Q2 2022 OceanFirst Financial Corp Earnings Call
We do not have a timeline from the regulators for when the process may be completed.
Until all approvals and customary closing conditions are met we cannot schedule of the merger closing.
Turning to net interest income and margin net loan growth of $316 million and our asset sensitive balance sheet drove another quarter of margin improvement, which expanded by 11 basis points to 329%.
We experienced elevated prepayment fees this quarter of $2 6 million.
Were nine basis points and expect the level of prepayments to slow for the remainder of the year.
Two factors should provide a tailwind for margins.
First the quarter end loan portfolio of $9 4 billion.
Was $176 million higher than the second quarter average of $9 2 billion.
Second the company held $2 3 billion of floating rate loans repricing in the third quarter, which will provide the opportunity to strengthen margins as rates increase.
That should be the case in the third quarter, perhaps for the remainder of the year.
The benefit from rate increases.
<unk> is a time lag.
So in the coming quarters, NIM could be flat or expand but trends should be positive overall.
Core noninterest income and noninterest expenses included a full quarter of Trident abstract title agency operations, which added $4 $5 million of noninterest income.
And $3 $2 million of noninterest expense for the quarter, resulting in $1 3 million of net income for the quarter.
The purchase of our interest in Triton was completed on April one. So these figures reflect a full quarter impact.
Excluding the impact of trade and our disciplined expense management resulted in core operating expenses related to banking operations, improving modestly to $54 $7 million were $400000 lower than the prior quarter.
I'd also like to provide some additional color regarding expense trends.
As noted in our earnings release, the bank increased base salaries by 5% for over 80% of our employees.
And paid a onetime award to almost 20% of our employees to support our team members, who would be most impacted by inflationary challenges.
The annual impact not captured in this quarter's financial results is $2 3 million or almost $600000 per quarter.
I will add the compensation increases for this purpose are not typical of the ocean <unk>.
Our company has a talent led business and our employees provide our competitive advantage.
This investment in our team reinforces our commitment to them that demonstrates an understanding of the challenges they and their families are facing during the current economic cycle.
No additional compensation actions are contemplated for the remainder of 2022, and it's simply too early to speculate on the level of labor expense pressure for 2023.
Fortunately, our multiyear and comprehensive program of branch consolidations has improved our ability to manage the company's overall expense base.
The second quarter run rate captures our expected core operating expense for the remainder of the year.
At this point I'll turn the call over to Joe to provide some color regarding our progress during the quarter.
Thanks, Chris the loan portfolio had another strong growth quarter with $316 million and net growth fueled by commercial banking relationships.
Total loan originations were three $835 million driven by commercial closings of $646 million.
Our New York region, crested 2 billion in its loan portfolio, while our Boston region has built a loan book of $250 million in one year from the opening of the office a testament to our continued investment in commercial talent in our legacy and expansion markets.
After nearly nearly $1 6 billion in meaningful loan growth over the last 12 months, we are starting to see the impact of rising rates affecting the decision, making a certain segments of our customer base.
Our pipeline of $385 million at the end of Q2 is typically our seasonal low for the bank.
But also reflects our expectation of more measured loan growth for the <unk>.
First of the year.
As we maintain our traditional discipline in pricing structure and credit appetite.
That said I expect we can responsibly grow the loan book in the range of $250 million quarterly.
Although growth could be choppy at times.
I expect our residential originations to slow.
Prepay speeds will also moderate providing some offset.
At the moment, we have less visibility of the pipeline is looking much past Q3, given some of the noise in rates supply chains and economic uncertainty.
Turning to deposits our loan to deposit ratio ticked upwards to 95, 9%.
From 96% in the prior linked quarter.
Due to the loan growth coupled with the traditional decline due to seasonality and certain deposit classes.
You'll notice we took action to protect against near term deposit cost pressure.
During the quarter, we elected the replacement portfolio are market sensitive floating rate deposits with term based certificates we.
We accomplished the duration extension by issuing $689 million and brokered Cds with ladder duration maturities.
Strategy also took advantage of some pricing anomalies in the brokered CD market and gained duration at lower rates than the equivalent duration S. H <unk> advances.
The rotation is complete and we expect to return to our traditional sources of funding.
The remainder of the year.
In keeping with normal seasonal trends the bank has experienced net deposit growth of $145 million since June 30.
