Good morning, everyone, and welcome to the OceanFirst Financial Corp. Quarterly Earnings Conference Call. My name is Davy, and I'll be coordinating today's event. I'll now hand over to your host, Jill Hewitt, Investor Relations Officer at OceanFirst to begin. So Jill, please go ahead..

Thank you, Davy. Good morning, and thank you all for joining us. 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.

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

Thank you, Jill, and good morning to all who have been able to join our first quarter 2022 earnings conference call today. This morning, I'm joined by our President, Joe Lebel; 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 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. In terms of financial results for the first quarter, GAAP diluted earnings per share were $0.42. Earnings reflect a strong loan and deposit growth, expanding margins, decreased operating expenses and benign credit conditions.

Core earnings were $0.49 per share and reflect non-core items, including charges related to 10 branch closures in January, merger charges and equity valuations. Regarding capital management, the Board declared a quarterly cash dividend of $0.17 per common share and approximately $0.44 per depositary share of preferred stock.

The common share dividend is the company's 101st consecutive quarterly cash dividend. The $0.17 common share dividend represents 35% of core earnings. Given strong growth rates for both loans and deposits, we elected to maintain the current dividend level.

Tangible common equity per share increased a $0.01 to $15.94, reflecting modest AOCI marks related to our investment portfolio.

For the past year, we have been focusing on adding floating rate instruments to our available-for-sale investment portfolio, which sacrificed margins at the time, but preserved equity positions for the bank during a rising interest rate environment.

The company also retired $35 million of subordinated debt, carrying an interest rate of 4.14% on March 31 of this year. Tangible stockholder's equity to tangible assets decreased to 8.6% as the balance sheet grew by $425 million or 3.6% for the linked quarter.

The increase in interest earning assets is being driven by our commercial banking expansion strategy. The company's share repurchase activities continued during the first quarter, with 100,444 shares repurchased.

Our appetite for share repurchases remains strong, the trading rules limit the number of shares the company was able to retire while awaiting the approval of the Partners Bancorp acquisition. There are 3.2 million shares available under the current repurchase program. Turning to operations.

Loan originations of just over $1 billion, set another quarterly record, helping to deliver $486 million in net loan growth for the first quarter. As of March 31, the committed loan pipeline remained strong at $515 million.

The deployment of cash drove a $3.6 million pickup in net interest income for the quarter and another improvement in net interest margin, which expanded by 19 basis points to 3.18%. It's important to note that the margin expansion was driven by the deployment of cash rather than interest rate movements.

We believe the two factors will provide a tailwind for margins in the second quarter. First, the quarter end loan portfolio of $9.1 billion was $269 million higher than the first quarter average of $8.8 billion.

Second, the company held $2 billion of floating rate instruments repricing in Q2, which will provide the opportunity to strengthen margins as rates increase in April and perhaps for the remainder of the year. The company is not experiencing pressure on deposit pricing at present. Although, we expect some pressure may develop later in the year.

Credit trends remain very benign with the company posting another quarter of net loan recoveries. Loan portfolio risk characteristics are very healthy with low delinquencies, positive risk rating trends and non-performing assets, excluding PCD loans of just 19 basis points of total assets.

The provision for the quarter was driven by a lengthening of the expected duration of the residential mortgage portfolio and net loan growth. Under CECL, the average loan life can have a measurable impact on reserve requirements, especially in a quarter when mortgage rates increased materially.

Much of our reserve remains in the form of qualitative factors that reflect the potential for economic uncertainty in future periods. Core operating expenses decreased by $2 million as compared to the linked quarter, but we are a bit higher than we would have liked.

The pressure came from information technology and professional services, both of which can be volatile from quarter-to-quarter. Our expense target for the second quarter will remain steady at approximately $55 million. The effective tax rate should be in the range of 24%.

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 for the quarter set a second consecutive record at $1.02 billion, driven by commercial originations of $817 million another record. The loan portfolio grew $486 million fueled by $286 million in commercial growth and $208 million of residential, which included $162 million in pool purchases.

We continue to see strong pipeline activity in commercial from all regions of the company, and customers have been active in all segments, including commercial real estate and C&I lending. Customer sentiment is largely bullish with some to be expected uncertainty about the rate environment and the resulting effect on economic conditions.

