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, 2023 March 31, 2023 June 30, 2022
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 13,538,903 $ 13,555,175 $ 12,438,653
Loans receivable, net of allowance for loan credit losses 10,030,106 9,986,949 9,380,688
Deposits 10,158,337 9,993,095 9,831,484
Total stockholders’ equity 1,626,283 1,610,371 1,521,432
SELECTED OPERATING DATA:
Net interest income 92,109 98,802 90,797
Provision for credit losses 1,229 3,013 1,254
Other income 8,928 2,073 7,541
Operating expenses 62,930 61,309 58,661
Net income 27,882 27,899 29,483
Net income attributable to OceanFirst Financial Corp. 27,797 27,883 28,961
Net income available to common stockholders 26,793 26,879 27,957
Diluted earnings per share 0.45 0.46 0.47
SELECTED FINANCIAL RATIOS:
Stockholders’ equity per common share at end of period 27.37 27.07 25.73
Cash dividend per share 0.20 0.20 0.17
Dividend payout ratio per common share 44.44 % 43.48 % 36.17 %
Stockholders’ equity to total assets 12.01 11.88 12.23
Return on average assets (2) (3) (4)
0.80 0.82 0.92
Return on average stockholders’ equity (2) (3) (4)
6.61 6.77 7.31
Net interest rate spread (5)
2.50 2.92 3.18
Net interest margin (2) (6)
3.02 3.34 3.29
Operating expenses to average assets (2) (4)
1.87 1.88 1.92
Efficiency ratio (4) (7)
62.28 60.78 59.65
Loans-to-deposits ratio (8)
99.30 100.50 95.90
ASSET QUALITY:
Non-performing loans (9)
$ 22,758 $ 22,437 $ 20,753
Allowance for loan credit losses as a percent of total loans receivable (8) (10)
0.61 % 0.60 % 0.55 %
Allowance for loan credit losses as a percent of total non-performing loans (9) (10)
271.51 268.28 250.86
Non-performing loans as a percent of total loans receivable (8) (9)
0.23 0.22 0.22
Non-performing assets as a percent of total assets (9)
0.17 0.17 0.17
(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) Performance ratios for the three months ended June 30, 2023 included a net loss on equity investments of $559,000, or $397,000, net of tax benefit. Performance ratios for the three months ended March 31, 2023 included a net expense related to merger related expenses, net branch consolidation expenses, net loss on equity investments, and net loss on sale of investments of $7.6 million, or $5.8 million, net of tax benefit. Performance ratio s for the three months ended June 30, 2022 included a net expense 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.
(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.
(8) Total loans receivable excludes loans held-for-sale.
(9) Non-performing loans and assets 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.
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(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 $9.8 million, $10.5 million, and $15.5 million at June 30, 2023, March 31, 2023 and June 30, 2022, 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 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, 2023 were as follows:
• Excess Liquidity: The Company maintained elevated levels of on-balance sheet cash and funding availability of $4.0 billion at June 30, 2023. Deposits increased $165.2 million during the quarter, which included a shift from non-maturity deposits to time deposits.
• Asset Quality: Continued strong asset quality as criticized assets, non-performing loans, and loans 30 to 89 days past due as a percent of total loans receivable were 1.18%, 0.23%, and 0.03%, respectively, at June 30, 2023. Net charge-off activity continues to remain at zero percent of total average loans on an annualized basis.
• Strong Capital: Capital ratios remained above “well-capitalized” levels, including the Company’s common equity tier 1 capital, which increased 19 basis points from the prior quarter, to 10.21% at June 30, 2023. Stockholders’ equity per common share was $27.37, up $0.30 from the prior quarter.
The current quarter results were impacted by the following matters. Net interest income and cost of funds were adversely impacted by shifts to higher cost time deposits, repricing of government deposits, and maintaining excess liquidity on balance sheet, which outpaced the increase in interest-earning assets. This drove an increase in deposit betas, which is the change in rates paid to customers relative to the change in federal funds target rate, to 29%.
