Q1 2022 OceanFirst Financial Corp Earnings Call
Good morning, everyone and welcome to the Ocean first financial Corp Quarterly earnings Conference call.
My name is Daisy and I'll be coordinating today's event.
You'll have the opportunity to ask a question at the end of the presentation, if you'd like to register a question. Please press star slipped by one on your telephone keypad.
Now handover to hoist Jill Hewitt Investor Relations Officer, Ashwin first to begin so Joe. Please go ahead.
Thank you Jamie good morning, and thank you all for joining us I'm, Jill Hewitt Senior Vice President and Investor Relations Officer at Ocean First financial Corp. We.
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.
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 turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher.
Thank you Jill and good morning to all who've been able to join our first quarter 2022 earnings conference call today.
Good morning, I'm joined by our President, Joe Labelle, Chief Financial Officer, Mike Fitzpatrick.
As always we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you.
This morning, we'll cover our financial and operating performance for the quarter and provide some color regarding the outlook for our business. Please.
Please note that our earnings release was accompanied by an investor presentation that is available on the company's website.
We may refer to those slides during this call.
After our discussion we look forward to taking your questions.
In terms of financial results for the first quarter GAAP diluted earnings per share was 42 cents.
Earnings reflect strong loan and deposit growth expanding margins decreased operating expenses and benign credit conditions.
Core earnings were <unk> 49 per share and reflect noncore items, including charges related to 10 branch closures in January merger charges and equity valuations.
Regarding capital management, the board declared a quarterly cash dividend of 17 cents per common share and approximately 44 cents per depository share of preferred stock.
The common share dividend as the company's 101st consecutive quarterly cash dividend.
The 17th <unk> common share dividend represents 35% of core earnings.
Given strong growth rates for both loans and deposits, we elected to maintain the current dividend level.
Tangible common equity per share increased a penny to $15.94, reflecting modest a OCI marks related to our investment portfolio.
For the past year, we've been focusing on adding floating rate instruments to our available for sale investment portfolio, which sacrificed margins at the time, but preserved equity positions for the bank.
During a rising interest rate environment.
The company also retired $35 million of subordinated debt carrying an interest rate of $4 one 4% on March 31 of this year.
Tangible stockholders' equity to tangible assets decreased to eight 6% as the balance sheet grew by $425 million or three 6% for the linked quarter.
The increase in interest, earning assets is being driven by our commercial banking expansion strategy.
The company's share repurchase activities continued during the first quarter with 100000 and 444 shares repurchased.
Our appetite for share repurchases remains strong, but trading rules limit the number of shares the company was able to retire while awaiting the approval of the partners Bancorp acquisition.
There are $3 2 million shares available under the current repurchase program.
Turning to operations loan originations of just over $1 billion set another quarterly record, helping to deliver $486 million in net loan growth for the first quarter.
As of March 31st the committed loan pipeline remained strong at $515 million.
The deployment of cash drove a $3 6 million dollar pickup in net interest income for the quarter.
And another improvement in net interest margin, which expanded by 19 basis points to 3.18%.
It's important to note that the margin expansion was driven by the deployment of cash rather than interest rate movements.
We believe the two factors will provide a tailwind for margins in the second quarter.
First the quarter end loan portfolio of $9 1 billion was $269 million higher than the first quarter average of $8 8 billion.
Second the company held $2 billion of floating rate instruments repricing in Q2, which will provide the opportunity to strengthen margins as rates increase in April and perhaps for the remainder of the year.
The company is not experiencing pressure on deposit pricing at present, although we expect some pressure may develop later in the year.
Credit trends remained very benign with the company posting another quarter of net loan recoveries.
Loan portfolio risk characteristics are very healthy with low delinquencies positive risk rating trends in nonperforming assets. Excluding P. C. D loans of just 19 basis points of total assets.
The provision for the quarter was driven by a lengthening of the expected duration of the residential mortgage portfolio and net loan growth.
Under Cecil the average loan life can have a measurable impact on reserve requirements.
Especially in a quarter when mortgage rates increase materially.
Much of our reserve remains in the form of qualitative factors that reflect the potential for economic uncertainty in future periods.
Core operating expenses decreased by $2 million as compared to the linked quarter, but were a bit higher than we would've liked.
Pressure came from information technology, and professional services, both of which can be volatile from quarter to quarter, our expense target for the second quarter will remain steady at approximately $55 million.
The effective tax rate should be in the range of 24%.
