OceanFirst Financial Corp. (NASDAQ:OCFC) Q4 2022 Earnings Call Transcript

OceanFirst Financial Corp. (NASDAQ:OCFC) Q4 2022 Earnings Call Transcript January 20, 2023

Operator: Hello everyone, and welcome to the OceanFirst Financial Corp. Earnings Conference Call. My name is Daisy, and I will be coordinating your call today. I would now like to hand over to your host, Jill Hewitt, Investor Relations Officer to begin. So Joe please come ahead.

Jill Hewitt: Thank you, Daisy. Good morning, and thank you all for joining us today. I’m Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning’s call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. We refer to our press release and other public filings including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you. And now, I will turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher.

Christopher Maher: Thank you, Jill. Good morning and happy New Year to all been able to join our fourth quarter 2022 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 will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. As a reminder, in addition to the earnings release issued last night, an investor presentation is also available on our company’s Website. We may refer to these slides during the call. After our discussion, we look forward to taking your questions.

Our financial results for the fourth quarter included GAAP diluted earnings per share of $0.89. Our record earnings reflect expanding margins, disciplined expense management and strong loan growth with benign credit conditions. Core earnings were $0.67 per share and reflect noncore items primarily related to a $17.5 million unrealized mark-to-market valuation gain on our equity investment position and Auxiliary Capital Partners. The details related to the auxiliary investment were shared in an 8-K filed on November 30, 2022. While provision expense was $3.6 million for the quarter, an increase of $2.6 million from the prior linked quarter. We couldn’t be more pleased with the credit experience in our loan portfolio. Nonperforming loans represent just 19 basis points of total loans and remain at pristine levels.

With the potential for a recession ahead, the increase in provision for the quarter represents general macroeconomic factors and risks external to our portfolio’s asset quality and loss experience. Turning to capital management. The Board approved a quarterly cash dividend of $0.20 per common share. This is the company’s 104th consecutive quarterly cash dividend and represents 30% of core earnings. Tangible common equity per share increased to $17.08, reflecting earnings momentum and stable AOCI marks related to our investment portfolio. Over the past eight quarters, tangible common equity per share has increased 14%. The company did not repurchase any shares in the fourth quarter. At this point, I’ll turn the call over to Joe to provide some more details regarding our progress during the quarter.

Joe Lebel: Thanks, Chris. Loan growth for the quarter totaled $199 million, capping off a record year of net loan growth of $1.3 billion. Loan originations of over $3 billion for the year were primarily driven by the commercial bank, with growth across the bank’s footprint. Originations were also bolstered by our conservatively underwritten construction vertical, which we expect to drive additional loan growth in 2023. We remain unwavering on the preservation of asset quality, credit standards and pricing disciplines. Regarding credit risk metrics, we ended the year with net credit recoveries, decreased delinquencies, sharply lower criticized and classified assets and improving portfolio risk ratings. At just 15 basis points, nonperforming assets, excluding PCD loans, are among the lowest level the bank has ever recorded.

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Our credit discipline will allow for responsible growth in certain segments. The soften pipeline provides relief of pressure on funding needs in the short-term as we shift to managed credit risk and focus on continued margin improvements. That said, we expect loan growth to continue in the mid single-digit ranges with less noise from prepayments. Turning to deposits. We continue to emphasize effective management of deposit costs. Total deposit costs of 53basis points for Q4 have increased 33 basis points over the past year for a deposit beta of just 8%. The deposits of $9.7 billion decreased just $57.6 million, less than 1% as compared to the prior year. The loan-to-deposit ratio ended the year at 102.5%, up from 97.6% in the prior quarter and slightly above our target of 95% to 100%.

We expect modest deposit growth in the coming quarters, but we will exercise price discipline and pace deposit growth to approximate the growth in well-priced credit facilities. We will be methodically focused on deposit gathering through our seasoned relationship bankers, treasury management teams and competitively priced consumer deposits. With that, I will turn the call over to Pat to review margin expansion, expenses and tax rate expectations.

Pat Barrett: Thanks, Joe. Turning to net interest income and margin. Net loan growth of $199 million in our historically asset-sensitive balance sheet drove another quarter of margin improvement, which expanded by 28 basis points to3.64%. Our strengthening margin benefited from 8 basis points of purchase accounting accretion and 5 basis points of accelerated loan payoff activity. While our margin was clearly impacted by higher funding costs, it’s important to expand or reiterate Joe’s remarks and highlight that our deposit betas to date have proven to be lower than we would have expected, and we believe will ultimately outperform others in this respect through the current rate cycle. Two factors should provide further modest tailwinds for our overall margin.

