Oceanfirst Financial Corp Q4 FY2024 Earnings Call

Good morning, and thank you all for attending the OceanFirst Financial Corp. Q4 2024 Earnings Call. My name is Brika, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. And I would now like to pass the conference over to your host, Alfred Goon, Investor Relations at OceanFirst Financial. Thank you. You may proceed, Alfred.

Thank you very much. Good morning and welcome to the OceanFirst fourth 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 the 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 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 CEO.

Thank you, Alfred. Good morning and thank you to all who are able to join our fourth 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 fourth quarter reflected net income of $0.36 per share on a fully diluted GAAP basis and $0.38 per share on a core basis. We were pleased to see expansion of both net interest income and margin this quarter on both a GAAP and core basis, and saw a return to positive growth in our loan portfolio. Deposit growth was also solid as we were able to nearly eliminate the last of our broker deposits that we had added over the past two years. Operating expenses increased as we expected, reflecting growth from the acquisitions of Garden State Home Loans and Spring Garden Capital during the last few months of the year. We also saw modest increases from the continued hiring of revenue-producing talent which Joe will discuss in a moment. Asset quality remained very strong. The reserve build for the quarter was related to the day one CECL provision resulting from the Spring Garden acquisition and macroeconomic factors. Loans classified as special mention and substandard decreased by 16% and represent just 1.56% of total loans, well below our historical average and considerably lower than the peer average. We saw another quarter of net recoveries resulting in a full-year net charge-off rate of less than 2 basis points. Capital levels remain robust with an estimated common equity Tier 1 capital ratio of 11.2% and tangible book value per share of $18.98. This week our Board approved the quarterly cash dividend of $0.20 per common share. This is the Company's 112th consecutive quarterly cash dividend and represents 56% GAAP earnings. At this point, I'll turn the call over to Joe to provide more details regarding our performance during the fourth quarter and our organic efforts heading into 2025.

Thanks, Chris. The Company's loan originations for the quarter totaled $515 million and included $78 million of C&I originations. The annualized net loan growth was 4% during the quarter driven by our owner-occupied and residential portfolios. Despite solid residential originations of $235 million for the quarter, pipelines remain impacted by uneven loan demand given interest rate increases and seasonality. Commercial loan pipelines of $197 million remain stable quarter-over-quarter and should improve as we move out of the winter months, which also reflects seasonality. For the quarter, we added three new C&I bankers to the eight already onboarded in 2024. This month alone we've added another three bankers as we continue to focus efforts on expanding the C&I bank. We are also excited about the build-out of our Premier banking team which is focused on targeting low-cost deposit-rich commercial customer relationships. We believe this is a pivotal opportunity to expand our services to new clients with our historical level of superior delivery. Deposit balances excluding brokered CDs increased by approximately 1% compared to the prior quarter. Our year-to-date runoff of brokered CDs is $557 million, which as Chris mentioned is close to our early 2023 levels of near zero. We remain confident in our ability to grow, retain, and reprice consumer, commercial, and government deposits in this environment, and based on our commitment to attract and hire talent, we anticipate accelerating commercial deposit growth in the coming quarters. Non-interest income decreased $2.5 million to $12.2 million during the quarter. However, excluding non-core and non-recurring items, non-interest income increased modestly, primarily driven by an increased gain on the sale of residential loans combined with modest improvements in fee income, but we will likely not see significant near-term improvement without increased mortgage activity in the markets. With that, I'll turn the call over to Pat to review the remaining areas for the quarter.

