Today is OceanFirst Financial Corp, Earnings Conference Call. My name is Tamiya and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. .

I'll now like to pass the conference over to our host, Jill Hewitt, Investor Relations Officer with OceanFirst. Please go ahead.

Thank you. Good morning and thank you all for joining us this morning. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We 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.

And now, I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Maher..

Thank you, Jill. And good morning to all who've been able to join our fourth quarter 2021 earnings conference call today. This morning, I'm joined by our President, Joe Lebel, the 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'll cover our financial and operating performance for the quarter and provide some color regarding the outlook for our business. Please note that our earnings release was accompanied by an investor presentation that is available on the company's website. We may refer to those slides during this call.

After our discussion, we look forward to taking your questions. Terms of financial results for the fourth quarter, GAAP diluted earnings per share were $0.37. Earnings reflect a healthy economy and material loan growth across all regions. Core earnings were stronger than GAAP earnings at $0.48 per share.

As branch consolidation expenses and net losses on equity investments totaled approximately $7.3 million and $1.3 million respectively on a pre -tax basis. The consolidation expenses relate primarily to real estate exit costs, associated with the nine branch consolidations conducted in December.

An additional two branches were sold in December, generating a non-core gain of $2 million, which partially offset branch consolidation charges for the quarter. Recall that the company previously announced an additional 10 branch consolidations, which will be completed with the close of business today.

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 100 consecutive quarterly cash dividend. $0.17 common share dividend represents 35% of core earnings.

Given the robust outlook for loan growth, which will be discussed later in the call, we are likely to maintain the current dividend level. Over the past year, maintaining a conservative dividend payout ratio has allowed tangible common equity per share to increase to $15.93, an increase of 6.3% as compared to December 31st, 2020.

In addition, the company intends to retire $35 million of subordinated debt carrying an interest rate of 4.14% on March 31, 2022. Tangible stock will lose equity to tangible assets strengthened to 8.89% as total assets decreased $90 million during the fourth quarter, resulting in total assets of $11.7 billion.

Our interest-earning assets increased during the quarter, as we continue to see success with our commercial banking expansion strategy. The company share repurchase activities continued during the fourth quarter, with approximately 251,000 shares repurchased. On a year-to-date basis.

The company has repurchased 1.7 million shares at a weighted average price of $21.07. There are 3.3 million shares available into the current repurchase program, or 5.6% of the total shares outstanding. Turning to operations, loan originations of $989 million set a new quarterly record, delivering $441 million in net loan growth in Q4.

As of December 31st, the committed loan pipeline also set a new record of $671 million, almost double the pipeline we went into last year with. That should support strong momentum moving into 2022. The deployment of cash drove of pickup in net interest income into another improvement in net interest margin, which ended the year at 2.99%.

Considering that a substantial portion of loans were booked late in the fourth quarter, the year-end loan balances were $286 million higher than the average balance for the fourth quarter. As a result, the balance sheet is positioned to deliver additional margin expansion in the first quarter of 2022.

Regarding credit trends, the company posted exceptional metrics for the year, including a 33% decrease in criticized assets, loan delinquencies, and net recoveries of $461,000 for 2021. Non-performing assets fell by 48% for the year to land at $19 million with just 16 basis points of total assets.

Positive credit trends and stable economic conditions drove a $1.6 million negative provision for the quarter. Operating expenses were elevated this quarter due to the upgrade of the bank's core banking platform earlier this year. We expect this to be a tailwind in 2022 as we finalize our optimization efforts associated with the new platform.

We offset by our continued investment in digital products and services? Additionally, our branch optimization efforts, which consisted of closing 19 full branches, one drive-through, and the sale of two branches will provide a tailwind going into the First Quarter.

Finally, we've been working to reduce our tax burden with several strategies, including the organic expansion into markets with more favorable tax policies. Going forward, our estimated effective tax rate should be in the range of 23%.

At this point, I'll turn the call over to Joe for a discussion regarding progress this past quarter, including an update on the expansion of our Commercial Bank..

Thanks, Chris. Loan originations of $989 million, were the highest on record for the company. In commercial originations of $780 million also set a record. We saw a solid growth from our new geographic regions of Baltimore and Boston with continued expansion in core markets of New Jersey, Philadelphia, and New York.

Even after record originations, we entered Q1 with a committed pipeline of $671 million, another all-time high, and fully expect momentum to continue as we are adjusting our stride in our new markets.

Excluding PPP forgiveness of 30 million, record origination led to loan growth of $471 million, which included $378 million in organic commercial growth, and a residential pool purchase of $82 million. The PPP loan portfolio totaled just $23 million as of December 31st. As Chris noted the bulk of the commercial growth occurred in December.

