OceanFirst Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2024

There are 11 speakers on the call.

Operator

thank you for standing by. My name is Daisy, and I'll be coordinating your call today. And I would now like to hand over to your host, Alfred Goon from First Station to begin.

Operator

Alfred, please go ahead.

Speaker 1

Thank you, Daisy.

Speaker 2

Good morning, and welcome to the OceanFirst's 4th quarter 2023 earnings call. I am Alfred Goone, SVP of Corporate Development and Investor Relations. Before we take up the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website oceanfirst.com. Our remarks today may contain forward looking statements and may refer to non GAAP financial measures. All participants should refer to our SEC filings, including those found in our Forms 8 ks, 10 Q and 10 ks for a complete discussion of forward looking statements and any factors that could cause actual results to differ from those statements.

Speaker 2

Thank you. And I will now turn the call over to Christopher Marr, Chairman and Chief Executive Officer.

Speaker 1

Thank you, Alfred. Good morning and thank you to all who have been able to join our Q4 2023 earnings conference call. This morning, I'm joined by our President, Joe LaBelle 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.

Speaker 1

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 Q4 included GAAP diluted earnings per share of $0.46 Our earnings reflect income of $87,800,000 representing a modest decrease compared to the prior linked quarter of $91,000,000 Operating expenses decreased to $60,200,000 excluding the FDIC special assessment of 1,700,000 Operating expenses decreased to $58,500,000 We're pleased to have executed many strategic initiatives that resulted in a meaningful improvement to the bank's efficiency. This work will continue in 2024 as we make every effort to hold expenses flat for the year. 4th quarter results were impacted by modest margin pressure linked to our continued efforts to improve the quality of deposit funding.

Speaker 1

These efforts resulted in another quarter of substantial decline in brokered CDs, stable deposit balances and a loan to deposit ratio below 100%. The resulting mix shift in deposits placed some pressure on net interest margins, but margin pressure continues to abate, allowing net interest income to stabilize And it is possible that margins may expand modestly throughout 2024. Deposit betas increased to 38% from 35% in the prior linked quarter, indicating a slowdown in the pace of deposit cost increases. Our competitive pricing strategy through various channels has continued to protect the deposit base, which increased $265,000,000 or 3% excluding brokered time deposits, resulting in our decision to reduce brokered time deposits by $364,000,000 all while keeping our loan to deposit ratio below 98%. Capital levels continue to build with our common equity Tier 1 capital ratio increasing to 10.88 percent and continued growth in tangible book value per share $18.35 Turning to Capital Management, the Board approved a quarterly cash dividend of $0.20 per common share.

Speaker 1

This is the company's 100 and 8th consecutive quarterly cash dividend and represents 44% of GAAP earnings. The company did not repurchase any shares in the Q4. However, the company may reactivate the share repurchase program this quarter. Despite a tumultuous time for the industry in 2023, the company executed on our strategic goals to improve operating expenses, diversify and strengthen our deposit base and bolster our capital position. Looking ahead to 2024, The company is well positioned to continue to create shareholder value by remaining focused on responsible growth, expense discipline and prudent balance sheet management.

Speaker 1

At this point, I'll turn the call over to Joe to provide some more details regarding our performance during the Q4.

Speaker 3

Thanks, Chris. Non maturity deposits continued to grow, increasing approximately 1% linked quarter, while overall deposit balances declined by approximately 1 percent, reflecting our continued planned runoff of brokered CDs. Our strategy to change the mix and the deposit composition has proven successful with the percentage of brokered CDs to total deposits dropping to 6%. We couldn't have accomplished this without growing our organically and our deposit growth for the year of $760,000,000 demonstrates our ability to grow and deepen relationship deposits during what has been a very challenging and competitive higher cost environment for the industry. On the loan origination side, we continue to see tempered growth As a result of reduced demand from customers, combined with our pricing discipline, we have seen a slight uptick in pipelines and anticipate a resurgence in customer demand with an outlook calling for loans and deposits to grow at mid single digit levels in 2024.

