OceanFirst Financial Corp. Announces Third Quarter Financial Results

RED BANK, N.J., Oct. 29, 2020 (GLOBE NEWSWIRE) -- OceanFirst Financial Corp. (NASDAQ:“OCFC”), (the “Company”), the holding company for OceanFirst Bank N.A. (the “Bank”), today announced a net loss available to common stockholders of $6.0 million, or $(0.10) per diluted share, for the three months ended September 30, 2020 as compared to net income available to common stockholders of $25.0 million, or $0.49 per diluted share, for the corresponding prior year period. For the nine months ended September 30, 2020, the Company reported net income available to common stockholders of $29.2 million, or $0.49 per diluted share, as compared to $65.1 million, or $1.28 per diluted share, for the corresponding prior year period. The quarter and year to date results were impacted by the COVID-19 pandemic, through both higher credit losses and increased operating expenses.

Core losses for the three months ended September 30, 2020 amounted to $266,000, or $0.00 per diluted share, while core earnings for the nine months ended September 30, 2020 were $48.3 million, or $0.80 per diluted share.

Core losses and earnings are non-GAAP measures that exclude merger related expenses, branch consolidation expenses, the opening credit loss expense under the Current Expected Credit Loss (“CECL”) model related to the acquisitions of Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc. (“Country Bank”), net unrealized loss on equity investments, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and income tax benefit related to change in the New Jersey tax code (collectively referred to as “non-core” operations). These non-core operations increased net loss by $5.8 million, net of tax, and decreased net income by $19.2 million, net of tax, for the three and nine months ended September 30, 2020, respectively. Refer to the “Explanation of Non-GAAP Financial Measures” and the “Non-GAAP Reconciliation” table for additional information regarding our non-GAAP measures and impact per period by operation.

Key developments for the recent quarter are described below:

• COVID-19: The Company’s third quarter results were adversely impacted by the COVID-19 pandemic, including an elevated credit loss provision of $35.7 million and an additional $1.7 million in operating expenses. Net charge-offs, excluding $14.2 million related to higher risk commercial loans transferred to held-for-sale, amounted to a modest $748,000.
• Credit Quality: The Company made a strategic decision to accelerate the resolution of credit losses through the sale of higher risk loans. As part of this strategy, the Company transferred $45.5 million of forbearance loans to held-for-sale at September 30, 2020. Excluding the loans held-for-sale, loans under full forbearance were $209.6 million, or 2.6% of total loans, at October 23, 2020, a significant reduction from a peak for all forbearance requests of almost 20% of total loans.
• Deposits: Deposits increased by $315.5 million, of which $79.0 million were non-interest bearing deposits. The total cost of deposits decreased to 0.49% for the quarter ended September 30, 2020.
• Capital: The Company continues to maintain strong capital levels with tangible stockholders’ equity of $935.7 million for a tangible stockholders’ equity to tangible assets ratio of 8.41%.
• Sale of Paycheck Protection Program (“PPP”) loans: The Company made a strategic decision to sell $298 million in PPP loans to improve operational efficiency and continue the Company’s efforts to focus on the core business. The sale is expected to close in the fourth quarter of 2020.
  

Chairman and Chief Executive Officer, Christopher D. Maher, commented on the Company’s results, “The ongoing global pandemic has created significant challenges for individuals and businesses. In an effort to maintain a sharp focus on helping our borrowers rebuild the economy, we chose to accelerate efforts to address our highest risk loans by liquidating $67.5 million of those assets, thereby reducing the time and effort required to manage non-performing loans. As of the end of the quarter, we have also substantially strengthened our allowance for credit losses as a percentage of non-performing loans held-for-investment. While our quarterly results were disappointing, our disciplined actions and continued sound risk management have set the stage for improved results in future quarters.” Mr. Maher added, “Our focus remains firmly on the strong potential for business, and includes a variety of growth initiatives as well as proactive capital management.”

The Company’s Board of Directors declared its ninety-fifth consecutive quarterly cash dividend on common stock. The quarterly cash dividend on common stock of $0.17 per share will be paid on November 20, 2020 to common stockholders of record on November 9, 2020. The Board previously declared a quarterly cash dividend on preferred stock of $0.4375 per depository share, representing 1/40th interest in the Series A Preferred Stock. This dividend will be paid on November 16, 2020 to preferred stockholders of record on October 30, 2020.