Nevertheless, borrowers tell us they can pass along price increases in most instances to their customers. Commercial customers continue to have uneven experiences with the supply chain.

Some are experiencing delays or rising shipping costs, especially with overseas containers while most indicate their suppliers have adequate raw materials on hand, so overall inventory availability is not severely constrained, just occasionally delayed.

Our shore-based seasonal operators in amusement, real estate, hospitality and retail are confident in yet another stellar summer with rentals and bookings at all time highs as consumers are spending on leisure activities. Residential real estate demand remains very strong with limited inventory, keeping prices high, despite the recent rate increases.

I expect overall residential volume to decrease as the refinance market slows dramatically. I don't expect any future residential pool purchases now that we have utilized the bulk of our excess liquidity on the balance sheet.

As you know, we like the diversity in the residential portfolio for credit risk and duration to offset some of our rapid commercial growth that carries shorter duration and have used pool purchases to counter residential runoff from refinance activity.

For the moment, I expect we will see prepay speeds slow dramatically with the interest rate increases. So our residential team should be able to keep the portfolio flat and may even experience some quarterly growth in the coming quarters.

Deposit growth for the quarter of $323 million helped fund the loan growth despite the 19 branch closures in December and January and the sale of two branches in November. The average cost of deposits fell to 16 basis points from 20 at year-end.

We expect the branch network to remain stable at 38 locations for the foreseeable future, now that the optimization is behind us. The average branch size now sits at $265 million. Notably, as we distance ourselves from the core banking systems conversion in summer 2021 as well as the recent branch consolidations.

Our net promoter scores have rebounded quickly as remaining retail branches and the back office continue their returns and normalized operations. We continue to make technology investments in the call center, including video and text chat, continuing our efforts to maximize the customer experience.

Effective April 1st, we closed on the majority share acquisition of Trident Abstract Title Agency. We are quickly gaining momentum in title referrals and expect Trident can generate a modest profit for 2022, providing some offset to the loss of interchange revenue attributed to the Durban impact of $1.5 million a quarter beginning in Q3.

With that, I'll turn it back to Chris..

Thank you, Joe. Before we open the line to questions, I just want to spend a minute thanking Mike Fitzpatrick for his career here at OceanFirst. As many of you know, Mike will be retiring this quarter and we will welcome, Pat Barrett, our incoming CFO for the next earnings call.

Just to put things in perspective, Mike joined the company as our first CFO ever, and has celebrated not just 30 years here, but more than 100 quarters of public filings and financial statements.

So I don't know how many publicly traded companies can host the CFO that has been around that long and is that dependable and has had such an accurate record.

But more importantly, Mike helped bring our company through some important transitions, not just our initial public offering, but the creation of the OceanFirst Foundation, and that was created at the time of our IPO. We were the first company, first banking company in the United States to create a foundation in connection with its IPO.

The OceanFirst Foundation has now made approximately $43 million of charitable contributions in our communities. And further than that, many banks completing IPOs after hours copied the format.

So there's a magnitude of philanthropy that's related to that, but perhaps the most important thing I could say about Mike is, in our industry many people talk about mutual conversions to public companies and the opportunity for those companies to continue on as publicly traded entities that are able to meet the demands of the market and their shareholders.

And we are certainly the exception now sitting here 25 years after our public offering as a standalone profitable publicly traded commercial bank, and Mike has been a big part of that along the way. So we thank, Mike, for his contributions to OceanFirst over the years. So with that, I'd like to open the line for questions and see what we have..

Thank you very much, Chris. Our first question is from Michael Perito from KBW. Michael, your line is open. Please go ahead..

Hey, good morning. Thanks for taking my questions..

Good morning, Mike..

I want to start just on the credit side here. It feels pretty, pretty good. But obviously there is some growing concerns as we kind of move out quarters here. And I'm just curious really just on the ACL.

I mean, is it fair to start to really model that in at a more flat rate just given CECL and potential for maybe higher downside economics getting bigger weightings and stuff of that nature, particularly with the growth of the pipeline? What it is and what it's expected to be?.

I think there is few ways to think about that, Mike. The first way is, I want to put in context the provision we made this quarter. The lengthening of our expected duration of the residential loan portfolio was really the single biggest factor in our provision and that is a standalone factor would've accounted for about a $3.5 million provision.

