Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL SUMMARY (1)
At or for the Quarters Ended
(dollars in thousands, except per share amounts) June 30, 2022 March 31, 2022 June 30, 2021
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 12,438,653 $ 12,164,945 $ 11,483,901
Loans receivable, net of allowance for loan credit losses 9,380,688 9,065,679 7,774,351
Deposits 9,831,484 10,056,233 9,415,286
Total stockholders’ equity 1,521,432 1,519,334 1,508,789
SELECTED OPERATING DATA:
Net interest income 90,797 84,227 74,016
Credit loss expense (benefit) 1,254 1,851 (6,460)
Other income 7,541 8,852 11,803
Operating expenses 58,661 57,495 51,670
Net income 29,483 25,759 30,555
Net income attributable to OceanFirst Financial Corp. 28,961 25,759 30,555
Net income available to common stockholders 27,957 24,755 29,551
Diluted earnings per share 0.47 0.42 0.49
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period 25.73 25.58 25.22
Cash dividend per share 0.17 0.17 0.17
Dividend payout ratio per common share 36.17 % 40.48 % 34.69 %
Stockholders’ equity to total assets 12.23 12.49 13.14
Return on average assets (2) (3) (4)
0.92 0.84 1.03
Return on average stockholders’ equity (2) (3) (4)
7.31 6.57 7.88
Net interest rate spread (5)
3.18 3.08 2.75
Net interest margin (2) (6)
3.29 3.18 2.89
Operating expenses to average assets (2) (4)
1.92 1.95 1.80
Efficiency ratio (4) (7)
59.65 61.77 60.21
Loans-to-deposits ratio 95.90 90.60 83.06
ASSET QUALITY:
Non-performing loans (8)
$ 20,753 $ 26,925 $ 38,659
Non-performing assets (8)
20,753 27,031 38,765
Allowance for loan credit losses as a percent of total loans receivable (9) (10)
0.55 % 0.56 % 0.69 %
Allowance for loan credit losses as a percent of total non-performing loans (8) (10)
250.86 187.92 139.36
Non-performing loans as a percent of total loans receivable (8) (9)
0.22 0.30 0.49
Non-performing assets as a percent of total assets (8)
0.17 0.22 0.34
(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Ratios are annualized.
(3) Ratios for each period are based on net income available to common stockholders.
(4) Included net expenses related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $8.8 million, or $6.7 million, net of tax benefit, for the three months ended June 30, 2022. Included net expenses related to merger related expenses, net branch consol idation expenses, and net loss on equity investments of $5.2 million, or $4.0 million, net of tax benefit, for the three months ended March 31, 2022. I ncluded a net benefit related to merger related expenses, net branch consolidation expenses, and net gain on equity investments of $104,000, or $78,000, net of tax expense, for the three months ended June 30, 2021.
(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(7) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.
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(8) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.
(9) Total loans receivable excludes loans held-for-sale.
(10) Loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $15.5 million, $16.9 million, and $23.6 million at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.
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Summary
OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, Washington D.C., and Boston. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans, securities and on equity investments, title-related fees and service charges and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees and other general and administrative expenses. The Company’s results of operations are also significantly affected by competition, general economic conditions, including levels of unemployment and real estate values, as well as changes in market interest rates, inflation, government policies and actions of regulatory agencies.
Key developments relating to the Company’s financial results and corporate activities for the three months ended June 30, 2022 were as follows:
• Strengthening Net Interest Income and Margin: Net interest income increased by $6.6 million to $90.8 million, from $84.2 million in the prior linked quarter. Net interest margin increased to 3.29%, as compared to 3.18% in the prior linked quarter, largely driven by the impact of the rising rate environment on interest earning assets, as well as elevated prepayment fees, partly offset by increased cost of funds.
• Balance Sheet Growth and Improving Asset Quality: Loan growth for the quarter was $315.9 million, reflecting originations of $835.5 million, and the committed loan pipeline was $385.0 million as of June 30, 2022. Non-performing loans decreased to $20.8 million, as compared to $26.9 million in the prior linked quarter. Deposits grew by $98.7 million year-to-date and $416.2 million as compared to June 30, 2021.
