OceanFirst Financial Corp. (NASDAQ:OCFC) Q1 2024 Earnings Call Transcript

OceanFirst Financial Corp. (NASDAQ:OCFC) Q1 2024 Earnings Call Transcript April 19, 2024

OceanFirst Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for attending the OceanFirst Financial First Quarter 2024 Earnings Release. My name is Victoria, and I’ll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon with OceanFirst Financial. Thank you. You may proceed, Alfred.

Alfred Goon: Thank you very much. Good morning and welcome to the OceanFirst first quarter 2024 earnings call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we’d like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on our Forms 8-K, 10-Q and 10-K. For a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you. And now I will turn the call over to Christopher Maher, Chairman and Chief Executive Officer.

Christopher Maher: Thank you, Alfred. Good morning and thank you to all been able to join our first quarter 2024 earnings conference call. This morning, I’m joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning we’ll provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. Our financial results for the first quarter included GAAP diluted earnings per share of $0.47.

Our earnings reflect net interest income of $86 million, representing a modest decrease compared to the prior linked quarter of $88 million. Operating expenses decreased to $59 million. First quarter results demonstrated a stable quarter for margins as our core net interest margin was flat at 2.77%, the same level as the prior quarter. Margins were impacted by our continuing efforts to improve the quality of deposit funding. These efforts resulted in another quarter of decline in brokered CDs, our loan to deposit ratio below 100% and a negligible increase in deposit betas to 40%. We continue to see a gradual shift in deposit mix towards higher yielding products, but that velocity is slowing and is now largely offset by the ongoing repricing of our loan and securities portfolios.

Capital levels continue to build with our common equity Tier 1 capital ratio increasing to 11% and continued growth in tangible book value, which increased by $0.28 or 1. 5% to $18.63. These results include nearly 1 million shares repurchased under the company’s repurchase program at a weighted average cost of $15.64. Further on capital management, the Board has approved the quarterly cash dividend of $0.20 per common share. This is the company’s 109th consecutive quarterly cash dividend that represents a 43% of GAAP earnings. We continue to remain focused on positioning the company for a variety of economic and industry outlooks through responsible growth, expense discipline and prudent balance sheet management. At this point, I’ll turn the call over to Joe to provide some more detail regarding our performance during the first quarter.

Joe Lebel: Thanks, Chris. Non-maturity deposits remain relatively stable, decreasing approximately 1% compared to the prior quarter. Our overall deposit balances declined by approximately 2%, reflecting our planned continued runoff of brokered CDs and a decline in high yield savings balances driven by targeted refinements to both marketing efforts and rates offered. On the loan origination side, we saw modest decline in loan balances of less than 1%, driven by reduced demand from customers combined with price and credit discipline. Given the slow start to the year, growth in loans and deposits may be modest for the remainder of 2024. Growth is expected to be lower in Q2, but ramp up in the second half of the year. Said another way, we expect our 2024 year-end loan balances to be higher than 2023 by low-to-mid single-digits with the majority of the growth coming in the third and fourth quarters.

Asset quality metrics remain strong with non-performing loans and criticized and classified assets representing 0.35% and 1.65% of total loans, respectively. We reported 0.01% in net charge-offs to average total loans for the quarter, which marks essentially no net charge-offs in the 11 of the last 12 quarters. With that, I’ll turn it over to Pat to review margin and expense outlook.

Pat Barrett: Thank you, Joe. GAAP net interest income and margin were $86 million and 2.81%, respectively, reflecting the continued repricing of assets offset by the higher interest expense from a continued modest mix shift in funding. As Chris noted, funding costs reflect cycles in a deposit betas of 40%, up modestly from 38% in the prior quarter, while initial signs show relative stabilization in net interest margin. This is subject to unpredictability around loan growth and funding mix trends. So you shouldn’t be surprised to see either stability or possibly some modest compression in the near-term. GAAP non-interest expenses decreased linked quarter to $59 million. We continue 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.

Our effective tax rate for the quarter of 27% included a one-time non-recurring charge of $1.2 million, excluding this charge, the full year effective tax rate is expected to remain at 24% in line with prior periods and guidance. Finally, as Chris mentioned earlier, capital strengthened appreciably with growth in our CET1 ratio to 11%, and we’re pleased to report capital accretion even while repurchasing 958,000 shares for approximately $15 million during the quarter. At this point, we’ll begin the question-and-answer portion of the call.

Operator: Of course. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

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Q&A Session

Frank Schiraldi: Good morning.

Christopher Maher: Good morning, Frank.

