OceanFirst Financial Corp Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Frank Schiraldi - Piper Sandler - Analyst : Good morning. Just wanted to ask on the two acquisitions, albeit small, just wondering if you could kind of walk us through the -- I guess the mortgage business is pretty straightforward. But Spring Garden, if you could just talk a little bit more about their specialty? It seems like they're a real estate bridge lending group. And their specialty and maybe expectations around size as that business ramps up on balance sheet? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Sure, Frank, you hit it on the head about the Garden State. It's really just an augment to our efforts to convert our mortgage origination business into a gain -- primarily gain on sale business. So they provide a direct-to-consumer channel. That kind of augments what we're doing, and we feel very good about that. In terms of Spring Garden, Spring Garden's been a client of the bank for many years. So we've known the operation really well. Former banker, Jay Goldstein, who ran that company and ran it really well, will be joining us and will continue to run it for us. Really, the financing they provide is for the renovation and rehabilitation of housing predominantly in urban markets where there's an infill need, where you've got housing units that need to be kind of upgraded. Originally, they started in Philadelphia, they subsequently expanded to Philadelphia, Baltimore, Washington DC, and Pittsburgh. And they're doing some additional growth beyond that. The two important dynamics to this: first, it's a very profitable business. They've managed it really well over the years. The second important thing about this is, close to 80% of what they do is [rate-qualifying] assets, which are pretty attractive to us. And their borrower composition is good as well. Nearly two-thirds of their borrowers are minority or women-owned businesses, so it helps kind of beef up our credentials in those areas. But in terms of the growth rate you asked, this will not grow fast; this is a business, you have to be very careful and stay on top of. So we do expect it to grow under our balance sheet, but I wouldn't think of it being a significant growth rate going forward. It's going to grow probably 10% a year. I wouldn't expect much more than that.

Question: Frank Schiraldi - Piper Sandler - Analyst : Okay. And I guess, just this last question on that, just kind of curious, obviously, seems like there's capital coming back into that business now. And there was a bit of a concern around that business certainly with production in the 2021, 2022 timeframe where you obviously had a pretty significant change in inflation levels and then interest rate level. So just curious about how it's - is that stuff still on the balance sheet that came over? What sort of years were this $145 million in footings were originated? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank So I'll need to just to clarify on that. This has been on our balance sheet for years. We were the warehouse funder for this company. Based on their business model, you're talking about loan duration that tends to be around 16 to 18 months. So really, the stuff that's on the balance sheet now was originated in the last two years. The credit experience has been spectacular. And they're able to, in most cases, they're delivering a net -- rehabilitated housing units at a pretty affordable cost in these markets. So they have not had any difficulty either renting or doing long-term finance on these loans. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call So this is not kind of a lend and hold business. This is a bridge business and almost all of their borrowers are repeat borrowers. So folks that they know and have done multiple projects over the years, so very modest credit costs. Very strong net interest margins, and they have not missed a beat in the last couple of years.

Question: Frank Schiraldi - Piper Sandler - Analyst : Great. Okay. Thanks for the color.

Question: Daniel Tamayo - Raymond James - Analyst : Thank you. Good morning, everyone. Maybe we start just on the funding side. You talked a little bit about how the -- I know you touched on it on your prepared remarks, but just how the repricing has gone since the rate cuts in the third quarter? And then, maybe how all that -- how you're thinking about kind of how the margin plays out in the fourth quarter and with future rate cuts? Thanks. Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Sure. So I'm going to point you first to -- I just want to show something on page 10 of the slide deck. You can see that we've been running down our CD portfolio over the last several quarters and we really want to push that down knowing that there might be a point at which the rate environment will become more favorable. So it's down year over year, down by $433 million or about 16%. And that was to position us for this cycle. I'll let Joe talk a little bit about the recent repricings and then [pack] and comment about margin.

