Good day, and welcome to the OceanFirst Financial Corp. Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Jill Hewitt. Please go ahead..

Thank you. Good morning, and thank you all for joining us today. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning's call with our forward-looking statement disclosure.

Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements..

Thank you, Jill. And good morning to all who've been able to join our first quarter 2021 earnings conference call today. This morning, I'm joined by our President, Joe Lebel; Chief Risk Officer, Grace Vallacchi; and Chief Financial Officer, Mike Fitzpatrick.

As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning, we will cover our financial and operating performance for the quarter and then provide some color regarding the outlook for our business in 2021.

Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to these slides during the call. After our discussion, we look forward to taking your questions.

In terms of financial results for the first quarter, GAAP diluted earnings per share were $0.53, another strong quarter for the company. Earnings reflect the continuing economic recovery, with the bank demonstrating improved credit trends, disciplined expense management, expansion in our core margin and the return of loan portfolio growth.

Reported earnings were impacted by a few items, including the final gains in our dividend-focused financial equity strategy, which collectively resulted in noncore net income in the amount of $5.2 million after tax.

As a result, we pegged the core net income for the quarter to be $26.5 million or $0.44 per share, which was almost 13% higher than the prior quarter. Regarding capital management, the Board declared a quarterly cash dividend of $0.17 per common share and approximately $0.44 per depository share of preferred stock.

The common share dividend is the company's 97th consecutive quarterly cash dividend. The $0.17 dividend represents just 32% GAAP earnings. Over the past 2 quarters, our robust earnings have driven a $0.68 or 4.7% increase in tangible book value per share.

The common share dividend remains at a conservative payout ratio and will be evaluated later in the year as the post-pandemic earnings trajectory is more established. Tangible stockholders' equity to tangible assets remained strong at 8.83%.

Our balance sheet continues to be somewhat inflated as we carried $1.2 billion or 10% of the entire balance sheet at cash at quarter end. I'd like to put that into perspective. If the excess cash, which provides no short-term financial benefit, were simply removed from the balance sheet, the reported NIM would increase by 36 basis points to 3.29%.

The reported return on assets would increase by 10 basis points to 1.04%. And the TCE ratio would increase by 97 basis points to 9.8%. The excess cash is a direct result of positive trends in our business and should provide an incredible opportunity to build earnings over time..

Thanks, Chris. Loan originations hit an all-time record for the company in the first quarter, with $748 million in new loans exclusive of some PPP originations. The commercial lending teams closed a record $548 million in loans in the quarter, with the consumer bank generating $200 million.

Overall portfolio growth of $116 million was net of $67.5 million in residential loan sales. Income from the gains on the sale of loans was well above forecast due to the execution available in the secondary market. Much of the loan growth for Q1 came late in the quarter, so we will see the interest income in Q2 and beyond.

In the Commercial Bank, our Philadelphia commercial region crested $1 billion in loans outstanding in the quarter, joining our New York region with over $1 billion in loans and furthering our belief that branch-light, talented, focused lending teams in robust, vibrant metropolitan markets makes sense.

On the hiring front, we added 9 new commercial bankers in Q1 and early in Q2. While I expect some ramp-up time, we should see some activity from the new lenders in the second half of 2021 and normalized revenue streams in 2022.

We remain actively recruiting in our existing and adjacent markets and expect continued adds to revenue-generating staff for the remainder of 2021..

Thanks, Joe. Before we turn to questions, I'll just close out our comments by noting that you can see we have a lot going on in terms of commercial banker hires, investments in digital and expected retail optimization.

During the second quarter, we expect to complete the bulk of our commercial bank hires for the year, and we'll be in a position to assess post-pandemic customer transaction patterns.

That will allow us to better forecast long-term objectives for loan growth; expense trends; and ultimately, the degree to which we can deliver improved financial performance in the coming quarters. As a result, we expect to host an Investor Day following our second quarter earnings release to share that road map with you.

The event will be scheduled for early August and is expected to include both in-person and remote access options. We hope you'll be able to join us for that. At this point, we'll turn it over to questions, the Q&A portion of the call..