So we'll see the benefit of the added interest income in Q1 and beyond. I expect we will continue to purchase a few smaller residential pools in Q1 and possibly Q2 largely to offset our existing portfolio runoff.

Our deposits decreased $41 million for the quarter due primarily to the loss of $101 million of deposits domiciled in the two branches sold in early December. As you know our deposit business is so much seasonal with the fourth-quarter usually representing a low point for the year.

Despite the sale of the branches year-over-year deposit growth totaled $305 million, continued growth at a time when we were not aggressively soliciting deposits.

Our cost of deposit begins to continue to trend down, decreasing by two basis points, to close the quarter at 20 basis points, down significantly from 45 basis points in fiscal year-end 2020.

We still expect the cost of deposit to trend lower as we have $338 million of time deposits with an average cost of 86 basis points maturing in the first half of 2022. Our treasury management and commercial banking teams are now actively sourcing new deposits to fund the '22 loan growth expected to utilization of much of our excess cash in Q4.

While deposits are always our first choice to fund loan growth, we have several alternatives to provide the funding for the additional growth. Our investment portfolio generates significant monthly cash flow. We have substantial wholesale funding capacity having paid off all of our home loan bank borrowings in Q4 of 2020.

I expect the loan growth in 2022 will be funded by a combination of a mix shift from the portfolio and investments to planned deposit growth from our treasury services and commercial teams and wholesale funding if necessary.

We've made strong progress this past quarter in utilizing our excess cash with our loan-to-deposit ratio ending the year at 88%, still below our target of 95% to 100%. Core NIM improved quarter-over-quarter by six basis points, we see continued modest improvement moving forward.

Rate increases will only improve NIM and earnings with our asset-sensitive balance sheet. With that, I'll turn it back to Chris..

This point, we'd be pleased to take your questions..

To me.

Can you explain how to ask a question, please and get in the queue?.

Please ensure you're unmuted while speaking. Our first question comes from Dave Bishop of Seaport Investors. David, the line is yours. Next question is Joe..

Yeah. Thank you. Hey, good morning, Joe..

Joe Lebel is well..

Hey, Chris, I appreciate the slide where you break out the expenses this quarter, technology expense versus other non-core.

I'm just curious what drove the uptake in that technology spend this quarter, and where do you see that settling in to into 2020?.

The Core conversion that we conducted this year was the replacement of a core that we had in place since the early 1980s. So while was a very old technology, it's been heavily customized for our environment and was actually reasonably efficient given its age.

Given the sizable move from one platform to another, a lot of ancillary things that had to be done prior to year-end. So these are things like making sure your controls are validated and the kind of one-time efforts to make sure that you have the same confidence in your year-end environment that you would've had in the other core system.

And then there's some ripples as you worked through that, there compliance functions they were a little harder, so we used some consulting and things like that during Q4.

We don't break out guidance for the IT line itself, but we have issued guidance for the first quarter saying that we believe total expenses should come in somewhere between $54 million and $57 million. I'm sorry, $54 million and $55 million. Sorry for that..

Got it, thanks. And then in the past, in terms of the outlook, potentially settling back to that 3 free 23, 20 bob range with expectations of several Fed rate moves here any update in terms of longer-term expectations for where the NIM could settle out here..

I think we're still on target to continue to go back more towards our historical norm. I mentioned the end of quarter loan balances versus the average balances.

That should be good for several basis points into Q1, and then we're going to continue this mix shift, so we have a very strong cash flows coming off the, both the bond book and the loan book that we can redeploy into new loans.

And then the last thing is, if you think about rates, our assumption going into 2022 when we were budgeting, is that we expected somewhere in the range of two rate actions by the Fed, and it's anybody's guess, but certainly, the -- most of the talk this year seems to be more than that, maybe three or four and some folks even thinking about five.

So that could be a substantial tailwind as well. I'm very happy that we came into the environment with a lot of floating rate and adjustable loans.

We had that, we kept that discipline throughout the last 18 months, and I think we're going benefit from it as we go into 2022.So I think in the past, Dave, we've talked about in the current interest rate environment working our way back up into the 320s, that would still be our expectation absent rate movements.

I think if you see substantial rate movements or policy action, it's possible we could get back to our longer-term average closer to 340 or 350, but I think that would take a longer period of time. It might take four or five quarters..

Got it. And then one final questions. In terms of the securities cash flow, how much cash flow is generating on a monthly basis? Thanks..

For the year dated, $275 million off of that base, pretty even throughout the year..

Great. Thank you..