• Expense Management Discipline: Total operating expenses increased modestly to $58.7 million, from $57.5 million in the prior linked quarter. Operating expenses for the current quarter included $3.2 million of expenses related to the acquisition of a majority interest in Trident Abstract Title Agency, LLC (“Trident”). The efficiency ratio improved to 59.65% from 61.77% in the prior linked quarter.
• Dividend Increase: On July 27, 2022, the Board of Directors approved an increase to the quarterly cash dividend by $0.03, or 18%, to $0.20 per share.
Net income available to common stockholders for the three and six months ended June 30, 2022 was $28.0 million and $52.7 million, respectively, or $0.47 and $0.89 per diluted share, respectively, as compared to $29.6 million and $61.2 million, or $0.49 and $1.02 per diluted share, for the corresponding prior year periods, respectively. The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2022 and 2021, respectively. Net income available to common stockholders for the three and six months ended June 30, 2022 included merger related expenses of $196,000 and $2.2 million, respectively, net branch consolidation expenses of $546,000 and $948,000, respectively, and net loss on equity investments of $8.1 million and $10.9 million, respectively. Net income available to common stockholders for the three and six months ended June 30, 2021 included merger related expenses of $446,000 and $827,000, respectively, net branch consolidation expenses of $26,000 and $1.0 million, respectively, and net gain on equity investments of $576,000 and $8.9 million, respectively.
The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.23% at June 30, 2022.
On July 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend, related to the quarter ended June 30, 2022, will be paid on August 19, 2022 to common stockholders of record on August 8, 2022. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing a 1/40th interest in the Series A Preferred Stock. This dividend will be paid on August 15, 2022 to preferred stockholders of record on July 29, 2022.
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Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the three and six months ended June 30, 2022 interest income included net loan fees of $3.2 million and $4.2 million, respectively, as compared to $1.2 million and $2.6 million for the same prior year periods, respectively.
The following tables set forth certain information relating to the Company for the three and six months ended June 30, 2022 and 2021. The yields and costs, which are annualized, are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields.
For the Three Months Ended June 30,
2022 2021
(dollars in thousands) Average Balance Interest Average
Yield/
Cost (1)
Average Balance Interest Average
Yield/
Cost (1)
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments $ 67,440 $ 100 0.59 % $ 992,485 $ 241 0.10 %
Securities (2)
1,811,869 8,585 1.90 1,501,484 6,052 1.62
Loans receivable, net (3)
Commercial 6,278,465 65,390 4.18 5,318,436 54,258 4.09
Residential real estate 2,718,787 22,742 3.35 2,219,425 19,097 3.44
Home equity loans and lines and other consumer (“other consumer”) 251,014 2,599 4.15 304,541 3,693 4.86
Allowance for loan credit losses, net of deferred loan costs and fees (43,683) — — (53,483) — —
Loans receivable, net 9,204,583 90,731 3.95 7,788,919 77,048 3.97
Total interest-earning assets 11,083,892 99,416 3.60 10,282,888 83,341 3.25
Non-interest-earning assets 1,168,093 1,256,844
Total assets $ 12,251,985 $ 11,539,732
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 4,020,474 1,612 0.16 % $ 3,701,496 3,385 0.37 %
Money market 739,647 279 0.15 760,323 212 0.11
Savings 1,639,568 161 0.04 1,581,284 166 0.04
Time deposits 937,387 2,265 0.97 1,002,086 2,562 1.03
Total 7,337,076 4,317 0.24 7,045,189 6,325 0.36
Federal Home Loan Bank (“FHLB”) advances 538,754 1,647 1.23 — — —
Securities sold under agreements to repurchase 103,929 41 0.16 135,181 56 0.17
Other borrowings 194,481 2,614 5.39 228,350 2,944 5.17
Total borrowings 837,164 4,302 2.06 363,531 3,000 3.31
Total interest-bearing liabilities 8,174,240 8,619 0.42 7,408,720 9,325 0.50
Non-interest-bearing deposits 2,328,124 2,462,203
Non-interest-bearing liabilities 214,900 164,774
Total liabilities 10,717,264 10,035,697
