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, 2024 June 30, 2024 September 30, 2023
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 13,488,483 $ 13,321,755 $ 13,498,183
Loans receivable, net of allowance for loan credit losses 9,963,598 9,961,117 10,068,156
Deposits 10,116,167 9,994,017 10,533,929
Total stockholders’ equity 1,694,508 1,676,669 1,637,604
SELECTED OPERATING DATA:
Net interest income 82,219 82,263 90,996
Provision for credit losses 517 3,114 10,283
Other income 14,684 10,985 10,762
Operating expenses 63,736 58,620 64,484
Net income 25,186 24,432 20,532
Net income attributable to OceanFirst Financial Corp. 25,116 24,373 20,667
Net income available to common stockholders 24,112 23,369 19,663
Diluted earnings per share 0.42 0.40 0.33
SELECTED FINANCIAL RATIOS:
Book value per common share at end of period 29.02 28.67 27.56
Cash dividend per share 0.20 0.20 0.20
Dividend payout ratio per common share 47.62 % 50.00 % 60.61 %
Stockholders’ equity to total assets 12.56 12.59 12.13
Return on average assets (2) (3) (4)
0.71 0.70 0.57
Return on average stockholders’ equity (2) (3) (4)
5.68 5.61 4.75
Net interest rate spread (5)
2.06 2.11 2.37
Net interest margin (2) (6)
2.67 2.71 2.91
Operating expenses to average assets (2) (4)
1.89 1.75 1.88
Efficiency ratio (4) (7)
65.77 62.86 63.37
Loan-to-deposit ratio (8)
99.10 100.30 96.10
ASSET QUALITY (9) :
Non-performing loans (10)
$ 28,139 $ 33,422 $ 30,098
Allowance for loan credit losses as a percent of total loans receivable (8) (11)
0.69 % 0.69 % 0.63 %
Allowance for loan credit losses as a percent of total non-performing loans (10) (11)
245.45 205.97 212.23
Non-performing loans as a percent of total loans receivable (8) (10)
0.28 0.33 0.30
Non-performing assets as a percent of total assets (10)
0.21 0.25 0.22
(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Ratios are annualized.
(3) Ratios are based on net income available to common stockholders.
(4) Performance ratios for the three months ended September 30, 2024 included a net benefit of $1.2 million, or $919,000, net of tax expense, related to a net gain on equity investments, a net gain on sale of trust business and merger related expenses. Performance ratios for the three months ended June 30, 2024 included a net gain on equity investments of $887,000, or $699,000, net of tax expense. Performance ratios for the three months ended September 30, 2023 included a net gain on equity investments of $1.5 million, or $1.1 million, net of tax expense.
(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) The quarters ended September 30, 2023 and 2024 include the addition and subsequent resolution of a single commercial relationship exposure of $7.2 million, which had life-to-date charge-offs of $10.0 million.
(10) 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.
(11) 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 $5.7 million, $6.1 million, and $8.8 million at September 30, 2024, June 30, 2024 and September 30, 2023, 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 between Massachusetts and Virginia. The term “Company” refers to OceanFirst Financial Corp., the Bank and all 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, sales of loans and investments, bank owned life insurance and commercial loan swap income. 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 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, 2024 were as follows:
• Net Interest Income Stabilization : Net interest income of $82.2 million for the quarter as compared to $82.3 million in the prior linked quarter.
• Deposits : Total deposits increased by $122.2 million to $10.1 billion from $10.0 billion, and the loan-to-deposit ratio was 99% at September 30, 2024.
• Strategic Investments: The results include $3.3 million of expenses, of which $1.7 million related to merger and acquisition costs for the talent acquisition of Garden State Home Loans, Inc. and acquisition of Spring Garden Capital Group, LLC. 1 These are expected to improve future operating performance by expanding fee revenue and specialty finance offerings.
• Asset Quality: Asset quality metrics remain strong as non-performing loans and loans 30 to 89 days past due as a percentage of total loans receivable were 0.28% and 0.15%, respectively. Non-performing loans decreased by $5.3 million, to $28.1 million, and the Company recorded net loan recoveries of $88,000 for the quarter.
