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) September 30, 2022 June 30, 2022 September 30, 2021
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 12,683,453 $ 12,438,653 $ 11,829,688
Loans receivable, net of allowance for loan credit losses 9,672,488 9,380,688 8,139,961
Deposits 9,959,469 9,831,484 9,774,097
Total stockholders’ equity 1,540,216 1,521,432 1,513,249
SELECTED OPERATING DATA:
Net interest income 95,965 90,797 77,132
Credit loss expense (benefit) 1,016 1,254 (3,179)
Other income 15,150 7,541 9,883
Operating expenses 58,997 58,661 58,673
Net income 38,804 29,483 24,167
Net income attributable to OceanFirst Financial Corp. 38,611 28,961 24,167
Net income available to common stockholders 37,607 27,957 23,163
Diluted earnings per share 0.64 0.47 0.39
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period 26.04 25.73 25.47
Cash dividend per share 0.20 0.17 0.17
Dividend payout ratio per common share 31.25 % 36.17 % 43.59 %
Stockholders’ equity to total assets 12.14 12.23 12.79
Return on average assets (2) (3) (4)
1.19 0.92 0.78
Return on average stockholders’ equity (2) (3) (4)
9.68 7.31 6.05
Net interest rate spread (5)
3.19 3.18 2.80
Net interest margin (2) (6)
3.36 3.29 2.93
Operating expenses to average assets (2) (4)
1.87 1.92 1.98
Efficiency ratio (4) (7)
53.10 59.65 67.43
Loans-to-deposits ratio 97.60 95.90 83.71
ASSET QUALITY:
Non-performing loans (8)
$ 21,498 $ 20,753 $ 30,304
Non-performing assets (8)
21,498 20,753 30,410
Allowance for loan credit losses as a percent of total loans receivable (9) (10)
0.55 % 0.55 % 0.61 %
Allowance for loan credit losses as a percent of total non-performing loans (8) (10)
248.96 250.86 165.50
Non-performing loans as a percent of total loans receivable (8) (9)
0.22 0.22 0.37
Non-performing assets as a percent of total assets (8)
0.17 0.17 0.26
(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 a net benefit related to merger related expenses, net branch consolidation (benefit) expense, and gain on equity investments of $3.4 million , or $2.6 million , net of tax expense, for the three months ended September 30, 2022. Included a net expense related to merger related expenses, net branch consol idation 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. I ncluded a net expense related to merger related expenses, net branch consolidation expenses, and net loss on equity investments of $4.7 million, or $3.6 million, net of tax benefit, for the three months ended September 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 generally 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 $13.6 million, $15.5 million, and $21.3 million at September 30, 2022, June 30, 2022 and September 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, 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 September 30, 2022 were as follows:
• Strengthening Net Interest Income and Margin: Net interest income increased by $5.2 million to $96.0 million, from $90.8 million in the prior linked quarter. Net interest margin increased to 3.36%, as compared to 3.29% in the prior linked quarter, largely driven by the impact of the rising rate environment on interest earning assets, and to a lesser extent an increase in loan balances, partly offset by an increased cost of funds and lower prepayment fees.
• Loan and Deposit Growth: Loan growth for the quarter was $293.9 million, reflecting originations of $543.8 million. The committed loan pipeline increased to $439.5 million as of September 30, 2022. Deposits grew by $128.0 million for the quarter and $226.7 million year-to-date.
• Interchange Fees: Effective July 1, 2022, the Bank became subject to the Durbin amendment, as contained in the Dodd-Frank Act, which imposes limitations on debit card interchange fees collected by banks with assets of $10 billion or more. As a result, bankcard services revenue was adversely impacted by $1.7 million. The Company is strategically positioned to absorb the decreased fee income and continue to grow earnings.
• Partners Bancorp: On November 9, 2022, the Company and Partners Bancorp (“Partners”) entered into a Mutual Termination Agreement (the “Termination Agreement”) pursuant to which, among other things, the Company and Partners mutually agreed to terminate the Agreement and Plan of Merger (the “Merger Agreement”) and transactions contemplated thereby. Each party will bear its own costs and expenses in connection with the terminated transaction, and neither party will pay a termination fee in connection with the termination of the Merger Agreement. The Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the Merger Agreement and the terminated transaction.