Speaker 3

Growth may be lower in the first half of the year, but potentially accelerate as the year goes on. Asset quality metrics remain strong with non performing loans and criticized and classified assets, representing only 0.29% and 1.44 percent of total loans respectively. This quarter we reported essentially 0 net charge offs, bringing our full year annualized charge off rate to a nominal 8 basis points. With that, I'll turn the call over to Pat to review margin and expense outlook.

Speaker 4

Thanks, Joe. Net interest income and margin were $87,800,000 2.82%, respectively, reflecting higher funding costs associated with deposit growth. As Chris noted, funding costs reflect cycle to date deposit betas of 38%, margin compression stabilizing through the quarter. Based on our expectations for modest asset growth assuming a continuation of the stability we're seeing in liquidity and funding, we're hopeful that we'll see margins stabilize and potentially expand as we move through the first half of 2024. But pinpointing the exact quarter that, that may occur depends on so many variables, I hesitate to put a degree of confidence on the exact timing.

Speaker 4

Said another way, in terms of net interest income, we've reported 2 consecutive quarters of approximately $90,000,000 in NII

Speaker 1

and we're hopeful We'll

Speaker 4

see that quarterly run rate continue and begin to grow as we move through the first half of this year. We're very pleased to have driven core non interest expenses down by nearly 10% linked quarter to $58,500,000 Our 4th quarter expense run rate is in line with our stated guidance and directly driven by the company wide efforts and investments which we executed during 2023. Note that core non interest expense excludes $1,700,000 related to the FDIC special assessment. We'll make every effort to hold operating expenses flat in 20 to our Q4 2023 run rate, some quarterly volatility should be expected. Additionally, we continue to explore opportunities to further improve our operating leverage.

Speaker 4

Effective tax rate for the quarter of 24% remains in line prior periods and guidance and we expect to remain in this range going forward. Finally, as Chris mentioned earlier, capital strengthened depreciably with growth in our CET1 ratio to an estimated 10.88%. At these levels and with modest organic growth expectations in the near term, It shouldn't surprise you to see the company resuming share repurchase activity as we remain very comfortable with the CET ratio above 10%. At this point, we'll begin the question and answer portion of the call.

Operator

Thank Our first question today is from Daniel Tamayo from Raymond James. Daniel, please go ahead. Your line is open.

Speaker 5

Thank you. Good morning, everybody. Maybe first just on the margin forecast for the stable and perhaps expansion this year. First just What are your assumptions in terms of any rate cuts this year baked into that? And then just curious how that is baked into the assumption of the margin in terms of like how much the margin you think is reacting will react to each 25 basis point rate cut?

Speaker 4

Hey, Dave. It's Pat. I'll take that. So we're assuming we kind of go with what the Fed says. And so we're assuming 3 rate cuts mid year, 3rd quarter, year end.

Speaker 4

And obviously, the Street has much more aggressive expectations So to the extent that rate cuts occur faster or in larger magnitude, It could move the needle for us, but not by a meaningful amount. We're talking about something that might be in the $1,000,000 range. So it moves slowly and unless we get a 50 basis point rate cut tomorrow, you're probably not going to see anything meaningful in the first half of the year coming out of that. We kind of moved our asset sensitivity and to where we're a fairly neutral position right now. So whether we get up rates or down rates, we're probably not going to see, unless it's just an order of magnitude larger than anyone's expecting, You're not going to see a lot of NII volatility.

Speaker 1

Okay.

Speaker 5

And How much does the assumption for rate cuts impact the assumption for accelerating loan growth in the back half of the year? Or is that just more around kind of pipelines or other factors?

Speaker 1

Hey, Dan, it's Chris. I think the assumption on loan growth is that we spent the majority of 2023 kind of bolstering capital and making sure that we had a great understanding of the credit risk dynamics in our portfolio and we feel very good about both of those things. So, we're going to start to slowly build back towards our historical growth rate. So as Joe said, mid single digits during the year, that's not a rate dependent decision. It's a decision that we're now generating capital and want to deploy it with our customers.

