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spk00: Hello everyone and welcome to the Ocean First Financial Corp Earnings Conference call. My name is Daisy and I'll be coordinating your call today. If you would like to register a question ready for the Q&A session, please press star followed by one on your telephone keypad. I would now like to hand over to your host, Jill Hewitt, Investor Relations Officer, to begin. So Jill, please go ahead.
spk01: Thank you, Daisy. Good morning and thank you all for joining us today. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at Ocean First 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 will turn the call over to our host this morning, Chairman and Chief Executive Officer Christopher Marr.
spk08: Thank you, Jill. Good morning and Happy New Year to all been able to join our fourth quarter 2022 earnings conference call. This morning I'm joined by our President Joe LaBelle and our Chief Financial Officer Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning we'll provide brief remarks about the financial and operating performance for the quarter. and 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 these slides during the call. After our discussion, we look forward to taking your questions. Our financial results for the fourth quarter included GAAP diluted earnings per share of 89 cents. Our record earnings reflect expanding margins, disciplined expense management, and strong loan growth with benign credit conditions. Core earnings were 67 cents per share and reflect non-core items primarily related to a $17.5 million unrealized mark-to-market valuation gain on our equity investment position in Auxiliar Capital Partners. The details related to the Auxiliar investment were shared in an 8 filed on November 30, 2022. While provision expense was $3.6 million for the quarter, an increase of $2.6 million from the prior length quarter, we couldn't be more pleased with the credit experience in our loan portfolio. Non-performing loans represent just 19 basis points of total loans and remain at pristine levels. With the potential for a recession ahead, the increase in provision for the quarter represents general macroeconomic factors and risks external to our portfolio's asset quality and loss experience. Turning to capital management, the Board approved the quarterly cash dividend of 20 cents per common share. This is the company's 104th consecutive quarterly cash dividend and represents 30 percent of core earnings. Tangible common equity per share increased to $17.08, reflecting earnings momentum and stable AOCI marks related to our investment portfolio. Over the past eight quarters, Tangible common equity per share has increased 14%. The company did not repurchase any shares in the fourth quarter. At this point, I'll turn the call over to Joe to provide some more details regarding our progress during the quarter.
spk06: Thanks, Chris. Loan growth for the quarter totaled $199 million, capping off a record year of net loan growth of $1.3 billion. Loan originations of over $3 billion for the year were primarily driven by the commercial bank with growth across the bank's footprint. Originations were also bolstered by our conservatively underwritten construction vertical, which we expect to drive additional loan growth in 2023. We remain unwavering on the preservation of asset quality, credit standards, and pricing disciplines. Regarding credit risk metrics, we ended the year with net credit recoveries, decreased delinquencies, sharply lower criticized and classified assets, and improving portfolio risk ratings. At just 15 basis points, non-performing assets excluding PCD loans are among the lowest level the bank has ever recorded. Our credit discipline will allow for responsible growth in certain segments. The softened pipeline provides relief of pressure on funding needs in the short term as we shift to manage credit risk and focus on continued margin improvements. That said, we expect loan growth to continue in the mid single digit ranges with less noise from prepayments. Turning to deposits, we continue to emphasize effective management of deposit costs. Total deposit costs of 53 basis points for Q4 have increased 33 basis points over the past year for deposit beta of just 8%. Deposits of 9.7 billion decreased just 57.6 million less than 1% as compared to the prior year. The loan-to-deposit ratio ended the year at 102.5%, up from 97.6% the prior quarter, and slightly above our target of 95 to 100%. We expect modest deposit growth in the coming quarters, but we'll exercise price discipline and pace deposit growth to approximate the growth in well-priced credit facilities. We will be methodically focused on deposit gathering through our seasoned relationship bankers, treasury management teams, and competitively priced consumer deposits. With that, I'll turn the call over to Pat to review margin expansion, expenses, and tax rate expectations.