So that was the driver this quarter. There were actually some other favorable outcomes, and obviously there is always pluses and minuses before you get to a final number. So that I want to put into context was the driving force in this quarter. As we look forward into the year, I would think about two things.

In terms of loan growth, we do expect to be able to need to provide for loan growth over time. Our credit record has been very good over the long-term, and CECL is heavily dependent upon your credit history in terms of how, what kind of an allowance you set up.

So if you were to think about say, somewhere between 70 or 75 basis point ballpark around covering loan growth, that would be likely in the range although that could change up or down. We also have a significant amount of qualitative reserves and those reserves are held for the exact uncertainty that you're mentioning.

Obviously with events in the Ukraine, as well as the GDP number we saw yesterday, we're just kind of keeping a couple extra dollars away in the qualitative reserves. But I think importantly, we need to talk about, how reserves relate to the economy. And while GDP is a driving number, GDP really influences unemployment.

And for our model, and I think many models in the industry, it is the unemployment model that drives the credit scenario. So we're not quite sure if the link between unemployment and GDP will be as tight in this cycle as it has in the past. So that translates into uncertainty.

I think you could see a call kind of the academic test of a recession where you have two quarters of GDP negative that do not have a big impact on unemployment. And then as a result, you may not have a particularly tough credit cycle. So I think we're all waiting to see how that develops.

We've got the qualitative reserves put aside to consider those kinds of things. So I don't know if – we really can't give much visibility about future provisions other than thinking about providing for growth and then waiting to see what the economy does..

Okay. That was a helpful rundown, Chris. Thanks.

And then on the growth side, just curious how partners’ growth fared in the first quarter, and as you think about that deal and the Baltimore market, I mean, is that something that you think will come in and be kind of immediately additive to the pipeline that you guys have today? Or are you guys already somewhat incorporating the pipeline of that market into that pipeline on a more fully basis? Just curious how.

And then I guess, any commentary about how that deal is kind of tracking from integration and keeping the team together standpoint would be great as well..

Sure. Let me start by saying that from the beginning, we felt that partners should be additive to our loan and customer growth in those markets, and we continue to think so. So everything is going well in that regard and our work with the company.

And our strategy really has been to focus on organic and to supplement that with acquisitions, where they make sense. And I would point to our market in New York where we've had a great combination of both an organic entry as well as the acquisition of a Community Bank.

We're approaching a $2 billion business in New York that would not have developed in the same way had we not combined the organic and the acquisition side. So we feel very good about the industrial logic behind that partners continues to have a fair amount of cash on the balance sheet, which would be a good opportunity for us to help deploy that.

So that's all rock solid. In terms of timing, we have to respect the regulatory process and there's really nothing more I can share about the timing for it. But we're working through that process as we have done in the past. And as soon as we have an update, we'll share it with everyone..

Very good.

And then just lastly, and it's fine, I guess if you don't want to comment specifically, but when we were onsite nine months ago at your Analyst Day, I think you guys talked about achieving 110 basis point plus ROA exit in 2023, it feels like with the growth you put on, the rate environment changings from the asset sensitivity that, that you guys should be able to get there a little sooner.

I'm wondering if you agree with that.

Or if there's other comments you would make that, that might keep that timeline more firmly intact?.

Uncomfortable, just pointing back to when we made those, we established those targets for performance, we had assumed that there might be two rate increases over the horizon of those targets. So clearly, we're in a very different environment from that.

We are asset sensitive, we think we're going to outperform in both margin and asset sensitivity as time goes on. So at this point, it would seem that we have the opportunity to outperform those targets.

My only cautionary note is that at present, we don't see any material pressure on funding, but funding over the course of this cycle is probably that one area that we're just kind of have to watch closely.

So from where we're sitting today with what appears to be multiple rate increases in front of us and the balance sheet that we positioned for this exact environment, we think we could probably outperform that..

Great. Thank you, guys, for taking my questions. And Mike, congrats and good luck in your retirement. Thanks..

Thank you, Michael..

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

Yes. Good morning, gentlemen, and Mike, congratulations. Buy a beer at Donovan's, next time I'm up at the shore..

Thanks, David..