At this point I'll turn the call over to Joe for a discussion regarding progress this past quarter, including an update on the expansion of our commercial bank.
Thanks, Chris.
Originations for the quarter cent, a second a second consecutive record at one point O 2 billion.
Driven by commercial originations of 817 million another record loan portfolio grew $486 million fueled by $286 million in commercial growth and $208 million of residential which included a $162 million in pool purchases.
We continue to see strong pipeline activity in commercial from all regions of the company and customers have been active in all segments, including commercial real estate and C&I lending.
Customer sentiment is largely bullish with some to be expected uncertainty about the rate environment and the resulting effect on economic conditions.
Nevertheless, borrowers tell us they can pass along price increases in most instances to their customers.
Commercial customers continue to have uneven experiences with the supply chain.
Some are experiencing delays were rising shipping costs, especially with overseas containers.
While most indicate their suppliers have adequate raw materials on hand, so overall inventory availability is not severely constrained just occasionally delayed.
Our shore based seasonal operators in amusement real estate hospitality and retail are confident in yet another stellar summer with rentals and bookings are all time highs as consumers are spending on leisure activities.
Residential real estate demand remains very strong with limited inventory.
Keeping prices high despite the race the recent rate increases.
I expect overall residential volume to decrease as the refinance market slows dramatically.
I don't expect any future residential pool purchases now that we've utilized the bulk of our excess liquidity on the balance sheet.
As you know we like the diversity in the residential portfolio for credit risk and duration to offset some of our rapid commercial growth that carry shorter duration and have used pool purchases to counter residential runoff from refinance activity.
For the moment I expect we will see prepay speeds slow dramatically with the interest rate increases so our residential team should be able to keep the portfolio flat and may even experienced some quarterly growth in the coming quarters.
Deposit growth for the quarter of $323 million helped fund the loan growth. Despite the 19th branch closures in December and January and the sale of two branches in November the.
The average cost of deposits fell to 16 basis points from 20 at year end.
We expect the branch network to remain stable at 38 locations for the foreseeable future now that the optimizations behind us.
The average branch size now sits at $265 million.
Notably as we distance ourselves from the core banking systems conversion in summer 2021, as well as the recent branch consolidations. Our net promoter scores have rebounded quickly has remaining retail branches in the back office continue their return to normalized operations.
We continue to make technology investments and the call center, including video and text chat continuing our efforts to maximize the customer experience.
Effective April one we closed on the majority of share acquisition have tried it abstract title agency where.
We are quickly gaining momentum in total referrals and expect expect tried and can generate a modest profit for 2022, providing some offset to the loss of interchange revenue attributable attributed to the Durbin impact.
A $1 5 million a quarter beginning in Q3.
With that I'll turn it back to Chris.
Thank you Joe before we open the line to questions I, just want to spend a minute.
Thanking Mike Fitzpatrick for his career here at Ocean first as many of you know Mike will be retiring this quarter and we will welcome Pat Barrett as our incoming CFO for the next earnings call.
Just to put things in perspective, Mike joined the company as our first CFO ever.
And has celebrated not just 30 years here, but more than 100 quarters of public filings of financial statements. So I don't know how many publicly traded companies can boast a CFO that has been around that long and as that dependable.
And has had such a an accurate record.
But more importantly, Mike helped bring our company through some important transitions not just our.
Our initial public offering.
But the creation of the Ocean first foundation.
And that was created at the time of our IPO. We were the first company first banking company in the United States to create a foundation in connection with its IPO.
The Ocean first foundation has now made approximately $43 million of charitable contributions and our communities.
And further than that many banks completing ipos after hours copied the format.
So theres a magnitude of philanthropy, that's related to that but perhaps the most important thing I can say about Mike is in our industry. Many people talk about mutual conversions to public companies and the opportunity for those companies to continue on as a publicly traded entities that are able to.
Meet the demands of the market and their shareholders and we are certainly the exception now sitting here 25 years after our public offering as a standalone profitable publicly traded commercial bank and Mike has been a big part of that along the way. So so we thank Mike for his.
Contribution Soc Osha first over the years.
So with that I'd like to open the line for questions and.
We have.
Thank you very much Chris if anyone would like to register a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by T. When preparing to ask your question. Please ensure you Amit you'd likely see that start.
<unk> slipped by one no telephone keypad to register a question.
Okay.
Our first question is from Michael Perito from K B W. Michael Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Good morning, Mike.
I wanted to start just on the <unk>.
The credit side here.
It fuels.