spk03: Thanks, Joe. Turning to net interest income and margin, net loan growth of $199 million in our historically asset-sensitive balance sheet drove another quarter of margin improvement which expanded by 28 basis points to 3.64%. Our strengthening margin benefited from eight basis points of purchase accounting accretion and five basis points of accelerated loan payoff activity. While our margin was clearly impacted by higher funding costs, it's important to expand or reiterate Joe's remarks and highlight that our deposit betas to date have proven to be lower than we would have expected and we believe will ultimately outperform others in this respect through the current rate cycle. Two factors should provide further modest tailwinds for our overall margin. First, the quarter end loan portfolio of nearly $10 billion was $100 million higher than the fourth quarter average. Second, nearly a quarter of our earning assets are floating rate, providing further opportunity for margin expansion, although likely at a more modest rate. Also of note, although not material to the fourth quarter's performance, is that we resumed securities purchases during the quarter as part of an overall effort to lock in longer-term investment yields and, in conjunction with other efforts, move our asset sensitivity towards a more neutral position. Core non-interest expense remained relatively flat in the fourth quarter compared to the prior quarter, with almost equal and offsetting increases and decreases in professional fees and data processing expense, respectively. The elevated level of professional fees are expected to continue through the first half of 23, should level up by year-end 23. It's also worth noting that our effective tax rate for the quarter is 24.6% and we expect that to remain in the range through the rest of this year. Overall, we continue to remain very disciplined around expense management. This, combined with our steady growth, puts us in a position to highlight that we've already outperformed both the 2022 and 2023 quarterly efficiency and profitability targets that we announced at our last investor day in third quarter of 2021, we couldn't be more pleased with the company's financial performance. As a reminder, the 2023 core target metrics set at that time were to earn 65 cents per share, meet or exceed a 1.1% ROA, and achieve an efficiency ratio of around 50%. Having largely achieved that performance a year earlier than originally anticipated, we continue to work through how we should be thinking about financial targets going forward. Not only are we considering the external economic and interest rate environment, we're also reviewing how our efficiency and productivity across all of our operating businesses and processes compare to industry benchmarks. More to come on this topic during the second quarter, but expect that over the near to medium term, our targets may be framed more in terms of relative performance rather than absolute goals. At this point, I'll turn the call back to Chris.
spk08: Thanks, Pat. Now we'll begin to the question and answer portion of the call.
spk00: Thank you very much. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. So that's star followed by one on your telephone keypad to register a question. Our first question today comes from Frank Chiraldi from Piper Sandler. Frank, please go ahead. Your line is open.
spk07: Good morning. Frank, just wanted to talk about the – Joe, you mentioned the pipeline, but, you know, still I think talking about mid-single-digit loan growth from here, and it sounds like you're thinking maybe more modest deposit growth. Just wondering where you guys sort of, you know, see or target this, that loan-to-deposit ratio moving over time. And also, if there's any specific niches you're looking at, you know, to note to drive the funding side of the balance sheet.
spk08: Sure, Frank. It's Chris. I'll take that. In terms of the strategy over the loan-to-deposit ratio, we love being like 95% to 100%. That's a great operating range for us. So it was a little bit higher. I mean, frankly, the last couple of days of the year, we had just a couple of variations in deposits that were a timing thing. We'd like to try and manage to stay around 100. There's really no issue going to 102 or 103. But, you know, we're not going to become a bank that's going to go to 120. We don't think that's a highly valuable franchise strategy. So I would expect as we go into this year, we think we're going to have mid single digit loan growth based on as much as we can see now, right, which is really early in the year. We want to try and match fund that with deposits for the most part. So in terms of where we're going to get those deposits, we have a terrific group of commercial bankers that have had a little bit of a luxury in the last couple of years not to have to focus as much on that. Obviously, their goals and objectives this year will be heavily focused on deposits. We have a great treasury team. We have a very mature product set there. So you're going to see our commercial bankers and our treasury team probably doing the heaviest lift But we also have the opportunity in our consumer franchise to be able to drive some deposit growth in consumers. So I would think about deposit growth coming in as a blend, some of which may be not interest-bearing, but a lot of it may be either less price-sensitive interest-bearing accounts, and some of it will just be market-sensitive rates. You know, I think it's a blend. So when we blend on that and we look at the loan opportunities in the pipeline, I think we can maintain margins. As Pat said, there's an opportunity potentially for additional margin improvement. as long as rates continue to increase, and then maybe flattening out after the increases stop.
spk07: Okay, great. And then, Pat, you also mentioned the securities purchases. I'm just kind of curious if you could talk about the size, maybe, of additional ads to the securities book. I assume as you're reducing asset sensitivity, you fund that with shorter term FHLB borrowings, I'm guessing you don't get much spread there. So just, you know, kind of curious about how to think about the progression there as we move through the year.
spk03: Yeah, well, it's kind of the trade you make for, you know, future asset sensitivity versus, you know, future, log in future returns. We bought roughly $250 million towards the middle and later part of the quarter of agency paper CMOs constructs. The yields on those were in the kind of low to mid fives. So net-net, if you consider incrementally, we're funding it at wholesale costs, we're probably clear about 1% on those increases. Now, the combination of that and some other efforts that we're looking at, we're hoping to get to where Our downside sensitivity is reduced from what we had last year. And frankly, as we move through this year, we'd kind of like to try to position ourselves relatively neutral so that we can hopefully lock in a margin at a higher level than certainly what we saw during the zero interest rate environment.
spk08: I'd underscore that, Frank. This is an opportunity for us to try and minimize the risk to future margin compression should rates begin to change in the back half of the year and going into 2024. So in the period of zero interest rates, we were comfortable letting the bank get pretty asset sensitive. We've seen that positively affect our margin in the last year. Now, who knows where terminal rates will go, but as we start to get closer to what to be terminal rates. We want to make sure that we've got kind of reduced some of that volatility that you might see in spreads. This is very much about how we're going to look in 2024, not 23.
