Good morning. Thank you for attending today's OceanFirst Financial Corp earnings conference call. My name is Bethany, 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. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Jill Hewitt with OceanFirst Financial Corp. Please go ahead.
Thank you, Bethany. 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. 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 second quarter 2022 earnings conference call. This morning, I'm joined by our President, Joe Lebel, and our Chief Financial Officer, Pat Barrett. You may recall Pat joined our team in April and assumed his role as Chief Financial Officer on June 2 upon the retirement of Mike Fitzpatrick. This is Pat's first quarterly earnings season with us. As always, we appreciate your interest in our performance and are pleased to discuss our results with you. This morning we'll provide brief remarks about the financial and operating performance for the quarter, and then provide some color regarding the outlook for our business. As a reminder, in addition to the earnings release issued last night, an investor presentation is also available on our company's website. We may refer to those slides during the call.
After our discussion, we look forward to taking your questions. Our financial results for the second quarter include a GAAP diluted earnings per share of $0.47. Earnings reflect strong loan growth, expanding margins, and benign credit conditions. Core earnings were $0.59 per share and reflect non-core items primarily related to unrealized equity mark-to-market valuation adjustments on preferred stock positions, and to a lesser extent, charges related to branch closures and mergers. Turning to capital management. Given the company's strong performance, the board increased the quarterly cash dividend by $0.03 or 18% to $0.20 per common share. This is the company's 102nd consecutive quarterly cash dividend and represents 34% of core earnings.
Tangible common equity per share increased modestly to $15.96, reflecting earnings momentum outpacing AOCI marks related to our investment portfolio, share repurchases, and the acquisition of our interest in the Trident title insurance business. The company's share repurchase activities continued during the second quarter with 272,779 shares repurchased at a weighted average cost of $19.25. Our appetite for share repurchases will be balanced against opportunities to deploy capital in growth initiatives and reflects trading rules that limit the number of shares the company is able to retire while awaiting the regulatory review for the Partners Bancorp acquisition. There are 2.9 million shares available under the current repurchase program.
Regarding the Partners Bancorp acquisition announced in November of 2021, the company has submitted all the necessary regulatory applications and continues to provide additional information as requested. At this time, we do not have a timeline from the regulators for when the process may be completed. Until all approvals and customary closing conditions are met, we cannot schedule the merger closing. Turning to net interest income and margin. Net loan growth of $316 million and our asset-sensitive balance sheet drove another quarter of margin improvement, which expanded by 11 basis points to 3.29%. We experienced elevated prepayment payoff fees this quarter of $2.6 million or 9 basis points and expect the level of prepayments to slow for the remainder of the year. Two factors should provide a tailwind for margins.
First, the quarter-end loan portfolio of $9.4 billion was $176 million higher than the second quarter average of $9.2 billion. Second, the company held $2.3 billion of floating-rate loans repricing in the third quarter, which will provide the opportunity to strengthen margins as rates increase. That should be the case in the third quarter and perhaps for the remainder of the year. The benefit from rate increases experiences a time lag, so in the coming quarters, NIM could be flat or expand, but trends should be positive overall.
Core non-interest income and non-interest expenses included a full quarter of Trident Abstract Title Agency operations, which added $4.5 million of non-interest income and $3.2 million of non-interest expense for the quarter, resulting in $1.3 million of net income for the quarter. The purchase of our interest in Trident was completed on April 1, so these figures reflect a full quarter impact. Excluding the impact of Trident, our disciplined expense management resulted in core operating expenses related to banking operations improving modestly to $54.7 million or $400,000 lower than the prior quarter. I'd also like to provide some additional color regarding expense trends.
As noted in our earnings release, the bank increased base salaries by 5% for over 80% of our employees and paid a one-time award to almost 20% of our employees to support our team members who would be most impacted by inflationary challenges. The annual impact not captured in this quarter's financial results is $2.3 million or almost $600,000 per quarter. I will add the compensation increases for this purpose are not typical at OceanFirst. Our company is a talent-led business, and our employees provide our competitive advantage. This investment in our team reinforces our commitment to them and demonstrates an understanding of the challenges they and their families are facing during the current economic cycle.