Net income available to common stockholders for the three and nine months ended September 30, 2022 was $37.6 million and $90.3 million, respectively, or $0.64 and $1.53 per diluted share, as compared to $23.2 million and $84.4 million, or $0.39 and $1.41 per diluted share, for the corresponding prior year periods. The dividends paid to preferred stockholders were $1.0 million and $3.0 million for the three and nine months ended September 30, 2022 and 2021, respectively. Net income available to common stockholders for the three and nine months ended September 30, 2022 included merger related expenses of $298,000 and $2.5 million, respectively, net branch consolidation benefit of $346,000 and net branch consolidation expense of $602,000, and gain on equity investments of $3.4 million and net loss on equity investments of $7.5 million. Net income available to common stockholders for the three and nine months ended September 30, 2021 included merger related expenses of $225,000 and $1.1 million, respectively, net branch consolidation expenses of $4.0 million and $5.1 million, and net loss on equity investments of $466,000 and net gain on equity investments of $8.4 million.
The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.14% at September 30, 2022.
On October 24, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend, related to the quarter ended September 30, 2022, will be paid on November 18, 2022 to common stockholders of record on November 7, 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 November 15, 2022 to preferred stockholders of record on October 31, 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 nine months ended September 30, 2022 interest income included net loan fees of $832,000 and $5.0 million, respectively, as compared to $1.6 million and $4.2 million for the same prior year periods, respectively.
The following tables set forth certain information relating to the Company for the three and nine months ended September 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 September 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 $ 65,648 $ 336 2.03 % $ 1,053,797 $ 441 0.17 %
Securities (2)
1,748,687 10,022 2.27 1,542,630 6,090 1.57
Loans receivable, net (3)
Commercial 6,509,515 74,309 4.53 5,361,472 55,387 4.10
Residential real estate 2,791,067 22,818 3.27 2,260,673 20,076 3.55
Home equity loans and lines and other consumer (“other consumer”) 256,638 3,014 4.66 289,011 3,426 4.70
Allowance for loan credit losses, net of deferred loan costs and fees (44,773) — — (46,436) — —
Loans receivable, net 9,512,447 100,141 4.18 7,864,720 78,889 3.98
Total interest-earning assets 11,326,782 110,499 3.88 10,461,147 85,420 3.24
Non-interest-earning assets 1,191,173 1,276,890
Total assets $ 12,517,955 $ 11,738,037
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 3,873,968 2,671 0.27 % $ 3,841,475 2,854 0.29 %
Money market 793,230 721 0.36 767,854 245 0.13
Savings 1,603,147 187 0.05 1,609,197 146 0.04
Time deposits 1,467,297 5,659 1.53 904,384 2,134 0.94
Total 7,737,642 9,238 0.47 7,122,910 5,379 0.30
Federal Home Loan Bank (“FHLB”) advances 352,392 2,208 2.49 — — —
Securities sold under agreements to repurchase 96,147 35 0.14 142,494 51 0.14
Other borrowings 194,755 3,053 6.22 228,695 2,858 4.96
Total borrowings 643,294 5,296 3.27 371,189 2,909 3.11
Total interest-bearing liabilities 8,380,936 14,534 0.69 7,494,099 8,288 0.44
Non-interest-bearing deposits 2,328,700 2,576,123
Non-interest-bearing liabilities 266,564 148,327
Total liabilities 10,976,200 10,218,549
Stockholders’ equity 1,541,755 1,519,488
Total liabilities and equity $ 12,517,955 $ 11,738,037
Net interest income $ 95,965 $ 77,132
Net interest rate spread (4)
3.19 % 2.80 %
Net interest margin (5)
3.36 % 2.93 %
Total cost of deposits (including non-interest-bearing deposits) 0.36 % 0.22 %
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For the Nine Months Ended September 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 $ 73,886 $ 472 0.85 % $ 1,061,419 $ 958 0.12 %
Securities (2)
1,801,978 27,086 2.01 1,452,778 18,832 1.73
Loans receivable, net (3)
Commercial 6,275,836 198,054 4.22 5,270,138 163,315 4.14
Residential real estate 2,685,080 66,899 3.32 2,269,066 59,242 3.48
Other consumer 254,891 8,387 4.40 306,681 11,288 4.92
Allowance for loan credit losses, net of deferred loan costs and fees (42,987) — — (50,912) — —
Loans receivable, net 9,172,820 273,340 3.98 7,794,973 233,845 4.01
Total interest-earning assets 11,048,684 300,898 3.64 10,309,170 253,635 3.29
Non-interest-earning assets 1,191,358 1,264,347
Total assets $ 12,240,042 $ 11,573,517
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 4,088,759 6,433 0.21 % $ 3,753,457 10,549 0.38 %