Pretty pretty good, but obviously, there's some growing concerns as we kind of move out quarters here I'm. Just curious really just on the the ACL I mean is it fair to start to really model that in at a more flat rate, just given cecil and and the potential for maybe higher yeah.
Al-qaeda economic scenarios getting bigger weighting stuff of that nature, particularly with the growth of the pipeline you know what it is and what it's expected to be.
There's a few ways to think about that like the first way is I want to put in context. The provision we made this quarter the lengthening of our expected duration of the residential loan portfolio was really the single biggest factor in our provision in that as a standalone factor would have accounted for about a three and a half million dollars provision so that was.
The driver this quarter there were actually some other favorable outcomes.
Obviously, there's always pluses and minuses before you get to a final number so that I want to put into context was the driving force in this quarter.
As we look forward into the year I would think about two things.
In terms of loan growth, we do expect to be able to need to provide for loan growth overtime.
Our credit record has been very good over the long term and Cecil is heavily dependent upon your credit history in terms of how what kind of an allowance you set up. So if you were to think about say.
Somewhere between a 70 or 75 basis point ballpark around covering loan growth.
That would be likely in the range, although that could change up or down.
We also have a significant amount of qualitative reserves and those reserves are held for the exact uncertainty that that you're mentioning.
Obviously with events in the Ukraine.
As well as the GDP number we saw yesterday, where just kind of keeping a couple of extra dollars away in the qualitative reserves.
But I think importantly, we need to talk about.
How reserves relate to the economy.
And while GDP is a driving number.
GDP really influences unemployment and for our model and I think many models in the industry. It is the unemployment model that drives the credit.
Scenario, so we're not quite sure if the link between unemployment and GDP will be as tight in this cycle as it has in the past so that translates into uncertainty I think you could see.
Call kind of the academic test of a recession, where you have two quarters of GDP negative that do not have a big impact on unemployment and then as a result, you may not have a particularly tough credit cycle. So I think we're all waiting to see how that develops we've got the qualitative reserves put aside to consider those kinds of things.
So I don't know if we really can't give much visibility about future provisions other than thinking about providing for growth and then waiting to see what the economy does.
Okay.
That was a helpful rundown, Chris Thanks, and then.
On the AR on the girls side, just curious you know how partners grow faired in the first quarter and as you think about that deal in the Baltimore market. I mean is that something that you think will come in and be kind of immediately additive to the pipeline that you guys have today are you guys already somewhat incorporating that pipeline of that.
Market its that pipeline or a more fully basis. Just curious you know how and then I guess any commentary about how that deal is kind of tracking from a integration and keeping the team together standpoint would be great as well.
Sure. Let me, let me start by saying that you know from the beginning we felt that partners, who would be additive to our loan and customer growth in those markets and we continue to think so so everything is going well in that regard and our work with the company.
And our strategy really has been to focus on organic and to supplement that with acquisitions, where they make sense and I would point to our market in New York, where we've had a great combination of both.
Inorganic entry as well as the acquisition of a community Bank you know, we're approaching a $2 billion business in New York that would not have developed in the same way had we not combined the organic and the acquisition side. So.
Feel very good about the.
The industrial logic behind that partners continues to have a fair amount of cash on the balance sheet, which would be a good opportunity for us to help deploy that so that's all all rock solid.
In terms of timing, we have to respect the regulatory process and.
There's really nothing more I can share about the timing for it.
But we're working through that processes as we have done in the past and as soon as we have an update we'll share with everyone.
Yeah.
Very good.
And then just lastly, I eh.
It's fine I guess, if you don't want to comment specifically, but you know when we were on site.
Nine months ago at your Analyst Day, I think you guys talked about achieving.
10 basis point, plus our OE.
Exited 2023, yeah, it feels like with with the growth you put all of the rate environment changing some of the asset sensitivity that you guys should be able to get there a little sooner I'm wondering if you agree with that or or if there's other comments you would make that that might keep that timeline more firmly intact.
I'm comfortable just pointing back to when we made those when we established those targets for performance. We had assumed that there might be two rate increases over the horizon of those targets. So clearly we're in a very different environment from that.
We are asset sensitive we think we're going to outperform in both.
Margin and asset sensitivity as time goes on.
So you know at this point it would seem that we have the opportunity to outperform those targets.
My only cautionary note is that at present, we don't see any material pressure on funding, but funding over the course of the cycle is probably that that one area that we're just going to have to watch closely so from where we're sitting today with the wood.
