OceanFirst Financial Corp. 2023 Form 10-K Summary
Business context and reporting period
OceanFirst Financial Corp. is a Delaware bank holding company whose principal subsidiary is OceanFirst Bank N.A., a regional community bank serving New Jersey and the metropolitan areas of New York, Philadelphia, Baltimore and Boston. The filing covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. The Bank operates 39 full-service branches and commercial loan production offices in its target markets.
The Bank focuses on commercial real estate, commercial and industrial, residential real estate and consumer lending, funded primarily by deposits, loan and investment cash flows, FHLB advances and other borrowings.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $13.54 billion | $13.10 billion | +$434.4 million |
| Total loans, net | $10.14 billion | $9.87 billion | +$268.0 million |
| Deposits | $10.43 billion | $9.68 billion | +$759.7 million |
| FHLB advances | $848.6 million | $1.21 billion | -$362.5 million |
| Total stockholders’ equity | $1.66 billion | $1.59 billion | +$76.5 million |
| Net interest income | $369.7 million | $377.5 million | -$7.7 million |
| Net income available to common stockholders | $100.0 million | $142.6 million | -$42.6 million |
| Diluted earnings per share | $1.70 | $2.42 | -$0.72 |
| Net interest margin | 3.02% | 3.37% | -35 basis points |
| Return on average assets | 0.74% | 1.15% | Down |
| Return on average equity | 6.13% | 9.24% | Down |
| Efficiency ratio | 61.71% | 53.80% | Higher |
Interest income rose to $608.0 million from $431.2 million as asset yields increased, but interest expense increased much faster, to $238.2 million from $53.7 million. The total cost of deposits increased to 1.68% from 0.31%, reflecting higher market rates and a shift toward time deposits.
Net cash provided by operating activities was $124.3 million. Investing activities used $488.0 million, principally reflecting loan growth, loan-pool purchases and purchases of debt securities. Financing activities provided $349.5 million, primarily from a $760.0 million increase in deposits, partly offset by $362.5 million of FHLB advance repayments and $51.3 million of dividends paid.
At year-end, total debt and other borrowings were approximately $1.12 billion, including $848.6 million of FHLB advances, $73.1 million of repurchase agreements and $196.5 million of other borrowings. The loans-to-deposits ratio was 97.7%.
Material changes versus the prior comparable period
- Net income available to common stockholders declined 30% to $100.0 million, driven primarily by margin compression, higher funding costs, lower non-interest income and increased credit-loss provisioning.
- Net interest income declined 2.1% despite higher interest income because deposit and borrowing costs increased substantially. The net interest margin fell from 3.37% to 3.02%.
- Total loans increased 2.8% to $10.20 billion before the allowance. Commercial real estate remained the largest category at $6.30 billion, or 61.8% of total loans; commercial and industrial loans increased to $666.5 million, or 6.5%.
- Deposits increased 7.9%, while time deposits rose to $2.45 billion from $1.54 billion. Non-interest-bearing deposits declined to $1.66 billion from $2.10 billion.
- The allowance for loan credit losses increased to $67.1 million from $56.8 million, or 0.66% of total loans versus 0.57%. Provision expense rose to $17.7 million from $7.8 million.
- Net charge-offs were $8.4 million compared with net recoveries of $340,000 in 2022, primarily due to an $8.4 million partial charge-off on one commercial real estate relationship.
- Non-performing loans increased to $29.5 million from $23.3 million, while classified substandard assets increased to $106.6 million from $50.8 million. Special mention assets declined to $40.4 million from $48.2 million.
- Other income declined to $33.6 million from $59.1 million, reflecting a $3.7 million net loss on equity investments, lower commercial loan swap income, lower fees and service charges, and a $3.3 million decline in bankcard services revenue following reduced debit-card interchange fees.
- Operating expenses increased to $248.9 million from $234.9 million, including a $1.7 million FDIC special assessment. Higher professional fees, compensation, regulatory assessments, data processing and marketing costs also contributed.
- Debt securities increased to approximately $1.91 billion at year-end, including $753.9 million of available-for-sale securities. Other comprehensive income improved by $15.1 million, primarily due to higher fair values of available-for-sale securities.
Liquidity, capital and outlook
Management reported $3.7 billion of total on-balance-sheet liquidity and funding capacity at December 31, 2023. Estimated adjusted uninsured deposits were $1.60 billion, or 15.2% of total deposits, after excluding collateralized government deposits and intercompany deposits. Management stated that the Bank and parent company remained adequately liquid under quarterly stress scenarios.
