OceanFirst Financial Corp. 2021 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 metropolitan markets including Philadelphia, New York, Baltimore, Washington, D.C., and Boston. The filing covers the fiscal year ended December 31, 2021, with comparative information for 2020 and 2019.
At December 31, 2021, the Company reported $11.74 billion of assets, $9.73 billion of deposits, $8.58 billion of net loans, and $1.52 billion of stockholders’ equity. The Bank operated 47 full-service customer facilities, commercial loan production offices, and deposit production facilities.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $11.74 billion | $11.45 billion | +$291.3 million |
| Net loans receivable | $8.58 billion | $7.70 billion | +$878.5 million |
| Deposits | $9.73 billion | $9.43 billion | +$305.2 million |
| Stockholders’ equity | $1.52 billion | $1.48 billion | +$32.4 million |
| Net interest income | $305.3 million | $313.0 million | -$7.6 million |
| Other income | $51.9 million | $73.9 million | -$22.0 million |
| Net income | $110.1 million | $63.3 million | +$46.8 million |
| Net income available to common stockholders | $106.1 million | $61.2 million | +$44.8 million |
| Diluted earnings per share | $1.78 | $1.02 | +$0.76 |
| Net interest margin | 2.93% | 3.16% | -23 basis points |
| Return on average assets | 0.91% | 0.55% | +36 basis points |
| Return on average equity | 7.02% | 4.20% | +282 basis points |
Net income benefited materially from a $11.8 million credit loss benefit in 2021, compared with $59.4 million of credit loss expense in 2020. Operating expenses were $226.9 million, down from $246.4 million, although 2021 included $12.3 million of branch consolidation expense and $1.5 million of merger-related expense.
Balance Sheet, Lending, Liquidity, and Capital
- Gross loans totaled $8.62 billion. Commercial real estate, multifamily, and land loans represented $5.43 billion, or 63.0%, of total loans; commercial and industrial loans were $449.2 million, residential real estate loans were $2.48 billion, and consumer loans were $260.8 million.
- Commercial loans, including commercial real estate, multifamily, commercial construction, and commercial and industrial loans, represented 68.2% of total loans.
- The loans-to-deposits ratio increased to 88.6% from 82.3%. Core deposits represented 92.0% of deposits.
- Cash and due from banks declined to $204.9 million from $1.27 billion as excess liquidity was deployed into loan growth and securities purchases.
- The Company held $1.71 billion of debt securities at amortized cost, including $894.5 million of mortgage-backed securities.
- There were no FHLB advances outstanding at year-end. Borrowed funds totaled $347.9 million, consisting primarily of subordinated debt, trust preferred securities, and repurchase agreements.
- The Company held $72.3 million of cash at the parent-company level and received $40.0 million of dividends from the Bank during 2021.
- The Company’s regulatory capital ratios were strong: common equity Tier 1 ratio of 10.26%, Tier 1 risk-based capital ratio of 11.68%, total capital ratio of 14.06%, and leverage ratio of 9.22%. The Bank was classified as well-capitalized.
Cash Flow and Capital Allocation
- Net cash provided by operating activities was $160.0 million.
- Net cash used in investing activities was $1.48 billion, primarily reflecting loan growth, $302.0 million of purchased residential loan pools, and purchases of debt and equity securities.
- Net cash provided by financing activities was $224.0 million, primarily from deposit growth, partly offset by share repurchases, dividends, and branch-sale payments.
- The Company repurchased 1.71 million common shares for $36.1 million and paid $40.5 million of common dividends. The annual common dividend remained $0.68 per share.
- At December 31, 2021, 3.31 million shares remained available for repurchase under existing authorizations.
Material Changes Versus the Prior Comparable Period
- Net income available to common stockholders increased 73% to $106.1 million, primarily because credit results improved substantially and operating expenses declined.
- Net interest income declined despite balance-sheet growth because asset yields fell and excess liquidity was invested in lower-yielding cash and securities. Net interest margin compressed from 3.16% to 2.93%.
- Interest expense declined from $66.7 million to $36.8 million due to lower deposit costs, maturities of higher-cost time deposits, and the absence of FHLB advances.
- Other income declined because 2020 included larger equity-investment gains and a $5.1 million gain on PPP loan sales. Commercial loan swap income also decreased.
- Net loan recoveries were $461,000 in 2021, compared with $18.9 million of net charge-offs in 2020.
- The allowance for loan credit losses decreased to $48.9 million, or 0.57% of total loans, from $60.7 million, or 0.78%. Non-performing loans declined to $18.9 million, or 0.22% of loans, from $36.4 million, or 0.47%.
- The Company consolidated 13 branches and sold two branches with $100.9 million of deposits. It expects additional branch consolidations in early 2022.
Guidance, Outlook, Risks, and Unusual Items
- The Company did not provide formal quantitative earnings guidance in the filing.
- Management described opportunities to grow commercial lending, core deposits, fee-based services, digital banking, wealth management, and other non-interest income businesses.
- On November 4, 2021, the Company announced a planned merger with Partners Bancorp, subject to stockholder and regulatory approvals, with an expected closing in the first half of 2022.
- In February 2022, the Company agreed to acquire a majority interest in Trident Abstract Title Agency, LLC, with a right to acquire 100%.
- Subsequent to year-end, the Company gave notice to redeem $35.0 million of subordinated debt on March 30, 2022.
- COVID-19 remained a risk to borrower performance, collateral values, liquidity, operations, cybersecurity, and credit-loss estimates. At year-end, 99.6% of total loans were complying with pre-COVID terms, and $22.9 million of PPP loans remained outstanding.
- The loan portfolio is concentrated in commercial real estate and multifamily lending. These exposures represented approximately 400% of Bank capital and could be sensitive to local economic conditions, real estate values, interest rates, and regulatory scrutiny.
- The Company had $671.0 million of commitments to originate loans and $1.37 billion of undrawn credit lines, including $1.01 billion for commercial and commercial construction borrowers.
- Management identified the allowance for credit losses as a critical estimate. A hypothetical downside economic scenario would have increased the year-end allowance by approximately $5.2 million.
- The Company exceeded $10 billion of assets and is subject to heightened regulatory requirements, including CFPB supervision, higher FDIC assessment considerations, and reduced debit-card interchange fees beginning in July 2022. Interchange revenue was $12.7 million in 2021.
- The Company ceased issuing LIBOR-based products and is transitioning existing exposures to alternative rates, including SOFR and other reference rates. Certain legacy contracts may require remediation.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The principal audit matter was the collective allowance for credit losses.
Facts Investors Should Verify
- Terms, regulatory approvals, consideration, and integration assumptions for the Partners Bancorp merger.
- Whether continued commercial real estate and multifamily loan growth changes concentration, delinquency, or capital risk.
- The sustainability of the 2021 credit loss benefit and the adequacy of the $48.9 million loan allowance under changing economic forecasts.
- The effect of margin compression, rising interest rates, deposit repricing, and the Company’s positive one-year interest-sensitivity gap.
- The financial impact of reduced debit-card interchange fees after the temporary exemption ends in July 2022.
- Liquidity implications of cash declining to $204.9 million, loan commitments of $671.0 million, and undrawn lines of $1.37 billion.
- Execution costs and customer effects from branch consolidations and the planned 2022 closures.
- LIBOR transition exposure, including the $35.0 million subordinated debt redemption and other LIBOR-linked instruments.