Thanks, Joe. Good morning to everyone. As Chris noted, both net interest income and margin grew in the quarter, totaling $83 million and 2.69%, respectively. Funding costs declined by 16 basis points, a decrease that meaningfully exceeded the modest decline in earning asset yields as the impact of rate cuts and further repricing activities rolled through our balance sheet this quarter. While volume growth was modest, we're pleased with the momentum in reducing overall deposit costs across all deposit types and are cautiously optimistic that we'll be able to continue this repricing into 2025. You should still expect seasonality and volatility in consumer spending, rate sensitivity, and investment alternatives, particularly if we're entering a higher prolonged short-term rate environment. Asset quality remains strong with non-performing loans and loans 30 days to 89 days past due at 0.35% and 0.36%, respectively. These measures reflect modest increases due to acquired PCD loans and normal seasonality for delinquencies. In spite of historically low net charge-offs, and absent any deterioration in credit quality, we were still able to increase our allowance modestly and we continue to feel great about our credit profile and outlook. Non-interest expense increased $1.1 million to $64.8 million during the quarter, in line with our expectations. Excluding non-recurring charges, expenses grew by $2.7 million, largely reflecting the full-quarter impact of our acquisitions on compensation, marketing, data processing, and professional fee expenses. This run rate may increase modestly in the next quarter, reflecting the impact of annual compensation actions and vendor contract renewals. Capital levels remain robust. We did not repurchase any shares during the quarter and ended the year with total repurchases of nearly 1.4 million shares at a weighted average cost of $15.38. We're not planning for material share repurchases in the near term. Finally, a word on taxes. Our effective tax rate of 19% for the quarter was positively impacted by tax credits and other year-end true-up activity. We expect our effective tax rate going forward to remain in the 23% to 25% range, absent any changes in tax policy. At this point, we'll begin the Q&A portion of the call.

Thank you. We will now begin the question-and-answer session. We have the first person on the line, which is Tim Switzer with KBW. You may proceed.

Hey, good morning, guys. Thank you for taking my question.

Good morning, Tim.

We appreciate the Q1 2025 outlook you guys provided, very helpful. If you could help quantify the typical seasonal increase you guys see on the OpEx side, give us an idea of where that goes, and then what's the trajectory from there over the course of the year, knowing that you might be able to recruit some additional talent along the way.

There is a reason that we modified our guidance to just being Q1 because we know that we're making investments this year. So we're a little bit reluctant to guide towards a full-year outlook. We'll keep you posted each quarter as we're making those investments. Typically, we do see a little bit of an uptick, as most firms do around compensation, payroll taxes, etc., that typically see an uptick in Q1. It's a pretty modest $1 million, maybe $1.5 million. So this year probably wouldn't be any different than that. The only real changes in expenses are likely to be in hiring that we'll be making or have already made, and that's almost entirely focused on revenue-producing talent.

And Tim, those hires — typically this is the season when bankers evaluate their options and high-quality bankers usually receive some sort of incentive payments in depending on the bank, somewhere between January and March. So we can't be quite certain exactly what the recruiting class of 2025 is going to be, but I would say this, what you see in our baseline, the guidance we've given you today, is consistent with the staff we have today. Should we have a successful recruiting season, and we certainly hope to and have every indication we will, we would not just be adjusting expense guidance. We would also be adjusting guidance around deposit growth and loan growth. So we'd really like to — it's not going to impact Q1, and by the time we're on the phone with you in April, I think we'll have a pretty good handle on what those numbers look like and would plan to share a better or more precise outlook at that time.

Okay, great. Yes, that all makes sense. Are there any specific regions or areas you're looking to be adding some additional bankers specifically? And then you mentioned multiple initiatives. What are some of the other initiatives you guys have coming from?

It's really two sets of bankers and I'll let Joe walk into more of the details. But if you think about them broadly, C&I bankers who are broadly interested in both loan and deposit taking, but tend to have loan-to-deposit ratios that require funding from other parts of our business. So we've been successful hiring some of them in the last couple of years. We are accelerating the pace of hiring in that area. And then as everyone has been doing, we're focused on deposit-gathering commercial bankers as well, who might focus on niche areas and provide that to generate their loan-to-deposit ratios, which tend to be quite low. Joe may talk about the hiring you did in 2024 and how you’re thinking about things at this time.

Tim, I think we spent the latter half of 2024, and as you can see already in 2025, focusing on the additions to the C&I bank, which, the recruiting door is open for us. We have the opportunity to grow that substantially. And then I think Chris aptly touched on the Premier bank. I'd add one more comment about the residential bank. We're dependent on the rate environment, but we've had some success in bringing people in. We have had a small acquisition we've added, which has been a substantial add to our volume. While that may be a little choppy, a lot of those folks tend to work on commission. They're active, they're in the market, and we're in the market as well. So if we have the opportunity to recruit more of those, we will, which will only help us as time goes on.

Okay, great. And if I could get one more question, you guys have your subordinated debt preferred coming up here? Have you had thoughts about if you want to refinance those at all unchanged?