Net income available to common stockholders for the three and six months ended June 30, 2023 decreased to $26.8 million and increased to $53.7 million, respectively, or $0.45 and $0.91 per diluted share, as compared to $28.0 million and $52.7 million, or $0.47 and $0.89 per diluted share, for the corresponding prior year periods. The dividends paid to preferred stockholders were $1.0 million and $2.0 million for the three and six months ended June 30, 2023 and 2022, respectively.
On July 20, 2023, the Company’s Board of Directors declared a quarterly cash dividend on common stock of $0.20 per share. The dividend, related to the quarter ended June 30, 2023, will be paid on August 18, 2023 to common stockholders of record on August 7, 2023. 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, 2023 to preferred stockholders of record on July 31, 2023.
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Recent Developments
Bank failures earlier in the year led to uncertainty and volatility in the financial services industry. In response to these events, in March 2023 the Company took a series of precautionary measures, which included expanding and optimizing its funding and contingency funding sources; enhanced monitoring of deposit and funding flows; refreshing stress test scenarios; and evaluating supplemental liquidity and conservation measures. Additionally, management executed other timely actions such as re-evaluating the securities portfolio and updating capital and credit stress tests to understand and mitigate other potential risks that were highlighted by these events.
As a result of these procedures, the Company took a few key actions such as increasing on-balance sheet liquidity and funding capacity to $4.0 billion at June 30, 2023; sold specific positions in two financial institutions for the three months ended March 31, 2023, reviewed and concluded no further impairment existed in the Company’s remaining securities portfolio; and performed credit stress tests on the Company’s commercial real estate - investor portfolio, which included site visits. These actions resulted in a robust liquidity position and strong balance sheet. The Company will continue to monitor these events and the impact they may have in future periods, and will respond accordingly as economic and industry conditions change. Refer to the “Liquidity and Capital Resources” section for further information regarding liquidity.
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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, 2023, interest income included net loan fees of $1.2 million and $1.8 million, respectively, as compared to $3.2 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 six months ended June 30, 2023 and 2022. 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,
2023 2022
(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 $ 308,238 $ 4,283 5.57 % $ 67,440 $ 100 0.59 %
Securities (2)
1,931,032 16,709 3.47 1,811,869 8,585 1.90
Loans receivable, net (3)
Commercial 6,912,698 99,350 5.76 6,278,465 65,390 4.18
Residential real estate 2,895,629 25,936 3.58 2,718,787 22,742 3.35
Home equity loans and lines and other consumer (“other consumer”) 255,785 3,818 5.99 251,014 2,599 4.15
Allowance for loan credit losses, net of deferred loan costs and fees (53,327) — — (43,683) — —
Loans receivable, net 10,010,785 129,104 5.17 9,204,583 90,731 3.95
Total interest-earning assets 12,250,055 150,096 4.91 11,083,892 99,416 3.60
Non-interest-earning assets 1,217,666 1,168,093
Total assets $ 13,467,721 $ 12,251,985
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 3,718,289 11,964 1.29 % $ 4,020,474 1,612 0.16 %
Money market 694,311 3,678 2.12 739,647 279 0.15
Savings 1,248,312 389 0.12 1,639,568 161 0.04
Time deposits 2,458,872 21,903 3.57 937,387 2,265 0.97
Total 8,119,784 37,934 1.87 7,337,076 4,317 0.24
Federal Home Loan Bank (“FHLB”) advances 1,246,914 15,406 4.96 538,754 1,647 1.23