. Our first question today comes from Frank Schiraldi with Piper Sandler..

I just wanted to make sure I have my numbers right. In terms of, Joe, you mentioned the 9 - and you put in the release the 9 commercial lenders since the end of the year. And then I think you hired a few in the fourth quarter as well.

So is that accurate? And then can you just give the breakout in terms of geography of these new hires?.

Sure, Frank. We did hire - I think that we had 4 in the fourth quarter. Of the 9 we hired, the bulk of those were in what I'd consider to be the core markets, which are Philadelphia, New York and New Jersey. We did open a new loan production office in New Jersey in Hasbrouck Heights, and we already have 4 folks up there working.

And we created a new vertical for us. One of the lenders is actually the leader of the vertical, a construction vertical for us here in New Jersey. We've always been a good construction lending company, but I felt that given the size and the scope of the company today, that we needed a dedicated vertical for that space.

So we've hired Stan Koreyva to run that business for us..

Okay. So it sounds like, yes, you've either gotten the guys in place or you've got really good visibility into hires that you want to make. Chris, you mentioned that you expect the bulk of new hires to take place by the second quarter.

So Just wondering if you could update us, and maybe it's too early, but just in terms of if you do get these folks in place, updated thoughts to what run rate loan growth could look like by the time we close out 2021..

Sure. So Frank, just a note on the seasonality of hiring commercial bankers. Not surprisingly, everything has a season, and the top-notch people or usually do some good year-end incentives. So the best time to be recruiting and getting them to change their employment is after they've gotten those incentives.

That usually happens in the first quarter or early second quarter. So that's kind of why you would have a seasonality to bring these folks on. As they come on, they'll become incrementally more productive - I'm sorry, we may have a technical issue..

Frank, still here?.

I'm here, fine. Yes..

Okay. Yes. Sorry. We may have technical issues. So sorry about that, Frank. Anyway, as those lenders come on, they're incrementally more productive during the course of the year.

So I think what we've said before is by the end of the year, we should be growing our loan portfolio at about a 10%-or-better clip, which would equate to about $250 million of growth per quarter, if you think about it that way..

And Frank, I would expect that the CRE lenders, we're hiring a mix of CRE and C&I lenders. The C&I business takes a little bit longer to ramp just by virtue of the customer relationship aspect. But I expect that the CRE lenders that we hire, as Chris noted, will be more productive in a more rapid fashion.

I do expect in 2022 that everyone that we hire in '21 will be fully up to speed in the revenue streams..

Our next question will come from Dave Bishop with Seaport Global Securities. Please go ahead..

Following up on the - that last question and the hirings you noted in the Boston, D.C., Baltimore market.

Just curious, is this your typical - I know you're hiring out of sort of the larger regional players, and just curious if any of these new hires were sort of impacted by some of the ongoing market consolidation we're seeing across the Mid-Atlantic and Northeast..

Well, Dave, definitely. So we look at bringing on seasoned folks that have a long history of being effective commercial bankers, and they typically come from larger companies. And we're talent-driven first. So when we find a team, that's where we want to go.

In terms of geography, we want to be able to drive to our markets, and we're hopping on training or do something like that. So this is still a relatively compact geography.

And the last thing I'd add to it is that our experience in Philadelphia and New York, as well as our experience during the pandemic, helps us feel more comfortable about having a little bit of distance between us and the lenders..

Got it. And then as it pertains - I appreciate the color on the slide deck on Page 7, where you note the tech spend accounted for about 19% of core operating expenses, and then contemplating additional investments in the latter part of the year.

Just curious where maybe - I don't know if you can provide specific guidance or where you think that ratio trends to - for the full year relative to 2020..

I think you're going to see two offsetting things happen. So you're going to see that technology spend, especially as a percentage, increasing. And then as we tune the retail distribution network, you're going to see some of those expenses decreasing over the course of the year.

And they should be - so the percentage should be moving, but the total shouldn't be moving as much. There'll be a little bit of an increase in expenses, obviously, as we add the commercial bankers. But at this point, we're hoping we can offset a good portion of that later in the year with optimization of our retail network.