Speaker 1

The only caveat I'll leave you with that is obviously it's situationally dependent. We have certain credit quality standards and return dynamics that we've got to get out of our loans. So we're going to be out looking to grow the loan portfolio, but we're going to do it prudently. And we're not going to grow to chase a number. We're going to grow to improve the dynamics of the company.

Speaker 5

I appreciate that, Chris. And I guess You expect to be able to you put, I think, 100% loan to deposit ratio this year, but As loan growth accelerates, you think you'd still be able to fund that loan growth with core deposit growth and maybe even overfunded, I guess, reduce the loan deposit ratio as we get in the out years?

Speaker 3

Yes, Danny, it's Joe. That's exactly right. I think we see loan growth as we see deposit growth. We expect that we'll fully fund loan growth with Continued core deposit growth as we deepen relationships. So we're pretty comfortable.

Speaker 3

You saw the uptick in the pipeline in Q4 a little bit. I mean we have a ways to go, but we're starting to see some green shoes. Clients are sort of seeing their way through, Navigating through and that I think will bode well for us as well.

Speaker 5

Okay. Thank you for all the color. I'll step back.

Speaker 1

Thank you.

Operator

Thank you. Our next question today is from Frank Schiraldi from Piper Sandler. Frank, please go ahead. Your line is open.

Speaker 6

Good morning. Good morning, Frank. Just given the cost of deposits and then the spot rate Being slightly below the average for the quarter. Is that an can we Sounds like you're still thinking that there could be some deposit cost increase in the first half of the year before we see margins stabilize or is it potentially we're already at stabilization on the deposit cost side and we could be closer to NIM drop here?

Speaker 1

We would be very cautious, Frank, predicting anything about the deposit costs because of the it's really unknown How consumers and businesses are going to respond to the perception about lower rates. So I think there's a lot of discussion about rates. Consumers and businesses may have different expectations about what they want for rate. I think what you saw in the mechanism in the Q4 is During the course of the quarter, we rolled off a substantial amount of brokered CDs. So that would cause the spot rate at the end of the quarter to not reflect all those brokered CDs.

Speaker 1

So that was kind of the impact. That impact will diminish a little bit over time.

Speaker 6

Okay, great. And then, Pat, you mentioned getting to we're getting close to neutral here on rate sensitivity. What does that assume and what do you assume for in your guide for deposit betas on the way down as we see these 3 rate cuts. Are you guys expecting modeling and immediate reaction To the rate cuts in terms of a deposit beta or is there some lag effect?

Speaker 4

I think we would definitely expect a lag effect. I mean we saw a 1 year lag effect for the most part on the way up and can't imagine that it would be dramatically shorter than that. So I think 2024 is going to be a baked in kind of higher funding cost here from a core deposit perspective. And frankly, people are still expecting I mean, we're still competing on rate for Just about all of our deposits right now.

Speaker 1

Frank, it's Chris. I'd add that if you think about kind of supply and demand and deposits for the industry, There are a lot of banks who would love to grow their deposit portfolio right now. So although the Fed may make rate cuts and you may see overall rates come down, We expect the competition among banks for deposits to remain brisk. So I think you're going to see, as Pat said, a fair lag.

Speaker 6

Okay. And then just lastly on that front, sorry if I missed it, but in terms of The guide for loan growth and deposit growth is pretty broad in the deck. And You guys talked about a little bit on the call, but it's sort of so my understanding is the most likely scenario as we sit here like low single digits to start the year and then The idea is that that could pick up through the year given, what the environment looks like? Is that the sort of the guide here?

Speaker 3

Yeah, Frank, it's Joe. That's the most likely scenario. I tend to think that we could see a little outperformance, Conversely, we could see a little slow performance. So it's sort of choppy out there a little bit. There's a lot of noise, a lot of conversations we're having.

