KBRA Affirms Ratings for OceanFirst Financial Corp.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Toms River, New Jersey-based OceanFirst Financial Corp. (NASDAQ: OCFC) ("OceanFirst" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A- , the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary, OceanFirst Bank, N.A. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by OceanFirst's consistent history of strong credit performance that has been evidenced through multiple economic cycles (NCO ratio averaged ~15 bps since the start of 2008), which is supported by a lower risk loan portfolio that includes conservative underwriting, as well as a credit focused management team with comprehensive knowledge of local markets and borrowers. OCFC's NPA and NCO ratios (0.35% and 0.01% as of 1Q24) in recent years have tracked well below peers, and the level of criticized, classified, and past due loans also remain below average as of 1Q24. With that said, KBRA recognizes that the company reflects a slightly elevated exposure to investor CRE (nearing 400% of total risk-based capital), including an above average concentration in office lending (11% of loans). However, we believe that the portfolio is well diversified geographically, relatively granular, reflects disciplined underwriting metrics (weighted average LTV and DSCR of 56% and 1.7x, respectively), and includes minimal exposure to central business districts (NYC central business district loans are ~0.2% of total loans), with a resilient tenant base that is largely comprised of credit tenants and the medical services. Additionally, with the recent headwinds facing the NYC rent-regulated multifamily space, it is also worth noting that the company reflects de-minimis exposure to this asset class at less than 1% of total loans. While higher interest rates continue to put pressure on borrowers across the industry, OCFC's stress testing and repricing analysis demonstrate that a vast majority of CRE loans continue to reflect solid DSCRs when repricing to market rates. KBRA also positively views OceanFirst’s core deposit franchise that reflects a majority of total funding, respectable market share in its home state of New Jersey, granularity, and a favorable mix (54% are transactional accounts), which results in below average costs (2.31% for 1Q24) and has helped support some NIM resiliency since the start of the Fed’s rate hiking regime despite its largely fixed rate loan portfolio that has offered less repricing opportunities (average yields ~60 bps below peers). Moreover, NIM, and, in turn, earnings, have shown signs of stabilization in 2024, albeit remaining slightly below average (ROA of ~0.80% during 1Q24). Additionally, noninterest income has been trending lower, and the company's revenue diversity is comparatively lower than peers (9% of total revenues for 2023). Given the lower amount of fee income, it is paramount that OceanFirst maintains a healthy NIM. The recent improvements with the expense base, including noninterest expenses to average assets tracking around 1.80%, could be a potential tailwind in the future as the more efficient banking operation allows for stronger profitability assuming a rebound in the margin. We acknowledge that risk-based capital measures have tracked below peers, though understand the rationale given the perceived lower risk credit profile. However, the more conservative approach to capital management (CET1 ratio has grown 110 bps since YE22; 11.0% as of 1Q24) given the uncertain operating environment has been viewed favorably.

Rating Sensitivities

Positive rating momentum is unlikely given the challenging operating environment, though over the longer-term, increased scale within current and newly established markets, along with stronger earnings, fee income, and capital ratios would be viewed favorably. A downgrade is unlikely, though any deterioration among key financial ratios, specifically within credit or liquidity categories, or more aggressive capital management, could potentially pressure the ratings.

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