No additional compensation actions are contemplated for the remainder of 2022, and it's simply too early to speculate on the level of labor expense pressure for 2023. Fortunately, our multi-year and comprehensive program of branch consolidations has improved our ability to manage the company's overall expense base. The second quarter run rate captures our expected core operating expense for the remainder of the year. At this point, I'll turn the call over to Joe to provide some color regarding our progress during the quarter.
Thanks, Chris. The loan portfolio had another strong growth quarter with $316 million in net growth fueled by commercial banking relationships. Total loan originations were $835 million, driven by commercial closings of $646 million. Our New York region crested $2 billion in its loan portfolio, while our Boston region has built a loan book of $250 million in 1 year from the opening of the office, a testament to our continued investment in commercial talent in our legacy and expansion markets. After nearly $1.6 billion in meaningful loan growth over the last 12 months, we are starting to see the impact of rising rates affecting the decision-making of certain segments of our customer base.
Our pipeline of $385 million at the end of Q2 is typically our seasonal low for the bank, but also reflects our expectation of more measured loan growth for the rest of the year as we maintain our traditional discipline in pricing, structure, and credit appetite. That said, I expect we can responsibly grow the loan book in the range of $250 million quarterly, although growth could be choppy at times. I expect the residential originations to slow, where prepay speeds will also moderate, providing some offset. At the moment, we have less visibility in the pipelines looking much past Q3, given some of the noise in rates, supply chains, and economic uncertainty.
Turning to deposits, our loan-to-deposit ratio ticked upwards to 95.9% from 90.6% in the prior linked quarter due to the loan growth coupled with a traditional decline due to seasonality in certain deposit classes. You'll notice we took action to protect against near-term deposit cost pressure. During the quarter, we elected to replace a portfolio of market-sensitive floating rate deposits with term-based certificates. We accomplished the duration extension by issuing $689 million in brokered CDs with laddered duration maturities. The strategy also took advantage of some pricing anomalies in the brokered CD market and gained duration at lower rates than the equivalent duration FHLB advances. The rotation is complete, and we expect to return to our traditional sources of funding for the remainder of the year.
In keeping with normal seasonal trends, the bank has experienced net deposit growth of $145 million since June 30th. Credit trends remain benign, with the company realizing just $9,000 of net charge-offs for the quarter and net recoveries of $83,000 year-to-date. Loan portfolio risk characteristics are very healthy, with low delinquencies, positive risk rating trends, and non-performing assets, excluding PCD loans, of just 14 basis points of total assets. For the first time in our history as a public company, we do not carry a single property of other real estate owned on our balance sheet. The loan loss provision for the quarter was driven primarily by net loan growth, with much of our reserve remaining in the form of qualitative factors that reflect the potential for economic uncertainty in future periods.
As Chris mentioned, Trident was additive to non-interest income on a net basis by $1.3 million in its first quarter as an OceanFirst subsidiary. This partially offsets the loss in interchange revenue attributed to Durbin of roughly $1.5 million per quarter, which began on July 1. With that, I'll turn it back to Chris.
All right. Thanks, Joe. We'll now begin our question-and-answer portion of the call.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Michael Perito with KBW. Please go ahead.
Hey, guys. Good morning. Thanks for taking my questions.
Good morning, Mike.
I apologize. I did hop on a few minutes late, so I'm assuming I might have missed it. Chris, what's the latest that you can share beyond the press release regarding the Partners transaction and
Yeah, I guess I'll just leave it there. I'm sure it's not much, but just I wanted to ask.
Yeah, no, I appreciate the question, Mike, and I know that's on everybody's minds. It's on our minds as well. Unfortunately, the only thing I can share is that we continue to await regulatory approval, and that's just a process we're being respectful about and try to work through as best we can. I don't have a timeline that I can give over when we might receive that.