Speaker 3

As I mentioned earlier, the pipeline is up, but still got to get to fruition. So I definitely think we're going to see positive growth. The question is how fast it ramps up to what we consider to be more normalized environments.

Speaker 6

Okay. And then just lastly, Chris, you mentioned the deposit environment. Obviously, it's quite competitive. And so just curious any sort of strategy you can talk about that you're using to bring in the incremental dollar Geographically or size range of a given competitor, where is the opportunity here to bring in the to bring in the incremental deposit dollar.

Speaker 1

I'll make a few comments and I'll ask Joe to follow in as well. One of the things We have not talked much about is that while we have reduced operating expenses, we've actually kind of apples to apples reduced them more than you would think. And we've then dedicated some of that save to reinvest in a couple of key platforms in both the hiring of bankers and treasury and all that. So Joe, maybe a little bit about the bankers you've added this year. So despite having kind of brought the expenses down.

Speaker 3

Yes. So Frank, a little color here. We've added 8 C and I bankers all throughout 2023 in all the footprints. A couple in Boston, Philadelphia, New Jersey, New York. And then I so they've been hitting the ground running and bringing some deposits.

Speaker 3

And I think the other point I'd mentioned, for us historically, being core deposit driven, we didn't offer competitive rates for some of the excess cash that many of our clients have had. And in the last year, we've dedicated ourselves to going out and getting that Cash back, so we've deepened relationships with existing clients as well as adding some new operational accounts. So I think it's been a testament to one of the reasons deposits have done well, both on the retail and in the commercial bank.

Speaker 6

Okay, great. I appreciate the color. Thank you. Thanks, Greg.

Operator

Thank you. Our next question today is from Michael Perito from KBW. Michael, please go ahead. Your line is open.

Speaker 7

Hey, guys. Good morning.

Speaker 3

Good morning, Mike.

Speaker 6

Pat, I want to

Speaker 7

ask a similar question that I asked last quarter and just kind of get the updated thoughts Kind of where as we think about why NIM might stabilize, right? It sounds like it's too early to necessarily call bottom on deposit costs rising, but I think maybe it sounds like with loan growth reengaging more consistently at better incremental spreads to like the $280,000,000 consolidated NIM you have today, that starts to become maybe a bigger impact, particularly as it compounds in the back half of 'twenty four. But just Long winded way of asking, can you give us kind of an updated view kind of where the average kind of credit commercial credits being originated today relative to the 5.40 blended yield 4th quarter. And are you still seeing that rise? Or is that also starting to stabilize that incremental kind of new yield on commercial origination?

Speaker 4

We're actually definitely seeing that rise on new money and on renewals. So I think, now I'll caution you that when numbers are small, you shouldn't extrapolate them. But on the originations we had In the Q4, we were originating at an average rate of about $7.70 Our pipeline, although it's grown, is still a lot smaller than it normally is and was a year, year and a half ago. But our pipeline yields are at around 8. So we're definitely getting the pricing that we're looking for on originations.

Speaker 4

And then we continue to have the portfolio roll. So We'll have somewhere in the neighborhood of $500,000,000 per quarter of loans that are going to roll And those are going to reprice into whatever terms they are as they mature and renew. So we definitely have all the pieces in place to see NIM expansion, Notwithstanding changes in deposit customer behavior or the need to fund incremental growth in a very competitive environment.

Speaker 7

That's helpful. And then just in terms of the 2024 outlook, any kind of initial thoughts around noninterest income, which I didn't see necessarily anywhere in the guide. Just is there obviously probably a couple of key pieces, Maybe swaps, mortgages, just any thoughts about what might transpire over the year in your budget as we think about what fee contribution looks like?