Securities sold under agreements to repurchase 71,752 192 1.07 103,929 41 0.16
Other borrowings 195,754 4,455 9.13 194,481 2,614 5.39
Total borrowings 1,514,420 20,053 5.31 837,164 4,302 2.06
Total interest-bearing liabilities 9,634,204 57,987 2.41 8,174,240 8,619 0.42
Non-interest-bearing deposits 1,873,226 2,328,124
Non-interest-bearing liabilities 333,598 214,900
Total liabilities 11,841,028 10,717,264
Stockholders’ equity 1,626,693 1,534,721
Total liabilities and equity $ 13,467,721 $ 12,251,985
Net interest income $ 92,109 $ 90,797
Net interest rate spread (4)
2.50 % 3.18 %
Net interest margin (5)
3.02 % 3.29 %
Total cost of deposits (including non-interest-bearing deposits) 1.52 % 0.18 %
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For the Six Months Ended June 30,
2023 2022
(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 $ 219,482 $ 5,221 4.80 % $ 78,074 $ 136 0.35 %
Securities (2)
1,943,148 33,085 3.43 1,829,065 17,064 1.88
Loans receivable, net (3)
Commercial 6,876,553 192,130 5.63 6,157,060 123,745 4.05
Residential real estate 2,883,904 51,097 3.54 2,631,208 44,081 3.35
Other consumer 259,573 7,597 5.90 254,002 5,373 4.27
Allowance for loan credit losses, net of deferred loan costs and fees (51,948) — — (42,080) — —
Loans receivable, net 9,968,082 250,824 5.07 9,000,190 173,199 3.87
Total interest-earning assets 12,130,712 289,130 4.80 10,907,329 190,399 3.51
Non-interest-earning assets 1,226,061 1,191,453
Total assets $ 13,356,773 $ 12,098,782
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 3,790,413 18,234 0.97 % $ 4,197,935 3,762 0.18 %
Money market 699,940 5,437 1.57 763,721 596 0.16
Savings 1,308,381 723 0.11 1,624,575 286 0.04
Time deposits 2,144,514 34,870 3.28 853,017 3,714 0.88
Total 7,943,248 59,264 1.50 7,439,248 8,358 0.23
FHLB Advances 1,234,919 29,824 4.87 285,501 1,682 1.19
Securities sold under agreements to repurchase 71,825 282 0.79 110,738 83 0.15
Other borrowings 203,911 8,849 8.75 211,407 5,252 5.01
Total borrowings 1,510,655 38,955 5.20 607,646 7,017 2.33
Total interest-bearing liabilities 9,453,903 98,219 2.10 8,046,894 15,375 0.39
Non-interest-bearing deposits 1,950,437 2,364,757
Non-interest-bearing liabilities 334,201 155,832
Total liabilities 11,738,541 10,567,483
Stockholders’ equity 1,618,232 1,531,299
Total liabilities and equity $ 13,356,773 $ 12,098,782
Net interest income $ 190,911 $ 175,024
Net interest rate spread (4)
2.70 % 3.12 %
Net interest margin (5)
3.17 % 3.24 %
Total cost of deposits (including non-interest-bearing deposits) 1.21 % 0.17 %
(1) Average yields and costs are annualized.
(2) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank (“FRB”) 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, 2023 and December 31, 2022
Total assets increased by $435.0 million to $13.54 billion, from $13.10 billion, due to higher cash and due from banks and loans. Cash and due from banks increased $289.8 million to $457.7 million, from $167.9 million as the Company maintained excess liquidity on balance sheet. Total loans increased by $165.6 million to $10.08 billion, from $9.92 billion, due to loan originations primarily in commercial.
Total liabilities increased by $394.2 million to $11.91 billion, from $11.52 billion. Deposits increased by $483.1 million to $10.16 billion, from $9.68 billion. Time deposits increased to $2.77 billion from $1.54 billion, or 27.2% and 15.9% of total deposits, respectively. Brokered time deposits increased $547.9 million and retail time deposits increased $674.9 million. The loans-to-deposit ratio was 99.3%, as compared to 102.5%. FHLB advances decreased by $119.5 million to $1.09 billion, from $1.21 billion.
Total stockholders’ equity increased to $1.63 billion, as compared to $1.59 billion, reflecting net income for the six months ended June 30, 2023 and a net increase in the fair market value of available-for-sale debt securities, net of tax, which decreased accumulated other comprehensive loss by $5.6 million.