Can you remind us, though, when in terms of the actual merger contract, like what was the duration that it ran through, and when would it be required to kind of negotiate an extension?
Yeah. The contract would call for us to consummate the transaction on or before November fourth of this year.
Got it. Okay.
Helpful.
Then I heard the expense commentary, you know, obviously the environment's challenging, but I just wanted to make sure I heard it right. It sounded like, you know, obviously ex-Partners, you know, you guys think the second quarter run rate now kind of reflects the near-term higher level of salaries and benefits and should be a decent run rate for the back half of the year as some of the other items you guys are working on continue or did I mishear that?
No, that's a good guide. As we think about, there's some kind of obviously in every quarter there's kind of some puts and calls on things like that. If you take the second quarter, we think that's roughly what we would experience in Q3 and Q4. You know, it might be a little bit higher than that, but it's not gonna be a materially different number.
Great. Then just lastly from me and then I'll step back. Just on the capital front, you guys have been a little bit more insulated than some peers, you know, in terms of the AOCI impact. I know it doesn't impact regulatory capital ratios, but I guess, you know, the bottom line is you guys are still sitting in a pretty strong position today despite the loan growth. Is it fair to assume that, you know, buybacks will continue to a certain extent near term here or does the potential deal impact your ability to buy back stock in the back half of the year?
We still have an appetite for buybacks. I guess I characterize that appetite to be informed by kind of where we're trading, what the earnbacks would be from a buyback and how strong the loan growth is gonna be. You know, Joe had mentioned that our, you know, pipeline's seasonally low. It's always low at this point of the year. We've got really good conversations with clients. We think Q3 will be in good shape. Looking forward, I can't give much guidance around how much loan demand we may see in Q4. Obviously the best thing we want to do is grow the bank. The second best thing if we don't have use for the capital is to return it to the shareholders.
We still have an appetite for buybacks. We're watching closely the organic consumption of capital. Look, we can grow at a good clip with our internally generated capital. There may be points at which we decide to, you know, rein it back on buybacks and use it to just fund growth.
Yeah. Once I get back from the beach, right? All right. Sounds good. Thanks for taking my questions. Have a good weekend.
All right. Thanks, Mike.
Thank you, Mr. Perito. The next question comes from the line of David Bishop with Hovde Group. Please go ahead.
Good morning, Chris. How are you?
Good morning, Dave. How are you?
I'm good. Hey, in your commentary, it sounds like maybe a little bit of cautiousness in terms of with regard to the outlook for this and near term net interest margin. You know, obviously it looks like, you know, loan yields in the pipeline are up, you know, over one hundred basis points year-over-year. But does the addition of the broker deposits sort of mute maybe the quote unquote asset sensitivity over the near term, and that it plays out maybe at the tail end of the current cycle if we get to like 3.50 by next year?
It may be a little bit in the short term. I think what happens is, not unlike other places, the rate increases roll through our loan book over the course of some loans adjust immediately, some at the end of the month. Some may have a quarterly repricing. The asset sensitivity is there. Whether it will show fully in Q3 is a question we're just kind of watching closely. What you might see is a little plateau and then a resumed expansion after that. Look, it may be an expansion in Q3, but we don't expect it to be a material expansion.
Got it. In terms of the new market initiatives here, just curious, in terms of the pipeline there, what you're seeing relative to the rest of the book and maybe potential for even further expansion within maybe the greater Boston market. Thanks.
Morning, Dave. We're really happy with what Boston and Baltimore have done so far. You know, the quarter billion in the year for Boston's in outstandings is an impressive number. They continue to have a healthy pipeline, as does Baltimore, and you know, I now refer to Philly and New York as legacy markets, right? Because we've been in them for you know, between four and five years, and they're both well over $1 billion. New York over $2 billion. I think overall while we're seeing some clients question what they want to do going forward, that we remain pretty confident that we can get you know, that $250 a quarter which has been our sort of benchmark.