Hey, Chris, in terms of funding the pipeline and loan growth, obviously, cash has been run down to more normalized levels here, investment securities. Cash flow is coming off. As we think about the nature of the funding and funding mix moving forward. I think in the past, you said potentially would look at wholesale sources.

Just curious what you're seeing maybe in terms of the outlook for deposit funding or borrowings or securities runoff? How should we think about the balance sheet vis-a-vis the funding of loan growth?.

So we certainly have access to a lot of different funding sources. We have just $75 million worth of FHLB advances in the balance sheet right now. So we've got a huge capacity there. But I think the right way to think about how we're going to fund loan growth over the next few quarters is an internal mix shift.

So we have a couple of buckets that we can turn to that are going to provide substantial opportunity to shift the mix. The first is we had established a $300 million CLO portfolio that is all floating rate and very liquid. We like those investments. That was a great opportunity to deploy cash, but they yield only about 2%.

So the opportunity to rotate out of $300 million of CLOs and into $300 million worth of loans is probably the first thing we would look at.

And then combined with that, we still have very strong cash flows coming off the remainder of our investment portfolio, so between now and the end of the year, should we not elect to reinvest? There's about $180 million worth of cash flows coming off that.

And if we were to shift our residential production to – for sale in the secondary market as opposed to the balance sheet, we have up to another $200 million that would be amortization off that portfolio between now in year-end.

So I'm not sure the exact mix of how we would draw on that, but combined, you're talking about say $680 million worth of opportunities that we could direct back into commercial lending growth. And that's the first place we would go to try and improve net interest margins and return on assets.

And even if we did those changes to our investment portfolio, we are a core deposit funded organization. We have a 90% loan to deposit ratio now. So we have in the past been comfortable running with a very modest investment portfolio and you could see us draw that down to say the 10% range or so by year-end in a responsible manner.

So that's over the next couple quarters, I think the story would be mix shift, margin expansion and hopefully improvement to earnings, but that's where we would go first.

Beyond that, we'd look at balance sheet growth and we are generating a substantial amount of internally generated capital and we could grow the balance sheet after that, but that wouldn't be the first thing we would do..

Yes. I'd appreciate that color. And then the follow-up question, as it relates to expenses, obviously there's been a lot of consolidation up in New Jersey. As you look at the expense levels, it sounded like, you're holding – trying to hold a line, at least at this $55 million level.

That said, any opportunity to add some lending talent here just given the consolidation within the market?.

Yes. We will always prioritize adding quality commercial bankers. And so we have an interesting approach here. We don't put a firm target on a number of people, but we also have no limit to that. So we find high quality commercial bankers. If you're getting the right people, they generally are cash flow positive within about a year.

So that really wouldn't be a big drag on earning. So we wouldn't hesitate to add individuals and teams, we're in the market all the time. And I think if we did that and the expense line came up a little bit, we would just kind of walk you through that and hopefully that would make sense to everybody..

Great. Appreciate the color..

Thanks, Dave..

Thank you. Our next question is from William Wallace from Raymond James. William, your line is open. Please go ahead..

Thank you, and good morning..

Hey, Wally..

My first question – hi. Just to follow-up on your – the last line of questioning, so totally get it if you opportunistically are able to hire producers, it makes sense.

Outside of that, your $55 million guy, are there other pressures that you would anticipate in the second half of the year, just given where inflation is or do you think you can hold the line around that number?.

Yes. Look, Wally, I think you're right to point out that inflation is a little bit of an unknown for all of us. That said, we really went at the branch network over the last few years to remove a whole lot of pressure that could have been there from inflation.

So at least for the next quarter or so, we don't expect any material pressure to come from inflation. If it persists or the wage portion of it, in particular were to get more acute later in the year. Maybe there's some pressure, but we feel pretty good about that $55 million run rate..

Okay. Great. Thank you very much. On loan growth, so you had another record quarter. I didn't – if there was commentary, I missed it about maybe what happen with prepays during the quarter. It's not hard to envision a scenario with rates if they rise aggressively where prepays could slow even more.

Is there a chance that in your view that we could even see loan growth accelerate based on the current pipelines that you have and what you can see?.

Wally, I think there is a chance, and I would tell you that we've supplemented a little bit of the growth with the resi pool purchase last two quarters to use some of the excess cash. So I think you carved that out a little bit.