What appears to be multiple rate increases in front of us and the balance sheet that we positioned for this exact environment, we think we could probably outperformed them.
Great. Thank you guys for taking my questions and my congrats and good luck in your retirement thanks.
Thanks.
Thank you Michael.
Thank you. Our next question is from David Bishop from Hovde Group.
David Your line is open. Please go ahead.
Yeah, Good morning, gentlemen, and Mike Congratulations.
Volume beer Donovan's next time I'm up at the shore.
Thanks, David.
Hey, Chris in terms of.
Funding.
The pipe on the loan growth obviously.
Cashes and run down to a more normalized levels here.
Investment Securities.
Cash flow is coming off as we think about both the nature of the funding funding mix moving forward I think in the past you said.
We'll look at wholesale sources, just curious what you're seeing maybe in terms of the outlook for deposit funding or borrowings or securities roll off how should we think about the balance sheet.
The funding of our loan growth.
So we certainly have access to a lot of different funding sources, we have.
Just $75 million worth of F. H L. B advances in the balance sheet right now so we've got a huge capacity there, but I think the right way to think about how we're going to fund loan growth over the next few quarters is an internal mix shift. So we have a couple of buckets that we can turn to that are going to provide substantial opportunity to to shift.
The mix of.
The first is we had established a $300 million CLO portfolio that is all floating rate and very liquid.
We like those investments that was a great opportunity to deploy cash, but they yield only about 2%. So the opportunity to rotate out of $300 million of C. L o's and into $300 million worth of loans.
Probably the first thing we would look at and then combined with that we still have very strong cash flows coming off the remainder of our investment portfolio. So between now and the end of the year should we not elect to reinvest theres about $180 million worth of cash flows coming off that.
And if we were to shift our residential production too.
For sale in the secondary market to as opposed to the balance sheet, we have up to another $200 million that would be amortization of that portfolio between now and year end. So.
I'm not sure the exact mix of how we would draw on that but combined you're talking about you know.
Say $680 million worth of opportunities that we could direct back into commercial lending growth and that's the first place. We would go to try and improve net interest margins and return on assets and even if we did those changes to our investment portfolio.
We are a core deposit funded organization, we have a 90% loan to deposit ratio now. So we have in the past been comfortable running with a very modest investment portfolio and you could see us draw that down to say, the 10% range or so by year end.
A responsible manner.
So that's over the next couple of quarters I think the story would be mix shift margin expansion and.
Hopefully improvement to earnings, but that that's where we would go first beyond that we'd look at balance sheet growth and where we are generating a substantial amount of internally generated capital in.
We could grow the balance sheet after that but that wouldn't be the first thing we would do.
Got it appreciate that color and then.
Follow up question as it relates to expenses, obviously, there's been a lot of consolidation up in New Jersey as you look at the expense levels. It sounded like you're holding trying to hold the line at least that that's $55 million level that said any opportunity to add some lending talent here just given the.
The consolidation within the market.
We will always prioritize adding quality commercial bankers and so.
We have an interesting approach here, we don't put a firm target on a number of people.
But we also have no limit to that so we find high quality commercial bankers, if you're getting the right people. They generally are cash flow positive within about a year. So you know there really wouldn't be a big drag on earnings. So we wouldn't hesitate to add individuals and teams were in the market. All the time and you know I think if we did that in the expense line came up.
Little bit we would just kind of walk you through that and hopefully that would make sense to everybody.
Great appreciate the color.
Thanks, Dave.
Thank you before we take our next question I'd, just like to remind everyone to register a question. Please press star followed by one on your telephone keypad.
Our next question is from William Wallace from Raymond James William Your line is open. Please go ahead.
Thank you and good morning.
My first question Hi, just to follow up on the last line of questioning so totally get it. If if you opportunistically are able to hire producers that makes it makes sense.
Side of that you're $55 million guide are there other pressures that you would anticipate in the second half of the year, just given where inflation is or or do you think you can hold the line around that number.
Look well I think you're right to point out that inflation is a little bit of an unknown for all of US that said, we really went at the branch network over the last few years to remove a whole lot of pressure that could have been there from inflation. So at least for the next quarter or so we don't expect any material.
Pressure to come from inflation, if it persists or the wage a portion of it in particular where to get more acute later in the year, maybe there's some pressure, but but we feel pretty good about that $55 million run rate.
Okay, great. Thank you very much.
On loan growth. So you had another record quarter.