It might be a little bumpy depending on the quarter, but I think on an annualized basis, you know, we're not overly concerned. Visibility going out more, a little bit more than a quarter has become a little bit more murky just because you just don't know where clients are going to fall out. I made a comment earlier this morning that, you know, we had 3% tenor rates just, you know, four years ago. People, you know, were acting like rates have disappeared.
These rates we haven't seen in forever. Prime was 5.5 in December of 2018. Customers should acclimate fairly quickly.
Got it. Appreciate it, Joseph Lebel, Jr..
Thank you, Mr. Bishop. Again, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from the line of Matthew Breese with Stephens Inc. Please go ahead.
Good morning, guys.
Morning.
Morning.
Hey, Joe, just on the $250 million of growth per quarter, understanding it could be lumpy, how long should we contemplate that kind of growth for? You know, I'm just thinking, you know, it's still a robust pace of growth. Should we consider that through year-end 2023 or just through year-end in your view?
Look, I don't know how you forecast that. I look at it quarter by quarter. I used to have. I would say, you know, before the noise in supply chains and economics, you had a little bit further visibility. You know, the neat thing about having, you know, engines in varying regions, you know, markets in the country is that when a region may be down or even a market is, you know, property area is down, CRE is down, C&I picks up, C&I slows down, CRE picks up. We feel pretty bullish. We're talking to our folks all the time. We do take a fairly measured approach in, you know, credit structure. I think short-term that's probably impacted the pipeline a bit.
I think we're holding fast to disciplines. I'm not overly concerned, Matt. It might be a little lumpy, but I don't think that's a near-term concern.
Okay.
Matt and Chris, I'd say, you know what? It's really difficult right now because we see the pricing changes and we're gonna get paid for the risk we take. We've always been a conservative credit shop, so it's hard to tell whether those two things, the pricing and our credit culture, which has always been, I think, careful, that may impact our ability to grow. I would say that, you know, as far as we can see, we think we can hit that number, but the bias might be to underperform that number rather than overperform that number.
Understood. Aside from capturing better yields, it sounds like perhaps you're just taking a second look at how you're underwriting things. In what ways have you become more conservative? Are you asking for more skin in the game from the borrowers? Are you putting more stipulations in place? If there's a portion of the portfolio that you've taken a second look at, I'd be curious which ones.
I think for us, Matt, you know, we always ask for equity. We're stressing portfolios at higher rates as you would expect, given the rate increases. I think property type's important, especially in the CRE space. You know, office, I think everybody's looking a little harder at office because no one knows what's gonna go on at lease expirations in a few years. Everything we hear is consolidation of space because of some remote work and some hybrid work. The same with retail. I mean, we look at retail as well. Everybody's jumped in the last few years in industrial. That's become a very crowded space. I think what you do there is pick and choose not only from a credit perspective, but from a pricing perspective.
There's no need to be in something where you don't make money. Well, I think we're fairly confident.
Okay. Just maybe turning to the opposite side of the balance sheet, you know, supporting that $250 million in loan growth. You know, how much of that can be done through deposit growth? What kinds of deposits? I'm curious on the 96% loan-to-deposit ratio, you know, how should we be thinking about an upper limit on that?
Joe may have some additional thoughts on kind of how we'll get those deposits, but I'll make some general comments. First, for the most part, we think that funding loan growth with deposits is the right thing to do. That's generally what our position is. We think we can grow deposits in the future quarters. Now, we may have to pay a little bit more for that, or we may have to, you know, offer certain products or rates, but we're prepared to do that. In terms of loan-to-deposit ratio, I think the most valued banks are traditionally at that 100% or lower loan-to-deposit ratio, and that's where we generally like to be.
That said, you know, we have a very unusual rate cycle going on right now, and you could foresee that if the Fed may peak increases later in the year or early next year or something like that it might be a good strategy to lean on some wholesale funds that would reprice faster. We're just gonna balance those two things off. You know, we're not gonna turn into a company that's gonna have a 120% loan-to-deposit ratio. That's not us. In fact, we were talking to our officers this morning and just emphasizing that we've always been good at deposit gathering, and we're gonna spend a lot more time and attention on that so we can kind of balance it out. It's been a little while since we needed that engine.