For the six months ended June 30, 2023, the Company did not repurchase shares under its stock repurchase program. There were 2,934,438 shares available for repurchase at June 30, 2023 under the existing repurchase program. Stockholders’ equity per common share increased to $27.37, as compared to $26.81.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2023 and June 30, 2022
General
Net income available to common stockholders for the three and six months ended June 30, 2023 decreased to $26.8 million and increased to $53.7 million, respectively, or $0.45 and $0.91 per diluted share, as compared to $28.0 million and $52.7 million, or $0.47 and $0.89 per diluted share, for the corresponding prior year periods. Net income for the three and six months ended June 30, 2023 included net loss on equity investments of $559,000 and $2.8 million, respectively. Net income for the six months ended June 30, 2023 also included merger related expenses of $22,000, net branch consolidation expense of $70,000 and net loss on sale of investments of $5.3 million. These items decreased net income by $397,000 and $6.2 million, net of tax, for the three and six months ended June 30, 2023, respectively.
Net income 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, and a net loss on equity investments of $8.1 million and $10.9 million. 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.
Interest Income
Interest income for the three and six months ended June 30, 2023 increased to $150.1 million and $289.1 million, respectively, from $99.4 million and $190.4 million for the corresponding prior year periods. For the three and six months ended June 30, 2023, the yield on average interest-earning assets increased to 4.91% and 4.80%, respectively, from 3.60% and 3.51% for the corresponding prior year periods, due to the impact of rising rates on interest-earning asset growth. Average interest-earning assets increased by $1.17 billion and $1.22 billion for the three and six months ended June 30, 2023, respectively, primarily driven by organic commercial loan growth.
Interest Expense
Interest expense for the three and six months ended June 30, 2023 increased to $58.0 million and $98.2 million, respectively, from $8.6 million and $15.4 million in the corresponding prior year periods, reflecting rising rates on costs, deposit mix shift to higher cost time deposits and FHLB advances, repricing of government deposits, and maintaining excess liquidity on balance sheet. For the three and six months ended June 30, 2023, the cost of average interest-bearing liabilities increased to 2.41% and 2.10%, respectively, from 0.42% and 0.39% for the corresponding prior year periods, due to higher cost of deposits and FHLB advances. The total cost of deposits (including non-interest-bearing deposits) increased to 1.52% and 1.21% for the three and six months ended June 30, 2023, respectively, from 0.18% and 0.17% for the same prior year periods.
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Net Interest Income and Margin
Net interest income for the three and six months ended June 30, 2023 increased to $92.1 million and $190.9 million, respectively, from $90.8 million and $175.0 million in the corresponding prior year periods, reflecting a net impact of higher interest rates and to a lesser extent, an increase in average interest-earning assets. Net interest margin for the three and six months ended June 30, 2023 decreased to 3.02% and 3.17%, respectively, from 3.29% and 3.24% for the same prior year periods. Net interest margin decreased primarily due to the increase in cost of funds outpacing that of average interest earning assets in the current interest rate environment.
Provision for Credit Losses
Provision for credit losses for the three and six months ended June 30, 2023 was $1.2 million and $4.2 million, respectively, as compared to $1.3 million and $3.1 million for the corresponding prior year periods. The provision for credit losses for the current quarter reflected an increase to the allowance for loan credit losses, primarily related to commercial real estate, which was driven by sustained macroeconomic headwinds. Net loan charge-offs were $123,000 and $76,000 for the three and six months ended June 30, 2023, respectively. Net loan charge-offs were $9,000 and net loan recoveries were $83,000 for the three and six months ended June 30, 2022, respectively.
Non-interest Income
Three months ended June 30, 2023 vs. June 30, 2022
Other income increased to $8.9 million, as compared to $7.5 million. Other income was adversely impacted by net losses on equity investments of $559,000 and $8.1 million, for the respective quarters. The remaining decrease of $6.1 million was driven by decreases in commercial loan swap income of $2.3 million and fees and service charges of $2.0 million, which were adversely impacted by the current interest rate environment resulting in lower swap volume and mortgage activity. Bankcard services revenue decreased $1.8 million due to the Durbin amendment, which became effective for the Company on July 1, 2022.