I think we've got it somewhere in the range of the $250 million a quarter in net organic loan growth, but to be fair, I think there's definitely the opportunity to outperform. Relative to prepays itself. I think we're going to see obviously the slowing prepays in resi, we've already forecasted that and you'll see that in the loss reserve.

But the prepays in the Commercial Bank, they tend to be a little bit choppier just by virtue of what's going on in the market. The last few quarters been pretty benign for us, which has also been beneficial..

And while I have you, are you seeing any strength in any one or two geographies or is it across all regions?.

It's really across all regions, it's funny. In Q4, we had Boston outperform our expectations in Q1. We've seen some stellar activity from Baltimore, but New Jersey, New York and Philadelphia regions continue to do the stellar business, pipelines are very strong..

Okay. Great. Chris, one last question. So appreciate the commentary around the benefits that we'll see to net trust margin as you continue to remix the earning assets towards loans.

Maybe just if you wouldn't mind just kind of help us think about what the Fed hikes do to net interest margin for you and your own modeling and what betas you're assuming maybe using the forward curve, might help us to kind of think about where NIM could land if the forward curve is correct?.

Yes. So let me start with just the stepping off point into Q2. So we talked about that ending loan balance being higher than the average for the quarter and the adjustments that we already know from the Fed having made its changes. So going into Q2, we're certainly looking at an expansion in the range of five to 10 basis points in NIM.

And we could outperform that. So there's a potential for upside on that in Q2. Then as we move forward, and we mentioned the $2 billion of adjustable rate and floating rate instruments, we are through our floors.

So I think we have two loans that might have a floor rather than that the entire portfolios through the floors, which means, we're equating to for each 25 basis point movement by the Fed, you have the opportunity to expand margins somewhere in the range of 5 basis points could be a little more, little less depending on the quarter.

Now that assumes the deposit beta experience that we had in the last cycle. And we feel pretty confident that we can perform at that level. It's possible we could perform better than that, especially given the continued liquidity positions of the major banks in the market.

But that's the question mark, right? How much pressure will there be on funding and where we going to see that pressure? But to kind of summarize, stepping into this quarter, 5 to 10 basis points seems fairly safe. We could outperform that.

And then going forward, recapturing about 20% of each of the Fed increases provided that funding doesn't start to accelerate..

Thank you, Chris. That's very helpful. I'll step back..

Thank you. Our next question is from Russell Gunther from D.A. Davidson. Russell, your line is open. Please go ahead..

Hey. Good morning, guys..

Good morning, Russell..

Good morning, Russell..

Joe, you may have answered this already, but asking the growth question maybe in a different way. Given some of the potential for softness in the back half of the year, some of the concerns or potential concerns you talked about in the asset quality discussion.

Is there any thought to dialing back that growth expectation that $250 million or do you guys still see a clear path to that going forward?.

Listen, I think in this economic market and with the expected rate rises, I think it can only go out a couple quarters. I can only look at where our pipelines are today and the conversations we have with our corporate clients. I'll give you an example, Russell, we have a lumber wholesaler we've known for a long period of time.

Obviously you know about the price of lumber in the last couple of years, the wide swings and disparity. We've talked about limited inventory in the residential space, yet their results have been nothing short of stellar. Their activity is up probably 18% to 20% in the first quarter.

And they don't see an insight, for the time being they've done a very good job relative to their own supply chain. So we have a variety of conversations with clients, very similar to that, that all translates into pipeline, C&I drawdowns, construction demand. So look, at least for Q2, we're pretty bullish. We've had a good start in April.

I think Q3 probably is more the same, but you're right. You add a couple of quarters of rate increases you have to determine. And then of course, there's always the capital management conversation, right. Growth is an outcropping of your ability to grow within your capital constraints..

I appreciate it, Joe. Thank you. Guys, the rest of my questions have been asked and answered. But Mike, I just wanted to extend my congratulations as well. Thank you, guys..

Thanks Russell..

Thank you. Our next question is from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open. Please go ahead..

Thanks very much. Chris, I appreciate your comments earlier about the GDP influencing unemployment.

So I'm just curious, how do you see charge-offs kind of reversing over time? It feels like maybe there'll be less than past cycles, but just in general, what's the sort of trend that would happen just in natural course?.