I think the point I made about wanting to see customer transaction patterns is really important. We're watching closely. As you guys know, we've consolidated 57 branches. So we're pretty good at that. We get it right. We tend to retain our customers and our relationships.

We're looking at the data now and watching who is using branches in what way and in what locations, and that will enable us. We just want the data to stabilize post-pandemic before we make further decisions about the optimization of retail networks. So you may have expenses come up a little bit in Q2 and Q3 as we add lenders.

And then towards the end of the year, we expect to be getting some more synergies..

Got it. Appreciate the color. And then in terms of the DDA growth, obviously, strong again.

Does this continue to represent some of the wins you've noted before in terms of expansion and wins in the cash management, treasury management group?.

It does, Dave. And we've talked about this before, as much as we'd like to deploy the money faster, we also can't tell our folks not to do their jobs on the other end. It's one of the things and one of the reasons we've more than double the size of our treasury team in the last few years, and it's paying dividends for us.

And even with that, they come in with new relationships exciting. And the first thing Chris and I think about is how do we lend the money out..

Got it.

And Joe, a quick housekeeping question, good tax rate to use moving forward?.

Yes. It's Mike, Dave. 24%, I would use..

. The next question today will come from Erik Zwick with Boenning and Scattergood..

First one for me, I guess, a bit of a kind of follow-up in terms of the new lenders.

I'm just curious as - what are your expectations in terms of the percentage of loans that they generate over the next 1 or 2 years comes from their prior book of customers versus new customers?.

It's a combination. But typically, Erik, when you recruit lenders, you recruit lenders that - we recruit seasonal lenders that have significant books of business.

So we expect that the bulk of their business, typically, is going to come from some portion of their existing relationships, recognizing that it's always based on a time frame, right? You're not going to get them almost immediately. There are certain strings tying folks to prior locations.

But for us, the value of seasoned bankers from larger companies is typically their COI network. So that gives them the opportunity - and they always have prospect list, so it gives them the opportunity to lever - pull different levers to get activity for us..

I would just give you some guidance on them. Folks are usually probably contributing net to income within a year. So these are not things where you've got to wait a long, long time. The first quarter or 2, they may be a little bit of a drag. But the good lenders, you're bringing people over immediately.

And they're building their books over the course of the first 2, 3, 4 quarters. You don't have to wait and see for years. A good lender is going to produce or not very quickly..

That's helpful. And then one last one on the new lenders, then I'll move on.

Just curious, as part of your evaluation process and your vetting process, how do you evaluate them in terms of kind of their past credit quality experience at their former employers?.

So for us, Erik, a lot of it is based on who the former employer was. I mean the neat thing about our business is that we know the credit quality and the credit metrics and the risk appetite of the larger companies in our footprints. Most of us have - it's small - it's a small world in our industry, so we understand that.

And that's one of the reasons we've focused on lenders coming from larger regional companies because the risk appetite in those companies is well documented, it's easy to follow and reputations of people are easy to track..

This is one of the tricks of bringing in qualified experienced bankers. Our credit folks are actually pretty involved in these conversations because nobody wants to make a mistake, right? A banker doesn't want to come to a company where they can't do the business they need to do.

And we don't want to have a banker who can't bring their typical clients into the bank. So as part of that betting process, all of our candidates have sat down with our credit folks. They've talked about representative deals, the way they've lent in the past to make sure there's an alignment.

They may have a different credit risk appetite in other bank, but we want to make sure that we're completely aligned in that. Otherwise, it's not going to be productive for them or us. We're just not going to make the loans that don't fit our mold..

I will tell you, Erik, that the recruiting process today in our industry is very much two-sided. Not only are we recruiting, but the lenders, if they have an interest, are having those kind of conversations, it's a 2-way interview process, which I encourage.

And as Chris mentioned, we have a cadre of folks in our company from operations to credit to lending to wealth to treasury, all having interview conversations with new lenders..

