OceanFirst Financial Corp. — 2023 Q3 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 nine months ended September 30, 2023, filed November 7, 2023.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $91.0 million | $96.0 million | $281.9 million | $271.0 million |
| Provision for credit losses | $10.3 million | $1.0 million | $14.5 million | $4.1 million |
| Other income | $10.8 million | $15.2 million | $21.8 million | $31.5 million |
| Operating expenses | $64.5 million | $59.0 million | $188.7 million | $175.2 million |
| Net income available to common stockholders | $19.7 million | $37.6 million | $73.3 million | $90.3 million |
| Diluted EPS | $0.33 | $0.64 | $1.24 | $1.53 |
| Net interest margin | 2.91% | 3.36% | 3.09% | 3.28% |
- Total assets were $13.50 billion at September 30, 2023, compared with $13.10 billion at December 31, 2022.
- Loans receivable, net, were $10.07 billion, up from $9.87 billion at year-end 2022. Total loans increased approximately $205.5 million before the allowance for credit losses.
- Deposits were $10.53 billion, up $858.7 million from December 31, 2022. Time deposits increased to $2.65 billion from $1.54 billion.
- Total stockholders’ equity was $1.64 billion, compared with $1.59 billion at year-end 2022. Book value per common share was $27.56.
- Net interest expense pressure was significant: third-quarter interest expense increased to $67.4 million from $14.5 million, while the cost of deposits rose to 1.99% from 0.36%.
- Nine-month operating cash flow was $151.1 million. Investing activities used $145.9 million, primarily from a $210.4 million increase in loans. Financing activities provided $235.7 million, primarily from deposit growth, partly offset by $605.1 million of FHLB advance repayments.
- FHLB advances totaled $606.1 million, down from $1.21 billion at December 31, 2022. Total borrowed funds were $885.2 million.
- On-balance-sheet liquidity and funding capacity totaled $4.3 billion. The Company reported no FHLB overnight advances and no borrowings from the Federal Reserve Discount Window or Bank Term Funding Program.
- The Company’s common equity tier 1 ratio was 10.36%; the Bank’s was 11.21%. Both the Company and Bank satisfied applicable regulatory capital requirements and the Bank remained “well-capitalized.”
Material Changes Versus Comparable Periods
- Third-quarter net income available to common stockholders fell 47.7%, and diluted EPS declined 48.4%, primarily due to lower net interest income, higher credit-loss provision, lower other income, and higher operating expenses.
- Nine-month net income available to common stockholders declined 18.8%, while net interest income increased 4.0%. The benefit from higher asset yields and loan growth was more than offset in the third quarter by rapidly increasing funding costs.
- Net interest margin declined 45 basis points year over year in the third quarter. Management attributed the decline to deposit repricing and a shift toward higher-cost deposits outpacing asset-yield increases, along with elevated on-balance-sheet cash.
- Deposit growth included a $425.7 million reduction in brokered time deposits during the quarter, while total deposits increased $375.6 million from the prior quarter. Non-interest-bearing deposits represented approximately 17% of total deposits at quarter-end.
- Other income decreased year over year, reflecting lower commercial loan swap income, fees and service charges, and bankcard services revenue. Nine-month results also included a $5.3 million loss on sales of investments and a $6.6 million net loss on equity investments.
- Operating expenses rose 9.3% in the third quarter and 7.7% for the nine months. The quarter included $2.4 million of severance and other program costs related to profitability and operational-efficiency initiatives, as well as higher professional fees and regulatory assessments.
Asset Quality, Outlook, Risks, and Unusual Items
- Non-performing loans were $30.1 million, or 0.30% of total loans, compared with $23.3 million, or 0.23%, at December 31, 2022. Non-performing assets were 0.22% of total assets.
- A single $17 million commercial real estate relationship secured by a Midtown Manhattan office building was written down by $8.4 million to an estimated realizable value of $8.8 million. The relationship accounted for most of the quarter’s charge-offs and provision increase.
- The allowance for loan credit losses was $63.9 million, or 0.63% of total loans, compared with $56.8 million, or 0.57%, at year-end 2022. Net loan charge-offs were $8.3 million in both the quarter and nine-month period.
- Criticized and classified loans were reported at 1.30% of total loans. Special Mention assets totaled $44.9 million and Substandard assets totaled $86.6 million; the filing attributes increases in Substandard assets primarily to several commercial and commercial real estate relationships.
- Management stated that liquidity and capital remained adequate under stress scenarios. Estimated adjusted uninsured deposits were $1.65 billion, or 16% of total deposits, and on-balance-sheet liquidity and funding capacity represented 262% of that amount.
- The filing provides no formal earnings or margin guidance. Management expects results to remain sensitive to interest rates, deposit pricing, funding mix, credit performance, economic conditions, and real estate values, particularly office real estate.
- Industry-wide banking volatility, unrealized securities losses, deposit competition, liquidity conditions, regulatory changes, cybersecurity, and potential goodwill impairment remain material risks. The August 31, 2023 quantitative goodwill test found that fair value exceeded carrying value, but not substantially; no impairment was recorded.
- The Board declared a $0.20 per share common dividend payable November 17, 2023, and a $0.4375 per depositary share preferred dividend payable November 15, 2023. No common shares were repurchased during the first nine months; 2,934,438 shares remained available under the repurchase authorization.
Important Facts for Investors to Verify
- Whether deposit costs and deposit mix continue to pressure net interest margin and earnings.
- Performance and collateral values of the Midtown Manhattan office exposure and other commercial real estate relationships.
- Trends in non-performing, criticized, classified, delinquent, and modified loans, including the adequacy of the allowance for credit losses.
- Retention of deposits, the level of brokered and uninsured deposits, and the maturity profile of approximately $2.47 billion of time deposits due within one year.
- Liquidity availability, FHLB borrowing capacity, securities valuations, and the effect of rising or falling rates on economic value of equity and net interest income.
- Whether profitability initiatives reduce recurring expenses after the disclosed $2.4 million one-time severance and program costs.
- The Company’s ability to continue common dividends, which depends partly on regulatory approval of Bank dividends to the Parent Company.