Let me interrupt that, Chris.
Got it.
The first time in a long time, Matt, we're actually going to start looking actively for deposits. You know, we've all been in the same boat the last couple of years with excess liquidity. Our folks, I think, are chomping at the bit to be able to go at it from both sides, right? We've been going at it hard on the lending side. I think our folks, especially our retail folks, are excited about going out into the deposit end.
The single biggest place we would see deposit growth is in our corporate treasury function. That is an engine that we have built over the last few years. We've got the right people in the right place. We've got the right technology. We're gonna push that pretty hard.
Okay. The last one along these lines is just expectations for deposit beta now that we're what seems to be past the halfway mark on the rate hiking cycle and how you'd compare and contrast expectations around beta this cycle versus last.
You know, every cycle is different, Matt, so I'd hesitate to try and predict how this one will play out exactly. I will say that given the mix of our deposits, 85% core, the vast majority of them are checking accounts, some interest-bearing and some not, but almost all checking accounts. We expect to outperform the group. I'm less clear on what that group will do, but I think we'll be on the positive side of that. We have seen, other than we noted the price sensitive accounts that we took care of in the last quarter in the second quarter. Other than that, we've seen remarkably little pressure on deposit flows and rates thus far.
That said, you know, the third quarter deposits are gonna be materially more highly priced than second quarter. As of right now, the loan yields are moving faster than that. We're not concerned about margin compression, but you'll see deposit costs come up.
Got it. Okay. I'll leave it there. Thank you for taking my questions. I appreciate it.
Thanks, Matt.
Thank you, Mr. Breese. Our next question comes from the line of Manuel Navas with D.A. Davidson. Please go ahead.
Good morning. In thinking about the loan outlook, do you think that kind of the shortened view is being imposed on you by the greater market, or are you seeing some things with your customer base that is informing that perhaps the fourth quarter could be a little different than higher expectations?
Well, Joe and I probably have the same view. I think when we think about what we're seeing in the market, there has not been a material decrease in economic activity or the demand for credit in our markets to date. Now, that could change. However, you know, we talked about structures and pricing. We are going to stick to our structure and pricing requirements, and it'll take a little while to understand exactly how many of those deals we'll be able to pull out. My caution is more about the market share deals we're going to get depending on rate and structure, not that the demand is falling off. Is that fair, Joe? Is it good?
Yeah, that's fair.
I guess following up on that, are you seeing greater competition in terms of pricing and structure? Is it different in different markets? That was going to be my next question.
Sure. I mean, I think the competition is similar. I think we purposefully have said, you know, we've had significant growth in the last year. We know the kind of deals we put on. We also know the kind of deals we're seeing today. I think the market's a little bit more aggressive in pricing and definitely a little more aggressive in structure. I think for us, we have the, you know, the ability to, for lack of a better word, pick and choose. I'm not overly concerned in any one market. I think all our markets are similar in scope. I think what we're seeing is what we expected to see. We just hold to disciplines. Our folks understand it. Remember that pipeline is a point in time.
The pipeline you're seeing is a point in time. It's improved since quarter end.
I'll just make one more point about the market, and we're very fortunate, although we did this deliberately in the market that we are in. You know, this Northeast megalopolis for us, it's 50 million people here. We are a very modest player in that market. Joe has the ability from quarter to quarter as conditions change to be more or less aggressive in different geographies and different asset classes. We're operating in an economy, a regional economy, that is so significant that I don't expect loan demand is going to fall off. It's going to be a matter of, you know, what choices we make about risk selection pricing.
Got it. I appreciate that. Kind of a picky question for modeling. How quickly, if you get regulatory approvals, could your deal close?
Typically, if you secure final regulatory approval, you could close in 2 weeks, 3 weeks. There is a shareholder election thing we have to work through, should we get approvals, but it should be measured in weeks.