The current quarter was impacted by a continued mix-shift and repricing of funding costs. Further, the results were impacted by the following non-recurring events: $1.7 million of merger related expenses, a $1.4 million gain on sale of a portion of the Company’s trust business, a $855,000 gain on sale of assets held for sale, and the resolution, via sale of collateral, of a single commercial real estate relationship of $7.2 million that was moved to non-accrual and partially charged-off in prior periods.
Net income available to common stockholders for the three and nine months ended September 30, 2024 increased to $24.1 million and $75.1 million, respectively, or $0.42 and $1.29 per diluted share, as compared to $19.7 million and $73.3 million, or $0.33 and $1.24 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, 2024 and 2023, respectively.
On October 17, 2024, 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 September 30, 2024, will be paid on November 15, 2024 to common stockholders of record on November 4, 2024. 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, 2024 to preferred stockholders of record on October 31, 2024.
1 The talent acquisition of Garden State Home Loans, Inc. was effective August 3, 2024. Additionally, the acquisition of Spring Garden Capital Group, LLC was effective October 1, 2024.
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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, 2024, interest income included net loan fees of $730,000 and $2.6 million, respectively, as compared to $621,000 and $2.6 million for the same prior year periods, respectively.
The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 2024 and 2023. 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,
2024 2023
(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 $ 210,245 $ 2,971 5.62 % $ 470,825 $ 6,440 5.43 %
Securities (2)
2,063,633 21,919 4.23 1,873,450 18,039 3.82
Loans receivable, net (3)
Commercial 6,782,777 102,881 6.03 6,923,743 103,069 5.91
Residential real estate 2,992,138 29,677 3.97 2,918,612 26,765 3.67
Home equity loans and lines and other consumer (“other consumer”) 242,942 4,077 6.68 252,126 4,097 6.45
Allowance for loan credit losses, net of deferred loan costs and fees (59,063) — — (53,959) — —
Loans receivable, net 9,958,794 136,635 5.46 10,040,522 133,931 5.30
Total interest-earning assets 12,232,672 161,525 5.26 12,384,797 158,410 5.08
Non-interest-earning assets 1,206,024 1,252,416
Total assets $ 13,438,696 $ 13,637,213
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 3,856,281 21,731 2.24 % $ 3,692,500 14,938 1.61 %
Money market 1,256,536 11,454 3.63 832,729 5,698 2.71
Savings 1,088,926 2,218 0.81 1,391,811 3,311 0.94
Time deposits 2,339,370 26,915 4.58 2,867,921 29,340 4.06
Total 8,541,113 62,318 2.90 8,784,961 53,287 2.41
Federal Home Loan Bank (“FHLB”) advances 757,535 9,140 4.80 701,343 8,707 4.93
Securities sold under agreements to repurchase 75,871 491 2.57 76,620 261 1.35
Other borrowings 499,839 7,357 5.86 317,210 5,159 6.45
Total borrowings 1,333,245 16,988 5.07 1,095,173 14,127 5.12
Total interest-bearing liabilities 9,874,358 79,306 3.20 9,880,134 67,414 2.71
Non-interest-bearing deposits 1,634,743 1,841,198
Non-interest-bearing liabilities 240,560 272,982
Total liabilities 11,749,661 11,994,314
Stockholders’ equity 1,689,035 1,642,899
Total liabilities and equity $ 13,438,696 $ 13,637,213
Net interest income $ 82,219 $ 90,996
Net interest rate spread (4)
2.06 % 2.37 %
Net interest margin (5)
2.67 % 2.91 %
Total cost of deposits (including non-interest-bearing deposits) 2.44 % 1.99 %
(continued)
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For the Nine Months Ended September 30,
2024 2023
(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 $ 168,822 $ 6,966 5.51 % $ 304,184 $ 11,661 5.13 %
Securities (2)
2,073,552 65,782 4.24 1,919,660 51,124 3.56
Loans receivable, net (3)
Commercial 6,851,021 309,922 6.04 6,892,456 295,199 5.73
Residential real estate 2,981,822 87,345 3.91 2,895,601 77,862 3.59
Other consumer 245,777 12,538 6.81 257,063 11,694 6.08