That's helpful. I really appreciate the detailed color there. Moving on to - I know I've said it before, but I just want to thank you guys. Again, I love the detail you guys provide in terms of existing pipeline, pipeline yield, origination data.

Looking at the commercial statistics for the first quarter, the pipeline yield from 4Q to the end of 1Q remained pretty stable, kind of 3.75%. But the origination yields in the quarter were lower, kind of 3.2% range, with strong origination volume. Just curious what maybe drove that origination yield down.

Were you selecting maybe some higher quality customers that had lower yields? Or what drove that, just kind of given the stability in the pipeline yield?.

Residential is easy, right? Residential rates are still amongst the lowest it's been in 30 years. The commercial business is a very competitive business, and it's become more competitive with the significant amount of liquidity on the balance sheet of many of our competitors, including ourselves.

So - and I think it's also - we're also focused on really, really strong underlying transactions. And when you focus on those, you're going to compete not only on structure and everything else, but on price. So if you're not going to give up on credit structure.

It's really important to do the right thing for the client and the bank and to win business that will be accretive over time. And a lot of the sponsors and companies we look to do business with are larger in nature that will have either other real estate projects or other C&I needs. So you need to be competitive when it makes sense to be competitive..

Got it. And then last one for me. On noninterest expenses. First quarter had, I think it was a $662,000 benefit from PPP referral fees.

Safe to assume that there's maybe a little bit more in 2Q lower than that, and then that trails off given the ending of that program?.

Yes, the - that would be a first quarter event. And unlikely to repeat in the second quarter..

Our next question will come from Russell Gunther with D.A. Davidson..

I wanted to follow up on the loan growth discussion. So the path forward is very clear with all of the hires. Could you guys spend a minute in terms of what drove the organic growth this quarter, whether that was any contribution from some previous commercial hires, or just specific geographies that contributed to the growth.

Would be helpful to get some color on this quarter's results..

So Russell, yes, I think it's a combination of both. So we did have some prior hires start to gain some traction, which is good. As we talked about, they tend to take 3 to 6 months to get folks up to speed. I also think some of it is a combination of - there is some renewed demand in the market which is good to see.

I still think it will be a little choppy over the coming quarter just because of the environment. I think regionally, we saw all of our regions add to it. So even though we've had some noise in regions because of the environment, you talk about whether it's in New York Metro or the New Jersey, we saw growth from New Jersey, New York and Philadelphia.

So really happy about that. And almost all the lenders were successful..

And then in terms of the choppiness you're talking about, I mean, is there a potential for organic balances to retract in the coming quarter before rebuilding in the back half of the year? Or just kind of organic growth to be perhaps less robust than it was this quarter?.

We're still early in the quarter. It would hope we wouldn't see a contraction, but we may not see as much growth as we think you're going to see in the second half of the year. So we think 2 things are going to come together. So think about, as Joe mentioned, the 4 new hires you made in the fourth quarter were partially productive in the first quarter.

Most of the hires, the 9, in the first quarter were just getting up to speed. We might start to see them contribute towards the end of the second quarter. And then call it a few more that we make in the second quarter. By the back half of the year, you're going to have a significant number of folks contributing.

And we time that - and we started this process back last November. I mean we've been at this for quite some time. We timed it because we knew coming out of the pandemic - what we expected coming out of pandemic that loan demand in our markets would pick up.

So we want to make sure we have all the right people in all the right chairs, they're well situated, they're trained, they're up to speed on credit policies, and they're able to be productive in the back half of the year. So we see Q2 will be probably an okay quarter. We may grow a little bit. I don't think you're going to see us contract much.

But then the back half of the year, looking at Q3 and Q4, we should have all of our folks in place, all contributing at the same point at which, hopefully, the market has got stronger demand. So you could see particularly strong numbers in the second half if all that comes together..

Understood. I guess just one housekeeping item, and I apologize if I missed it.

But the end-of-period balances on PPP as they stand today, do you have that?.

It's $110 million..

