OceanFirst Financial Corp. 2021 Q1 SEC Filing Summary
Business Context and Reporting Period
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A., a regional bank serving business and retail customers in New Jersey and the Philadelphia and New York City metropolitan areas. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparable results for the three months ended March 31, 2020 and financial condition comparisons to December 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net interest income | $73.6 million | $79.6 million | Down $6.0 million |
| Credit loss expense/(benefit) | $(0.6) million | $10.0 million | $10.6 million favorable |
| Other income | $20.8 million | $13.7 million | Up $7.1 million |
| Operating expenses | $51.7 million | $62.8 million | Down $11.1 million |
| Net income | $32.7 million | $16.5 million | Up $16.2 million |
| Net income available to common stockholders | $31.7 million | $16.5 million | Up $15.2 million |
| Diluted EPS | $0.53 | $0.27 | Up $0.26 |
| Net interest margin | 2.93% | 3.52% | Down 59 bps |
| Return on average assets | 1.12% | 0.64% | Up 48 bps |
| Return on average equity | 8.59% | 4.70% | Up 389 bps |
| Operating expenses to average assets | 1.83% | 2.44% | Improved |
- Total assets were $11.58 billion at March 31, 2021, compared with $11.45 billion at December 31, 2020.
- Net loans were $7.82 billion, up $115.7 million from year-end 2020. Record quarterly loan originations were $747.8 million.
- Deposits were $9.50 billion, up $75.2 million from December 31, 2020. The loan-to-deposit ratio was 82.84%.
- Stockholders’ equity was $1.50 billion, representing 12.95% of total assets.
- Cash and due from banks were $1.17 billion at quarter-end. The Company had no FHLB advances outstanding.
- Operating cash flow was $36.9 million; investing activities used $223.2 million, principally for loan growth and debt-security purchases; financing activities provided $57.4 million.
- The allowance for loan credit losses was $60.0 million, or 0.76% of total loans, excluding acquired-loan credit marks.
- Non-performing loans were $34.1 million, or 0.43% of total loans; non-performing assets were $34.2 million, or 0.30% of total assets.
- The Bank remained well-capitalized. Its common equity Tier 1 ratio was 12.09%, Tier 1 risk-based capital ratio was 12.09%, and total risk-based capital ratio was 12.85%.
Material Changes Versus Comparable Periods
- Net income available to common stockholders nearly doubled year over year, primarily because of the credit-loss benefit, lower operating expenses, and higher other income.
- Net interest income declined despite higher average interest-earning assets. The principal drivers were lower market rates, excess liquidity, and low-yielding PPP loans. The yield on average interest-earning assets declined to 3.38% from 4.34%.
- Interest expense decreased to $11.3 million from $18.6 million as the cost of interest-bearing liabilities fell to 0.60% from 1.05%; total deposit cost declined to 0.37% from 0.70%.
- Other income included an $8.3 million net gain on equity investments, primarily from the sale of equity securities purchased with excess liquidity in 2020. Equity investments declined to $50.2 million from $107.1 million at year-end 2020.
- Operating expenses benefited from lower merger-related and branch-consolidation costs, which totaled $1.4 million in Q1 2021 versus $11.1 million in Q1 2020.
- Credit results improved substantially, with a $0.6 million credit-loss benefit versus $10.0 million of expense in the prior-year quarter. Net recoveries were $0.3 million versus $1.2 million of net charge-offs.
- The Company repurchased 500,000 common shares for approximately $10.0 million at an average price of $19.94 per share. Approximately 1.52 million shares remained available under the repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that the nine newly hired commercial bankers are expected to support organic loan growth during the remainder of 2021.
- Four branches were consolidated in April 2021. Management expects the consolidations to help offset operating expenses beginning in the second quarter.
- PPP loans on the balance sheet totaled $109.7 million, with $2.5 million of deferred fees; $60.0 million of PPP loans were originated during the quarter.
- COVID-19 borrower relief programs remained in place. Qualifying deferrals were not treated as troubled debt restructurings or reported as past due during the deferral period under applicable CARES Act guidance.
- COVID-19 remains a material uncertainty. Potential effects include higher delinquencies, problem assets, foreclosures, credit-loss provisions, collateral valuation pressure, weaker demand, cyber risk from remote and online activity, and increased regulatory or FDIC costs.
- Interest-rate risk remains important. The one-year cumulative interest sensitivity gap was positive 22.82% of total interest-earning assets at March 31, 2021, compared with 18.05% at year-end 2020.
- Liquidity was described as significant under stress scenarios. However, the parent company’s ability to continue dividends depends substantially on dividends from the Bank, which may be limited by regulatory requirements.
- Outstanding commitments included $344.3 million of commitments to originate loans and $1.10 billion of undrawn credit lines. These amounts do not necessarily represent future cash requirements because some commitments may expire unused.
- Unusual Q1 2021 items included the $8.3 million equity-investment gain, $0.4 million of merger-related expenses, and $1.0 million of branch-consolidation expenses. Management stated that these items increased net income by approximately $5.2 million after tax.
Important Facts for Investors to Verify
- Whether the improvement in earnings remains after excluding the equity-investment gain and the credit-loss benefit.
- The sustainability of the 2.93% net interest margin amid elevated liquidity, low interest rates, and PPP loan activity.
- Trends in non-performing loans, criticized loans, acquired-loan credit marks, and future credit-loss provisions as COVID-19 relief programs expire.
- The effect of branch consolidations and commercial banker hiring on recurring expenses and organic loan growth.
- The ability of the Bank to distribute capital to the parent company to support dividends, debt obligations, and share repurchases.
- Future deposit pricing, liquidity levels, interest-rate sensitivity, and the potential impact of changing market rates on net interest income and economic value of equity.