Frank Schiraldi: Just wanted to ask about the — in the, I believe in the slide deck you talked about the CET1 ratio remaining above 10%, and obviously it’s well above there now to 11%. And thinking about some modest growth in the back half of 2024, it seems like you could, if you wanted to even, return, 100% plus of earnings to your buyback. So I’m just trying to get a sense of when you talk about getting to that or that 10% threshold, how aggressive you could be on capital return with the stock at these levels, and yeah, your thoughts about capital I guess over the next medium-term here?

Christopher Maher: Hey, Frank, it’s Chris. Look, we’re very comfortable with where we are in the capital ratios today. I think we have a little bit of room, but we also anticipate returning to growth. So we don’t want to use up any of that excess capital that we might want later in the year for growth. I think like you saw in the first quarter, if you just think about it this way, we’re not using repurchases to increase our leverage. We’re using all the free cash flow that we’re not using for growth to fund repurchases, and if the pricing remains around this level, I would expect that to continue.

Frank Schiraldi: Got you. Okay. Appreciate that. And then as you think about growth in the back half of this year, and maybe beyond, just curious any targets in terms of as we think about commercial real estate concentration, if you could just remind us where that is currently as a percentage of total capital and any sort of thoughts about trend there going forward?

Christopher Maher: So Frank, I think the way to think about it is that we’re comfortable with our CRE exposure today, but we will not be increasing it. So what we’re doing is as loans mature, in some cases, we’re allowing those depending on the credit structure to move off the balance sheet and replacing them with other borrowers. But that’s kind of a treading water position. So, most of the growth you’re going to see is in classes outside of CRE. So that’s kind of the right way to think about it.

Frank Schiraldi: Okay. And then just finally, obviously office has been a focus of investors and I know you don’t have much in the central business districts, but I wondered if you could maybe just spend a second or two on your larger loans. I believe that average — taken as an average your loans are below $1 million to $2 million in size. But, if you could just spend a second maybe on your larger loans and how they’re performing and the geography there. Thanks.

Christopher Maher: Yeah, Frank I’ll give you a couple of thoughts and then I’ll have Joe walk you through some of the numbers. First as we’ve talked before, our exposure in central business district is quite low and all credits that we feel very comfortable with. So we’ve been through that book. One important note, I’ve shared this with a number of folks, our exposure in Central Business District in Manhattan for example, totals just $16 million in the balance sheet. We’re talking about very low numbers. The vast majority of the portfolio is suburban office and in smaller size, loans. But Joe maybe walk through some of the stats you have that might be helpful.

Joe Lebel: Yeah. I’ll just give you a couple, Frank. So we have about 87% of loans are under 10% and actually, the weighted average size of those loans is about $1.8 million. And we only have 9 loans over $25 million in the portfolio. And that includes a loan I think we’ve been pretty transparent about in the CBD book, which is a very well-known national pharmaceutical company and another very well-known confectionery company, where it’s their US headquarters. So we’re pretty confident and pretty positive. The — another very large loan is a headquarters of one of the big four banks — a regional headquarters in one of the big four banks in the country. So that’s three of the nine larger loans over $25 million.

Frank Schiraldi: Okay. And I guess if we’re thinking about central business district, forgive me, I forget exactly what you have totaled, but is that kind of the book you look at the stuff over $25 million is kind of the CBD stuff?

Christopher Maher: There’s a correlation there. Certainly, the largest stuff tends to be in CBDs, where you’d see bigger buildings, but the entirety of the CBD book is about $125 million. And each of the loans that Joe mentioned is part of that. They all happen to be in CBDs.

Frank Schiraldi: Sure. Okay. Appreciate it. Thanks.

Christopher Maher: Thanks, Frank.

Operator: Thank you for your question. Our next question comes from the line of Tim Switzer with KBW. Your line is now open.

Tim Switzer: Hey. Good morning. Thanks for taking my question.

Christopher Maher: Good morning, Tim.

Tim Switzer: I wanted to follow-up on your comments about the loan demand you’ve seen recently and a little bit less demand from customers. Do you think part of that is driven by an expectation for rates to be lower by the end of the year and so they’re maybe waiting for that? Or is it macro related peers? Could you maybe just provide some color around the lower demand?

Joe Lebel: Yeah. Tim, it’s Joe. I would tell you that was absolutely the case early in the year, January, February. I think people were looking for some relief before taking on either an M&A transaction, a new business line, maybe some capital expenditure purchases. But we’re seeing that moderate. I think people are coming to the realization that that may not necessarily be the case. The other thing that we’re seeing is that, we’re seeing a little bit more renewed confidence. People have been able to pass along increases in some of the product costs. We’re seeing that obviously in inflation. So we’ve seen subsequent to quarter end, a little bit of an increase in pipelines. So we’re seeing those green shoots start which is a positive for us. And I think as Chris mentioned earlier, the vast majority of the increase in the pipe is coming from the C&I book, which is really where we’ve been focused.