Allowance for loan credit losses, net of deferred loan costs and fees (58,825) — — (52,626) — —
Loans receivable, net 10,019,795 409,805 5.46 9,992,494 384,755 5.15
Total interest-earning assets 12,262,169 482,553 5.25 12,216,338 447,540 4.90
Non-interest-earning assets 1,216,562 1,234,942
Total assets $ 13,478,731 $ 13,451,280
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking $ 3,881,344 63,570 2.19 % $ 3,757,417 33,171 1.18 %
Money market 1,177,612 31,107 3.53 744,689 11,136 2.00
Savings 1,202,533 9,284 1.03 1,336,497 4,034 0.40
Time deposits 2,363,542 78,283 4.42 2,388,299 64,210 3.59
Total 8,625,031 182,244 2.82 8,226,902 112,551 1.83
FHLB Advances 704,911 25,657 4.86 1,055,106 38,530 4.88
Securities sold under agreements to repurchase 72,239 1,380 2.55 73,441 544 0.99
Other borrowings 513,951 22,566 5.86 302,649 14,008 6.19
Total borrowings 1,291,101 49,603 5.13 1,431,196 53,082 4.96
Total interest-bearing liabilities 9,916,132 231,847 3.12 9,658,098 165,633 2.29
Non-interest-bearing deposits 1,631,841 1,913,624
Non-interest-bearing liabilities 251,878 253,014
Total liabilities 11,799,851 11,824,736
Stockholders’ equity 1,678,880 1,626,544
Total liabilities and equity $ 13,478,731 $ 13,451,280
Net interest income $ 250,706 $ 281,907
Net interest rate spread (4)
2.13 % 2.61 %
Net interest margin (5)
2.73 % 3.09 %
Total cost of deposits (including non-interest-bearing deposits) 2.37 % 1.48 %
(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 September 30, 2024 and December 31, 2023
Total assets decreased by $49.8 million to $13.49 billion, from $13.54 billion, primarily due to decreases in loans, partly offset by an increase in total debt securities. Total loans decreased by $172.4 million to $10.02 billion, from $10.19 billion, primarily due to a decrease in the total commercial portfolio of $188.4 million driven by loan payoffs. The loan pipeline increased by $168.6 million to $351.6 million, from $183.0 million. Loan originations increased $206.4 million to $430.9 million, from $224.5 million, primarily in commercial loans. For more information on the composition of the loan portfolio, see “Lending Activities.” Held-to-maturity debt securities decreased by $84.6 million to $1.08 billion, from $1.16 billion, primarily due to principal repayments. Debt securities available-for-sale increased $157.9 million to $911.8 million, from $753.9 million, primarily due to new purchases. Other assets decreased by $20.3 million to $159.3 million, from $179.7 million, primarily due to a decrease in market values associated with customer interest rate swap programs.
Total liabilities decreased by $82.3 million to $11.79 billion, from $11.88 billion, primarily related to lower deposits offset by a funding mix shift to other borrowings. Deposits decreased by $318.8 million to $10.12 billion, from $10.43 billion, primarily due to decreases in high-yield savings accounts of $326.9 million and time deposits of $224.6 million, offset by increases in money market accounts of $266.8 million. Time deposits decreased to $2.22 billion, from $2.45 billion, representing 22.0% and 23.4% of total deposits, respectively, which was primarily related to planned runoff of brokered time deposits, which decreased by $430.4 million, offset by increases in retail time deposits of $221.4 million. The loan-to-deposit ratio was 99.1%, as compared to 97.7%. FHLB advances increased by $43.2 million to $891.9 million, from $848.6 million, and other borrowings increased by $223.5 million to $419.9 million, from $196.5 million, as a result of lower-cost funding availability.
Other liabilities decreased by $43.1 million to $257.6 million, from $300.7 million, primarily due to a decrease in the market values of derivatives associated with customer interest rate swaps and related collateral received from counterparties.
Capital levels remain strong and in excess of “well-capitalized” regulatory levels at September 30, 2024, including the Company’s common equity tier one capital ratio, which increased to 11.3%, up approximately 40 basis points from December 31, 2023.
