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 across New Jersey and selected metropolitan markets in the Northeast and Mid-Atlantic. This unaudited Form 10-Q covers the quarter ended March 31, 2022, with comparisons to March 31, 2021 and December 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Total assets | $12.16 billion | $11.58 billion at March 31, 2021 |
| Net loans | $9.07 billion | $7.82 billion at March 31, 2021 |
| Deposits | $10.06 billion | $9.50 billion at March 31, 2021 |
| Net interest income | $84.2 million | $73.6 million |
| Credit loss expense | $1.9 million | $0.6 million benefit |
| Other income | $8.9 million | $20.8 million |
| Operating expenses | $57.5 million | $51.7 million |
| Net income | $25.8 million | $32.7 million |
| Net income available to common stockholders | $24.8 million | $31.7 million |
| Diluted EPS | $0.42 | $0.53 |
| Net interest margin | 3.18% | 2.93% |
| Return on average assets | 0.84% | 1.12% |
| Return on average equity | 6.57% | 8.59% |
Balance Sheet, Liquidity and Capital
- Loans increased $486.1 million during the quarter to $9.11 billion gross, driven by record originations of $1.02 billion and $161.7 million of purchased residential loan pools. The committed loan pipeline was $515.4 million.
- Deposits increased $323.4 million to $10.06 billion. The cost of deposits declined to 0.16% from 0.20% in the prior linked quarter, while the loans-to-deposits ratio rose to 90.60% from 88.60%.
- FHLB advances were $75.0 million at March 31, 2022, compared with none at December 31, 2021. Total borrowed funds were $387.2 million.
- The Company redeemed $35.0 million of subordinated debt during the quarter. Contractual debt obligations totaled $387.2 million, including $1.9 million of finance lease obligations.
- Holding-company cash was $45.1 million. Cash and due from banks, including restricted cash, totaled $211.2 million at quarter-end.
- The Company and Bank satisfied applicable regulatory capital requirements and were considered well-capitalized. The Bank’s common equity Tier 1 ratio was 11.15%, and its total capital ratio was 11.73%.
- Stockholders’ equity was $1.52 billion, or 12.49% of total assets. Accumulated other comprehensive loss increased by $12.3 million, primarily from unrealized losses on available-for-sale debt securities as interest rates rose.
Cash Flow and Shareholder Returns
- Operating activities provided $57.6 million of cash, compared with $36.9 million in the prior-year quarter.
- Investing activities used $424.7 million, primarily for net loan growth, the residential loan-pool purchase, and securities purchases.
- Financing activities provided $353.4 million, primarily from deposit growth and FHLB advances.
- Common dividends paid were $10.0 million, or $0.17 per share; preferred dividends were $1.0 million. The Board declared the same quarterly common dividend and a preferred dividend of $0.4375 per depositary share.
- The Company repurchased 100,444 common shares for $2.1 million, with 3.21 million shares remaining available under repurchase authorizations.
Material Changes Versus Prior Comparable Period
- Net interest income increased 14.4% as average loans and securities grew, excess liquidity was redeployed into higher-yielding assets, and deposit costs declined. Net interest margin expanded 25 basis points to 3.18%.
- Net income available to common stockholders declined 21.9% to $24.8 million. Results were affected by a $2.8 million net loss on equity investments, compared with an $8.3 million net gain in the prior-year quarter.
- Other income declined $12.0 million, primarily because of the unfavorable change in equity investment results, lower loan-sale gains, and the absence of prior-year PPP referral fees. Commercial loan swap income and bank-owned life insurance income increased.
- Operating expenses increased $5.8 million. Compensation rose due to commercial banking expansion and hiring, while data-processing costs increased in connection with migration to a new core banking system.
- Credit loss expense shifted from a $0.6 million benefit to $1.9 million of expense, reflecting slower residential-loan prepayment assumptions, loan growth, and uncertainty related to the Russia-Ukraine war, partly offset by improved criticized and classified assets and employment trends.
- Non-performing loans were $26.9 million, or 0.30% of total loans, versus $42.8 million, or 0.54%, a year earlier. The allowance for loan credit losses was $50.6 million, or 0.56% of total loans.
- The Company consolidated 10 branches during the quarter, bringing total branch consolidations since 2013 to 77.
Guidance, Outlook, Risks and Unusual Items
- Management reported strong loan demand and a $515.4 million committed pipeline but did not provide formal full-year earnings or revenue guidance.
- Management expects sufficient funds to meet current commitments in the normal course and reported significant liquidity under its stress scenarios. However, deposit flows, loan prepayments, securities sales, and borrowing access remain sensitive to interest rates, economic conditions, and competition.
- Outstanding commitments to originate loans were $515.4 million, and undrawn lines of credit totaled $1.63 billion, including $1.27 billion for commercial and commercial construction borrowers.
- Key risks include rising interest rates, inflation, economic deterioration, real estate values, unemployment, credit losses, deposit competition, COVID-19 effects, cybersecurity, regulatory changes, geopolitical events including the Russia-Ukraine war, and the ability to integrate acquired operations.
- The Company’s one-year cumulative interest sensitivity gap was positive 10.82%. The filing cautions that gap and interest-rate sensitivity models depend on assumptions and may not precisely predict actual results.
- Subsequent to quarter-end, on April 1, 2022, the Company acquired a 60% interest in Trident Abstract Title Agency, LLC, for $7.1 million, with estimated goodwill of $5.7 million.
- The Company adopted ASU 2019-12 without a material impact. It is evaluating the potential effects of ASU 2022-01 and ASU 2022-02, both generally effective for fiscal years beginning after December 15, 2022.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings beyond ordinary-course matters, and effective disclosure controls as of March 31, 2022.
Important Facts for Investors to Verify
- Whether rapid loan growth and the increased 90.60% loans-to-deposits ratio remain sustainable without materially increasing funding costs or liquidity risk.
- Whether the improved net interest margin persists as market rates, deposit pricing, loan yields, and securities valuations change.
- The effect of equity-market volatility, unrealized securities losses, and future investment gains or losses on earnings and tangible capital.
- Trends in credit loss provisions, non-performing loans, criticized and classified assets, commercial real estate exposure, and residential prepayment assumptions.
- The financial contribution, integration requirements, and goodwill implications of the Trident acquisition.
- Whether branch consolidation and core-system investments produce the expected cost savings after merger-related and restructuring expenses.
- The Company’s continuing ability to receive dividends from the Bank and maintain common and preferred dividends under applicable regulatory capital constraints.