Credit trends remained benign with the company realizing just $9000 of net charge offs for the quarter and net recoveries of 83000 year to date.
Loan portfolio risk characteristics are very healthy with low delinquencies positive risk rating trends in nonperforming assets, excluding PCI loans of just 14 basis points of total assets.
For the first time in our history as a public company, we do not carry a single property of other real estate owned on our balance sheet.
The loan loss provision for the quarter was driven primarily by net loan growth with much of our reserve remaining in the form of qualitative factors.
That reflects the potential for economic uncertainty in future periods.
As Chris mentioned Triton was additive to net noninterest income on a net basis by $1 3 million in its first quarter as an ocean for a subsidiary.
This partially offsets the loss of interchange revenue contributed to Durbin.
Roughly $1 5 million per quarter, which began on July one.
With that I'll turn it back to Chris.
Alright, Thanks, Joe will now begin our question and answer portion of the call.
No.
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Our first question comes from the line of it.
Michael Perito with <unk>. Please go ahead.
Hey, guys. Good morning, Thanks for taking my questions.
Hey, good morning, Mike.
I apologize I did hop on a few minutes late so I'm assuming.
Chris.
What's the latest that you can share beyond the press release regarding the partner transaction in and dump.
Yes, I guess I'll, just I'll just leave it that I'm sure it's not much Patricia I wanted to ask.
Yes, I appreciate the question, Mike and I know that's on everybody's minds, it's on our minds as well. Unfortunately, the only thing I can share is that we continue to await regulatory approval and that's just the process, we're being respectful about and.
We're trying to work through as best we can.
And I don't have a timeline that I can give over when we might receive them.
Can you remind us.
The actual contract.
What's the duration.
Hum.
Our quality to kind of low teens.
So the contract would call for us to consummate the transaction on or before November 4th.
This year.
Okay.
Helpful.
And then.
Expense commentary, obviously the environment challenging.
But I just wanted to make sure I heard it right it sounded like obviously.
<unk> partner.
Do you guys think the second quarter run rate now kind of reflects the near term higher level of salaries and benefits.
You could run rate for the back half of the year.
Some of the other items that youre working on continue or did I mishear that.
So that's a good guide.
As we think about there is some kind of obviously in every quarter, there's kind of some puts and calls on things like that but if you take the second quarter. We think that's roughly what we would experience in Q3 and Q4.
It might be a little bit higher than that but that could be a material materially different number.
Great.
Welcome.
Bob just on the capital front, you've outperformed a little bit more insulated.
In terms of the OCI impact and I'll, let the regulatory cap ratios, but I guess.
The bottom line is you guys are still sitting on a pretty strong position today. Despite the loan growth. So is it fair to assume that buybacks will continue.
To certain extent near term here or does the potential deal <unk>.
Impact your ability to buy back stock in the back half of the year.
We still have an appetite for buybacks, but I guess I would characterize that appetite to be informed by kind of where we're trading what the <unk> would be from a buyback and how strong the loan growth is going to be Joe had mentioned that our pipeline seasonally low thats always low at this point of the year. So we've got really good conversations with clients. We think Q3 will be in good shape.
But looking forward I can't give much guidance around how much loan demand we may see in Q4.
Obviously, the best thing we wanted to do is grow the bank. The second best thing. If we don't have use for the capitals to return it to the shareholders. So we still have an appetite for growth, but we're watching closely.
And appetite for buybacks, we are watching closely the organic consumption of capital and look we can grow at a good clip with our internally generated capital, but there may be points at which we decide to.
The ratchet back on buybacks and use it to disciplined growth.
Yes.
And then can I get back.
Hi.
Alright sounds good thanks for taking my questions I have a good weekend.
Alright, Thanks, Mike.
Thank you Mr <unk>.
The next question comes from the line of David Raso with Hovde Group. Please go ahead.
Good morning, Chris how are you.
Good morning, Dave how are you.
I'm good I'm good.
In your commentary it sounded like maybe a little bit of cautiousness in terms of regards with regards to the outlook for the near term net interest margin.
Obviously it looks like.
Loan yields of the pipeline are up over 100 basis points year over year.
But does the addition of the broker deposits sort of mute maybe.
Quote unquote asset density over the near term.
Plays out maybe.
The tail end of the current cycle, if we get to like $3 50 by next year.