Money market 773,666 1,317 0.23 761,975 823 0.14
Savings 1,617,354 473 0.04 1,571,345 490 0.04
Time deposits 1,060,027 9,373 1.18 1,041,371 8,338 1.07
Total 7,539,806 17,596 0.31 7,128,148 20,200 0.38
FHLB Advances 308,043 3,890 1.69 — — —
Securities sold under agreements to repurchase 105,821 117 0.15 135,754 203 0.20
Other borrowings 205,796 8,306 5.40 228,472 8,480 4.96
Total borrowings 619,660 12,313 2.66 364,226 8,683 3.19
Total interest-bearing liabilities 8,159,466 29,909 0.49 7,492,374 28,883 0.52
Non-interest-bearing deposits 2,352,606 2,416,866
Non-interest-bearing liabilities 193,147 157,821
Total liabilities 10,705,219 10,067,061
Stockholders’ equity 1,534,823 1,506,456
Total liabilities and equity $ 12,240,042 $ 11,573,517
Net interest income $ 270,989 $ 224,752
Net interest rate spread (4)
3.15 % 2.77 %
Net interest margin (5)
3.28 % 2.91 %
Total cost of deposits (including non-interest-bearing deposits) 0.24 % 0.28 %
(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 September 30, 2022 and December 31, 2021
Total assets increased by $943.8 million to $12.68 billion at September 30, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.10 billion to $9.72 billion at September 30, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations. Total debt securities decreased by $209.4 million at September 30, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment. Other assets increased by $81.1 million to $228.1 million at September 30, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs.
Total liabilities increased by $920.2 million to $11.14 billion at September 30, 2022, from $10.22 billion at December 31, 2021. Deposits increased by $226.7 million to $9.96 billion at September 30, 2022, from $9.73 billion at December 31, 2021. Total deposits, excluding time deposits, decreased by $402.7 million to $8.56 billion at September 30, 2022, from $8.96 billion at December 31, 2021, primarily due to the net runoff of interest-bearing checking balances. Time deposits increased to $1.40 billion at September 30, 2022, from $775.0 million at December 31, 2021, primarily due to an increase in brokered time deposits, which increased to $828.7 million at September 30, 2022 from $25.0 million at December 31, 2021. The loans-to-deposit ratio at September 30, 2022 was 97.6%, as compared to 88.6% at December 31, 2021.
FHLB advances increased to $514.2 million at September 30, 2022 from $0 at December 31, 2021 to fund liquidity needs. Other borrowings decreased by $34.2 million to $194.9 million at September 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 $230.9 million to $352.9 million at September 30, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties.
Stockholders’ equity increased to $1.54 billion at September 30, 2022, as compared to $1.52 billion at December 31, 2021. Accumulated other comprehensive loss increased by $35.7 million to $38.5 million at September 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 nine months ended September 30, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82. There were 2,934,438 shares available for repurchase at September 30, 2022 under the existing repurchase program. Stockholders’ equity per common share increased to $26.04 at September 30, 2022, as compared to $25.63 at December 31, 2021.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2022 and September 30, 2021
General
Net income available to common stockholders for the three and nine months ended September 30, 2022 was $37.6 million and $90.3 million, respectively, or $0.64 and $1.53 per diluted share, as compared to $23.2 million and $84.4 million, or $0.39 and $1.41 per diluted share, for the corresponding prior year periods. Net income available to common stockholders for the three and nine months ended September 30, 2022 included merger related expenses of $298,000 and $2.5 million, respectively, net branch consolidation benefit of $346,000 and net branch consolidation expense of $602,000, and gain on equity investments of $3.4 million and net loss on equity investments of $7.5 million. These items increased net income by $2.6 million and decreased net income by $8.1 million, net of tax, for the three and nine months ended September 30, 2022, respectively. Net income available to common stockholders for the three and nine months ended September 30, 2021 included merger related expenses of $225,000 and $1.1 million, respectively, net branch consolidation expenses of $4.0 million and $5.1 million, and a net loss on equity investments of $466,000 and net gain on equity investments of $8.4 million. These items decreased net income by $3.6 million and increased net income by $1.7 million, net of tax, for the three and nine months ended September 30, 2021, respectively.