Six months ended June 30, 2023 vs. June 30, 2022
Other income decreased to $11.0 million, as compared to $16.4 million. Other income was adversely impacted by net losses on equity investments of $8.1 million and $10.9 million, for the respective periods. The current year also included $5.3 million of losses related to the sale of investments in the first quarter. The remaining decrease of $8.2 million was driven by decreases in commercial loan swap income on lower volume of $4.4 million, bankcard services revenue of $3.4 million due to the Durbin amendment, and income from bank owned life insurance of $1.1 million on lower claims.
Non-interest Expense
Three months ended June 30, 2023 vs. June 30, 2022
Operating expenses increased to $62.9 million, as compared to $58.7 million. Operating expenses were adversely impacted by $742,000 of merger related expenses and net branch consolidation expense in the prior year period. The remaining increase of $5.0 million was due to increases in professional fees of $2.6 million related to the ongoing investments to improve profitability and operational efficiencies, and compensation and benefits expense of $1.1 million primarily related to inflation, annual merit-related compensation increases and higher medical costs. The current quarter also included increases to federal deposit insurance and regulatory assessments of $677,000 due to new assessment rates that went into effect on January 1, 2023, and real estate charges on assets held for sale of $580,000.
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Six months ended June 30, 2023 vs. June 30, 2022
Operating expenses increased to $124.2 million, as compared to $116.2 million. Operating expenses were adversely impacted by $92,000 and $3.1 million, for the respective periods, related to merger related expenses and net branch consolidation expense. The remaining increase of $11.1 million was due to increases in professional fees of $4.4 million and compensation and benefits expense of $4.3 million. The drivers of changes in expenses for the three months ended, as noted above, were also the drivers for the six months ended. Additionally, other operating expenses included higher expenses of $580,000 and $427,000 related to real estate charges on assets held for sale and mortgage title search fees, respectively.
Income Tax Expense
The provision for income taxes was $9.0 million and $17.7 million for the three and six months ended June 30, 2023, respectively, as compared to $8.9 million and $16.9 million for the same prior year periods. The effective tax rate was 24.4% and 24.0% for the three and six months ended June 30, 2023, respectively, as compared to 23.3% and 23.4% for the same prior year periods.
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Liquidity and Capital Resources
Liquidity Management
The Company manages its liquidity and funding needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses liquidity and management monitors the adherence to policy limits to satisfy current and future cash flow needs. The policy includes internal limits, monitoring of key indicators, deposit concentrations, liquidity sources and availability, quarterly stress testing, collateral management, and other qualitative and quantitative metrics.
Management monitors cash on a daily basis to determine the liquidity needs of the Bank and OceanFirst Financial Corp. (the “Parent Company”), a separate legal entity from the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. The Bank and Parent Company continue to maintain adequate liquidity under all stress scenarios. The Company also has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.
As a result of bank failures during the first quarter of the year, the Company took a series of precautionary measures and opted to bolster on-balance sheet liquidity, including cash and unpledged securities; and funding capacity at the FHLB and FRB Discount Window. As of June 30, 2023, total on-balance sheet liquidity and funding capacity was $4.0 billion.
The Company has a highly operational and granular deposit base, with long-standing client relationships across multiple customer segments providing stable funding. The vast majority of the government deposits are protected by the Federal Deposit Insurance Corporation insurance as well as the State of New Jersey under the Government Unit Deposit Protection Act, which requires uninsured government deposits to be further collateralized by the Bank. At June 30, 2023, the Bank reported in its respective Call Report $5.06 billion of estimated uninsured deposits. Excluding $2.03 billion of collateralized government deposits and $1.48 billion of intercompany deposits of fully consolidated subsidiaries, the Bank had estimated adjusted uninsured deposits of $1.55 billion, or 15% of total deposits. On balance-sheet liquidity and funding capacity represent 260% of the estimated adjusted uninsured deposits.
The primary sources of liquidity specifically available to the Parent Company are dividends from the Bank, proceeds from the sale of investments, and the issuance of debt, preferred and common stock. For the six months ended June 30, 2023, the Parent Company received dividend payments of $51.5 million from the Bank. At June 30, 2023, the Parent Company held $62.7 million in cash and cash equivalents.