That's helpful. Thank you. That's it for today. Thank you.
Thank you, Mr. Navas. Again, if you would like to ask a question, please press star followed by one on your telephone keypad. Our next question is a follow-up from the line of David Bishop with Hovde Group. Please go ahead.
Yeah. Hey, Chris. Just sticking to the discussion on the funding and the deposit side. I guess you mentioned the runoff of those interest-sensitive checking accounts. Just curious what the genesis of those. Were those accounts acquired via acquisition or from poor organic deposit growth? Just curious where those were generated from.
Our corporate treasury group first of all has a great granularity. We have almost 40,000 customers who have at least one cash management product with us. There was a very small segment of those customers who were rate sensitive, and we were happy to have them when, you know, Fed funds was 0.25 point. They wanted to optimize their balances, either do sweeps or different things like that. We could have elected to keep them. In fact, interestingly, if we'd elected to keep them, we would've kept them at a lower cost than the CDs we put on. However, we knew we would be in this cycle of having to match. It would've been not 100% beta, but close to it. We said, "You know what? We don't need these 100% beta deposits.
Let's replace them with something that has a little more duration." They were a very defined portfolio, and that rotation's been completed, so we don't have that concern beyond that.
Got it. This isn't a case. I know you guys have obviously been aggressive in winnowing the branch network here. This isn't sort of related to any sort of outflows there. It sounds like it's no issues from what you said in terms of deposit attrition from branch closures.
No, that's a really good point, Dave. Thanks for mentioning it. In fact, we track deposit retention really carefully given you know our history. Even the closures we did in December and January, the attrition peaked by probably end of March, and then those branches began growing again. Again, it was well within the range of what we expected. This is not related to the branch consolidation efforts.
Got it. Then maybe out of your purview and realm of expertise, but did see that Netflix is potentially, you know, bidding on to build their East Coast studio there at the Fort Monmouth property. I know you're on a lot of boards up there in terms of chamber of commerce and such. Any insights or probability or hedging or any updates? Have you heard any rumors about that getting approved?
Look, we would love to have them here, as I'm sure most communities would. You know, one of the assets we have in our core geography is the former Fort Monmouth, which is in the process of redevelopment. A process that takes decades. I'll be thrilled if Netflix comes in there. If they don't come in there, then somebody else will come in there over time, and it'll be good for the area.
Great. Thank you.
All right. Thanks, Dave.
Thank you, Mr. Bishop. Our next question is a follow-up from the line of Manuel Navas with D.A. Davidson. Please go ahead.
Hey, just wanted to follow up. With kind of the actions you've done with the broker deposits into the FHLB, you know, lengthening duration, would you consider offering CDs to try to get ahead of deposit cost increases? It seems like that would match your kind of thought process in general with funding.
Yes, although we wanna be careful, and we're very thoughtful in the duration we chose. The weighted average duration is nine months on that book. Some of them extend, you know, say a little bit over a year. What we don't wanna do is create a funding overhang that should the Fed start to ease in 2023, that we regret having gone too long on funding. We want to lengthen, stay a little bit, but not go overboard.
I was thinking more of your general deposit strategy.
You mean how the-
Kind of comparing the two. This is just a piece of it, and you'll be a little bit more careful with the rest of the larger-
Correct. Yeah. We would have a similar pricing philosophy on consumer CDs and things like that. It's same idea. You wanna lengthen enough so that you're not having to reprice those, you know, every few weeks, but you don't want them lasting out there for years unless we see something different in the economy.
Perfect. Very thoughtful. Thank you.
All right. Thanks.
Thank you, Mr. Navas. Again, to ask a question, please press star followed by one on your telephone keypad. There are no questions waiting at this time. I would like to pass the conference back to Christopher Maher for any closing remarks.
All right. Thank you. We appreciate everyone's time and participation this morning. We look forward to speaking with you after our third quarter results are published in October. Thanks.
That concludes the OceanFirst Financial Corp earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your line.