OCEANFIRST FINANCIAL CORP Q3 FY2024 earnings call

• GAAP diluted earnings per share were $0.42. Net interest income stabilized at $82 million. Operating expenses included non-recurring costs from acquisitions of Garden State Home Loans and Spring Garden Capital, which are modestly accretive to earnings. - Asset quality metrics remained strong with nonperforming loans and criticized/classified assets at low levels. Capital levels built with common equity Tier 1 capital ratio at 11.3% and tangible book value up $0.35 to $19.28. - Loan originations totaled $431 million, with a pipeline of $352 million. Deposit balances increased, and asset quality metrics were favorable. Provision for credit losses totaled $517,000.

In the third quarter, net interest income was $82 million, remaining essentially flat compared to the prior linked quarter. Operating expenses increased by $5 million to $64 million, including $1.7 million of non-recurring operating expenses from acquisitions. Asset quality metrics remained strong with non-performing loans at 0.28% and criticized and classified assets at 1.9% of total loans. Loan originations totaled $431 million, with $161 million of C&I originations. Deposit balances increased by approximately 1%, net of planned runoff of $200 million of brokered CDs.

• Net interest income and margin are at trough, outlook modestly shifting based on interest rate, loan growth, and funding mix trends. - Non-interest expense projected run rate in Q4 is $63 million to $65 million, including full impact of acquisitions. - Acquisitions of Garden State Home Loans and Spring Garden Capital are expected to be modestly accretive to earnings.

• Interest rate changes could impact net interest income and margin. - Volatility in mortgage production volumes may cause expense volatility. - Credit risks in CRE portfolio, though metrics remain strong relative to pre-pandemic levels.

Q: Good morning. I just wanted to ask the two acquisitions, albeit small. Just wondering if you could kind of walk us through that...

A: Sure, Frank. You hit it on the head about Garden State, it's really just an augment to our efforts to convert our mortgage origination business into a gain -- primarily gain on sale business. So they provide a direct-to-consumer channel kind of augments what we're doing, and we feel very good about that. In terms of Spring Garden, Spring Garden has been a client of the bank for many years. So we've known the operation really well. Former banker, Jay Goldstein, who ran that company, ran it really well, will be joining us and we'll continue to run it for us. Really, the financing they provide is for the renovation and rehabilitation of housing predominantly in urban markets where there's an infill need where you've got housing units that need to be kind of upgraded. Originally, they started in Philadelphia. They subsequently expanded to Philadelphia, Baltimore, Washington, D.C. and Pittsburgh. And they're doing some additional growth beyond that. The two important dynamics to this. First, it's a very profitable business. They've managed it really well over the years. The second important thing about this is close to 80% of what they do is CRA qualifying assets, which are pretty attractive to us. And their borrower composition is good as well. Nearly two-thirds of their borrowers are minority or women-owned businesses. So it helps kind of beef up our credentials in those areas. But in terms of the growth rate in the U.S., this will not grow fast. This is a business you have to be very careful and stay on top of. So we do expect it to grow under our balance sheet. But I wouldn't think of it being a significant growth rate going forward. It's going to grow probably 10% a year. I wouldn't expect much more than that.

Q: Good morning. Maybe we start just on the funding side. You talked a little bit about how the -- I know you touched on it in your prepared remarks, but just how the repricing has gone since the rate cuts in the third quarter? And then maybe how all that -- how you're thinking about kind of how the margin plays out in the fourth quarter and -- with future rate cuts? Thanks.

A: Sure. So I mean, I would point you first to -- I just want to show something on page 10 of the slide deck. You can see that we've been running down our CD portfolio over the last several quarters. And we really wanted to push that down, knowing that there might be a point at which the rate fire will become more favorable. So it's down year-over-year down by $433 million or about 16%. And that was to position us for this cycle. I'll let Joe talk a little bit about the recent repricing, and then Pat can comment about margin.

Q: Hey, if you want to see the OpEx and the fee income guidance. So I think the there's a slide where it is, it should be breakeven accretive to earnings, no later than first quarter '25. Chris, does that continue? And I think those step up in expenses is like $5 billion. Should we expect the sort of fee income -- is that implying that we intend to move up like about in the period and how we should think about just on a dollar basis what the looks like?

A: You're right, Dave, that the fee income and expenses related to the Garden State would be roughly equivalent over time, there'll be a sense of profit there. But the $5 million was a combination of Spring Garden and Garden State. So you're not going to see fee income going up by $5 million a quarter. It's probably about half and half would be the best estimate I can give you. And again, a little bit dependent upon volumes and commission payments and all that. But think of like the $2.5 million of expenses and about that and fee income growing over time.