Results of Operations
On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”) and its results of operations are included in the consolidated results for the three and nine months ended September 30, 2020, but are excluded from the results of operations for the period from January 1, 2019 to January 31, 2019.

On January 1, 2020, the Company completed its acquisitions of Two River and Country Bank and their respective results of operations from January 1, 2020 through September 30, 2020 are included in the consolidated results for the three and nine months ended September 30, 2020, but are not included in the results of operations for the corresponding prior year periods.

Net loss for the three months ended September 30, 2020 and net income for the three months ended September 30, 2019 were adversely impacted by non-core operations of $5.8 million, net of tax, and $2.6 million, net of tax, respectively. Net income for the nine months ended September 30, 2020 and 2019 was adversely impacted by non-core operations of $19.2 million, net of tax, and $14.0 million, net of tax, respectively. Core losses for the three months ended September 30, 2020 were $266,000 and core earnings for the nine months ended September 30, 2020 were $48.3 million, representing a decrease from core earnings of $27.5 million and $79.1 million for the same prior year periods, respectively. The decrease as compared to the prior periods was largely driven by the adverse impact of the COVID-19 pandemic.

Net Interest Income and Margin
Net interest income for the three and nine months ended September 30, 2020 increased to $76.8 million and $235.1 million, as compared to $63.4 million and $192.6 million for the same prior year periods, respectively, reflecting an increase in interest-earning assets, partly offset by a reduction in net interest margin. Average interest-earning assets increased by $3.18 billion and $2.68 billion for the three and nine months ended September 30, 2020, respectively, as compared to the same prior year periods. The averages for the three and nine months ended September 30, 2020 were favorably impacted by $1.81 billion and $1.80 billion, respectively, of interest-earning assets acquired from Two River and Country Bank and $461.6 million and $277.8 million, respectively, of interest-earning assets from PPP loans. Average loans receivable, net of allowance for credit losses, increased by $2.34 billion and $2.26 billion for the three and nine months ended September 30, 2020, respectively, as compared to the same prior year periods. The increases attributable to the acquisitions of Two River and Country Bank for the three and nine months ended September 30, 2020 were $1.60 billion and $1.58 billion, respectively. The net interest margin for the three and nine months ended September 30, 2020 decreased to 2.97% and 3.23%, respectively, from 3.55% and 3.66%, respectively, for the same prior year periods. The compression in net interest margin is primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn. For the three and nine months ended September 30, 2020, the cost of average interest-bearing liabilities decreased to 0.83% and 0.93%, respectively, from 0.98% and 0.95%, respectively, in the corresponding prior year periods. The total cost of deposits (including non-interest bearing deposits) was 0.49% and 0.58% for the three and nine months ended September 30, 2020, respectively, as compared to 0.62% and 0.60%, respectively, in the same prior year periods.

Net interest income for the three months ended September 30, 2020 decreased by $1.9 million as compared to the prior linked quarter, as the net interest margin decreased to 2.97% as compared to 3.24% for the prior linked quarter. The yield on average interest-earning assets decreased to 3.60% from 3.94% in the prior linked quarter, primarily due to increasing balance sheet liquidity and the lower interest rate environment. The total cost of deposits (including non-interest bearing deposits) was 0.49% for the three months ended September 30, 2020, as compared to 0.57% for the three months ended June 30, 2020.

Provision for Credit Losses
For the three and nine months ended September 30, 2020, the credit loss expense was $35.7 million and $55.3 million, respectively, as compared to $305,000 and $1.3 million, respectively, for the corresponding prior year periods, and $9.6 million in the prior linked quarter. Net loan charge-offs were $15.0 million and $15.9 million for the three and nine months ended September 30, 2020, respectively, as compared to net loan recoveries of $196,000 and net loan charge-offs of $1.2 million for the three and nine months ended September 30, 2019, respectively, and net loan recoveries of $232,000 in the prior linked quarter. The three months ended September 30, 2020 included $14.2 million of charge-offs related to higher risk commercial loans transferred to held-for-sale. Non-performing loans held-for-investment totaled $29.9 million at September 30, 2020, as compared to $21.0 million at June 30, 2020 and $17.5 million at September 30, 2019. The increase in non-performing loans held-for-investment over the prior linked quarter is primarily due to the addition of one commercial real estate owner-occupied loan relationship totaling $6.3 million.