Didn't if there was commentary ive missed it about what maybe what happened with pre pace during the quarter, it's not hard to envision a scenario with rates if they rise aggressively where pre pace could slow even more is there a chance that in your view that we could even see loan growth accelerate based on the current pipelines debt that you have and what you can.
Can see.
Yeah.
Well I think there is a chance and I would tell you that we've supplemented a little bit of the growth with the with the resi pool purchases last few quarters to use some of the excess cash. So I think it carve that out a little bit I think we've got it somewhere in the range of the $250 million a quarter in net organic loan growth, but to be fair I think there's definitely the opportunity there.
Outperform relative to pre pays itself I think we're going to see obviously, the slowing prepays and raising we've already forecasted that and were you know you'll see that when the loss reserve but.
The prepays in the commercial bank they tend to be a little bit choppy or just by virtue of what's going on in the market. The last few quarters been pretty benign for US which has also been.
Beneficial.
And while I have you are you seeing are you seeing any strength in any one or two G geographies or is it across across all regions.
It's really across all regions with a you know it was funny and Doug in Q4, we had Boston outperform our expectations in Q1, we've seen some some stellar activity from Baltimore, but the New Jersey, New York and Philadelphia regions continue to do.
Stellar business pipelines are very strong.
Okay great.
Chris One last question. So so appreciate.
Appreciate the commentary around the benefits that we'll see to net interest margin as you continue to remix the a D.
Turning assets towards loans.
Maybe just if you wouldn't mind, just kind of help us think about what the fed hikes due to net interest margin for you and in your own modeling what betas, you're assuming maybe using the forward curve.
Help us to kind of think about where the NIM could could land if.
If the forward curve is correct.
Yeah. So let me start with just the.
Stepping off point into Q2, so we talked about that ending loan balance being higher than the average for the quarter.
And in the adjustments that we already know from the fed having made its changes so.
Going into Q2, we're certainly looking at an expansion in the range of five to 10 basis points in NIM.
And we could we could outperform them. So there's a there's a potential for upside on that in Q2.
Then as we move forward, we mentioned that $2 billion of adjustable rate and floating rate instruments.
We are through our floors. So I think we have two loans might that might have a floor rather than that the entire portfolios through the floors.
Which means.
We're equating to for each 25 basis point movement by the fed use the opportunity to expand margins somewhere in the range of five basis points it could be a little more a little less depending on the quarter.
Now that assumes the deposit beta experience that we had in the last cycle.
And we feel pretty confident that we can perform at that level and you know it's possible, we could perform better than that especially given the continued liquidity positions of the major banks in the market.
But that's the question Mark right.
How much pressure will there be on funding.
And where are we going to see that pressure, but.
To kind of summarize you know stepping into this quarter. The five to 10 basis points seems fairly safe, we could outperform that and then going forward you know recapturing about 20% of each of the fed increases provided that funding doesn't start to accelerate.
Thank you, Chris that's very helpful I'll step back.
Yeah.
Thank you. Our next question is from Russell Gunther from D. A Davidson. Your line is open. Please go ahead.
Hey, good morning, guys.
Good morning, Russell and Russell.
Right.
You may have answered this already but asking the growth question, maybe a different way.
Given some of the potential for softness in the back half of the year. Some of the concerns of potential concerns you've talked about in the asset quality discussion.
Is there any thought to.
Dialing back that growth expectation that $250 million.
Sure.
Do you guys still see a clear path to that going forward.
I don't know if I listen I think in this.
In this economic market and with the expected rate rises I think it can only go out a couple of quarters.
I can only look at where our pipelines are today and the conversations we have with our with our corporate clients. So I'll give you an example.
Russell, we have a <unk>.
Lumber wholesaler, we've known for a long period of time, obviously, you know about the price of lumber in the last couple of years, the the wide swings in disparity.
We've talked about limited inventory in the residential space yet their of their results have been nothing short of stellar.
Their activity is up probably 18, 20% in the first quarter.
And they don't see an end in sight for the time being they've they've.
They've done a very good job relative to their own supply chain.
So we have a variety of conversations with clients very similar to that that all translates into pipeline C&I drawdowns construction.
And demand so that looked at least for Q2, where we're pretty bullish we've had a good start in April .
I think Q3, probably is more of the same but you're right.
A couple you add a couple of.
Quarters of rate increases you have to determine and then of course, there is always that the capital management conversation rate growth as a as an outcropping of your ability to grow within your capital constraints.
I appreciate it Joe Thank you.
