OceanFirst Financial Corp. (NASDAQ:OCFC) Q4 2023 Earnings Call Transcript

OceanFirst Financial Corp. (NASDAQ:OCFC) Q4 2023 Earnings Call Transcript January 19, 2024

OceanFirst Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, and welcome to the OceanFirst Financial Corp Q4 ’23 Earnings Release and thank you for standing by. My name is Daisy, and I’ll be coordinating your call today. [Operator Instructions] Now I would like to hand over to your host, Alfred Goon from OceanFirst to begin. Alfred, please go ahead.

Alfred Goon: Thank you, Daisy. Good morning, and welcome to the OceanFirst Fourth Quarter 2023 Earnings Call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we’d like to remind everyone that 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-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you and I will now turn the call over to Christopher Maher, Chairman and Chief Executive Officer.

Christopher Maher: Thank you, Alfred. Good morning and thank you to all been able to join our fourth quarter 2023 earnings conference call. This morning, I’m joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we’ll provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. Our financial results for the fourth quarter included GAAP diluted earnings per share of $0.46.

Our earnings reflect net interest income of $87.8 million representing a modest decrease compared to the prior linked quarter of $91 million. Operating expenses decreased to $60.2 million, excluding the FDIC special assessment of $1.7 million. Operating expenses decreased to $58.5 million. 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. Fourth quarter results were impacted by modest margin pressure linked to our continued efforts to improve the quality of deposit funding. 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 million or 3%, excluding brokered time deposits, resulting in our decision to reduce brokered time deposits by $364 million, 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% and continued growth in tangible book value per share to $18.35.

Turning to capital management. The Board approved a quarterly cash dividend of $0.20 per common share. This is the company’s 108th consecutive quarterly cash dividend and represents 44% of GAAP earnings. The company did not repurchase any shares in the fourth quarter. 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. At this point, I’ll turn the call over to Joe to provide some more details regarding our performance during the fourth quarter.

Joseph Lebel: Thanks, Chris. Non-maturity deposits continued to grow, increasing approximately 1% linked quarter, while overall deposit balances declined by approximately 1%, 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 deposits organically and our deposit growth for the year of $760 million 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. Growth may be lower in the first half of the year, but potentially accelerate as the year goes on. Asset quality metrics remained strong with nonperforming loans and criticized and classified assets representing only 0.29% and 1.44% of total loans, respectively. This quarter, we reported essentially zero net charge-offs, bringing our full year annualized charge-off rate to a nominal eight basis points. With that, I’ll turn the call over to Pat to review margin and expense outlook.

Patrick Barrett: Thanks, Joe. Net interest income and margin were $87.8 million and 2.82%, respectively, reflecting higher funding costs associated with deposit growth. As Chris noted, funding costs reflect cycle-to-date deposit betas of 38% with margin compression stabilizing through the quarter. Based on our expectations for modest asset growth and 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 may occur depends on so many variables I hesitate to put a degree of confidence on the exact timing. Said in another way, in terms of net interest income, we reported two consecutive quarters of approximately $90 million in NII, and we’re hopeful that we’ll 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 noninterest expenses down by nearly 10% linked quarter to $58.5 million. Our fourth 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 noninterest expense excludes $1.7 million related to the FDIC special assessment. We’ll make every effort to hold operating expenses flat in 2024 to our fourth quarter 2023 run rate some quarterly volatility should be expected. Additionally, we continue to explore opportunities to further improve our operating leverage. Effective tax rate for the quarter of 24% remains in line with 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 you. [Operator Instructions] Our first question today is from Daniel Tamayo from Raymond James. Daniel, please go ahead. Your line is open.

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Q&A Session

Daniel Tamayo: Thank you. Good morning, everybody.

Christopher Maher: Good morning.

Daniel Tamayo: 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 on the margin in terms of like what — how much the margin you think is reacting — will react to each 25 basis point rate cut?

Patrick Barrett: Hey, Dan, 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 three rate cuts midyear, third quarter, year-end. And obviously the street has a much more aggressive expectations than that. 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 million 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’ve 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.

Daniel Tamayo: Okay. 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?

Christopher Maher: 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. 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.

Daniel Tamayo: 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, do 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 to deposit ratio as we get in the out years?

Joseph Lebel: Yeah, 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 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 shoots clients are sort of seeing their way through, navigating through and that I think will bode well for us as well.

Daniel Tamayo: Okay. Thank you for all the color. I’ll step back.

Joseph Lebel: Thank you.

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

Frank Schiraldi: Good morning.

Christopher Maher: Good morning, Frank.

Frank Schiraldi: 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.

Christopher Maher: Yes. We would be very cautious, Frank, predicting anything about the deposit cost because of the — it’s really unknown how consumers and businesses are going to respond to the perception of that 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 fourth quarter 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. So that was kind of the impact. That impact will diminish a little bit over time.

Frank Schiraldi: Okay. Great. And then Pat you mentioned getting to — 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 three rate cuts. Are you guys expecting modeling an immediate reaction to the rate cuts in terms of deposit beta? Or is there some lag effect?