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, access to the FRB discount window, and the Bank Term Funding Program (“BTFP”).
As of June 30, 2023, the Company pledged $7.15 billion of loans with the FHLB and FRB to enhance the Company’s borrowing capacity, and includes collateral pledged to the FHLB to obtain a municipal letter of credit to collateralize certain municipal deposits. The Company also pledged $97.0 million of securities to collateralize its repurchase agreements and for other purposes required by law. The Company had $1.09 billion of term advances from the FHLB as of June 30, 2023, as compared to $1.21 billion at December 31, 2022. As of June 30, 2023, the Company had no overnight borrowings from the FHLB and no outstanding borrowings from the FRB discount window or the BTFP.
The Com pany’s cash needs for the six months ended June 30, 2023 were primarily satisfied by the increase in deposits. The cash was primarily maintained on the balance sheet to increase liquidity on hand, and utilized for loan originations and purchases of debt securities.
Off-Balance Sheet Commitments and Contractual Obligations
In the normal course of business, the Bank routinely enters into various off-balance sheet commitments, primarily relating to the origination and funding of loans. At June 30, 2023, outstanding commitments to originate loans totaled $115.8 million and outstanding undrawn lines of credit totaled $1.65 billion, of which $1.29 billion were commitments to commercial and commercial construction borrowers and $364.6 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
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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.
At June 30, 2023, the Company also had various contractual obligations, which included debt obligations of $1.4 billion, including finance lease obligations of $1.8 million, and an additional $21.1 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. Time deposits scheduled to mature in one year or less totaled $2.51 billion at June 30, 2023.
Liquidity Used in Stock Repurchases and Cash Dividends
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 June 30, 2023, the Company did not repurchase any shares of its common stock. At June 30, 2023, 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, 2023 was $23.6 million. Cash dividends on preferred stock declared and paid during the first six months of June 30, 2023 was $2.0 million.
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 Parent Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Parent 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.
Capital Management
The Company manages its capital sources, uses, and expected future needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses capital and management monitors the adherence to policy limits to satisfy current and future capital needs. The policy includes internal limits, monitoring of key indicators, sources and availability, intercompany transactions, forecasts and stress testing, and other qualitative and quantitative metrics.
Additionally, management performs multiple capital stress test scenarios on a quarterly basis, varying loan growth, earnings, access to the capital markets, credit losses, and more recently, mark-to-market losses in the investment portfolio, including both available-for-sale and held-to-maturity. The Bank and Parent Company continue to maintain adequate capital under all stress scenarios, including a scenario where all losses related to the investment securities portfolio are realized. The Bank and the Parent Company also have detailed contingency capital plans and obtain comprehensive reporting of capital trends on a regular basis, which are reviewed by management and the Board.