Okay. And then just switching gears quickly. So on the expense outlook, I think I understand the puts and takes as you talk about 1Q to 2Q to 3Q, but maybe tying it all together kind of an annual basis. I mean, I'm not sure how you guys define core, but I was looking at a core noninterest expense number, around $209 million last year.

Even with some of the step-up, is this a result that you think you could hold relatively flat for '21?.

Yes, I think so. I think, year-over-year, it would be relatively flat. So we did - it was about $50 million in the first quarter. We might be a little closer to consensus in the second quarter, maybe closer to $51 million to $52 million.

But then by that point, hopefully, we will be identifying expense reductions as well as we had that last group of lenders. So it should hopefully offset towards the latter half of the year. But saying that 2020, 2021, that's probably a good comparison..

. Our next question today will come from Christopher Marinac with Janney Montgomery Scott..

Chris, I wanted to circle back to your comment earlier about the - I believe it was 36 basis points of NIM upside from the excess cash.

Do you think that there's a scenario that this takes way more than a year for it to unfold, and that it would be a prolonged time frame to utilize this? And then does that impact your sort of strategy going forward?.

It's certainly possible, Chris, when you think about absorbing that amount, right? So let's say we get to a run rate of $250 million a quarter, and that's going to take a year, right? It's not hard math. What's a little uncertain for us is exactly how strong the market will be in the second half of the year.

If the market's strong, we will have the capacity in place to be able to overshoot that a little bit, maybe do it a little faster. If there's a market setback for one reason or another or some new concerns that come up, it might go a little slower.

But I'd be thinking of it, taking us about 4 quarters to get there, beginning in the second half of the year, we'll really start to absorb it. There is another positive, though. If you - we did put cash to work in the investment portfolio as well.

So although it's not going up to loan yields, we're bringing it off that low base of the 10 basis points we were getting from the Fed keeping the cash there. So that'll help a little bit as a tailwind, too - as an interim step, as we kind of rotate into investments and then back into loans..

And then does this impact....

I'm sorry, one more thing, Chris, I should have mentioned is all of that considers a yield curve, which is relatively static. We have maintained and we will continue to maintain a strong asset-sensitive balance sheet. So I think we could disproportionately benefit should the yield curve beginning to move..

Got it.

And does this at all impact your interest on M&A? Or does it put that in the back seat because you have this to say grace on for a while?.

It's a great question. It doesn't impact our overall outlook for M&A, but it may impact what targets are most attractive to us. So when we began M&A in 2016, it had a very direct function, and that was to provide cash balances for us to continue to grow our commercial lending business. And it worked very effectively in that regard.

We've got great franchises, great loan deposits, and we're able to lever them. That is not important for us now given the cash that we have on the balance sheet today. So unless we found opportunities that were not just kind of relatively fully went, but also with the capacity to continue to help us on the asset side, they would not be as attractive.

The last thing we need now is more deposits that are unleveraged. So that would not be as attractive for us. So look at us. There's been a lot of M&A in the markets. We're watching like everybody else is. Our focus would be on opportunities that help us advance the commercial banking business..

Our next question will come from Judy Same , who's a private investor..

My question is when and how will we be notified about the share repurchase program?.

Yes. So the share repurchase program is active today. And the way that we operate that program is that we're - we repurchase shares in the open market, so over the exchanges. And so we're purchasing shares just like anybody else would be purchasing shares in the market.

From time to time, we have had investors contact us about a direct purchase of shares. And if you'd like to do so, I'd suggest you reach out to us, to our Investor Relations office, and we'd be happy to talk with you further about that..

I have one other question.

Which branch offices did you close?.

We closed Newark, Atlantic Islands. I don't remember the other two..

Yes. The other two, they were all in market. And we had the - as we've done over the years, these branches are reasonably close to other branches, so customers continue to have access. And we're also very careful to make sure there's a continuation of banking services in those communities. So most often, we're closing a duplicate branch in a community..

. There being no further questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to Christopher Maher for any closing remarks..

Thank you. With that, I'd like to thank everyone for their participation in the call this morning. We'll remain focused on building the business, deploying cash and improving earnings. We look forward to discussing our second quarter results with you in July. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..