Credit loss expense for the three and nine months ended September 30, 2020 was significantly influenced by the decision to sell higher risk commercial loans as well as economic conditions related to the COVID-19 pandemic and estimates of how those conditions may impact the Company’s borrowers. COVID-19 related loans under full forbearance (excluding forbearance loans held-for-sale) decreased to $209.6 million, or 2.6% of total loans at October 23, 2020 as compared to a peak for all forbearance requests of almost 20% of total loans in mid-2020 as borrowers have returned to monthly payments. The Company continues to proactively address the pandemic’s impact on credit. Due to the U.S. government guarantee on PPP loans, there is no credit allowance on these loans. Refer to exhibits filed with the earnings release on Form 8-K for detailed information on loans under forbearance agreements.

Non-interest Income
For the three and nine months ended September 30, 2020, other income decreased to $8.2 million and increased to $33.3 million, respectively, as compared to $11.5 million and $30.9 million, respectively, for the corresponding prior year periods. Other income for both the three and nine months ended September 30, 2020 included $3.6 million of net unrealized loss on equity investments.

Excluding the Two River and Country Bank acquisitions, which added $882,000, and the impact of the net unrealized loss on equity investments, the decrease in other income for the three months ended September 30, 2020, compared to the corresponding prior year period, was due to a decrease in fees and service charges of $1.4 million, partly offset by an increase in net gain on sale of loans of $800,000.

For the nine months ended September 30, 2020, excluding the Two River and Country Bank acquisitions which added $2.3 million, and the impact of the net unrealized loss on equity investments, the increase in other income was due to increases in commercial loan swap income of $4.7 million and net gain on sales of loans of $1.5 million, partly offset by a decrease in fees and service charges of $3.2 million. The waiver of certain fees during the COVID-19 pandemic may continue to suppress deposit fee income for the remainder of the public health crisis.

For the three months ended September 30, 2020, other income, excluding net unrealized loss on equity investments, increased $325,000 as compared to the prior linked quarter.

Non-interest Expense
Operating expenses increased to $56.8 million and $175.5 million for the three and nine months ended September 30, 2020, respectively, as compared to $43.4 million and $141.5 million, respectively, in the same prior year periods. Operating expenses for the three and nine months ended September 30, 2020 included $4.0 million and $19.0 million, respectively, of net expenses related to non-core operations. Operating expenses for the three and nine months ended September 30, 2019 included $3.2 million and $17.5 million, respectively, of net expenses related to non-core operations. Excluding the impact of non-core operations, the change in operating expenses over the prior year was due to the Two River and Country Bank acquisitions, which added $6.9 million and $23.0 million, respectively, for the three and nine months ended September 30, 2020. The remaining increase in operating expenses for the three months ended September 30, 2020 was primarily due to operating expenses attributable to the COVID-19 pandemic of $1.7 million, increases in compensation and benefits expense of $3.0 million and federal deposit insurance expense of $770,000. The increase in operating expenses for the nine months ended September 30, 2020 was primarily due to operating expenses attributable to the COVID-19 pandemic of $3.8 million, increases in compensation and benefits expense of $6.3 million, professional fees of $2.3 million, and Federal Home Loan Bank (“FHLB”) prepayment penalty fee of $924,000, partly offset by decreases in occupancy expense of $1.5 million, and equipment expense of $1.4 million.

For the three months ended September 30, 2020, operating expenses, excluding net expenses related to non-core operations, increased $802,000, as compared to the prior linked quarter. The increases were due to operating expenses attributable to the COVID-19 pandemic of $609,000 and professional fees of $832,000, offset by a decrease in FHLB prepayment penalty fee of $924,000.