The Company held $79.4 million of parent-company cash and cash equivalents and received $97.0 million of dividends from the Bank during 2023. The Bank had no borrowings from the Federal Reserve discount window or Bank Term Funding Program at year-end. Time deposits totaling $2.30 billion mature in 2024, creating a refinancing and deposit-retention consideration.
The Company and Bank exceeded applicable regulatory capital requirements and were classified as well-capitalized. The Company’s common equity Tier 1 ratio was 10.86%, total risk-based capital ratio was 14.10%, and equity-to-assets ratio was 12.28%. No common-stock repurchases were made in 2023; 2,934,438 shares remained authorized for repurchase.
Management’s strategy is to reduce reliance on commercial real estate over time, expand commercial and industrial lending, grow residential lending and strengthen deposits through commercial relationships and digital capabilities. Management also slowed loan growth during 2023 to preserve liquidity and build capital. No quantitative earnings or revenue guidance was provided in the filing.
Risks, contingencies and unusual items
- Commercial real estate concentration: Commercial real estate, multi-family and land loans represented approximately 62% of total loans, and the Bank’s commercial real estate concentration was 447% of total bank capital. Office, retail and other property sectors are exposed to weaker valuations, refinancing risk and changes in occupancy and demand.
- Interest-rate and margin risk: Higher deposit costs, an increased use of short-term time deposits and potential further rate changes could compress net interest income. Under the December 31, 2023 model, a 300-basis-point rate increase reduced estimated economic value of equity by 12.8% and projected 12-month net interest income by 2.2%.
- Liquidity and uninsured deposits: Deposit competition, the maturity of $2.30 billion of 2024 time deposits, market volatility and unrealized securities losses could pressure liquidity or increase funding costs.
- Credit quality: Classified assets, non-performing loans, loan charge-offs and the allowance all increased. Management’s ACL sensitivity analysis indicated that a more adverse economic scenario would have increased the allowance by approximately $4.2 million based on year-end assumptions.
- Regulatory and CRA matters: The OCC assigned the Bank an overall “Needs to Improve” CRA rating due to a Fair Housing Act violation, despite “Low Satisfactory” ratings on the Lending, Investment and Service Tests. The rating may restrict certain branches, mergers and other expansionary activities until revised. A subsequent CRA examination was expected to begin in 2024.
- Heightened regulation: Assets above $10 billion subject the Bank to CFPB supervision, higher FDIC assessment costs, reduced debit-card interchange fees and enhanced risk-management requirements.
- Unusual items: 2023 results included a $5.3 million net loss on investment sales, a $1.7 million FDIC special assessment, $70,000 of branch-consolidation expense and $22,000 of merger-related expense. These items reduced 2023 net income by approximately $4.7 million after tax.
- Goodwill: The Company had $506.1 million of goodwill. The 2023 quantitative impairment test found that fair value exceeded carrying value, but not substantially; adverse industry, market or operating developments could result in a future impairment charge.
- Operational and legal risks: Cybersecurity incidents, third-party technology failures, regulatory changes, foreclosure delays, climate and natural-disaster exposure, and potential mortgage-loan repurchase obligations could adversely affect results. Management reported no known cybersecurity incident that materially affected, or was reasonably likely to materially affect, the Company as of the filing date.
Investor verification checklist
- Verify the sustainability of the 3.02% net interest margin as deposits reprice and $2.30 billion of time deposits mature in 2024.
- Review commercial real estate exposure by property type and geography, particularly office, retail, multi-family and construction loans.
- Monitor classified assets, non-performing loans, net charge-offs and the adequacy of the $67.1 million allowance under changing economic forecasts.
- Assess the effect of the “Needs to Improve” CRA rating on branch openings, acquisitions and other strategic initiatives, including the results of the next OCC examination.
- Evaluate liquidity coverage, uninsured deposit trends, available borrowing capacity and the potential effect of securities fair-value losses if assets must be sold.
- Review dividend sustainability, given $51.3 million of total dividends paid in 2023, dependence on Bank dividends and regulatory limitations on capital distributions.
- Reconcile reported earnings with the unusual investment loss, FDIC assessment and other non-recurring items, and assess whether expense increases reflect ongoing strategic costs.
- Review the filing’s audited financial statements, CECL assumptions, goodwill valuation sensitivity and the detailed debt and off-balance-sheet commitment schedules.