OceanFirst Financial Corp. — Q2 2023 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 in New Jersey and the metropolitan areas of Philadelphia, New York, Baltimore and Boston. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to June 30, 2022 and December 31, 2022.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total assets | $13.54 billion | $12.44 billion | 8.8% year-over-year |
| Loans receivable, net | $10.03 billion | $9.38 billion | 6.9% year-over-year |
| Deposits | $10.16 billion | $9.83 billion | 3.3% year-over-year |
| Net interest income | $92.1 million | $90.8 million | 1.4% year-over-year |
| Other income | $8.9 million | $7.5 million | 18.4% year-over-year |
| Net income available to common stockholders | $26.8 million | $28.0 million | (4.2%) year-over-year |
| Diluted EPS | $0.45 | $0.47 | Decreased |
| Net interest margin | 3.02% | 3.29% | Down 27 basis points |
| Return on average assets | 0.80% | 0.92% | Decreased |
| Return on average equity | 6.61% | 7.31% | Decreased |
For the six months ended June 30, 2023, net interest income was $190.9 million, net income available to common stockholders was $53.7 million and diluted EPS was $0.91, compared with $175.0 million, $52.7 million and $0.89, respectively, in the prior-year period.
Interest income rose sharply as average interest-earning assets and yields increased, but interest expense increased substantially due to higher deposit costs, greater use of FHLB advances, repricing of government deposits and a shift toward time deposits. The cost of average interest-bearing liabilities increased to 2.41% from 0.42% year over year, while total deposit cost increased to 1.52% from 0.18%.
Operating expenses were $62.9 million in Q2 and $124.2 million for the first six months, compared with $58.7 million and $116.2 million, respectively, in the comparable periods. The increases primarily reflected higher professional fees, compensation and benefits, regulatory assessments and real estate charges. The Q2 efficiency ratio was 62.28%, compared with 59.65% in the prior-year quarter.
Net cash provided by operating activities was $96.3 million for the first six months, compared with $126.3 million in the prior-year period. Investing activities used $154.6 million, principally reflecting net loan growth, while financing activities provided $348.1 million, primarily from a $483.3 million increase in deposits. Cash and due from banks increased to $457.7 million from $167.9 million at year-end 2022.
Material Changes Versus Prior Periods
- Total assets increased $435.0 million from December 31, 2022, primarily from higher cash balances and loan growth.
- Loans increased $165.6 million from year-end, driven primarily by commercial originations.
- Deposits increased $483.1 million from year-end. Time deposits rose to $2.77 billion, or 27.2% of deposits, from $1.54 billion, or 15.9%.
- Brokered time deposits increased to $1.42 billion from $873.4 million, while retail time deposits increased to approximately $1.35 billion from approximately $675 million.
- FHLB advances decreased to $1.09 billion from $1.21 billion at year-end. Total borrowed funds were $1.36 billion.
- Net interest margin declined because funding costs increased faster than asset yields. Management reported a deposit beta of 29%.
- Q2 other income included a $559,000 net loss on equity investments, compared with an $8.1 million loss in Q2 2022. Six-month results included a $7.36 million net loss on equity investments and $5.3 million of losses on investment sales.
- The allowance for loan credit losses increased to $61.8 million, or 0.61% of loans, from $56.8 million, or 0.57%, at year-end.
Liquidity, Capital and Asset Quality
Management reported $4.0 billion of on-balance-sheet liquidity and funding capacity at June 30, 2023. The Bank had no overnight FHLB advances and no borrowings from the Federal Reserve discount window or the Bank Term Funding Program. Adjusted uninsured deposits were estimated at $1.55 billion, and liquidity and funding capacity represented 260% of that amount.
The Company’s common equity tier 1 ratio was 10.21%, up from 9.93% at year-end. The Bank’s common equity tier 1 ratio was 11.13%, and the Bank and Company satisfied applicable “well-capitalized” requirements.
Asset quality remained strong overall: non-performing loans were $22.8 million, or 0.23% of loans; non-performing assets were 0.17% of total assets; criticized assets were 1.18% of loans; and annualized net charge-offs were approximately zero. However, substandard assets increased to $88.2 million from $50.8 million at year-end, primarily due to downgrades in commercial real estate investor relationships.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to continue monitoring liquidity, deposit flows, interest-rate conditions, capital, credit quality and the effects of financial-sector volatility. The Company took precautionary measures following bank failures earlier in 2023, including increasing liquidity, enhancing funding sources and performing capital, credit and commercial real estate stress tests.
- Primary earnings risk is continued deposit repricing and migration into higher-cost time deposits, which could further pressure net interest margin.
- Interest-rate changes may affect earnings, the economic value of equity and the fair value of fixed-rate securities. The filing states that the Company was modestly asset-sensitive.
- Commercial real estate exposure and macroeconomic headwinds could increase credit losses, criticized assets or non-performing loans.
- Unrealized losses on debt securities totaled $153.7 million, principally from interest-rate changes; management concluded the securities were not credit-impaired.
- The Company had $115.8 million of commitments to originate loans and $1.65 billion of undrawn credit commitments, including $1.29 billion to commercial and commercial construction borrowers.
- Time deposits totaling $2.51 billion were scheduled to mature within one year, creating potential future funding-cost pressure.
- The Company declared a $0.20 per common share quarterly dividend and a $0.4375 per depositary share preferred dividend after quarter-end. Future dividends depend partly on the Bank’s ability to distribute capital to the parent under applicable regulations.
- No material changes to previously disclosed risk factors were reported, and pending legal proceedings were described as routine and immaterial.
Most Important Facts for Investors to Verify
- Whether deposit pricing and the shift toward time and brokered deposits stabilize or continue to compress net interest margin.
- Commercial real estate credit migration, especially the increase in substandard investor-owned CRE loans.
- Liquidity coverage, uninsured deposit trends and maturities of time deposits.
- Allowance coverage relative to loan growth, non-performing loans and broader economic conditions.
- The sustainability of earnings excluding investment losses, investment-sale losses and other unusual items.
- Whether capital ratios remain comfortably above well-capitalized thresholds while dividends and loan growth continue.