Income Tax (Benefit) Expense
The benefit for income taxes was $2.6 million for the three months ended September 30, 2020, and the provision for income taxes was $7.3 million for the nine months ended September 30, 2020 as compared to provision for income taxes of $6.3 million and $15.6 million, respectively, for the same prior year periods. The effective tax rate was 34.6% and 19.5% for the three and nine months ended September 30, 2020, respectively, as compared to 20.2% and 19.3%, respectively, for the same prior year periods. The higher effective tax rate for the three months ended September 30, 2020 is primarily attributable to the net loss recognized during the quarter. The three and nine months ended September 30, 2020 included the adverse impacts of a New Jersey tax code change and a higher allocation of taxable income to New York due to the acquisition of Country Bank.

Fin ancial Condition
Total assets increased $3.41 billion, to $11.65 billion at September 30, 2020, from $8.25 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.03 billion to total assets. Cash and due from banks increased $860.3 million, to $980.9 million at September 30, 2020, from $120.5 million at December 31, 2019, due to increased deposits, the Company’s decision to build liquidity during the economic downturn and the cash received from the issuance of subordinated notes and non-cumulative perpetual preferred stock as described below. Loans receivable, net of allowance for credit losses, increased by $1.74 billion, to $7.94 billion at September 30, 2020, from $6.21 billion at December 31, 2019, due to acquired loans from Two River and Country Bank of $1.56 billion coupled with organic loan growth. Loans held-for-sale increased to $388.8 million at September 30, 2020, of which $298 million were PPP loans. Non-performing loans held-for-sale totaled $67.5 million at September 30, 2020. As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $500.8 million at September 30, 2020, from $374.6 million at December 31, 2019 and core deposit intangibles increased to $25.2 million, from $15.6 million. Other assets increased by $55.1 million to $224.6 million at September 30, 2020, from $169.5 million at December 31, 2019, primarily due to the increase in swap positions.

Deposits increased $2.95 billion, to $9.28 billion at September 30, 2020, from $6.33 billion at December 31, 2019, due to acquired deposits from Two River and Country Bank of $1.59 billion and organic deposit growth of $1.4 billion. The loan-to-deposit ratio at September 30, 2020 was 86.2%, as compared to 98.2% at December 31, 2019. The deposit growth funded a decrease in FHLB advances of $175.8 million to $343.5 million at September 30, 2020, from $519.3 million at December 31, 2019. The increase in other borrowings of $150.1 million to $246.9 million at September 30, 2020, from $96.8 million at December 31, 2019, primarily resulted from the May 2020 issuance of $125.0 million in subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030. Other liabilities increased $90.4 million to $153.0 million at September 30, 2020, from $62.6 million at December 31, 2019, primarily due to the increase in swap positions.

Stockholders’ equity increased to $1.46 billion at September 30, 2020, as compared to $1.15 billion at December 31, 2019. The acquisitions of Two River and Country Bank added $261.4 million to stockholders’ equity. During the three months ended June 30, 2020, the Company raised $55.7 million from the issuance of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share. Under the Company’s stock repurchase program, there were 2,019,145 shares available for repurchase at September 30, 2020. The Company suspended its repurchase activity on February 28, 2020. For the nine months ended September 30, 2020, the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of $22.83.

Asset Quality
The Company’s non-performing loans held-for-investment increased to $29.9 million at September 30, 2020, as compared to $17.8 million at December 31, 2019. Non-performing loans do not include $56.4 million of purchased with credit deterioration (“PCD”) loans acquired in the Two River, Country Bank, Capital Bank, Sun Bancorp, Inc. (“Sun”), Ocean Shore Holding Co. (“Ocean Shore”), Cape Bancorp, Inc. (“Cape”), and Colonial American Bank (“Colonial American”) acquisitions (“Acquisition Transactions”). The Company’s other real estate owned totaled $106,000 at September 30, 2020, as compared to $264,000 at December 31, 2019.

The Company’s allowance for credit losses was 0.70% of total loans at September 30, 2020 as compared to 0.27% at December 31, 2019. The allowance for credit losses does not reflect the net unamortized credit mark of $31.6 million. The allowance for credit losses plus the unamortized credit mark amounted to $88.0 million, or 1.10% of loans held-for-investment. The allowance for credit losses as a percentage of non-performing loans held-for-investment was 188.5% at September 30, 2020, as compared to 94.4% at December 31, 2019.