Maybe a little bit in the short term I think what happens is not unlike other places.
The rate increases roll through our loan book over the course of sometimes there's some loans adjust immediately some at the end of the month. Some may have a quarterly repricing. So.
The asset sensitivity is there whether it will show fully in Q3 is a question. We're just kind of watching closely what you might see a little plateau and then resumed expansion after that and look it may be it may be an expansion in Q3, but.
We don't expect it to be a material expansion.
Got it and then in terms of the new.
The new market initiatives here.
Just curious.
Terms of the pipeline there what youre seeing relative to the rest of the bucket and maybe.
Potential for even further expansion, but then.
But that maybe the greater Boston market.
So good morning, Dave.
We're really happy with what Boston and Baltimore have done so far.
A quarter billion dollars in the year for Boston.
<unk> has an impressive number that continue to have a healthy pipeline as those Baltimore.
I would now refer to Philly and New York as legacy markets right because we've been in it for.
Between four and five years.
Well over 1 billion in New York over $2 billion. So I think overall, while we are.
We're seeing some clients question, what they want to do going forward.
We made pretty confident that we can get.
The $2 50, a quarter, which is.
Sort of a benchmark it might be a little bumpy, depending on the quarter, but I think.
On an annualized basis, we're not overly concern visibility going out more than a little bit more than a quarter is become a little bit more murky just because you just don't know where client is going to fallout, but.
I made a comment earlier this morning that we had 3% 10 year rates just four years ago.
People were acting like rates of these.
These rates, we haven't seen a forever prime was $5 five in December 2018.
So customers to acclimate fairly quickly.
Got it appreciate the color.
Thank you Mr. Vincent.
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Our next question.
Comes from the line of Matthew Breese with Stephens, Inc. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey, Joe just on the $250 million of growth per quarter I understand it could be lumpy.
How long should we contemplate that kind of growth for.
I'm just thinking it is.
Still a robust pace of growth should we consider that through year end 'twenty three or just through year end in your view.
I think look I don't I don't know, how you forecast that I look at it quarter by quarter I used to have I would say before the.
<unk>.
Noise in supply chain and economics, you add a little bit further visibility but.
The neat thing about having engines in varying regions markets in the country.
When a region may be down or even a market is.
Property areas CRA is down C&I picks up C&I close downs here index up so we feel pretty bullish we're talking to our folks all the time and we did take a fairly measured approach.
Credit structure, I think short term, that's probably impacted the pipeline a bit I think we're holding fast disciplines.
But I'm.
I'm not overly concerned that it might be a little lumpy, but I don't think thats a.
I don't think Thats, a near term concern.
Okay.
It's really difficult right now because we see the pricing changes and we're going to get paid for the risk we take.
We've always been a conservative credit shop, so it's hard to tell whether those two things the pricing and our credit cut which has always been I think careful.
That may impact our ability to grow so I would say that as far as we can see we think we can hit that number but the bias might be to under perform that number rather than over perform that number.
Understood.
And then aside from capturing better yields it sounds like perhaps you're just taking a second look at how you're underwriting things in what ways have you become more conservative are you asking for more skin in the game from the borrowers are you putting more stipulations and in place and if there is a portion of the portfolio.
You've taken a second look I'd be curious.
Which ones.
I think for US Matt we always ask for oil exists for equity.
Stressing portfolios at higher rates as you would expect given the rate increases and.
And I think property types are important as mentioned in the CRE space. So office I think everybody is looking a little harder at office because no one knows what's going to go on at lease explorations that a few years everything we hear is.
Validation of space because of some remote work and some hybrid work.
With retail I mean, we look at retail as well everybody has jumped in the last few years in industrial.
Become a very crowded space I think what you do there is peaking.
We can choose not only from a credit perspective, but from a pricing perspective. There is no. There is no need to be in something where you don't make money.
So.
Well I think we're fairly confident.
Okay.
And then just maybe turning to the opposite side of the balance sheet supporting that $250 million in loan growth.
How much of that can be done through deposit growth.
Kinds of deposits.
And then I'm curious on the the 96% loan to deposit ratio, how should we be thinking about an upper limit on that.
Joe May have some additional thoughts on kind of how we will get those deposits but.
I make some general comments first for.
For the most part we think that funding loan growth with deposits is the right thing to do so thats generally what our position is.
