related fees and service charges during the first nine months.
- On November 9, 2022, after the quarter-end, OceanFirst and Partners Bancorp mutually terminated their proposed merger. Each party will bear its own expenses, neither party will pay a termination fee, and the parties mutually released related claims.
- Reported results included merger-related expenses, branch-consolidation benefits or expenses, and volatile equity-investment gains and losses. These items increased Q3 2022 net income by $2.6 million after tax but reduced nine-month 2022 net income by $8.1 million after tax.
- Debt securities had $175.5 million of unrealized losses at September 30, 2022, primarily reflecting interest-rate and credit-spread movements. Management concluded that the securities were not credit-impaired and reported no defaults or deferred interest payments.
- Key risks include higher interest rates, inflation, economic and real-estate conditions, deposit outflows and funding costs, credit deterioration, market volatility, regulatory changes, cybersecurity and operational failures, and the effects of terminating the Partners merger.
- The Company’s positive one-year interest-rate sensitivity gap was 7.90%. Management cautioned that gap, economic-value-of-equity and net-interest-income models depend on assumptions and may differ materially from actual results.
- The Company adopted ASU 2019-12 without a material effect and planned to adopt ASU 2022-02 concerning troubled debt restructurings and vintage disclosures on January 1, 2023; the impact was still under evaluation.
Investor Verification Items
- Verify whether loan growth and the 97.6% loan-to-deposit ratio remain sustainable as deposits reprice and brokered funding increases.
- Assess the sensitivity of net interest margin, funding costs and liquidity to further Federal Reserve rate increases or deposit migration.
- Monitor unrealized securities losses and their potential effect on tangible capital, liquidity and securities-sale decisions.
- Review credit trends in the commercial real estate portfolio, including investor commercial real estate exposure, special-mention and substandard assets, and the allowance methodology.
- Separate recurring earnings from equity-investment gains and losses, merger and branch-consolidation items, and Trident-related contributions.
- Confirm the financial and strategic consequences of the terminated Partners Bancorp merger and any remaining transaction-related expenses.
- Evaluate the effect of the Durbin amendment and other regulatory changes on non-interest income.
- Reconcile future liquidity needs against $439.5 million of loan-origination commitments, $1.72 billion of undrawn credit lines and $866.3 million of time deposits maturing within one year.