Thanks, Dave..

Thank you, Mr. Bishop. the next question is from the line of Russell Gunther, with D.A. Davidson, your line is open..

Hey, good morning, guys. I want to start on the -- good morning, Chris. I wanted to start on the loan growth conversation.

If you guys could share where footings are within the Boston and Baltimore areas and your sense for continuing decline towards that ultimate billion-dollar target that you have?.

I think we're pretty bullish about how we did in the fourth quarter with Boston and Baltimore.

I think all the regions contributed to the loan growth which is actually it's something really good to see, because we have some regions that are more mature and of course you guys know the success that we've had in Philly and Boston, but -- oh, I'm sorry, Philly and New York.

But Boston and Baltimore collectively are more than nine figures in 90 days. So we're pretty bullish about that. And by that I mean in portfolio growth, our originations were higher. So I think we're really looking forward to a strong 2022..

Maybe you may take a bit about the earnings track on..

That's actually a good point, we talked about this a bit this morning, Russell, we've got the portfolio to the size now where the profitability off the existing portfolio totally offsets the run rate on an annualized basis.

So there's -- we've already achieved break even or slight profitability with the new regions in Boston and Baltimore collectively..

That's great color, guys. Thank you both. And then just one follow-up in terms of the expense conversation. So the 5455 guide for the first quarter, can you just help me think about what that will reflect in terms of, Chris, you mentioned tailwinds from optimization efforts with the new core eventually, cost saves from the branch closures.

Is that all embedded within the 5455 and do we trend a little higher from there based on any franchise investment or hires? Just a general glide pass discussion would be helpful..

The vast majority of that is embedded, of course -- we do have the 10 branches that we operated for January, so that'll be a little bit of a tailwind into Q2. I guess the way to think about this is we're all facing across the sector inflationary pressures. We were not surprised about that.

We've been working towards this for the last six months to make sure we got ahead of the curve on the branch consolidations. It's very hard to predict the next three quarters, which is why we're not giving so much guidance, but there's no known reason today that those quarters would be materially different from the $54 million or $55 million.

So I think you're going to see relatively flattish, but it's hard to say we have to watch, obviously compensation, expenses are in line item, we're all watching carefully, but at this point, first quarter, $54 million to $55 million and nothing on the horizon that we see that would materially change that for the remainder of the year..

Okay. Great. That's very helpful. And that's it for me. Thank you both..

Thanks Russell..

Thank you Mr. Gunther. The next question is from Christopher Marinac with Janney Montgomery Scott, your line is open..

Thanks. Good morning. Chris and Joe, can you tell us about the goalpost on the technology initiatives this year. You educated us back at Analyst Day about some of the things, tho -- those were repeated in the deck last night.

But is the goalpost changing for what you want to get out of the technology spend and where you see your products going?.

Very much. I think that the horizon for us now and the spend that we're focusing on is back-office efficiency as opposed to front office capabilities. So we feel very good about the customer experience that we're delivering. But we know that we can take this new environment and tune it.

The other thing is we chose a core that's a very common core processing system that is used by thousands of banks across the U.S. The advantage of that is there are a lot of third-party opportunities to come in and automate processes.

The significant milestone, we launched our first internally developed part in January that's doing a process for us and we've got a development team in place that will be doing more of that throughout the year.

So I think what we're looking at is, how do we create operating leverage in the back-office in a material way now that we have an infrastructure that will accept more modern technologies and we can build our own routines into it.

And let me be clear, we're not going to build stuff that's readily available on the open market, but we have an architecture now where we can source things on the open market, we can adapt them for our environment, and where necessary we can build our own software to take small tasks that are repetitive and low value and automate them and take the human element out.

I think the only way the industry is going to stay ahead of the expense curve, is by reducing the amount of labor input it takes to operate a bank. And for us this horizon is all back-office for 2022..

So Chris, to that point, and thanks for all that background.

Do -- we can see the expense ratios, but does like the per transaction costs become a figure that becomes more prominent as you evolve on the financials?.

Absolutely. And I think looking at total operating expense as a percent of assets for the bank as well, because as Joe adds, you think about the loan growth we added in the fourth quarter that was there was virtually no marginal operating expense to add that. So as we continue to grow, we want to keep a line on the back-office expenses.

And that should help us grow into a lower expense ratio as a percent of assets..

Okay. Thanks again..

Thanks, Chris..

Thank you Mr. Marinac. Again,. The next question is from the line of Matthew Breese with Stephens Inc. Your line is open..

Good morning..

Good morning, Eric..

No, this is Matt Breese, Chris..

I'm sorry. Glad to hear you. Sorry about that..