The way we're thinking about that, Tim, is we've got multiple options and we're watching the markets and the cost of capital that would be available. One of the reasons that we have been allowing our capital ratios to drift up is to have the ability to at least partially redeem those out of our existing capital base when they hit their repricing. So it's something that we would consider various options. But one of the options on the table is just using our current capital position to redeem some of them in May, and then maybe in subsequent quarters, redeem the remainder out of earnings. We would certainly consider other ways to do that, raising fresh capital. But we want to be very careful about the overall cost of capital and the utilization of what we have in the books. Certainly, our growth rate will factor into this as well. So as we conclude the hiring season and understand how much capital we'd like to have on hand for growth capital, we'll think through that as well.

Great. Thank you, guys, for answering all my questions.

Thank you. Your next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Thanks. Good morning. Chris and Joe, I wanted to ask about the reserve build we saw this quarter. Is that really reflective of future loan growth you anticipate this year? Is there any change in loss content that you see on the horizon?

Fortunately, I'll give you two primary messages on that. The first is that about half, a little less than half of it was related to the day one provision for Spring Garden, so that won't recur, and then the remainder was due to macroeconomic factors; the models move around a little bit. Everything we're seeing on the interior, the loan portfolio, the performance has been very good. So I think if you look at where the reserve is now, as we grow, we'd probably be growing at that level, maybe a little higher, depending on the mix of growth. So as we do more C&I lending, you might expect that the incremental provisioning for growth would probably be closer to, or maybe a little bit over 1%.

Great. Thank you for that. And then just a quick overview about C&I as a percentage of the portfolio. If you look out a year or two, how big of a change should we anticipate just in terms of percentage mix of the overall Company?

I think it's going to be something you're going to see very gradually. So we're not trying to turn too quickly. We're very mindful that it's a crowded market, meaning there's a lot of people out there trying to do exactly the same thing we're doing, and we're going to be very careful about our risk selection in that. But it all comes down to risk selection, structure, and pricing. So I think you're going to see that kind of growth slowly, but you will see as a proportion that's going to increase, and investor CRE is on a more downward trend. And that's just kind of a rebalancing. We think we're a better and more profitable and more valuable company with a little more balance.

Great. Thank you for hosting us and all the background today.

Thanks, Chris.

We now have a question from David Bishop with Hovde Group. You may proceed.

Yes. Good morning, gentlemen.

Hey, David.

Chris and Joe, just curious on the funding side. We've seen the cost come down. Just curious where you see more opportunity, or how much more opportunity there is to roll down deposit costs, either in the CD book or on the retail commercial deposit base. Thanks.

We're still in the process of repricing that base down. It can be very hard to figure out exactly at what point the market pushes back a little bit.

The CD book is obviously the easiest one to deliberately price down and watch how flows work. So our posture going into Q1 is that we're going to continue to price that down slowly but methodically. And if we get to a point where there's kind of pushback on balances, then we'll pull back a little bit. But at this point, we think there's still a little more room. I wouldn't say there's a lot of room, but a little more room. And there's certainly less competitive pressure than there was at pretty much any point in the last two years. So we still see that pressure decreasing, which we think gives us a little bit of room around rates.

Got it. And then maybe a question for Joe, and Chris too. You mentioned the Premier banking division. Have any of those hires related to that group? And are you seeing any sort of traction from Eric Howell hiring some of these new bankers?

It's still very early days. We have been building out the infrastructure. Already baked into the expense rate today are a few hires to make sure we've got our infrastructure tuned very well. We're very mindful that as we add these new bankers, we have one opportunity to get our brand right, especially in markets we may be going into, let’s say, in the New York metro that don't know the OceanFirst brand as well. So we're being very deliberate and careful. We want to launch the right way. The hiring in that division of bankers will probably be more skewed into Q2 than Q1. We may have one or two hires in Q1, but you haven't seen that yet. We do have the escrow team we talked about last quarter. They're starting to put business on, which is nice. Anything you'd add, Joe?

No, I think you hit it right on the head. I think the vast majority of the hires will be Q2 and Q3. The people we've met so far we've been impressed by. So looking forward to it.

Got it. A final question, I saw in the footnote. Hello?

Yes.

Detail is on the loan purchase, Chris? Yes, the $76 million in loan purchase, any details on that?

Sure. We noted a couple of years ago that we did the auxiliary capital investment. Joe, why don't you talk a little bit about the loans we do with them and the opportunity to add some of these?

