OceanFirst Financial Corp. 2022 Form 10-K Summary
Business context and reporting period
OceanFirst Financial Corp. is the bank holding company for OceanFirst Bank N.A., a regional community bank serving New Jersey and the metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The Bank primarily originates commercial real estate, commercial and industrial, residential real estate, and consumer loans, funded principally by deposits and borrowings. The filing covers the fiscal year ended December 31, 2022; comparisons are primarily with the year ended December 31, 2021.
At December 31, 2022, the Company had 37 additional branch offices and deposit-production facilities, commercial loan offices in five markets, 958 Bank employees, total assets of $13.10 billion, and stockholders’ equity of $1.59 billion.
Key financial metrics
| Metric | 2022 | 2021 | Change or observation |
|---|---|---|---|
| Total assets | $13.10 billion | $11.74 billion | Increased $1.36 billion |
| Total loans | $9.92 billion | $8.62 billion | Increased $1.30 billion |
| Deposits | $9.68 billion | $9.73 billion | Decreased $57.6 million |
| Net interest income | $377.5 million | $305.3 million | Increased 23.6% |
| Net interest margin | 3.37% | 2.93% | Expanded 44 basis points |
| Net income available to common stockholders | $142.6 million | $106.1 million | Increased 34.4% |
| Diluted earnings per share | $2.42 | $1.78 | Increased $0.64 |
| Return on average assets | 1.15% | 0.91% | Improved |
| Return on average equity | 9.24% | 7.02% | Improved |
| Efficiency ratio | 53.8% | 63.5% | Improved |
| Allowance for loan credit losses | $56.8 million | $48.9 million | 0.57% of loans in both periods |
| Non-performing loans | $23.3 million | $25.5 million | Decreased $2.2 million |
| Common dividends per share | $0.74 | $0.68 | Increased |
Interest income increased to $431.2 million from $342.1 million, driven by loan growth, higher asset yields, and the rising-rate environment. Interest expense increased to $53.7 million from $36.8 million as deposit and borrowing costs rose. Credit loss expense was $7.8 million, compared with a $11.8 million credit loss benefit in 2021. Other income increased to $59.1 million from $51.9 million, including a $17.5 million unrealized gain on the Auxilior investment and $10.4 million of revenue contributed by Trident.
Cash flow from operating activities was $250.5 million. Investing activities used $1.32 billion, principally for loan growth, residential loan pool purchases, and securities purchases. Financing activities provided $1.01 billion, primarily from $1.21 billion of net FHLB advances, partly offset by deposit outflows, dividends, debt repayment, and share repurchases.
Balance sheet, debt, liquidity, and capital
- Commercial real estate, multifamily, and land loans totaled $6.17 billion, or 62.2% of total loans. Commercial loans overall represented 68.5% of total loans.
- Loans-to-deposits increased to 102.5% from 88.6%, reflecting loan growth and deposit runoff.
- FHLB advances were $1.21 billion at year-end, compared with none at December 31, 2021. Total borrowed funds were $1.48 billion.
- Total uninsured deposits were $6.28 billion, compared with $5.14 billion in 2021. Brokered time deposits increased to $873.4 million from $25.0 million.
- The Company held $43.5 million of cash at the parent level and reported access to lines of credit, FHLB funding, and the Federal Reserve discount window. Management stated that liquidity remained adequate under stress scenarios.
- The Company’s total capital ratio was 12.98%, common equity Tier 1 ratio was 9.93%, and Tier 1 leverage ratio was 9.43%. The Bank’s corresponding ratios were 11.62%, 11.02%, and 9.20%. Both entities exceeded applicable requirements and were well-capitalized.
- Accumulated other comprehensive loss increased to $36.0 million, primarily due to unrealized losses on available-for-sale securities caused by higher interest rates. The Company recorded a $33.4 million after-tax other comprehensive loss related to debt securities.
Material changes versus the prior comparable period
- The Company completed the acquisition of a 60% controlling interest in Trident Abstract Title Agency on April 1, 2022, for $7.1 million, recording $5.8 million of goodwill. Trident added title-related fee income but also increased operating expenses.