Question: Daniel Tamayo - Raymond James - Analyst : All right. I appreciate all that color from everyone. Maybe a follow-up. Chris, you touched on -- in the release capital deployment opportunities kind of being the crux of five -- how much of the five acts, maybe think about it as a plug there. But if you could just talk about a little bit about those capital deployment opportunities that you're seeing and considering? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Sure. So I think what we're leaning towards is that as growth comes on board, the best thing we can do is use that. We think a little bit of a cushion in capital to pick up our growth rates, organic growth rates. The second thing we're thinking about, and Pat referenced it in his comments. We have some repricing instruments next May, and there's a lot of different things we can do with those. But the current rates today, they would be a little bit expensive. So we're keeping a little capital on the side to give us some optionality. We may decide to redeem some or all of that over time. It's a pretty effective use of capital. So, and look, we always look at earn-backs when we buy anything, including our own stock. And as our prices appreciated, the earn-backs have lengthened a little bit. They're still pretty favorable. But for now, we're going to keep the capital for organic growth and optionality around the repricing instruments next May.

Question: Tim Switzer - KBW - Analyst : Hey, good morning. Thank you for taking my questions. Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Sure. Good morning, Tim.

Question: Tim Switzer - KBW - Analyst : Yeah. No, I think that makes sense. For Spring Garden, just to be clear, we shouldn't be modeling a large pick-up in the loan balance since they're already on your balance sheet, right? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Correct. It's really the difference between what was on our balance sheet and [$145 million]. So net, it's going to be about a $60 million pick-up from that activity, plus other loan growth during the quarter.

Question: Tim Switzer - KBW - Analyst : Okay, great. That's all for me. Thank you, guys. Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Thanks, Tim.

Question: David Bishop - Hovde Group LLC - Analyst : Yeah, thanks for taking my question. Just (inaudible) for the fee income guide. So I think that there's a slide where it says it should be breakeven or create earnings not later than [FY25]. Chris, is that -- and I think the step-up in excesses is like [$5 million]. Should we expect the sort of fee income -- is that implying that fee income should move up like about (inaudible), how we should think about it just on a dollar basis, what fee income looks like? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Yeah, you're right, Dave, that the fee income and expenses related to Garden State would be roughly equivalent over time. There'd be a sense of profit there, but the $5 million was a combination of Spring Garden and Garden State. So you're not going to see fee income going up by $5 million in the quarter. It's probably about half and half, would be the best estimate I can give you. And again, a little bit dependent upon volumes and commission payments and all that. But think of like the $2.5 million of expenses in about that and fee income growing over time.

Question: David Bishop - Hovde Group LLC - Analyst : Okay. Got it. I thought that was more of a longer-term projection there, apologies. And then, so the increase -- the amount of increase in special mention and substandard, any color you can provide in terms of that --? (inaudible) REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Sure. I'd actually point everybody to slide 7 and just kind of talk through what the numbers are there. The good news is that we've always been pretty prompt about recognizing risk as it appears in our balance sheet. I'd categorize this number, and you can see it on the slide. That's 1.89% of total loans. This is well below our 10-year average of 2.4%. It's well below the industry and significantly below the peer group. I'd also note we call out on page 18, the experience of the Northeast in terms of credit cycles, which is typically far more benign. So we had a couple of credits that we're keeping an eye on. We brought them down to special mention. That's what we do. Things kind of come in and come out. There was no pattern to it. And no particular concern or cluster around those credits. So it's not something that's bothering us.

Question: Matthew Breese - Stephens Inc - Analyst : Hey, good morning. I don't mean to beat a dead horse just on some of the fee income expense numbers here, but I just wanted to make sure I have it right. So we have $62 million in operating expenses this quarter. Pat, I think your commentary suggested this is kind of fully baked, but I just wanted to clarify because I know the presentation suggests that there might be a little bit of a higher run rate here. And obviously there's an asterisk because there's going to be volatility in gain on sale and (inaudible). But I just wanted to make sure we're kind of --there's not a near-term increase coming?

Question: Matthew Breese - Stephens Inc - Analyst : Got it. Okay. Yup, I got it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call

Question: Matthew Breese - Stephens Inc - Analyst : How much of $140 million [ROTCE] pipeline as of September 30 would you attribute to this business? And we should think about as being kind of channeled into gain on sale?