The rest of my questions have been asked and answered, but Mike I just wanted to extend my congratulations as well. Thank you guys.
Thanks Russell.
Thank you. Our next question is from Christopher Merrimack from Janney Montgomery Scott.
Christopher Your line is open. Please go ahead.
Thanks, very much Chris I appreciate your comments earlier about the GDP influencing unemployment. So I'm. Just curious you know how do you see charge offs kind of reversing over time, it feels like maybe it'll be less than in past cycles, but just in general what's the sort of Bob who will turn on what would happen.
Natural course.
It sits so it's really hard to predict Chris and Doug you always get that kind of knock on wood feeling right. You don't want to go too far out and talking about provisions I will say, though that the credit has always been very much a long game.
That if you try and time your credit risk management, and appetite and kind of come in and out that's the way you get tattooed we've been fairly careful over the years to make sure that their credit appetite is consistent if anything.
We're a little bit more conservative on credit now than we were a year ago and that's really just you know ltvs and looking at policy exception percentages and things like that so you have to place a lot of faith that your policies procedures and history, you're going to serve you well.
For our company, we've always outperformed our peer group and net charge offs I think the worst case back after the 2008 recession is our peak charge offs. We're about just over 50 basis points. That's the worst year, we've had in the past 'twenty.
So you know I think we've been pretty good at credit we're using the same disciplines.
The other thing I would point out is that credit is very much a slow motion event.
That even if we were to have issues around credit those are our kind of portfolio, they're not going to show up tomorrow.
Tomorrow, they're going to just gradually you're going to see things like downgrades to risk ratings youre going to see an increase in delinquencies you're going to see.
Some level of net charge offs, we've experienced essentially none for five quarters. So none of those indicators are before us. So that gives us and you know Joe is right to point out.
There are two seems to be relatively clear sailing.
But we're gonna have to watch the data closely and the number one point of data that we're watching.
Unemployment.
Because we think that that's going to that's going to be what indicates to turn on the cycle.
Great I appreciate that and then I guess the related question is the the amortized discount from past acquisitions would that be slower to be recognized just as interest rates have moved up or as they move up.
But you're right that that's going to amortize more slowly just because of the rate environment.
And most of it was in general so we don't have too many specific provisions are marks on loans.
And look where we're also very pleased that looking backwards now on the two river and country acquisitions were done in January of 2020.
We bought those banks and then immediately went into the pandemic and yet we've been able to manage that credit REIT. So I think our.
Kind of proves out our due diligence and discipline around asset quality.
Yeah.
Great and then last one for me is as interest rates move up here in the next few months and quarters is there a portion of the rate hikes that maybe cannot be passed on to customers. Just got a competition is there a way to kind of handicap that.
You always worry about that right or you to compete away the margin and there will be some of that no doubt because everybody is going to be under the same pressure.
And especially folks who may not have either as asset sensitive balance sheet or they may have a liability sensitive balance sheet. So.
So we do always worry about that the other thing is and this may sound really premature, but you have to think about rates going down.
That's crazy today, because we will expect rates to be going up but the time to think about rate increases was 18 months ago not today. If you waited until today. It was too late in the time to think about you know the fed will get inflation under control at some point.
After they get it under control I don't know that.
What number of quarters, that's going to be you may see a moderation in interest rates. So we certainly learned at our asset sensitivity took a toll on earnings in the last cycle and we can try and moderate that a little bit. So so we're kind of thinking about.
Where rates peak and the back end of the cycle as we go into may be 'twenty three 'twenty four.
Great Chris Thanks, again for all the feedback and best wishes to Mike.
Thanks, Craig and Chris on your on the purchase accounting accretion that was 11 basis points in the first quarter, but that it drops down to eight next quarter. So we've moved three and then it's really pretty steady because 80 7677 for the next year. So it does that much volatility in that.
$17 million left in credit marks, but we see that is.
As being much less volatile than it's been in the past.
Sounds good thank you for that too.
Alright. Thanks.
Thank you as a reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
Our next question is from Erik Zwick from Boenning and Scattergood.
Eric Your line is open. Please go ahead.
Good morning, everyone.
Okay very good.
Just thinking a little bit about the kind of composition of average earning assets going forward. The investment securities portfolio is about 15%.
Of that total today, I guess, given the strong pipeline.
And then kind of talk about loan growth going forward would you expect.
The investment securities portfolio to kind of keep pace with loan growth or are you okay with that.
Percentage coming down a little bit over that in the next few quarters.