Stockholders’ equity 1,534,721 1,504,035
Total liabilities and equity $ 12,251,985 $ 11,539,732
Net interest income $ 90,797 $ 74,016
Net interest rate spread (4)
3.18 % 2.75 %
Net interest margin (5)
3.29 % 2.89 %
Total cost of deposits (including non-interest-bearing deposits) 0.18 % 0.27 %
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For the Six Months Ended June 30,
2022 2021
(dollars in thousands) Average
Balance Interest Average
Yield/
Cost (1)
Average
Balance Interest Average
Yield/
Cost (1)
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments $ 78,074 $ 136 0.35 % $ 1,065,294 $ 518 0.10 %
Securities (2)
1,829,065 17,064 1.88 1,407,108 12,741 1.83
Loans receivable, net (3)
Commercial 6,157,060 123,745 4.05 5,223,714 107,927 4.17
Residential real estate 2,631,208 44,081 3.35 2,273,332 39,166 3.45
Other consumer 254,002 5,373 4.27 315,662 7,863 5.02
Allowance for loan credit losses, net of deferred loan costs and fees (42,080) — — (53,187) — —
Loans receivable, net 9,000,190 173,199 3.87 7,759,521 154,956 4.03
Total interest-earning assets 10,907,329 190,399 3.51 10,231,923 168,215 3.32
Non-interest-earning assets 1,191,453 1,257,970
Total assets $ 12,098,782 $ 11,489,893
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 4,197,935 3,762 0.18 % $ 3,707,398 7,695 0.42 %
Money market 763,721 596 0.16 758,986 579 0.15
Savings 1,624,575 286 0.04 1,552,106 345 0.04
Time deposits 853,017 3,714 0.88 1,111,000 6,202 1.13
Total 7,439,248 8,358 0.23 7,129,490 14,821 0.42
FHLB Advances 285,501 1,682 1.19 — — —
Securities sold under agreements to repurchase 110,738 83 0.15 132,328 151 0.23
Other borrowings 211,407 5,252 5.01 228,359 5,623 4.97
Total borrowings 607,646 7,017 2.33 360,687 5,774 3.23
Total interest-bearing liabilities 8,046,894 15,375 0.39 7,490,177 20,595 0.55
Non-interest-bearing deposits 2,364,757 2,337,238
Non-interest-bearing liabilities 155,832 162,647
Total liabilities 10,567,483 9,990,062
Stockholders’ equity 1,531,299 1,499,831
Total liabilities and equity $ 12,098,782 $ 11,489,893
Net interest income $ 175,024 $ 147,620
Net interest rate spread (4)
3.12 % 2.77 %
Net interest margin (5)
3.24 % 2.91 %
Total cost of deposits (including non-interest-bearing deposits) 0.17 % 0.32 %
(1) Average yields and costs are annualized.
(2) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost net of allowance for securities credit losses.
(3) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans.
(4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets.
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Comparison of Financial Condition at June 30, 2022 and December 31, 2021
Total assets increased by $699.0 million to $12.44 billion at June 30, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $802.0 million to $9.42 billion at June 30, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations. Total debt securities decreased by $132.1 million at June 30, 2022, as compared to December 31, 2021, primarily due to principal repayments, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment. Other assets increased by $46.5 million to $193.6 million at June 30, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with the Company’s customer interest rate swap programs.
Total liabilities increased by $694.2 million to $10.92 billion at June 30, 2022, from $10.22 billion at December 31, 2021. Deposits increased by $98.7 million to $9.83 billion at June 30, 2022, from $9.73 billion at December 31, 2021. Total deposits, excluding time deposits, decreased by $626.3 million to $8.33 billion at June 30, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of interest-bearing checking balances. Time deposits increased to $1.50 billion at June 30, 2022, from $775.0 million at December 31, 2021, primarily due to an increase in brokered time deposits. The Company largely completed a program to extend maturities on price sensitive deposits in a cost-effective manner, consisting of the addition of $689.2 million in brokered time deposits with laddered maturities ranging from 1 to 24 months. The brokered time deposits carry a weighted average rate of 2.12%, a weighted average life of 9.5 months, and were issued at costs less than comparable wholesale borrowings. The loans-to-deposit ratio at June 30, 2022 was 95.9%, as compared to 88.6% at December 31, 2021.