Explanation of Non-GAAP Financial Measures
Reported amounts are presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s management believes that the supplemental Non-GAAP information, which consists of reported net income excluding non-core operations, which can vary from period to period, provides a better comparison of period to period operating performance. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to Non-GAAP performance measures which may be presented by other companies. Refer to Non-GAAP Reconciliation table at the end of this document for details on the earnings impact of these items.

Conference Call
As previously announced, the Company will host an earnings conference call on Friday, October 30, 2020 at 11:00 a.m. Eastern Time. The direct dial number for the call is (888) 338-7143. For those unable to participate in the conference call, a replay will be available. To access the replay, dial (877) 344-7529, Replay Conference Number 10148569 from one hour after the end of the call until January 28, 2021. The conference call, as well as the replay, are also available (listen-only) by internet webcast at www.oceanfirst.com in the Investor Relations section.

OceanFirst Financial Corp.’s subsidiary, OceanFirst Bank N.A., founded in 1902, is a $11.7 billion regional bank operating throughout New Jersey, metropolitan Philadelphia and metropolitan New York City. OceanFirst Bank delivers commercial and residential financing solutions, trust and asset management and deposit services and is one of the largest and oldest community-based financial institutions headquartered in New Jersey.

OceanFirst Financial Corp.’s press releases are available by visiting us at www.oceanfirst.com .

Forward-Looking Statements

In addition to historical information, this news release 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 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: the impact of the COVID-19 pandemic on our operations and financial results and those of our customers, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the 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, competition, demand for financial services in the Company’s market area, accounting principles and guidelines 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, 2019, 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.

OceanFirst Financial Corp .
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)

OceanFirst Financial Corp .
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)

OceanFirst Financial Corp.
SELECTED LOAN AND DEPOSIT DATA
(dollars in thousands)

(1) Loan pipeline includes loans approved but not funded.
(2) Excludes loans originated through the Paycheck Protection Program of $504 million.
(3) Excludes the sale of under-performing commercial loans of $4.9 million for the three months ended June 30, 2020, under-performing residential loans of $4.0 million and commercial loans of $5.1 million for the three months ended March 31, 2020 and small business administration loans of $3.5 million for the three months ended September 30, 2019.

OceanFirst Financial Corp.
ASSET QUALITY
(dollars in thousands)

(1) PCD loans are not included in non-performing loans held-for-investment or delinquent loans totals.
(2) The loans acquired from Two River, Country Bank, Capital Bank, Sun, Ocean Shore, Cape, and Colonial American were recorded at fair value. The net credit mark on these loans, not reflected in the allowance for credit losses, was $31,617, $35,439, $38,272, $30,260 and $32,768 at September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019, respectively.

(1) Included in net loan charge-offs for the three months ended September 30, 2020 is $14.2 million relating to loans transferred to held-for-sale.
(2) Included in net loan charge-offs for the three months ended March 31, 2020 is $949 relating to under-performing loans sold.

* Not meaningful

OceanFirst Financial Corp.
ANALYSIS OF NET INTEREST INCOME

(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for credit losses.
(2) Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated allowance for credit losses and includes loans held for sale and non-performing loans.
(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.

OceanFirst Financial Corp.
SELECTED QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)

(continued)

(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.
(2) Performance ratios for each period include non-core operations. Refer to “Non-GAAP Reconciliation” table under “Supplemental Information” for additional information.
(3) Tangible common stockholders’ equity and tangible assets exclude intangible assets relating to goodwill and core deposit intangible. Tangible common stockholders’ equity also excludes preferred equity.
(4) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

OceanFirst Financial Corp.
SUPPLEMENTAL INFORMATION
(dollars in thousands, except per share amounts)

NON-GAAP RECONCILIATION

COMPUTATION OF TOTAL TANGIBLE EQUITY TO TOTAL TANGIBLE ASSETS

COMPUTATION OF TOTAL TANGIBLE COMMON EQUITY TO TOTAL TANGIBLE ASSETS

ACQUISITION DATE - FAIR VALUE BALANCE SHEET

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of the total consideration paid (in thousands):

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to recorded carrying values may be required.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of the total consideration paid (in thousands):

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to recorded carrying values may be required.

Company Contact:

Michael J. Fitzpatrick
Chief Financial Officer
OceanFirst Financial Corp.
Tel: (732) 240-4500, ext. 7506
Email: Mfitzpatrick@oceanfirst.com