Total stockholders’ equity increased to $1.69 billion, as compared to $1.66 billion, primarily reflecting net income, partially offset by capital returns comprising of dividends and share repurchases. For the nine months ended September 30, 2024, the Company repurchased 1,383,238 shares totaling $21.5 million at a weighted average cost of $15.38. The Company had 1,551,200 shares available for repurchase under the authorized repurchase program. Additionally, accumulated other comprehensive loss decreased by $8.7 million primarily due to increases in fair market value of available-for-sale debt securities, net of tax. The Company’s stockholders’ equity to assets ratio was 12.56%, as compared to 12.28% and book value per share increased to $29.02, as compared to $27.96.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2024 and September 30, 2023
General
Net income available to common stockholders for the three and nine months increased to $24.1 million and $75.1 million, respectively, or $0.42 and $1.29 per diluted share, as compared to $19.7 million and $73.3 million, or $0.33 and $1.24 per diluted share, for the corresponding prior year periods. Net income for the three and nine months ended September 30, 2024 included net gains on equity investments of $1.4 million and $4.2 million, respectively, a net gain on sale of a portion of its trust business of $1.4 million and $2.6 million, respectively, and merger related expenses of $1.7 million for both periods. Net income for the nine months ended September 30, 2024 included a special Federal Deposit Insurance Corporation (“FDIC”) assessment of $418,000. These items, net of tax, increased net income by $919,000 and $3.6 million for the three and nine months ended September 30, 2024, respectively.
Net income for the three and nine months ended September 30, 2023 included net gain on equity investments of $1.5 million and a net loss on equity investments of $1.3 million, respectively. Net income for the nine months ended September 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 increased net income by $1.1 million and decreased net income by $5.1 million, net of tax, for the three and nine months ended September 30, 2023, respectively.
Interest Income
Interest income for the three and nine months ended September 30, 2024 increased to $161.5 million and $482.6 million, respectively, from $158.4 million and $447.5 million for the corresponding prior year periods. For the three and nine months ended September 30, 2024, the yield on average interest-earning assets increased to 5.26% and 5.25%, respectively, from
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5.08% and 4.90% for the corresponding prior year periods. The average balance of interest-earning assets decreased by $152.1 million for the three months ended September 30, 2024, due to balance sheet contraction. The average balance of interest-earning assets increased by $45.8 million for the nine months ended September 30, 2024, primarily driven by securities growth of $153.9 million which was funded through the decrease of $135.4 million of interest-earning deposits and short-term investments and additional borrowings.
Interest Expense
Interest expense for the three and nine months ended September 30, 2024 increased to $79.3 million and $231.8 million, respectively, from $67.4 million and $165.6 million in the corresponding prior year periods, primarily due to an increase in the cost of deposits, partly offset by a decrease in the cost of total borrowings. For the three and nine months ended September 30, 2024, the cost of average interest-bearing liabilities increased to 3.20% and 3.12%, respectively, from 2.71% and 2.29% for the corresponding prior year periods, primarily due to higher cost of deposits. The total cost of deposits (including non-interest-bearing deposits) increased to 2.44% and 2.37% for the three and nine months ended September 30, 2024, respectively, from 1.99% and 1.48% for the same prior year periods.
Net Interest Income and Margin
Net interest income for the three and nine months ended September 30, 2024 decreased to $82.2 million and $250.7 million, respectively, from $91.0 million and $281.9 million in the corresponding prior year periods, primarily reflecting the net impact of the higher interest rate environment. The net interest margin for the three and nine months ended September 30, 2024 decreased to 2.67% and 2.73%, respectively, from 2.91% and 3.09% for the same prior year periods. The net interest margin decreased primarily due to the increase in cost of funds outpacing the increase in yield on average interest-earning assets.
Provision for Credit Losses
Provision for credit losses for the three and nine months ended September 30, 2024 was $517,000 and $4.2 million, respectively, as compared to $10.3 million and $14.5 million for the corresponding prior year periods. The lower provision for the current quarter was a result of flat loan growth, net loan recoveries, and the net effect of shifts in the Company’s loan portfolio and external macro economic forecasts. Net loan recoveries were $88,000 and net loan charge-offs were $1.7 million for the three and nine months ended September 30, 2024, respectively, as compared to net loans charge-offs of $8.3 million for both the same prior year periods. The prior year periods included a partial charge-off of $8.4 million for a single commercial real estate relationship, which was resolved through the sale of the underlying collateral in the current quarter.