Interest Income
Interest income for the three and nine months ended September 30, 2022 increased to $110.5 million and $300.9 million, respectively, as compared to $85.4 million and $253.6 million for the corresponding prior year periods. Average interest-earning assets increased by $865.6 million and $739.5 million for the three and nine months ended September 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. Average loans receivable, net of allowance for loan credit losses, increased by $1.65 billion and $1.38 billion for the three and nine months ended September 30, 2022, respectively, as compared to the same prior year periods. For the three and nine months ended September 30, 2022, the yield on average interest-earning assets increased to 3.88% and
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3.64%, respectively, from 3.24% and 3.29%, for the corresponding prior year periods due to interest earning asset growth funded by the redeployment of excess cash and the rising rate environment.
Interest Expense
Interest expense for the three and nine months ended September 30, 2022 was $14.5 million and $29.9 million, respectively, as compared to $8.3 million and $28.9 million in the corresponding prior year periods. For the three months ended September 30, 2022, the cost of average interest-bearing liabilities increased to 0.69% from 0.44% for corresponding prior year period, as a result of higher costs associated with FHLB advances and time deposits issued in an elevated rate environment in 2022. For the nine months ended September 30, 2022, the cost of average interest-bearing liabilities decreased to 0.49% from 0.52% for the corresponding prior year period, as a result of downward repricing of deposits that began in the prior year and continued through the current year, partly offset by the recent pace of the rising rate environment in the current quarter and increased funding costs on FHLB advances. The total cost of deposits (including non-interest bearing deposits) was 0.36% and 0.24% for the three and nine months ended September 30, 2022, respectively, as compared to 0.22% and 0.28%, for the same prior year periods.
Net Interest Income and Margin
Net interest income for the three and nine months ended September 30, 2022 increased to $96.0 million and $271.0 million, respectively, as compared to $77.1 million and $224.8 million for the corresponding prior year periods, reflecting an increase in average interest-earning assets and net interest margin. Net interest margin for the three and nine months ended September 30, 2022 increased to 3.36% and 3.28%, respectively, from 2.93% and 2.91% from the same prior year periods. The net interest margin expansion was positively impacted by the redeployment of excess cash into loans and the impact of the rising rate environment on interest earning assets, partly offset by an increased cost of funds and the growth in interest-bearing liabilities balances.
Credit Loss Expense (Benefit)
Credit loss expense for the three and nine months ended September 30, 2022 was $1.0 million and $4.1 million, respectively, as compared to a credit loss benefit of $3.2 million and $10.3 million, for the corresponding prior year periods. The credit loss expense for the three and nine months ended September 30, 2022 was influenced by loan growth, slowing prepayment rates, and increasingly uncertain macro-economic forecasts due to rising interest rates, inflation, and global economic headwinds, partly offset by positive trends in the Company’s criticized and classified assets. Net loan recoveries were $252,000 and $386,000 for the three months ended September 30, 2022 and 2021, respectively. Net loan recoveries were $335,000 and $442,000 for the nine months ended September 30, 2022 and 2021, respectively. Non-performing loans totaled $21.5 million at September 30, 2022, as compared to $30.3 million at September 30, 2021, primarily due to loans that were paid off and partly due to loans that returned to accrual status.
