OceanFirst Financial Corp. 2020 Form 10-K Summary
Business context and reporting period
OceanFirst Financial Corp. is the bank holding company for OceanFirst Bank N.A., a regional community bank serving New Jersey and the metropolitan areas of New York City and Philadelphia. The filing covers the fiscal year ended December 31, 2020; quarterly data is also provided for the fourth quarter. The Bank primarily gathers retail and commercial deposits and invests in commercial real estate, multifamily, commercial and industrial, residential real estate, consumer loans, and securities.
On January 1, 2020, the Company completed acquisitions of Two River Bancorp and Country Bank Holding Company. The acquisitions added approximately $1.9 billion of assets, $1.6 billion of loans, and $1.6 billion of deposits, and materially affect year-over-year comparability.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $11.45 billion | $8.25 billion |
| Loans receivable, net | $7.70 billion | $6.21 billion |
| Deposits | $9.43 billion | $6.33 billion |
| Stockholders’ equity | $1.48 billion | $1.15 billion |
| Net interest income | $313.0 million | $256.0 million |
| Credit loss expense | $59.4 million | $1.6 million |
| Other income | $73.9 million | $42.2 million |
| Operating expenses | $246.4 million | $189.1 million |
| Net income | $63.3 million | $88.6 million |
| Net income available to common stockholders | $61.2 million | $88.6 million |
| Diluted earnings per share | $1.02 | $1.75 |
| Net interest margin | 3.16% | 3.62% |
| Return on average assets | 0.56% | 1.10% |
| Return on average equity | 4.35% | 7.84% |
| Loans-to-deposits ratio | 82.3% | 98.2% |
Operating cash flow was $132.7 million, compared with $100.2 million in 2019. Cash and due from banks increased to $1.27 billion from $120.5 million. Financing activities provided $1.07 billion, primarily from deposit growth and capital issuance. Investing activities used $22.2 million.
Borrowed funds totaled $363.9 million at year-end, including $128.5 million of repurchase agreements and $235.5 million of other borrowings. FHLB advances were reduced to zero from $519.3 million after the Company prepaid its FHLB borrowings. The Company had $108.5 million of holding-company cash.
The loan portfolio totaled $7.80 billion before the allowance. Commercial real estate, multifamily and land loans represented approximately 59.4% of total loans, while total commercial lending represented 65.5%. The allowance for credit losses was $60.7 million, or 0.78% of loans, compared with $16.9 million, or 0.27%, in 2019.
Material changes versus the prior comparable period
- Assets increased 38.8%, loans receivable increased 24.1%, and deposits increased 49.0%, primarily because of the Two River and Country Bank acquisitions and $1.51 billion of organic deposit growth.
- Net interest income increased 22.3% because of balance-sheet growth, but net interest margin declined from 3.62% to 3.16% due to lower interest rates, low-yielding PPP loans, and excess liquidity.
- Net income available to common stockholders declined 30.9%, and diluted EPS declined 41.7%, reflecting elevated credit losses, margin compression, higher expenses, preferred dividends, and acquisition-related items.
- Credit loss expense increased by $57.8 million. Net charge-offs were $18.9 million versus $1.4 million in 2019, including $14.6 million related to the sale of higher-risk commercial loans and $3.3 million related to underperforming residential and consumer loans.
- Non-performing loans increased to $36.4 million from $17.8 million, and non-performing assets increased to $36.5 million from $18.1 million. Substandard assets increased to $194.5 million from $73.2 million, while Special Mention assets increased to $165.8 million from $34.5 million.
- Other income benefited from a $21.2 million net gain on equity investments and a $5.1 million gain on the sale of PPP loans. Equity investments increased to $107.1 million at year-end from $10.1 million, and management liquidated most of the positions in December 2020 and January 2021.
- The Company raised approximately $125.0 million of subordinated notes and approximately $55.7 million of Series A preferred stock in 2020. It repurchased 648,851 common shares for $14.8 million, suspended repurchases during the pandemic, and planned to recommence repurchases in February 2021.
- The Company adopted CECL on January 1, 2020. The adoption reduced retained earnings by approximately $4,000, net of tax, while pandemic-related economic estimates substantially increased the year-end allowance.
Guidance, outlook, management commentary, risks and unusual items
Management emphasizes prudent commercial-loan and core-deposit growth, expansion of fee-based services, digital banking, branch rationalization, and opportunistic acquisitions. The filing does not provide formal earnings or revenue guidance.
The Company disbursed $504 million of PPP loans, recorded $17.7 million of deferred processing fees, sold $298.1 million of PPP loans for a $5.1 million gain, and retained $95.4 million of PPP loans at year-end. COVID-19-related credit loss expense was elevated, and management stated that the full economic impact of the pandemic remained uncertain.
COVID-19 risks include higher delinquencies, problem assets, foreclosures, collateral declines, additional credit-loss provisions, reduced loan demand, operational disruption, cybersecurity exposure, and pressure on net interest income. The Company reported that COVID-19-related loans under full forbearance had been substantially resolved by December 31, 2020, but relief programs and economic effects remained ongoing.
Other notable items included $14.3 million of FHLB advance prepayment fees, $7.6 million of branch consolidation expense, and $15.9 million of merger-related expenses. The Company also incurred $4.5 million of COVID-19-related operating expense. Goodwill totaled $500.3 million; management reported no goodwill impairment as of December 31, 2020.
The Company and Bank exceeded applicable regulatory capital requirements. At year-end, the Bank reported a common equity Tier 1 ratio of 12.11%, Tier 1 risk-based capital ratio of 12.11%, total capital ratio of 12.91%, and leverage ratio of 8.48%, and satisfied the criteria to be well-capitalized.
Key continuing risks include the 65.5% commercial-loan concentration, commercial real estate exposure equal to 321% of Bank capital, interest-rate and margin risk, reliance on real estate collateral, acquisition integration, regulatory costs associated with assets exceeding $10 billion, reduced debit-card interchange fees beginning in July 2021, PPP compliance and guarantee risk, cybersecurity, and the transition away from LIBOR.
KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. The allowance for credit losses on collectively evaluated loans was identified as the critical audit matter because of significant estimation uncertainty and the use of economic forecasts, portfolio segmentation, risk ratings, and qualitative adjustments.
Most important facts for investors to verify
- Whether the elevated allowance, non-performing loans, classified assets, and charge-offs stabilize or increase as pandemic-related assistance expires.
- The performance and concentration of commercial real estate, multifamily, construction, and other commercial loans, particularly in New Jersey and surrounding metropolitan markets.
- The sustainability of the 3.16% net interest margin amid low rates, excess liquidity, PPP loan runoff, and deposit repricing.
- The recurring earnings contribution of the $21.2 million equity-investment gain and $5.1 million PPP loan-sale gain, which are not necessarily repeatable.
- The financial and regulatory effect of crossing the $10 billion asset threshold, including lower interchange revenue and higher compliance and FDIC-related costs.
- The integration results, expense synergies, credit performance, and goodwill associated with the Two River and Country Bank acquisitions.
- The Company’s ability to maintain dividends and resume share repurchases while preserving regulatory capital and holding-company liquidity.
- Exposure to PPP-related litigation, SBA guarantee disputes, loan repurchase claims, interest-rate movements, LIBOR replacement, cybersecurity incidents, and potential real estate valuation declines.