Non-interest Income
Three months ended September 30, 2024 vs. September 30, 2023
Other income increased to $14.7 million, as compared to $10.8 million. Other income was favorably impacted by net gains on equity investments of $1.4 million and $1.5 million, for the respective quarters, and a $1.4 million gain on sale of a portion of the Company’s trust business in the current quarter. The remaining increase of $2.5 million was primarily driven by increases in fees and service charges of $918,000 related to treasury management fees, a non-recurring gain on sale of assets held for sale of $855,000, and net gain on sale of loans of $439,000.
Nine months ended September 30, 2024 vs. September 30, 2023
Other income increased to $38.0 million, as compared to $21.8 million. The current period was favorably impacted by net gains on equity investments of $4.2 million and a net gain on sale of a portion of its trust business of $2.6 million. The prior year was adversely impacted by a net loss on equity investments of $6.6 million, primarily related to losses on sale of investments. The remaining increase of $2.8 million was primarily driven by increases in the cash surrender value of bank owned life insurance of $1.5 million, which included one-time death benefits in the current period, and net gain on sale of loans of $1.2 million, and gain on sale of assets held for sale of $855,000. This was partially offset by a decrease in trust and asset management revenue of $590,000, related to the sale of a portion of the Company’s trust business.
Non-interest Expense
Three months ended September 30, 2024 vs. September 30, 2023
Operating expenses decreased to $63.7 million, as compared to $64.5 million. The current quarter was adversely impacted by non-core operations related to merger related expenses of $1.7 million. The remaining decrease of $2.4 million was primarily driven by decreases in professional fees of $3.3 million as the Company realized benefits from the performance improvement
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initiatives and investments made in the prior periods. This was partially offset by an increase in other operating expense of $1.1 million, which was partly due to additional loan servicing expenses.
Nine months ended September 30, 2024 vs. September 30, 2023
Operating expenses decreased to $181.0 million, as compared to $188.7 million. Operating expenses were adversely impacted by $2.1 million related to merger related expenses and an FDIC special assessment in the current year, and merger related and net branch consolidation expenses of $92,000 in the prior year. The remaining decrease of $9.7 million was driven by decreases in professional fees of $8.6 million and compensation and employee benefits expenses of $1.9 million, which were due to the same initiatives discussed in the three-month periods above. This was partially offset by an increase in other operating expenses of $1.3 million, which was partly due to additional loan servicing expenses.
Income Tax Expense
The provision for income taxes was $7.5 million and $25.2 million for the three and nine months ended September 30, 2024, respectively, as compared to $6.5 million and $24.1 million for the same prior year periods. The effective tax rate was 22.9% and 24.4% for the three and nine months ended September 30, 2024, respectively, as compared to 23.9% and 24.0% for the same prior year periods. The current quarter’s effective tax rate was positively impacted by geographic mix as compared to the same prior year period and the nine months ended September 30, 2024 was adversely impacted by the non-recurring write-off of a deferred tax asset of $1.2 million net of other state effects.
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, 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 periodic basis. As of September 30, 2024, the Bank and the Parent Company continued 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.
The Company continually evaluates its on-balance sheet liquidity, including cash and unpledged securities and funding capacity at the FHLB and FRB Discount Window, and periodically tests each of its lines of credit. As of September 30, 2024, 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 FDIC 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 September 30, 2024, the Bank reported in its Call Report $5.70 billion of estimated uninsured deposits. This total included $2.46 billion of collateralized government deposits and $1.58 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.66 billion, or 16.3% of total deposits. On-balance-sheet liquidity and funding capacity represented 242.3% 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 nine months ended September 30, 2024, the Parent Company received dividend payments of $69.0 million from the Bank. At September 30, 2024, the Parent Company held $92.7 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, and other borrowings . 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 lines of credit at multiple financial institutions and access to the FRB discount window.
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As of September 30, 2024, the Company pledged $7.40 billion of loans with the FHLB and FRB to enhance the Company’s borrowing capacity, which included collateral pledged to the FHLB to obtain a municipal letter of credit to collateralize certain municipal deposits. The Company also pledged $1.22 billion of securities to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law. The Company had $891.9 million of FHLB advances, including $60.0 million of overnight borrowings as of September 30, 2024, as compared to $848.6 million of FHLB term advances and no outstanding overnight borrowings from the FHLB at December 31, 2023. The Company had $419.9 million of other borrowings as of September 30, 2024, as compared to $196.5 million at December 31, 2023, as a result of lower cost funding availability.