Speaker 1

We have look, there's an opportunity. We wouldn't provide guidance and it'd be very difficult to quantify for you. But The 3 main areas that could be impacted by 2024 volumes are, as you mentioned, swaps, but also gain on sale income in residential and the title insurance business that we own as well. So, it's really far too early to tell how much the unit volumes will increase. But you could imagine over the course of 2024, we certainly expect units to be higher in 2024 than they were in 2023, which should bode well for swap income, gain on sale and title insurance revenues.

Speaker 7

Thanks, Chris. It's helpful. And then just lastly, and I'll step back. Just on the I know you commented a little bit on it already, just to maybe go a layer deeper, just around buybacks. I think you were pretty clear in terms of why you didn't elect to use them in 2023.

Speaker 7

It was kind of a build It feels like the footing underneath you guys is much more certain now. As we think about the $2,900,000 authorization remaining, Are you willing to provide any more color about how kind of attractive the opportunity is to deploy capital that route today, particularly if Loan growth might be a little bit more back half heavy in 2024. I mean, it's kind of now the time to maybe buy back some shares or just any expanded thoughts there would be great.

Speaker 1

Mike, thanks for bringing that up. And you're exactly spot on. When you get into a period like we did in 2023, You want to be extra careful to make sure that you understand your risk positions, you understand your liquidity position and don't have anything that would be a lean against capital. So we built capital up over the course of the year. We're really happy with where capital is now and we expect to maintain it.

Speaker 1

So math around this, I think, would be pretty straightforward. To the extent we can grow customer relationships, that's always the best thing we can do with capital. But if that growth is a little more back ended or takes a little more time, then these valuations, we would expect to deploy capital through repurchases to maintain our capital ratio. And interestingly, as we do the math, that's about a neutral proposition. So whether we're doing incremental repurchase or bringing on new clients, has about a neutral impact to earnings per share.

Speaker 1

And that's fine. We'd always rather have a customer. So that's our priority. But if we can't have the customer, we can get the same benefit by doing the buybacks. And certainly trading below book value is a great opportunity to make to take advantage of.

Speaker 7

Got it. Helpful guys. Thanks. Stay safe with the storm and I appreciate you taking my question.

Speaker 1

Thanks. Take care.

Operator

Thank you. Our next question is from David Bishop from Hovde Group. David, please go ahead. Your line is open.

Speaker 8

Hey, good morning, gentlemen.

Speaker 9

Good morning, David.

Speaker 5

Hey, Chris, quick question in terms of

Speaker 8

you noted another quarter maybe Challenging in terms of the non interest bearing deposits. Has there been any change

Speaker 5

in terms of I don't know

Speaker 8

if you track where they go, is it continuing to run off to Some of the bigger the JP Morgans of the world, are you retaining them in other OCS product, OceanFirst products? And Remind us if there's any seasonality in that end of year run off?

Speaker 1

Yes. No, we're certainly keeping the deposits here at the bank for the most As Joe mentioned, we've taken the opportunity to deepen relationships. The good news about that is you get customers to bring money in from other banks. The bad news is sometimes they want to move some of their non interest bearing accounts into other accounts. So we're not seeing any competitive losses of magnitude to anyone, whether a big bank or a small bank.

Speaker 1

That's really what's driving it. And as we look forward, I would also mention that we have a lot of transaction accounts that are not captured in the non interest bearing designation. So, we have a lot of interest bearing checking that are truly transactional accounts. So, While the non interest number is important to us, the transaction account number is more important to us and that's been pretty stable.

Speaker 4

I'd just Hey, Dave. It's Pat. I'd just throw into, we do have seasonality, but it tends to be in truck order. So if we changed our year end to October 15th, Then you would probably see kind of peak non interest bearing levels every quarter instead of trough, which is what you see today. But it's a very it's the government business.

Speaker 4

So that does drive inflows throughout the quarter. They come back out again just in time for us to report.

Speaker 8

Got it. And then, noticed a modest uptick in substandard loans. Didn't know if any comment was there any commonality in segments? Just curious some color behind that increase?