It's really hard to predict Chris and you always get that kind of knock on wood feeling, right. You don't want to go too far out in talking about provisions.

I will say though that the credit has always been very much a long game that if you try and time your credit risk management and appetite and kind of come in and out, that's the way you get tattooed. We've been fairly careful over the years to make sure that that credit appetite is consistent.

If anything, we're a little bit more conservative on credit now than we were a year-ago. And that's really just LTVs and looking at policy exception percentages and things like that. So you have to place a lot of faith that your policies, procedures and history are going to serve you well.

For our company, we've always outperformed our peer group in net charge-offs. I think the worst case back after the 2008 recession is our peak charge-offs were about just over 50 basis points. That's the worst year we've had in the past 20. So I think we've been pretty good at credit. We're using the same disciplines.

The other thing I would point out is that credit is very much a slow motion event that even if we were to have issues around credit, those are our kind of portfolio. They're not going to show up tomorrow, they're going to – just gradually you're going to see things like downgrades to risk ratings. You're going to see an increase in delinquencies.

You're going to see some level of net charge-offs, we've experienced essentially none for five quarters. So none of those indicators are before us. So that gives us an – Joe is right to point out. Quarter two seems to be relatively clear sailing. But we're going to have to watch the data closely.

And the number one point of data that we're watching is unemployment because we think that that's going to be what indicates the turn on the cycle..

Great. I appreciate that.

And then I guess the related question is the unamortized discount from past acquisitions, would that be slower to be recognized just as interest rates have moved up or as they move up?.

You're right. That's going to amortize more slowly just because of the rate environment. And most of it was general also, we don't have too many specific provisions or marks on loans. And look, we're also very pleased at looking backwards now on the Two River and Country acquisitions we’ve done in January of 2020.

We bought those banks and then immediately went into the pandemic and yet we've been able to manage that credit rate. So I think our – kind of proves out our due diligence and discipline around asset quality..

Great.

And last one for me is as interest rates move up here in the next few months and quarters, is there a portion of the rate hikes that maybe could not be passed on to customers just kind of competition? Is there a way to kind of handicap that?.

You always worry about that, right? Are you in a competed way, the margin and there will be some of that, no doubt because everybody is going to be under the same pressure. And especially folks who may not have either asset sensitive balance sheet, or they may have a liability sensitive balance sheet. So we do always worry about that.

The other thing is, and this may sound really premature, but you have to think about rates going down. It sounds crazy today because we all expect rates to be going up. But the time to think about rate increases was 18 months ago, not today, if you waited till today, it was too late.

And the time to think about, the Fed will get inflation under control at some point. After they get under control, I don't know like what number of quarters that's going to be. You may see a moderation interest rate. So we certainly learned that our asset sensitivity took a toll on earnings in the last cycle.

And we're going to try and moderate that a little bit. So we're kind of thinking about where rates peak and the back end of the cycle as we go into maybe 2023 or 2024..

Great, Chris. Thanks again for all the feedback and best wishes to Mike..

Thanks, Chris. And Chris on the purchase accounting accretion, that was a 11 basis points in the first quarter, but that – it drops down to 8 next quarter, so we lose three. And then it's really pretty steady because eight, seven, six, seven, seven for the next year. So there's not much volatility in that.

It's about $17 million left in credit marks, but we see that as not being much less volatile than it's been in the past..

Sounds good. Thank you for that too..

All right. Thanks..

Thank you. Our next question is from Erik Zwick from Boenning & Scattergood. Erik, your line is open. Please go ahead..

Good morning, everyone..

Good morning, Erik..

Just thinking a little bit about the kind of composition of average earning assets going forward, the investment securities portfolios is about at 15% of that total today. I guess, given that the strong pipeline and kind of the talk about loan growth going forward.

Would you expect the investment securities portfolio to kind of keep pace with loan growth? Or are you okay with that percentage coming down a little bit over the next few quarters?.

Yes. I think point back to our core deposit funding, not just the composition of it, which is really not rate sensitive deposits. And the degree of it being at a 90% loan to deposit ratio, I think we can operate with a more modest investment portfolio.

So we could see that over time going down as well as maybe 10% that would start to approach a limit for us. .

Thanks, Chris. And then looking at the non-interest income breakdown for the quarter, both the bank card services and fees and service charges lines were down quarter-over-quarter.