Yes. We’ve been pretty thoughtful. We like the relationship we have with aux cap on a variety of levels, and we look at that as a three-pronged approach. Obviously, we have the ownership investment, which we've been very happy with. We also do a combination of purchases with them. We’ve looked at a variety of purchases that we do as one-off transactions where we partner with them. And as you've seen more recently, we've done a couple of these loan pools which have been an amalgamation of credits that we already knew and credits that they had originated. We also have the white label business where they act on our behalf as our equipment leasing provider, where we also share in the ownership. We hold the majority of those loans and they own a smaller piece. So it’s been a really good three-pronged approach for us, and we're pretty happy with it — and the credit quality has been great. We have no delinquencies in the portfolio.

Great. Thank you.

Thank you. We have Matthew Breese from Stephens Inc.

Hey, good morning, everybody.

Good morning, Matt.

Understanding some hesitancy on the longer-term guidance and a number of different areas, I guess, maybe what does the pipeline for some of these new teams look like? And if you're successful in bringing them in, what does that do to the deposit expense, loan impact, I don't know, per team or overall? Or maybe that's another way if you guys were to give yourself an A grade in terms of the hiring opportunities here, bringing them in, how would that impact some of these items, expenses, deposits, loans? Just some color would be very helpful.

Matt, I'm glad you started off with an understanding of our hesitancy because until we work through the hiring season and have people on board and this is clicking, we don't want to get ahead of ourselves. But I would tell you that we're talking to multiple teams. Each team has a couple of people on it. Teams have portfolios of various sizes. Some might be just $100 million, some may be a few hundred million. I think you've seen very good examples in the market of what other banks have done in this space. And if you think about the opportunity — we wouldn't be doing this if we didn't think there was an opportunity for hundreds of millions of dollars of new customers over time. But I'm very hesitant to give you a sense of when that would be and what the cost of those would be. The cost is not free money, but it will be well-priced deposits. So you get the opportunity to blend into your deposit base, higher quality customer deposits. I think at the call in April, we'll be able to give you information that makes you feel a little more comfortable about what this is. But this is not a new strategy for us. There’s a new pool we'll be going after. We've been hiring commercial bankers for years. It's how we built our business largely. We slowed that down tremendously in 2023 and 2024 because there was a lot of things going on in the market, in the environment, the liquidity issues that came up, and we wanted to be deliberate and not get over our skis. But we're back into that mode of hiring bankers, and we hope it's a substantial number of bankers.

And maybe just to push it a little bit further, one of the things we've seen in the market, a lot of these teams tend to come with maybe 35% to 45% non-interest-bearing demand deposits with the balance being in at-market savings or money market. Is that a fair statement as you start to bring some of these teams in? It's going to be an improvement to the positive mix?

Yes. That's consistent with the conversations we've had.

And then maybe just bigger picture. This environment, this yield curve is increasingly favorable for folks like yourselves, where the margins at 2.69% is a far cry from where it's been historically. I assume it's up and to the right. I was just curious when you think you can get back to your 3% level. Do you think it's a 2025 event or 2026?

Probably more likely in 2026 than 2025, but there's still a fair amount of uncertainty about the shape of the curve. But your general point, Matt, I think is right, that this is not a bad rate environment for us. I talked earlier about our deliberate repricing of deposit accounts. If that goes really well, then maybe that happens a little faster. If we hit the resistance point a little earlier, it may take us a little longer. But our back book, we have a nice part of it that rolls this year and next. One of the nice things about the long end of the curve being up is that those things are going to reprice at a healthy rate. Our stress testing shows they'll perform just fine at those new rates. We’d like to have a little more time with the long end of the curve being elevated like this. So a lot of variables here, but we're on the march now. We're really pleased to see that inflection point is now behind us. But I think you're going to see a steady slow march, not something that happens in a dramatic fashion.

Got it. Understood. I appreciate you taking my questions. Thank you.

Thanks, Matt.

Thank you. We have the next question from Frank Schiraldi with Piper Sandler.

Good morning.

Good morning, Frank.

You mentioned — I might have missed it. I know you talked, Joe, about new C&I bankers being hired over I think even the last couple of weeks. Did you mention what geography those are?