Speaker 1

Yes, there's no theme and there was nothing of note in terms of a trend that would cause any concern. I would note that the level of substandard remains well below our long term average of around 2%. It's below the level of pre pandemic. So this is really just kind of a reversion to normalcy, right? That Credits go through cycles and all that, but there's no segment of the portfolio that gives us any concern and no commonality among them.

Speaker 8

Got it. Appreciate the color.

Speaker 1

Thanks, Steve.

Operator

Thank you. Our next question is from Matthew Breese from Stephens Inc. Matthew, please go ahead. Your line is open.

Speaker 10

Yes, thank you. Good morning, everybody. The first one for me is maybe for Pat. Taking the lower end of the NIM guide, which is calling for stability, what is the expectation for deposit costs by year end? And is there any sort of peak and reduction in deposit costs within that assumption throughout the year?

Speaker 4

I think we're assuming that we're peaking on deposit costs right now with some A little bit of adjustment for some of the more institutional deposits that we have and allowing for runoff with those. But we're assuming that We're going to be rolling our Ocean First CD program at generally kind of similar rates to where we are today. We've been pretty successful At rolling, it does we're not aggressively growing institutional and sweep deposits right now, but we always have that to turn on. And then across the core deposit base, we're assuming a fairly stable mix in pricing. And as we touched on earlier, if we do begin to see improvement or I.

Speaker 4

E. Lowering of costs, that's certainly going to be on the back half. We look forward to being able to put a couple of months together and start talking about a trend like that, but we just aren't seeing it quite yet.

Speaker 10

Okay. So the NIM stability guide basically assumes deposit costs are flat and expansion assumes maybe there's some reduction. Is that a fair statement?

Speaker 4

Yes.

Speaker 7

Okay.

Speaker 10

And then flipping to the loan pipelines, I mean, the rates are considerably higher than what's on the balance sheet today. I mean, I think it's the widest I've seen in 5 to 10 years, that difference. So I'm curious on the loan side, if we should see an acceleration in terms of loan yield expansion from here And any sort of frame of reference for the extent we might see that would be helpful.

Speaker 3

Matt, it's Joe. I'll start by saying this. We've seen a mix shift in the pipelines, which is good, especially in the commercial pipe, more towards C and I credit and a little bit less in CRE credit. So those C and I credits as you know tend to be floating rate based off prime or multiple of sulfur. So that's why you're seeing the increased yields, which by the way is a good thing.

Speaker 3

We're very happy about that because those relationships come with deposits and a variety of other things. So, we'll have some rate sensitivity if the Fed starts to move, but that will benefit hopefully in the deposit costs and the end game as well. So I do think you're going to see higher yields. I probably a little too premature to declare victory and think that we can expand margin just on loan yields. But we're pretty happy with what we're seeing so far.

Speaker 1

I might add to that too that if you look at Rolling just the CRE loans that are rolling that are in our supplemental presentation, they're carrying yields in the 6s. So we're not rolling loans from 3 to 8. We're rolling loans from 6 to 7 and change because The rolling loans are probably a little bit lower than that newly originated C and I pipeline stuff that Joe refers to. So this is something that will play out over time. And if you kind of freeze rates where they are now, we have a backlog of loans that have to roll.

Speaker 1

So that'll be a little bit of tailwind. We just don't know if it's enough to overcome any deposit headwind.

Speaker 7

Got it. And could you just remind us

Speaker 10

of what percentage of the overall loan book floats immediately or then call it 60, 90 days?

Speaker 4

Call it a third, a third and a third. So we've got a third that resets at least quarterly, if not more frequently. We've got a third that's hard fixed and then we've got a third that are adjustable and those are spread out over A series of maturities and dates and they roll when they roll.

Speaker 9

Okay.

Speaker 10

Last one for me, which is just on, Christy, your prior point on stuff that's rolling, particularly commercial real estate. How well do these properties handle higher rates, could you provide some colors on before and after debt service coverage ratios? And then if there was a reappraisal on any of this stuff, How did the valuations and loan to value ratios respond?