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Regulatory Capital Requirements
As of June 30, 2023 and December 31, 2022, 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, 2023 Amount Ratio Amount Ratio Amount Ratio
Company:
Tier 1 capital (to average assets) $ 1,190,122 9.21 % $ 517,131 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
1,060,812 10.21 727,032 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,190,122 11.46 882,824 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,380,249 13.29 1,090,547 10.50 (1)
N/A N/A
Bank:
Tier 1 capital (to average assets) $ 1,144,580 8.92 % $ 513,100 4.00 % $ 641,375 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,144,580 11.13 719,670 7.00 (1)
668,265 6.50
Tier 1 capital (to risk-weighted assets) 1,144,580 11.13 873,885 8.50 (1)
822,480 8.00
Total capital (to risk-weighted assets) 1,209,475 11.76 1,079,505 10.50 (1)
1,028,100 10.00
As of December 31, 2022
Company:
Tier 1 capital (to average assets) $ 1,150,690 9.43 % $ 488,297 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
1,021,774 9.93 720,641 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,150,690 11.18 875,064 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,336,652 12.98 1,080,961 10.50 (1)
N/A N/A
Bank:
Tier 1 capital (to average assets) $ 1,122,946 9.20 % $ 488,033 4.00 % $ 610,041 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,122,946 11.02 713,194 7.00 (1)
662,251 6.50
Tier 1 capital (to risk-weighted assets) 1,122,946 11.02 866,021 8.50 (1)
815,078 8.00
Total capital (to risk-weighted assets) 1,183,705 11.62 1,069,791 10.50 (1)
1,018,848 10.00
(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, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 12.01% and 12.10%, 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. 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,
2023 2022
(dollars in thousands)
Non-performing loans:
Commercial real estate – investor $ 13,000 $ 10,483
Commercial real estate – owner occupied 565 4,025
Commercial and industrial 199 331
Residential real estate 6,174 5,969
Other consumer 2,820 2,457
Total non-performing loans and assets $ 22,758 $ 23,265
PCD loans, net of allowance for loan credit losses
$ 18,872 $ 27,129
Delinquent loans 30-89 days $ 3,136 $ 14,148
Allowance for loan credit losses as a percent of total loans 0.61 % 0.57 %
Allowance for loan credit losses as a percent of total non-performing loans
271.51 244.25
Non-performing loans as a percent of total loans receivable 0.23 0.23
Non-performing assets as a percent of total assets 0.17 0.18
The Company’s non-performing loans totaled $22.8 million at June 30, 2023, as compared to $23.3 million at December 31, 2022. At June 30, 2023, total non-performing loans included $718,000 of modified loans to borrowers experiencing financial difficulty and $6.2 million of troubled debt restructuring (“TDR”) loans that existed prior to adoption of Accounting Standards Update (“ASU”) 2022-02 on January 1, 2023. At December 31, 2022, total non-performing loans included $6.4 million of TDR loans. Included in the non-performing loans total was $3.2 million and $3.9 million of PCD loans at June 30, 2023 and December 31, 2022, respectively. At June 30, 2023, the allowance for loan credit losses totaled $61.8 million, or 0.61% of total loans, as compared to $56.8 million, or 0.57% of total loans, at December 31, 2022. These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $9.8 million and $11.4 million at June 30, 2023 and December 31, 2022, 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):
June 30, December 31,
2023 2022
Special Mention $ 30,859 $ 48,214
Substandard 88,152 50,776
The change in special mention and substandard loans was due to a migration of certain loans from special mention to substandard risk rating, which primarily consisted of two CRE-Investor Owned relationships totaling $24.3 million. The remaining increase in substandard loans was primarily due to one CRE-Investor Owned relationship for $7.0 million, which was downgraded to substandard during the six months ended June 30, 2023.
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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, 2022 (the “2022 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 2023
In March 2022, the Financial Accounting Standards Board (“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 adoption of this standard did not have an impact on the Company’s consolidated financial statements, as the Company currently does not have any fair value hedges.
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 adopted this guidance prospectively, and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In December 2022, FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance. The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024. Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from London Inter-Bank Offered Rate (“LIBOR”) towards alternative reference rates. As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Transition from LIBOR
As of December 31, 2021, the Company ceased issuing LIBOR-based products and transitioned to Alternative Rates. For the tenors of U.S. dollar LIBOR utilized by the Company, the administrator of LIBOR extended publication until June 30, 2023. As of June 30, 2023, the Company has transitioned substantially all of its previously existing LIBOR-based products that were not expected to mature or settle prior to the cessation date. Contract language for all remaining LIBOR-based loans, securities, and borrowings has been reviewed and updated as necessary to automatically convert to an Alternative Rate at their next rate reset date with no action required.
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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 restriction. 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 2023, FASB issued ASU 2023-02, “Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. 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 impact of this standard on 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 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: changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters, potential 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, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, changes in liquidity, including the size and composition of the Company’s deposit portfolio, including the percentage of uninsured deposits in the portfolio, competition, demand for financial services in the Company’s market area, changes in consumer spending, borrowing and savings habits, changes in accounting principles, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks, the failure to maintain current technologies, failure to retain or attract employees, the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers 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, 2022, 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.