The Com pany’s cash needs for the nine months ended September 30, 2024 were primarily satisfied by the increase in other borrowings and primarily utilized for the reduction of deposits and the purchase 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 September 30, 2024, outstanding commitments to originate loans totaled $351.6 million and outstanding undrawn lines of credit totaled $1.41 billion, of which $1.10 billion were commitments to commercial and commercial construction borrowers and $312.3 million were commitments to consumer 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.
At September 30, 2024, the Company also had various contractual obligations, which included debt obligations of $1.39 billion, including finance lease obligations of $1.5 million, and an additional $17.8 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 $2.16 billion at September 30, 2024.
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 and nine months ended September 30, 2024, the Company repurchased 87,324 and 1,383,238 shares of its common stock, respectively, totaling $1.4 million and $21.5 million, respectively. At September 30, 2024, there were 1,551,200 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, 2024 were $35.2 million. Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2024 were $3.0 million.
The Company’s ability to continue to repurchase shares of common stock and pay dividends remain dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations. 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 repurchase shares of common stock or 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. These regulatory policies may affect the ability of the Parent Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions.
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 periodically, varying loan growth, earnings, access to the capital markets, credit losses, and mark-to-market losses in the investment portfolio, including both available-for-sale and held-to-maturity. As of September 30, 2024, the Bank and Parent Company continued to maintain adequate capital under all
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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.
Regulatory Capital Requirements
As of September 30, 2024 and December 31, 2023, the Company and the Bank satisfied 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, 2024 Amount Ratio Amount Ratio Amount Ratio
Company:
Tier 1 capital (to average assets) $ 1,246,685 9.65 % $ 516,930 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
1,116,470 11.31 691,086 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,246,685 12.63 839,176 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,444,450 14.63 1,036,629 10.50 (1)
N/A N/A
Bank:
Tier 1 capital (to average assets) $ 1,175,318 9.17 % $ 512,823 4.00 % $ 641,029 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,175,318 12.02 684,225 7.00 (1)
635,352 6.50
Tier 1 capital (to risk-weighted assets) 1,175,318 12.02 830,844 8.50 (1)
781,971 8.00
Total capital (to risk-weighted assets) 1,248,082 12.77 1,026,337 10.50 (1)
977,464 10.00
As of December 31, 2023
Company:
Tier 1 capital (to average assets) $ 1,218,142 9.31 % $ 523,588 4.00 % N/A N/A
Common equity Tier 1 (to risk-weighted assets)
1,088,542 10.86 701,778 7.00 (1)
N/A N/A
Tier 1 capital (to risk-weighted assets) 1,218,142 12.15 852,159 8.50 (1)
N/A N/A
Total capital (to risk-weighted assets) 1,413,400 14.10 1,052,667 10.50 (1)
N/A N/A
Bank:
Tier 1 capital (to average assets) $ 1,155,896 8.90 % $ 519,690 4.00 % $ 649,612 5.00 %
Common equity Tier 1 (to risk-weighted assets)
1,155,896 11.65 694,620 7.00 (1)
645,004 6.50
Tier 1 capital (to risk-weighted assets) 1,155,896 11.65 843,467 8.50 (1)
793,852 8.00
Total capital (to risk-weighted assets) 1,226,154 12.36 1,041,930 10.50 (1)
992,315 10.00
(1) Includes the Capital Conservation Buffer of 2.50%.
At September 30, 2024 and December 31, 2023, the Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations.
At September 30, 2024 and December 31, 2023, the Company maintained a stockholders’ equity to total assets ratio of 12.56% and 12.28%, respectively.
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Lending Activities
Loan Portfolio Composition . At September 30, 2024, the Company had total loans outstanding of $10.02 billion, of which $6.12 billion, or 61.0% of total loans, were commercial real estate, multi-family, and land loans (collectively, “commercial real estate”). The remainder of the portfolio consisted of: $660.9 million of commercial and industrial loans, or 6.6% of total loans; $3.00 billion of residential real estate loans, or 30.0% of total loans; and $243.0 million of consumer loans, primarily home equity loans and lines of credit, or 2.4% of total loans.