Speaker 1

So there's more detail in our in our supplemental, but I will kind of give you kind of the headlines. We've done a lot of stress testing of the loan book over the course of the year. We've looked at rolling maturities, all office loans, kind of every we can look at. We have updated as we have financial statements from clients about cash flows and rent rolls. And if you were to stress particularly the rolling CRE, the stuff that rolls over the next 2 years and stressed it at an interest rate of 7%, What you find is it's still debt service pretty easily.

Speaker 1

So it's in the 124 range, I think of debt service. So we're comfortable that at that rate, The portfolio doesn't really have much stress that would be interest rate related. And then I would point out another phenomenon. Some of these loans are eligible for either CMBS or some of the GSE programs. And what we're finding is that their pricing is even more affordable than that.

Speaker 1

So although we did all that stress at 7, that's not a market rate for those loans. So we don't a whole lot of concerns around that. In fact, it might be that some of that may wind up coming off the balance sheet because we're not willing to renew it at rates that are available in the market today.

Speaker 10

Got it. Okay. I appreciate taking my questions. Thank you. That's all I had.

Speaker 1

Thanks, Matt.

Operator

Thank you. Our next question today comes from Manuel Nabas from D. Manuel, please go ahead. Your line is open.

Speaker 9

Hey, thank you. Just to, I guess dive into the pipeline a little bit better. So most of the pipeline right now on the commercial side is C and I and that's indicative that CRE is still muted and CRE can kind of grow as we start to get the cuts that you foresee in your forecast?

Speaker 3

I think we've been fortunate as I mentioned earlier, Matt, good morning, to hire 8 more C and I bankers during 2023. Those folks have now Gotten fully immersed in the ocean first culture, so to speak, and are starting to see green shoots in their opportunities. Look, we still love CRE, we're good at that. But I think as it's been well documented, CRE has had Some more recent concerns around valuations and there's not a lot of activity. So the activity that's in the market, we're absolutely interested in.

Speaker 3

And as Chris mentioned earlier, we're happy to compete. We've done a decent amount of construction in the last couple of years. We're pretty happy with that. That continues to as the projects complete lease up according to terms or better than expected terms. So we'd like to do more.

Speaker 3

We're just not seeing a lot of it yet.

Speaker 9

On those C and I hires, you talked a little bit about Deepening relationships, is that kind of the commercial lending channel? How much of the deposits are being driven from that commercial lending channel in the 4th quarter?

Speaker 3

Well, I don't have that answer in front of me, but I will tell you that we've been very fortunate to not only defend but attract new deposits in the market in the commercial bank. I'm sure we can get you some color after the call if that makes sense.

Speaker 9

Okay. That's great. Thinking about as capital builds, you talked a little bit about the buyback, especially when growth is a little bit slower. What are your kind of thoughts on M and A thawing, just kind of what's the opportunity out there if you find the right partner and capital stays elevated? I'd

Speaker 1

start with our best investment is in ourselves, especially as we are currently trading below tangible book. So that would be our priority. We're going to continue the organic growth and build out the franchise. There are kind of 2, I think, precursors to M and A returning to the industry with a better understanding of rates and rate marks and financial conditions. Then a little more transparency from the regulators regarding what they're looking for in responsible M and A transactions.

Speaker 1

So that said, I don't think it's a short term, but in the long term, I think there's obviously going to be more industry I think we've done that well in the past and we'd like to play a role going forward. But right now, most of our focus is on organically performing and improving our franchise.

Speaker 9

Appreciate that. Thank you.

Operator

Thank Our next question is from Christopher Marinac from Janney Montgomery Scott. Christopher, please go ahead.

Speaker 9

Thanks very much and thanks for hosting us all today. Chris, I wanted to ask you or Joe about the case of new customers and I know you talked a couple of times this morning about bringing in new deposits and having that success last year. Should that pace Accelerate under the right circumstances and can you just kind of walk us through kind of what would kind of drive that? Is it more external economic factors that would drive the pace of new customers

Speaker 1

Yes. We'd certainly like to see more growth going forward. And I think the way I would sum things up is that For a decent chunk of the year, if you think about events in March, April and even into May, there was such unrest that customers were not willing to move from any bank to any other bank, right? If they were happy where they were, they were just kind of staying put. The same went for staff.