I did want to go back to the NIM just to level set because there's just a few moving parts, right? So you have the carry through from higher loan balances and then you have the sub-debt redemption as we exit March.

And so maybe just thinking as we get into rate hikes, is it fair to say that the launch point for the NIM is in that 304, 305 range, and then we can assume securities into loans and then rate hikes from there?.

That's fair. I mean, it could be as high as 310, but somewhere between 305 and 310 is probably the launch point for then rate movements to come in on top of that..

Got it. Okay, and then, Joe, maybe one for you. I'm just thinking about the pipeline, obviously it was a very strong quarter on loan growth this quarter.

How do you feel about the $250 million net growth per quarter and obviously plus or minus a little bit, but that type of guidance for’22? Do you feel any better or worse or how would you recalibrate there?.

I'm pretty confident about that, Matt, I think we could -- there's a definite opportunity to do better than that. And I think that dovetails into the comments that we've made the last couple of quarters about some of these resi -pools. We're not buying resi -pools to build a Loan growth.

We're basically purchasing those just to offset some of our own runoff. At some of the -- some of the activity in the resi -space tends to tail off. If there's something worthwhile, we'll buy just to offset our residential amortization. If it's not, we won't do it.

But I think from the commercial bank perspective, I think we're really pretty confident we are going to hit the 250, if not, do a bit better..

Some of that too may be just an outcome of whatever payoffs there are. In the fourth quarter, we had payoffs of about $483 million in payoffs and other pay downs and prepayments. So we're able to grow a significant amount with that level of payoffs. That was a pretty robust quarter.

If that number changes up or down a little bit, it will create opportunity. We certainly have the productive capacity and we think that's going to be a big tailwind in the year..

Got it, okay. I was curious on the tax strategy. I assume this is part and parcel with the exposures now in Philly, DC, Baltimore, and Boston. But are there any other geographic exposures you've exposed the bank to and maybe any other strategy which we should be aware of underneath the hood..

I think there's a couple of things going on there, Matt. The first is obviously, there very different statutory tax rates in the areas we currently operate in, and that's all the focus today.

So our lending is happening in the markets we've been talking about, but you have in those markets, New Jersey, for example, has an 8% stat -- I'm sorry, 11% statutory tax rate, which is very high amongst the highest in the Northeast and the highest in the country. So we employ a couple strategies.

One is attribution, so you can look at the portfolio and where it is and your tax liability reflects where that collateral is or where those loans are. So it's helpful to have more and more collateral outside New Jersey.

And then, obviously, we use as many banks to reach an Investment Corp structures that are allowable into the code, and we have the ability to move our loan portfolio among those structures to optimize the tax online. By doing all that, the net you get to is about 23%, so for the new jersey domiciled bank we think that's a decent number..

Great. I'll leave it there, thank you for taking my questions..

Thank, man..

Thank you, Mr. Breese. The next question is from Eric Zwick with Cowen and Scattergood. Your line is open..

Hello?.

Eric, your line is open. The next question is from Michael Perito with KBW. Your line is open..

Hey, good morning, guys. Well, since a couple of my questions have been asked and answered, but just a couple of things.

Number one is on the non-interest income side, I'm just curious if you could please provide a little bit more color about what are some of the growth opportunities are there for 2022, and particularly a comment maybe around the swap income which I would imagine the back half of the year it was shown with the rates moving higher, I would think maybe there is some tailwind there.

I just would love you to start there if you have any comments..

I think I mean, if you think about the swap side, that's where the big opportunity is. And we have opposing forces here. You would think that borrowers would be highly motivated to get into a fixed rate instrument right now, but the cost to get into that instrument is different than it was six months ago.

So there's two opposing forces there, but we would hope that you'd see more swap income throughout the course of the year, especially as these loans and volumes continue. And then we're fighting whatever other bank is fighting around, depository fees and overdraft and that's more of a long-term trend that we're just going to have to watch.

And we're in the process of working through with our folks what our fee strategy will be in the back half of the year for those deposit accounts..

Helpful. Thank you. And then just on the pending acquisition if I missed this, but did you guys give any update in terms of when do you expect that partners Bancorp deal to close in the first half of the year.

And secondly, just curious how that process is pending in terms of the team buy-in down there, what the pipeline look like down there, and if you guys still feel pretty, pretty bullish about the ability to kind of bolster your presence in and have it be additive to your organic growth pro forma..

Sure, so we feel great about the opportunity. Their performance is continuing as we expected. And I think they'll be releasing their earnings shortly. So everything is in line from a business standpoint to what we had expected. We've had great conversations with their people and worked through the onboarding to the extent that we can.