Commercial real estate . Th e Bank originates commercial real estate loans that are secured by properties, or properties under construction, that are generally used for busin ess purposes such as office, industrial, multi-family or retail facilities. Commercial real estate loans are provided on owner-occupied properties and on investor-owned properties. At September 30, 2024, of the total commercial real estate portfolio, $5.27 billion or 86.2% was considered investor-owned and $841.9 million or 13.8% was considered owner-occupied.
The Bank performs extensive due diligence in underwriting commercial real estate loans due to the larger loan amounts and the riskier nature of such loans. The Bank assesses and mitigates the risk in several ways, including inspection of all such properties and the review of the overall financial condition of the borrower and guarantors, which include, for example, the review of the rent rolls and applicable leases/lease terms and conditions and the verification of income. A tenant analysis and market analysis are part of the underwriting.
For investor-owned properties, because repayment is often dependent on the successful management of the properties, repayment of commercial real estate loans may be affected by adverse conditions in the real estate market or the economy. As a result, the Bank is particularly vigilant of this portfolio. The portfolio is highly diversified with loans secured by a variety of property types in multiple geographies and the portfolio exhibits stable credit quality.
The following table presents the Company’s commercial real estate - investor owned loans by industry as of September 30, 2024:
As of September 30, 2024
(dollars in thousands) Amount Percent of Total Weighted Average LTV (1)
Weighted Average Debt Service Coverage Ratio (2)
Office $ 533,029 12 % 52 % 1.8x
Medical 283,802 6 57 1.8
Credit Tenant 259,555 6 67 1.5
Total Office (3)
1,076,386 23 57 1.8
Retail 1,071,999 23 54 2.0
Multi-family (4)
886,238 19 63 1.7
Industrial/warehouse 700,467 15 49 2.1
Hospitality 172,804 4 48 2.0
Other (5)
703,650 15 45 1.9
Total 4,611,544 100 % 54 1.9
Construction 661,615
Total CRE investor owned and construction $ 5,273,159
(1) Represents the weighted average of loan balances as of September 30, 2024 divided by their most recent appraisal value, which is generally obtained at the time of origination.
(2) Represents the weighted average of net operating income on the property before debt service divided by the loan’s respective annual debt service based on the most recent credit review of the borrower.
(3) Central business district (“CBD”) exposure represented $116 million, or 10.8%, of the total office loan balance at September 30, 2024. Office CBD loans had a weighted average LTV of 64% and weighted average debt service coverage ratio of 1.9x at September 30, 2024. $83 million, or 72%, of the total office CBD exposure are to credit tenants, life sciences and medical borrowers at September 30, 2024. New York City office CBD loans represented $7 million, or 0.05% of the Company’s total assets at September 30, 2024.
(4) New York City rent-regulated multi-family loans, where the property has more than 50% of its units rent-regulated, represent $33 million, or 0.25% of the Company’s total assets at September 30, 2024.
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(5) Other includes co-operatives, single purpose, stores and some living units / mixed use, investor owned 1-4 family, land / development, and other.
The following table presents total commercial real estate - investor owned loans by geography (generally based on location of collateral) as of September 30, 2024:
As of September 30, 2024
(dollars in thousands) Amount Percent of Total
New York $ 1,494,156 32 %
Pennsylvania and Delaware 1,262,330 27
New Jersey 1,168,290 25
Massachusetts 126,784 3
Maryland and District of Columbia 139,376 3
Other 420,608 9
Total 4,611,544 100 %
Construction 661,615
Total CRE investor owned and construction $ 5,273,159
Asset quality . 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.
September 30, December 31,
2024 2023
(dollars in thousands)
Non-performing loans (1) :
Commercial real estate – investor $ 12,478 $ 20,820
Commercial real estate – owner occupied 4,368 351
Commercial and industrial 122 304
Residential real estate 9,108 5,542
Other consumer 2,063 2,531
Total non-performing loans and assets $ 28,139 $ 29,548
PCD loans, net of allowance for loan credit losses
$ 15,323 $ 16,122
Delinquent loans 30-89 days $ 15,458 $ 19,202
Allowance for loan credit losses as a percent of total loans (2)
0.69 % 0.66 %
Allowance for loan credit losses as a percent of total non-performing loans (2)
245.45 227.21
Non-performing loans as a percent of total loans receivable 0.28 0.29
Non-performing assets as a percent of total assets 0.21 0.22
(1) At December 31, 2023, non-performing loans includes a single commercial relationship exposure of $8.8 million. During the quarter ended September 30, 2024, the exposure, which had life-to-date charge-offs of $10.0 million, was resolved via sale of collateral.