- The Bank consolidated 10 branches during 2022, following 13 consolidations in 2021, as part of its branch rationalization and digital-service strategy.
- The Company repurchased 373,223 common shares for $7.4 million in 2022, compared with 1.71 million shares for $36.1 million in 2021. Approximately 2.93 million shares remained authorized for repurchase at year-end.
- Commercial and residential loan growth was strong, while non-interest-bearing and interest-bearing checking balances declined. Time deposits increased substantially, including brokered deposits.
- The Company redeemed $35.0 million of subordinated debt in March 2022.
- The remaining other real estate owned was sold during 2022, leaving no OREO at year-end. Classified assets also declined, with Substandard assets of $50.8 million and Special Mention assets of $48.2 million.
- The proposed merger with Partners Bancorp was terminated; 2022 merger-related expenses included costs associated with that terminated transaction.
Outlook, commentary, risks, and unusual items
Management’s strategy remains focused on growing commercial loans, expanding core deposits, increasing fee-based income, investing in digital capabilities, and pursuing opportunistic acquisitions. The filing does not provide formal numerical earnings or revenue guidance.
- Management identified persistent inflation, higher interest rates, uncertain economic forecasts, and global economic headwinds as factors affecting the 2022 credit loss provision. A hypothetical downside scenario would have increased the ACL by approximately $2.3 million, while a severely adverse scenario would have increased it by approximately $11.3 million.
- Commercial real estate and multifamily exposure is a principal risk. These loans represented approximately 438% of Bank capital and may be affected by property values, occupancy, borrower cash flow, refinancing conditions, and regulatory scrutiny.
- Rising rates may increase funding costs, reduce securities fair values, compress margins, weaken borrower repayment capacity, and increase deposit competition. The filing’s interest-rate model projected 2022 net interest income of $440.9 million under a 200-basis-point shock and $428.5 million under a 100-basis-point decline, but management cautioned that actual results may differ materially.
- The Company had approximately $1.2 billion of LIBOR-referencing loans, approximately $250 million of LIBOR-referencing securities, and approximately $80 million of LIBOR-referencing borrowings. Management expects substantially all exposure to transition to alternative rates, including SOFR, but some contracts may remain exposed after cessation.
- Off-balance-sheet commitments included $1.78 billion of undrawn lines of credit, $166.1 million of commitments to originate loans, and $7.5 million of unfunded investment commitments.
- The Company faces heightened regulatory requirements because assets exceed $10 billion, including CFPB oversight, higher FDIC assessment exposure, and reduced debit-card interchange revenue. Interchange revenue declined $4.4 million to $8.3 million in 2022.
- Other significant risks include deposit attrition, liquidity and funding costs, cyber and third-party system risks, climate and coastal-weather exposure, foreclosure delays in New Jersey, acquisition integration, goodwill impairment, regulatory capital limitations, and the discretionary, non-cumulative nature of Series A preferred dividends.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor identified the allowance for loan credit losses as the critical audit matter because of its complexity and reliance on economic forecasts and qualitative assumptions.
Investor verification points
- Verify the sustainability of loan growth and the 102.5% loans-to-deposits ratio, including dependence on FHLB advances and brokered time deposits.
- Review commercial real estate and multifamily concentration, criticized and classified assets, non-performing loans, collateral values, and ACL sensitivity to recessionary scenarios.
- Separate recurring earnings from the $17.5 million unrealized Auxilior gain, Trident-related results, branch consolidation costs, and merger-related expenses.
- Assess the effect of further interest-rate changes on net interest margin, deposit pricing, securities accumulated other comprehensive loss, and borrower credit quality.
- Review the timing and effectiveness of LIBOR-to-SOFR and other alternative-rate conversions, including the approximately $1.2 billion of LIBOR-linked loans.
- Confirm ongoing access to liquidity sources, upcoming maturities of approximately $1.04 billion of time deposits in 2023, and the maturity or refinancing of FHLB advances.
- Evaluate the capacity to continue common and preferred dividends and share repurchases under regulatory capital and parent-company liquidity constraints.