Overnight FHLB advances increased to $488.8 million at June 30, 2022 from $0 at December 31, 2021 to fund liquidity needs. Other borrowings decreased by $34.5 million to $194.7 million at June 30, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022. Other liabilities increased by $151.2 million to $273.2 million at June 30, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with the Company’s customer interest rate swap programs and collateral received from counterparties.
Stockholders’ equity was $1.52 billion at June 30, 2022 and December 31, 2021 as net income of $55.2 million was primarily offset by an increase in accumulated other comprehensive loss, cash dividends of $0.34 per share for a cost of $20.0 million, stock repurchases of $7.4 million, and preferred stock dividends of $2.0 million. Accumulated other comprehensive loss increased by $26.3 million to $29.1 million at June 30, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale which were adversely impacted by the rising interest rate environment. For the six months ended June 30, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase programs at a weighted average cost of $19.82. There were 2,934,438 shares available for repurchase at June 30, 2022 under the existing repurchase program. Stockholders’ equity per common share increased to $25.73 at June 30, 2022, as compared to $25.63 at December 31, 2021.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2022 and June 30, 2021
General
Net income available to common stockholders for the three and six months ended June 30, 2022 was $28.0 million and $52.7 million, respectively, or $0.47 and $0.89 per diluted share, respectively, as compared to $29.6 million and $61.2 million, or $0.49 and $1.02 per diluted share, for the corresponding prior year periods, respectively. Net income available to common stockholders for the three and six months ended June 30, 2022 included merger related expenses of $196,000 and $2.2 million, respectively, net branch consolidation expenses of $546,000 and $948,000, respectively, and net loss on equity investments of and $8.1 million and $10.9 million, respectively. These items decreased net income by $6.7 million and $10.7 million, net of tax, for the three and six months ended June 30, 2022, respectively. Net income available to common stockholders for the three and six months ended June 30, 2021 included merger related expenses of $446,000 and $827,000, respectively, net branch consolidation expenses of $26,000 and $1.0 million, respectively, and a net gain on equity investments of $576,000 and $8.9 million, respectively. These items increased net income by $78,000 and $5.3 million, net of tax, for the three and six months ended June 30, 2021, respectively.
Interest Income
Interest income for the three and six months ended June 30, 2022 increased to $99.4 million and $190.4 million, respectively, as compared to $83.3 million and $168.2 million for the corresponding prior year periods, respectively. Average interest-earning assets increased by $801.0 million and $675.4 million for the three and six months ended June 30, 2022, respectively, as compared to the same prior year periods, primarily due to loan and securities growth funded by the redeployment of excess cash and, to a lesser extent, funding from increased deposits and borrowings. Average loans receivable, net of allowance for loan credit losses, increased by $1.42 billion and $1.24 billion for the three and six months ended June 30, 2022, respectively, as compared to the same prior year periods. For the three and six months ended June 30, 2022, the yield on average interest-
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earning assets increased to 3.60% and 3.51%, respectively, from 3.25% and 3.32%, for the corresponding prior year periods, respectively.
Interest Expense
Interest expense for the three and six months ended June 30, 2022 was $8.6 million and $15.4 million, respectively, as compared to $9.3 million and $20.6 million in the corresponding prior year periods, respectively. For the three and six months ended June 30, 2022, the cost of average interest-bearing liabilities decreased to 0.42% and 0.39%, respectively, from 0.50% and 0.55% for the corresponding prior year periods, respectively, as a result of the downward repricing of deposits. The total cost of deposits (including non-interest bearing deposits) was 0.18% and 0.17% for the three and six months ended June 30, 2022, respectively, as compared to 0.27% and 0.32%, for the same prior year periods, respectively, and a weighted average rate of 0.28% at June 30, 2022.