(2) Loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and PCD marks on these loans, not reflected in the allowance for loan credit losses, were $5.7 million and $7.5 million at September 30, 2024 and December 31, 2023, respectively.
Overall asset quality metrics remained stable. The Company’s non-performing loans represented 0.28% and 0.29% of total loans, respectively. The allowance for loan credit losses as a percentage of total non-performing loans was 245.45%, as compared to 227.21%. The level of 30 to 89 days delinquent loans decreased to $15.5 million, from $19.2 million. The Company’s allowance for loan credit losses was 0.69%, as compared to 0.66%.
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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,
2024 2023
Special Mention $ 85,721 $ 40,385
Substandard 103,384 106,552
The increase in special mention loans was primarily due to new downgrades of six commercial relationships totaling $60.4 million, partly offset by four commercial loans totaling $10.1 million, which were upgraded and two commercial loans of $7.8 million migrating to substandard during the nine months ended September 30, 2024. The decrease in substandard loans was primarily due to nine commercial relationships totaling $27.2 million that were paid off or were upgraded, which was partially offset by new downgrades primarily related to four commercial relationships totaling $16.2 million and the $7.8 million of downgraded special mention loans noted above.
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Critical Accounting Policies and Estimates
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, 2023 (the “2023 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 on 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 and high level of subjectivity. 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.
The evaluation of goodwill was a critical accounting estimate in the preparation of the consolidated financial statements. The Company bypassed the qualitative assessment and proceeded directly to the quantitative test on its annual impairment testing date of August 31, 2024. In addition to the approaches and assumptions disclosed in the Company’s 2023 Form 10-K, the Company considered an additional market approach valuation method, the guideline merged and acquired company method, which utilizes observable transactions of actual prices paid for target companies that operated in comparable industries or markets facing similar risks. This approach requires judgment in the selection of comparable transactions and includes those with similar business activities, and related operating environments. The results of the quantitative assessment indicated that the fair value of the Company’s reporting unit exceeded its carrying amount, which resulted in no impairment loss at August 31, 2024.
Management continued to carefully assess and evaluate all available information for potential triggering events after the August 31 annual testing date, and concluded no triggering events were identified subsequent to the annual test date. Significant negative industry or economic trends, including declines in the market price of the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill in the future, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue evaluating the economic conditions at future reporting periods for triggering events.
Impact of New Accounting Pronouncements
Accounting Pronouncements Adopted in 2024
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. The Company adopted this standard in 2024. The adoption of this standard did not have a material impact on the Company’s 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 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. The Company adopted this standard in 2024. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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Recent Accounting Pronouncements Not Yet Adopted
In August 2023, FASB issued ASU 2023-05, “Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. The amendments in this ASU require that a joint venture, upon formation, apply a new basis of accounting and initially measure assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance. This update will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.
In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments in this ASU require improved reportable segment information on an annual and interim basis, primarily through enhanced disclosures about significant segment expenses. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company does not expect this standard to have a material impact on the financial condition or results of operations but is currently assessing the impact of additional disclosures to the consolidated financial statements.
In December 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments in this ASU require improved annual income tax disclosures surrounding rate reconciliation, income taxes paid, and other disclosures. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2024. 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, those items discussed under Item 1A. Risk Factors herein and the following: changes in interest rates, inflation, general economic conditions, including potential recessionary conditions, levels of unemployment in the Company’s lending area, real estate market values in the Company’s lending area, potential goodwill impairment, 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 Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, the availability of low-cost funding, changes in liquidity, including the size and composition of the Company’s deposit portfolio, and the percentage of uninsured deposits in the portfolio, changes in capital management and balance sheet strategies and the ability to successfully implement such strategies, competition, demand for financial services in the Company’s market area, changes in consumer spending, borrowing and saving 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 effect of the Company’s rating under the Community Reinvestment Act, the impact of pandemics 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 2023 Form 10-K, 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.