Yes, sure, Frank. There are varied geographies, but as you know, our footprint. We've hired some new bankers. I'll use Northern Virginia market up all through Boston. So we've hired in Philly, we've hired in New Jersey, and those two outside markets. The interesting thing is something I expected to happen. We tend to hire from larger regional or national banks just because they're more familiar with the way we do things in terms of credit and everything else. But we've been seeing some additional activity from folks that we've hired from historically like TD. Especially early in the year, they've already paid their bonuses and people are unhappy with the direction, so we're benefiting from that. I don't want to lose sight of the fact we also hired in New York City. I would say all throughout our markets.

Got it. Okay. And then as you're thinking about these — the potential for these deposit-focused teams to come over, are you casting a wide net? Are there certain niches, geographies that you're maybe shying away from? Or could this result in just an expansion of geography kind of reasonably far outside your current footprint?

Look, it's a wide net, Frank. But most of the conversations are happening in places pretty close to our current footprint, clustering in New York, areas that are not far-flung for us, and a pretty wide appetite over the kinds of customers these teams service. We do have an eye on volatility. We want to make sure that we're not creating a funding source that's more volatile than we would like. So we want it to be high-quality long-term relationships. The conversations we're having overall, Gas, and this goes for all the hiring we do. Joe was talking about the C&I hiring we've done. We love people that have usually our best people have spent more than a decade where they are. They have mature durable relationships with their clients, creating a lot of long-term value for us.

Okay. And just wondering if how you're thinking through what a reasonable earn back would be. Obviously, you bring these teams over, there's some upfront expenses. Broadly speaking, what do you think a reasonable earn back is? Is it one year? Is that too short of a time to do it right? Any broad thoughts?

I think it'd be a blend, Frank. Some of the teams may be very productive early on and we would expect that they're all productive. If you’ve seen momentum, you've got the right conversations, you have the right pipelines, you'll feel pretty good about things. That's how we've historically looked at things. If you've seen momentum, you've got the right conversations, you're going to give people the time they need to get kind of maturity. Our best bankers over the years, typically they’re at that contributing point somewhere between year one and year two. If they're really good, it could be at a year or inside that. And if they need a little more time, but they have momentum, not unusual for them to hit stride more in the second year than the first. But this is not a multi-year exercise. It’s somewhere in the next 18 months that they’re making substantial contributions. They should be contributing all along. I would also caution, while these are high talent, good talent has a cost, but the costs we're discussing won’t represent a giant percentage of our total expenses. This is still on the margins for expenses for us.

Okay. And then just lastly, given the focus here and considering the valuation of the stock, would you say the focus is on organic growth or is M&A on the back burner here?

We're highly focused on organic initiatives. That’s kind of what I would say.

Okay. All right, fair enough. All right. Thank you.

Thanks, Frank.

Thanks, Frank.

Thank you, Frank. We have another question on the line from Daniel Tamayo with Raymond James.

Thank you, guys. Good morning.

Good morning.

Most of my questions have been asked and answered already, but I guess I'll just ask one also related to the big picture here. You're obviously making a big push into the C&I space, but have a strong track record in credit and growth on the CRE side. Just if you plan to get back to the volume growth, you win that business again, is it CRE concentration? That's the biggest lever there? What is it, a mix? Just curious how you're thinking about the core CRE business that you've had going forward.

We have a few thoughts on it. The first is that we were very conservative in the way we constructed the portfolio. It’s a portfolio that does not have an exposure to things like rent-stabilized multifamily. It doesn't have a material exposure in urban office or central business district office. It's performing really well. It's spread among five states. It's been rolling really well. As customers roll to the new rates, we've not seen signs of distress. Our stress testing is good and credit metrics are good. We like the book, but we recognize that I think we're a more valuable company if we're more diversified. That's why you're seeing the investor CRE number is slowly going down and the C&I number will be coming up. This is not something we're trying to accomplish in the next three quarters. There is a fair amount of repricing CRE that gives us the opportunity to originate CRE loans every day. We're not out of the markets. We never left the markets. It’s important to us to be there for our clients. Our appetite is a little different. We’re a little more conservative. We want to get paid for what we do. Some of the things we've seen in the CRE space are the best-structured and best-price credits available. We're still doing those loans, but directionally, you'll see more of a blend of the business lines.

Yes, that's a good color. Thanks, Chris. That's all I had.

All right. Thanks, Daniel.

Thank you. Thank you all for joining. I can confirm that does conclude today's call. Please enjoy the rest of your day, and you may now disconnect.