Question: Matthew Breese - Stephens Inc - Analyst : Okay, I appreciate that. And then Chris, obviously, there's still a lot of focus on kind of CRE concentrations. But anecdotally, we're hearing that competition from the insurance companies, agencies, and the bigger banks is picking up. And so, the ability for this stuff to kind of refi off your balance sheet. And I think we're seeing some increased payoff activity this quarter. I was just curious if you could kind of comment on that, whether or not you're seeing that as well? And you're being given the opportunity to see some of this refi off the balance sheet selectively? And then secondly, I was really curious on commercial loan that the pipeline is [8.28%] for yield. That just struck me as a little high. Curious what's in there, if it's kind of a bend towards construction or some of the newer verticals you're in? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank It's a really good question. So first, you're spot on that the competitive market around commercial real estate has freed up. You're seeing private credit, you're seeing insurance companies, and let's not forget the GSEs. Freddie Mac is one of the biggest writers out there and has a voracious appetite for multifamily at standards that are looser than most bank standards. So there is an opportunity, I think, to see some rotation there. The way we're thinking about it is that this portfolio has worked really well for us. We continue to feel good about the credit quality. We will let a fair amount of credits roll off to folks that are willing to either offer looser structures or lower pricing or whatever that attraction may be. You'll see our CRE concentration slowly go down, it's not going to drop quickly because we're, we're also going to take the opportunity to do the things that we do well. And Spring Garden is a good example of that. We will rotate out of a slightly longer duration CRE paper at a lower yield into shorter duration, well-structured CRE credits at a higher yield. As Joe mentioned, it's over a 10% yield on those. Similarly, as you look at the pipeline, we're focusing on short duration, things in construction. And just to remind, I know we've said this before, when we get involved in construction, it's generally up and out of the ground. We're not talking about land and entitlements and the things that are harder to put, excuse me, a risk evaluation on. When we know absorption in the market and we're comfortable making that kind of credit assessment, then we're going to get into more floating rate short duration, higher yielding assets. So that's kind of just a trend. You will see concentrations come down, but we're not going to run the portfolio off dramatically or quickly. We're going to rotate it into segments we think are going to pay us a better return on capital.

Question: Matthew Breese - Stephens Inc - Analyst : I appreciate that. And then just last one is on capital strategies. You have two things going on. In May, the reset date for your [sub debt preferred hits] and it looks like both of those, those sources of capital will flip to right around 10%, maybe a little higher for the preferred. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call And the second thing is, it feels like the sub debt has changed a little bit. It used to be banks that predominantly bought the paper. I don't know if that's true today. But regardless, it feels like the sub debt might be at the cost of where you would go to common. And I was curious as we think about May, that cost of capital is such at a point where you might actually do that? Is there a likely outcome here where it's not re-upping fully in sub debt? But we see some common components. Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank You're right to point that out, that that could be an option when the instruments reprice. And we're going to make that evaluation based on what's the right mix of capital and the cost of capital. One of the things we're, we're doing right now is making sure we have everything lined up so that we have every option available to us. You've been watching the sub debt market this year, there are some banks buying sub debt, but frankly, we've seen some of the sub debt issues appeared pretty high price to us. And I don't know that we would have any interest in doing something that had a coupon of the coupons you're seeing in the last few deals. And we want to keep the optionality of being able to just pay it down on our own. And that may not mean we pay the whole thing off at its repricing date, but we may chunk it down at that point and then in a couple of quarters afterwards just redeem it. So we're preparing to have the option to take it out using earnings, take it out using capital we've built up over time. Or the capital markets are functioning well. And we think there's well-priced instruments out there. We'd look at the capital stack. That said, we're kind of low to issue common unless there's a really, really good reason. So it would have to be compelling

Question: Matthew Breese - Stephens Inc - Analyst : Understood. All right, I'll leave it there. Thank you very much. Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Thanks, Matt.