First, the quarter end loan portfolio of nearly $10 billion was $100 million higher than the fourth quarter average. Second, nearly a quarter of our earning assets are floating rate, providing further opportunity for margin expansion, although likely at a more modest rate. Also of note, although not material to the fourth quarter’s performance is that we resumed securities purchases during the quarter as part of an overall effort to lock in longer-term investment yields and in conjunction with other efforts, move our asset sensitivity towards a more neutral position. Core noninterest expense remained relatively flat in the fourth quarter compared to the prior quarter, with almost equal and offsetting increases and decreases in professional fees and data processing expense, respectively.

The elevated level of professional fees are expected to continue and through the first half of ’23 should level up by year-end ’23. It’s also worth noting that our effective tax rate for the quarter was 24.6%, and we expect that to remain in the range through the rest of this year. Overall, we continue to remain very disciplined around expense management. This, combined with our steady growth puts us in a position to highlight that we’ve already outperformed both the 2022 and 2023 quarterly efficiency and profitability targets that we announced at our last Investor Day in third quarter of 2021. We couldn’t be more pleased with the company’s financial performance. As a reminder, the 2023 core target metrics set at that time were to earn $0.65 per share, meter exceed 1.1% ROA and achieve an efficiency ratio of around 50%.

Having largely achieved that performance a year earlier than originally anticipated, we continue to work through how we should be thinking about financial targets going forward. Not only are we considering the external economic and interest rate environment, we’re also reviewing how our efficiency and productivity across all of our operating businesses and processes compared to industry benchmarks. More to come on this topic during the second quarter, but expect that over the near to medium term, our targets may be framed more in terms of relative performance rather than absolute goals. At this point, I’ll turn the call back to Chris.

Christopher Maher: Thanks, Pat. Now we will begin to the question-and-answer portion of the call.

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Q&A Session

Operator: Our first question today comes from Frank Schiraldi from Piper Sandler. Frank, please go ahead. Your line is open.

Frank Schiraldi: Good morning.

Christopher Maher: Hi, Frank.

Frank Schiraldi: Just wanted to talk about the — Joe, you mentioned the pipeline, but still, I think, talked about mid single-digit loan growth from here. And it sounds like you’re thinking maybe more modest deposit growth. Just wondering where you guys sort of see or target that loan-to-deposit ratio moving over time? And also, if there’s any specific niches you’re looking at to note to drive the funding side of the balance sheet?

Christopher Maher: Sure, Frank, it’s Chris. I will take that. In terms of the strategy over the loan-to-deposit ratio, we love being like 95%to 100%. That’s a great operating range for us. So it was a little bit higher. I mean, frankly, the last couple of days of the year, we had just a couple of variations in deposits that were a timing thing. We’d like to try and manage to stay around 100, there’s really no issue going to 102 or 103, but we are not going to become a bank that’s going to go to 120. We don’t think that’s a highly valuable franchise strategy. So I would expect, as we go into this year, we think we’re going to have mid single-digit loan growth based on as much as we can see now, right, which is really early in the year.

We want to try and match fund that with deposits for the most part. So in terms of where we’re going to get those deposits, we have a terrific group of commercial bankers that have had a little bit of a luxury in the last couple of years not to have to focus as much on that. Obviously, their goals and objectives this year will be heavily focused on deposits. We have a great treasury team. We have a very mature product set there. So you’re going to see our commercial bankers and our treasury team are probably doing the heaviest lift. But we also have the opportunity in our consumer franchise to be able to drive some deposit growth in consumer. So I would think about deposit growth coming in as a blend, some of which may be noninterest-bearing, but a lot of it may be either less price-sensitive interest-bearing accounts and some of it will be just be market-sensitive rates.

I think it’s a blend. So when we blend on that and we look at the loan opportunities in the pipeline, I think we can maintain margins. As Pat said, there’s an opportunity potentially for additional margin improvement, as long as rates continue to increase and then maybe flattening out after the increase is top.

Frank Schiraldi: Okay, great. And then, Pat, you also — Pat also mentioned the securities purchases. I’m just kind of curious if you could talk about the size maybe of additional adds to the securities book. I assume as you’re reducing asset sensitivities, you fund that with shorter-term FHLB borrowings. I guessing you don’t get much spread there. So just kind of curious about how to think about the progression there as we move through the year.

Pat Barrett: Yes. Well, it’s kind of the trade you make for future asset-sensitivity versus future log-in future returns. We bought roughly $250 million towards the middle and later part of the quarter of agency paper CMOs constructs. The yields on those were in the kind of low to mid 5s. So net-net, we are — if you consider incrementally, we are funding it at wholesale costs, we probably clear about 1% on those increases. Now the combination of that and some other efforts that we are looking at, we are hoping to get to where our downside sensitivity is reduced from what we had last year. And frankly, as we move through this year, we kind of like to try to position ourselves relatively neutral. So that we can hopefully lock in a margin at a higher level than certainly what we saw during the zero interest rate environment.