Net Interest Income and Margin
Net interest income for the three and six months ended June 30, 2022 increased to $90.8 million and $175.0 million, respectively, as compared to $74.0 million and $147.6 million for the corresponding prior year periods, respectively, reflecting increases in average interest-earning assets and net interest margin. Net interest margin for the three and six months ended June 30, 2022 increased to 3.29% and 3.24%, from 2.89% and 2.91% for the same prior year periods, respectively. The net interest margin expansion was primarily attributable to the redeployment of excess cash into loans and securities and, to a lesser extent, the impact of the rising interest rate environment on interest earning assets and a decreased cost of funds.
Credit Loss Expense (Benefit)
For the three and six months ended June 30, 2022, the credit loss expense was $1.3 million and $3.1 million, respectively, as compared to a credit loss benefit of $6.5 million and $7.1 million, for the corresponding prior year periods, respectively. The credit loss expense for the three and six months ended June 30, 2022 was influenced by strong loan portfolio growth, cooling and increasingly uncertain macro-economic forecasts due to conflicting economic signals, partly offset by ongoing positive trends in the Company’s asset quality and continued robust employment levels. Net loan charge-offs were $9,000 and $224,000 for the three months ended June 30, 2022 and 2021, respectively. Net loan recoveries were $83,000 and $56,000 for the six months ended June 30, 2022 and 2021, respectively. Non-performing loans totaled $20.8 million at June 30, 2022, as compared to $38.7 million at June 30, 2021, primarily due to loans that returned to accrual status and partly due to loans that were paid off.
Non-interest Income
For the three months ended June 30, 2022, other income decreased to $7.5 million, as compared to $11.8 million for the corresponding prior year period. The decrease was driven by a net loss on equity investments of $8.1 million compared to a net gain on equity investments of $576,000 in the prior year period, along with lower net gain on sale of loans of $1.3 million and fees and service charges of $510,000. The decrease was partially offset by the acquisition of a majority interest in Trident, which added $4.5 million of title-related fees and service charges and an increase in commercial loan swap income of $2.2 million.
For the six months ended June 30, 2022, other income decreased to $16.4 million, as compared to $32.6 million for the corresponding prior year period. The decrease was driven by a net loss on equity investments of $10.9 million compared to a net gain on equity investments of $8.9 million in the prior period, along with lower net gain on sale of loans of $3.0 million, deposit fees and service charges of $1.2 million, and Paycheck Protection Program (“PPP”) loan origination referral fees of $776,000. The decrease was partially offset by the acquisition of a majority interest in Trident, which added $4.5 million of title-related fees and service charges and an increase in commercial loan swap income of $3.9 million.
Non-interest Expense
Operating expenses increased to $58.7 million for the three months ended June 30, 2022, as compared to $51.7 million in the same prior year period. Operating expenses for the three months ended June 30, 2022 and 2021 included $742,000 and $472,000, respectively, of merger related and net branch consolidation expenses. The remaining increase of $6.7 million in operating expenses for the three months ended June 30, 2022, as compared to the corresponding prior year period, was partly due to the acquisition of majority interest in Trident, which added $3.2 million of expenses. The further remaining increase of $3.5 million in operating expense for the three months ended June 30, 2022 was due to increases in data processing expense of $1.8 million, as a result of the migration to a new core banking system, compensation and benefits expense of $1.2 million partly relating to the commercial banking strategy and the commercial banking hires in expansion markets of Boston and
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Baltimore, and an increase in the Company’s federal deposit insurance and regulatory assessments of $689,000 as a result of a higher assessment base and multiplier.
Operating expenses increased to $116.2 million for the six months ended June 30, 2022, as compared to $103.4 million in the same prior year period. Operating expenses for the six months ended June 30, 2022 and 2021 included $3.1 million and $1.9 million, respectively, of merger related and net branch consolidation expenses. The remaining increase of $11.6 million in operating expenses for the six months ended June 30, 2022, as compared to the corresponding prior year period, was partly due to the acquisition of majority interest in Trident, which added $3.2 million of expenses. The further remaining increase of $8.4 million in operating expense for the six months ended June 30, 2022 was primarily due to increases in data processing expense of $3.5 million as a result of the migration to a new core banking system, compensation and benefits expense of $3.5 million partly relating to the commercial banking strategy and the commercial banking hires in expansion markets of Boston and Baltimore, federal deposit insurance and regulatory assessments of $715,000 as a result of a higher assessment base and multiplier, and professional fees of $547,000.
