OceanFirst Financial Corp. — Q3 2021 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 business and retail customers primarily in New Jersey and metropolitan areas including Philadelphia, New York, Baltimore, Washington, D.C., and Boston. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 financial condition data.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $77.1 million | $76.8 million | $224.8 million | $235.1 million |
| Credit loss expense/(benefit) | $(3.2) million | $35.7 million | $(10.3) million | $55.3 million |
| Other income | $9.9 million | $8.2 million | $42.5 million | $33.3 million |
| Operating expenses | $58.7 million | $56.8 million | $162.0 million | $175.5 million |
| Net income | $24.2 million | $(4.9) million | $87.4 million | $30.2 million |
| Net income available to common stockholders | $23.2 million | $(6.0) million | $84.4 million | $29.2 million |
| Diluted EPS | $0.39 | $(0.10) | $1.41 | $0.49 |
| Net interest margin | 2.93% | 2.97% | 2.91% | 3.23% |
| Return on average assets | 0.78% | (0.21)% | Not clearly provided for the nine-month period | Not clearly provided for the nine-month period |
At September 30, 2021, total assets were $11.83 billion, net loans were $8.14 billion, deposits were $9.77 billion, and stockholders’ equity was $1.51 billion. The loans-to-deposits ratio was 83.71%, and equity represented 12.79% of total assets.
Net cash provided by operating activities was $119.1 million for the first nine months of 2021, compared with $127.5 million in the prior-year period. Investing activities used $726.5 million, principally for loan growth, a $219.7 million residential loan pool purchase, securities purchases, and premises and equipment. Financing activities provided $296.4 million, primarily from deposit growth. Cash and due from banks ended at $981.1 million, or $1.01 billion including restricted cash.
Reported borrowings included $228.9 million of other borrowings and $143.3 million of securities sold under agreements to repurchase. The Bank had no outstanding overnight or term FHLB advances at September 30, 2021. The Bank and Company exceeded applicable regulatory capital requirements; the Bank's total capital ratio was 12.83% and its common equity Tier 1 ratio was 12.19%.
Material changes versus comparable periods
- Third-quarter net income available to common stockholders improved to $23.2 million from a $6.0 million loss, while nine-month earnings increased to $84.4 million from $29.2 million.
- The improvement primarily reflected a $38.9 million year-over-year swing in credit loss results, from $35.7 million of expense to a $3.2 million benefit in Q3, and a $65.6 million swing for the nine-month period.
- Net interest income increased slightly in Q3 but declined for the nine-month period. The nine-month net interest margin fell to 2.91% from 3.23%, reflecting excess liquidity and the lower-rate environment.
- Interest expense declined materially as the cost of average interest-bearing liabilities fell to 0.44% in Q3 from 0.83%; total deposit cost fell to 0.22% from 0.49%.
- Loans increased $425.7 million from December 31, 2020, excluding PPP loans, with Q3 loan growth of $361.0 million and a committed loan pipeline of $651.4 million. PPP loans declined to $52.5 million from $95.4 million at year-end 2020.
- Deposits increased $346.5 million from year-end, driven primarily by an $863.8 million increase in deposits excluding time deposits; time deposits declined by $517.3 million.
- Asset quality improved. Non-performing loans declined to $23.3 million from $36.4 million at year-end, non-performing assets declined to $23.5 million from $36.5 million, and non-performing assets were 0.20% of total assets.
- The allowance for loan credit losses declined to $50.2 million, or 0.61% of total loans, from $60.7 million, or 0.78%, at year-end. Acquired-loan credit and PCD marks provided an additional $21.3 million of credit protection outside the allowance.
- Operating expenses declined for the nine-month period because 2020 included substantial merger-related expenses and FHLB advance prepayment fees. Q3 expenses increased due partly to compensation, data processing, and $4.0 million of branch consolidation expense.
Guidance, outlook, commentary, risks, and unusual items
Management described loan production and the committed pipeline as strong and stated that deposit quality was improving. Management also stated that liquidity remained significant under stress scenarios and that available funding sources were sufficient to meet current commitments in the normal course of business.
The Company expects the sale of two New Jersey branches to First Bank, including approximately $124 million of deposits and $14 million of selected performing loans based on June 30, 2021 balances, to close in early December 2021. The Company also planned to consolidate 20 deposit-gathering locations in late 2021 and early 2022; related accelerated branch and lease costs contributed to branch consolidation expense.
On November 4, 2021, the Company announced a definitive merger agreement with Partners Bancorp. The transaction is subject to stockholder and regulatory approvals and was expected to close in the first half of 2022. The filing does not provide purchase consideration or detailed pro forma financial effects.
COVID-19 remains a material uncertainty. At September 30, 2021, 98.7% of total loans complied with pre-COVID terms, and qualifying pandemic-related deferrals were not treated as TDRs or past due during the deferral period. Management identified risks from supply-chain and labor constraints, unemployment, real estate values, collateral quality, loan delinquencies, foreclosures, cyber threats, regulatory changes, deposit flows, competition, and interest-rate movements.
Unusual or nonrecurring items included $4.2 million of merger-related and branch consolidation expenses in Q3, a $466,000 net loss on equity investments in Q3, and an $8.4 million net gain on equity investments for the first nine months. The filing states that reported results are not necessarily indicative of full-year 2021 results.
The Company repurchased 1,460,009 common shares during the first nine months at a weighted average cost of $20.98 per share; 3,559,136 shares remained available under authorized programs at September 30, 2021. The quarterly common dividend remained $0.17 per share, and the preferred dividend was $0.4375 per depositary share.
Most important facts for investors to verify
- Whether loan growth and the $651.4 million pipeline can be sustained without weakening underwriting or increasing credit losses.
- Whether the credit loss benefit and improved asset quality are durable, particularly after pandemic relief programs expire.
- The effect of prolonged low rates, excess liquidity, deposit repricing, and future rate changes on net interest margin.
- The final terms, regulatory and stockholder approvals, timing, integration risks, and pro forma impact of the Partners Bancorp merger.
- The financial and operating effect of the two-branch sale and planned consolidation of 20 deposit-gathering locations.
- The level and composition of commercial real estate exposure, including investor commercial real estate loans of approximately $3.92 billion.
- The potential impact of loan-sale representations, FHLB loss-sharing obligations, undrawn commitments of $1.22 billion, and $651.4 million of commitments to originate loans.
- Whether capital distributions from the Bank remain available to support the holding company’s dividends and debt obligations.