Just curious if that was due to seasonality or maybe some other factor, and then would you expect some sort of kind of pick up or reversal as we move throughout the year or those good rates going forward?.

I think relative to bank card, the fourth quarter is always the busiest quarter because of the holiday season. Some people do a lot of spending, so that that's kind of a more natural seasonal thing. And as Joe pointed out, we've become subject to on July 1. So you can expect about a million five headwind into that line item per quarter.

In terms of other deposit fees, those do fluctuate a lot as people have kept higher balances during the pandemic, those fees have come down. In the long-term, I expect there to be some softness there. The upside we see in non-interest income is really related to swaps, and to our acquisition of Trident, the title company we acquired on April 1.

So that should help a little bit too..

Right.

And then on Trident, any – are you able to quantify what that positive impact might be in 2Q?.

I think that if you think about it on an annual basis, right. We think that somewhere between a $1.5 million and $2 million a year is the range you can operate in. So in terms of our portion, we're a majority owner, but we don't own a 100%. So we'd recognize somewhere in that range per year.

So it certainly offsets some of the lost in Durban, but doesn't completely cover it..

That's great. Thanks. That's all I had. But also wanted to throw and Mike, congratulations on the retirement. It's been a pleasure working with you. .

Thanks, Erik..

Thank you. Our next question is from Matthew Breese from Stephens. Matthew, your line is open. Please go ahead..

Thank you. Good morning..

Good morning, Matt..

I was hoping to go back to fee income just for a second. Chris, you had mentioned swaps, BOLI was up as well.

Just wanted to get a sense for whether what we saw this quarter, a decent run rates going forward?.

Joe, you maybe handle swaps and Mike can handle BOLI..

Yes, I do. Matt, I'm pretty bullish on swaps. I think, we much like we talked about earlier around our discipline last year, trying to build, continue to focus on the floating rate assets in a rising rate environment. We spend a lot of time with our folks in the commercial space, especially talking about the value of swaps to clients and education.

I think that's really starting to pay off. So I think that's going to continue. I think that's a fair run rate. I'm actually pretty happy about it. And I think as Chris mentioned, we'll have that opportunity to use some of that income to offset some of the Durban loss..

Yes. On the BOLI, debt benefit about $500,000 in the quarter, so that's volatility..

Okay. The other question I had, Chris, year-end your commercial real estate concentration, I think was right around 400, 404. And I assume it's higher this quarter, just given where we saw the growth. And I wouldn't really bring this up, but you are OCC regulated. So it's a bit above average for that regulator.

Can you just talk about the concentration and how much flexibility you have to take this higher? And if there's a cap, could you just maybe give us some reference point for where you'd like to keep it….

Sure. Let me start by maybe just spending a minute talking about why we're okay moving the commercial real estate number a little bit higher in this environment. We've talked a little bit on the call about the potential for economic weakness over the course of maybe this year and into next year.

And in a recession that it could be acute, it's hard to say. We have a great track record in commercial real estate performance. It's been our strongest asset category. We think we can manage through the LTV and cash flow composition of that to continue to outperform from a credit perspective.

So we love C&I, we grew C&I somewhere around 10% for the quarter. But at the end of the day, C&I assets can be exposed to cash flow evaluations and things like that. Some of those C&I assets will do better in inflationary period and some worse. So from a very high level, we're okay.

Increasing our concentration in commercial real estate because at this point in the cycle, having that real estate collateral gives us a sense of comfort and we're always cash flow lenders. So we always look at both things.

In terms of the regulatory environment, look, you're right to point out all the regulators have their antenna out around investor CRE. If you were to pick an area of the country where investor CRE concentrations are higher that’s traditionally been in the Northeast.

And I think the most important thing to our regulator or any others is that you're complying with their recommendations around managing the enhanced or potentially increased risk that may come with higher commercial real estate concentration. So there's a lot that you have to do to make sure you're complying with that.

We started down this road, when we acquired Sun National Bank in 2018, working with our regulator around this and making sure that we made the incremental investments in people and process and procedures and things like that to get that risk management right. So I think the regulators would tell you that there's not a cap, there's no limit.

What there is, is the expectation of enhanced risk management as those concentrations increase. So we've been making those investments and that's – and look, we know and talk to a lot of our peers, we're in similar situations and everybody provides everybody advice on how to make sure they do that right..