There are restrictions on what you can do so we're prepared on that. The process is moving normally, nothing unexpected. We have -- on the SEC and shareholder side, the partner’s folks have a vote scheduled for March 9th, so that's kind of an ordinary course schedule. We have submitted our applications to our regulators.

And as you can appreciate that this is an environment where it's a little bit difficult to get the transparency you'd like around timelines. So we're -- we understand they have an obligation to review applications in maybe a new way.

So as you've seen with a lot of the deals in the last few months, we're responding to requests if we get them and giving them the time to do what they need to do. So we have no reason to believe that they will have an extended approval time. As we continue to hope that maybe sometime in the second quarter we're going to close it..

Great. Thanks, Chris. Appreciate you guys taking my questions..

Thanks, Mike..

Thank you, Mr. Perito. The next question is from the line of Eric Zwick with Cowen and Scattergood. Your line is open..

Good morning.

Can you guys hear me now?.

We can Eric, sorry about that. And then I called Matt, Eric, so sorry both of you..

A couple of false starts. No problems. I'm not sure what was going on there, but glad you guys can hear me. Just a couple from me at this point. 1.

curious just thinking about the outlook for the strong loan growth and thinking about the rest of the earning assets and in particularly the investments securities portfolio expands at about 15% or so of total assets today.

How would you expect that to trend? And what keep pace with the loan portfolio? Are you okay with that shrinking? Would assume from a yield perspective if you probably prefer to deploy capital there, but curious about your thoughts there..

I think our first option would be to decrease the percentage of securities and increase the percentage of loans and get a make shift and improvement in NIM and earnings that way. And I think important note about that is our deposit, the quality of our deposit funding, which is high-quality core deposits.

We continue to have a loan to deposit ratio well under 90% and we have no Federal Home Loan Bank borrowings at this time. So it's a very strong funding profile. And I think that allows us the opportunity to have a slightly lower percentage of securities than some peers.

So the first thing we'll do is kind of redirect cash flows from the securities book into the loan book. But we're not averse to growing the balance sheet and our teams are doing a great job. If we've got another string of strong quarter, we'll be taking a fresh look at what point do you just allow that to turn into balance sheet growth..

Thanks, Chris. I appreciate the color there. And then maybe a question for Mike.

Can you remind us what the deposit betas are using your assumptions for the interest rate sensitivity modeling that shows up in the Qs and Ks?.

Yeah, we updated the betas every year. We've probably got about 12 or more years. 12 to 15-year history now of studying this, but we're -- so the betas is I think about generally about 10% the life. The average life is probably 5, 6, 7, for money market, savings interest, something around there, so five to seven years..

So it's -- and you can see that from where we were a couple of years ago in relation to our peers before the rate reductions. Our cost of deposits was very, very low in relation to our peer group. In the last rising cycle, our beta was about half that of our peer group, which I think is important it ended.

If we think about our deposit base today versus what it was when we went in to the last rising cycle, we have an even lower proportion of certificates and high rate instruments. So I think we're feeling pretty good about how that funding will work out.

And we have options, having -- we've got the dry powder in terms of FHLB advances, so we don't have to raise our deposit prices too quickly. So I think we've got the ability to manage this a bunch of different ways..

Got it. That's helpful. And just last one for me and Chris, I know in your prepared remarks, you mentioned the amount of shares that you repurchased in 2021. Sorry if I missed it.

Did you address your appetite for continuing to repurchase shares in '22 at this point?.

I'll address that specifically. So let me be clear. We have a strong appetite to repurchase our shares. The challenges just with the security's rules. Our ability to get our hands on enough shares in any given window has been a bit of a challenge, especially the windows are tighter with the pending acquisition-like partners.

But we're ready and we have an interest and we can do block trades, so we can do larger trades as they become available to us in certain time window. So I think you should expect us to do -- to run on the pace we were running last year and faster if we can find an opportunity to do that..

Great. Thanks for taking my questions today..

Thanks very much..

Sure..

Thank you Mr. Zwick. There are no additional questions waiting at this time. I want to now turn the conference over to Chris Maher for any closing remarks..

All right. Thank you very much. With that I would like to thank everyone for their participation in the call this morning.

Obviously, we're very pleased with the momentum of our commercial business, our expanding net interest margin, our asset sensitivity position especially in light of the Fed moves that may come later in the year, and the trend towards decreasing expenses throughout the year.

So we look forward to speaking with you following our quarter-end results in April. Thank you..

That concludes the OceanFirst Financial Corp earnings conference call. Thank you for your participation. You may now disconnect your line..