OceanFirst Financial Corp. (NASDAQ:OCFC) is a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The company reported annual net income of $104,029,000 and annual revenue of $639,873,000 in its latest fiscal year. Its annual operating cash flow was $128,309,000, and its annual free cash flow was $120,601,000.

Recent Developments

In the second quarter of 2024, OceanFirst reported GAAP diluted earnings per share of $0.40, missing the Zacks Consensus Estimate of $0.42 per share. The company's earnings reflect net interest income of $82 million, representing a decrease compared to the prior linked quarter of $86 million, as the yield curve remains inverted and the company experienced elevated paydowns in higher-yielding loans. Operating expenses remained stable at $59 million.

Asset Quality

Asset quality metrics continue to remain strong, with criticized and classified assets, which were already lower than peers and below the company's long-term averages, decreasing 15% or $25 million to $143 million. The quarter included a net allowance for credit losses (ACL) build of $1.6 million and net charge-offs of $1.5 million, which includes a $1.6 million charge-off on a single commercial real estate relationship that was moved to nonaccrual in the third quarter of 2023. The remaining exposure for this credit is $7.2 million, and the sale of the collateral is contracted to settle during the third quarter.

Capital and Share Repurchase

Capital levels continued to build, with the company's estimated common equity Tier 1 capital ratio increasing to 11.2%, and tangible book value per share growing 7% over the past year to $18.93. The company repurchased an incremental 338,000 shares under its repurchase program during the quarter, bringing the total shares repurchased to nearly 1.3 million at a weighted average cost of $15.35. The company has 1,638,524 shares available for repurchase under the authorized program.

Outlook

Looking ahead, the company is increasingly focused on driving organic growth in the back half of 2024 and into 2025. The bank's loan pipeline of $259 million reflects a marked increase over the $137 million in the first quarter and was the highest in the past five quarters, as the company continues to pivot its origination engines to growing and expanding commercial and industrial (C&I) lending relationships from its historical commercial real estate (CRE) focus.

Recruitment and Expansion

The recruitment of C&I lenders continues, with the addition of five new bankers this year and four offers accepted or pending, with additional recruiting ongoing. This includes a new team build-out with a focus on middle-market C&I and government contracting, as well as the addition of a middle-market banker well-known in the grocery space, which should expand opportunities in that industry.

Loan Portfolio

While originations of new loans were modest in the second quarter, the company expects growth in the C&I business in the second half of the year, which will bring with it new deposits and fee income, while offsetting any small decline in CRE. For the quarter, the company's C&I loan balances were impacted by five borrowers who paid down or paid off loans in the normal course of business, totaling $86 million.

The company's CRE portfolio continues to perform well, and it remains committed to methodically rebalancing its commercial loan portfolio towards C&I relationships over time. Deposit balances declined by approximately 2% in the quarter, as nonmaturity deposits decreased 4% compared to the prior quarter. This decline includes the continued runoff of brokered CDs of $142 million and a decline in high-yield savings balances of $96 million, driven by targeted refinements to both marketing efforts and rates offered.

Financials

Net interest income and net interest margin were $82 million and 2.71%, respectively, reflecting a combination of higher funding costs associated with a mix shift in funding and modestly lower average earning assets. Funding costs reflect cycle-to-date deposit betas of 42%, up from 40% in the prior quarter. The company continues to believe that it is at or very near its trough in both net interest income and margin, but the outlook for both could shift modestly subject to interest rates, loan growth or repayments, and funding mix trends in future quarters.

The company increased its provision by $3.1 million in the quarter, increasing its coverage ratio to total loans to 0.69% and 0.75%, including purchase accounting credit marks. Despite strong asset quality metrics and stress test results, the company has remained prudent and steadily continues to build reserve levels to address the uncertainty risk in the overall environment.

Noninterest expenses remained flat from the prior quarter at $59 million. The company continues to make every effort to hold operating expenses stable in the $58 million to $60 million per quarter range, but modest quarterly volatility may occur.

Geographic Footprint

In terms of the company's geographic footprint, the majority of its activity continues to happen in the corridor between Philadelphia and New York, its most concentrated market. However, the company does see measured growth in other regions, such as the Baltimore-Washington area, particularly in the government contracting space, where it has made some strategic hires.

Conclusion

Overall, OceanFirst is navigating the challenging environment with a prudent approach, focusing on organic growth, disciplined expense management, and maintaining a strong capital position. The company's shift towards a more diversified loan portfolio, with an increased emphasis on C&I lending, positions it well for the future, even as it remains cautious about the broader economic outlook.