Non-interest Income
Other income increased to $15.2 million for the three months ended September 30, 2022, as compared to $9.9 million for the corresponding prior year period. The increase was driven by a gain on equity investments of $3.4 million as compared to a net loss on equity investments of $466,000 in the prior year period, along with the acquisition of a majority interest in Trident Abstract Title Agency, LLC (“Trident”), which added $3.3 million of title-related fees and service charges. These increases were partially offset by lower income from bankcard services of $1.9 million, primarily as a result of the impact of the Durbin amendment, which became effective for the Company on July 1, 2022.
Other income decreased to $31.5 million for the nine months ended September 30, 2022, as compared to $42.5 million for the corresponding prior year period. The decrease was driven by a net loss on equity investments of $7.5 million as compared to a net gain on equity investments of $8.4 million in the prior year period, along with decreases in net gain on sale of loans of $2.8 million, income from bankcard services of $2.3 million primarily as a result of the impact of the Durbin amendment, fees and service charges of $849,000, and Paycheck Protection Program (“PPP”) loan origination referral fees of $800,000. These decreases were partially offset by the impact of Trident, which added $7.8 million of title-related fees and service charges and an increase in commercial loan swap income of $3.8 million.
Non-interest Expense
Operating expenses increased to $59.0 million for the three months ended September 30, 2022, as compared to $58.7 million in the same prior year period. Operating expenses for the three months ended September 30, 2022 and 2021 included $48,000 and $4.2 million, respectively, of merger related expenses and net branch consolidation benefit/expense. The remaining increase of $4.6 million in operating expenses for the three months ended September 30, 2022, as compared to the corresponding prior year
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period, was partly due to the acquisition of a majority interest in Trident, which added $2.8 million of expenses, compensation and benefits expense of $1.8 million primarily related to increased employee medical benefit claims, and data processing expense of $1.2 million, as a result of the migration to a new core banking system. These increases were partly offset by a decrease in professional fees of $615,000.
Operating expenses increased to $175.2 million for the nine months ended September 30, 2022, as compared to $162.0 million in the same prior year period. Operating expenses for the nine months ended September 30, 2022 and 2021 included $3.1 million and $6.1 million, respectively, of merger related and net branch consolidation expenses. The remaining increase of $16.2 million in operating expenses for the nine months ended September 30, 2022, as compared to the corresponding prior year period, was partly due to the impact of Trident, which added $6.0 million of expenses, and increases in compensation and benefits expense of $5.3 million partly relating to the commercial banking strategy and commercial banking hires in expansion markets of Boston and Baltimore, data processing expense of $4.6 million as a result of the migration to a new core banking system, and federal deposit insurance and regulatory assessments of $1.0 million as a result of a higher assessment base and multiplier. These increases were partly offset by a decrease in amortization of core deposit intangible of $551,000.
Income Tax Expense
The provision for income taxes was $12.3 million and $29.2 million for the three and nine months ended September 30, 2022, respectively, as compared to $7.4 million and $28.1 million for the same prior year periods. The effective tax rate was 24.1% and 23.7% for the three and nine months ended September 30, 2022, respectively, as compared to 23.3% and 24.3% for the same prior year periods.
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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 nine months ended September 30, 2022, the holding company received dividend payments of $50.0 million from the Bank. At September 30, 2022, OceanFirst Financial Corp. held $38.2 million in cash.
The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, 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 and access to the Federal Reserve Bank discount window.
At September 30, 2022, the Bank had $500.0 million of short-term advances and $14.2 million of overnight borrowings from the FHLB, as compared to $0 at December 31, 2021. The Bank regularly utilizes overnight and short-term borrowings to fund short-term liquidity needs.
The Com pany’s cash needs for the nine months ended September 30, 2022 were primarily satisfied by the net proceeds from FHLB advances, deposits, which included the issuance of brokered time deposits, principal repayments on debt securities and loans, and proceeds from maturities and calls of debt maturities. The cash was principally utilized for loan originations, purchases of residential loan pools, purchases of debt and equity securities, redemption of subordinated debt, and dividend payments. The Company’s cash needs for the nine months ended September 30, 2021 were primarily satisfied by the increase in deposits, proceeds from sales of loans and equity investments, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities. The cash was principally utilized for purchases of debt and equity securities, a purchase of a residential loan pool, 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 September 30, 2022, outstanding commitments to originate loans totaled $439.5 million and outstanding undrawn lines of credit totaled $1.72 billion, of which $1.34 billion were commitments to commercial and commercial construction borrowers and $382.3 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 $866.3 million at September 30, 2022.