Speaker 1

We've been pleased to be able to add A few new bankers that Joe referenced. Historically, we have grown organically over a long period of time at like the 10% per year rate. We'd love to get ourselves back to that. It's not going to happen, I don't think, in 2024, but that's a really good number for our franchise. Our markets support it, we can find the talent to do that.

Speaker 1

So this is the year where we growth rates pick up, but our long term outlook would be to Position the franchise to grow at about 10% a year. And I think we have the markets and the people to do that. It's just take a little while to return back to that level. So we're bullish, but it's going to take a little time to work through that.

Speaker 9

Got it. That's helpful. And just a follow-up for Pat or whomever. The loan marks some fair value that we've seen in past quarters. Did those improve this quarter and is there opportunity for that to change further with rates this year?

Speaker 4

I really want to thank you for closing the call down with that question. I was hoping we wouldn't get that, but Yes. You're going to see loan marks improve this quarter. You're going to see that across the industry with the change in curves and rate expectations. We've spent a fair amount of time looking at that and taking a look at how our mix is the same or differs from others.

Speaker 4

Because we've noticed that we tend to have very conservative loan marks that are out there from a fair value disclosure perspective, We feel good about those fair value marks. We think we probably got a little bit of room for improvement to be a little more in line with some of the assumptions our discount rates. But we've got probably a bit heavier concentration of longer term residential Many others do and that will tend to drive bigger fair value marks. But I think you'll see the gap between kind of average And high and low narrow pretty meaningfully as people report this quarter.

Speaker 9

That's great, Pat. Thank you for that. And sorry to bring up a sore topic, but we appreciate the background a lot.

Speaker 4

It's not a sore. It's just It's a pretty new topic. So, let's take Benjie or your offline on that sometime.

Speaker 1

Chris, it's Chris. I'll add to Pat's comments. These are they're like notoriously sensitive calculations and We're kind of looking at them and they're very circular in some cases where your prepayment speed assumptions change, then your rates change and kind of one thing feeds into another. The good news is they're getting better, and we're going to continue to put a finer point on that.

Speaker 9

No, understood and I appreciate it. Thanks again for taking all of our questions.

Speaker 1

Thanks, Chris.

Operator

Thank you. This is our final So I'd like to hand back to management for any closing remarks.

Speaker 4

All right.

Speaker 1

Thank you. We appreciate your time today and

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Key Takeaways

  • OceanFirst reported Q4 GAAP EPS of $0.46 and net income of $87.8 million, with operating expenses down nearly 10% excluding the FDIC assessment, reflecting meaningful efficiency improvements.
  • The bank reduced brokered CDs by $364 million while growing core deposits by $265 million (excluding brokered time deposits), keeping the loan-to-deposit ratio below 98% as deposit betas eased to 38%, stabilizing net interest income and paving the way for modest NIM expansion in 2024.
  • Loan pipelines increased, led by higher-yielding C&I originations, and asset quality remained strong with nonperforming loans at 0.29%, criticized/classified assets at 1.44%, and essentially zero net charge-offs, as the bank targets mid-single digit loan and deposit growth.
  • Strong capital generation lifted the CET1 ratio to 10.88% and tangible book value per share to $18.35, supported a 100th consecutive quarterly dividend of $0.20 (44% payout ratio), and leaves the board comfortable with reactivating share repurchases.
  • Management’s 2024 priorities include maintaining flat operating expenses, driving responsible growth through organic deposit and loan initiatives, and exercising prudent balance-sheet management to continue creating shareholder value.
A.I. generated. May contain errors.
Earnings Conference Call
OceanFirst Financial Q4 2023
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