Question: Manuel Navas - DA Davidson & Co - Analyst : Hey, good morning. A lot of my questions have been answered, but I just want to kind of follow up on what's kind of the customer profile driving this strong deposit growth? Retail versus commercial, it seems like it's not high-yield savings. You had a little bit of retail CD growth. Like can you just kind of walk through that a bit? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Yeah, I think if I were to give you just a broad trend, over the years we had probably given up a little bit of wallet share in the consumer business to banks that were paying higher yields. For many years, I think our highest consumer yield was like 15 basis points. And so, when the market turned a little bit and we weren't in a position to offer any rate at all, we were able to pull back some of that wallet share. So the single biggest component would be wallet share in the consumer business. But we've made gains kind of across the board. Our government banking business has done well, commercial banking has done well. So it's a little bit everywhere but probably the single biggest source of it would be a wallet share gain in our consumer households, which is nice to see. We do operate in very dense markets where there's a tremendous amount of deposits available. So we're able to kind of pull that in when we became a little bit of a rate payer. And early indications are we're holding that fine even with the repricings that we've done, and our repricing started actually before the Fed moved. So we got a little bit of experience there. It's too early to call a particular beta, but consumers are hanging in there with us.

Question: Manuel Navas - DA Davidson & Co - Analyst : Okay. On the fee businesses, they seem to offer nice revenue diversification. They appear to be a little bit more standalone. Can you talk about how they offer, if at all, any synergies? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank I think that there's an opportunity any time you identify a company that is specialized and done something really well because they do just one thing. If you're thoughtful about it, you're adding talent and capabilities that should help improve kind of the DNA of your company and the people that kind of inspire you to be better. So there's no question in both of these cases, we're bringing talent on. There are virtually very few expense saves in either of these deals. We're bringing everybody on, we're bringing their capabilities on, their competencies, their systems and approaches. So in a way, we hope to make them a little better by giving them a platform and a balance sheet and attributes they don't have today. And we hope that they're going to make us a little better in thinking about customer response times and things like that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Probably the biggest cultural commonality between Garden State and Spring Garden is this focus on speed and the focus on delivering for your customers answers and credit facilities at a very rapid pace, and they get paid for doing that. And we could always be -- you can always be faster. Customers are never going to say I wanted to wait another few days to get my loan approved. So I think that's going to help us just in DNA culture and mentality. But Joe, anything else you have?

Question: Manuel Navas - DA Davidson & Co - Analyst : I appreciate that extra color. Can I shift briefly to the NIM and NII? What's embedded in that forecast for kind of the stabilization [you've determined], steady NII growth in terms of rates? And what is the sensitivity if the Fed changes its pace, skips a meeting, or goes back to a 50-basis point cut? Just kind of thoughts around that sensitivity to different types of rate scenarios.

Question: Manuel Navas - DA Davidson & Co - Analyst : Thank you. I appreciate that.

Question: Christopher Marinac - Janney Montgomery Scott LLC - Analyst : Hey, good morning. I just wanted to ask about possible credit upgrades with lower interest rates. And what's the kind of glide path for that? Could you see some now and how long does it take as next year develops? Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank That's a good question, Chris. The portfolio is not that sensitive to rates, it'd be more sensitive to occupancies and leases and tenants and all that, which by the way, we've stressed, and we don't have much concern about. Around the margin, you might see a few of these credits that are in special mention, criticized, classified, able to kind of carry. But our experience has been that virtually everything that has rolled even at today's rates has rolled without stress and the DSCRs may come down a little bit. But in many cases, especially outside of office, you've seen rents increase over time. So these are loans we underwrote in 2019, they're coming due and the rents might be up 30%. So they're handling the interest rate stress pretty easily. So it's maybe a handful of credits, but we don't have a lot that we're watching, anyway. So it wouldn't make a significant difference. Probably de-risks the 2025 maturity wall a little bit. It would also play into other folks coming into the market. I know there's a question earlier. What we're finding is that more and more people are stepping into the market, especially private credit. So there are takeouts for a lot of these loans. So I really think probably the worst concerns around CRE are behind us. Although, you always have to be thoughtful. There will be a credit here and there from time to time that has an issue. So you want to be very humble about these things.

Question: Christopher Marinac - Janney Montgomery Scott LLC - Analyst : Sounds good. Thank you both. Appreciate it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 3:00PM, OCFC.OQ - Q3 2024 OceanFirst Financial Corp Earnings Call Christopher Maher - OceanFirst Financial Corp - Chairman of the Board, President, Chief Executive Officer of the Company, Chairman and Chief Executive Officer of the Bank Thanks, Chris.