Got it. Okay. Appreciate that. And then turning back to betas. It's funny, it feels like the script is beginning to flip on deposit betas for the cycle. I think a year-ago, if you were to ask most management teams about betas, they were very confident that did come in below where they did last cycle. I don't quite get the same confidence today.

So I was hoping you could characterize your expectations for the bank and the industry for deposit betas this cycle versus last and what are some of the swing factors and why might it be different this time?.

I think it's a couple of things that could be different, and I can only talk to our portfolio.

But let me talk about the market first, if you look at the excess cash positions at the largest banks in the United States, so you take the JPMorgan and Wells and Citibank and BofA, and you look at how much cash they have and how their deposit positions have changed in the last three years. There is a sea of cash that's still out there.

They also have very significant market shares. So if you think about deposit pricing, right, they're going to be the big gorillas. And I don't see a scenario where the largest banks in the country start to bid up deposits. So that's a positive, and that would speak to maybe less pressure on deposit pricing.

On the other hand, we're going to enter a period where margins maybe compressed for some, the only way out of that maybe through growth. So it doesn't take too many competitors in a market to start throwing a rate around before that starts to become the market rate.

So really the question about balance is, who's going to drive the rate market? Is it going to be maybe some of the peripheral players or smaller banks, regional banks, or even a FinTech, right? Look at what Goldman pays on markets, right? That's a combination, big bank and FinTech. I think we're going to have to see all that play out.

I'd go back to disciplines and say this, the banks that I think will do better, or those that have the lowest concentration of rate-driven deposits, CDs, high rate money markets, those kinds of things. Those are the things that can be under the most pressure. What we like about our deposit base is we've always focused on transaction accounts.

We have almost 40,000 customers in our commercial cash management group. That gives us a granularity around those deposits. So as we look at our models, we think that our mix is better than the mix was in the last cycle. And in the last cycle, we outperformed the peer group. So I can't tell you what betas will be.

But our mix and our experience would suggest that we'll be in the better half of them..

That was the last rate cycle. 2016, 2018, we had a Fed hike of 200 basis points. And when we measure our deposit cost in 2019 versus 2015, the beta is about 19%. As Chris said, that's well less than our peer group and a relatively modest beta. So we think it'll be no worse than that on this cycle and hopefully better..

Great. Appreciate that..

The loan to deposit ratio is something to focus on as well because it tells you how much pressure you have before you have to turn to deposit rate increases. So we have virtually dry powder at the federal loan bank that's widely available to us. So deposit rates are not going to be the first place we turn..

Understood. Okay. And then the Trident, the Title company acquisition, I appreciate the revenue guide there.

Just curious, are there revenue synergies that we're not – that we should be considering over time and what else is there within that acquisition that we should consider?.

Yes. I think you're right, Matt. There are potential revenue synergies there that we're not baking into our plan. But the thought is that we do a lot of settlement of real estate transactions, both for consumers and for commercial entities.

And anyone who's had a real estate transaction going down, knows that title can be your friend or your enemy in that transaction. So our opportunity to work that into the customer workflow, we think is going to provide benefit to our clients. They're going to have a smoother process. In many jurisdictions, title prices are fixed.

So the market is not a – is all the same price. Convenience is really what causes the buying decision. And although we've always done business with Trident, we think there's an opportunity for a larger percentage of our real estate transactions to choose Trident going forward.

Obviously, we will offer it as a kind of embedded option, but certainly not a requirement. Customers can get title from whomever they'd like..

Got it. I appreciate it. That's all I had. Thanks for taking my questions..

Thanks, Matt..

Thank you. This is all the questions we have today. So I'll now hand back over to Christopher for any closing remarks..

All right. Thank you. With that, I'd like to thank everyone for their participation on the call this morning. We look forward to speaking with you following our second quarter results in July. And for all our shareholders out there, I just remind you, we have our Annual Shareholder Meeting on May 25 at 9:00 A.M.

We will be holding that in a virtual format, and we think that's going to provide the widest possible access to our shareholders. So look forward to catching up with you either at the Shareholder Meeting or next quarter. Thank you..

Thank you, everyone for joining today's call. You may now disconnect your lines and have a lovely day..