Income Tax Expense
The provision for income taxes was $8.9 million and $16.9 million for the three and six months ended June 30, 2022, respectively, as compared to $10.1 million and $20.7 million for the same prior year periods. The effective tax rate was 23.3% and 23.4% for the three and six months ended June 30, 2022, respectively, as compared to 24.8% and 24.7% for the same prior year periods, respectively.
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Liquidity and Capital Resources
The primary sources of liquidity specifically available to OceanFirst Financial Corp. are dividends from the Bank, proceeds from sale of investments, and the issuance of preferred and common stock, and debt. For the six months ended June 30, 2022, the holding company received dividend payments of $30.0 million from the Bank. At June 30, 2022, OceanFirst Financial Corp. held $32.8 million in cash.
The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, access to the Federal Reserve discount window, other borrowings, and proceeds from the sale of loans and investments . While scheduled payments on loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition. The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions.
At June 30, 2022, the Bank had $488.8 million outstanding in overnight borrowings from the FHLB, as compared to $0 at December 31, 2021. The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs. There were no FHLB term advances at June 30, 2022 and December 31, 2021.
The Company’s cash needs for the six months ended June 30, 2022 were primarily satisfied by the increase in net proceeds from FHLB advances, deposits, which included the issuance of brokered time deposits, proceeds from maturities and calls of debt maturities, and principal repayments on debt securities. The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt and equity securities, and redemption of subordinated debt. The Company’s cash needs for the six months ended June 30, 2021 were primarily satisfied by principal repayments on debt securities held-to-maturity, proceeds from sales of loans and equity investments, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities, and loan originations.
In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans. At June 30, 2022, outstanding commitments to originate loans totaled $385.0 million and outstanding undrawn lines of credit totaled $1.78 billion, of which $1.42 billion were commitments to commercial and commercial construction borrowers and $359.5 million were commitments to consumer borrowers and residential construction borrowers. Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.
Time deposits scheduled to mature in one year or less totaled $1.01 billion at June 30, 2022.
At June 30, 2022, the Company also had various contractual obligations, which included debt obligations of $788.9 million, including finance lease obligations of $1.8 million, and an additional $21.2 million in operating lease obligations included in other liabilities. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
The Company has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management. Management also monitors cash on a daily basis to determine the liquidity needs of the Company and the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Company and Bank continue to maintain adequate liquidity under all stress scenarios.
Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the three and six months ended June 30, 2022, the Company repurchased 272,779 and 373,223 shares of its common stock, respectively, at a total cost of $5.3 million and $7.4 million, respectively. For the three and six months ended June 30, 2021, the Company repurchased 500,000 and 1.0 million shares of its common stock, respectively, at a total cost of $10.9 million and $20.9 million, respectively. At June 30, 2022, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.
Cash dividends on common stock declared and paid during the first six months of June 30, 2022 were $20.0 million, as compared to $20.3 million for the same prior year period. On July 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend is payable on August 19, 2022 to common stockholders of record at the close of business on August 8, 2022.
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Cash dividends on preferred stock declared and paid during the first six months of June 30, 2022 and 2021 were $2.0 million for both periods. The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, payable on August 15, 2022 to preferred stockholders of record on July 29, 2022.
The Company’s ability to continue to pay dividends remains dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.