At September 30, 2022, the Company also had various contractual obligations, which included debt obligations of $805.4 million, including finance lease obligations of $1.8 million, and an additional $20.4 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 months ended September 30, 2022, the Company did not repurchase any shares of its common stock. For the nine months ended September 30, 2022, the Company repurchased 373,223 shares of its common stock, at a total cost of $7.4 million. For the three and nine months ended September 30, 2021, the Company repurchased 460,009 and 1.5 million shares of its common stock, respectively, at a total cost of $9.7 million and $30.6 million, respectively. At September 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 nine months of September 30, 2022 were $31.8 million, as compared to $30.4 million for the same prior year period. The increase in dividends was a result of an increase in the dividend rate from $0.17 to $0.20 per common share. On October 24, 2022, the Company’s Board of Directors declared a quarterly cash
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dividend of $0.20 per common share. The dividend is payable on November 18, 2022 to common stockholders of record at the close of business on November 7, 2022.
Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2022 and 2021 were $3.0 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 November 15, 2022 to preferred stockholders of record on October 31, 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 September 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 September 30, 2022 Amount Ratio Amount Ratio Amount Ratio
Bank:
Tier 1 capital (to average assets) $ 1,097,654 9.23 % $ 475,574 4.00 % $ 594,467 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,097,654 10.98 699,932 7.00 (1)
649,937 6.50
Tier 1 capital (to risk-weighted assets) 1,097,654 10.98 849,918 8.50 (1)
799,923 8.00
Total capital (to risk-weighted assets) 1,154,421 11.55 1,049,899 10.50 (1)
999,903 10.00
Company:
Tier 1 capital (to average assets) $ 1,106,915 9.30 % $ 475,873 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
978,012 9.69 706,355 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,106,915 10.97 857,717 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,289,224 12.78 1,059,533 10.50 (1)
N/A N/A
As of December 31, 2021
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 September 30, 2022 and December 31, 2021, the Company maintained a stockholders’ equity to total assets ratio of 12.14% 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.
September 30, December 31,
2022 2021
(dollars in thousands)
Non-performing loans:
Commercial real estate – investor $ 9,866 $ 3,614
Commercial real estate – owner occupied 1,976 11,904
Commercial and industrial 321 277
Residential real estate 5,958 6,114
Other consumer 3,377 3,585
Total non-performing loans 21,498 25,494
Other real estate owned — 106
Total non-performing assets $ 21,498 $ 25,600
PCD loans, net of allowance for loan credit losses
$ 29,249 $ 41,817
Delinquent loans 30-89 days $ 11,846 $ 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
248.96 191.61
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 $21.5 million at September 30, 2022, as compared to $25.5 million at December 31, 2021, primarily due to loans that were paid off and partly due to loans that returned to accrual status. Included in the non-performing loans total was $10.0 million and $11.3 million of troubled debt restructuring (“TDR”) loans at September 30, 2022 and December 31, 2021, respectively. Included in the non-performing loans total was $3.0 million and $6.5 million of PCD loans at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, the allowance for loan credit losses totaled $53.5 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 $13.6 million and $18.9 million at September 30, 2022 and December 31, 2021, respectively.
The Company classifies loans and other assets in accordance with regulatory guidelines. The table below excludes any loans held-for-sale and represents Special Mention and Substandard assets (in thousands):
September 30, December 31,
2022 2021
Special Mention $ 54,330 $ 91,607
Substandard 97,353 148,557
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 was repaid in full during the nine months ended September 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 consolidated 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 does not expect this standard to have a material impact 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 does not expect this standard to have a material impact to the consolidated financial statement s.
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 use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, “will”, “should”, “may”, “view”, “opportunity”, “potential”, or similar expressions or expressions of confidence.
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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: implications arising from the termination of the proposed merger with Partners Bancorp; 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.