Yeah, I think I'd point back to our core deposit funding not just the composition of it which is really not rate sensitive deposits.
And the degree of it being at a 90% loan to deposit ratio I think we can operate with a more modest investment portfolio. So we could see that overtime going down as well or is it maybe 10% would that would start to approach a limit for us.
Thanks, Chris and then looking at that the noninterest income breakdown for the quarter.
Both the bank card services and in fees and service charges lines were down quarter over quarter. Just curious if that was due to seasonality or maybe some other factor in and would you expect some sort of you know.
What kind of pick up a reversal as we move throughout the year are those good rates going forward.
I think relative to bank card the fourth quarter is always the busiest quarter because of the holiday season, and some people do it a lot of spending so that that's kind of a more natural seasonal thing and as Joe pointed out.
We'd become subject to Durbin on July one.
So you can expect about a million five headwind into that line item per quarter.
In terms of other deposit fees those those do fluctuate a lot as people have kept higher balances during the pandemic those fees have come down.
In the long term I expect there to be some softness there that the upside we've seen in noninterest income is really related to swaps.
And to our acquisition of Triton The title company, we acquired on April one so that should help a little bit too.
Right and then try and any are you able to quantify what that positive impact might be in <unk>.
You know I think that if you think about it on an annual basis right, we think that somewhere between 2 million and a half and 2 million a year is the range you could operate and so in terms of our portion where a majority owner, but we don't own 100%. So we'd recognize somewhere in that range per year. So it certainly offsets some of the wass in Durban.
If it doesn't completely covered.
That's great. Thanks, that's all I had I just also wanted to throw in my congratulations on your retirement, it's been a pleasure working with you.
Thanks, Eric.
Okay.
Thank you. Our next question is from Matthew Breese from Stephens Matthew Your line is open. Please go ahead.
Thank you good morning.
I was hoping to go back to fee income just for a second Chris you had mentioned swaps a boy who was up as well just wanted to get a sense for whether what we saw this quarter a decent run rates going forward.
So do you want to maybe you can handle swaps and Mike can handle bowling so yeah, I do I'm, Matt I'm pretty bullish on swaps I think we much like we talked about earlier around our disciplined last year trying to build the continue to focus on the floating rate assets.
In a rising rate environment, we've spent a lot of time with our folks in the commercial space, especially talking about the value the value of swaps to clients in education, I think that's really starting the starting to pay off so I think that that's going to continue I think that's a fair run rate.
Actually pretty happy about it.
I think as Chris mentioned, we will have that opportunity to use some of that income to offset some of the some of the Durban loss.
And on the Bali, we had at that there was a <unk> death benefit of about $500000 in the quarter. So that's okay.
Okay introduces some volatility.
Okay.
The other question I had you know Chris you know a year and your commercial real estate concentration I think was right around 444 tumor.
Assume it's higher this quarter, just given where we saw the growth and I wouldn't really bring this up but you are OCC regulated so it's a bit above average for that regulator can you just talk about the concentration and how much flexibility you have to take this higher and if theres a cap could you just maybe give us some reference point for where you'd like to keep it south of.
Sure. Let me, let me start by maybe just spending a minute talking about why we're okay moving the commercial real estate number a little bit higher in this environment.
We took we've talked a little bit on the call about the potential for economic weakness over the course of maybe this year and into next year.
When a recession that could be acute it's hard to say.
We have a great track record in commercial real estate performance its been our strongest asset category.
We think we can manage through the LTV and cash flow composition of that.
To continue to outperform from a credit perspective so.
We love C&I, we grew C&I somewhere around 10% for the quarter.
But at the end of the day CNI assets can be exposed to.
Hello, valuations and things like that they saw some of those CNI assets will do better in an inflationary period and some worse. So from a very high level, we're okay, increasing our concentration in commercial real estate.
At this point in the cycle, having that real estate collateral gives us a sense of comfort and we're always cash flow lenders. So we always look at both things.
In terms of the regulatory environment look you're right to point out all the regulators have.
Antenna out around Investor CRE.
If you were to pick an area of the country, where investor CRE concentrations are higher that's traditionally been in the northeast.
And I think the most important thing to our regulator or any others is that you are complying with their recommendations around managing the enhanced or potentially increased risk that may come with higher commercial real estate concentration. So theres a lot that you have to do to make sure you are complying with that.
We started down this road when we acquired.
Sun National Bank in 2018, working with our regulator around this and making sure that we've made the incremental investments in people and process and procedures and things like that to get that risk management right. So.