And we think we can grow deposits in the future quarters now we may have to pay a little bit more for that or we may have to.
Offer certain products or rates, but we're prepared to do that.
Terms of loan to deposit ratio I.
I think the most valued banks are traditionally at that 100% or lower loan to deposit ratio and Thats, where we generally like to be that said, we have a very unusual rate cycle going on right now and you could foresee that if the fed.
They peak increases later in the year early next year or something like that that it might be a good strategy to lean on some wholesale funds that would reprice faster.
So we're just going to balance those two things off but we're not going to turn into a company that's going to have a 120% loan to deposit ratio thats not accurate.
We're talking to our officers this morning, and just emphasizing that.
We've always been good at deposit gathering and we're going to spend a lot more time and attention on that so we can balance it out it's been a little while since we need to the engine.
Got it and obviously the first time in a long time that we're actually going to start looking actively for deposits.
<unk> been in the St. Both the last couple of years with excess liquidity.
But our pumps I think youre chomping at the bit to be able to go out go at it from both sides right we've been going at it hard on the lending side.
I think our folks, especially in our retail folks are excited about going out.
The single biggest place we would see deposit growth is in our corporate treasury function.
That is an engine that we've built over the last few years, we've got the right people in the right place. We've got the right technology, So we're going to push that pretty hard.
Okay and then the last one along is along these lines is just expectations for the deposit beta now that were what seems to be have to passed the halfway mark on the the rate hiking cycle.
How you would compare and contrast.
Expectations around beta this cycle versus last.
Every cycle is different Matt so it hesitate to try and predict how this one will play out exactly I will say that given the mix of our deposits, 85% core the vast majority of them are checking accounts.
Some interest bearing and some not but almost all checking accounts.
We expect to outperform the group.
Less clear on what that group will do.
It will be on the positive side of that and we have seen other than we noted the price sensitive.
Accounts that we took care of in the last quarter and second quarter other than that we've seen remarkably little pressure on deposit flows and rates thus far.
That said.
The third quarter deposits are going to be materially more higher more highly priced in second quarter, but as of right now the loan yields are moving faster than that so we don't think we're.
We're not concerned about margin compression, but youll see deposit cost come up.
Got it okay.
Leave it there. Thank you for taking my questions I appreciate it.
Thanks, Matt.
Thank you Mr. Li.
Our next question comes from the line of Manuel Nava.
With D a.
Davidson. Please go ahead.
Good morning.
Thinking about our loan outlook.
And thinking about the loan outlook do you think that.
Kind of.
Shortened.
<unk> is being imposed on you by that.
By the greater market or are you seeing some things with your customer base.
That is informing that.
Perhaps the fourth quarter could be a little different than higher expectations.
Joe and I probably.
<unk> view.
When we think about what we're seeing in the market.
There has not been a material decrease in economic activity or the demand for <unk>.
Credit in our markets to date that could change.
However.
We talked about structures and pricing.
We're going to stick to our structure and pricing requirements.
It will take a little while to understand exactly how many of those deals will be able to pull out so.
My caution is more about the market share of deals, we're going to get depending on rates and structure.
Not that the demand is falling off is it fair Joseph.
That's fair.
I guess following up on that are you seeing greater competition.
In terms of pricing and structure.
And is it different in different markets.
My next question.
Sure.
The competition is similar.
I think we purposefully have said we've had significant growth from last year.
No the kind of deals we put on we also know the kind of deals we're seeing today.
I think the market's a little bit more aggressive in pricing and definitely.
Over aggressive in structure, so I think for US we have.
The ability to.
Molecular where ticket shoes I'm not overly concerned in any one market I think all of our markets. There are similar in.
Scope so.
Thank.
I think what we're seeing is what we expected to see we just hold to disciplines, our folks to understand it and remember that pipeline is a point in time the pipeline you're seeing important time, it's improved since quarter end.
Hey, just one more point about the market and we're very fortunate. Although we did this deliberately in the market that we are in.
This northeast Megapolis forces 50 million people here, we are a very modest player in that market. So Joe has the ability from quarter to quarter as conditions change to be more or less aggressive in different geographies and different asset classes and we.
We have a tremendous.
We're operating in an economy, our regional economy that is so significant that I don't expect loan demand is going to fall off it's going to be a matter of what choices, we make about risk selection and pricing.