As of June 30, 2022 and December 31, 2021, the Company and the Bank satisfy all regulatory capital requirements currently applicable as follows (dollars in thousands):
Actual For capital adequacy
purposes To be well-capitalized
under prompt
corrective action
As of June 30, 2022 Amount Ratio Amount Ratio Amount Ratio
Bank:
Tier 1 capital (to average assets) $ 1,075,202 9.26 % $ 464,250 4.00 % $ 580,313 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,075,202 11.03 682,095 7.00 (1)
633,374 6.50
Tier 1 capital (to risk-weighted assets) 1,075,202 11.03 828,258 8.50 (1)
779,537 8.00
Total capital (to risk-weighted assets) 1,130,590 11.60 1,023,143 10.50 (1)
974,422 10.00
Company:
Tier 1 capital (to average assets) $ 1,077,686 9.28 % $ 464,464 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
948,973 9.65 688,350 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,077,686 10.96 835,853 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,258,728 12.80 1,032,525 10.50 (1)
N/A N/A
Actual For capital adequacy
purposes To be well-capitalized
under prompt
corrective action
As of December 31, 2021 Amount Ratio Amount Ratio Amount Ratio
Bank:
Tier 1 capital (to average assets) $ 1,027,660 9.08 % $ 452,669 4.00 % $ 565,836 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,027,660 11.62 619,178 7.00 (1)
574,951 6.50
Tier 1 capital (to risk-weighted assets) 1,027,660 11.62 751,860 8.50 (1)
707,633 8.00
Total capital (to risk-weighted assets) 1,079,766 12.21 928,768 10.50 (1)
884,541 10.00
Company:
Tier 1 capital (to average assets) $ 1,044,518 9.22 % $ 453,087 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
917,088 10.26 625,801 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,044,518 11.68 759,902 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,257,372 14.06 938,702 10.50 (1)
N/A N/A
(1) Includes the Capital Conservation Buffer of 2.50%.
The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.
At June 30, 2022 and December 31, 2021, the Company maintained a stockholders’ equity to total assets ratio of 12.23% and 12.92%, respectively.
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Non-Performing Assets
The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans and other real estate owned. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.
June 30, December 31,
2022 2021
(dollars in thousands)
Non-performing loans:
Commercial real estate – investor $ 2,609 $ 3,614
Commercial real estate – owner occupied 8,233 11,904
Commercial and industrial 364 277
Residential real estate 5,846 6,114
Other consumer 3,701 3,585
Total non-performing loans 20,753 25,494
Other real estate owned — 106
Total non-performing assets $ 20,753 $ 25,600
PCD loans
$ 35,227 $ 41,817
Delinquent loans 30-89 days $ 9,558 $ 14,546
Allowance for loan credit losses as a percent of total loans 0.55 % 0.57 %
Allowance for loan credit losses as a percent of total non-performing loans
250.86 191.61
Non-performing loans as a percent of total loans receivable 0.22 0.30
Non-performing assets as a percent of total assets 0.17 0.22
The Company’s non-performing loans totaled $20.8 million at June 30, 2022, as compared to $25.5 million at December 31, 2021, primarily due to loans that returned to accrual status and partly due to loans that were paid off. Included in the non-performing loans total was $10.5 million and $11.3 million of troubled debt restructuring (“TDR”) loans at June 30, 2022 and December 31, 2021, respectively. Included in the non-performing loans total was $3.5 million and $6.5 million of PCD loans at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the allowance for loan credit losses totaled $52.1 million, or 0.55% of total loans, as compared to $48.9 million, or 0.57% of total loans, at December 31, 2021. These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $15.5 million and $18.9 million at June 30, 2022 and December 31, 2021, respectively.
The Company classifies loans and other assets in accordance with regulatory guidelines. The table below represents Special Mention and Substandard assets (in thousands):
June 30, December 31,
2022 2021
Special Mention $ 60,812 $ 91,607
Substandard 103,294 148,557
The decreases in special mention and substandard loans were primarily due to improved profitability of borrowers and their ability to service their loans. The decrease in special mention also included one commercial loan of $14.1 million, which paid in full during the six months ended June 30, 2022.
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Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.
Impact of New Accounting Pronouncements
Accounting Pronouncements Adopted in 2022
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify generally accepted accounting principles for other areas of Topic 740 by clarifying and amending existing guidance. This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restricti on. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard to the consolidated financial statements.
In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. The amendments in this ASU were issued to (1) eliminate accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty; (2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company plans to adopt this standard on January 1, 2023 and is currently evaluating the impact of this standard to the consolidated financial statements.
In March 2022, FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. The Company currently does not apply fair value hedge accounting; however the Company is currently evaluating the potential impact of this standard to the consolidated financial statements.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by
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use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: the impact of the COVID-19 or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, volatility and deterioration in the credit and equity markets, our ability to access low-cost funding, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in accounting principles, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks; and the Bank’s ability to successfully integrate acquired operations.
These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, under Item 1A - Risk Factors and elsewhere, and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.