So and I think the regulators would tell you that there is not a cap there's no limit. What there is is the expectation of enhanced risk management as those concentrations increase so we've been making those investments and.
That's and what we know and talk to a lot of our peers, who are in similar situations and really provides everybody advice on how to make sure they do that right.
Got it okay I appreciate that.
And then turn it back to beta as you know it's funny it feels like the script just beginning to flip on deposit betas for the cycle I think a year ago for you to ask most management teams about betas. They were very confident that did come in below where they did last cycle I don't quite get the same confidence today.
Was hoping you could characterize your expectations for the bank in the industry for deposit betas this cycle versus last and what are some of the swing factors and why it might be different this time.
Well, there's a couple of things that could be different and I can only talk to our portfolio, but let me let me talk about the market first if you look at the excess cash positions at the largest banks in the United States. So you take the J P Morgans.
Wells, and Citibank and Bofa and you look at how much cash they have and how their deposit positions have changed in the last three years there.
There is a sea of cash that's still out there.
They also have very significant market share. So if you think about deposit pricing right, they're going to be the big gorillas and I don't see a scenario, where the largest banks in the country.
Start to bid up deposits. So that's a positive and that would speak to maybe less pressure on deposit pricing.
On the other hand.
We're going to enter a period, where margins may be compressed for some.
The only way out of that may be through growth. So you. It doesn't take too many competitors in our market to start throwing a rate around before that starts to become the market rates. So that really the question about balances.
Who is going to drive the rate market is it going to be maybe some of the peripheral players or smaller banks regional banks or even a fintech REIT look at with Goldman pays on markets right. That's a combination of big Bank and Fintech.
I think we're gonna have to see all that play out I.
I'd go back to disciplines and say this the.
The banks that I think will do better or those that have the lowest concentration of rate driven deposits Cds high rate money markets. Those kinds of things those are the things that give me under the most pressure.
What we like about our deposit base as we've always focused on transaction accounts.
We have almost 40000 customers in our commercial cash management group.
That gives us a granularity around those deposits.
So.
As we look at our models, we think that our mix.
Is better than the mix was in the last cycle and in the last cycle, we outperformed the peer group. So I can't tell you what betas will be.
But our mix and our experience would suggest that will be in the better half of them.
That was the last rate cycle.
2016 to 18, we had a fed hike of 200 basis points and when we measure our deposit costs in 2019 versus 2015. The beta is about 19% as Chris said, that's well less than our than our peer group and a relatively modest betas. So we think it'll be no worse than that in this cycle and hopefully better.
Great.
The loan to deposit ratio.
There's something to focus on as well because it tells you how much pressure you have before you have to turn to deposit rate increases.
So we have virtually we have dry powder at the federal home loan bank, that's widely available to us so.
Rate deposit rates are not going to be the first place we turn.
Understood Okay.
And then the.
The title company acquisition.
I appreciate the the revenue guide.
Guy there just curious are there revenue synergies that we're not you know that we should be considering over time and what else is there.
Within that acquisition that we should consider.
Yeah, I think Youre right, Matt there are potential revenue synergies there that we're not baking into our plan but.
The thought is that we do a lot of settlement of real estate transactions, both for consumers and for commercial entities.
Anyone who has had a real estate transaction goes down going down knows that title can be your friend of your enemy in that transaction so our opportunity.
<unk> to work that into the customer workflow.
We think it's going to provide benefit to our clients, they're going to have a smoother process.
In many jurisdictions titled prices are fixed.
So the market is not all the same price convenience is really what causes the buying decision.
And although we've always done business with tried and we think theres an opportunity for a larger percentage of our.
Real estate transactions to choose trying trading going forward, obviously, we will offer it as a kind of embedded option.
But certainly not a requirement customers can get title from whomever they'd like.
Got it.
I appreciate it that's all I had thanks for taking my questions.
Thanks, Matt.
Thank you.
This is all the questions. We have today, so I'll now hand back over to Christopher <unk> for any closing remarks.
Alright, thank you.
I'd like to thank everyone for their participation on the call. This morning, we look forward to speaking with you following our second quarter results in July and for all our shareholders out there I'd just remind you we have our annual shareholder meeting on May 25th at nine a M. We will be holding that in a virtual format and we think that's going to provide the widest possible access to our shareholders.
Look forward to catching up with you either at the shareholder meeting or next quarter. Thank you.
Thank you every one for joining today's call you may now disconnect your lines and have a lovely day.
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