Got it got it I appreciate that kind of.
Picky question for modeling.
How quickly you get regulatory approvals could your deal close.
So typically if you secure final regulatory approval you could close in two weeks three weeks there.
There is a shareholder election thing we have to work through should we get approvals, but it should be measured in weeks.
That's helpful.
Thank you that's it for today.
Thank you Mr. Robert.
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Next question.
A follow up from the line of David Fisher with Hovde Group. Please go ahead.
Hey, Christian.
Discussion on the funding and the deposit side I guess you mentioned the.
The runoff of those interest sensitive checking accounts just curious.
The Genesis of those where those accounts acquired via acquisition.
Organic deposit growth just curious what were those.
Generation from.
So our corporate Treasury group is first of all as a great granularity. So we have almost 40000 customers have at least one cash management product with us.
It was a very small segment of those customers who were rate sensitive and we were happy to have them when fed funds was a quarter point.
They wanted to optimize their balances either do sweeps or different things like that so we could have elected to keep them and in fact interestingly. If we elected to keep them. We would have kept them at a lower cost than the Cds. We put on however, we knew we would be in the cycle of having to match it would've been about 100% beta but close to it so.
We said you know what we don't need the 100% beta deposits, what's replace them with something that has a little more duration, but they were a very defined portfolio and that rotation has been completed so we don't have that concern beyond that.
Got it. So this isn't a case I know you guys have obviously been in <unk>.
Aggressive and windowing the branch network here this isn't related to any sort of outflows. There. So it sounds like it's no issues from what you said in terms of deposit attrition of branch closures.
No that's a really good point, David Thanks for mentioning it in fact, we track deposit retention.
Really really carefully given.
Our history and.
And even the closures we did in December and January .
They kind of.
<unk>.
Attrition.
Piqued by probably end of March.
And then those branches began growing again, so and.
And again it was well within the range of what we expected. So this is not related to the.
The branch consolidation efforts.
Got it and then maybe as Youre out of Europe for a review of all of that expertise, but did see that.
Netflix is potentially getting on to build their east coast studio there at the forefront of the property.
I know youre on a lot of words up there in terms of chamber of commerce, as such any any insights or profitability or hedging or any update maybe heard anywhere and there's about that getting approved.
But we would love to have them here, so I'm sure most communities wood.
And one of the assets, we have in our core geographies former Fort moments, which is in the process of redevelopment process. It takes decades. So.
We'll be thrilled that Netflix comes in there they don't come in there then somebody else will come in there over time it would be good for the for the area.
Great. Thank you.
Alright. Thanks.
Thanks, Dave.
Thank you Mr Fischer.
Our next question a follow up from the line of Manuel Nava with D. A Davidson. Please go ahead.
Hey, just wanted to follow up.
With the actions you've done with the.
Brokered deposits into the FHA L b.
Lengthening lengthening duration would you consider.
Offering.
Cds to try to get ahead of.
Deposit cost increases.
It seems like that would match your kind of.
Thought process in general that funding.
Yes, so, though we want to be careful and Thats. We are very thoughtful in the duration. We chose so the weighted average duration is nine months on that book some of them extend.
Little bit over a year, but we don't want to do is create funding overhang that should the fed start to ease in 2023 that we regret having gone too long on funding. So we wanted we wanted to Linkedin skewed a little bit but not go overboard.
And I was thinking more of your general Cds you Jed.
General <unk>.
Deposit strategy Youll have the kind of comparing the two so this is just a piece of it and there'll be a little bit more careful at the rest of it.
Correct, yes.
A similar pricing philosophy on.
On consumer Cds, and things like that and say hey, it might be you want to lengthen enough. So that you're not having to reprice. Those every few weeks, but you don't want them lasting out there for years, unless we see something different economy.
Perfect very thoughtful.
Yes.
Alright. Thanks.
Thank you Mr Dugan.
Again to ask a question. Please press star followed by one on your telephone keypad.
And there are no questions waiting at this time I would like to pass the conference back to Christopher.
For any closing remarks.
Alright. Thank you we appreciate everyones time and your participation. This morning, we look forward to speaking with you. After our third quarter results are published in October .
That concludes the Ocean <unk> Financial Corp Earnings Conference call I Hope you all enjoy the rest of your day you may now disconnect your lines.
Okay.