spk07: Gotcha. But, you know, in thinking about maybe additional purchases, just for modeling purposes, is there any sort of, you know, securities to assets maybe ratio we should think about? Or, you know, is it not expected to change much from what you did in the first quarter?
spk08: I don't think you're going to see a material change in that kind of outlook. And this is a very tailored approach. So we're dollar averaging into a few positions. We're going to watch the market, watch what rates do, watch what our own interest rate sensitivity evolves to be, and also look at the peer group and make sure that we kind of stay in the band of folks that we want to be in with. So I don't think you're going to see a very different structure to our balance sheet. It's just kind of around the margins.
spk07: Okay, great. Thanks for all the color.
spk08: Thanks, Frank.
spk00: Thank you. Our next question is from Daniel Tomeo from Raymond James. Daniel, please go ahead. Your line is open.
spk10: Thank you. Good morning, everyone. Good morning. Starting on the expense base, just wanted to see if that fourth quarter seemed to be about in line with what you were thinking, if that remains a good jumping-off point. And then... you know, as we see the increase in the FDIC assessments take place in the quarter, just wondering what you guys were thinking, how that impacts that line item.
spk03: Right. Hey, Danny, it's Pat. So, yeah, I think fourth quarter is a pretty good jumping off point. You know, first quarter will always have the impact of merits and related staff costs and comp costs that come towards the tail end of that. So it'll inflate a little bit. And in this environment, that might be a more permanent inflation. So we might see it take up just a little bit with merit increases. But the run rate on most of our line items is pretty solid right now. We are, you should assume, excuse me, looking across all of our expense base as well as our revenue productivity. That'll take a little bit of time, but working to make sure that we are kind of optimizing for the businesses that we do. So that'll be a theme throughout the year for us. So that kind of underpins the professional. Some of the professional fees and other costs will remain kind of elevated, at least for the near term. The FDIC assessment will hit us like everybody else to the tune for us, it'll be about $2 million on the new rate scale. Yeah. For the year. Sorry.
spk10: Okay. Terrific. Thanks Pat. Um, and then maybe on the, uh, on the fee income side, um, a little bit below what, what, uh, we were all looking for, you know, the swap fees certainly impacted that. Um, So maybe your thoughts on the swap fees from here and how the rates play into that, and then on Trident as well, a little bit below the range, if there was some seasonality there, or how you're thinking about that going forward.
spk08: Yeah, I'd say a couple things just on swaps and the outlook there, and then Joe may chime in on both loan volume and Trident. look, our clients are smart. That's a good thing. So they're resistant to buying swaps in a market where they think that rates may be going down over the next couple of years. So it's a combination of the appetite for our customers to want to be in swaps as well as the aggregate amount of loan volume. So while loan growth has been pretty good, the origination volume has come down quite a bit. So we're seeing kind of slower prepayments, and that's what's affecting growth. So if you looked at The swap income, that's going to vary with your new originations, not with your portfolio growth. So do you have any comments on swaps or Trident?
spk06: I think you hit it right on the head. Relative to Trident, I'd say that there's always a little seasonality in the fourth quarter, but I think there's also a mechanism that rates have gone up substantially in the residential market. While we're still doing the commercial business and we're doing more and more of a penetration there of our own book into Trident, that we expect that run rate may be a little bit muted over the next year until we get a little bit more normalized, less volatile rate environment in the residential space.
spk10: Okay. Perfect. Thank you. Um, and then lastly, just on the, I guess on CRE loan growth in particular, um, just curious, you know, the interest cap renewals, you know, there was an article in Wall Street Journal recently about how that may impact, um, values of real estate in the industry and potentially loan demand there. But just curious what you're thinking about that dynamic in the current environment.
spk08: So a couple things I would just point out. We've always been very disciplined about stress testing every credit we put on. So at the very beginning, we're looking at how interest rate changes over time will affect that borrower's ability to kind of roll that loan I think the article you're referencing focused in on central business district office and the ability for those kind of cap rates and vacancies. How could you roll that? We have very low exposure in that segment. So we have less than 1% of our assets in central business district office underwritten CRE. So we don't feel we've got a significant exposure to that. Most of the exposures we have have been well stress tested at the beginning. and have enough room that we don't think rollover risk is going to be material, at least if rates kind of top out where the market expects now. Any thoughts you have about other segments, Joe, you've seen outside the office segment and kind of continuing strength?
spk06: Yeah, I mean, if you look at the balance sheet and the way we've reported, the credit metrics are very strong. We're not seeing any noise in any one segment. I think one of the things we do well, especially in the CRE book, is we have – diversified not only within asset classes so you know office and industrial retail multifamily and a bunch of other stuff we've also diversified by geographic region so in the last few years with the advent of our Philly and New York offices which are now already four years old and more recently Boston Baltimore we've really diversified the portfolio okay thanks guys I appreciate all the color
spk08: Thank you.
spk00: Thank you. Our next question is from Michael Perito from KBW. Michael, please go ahead. Your line is open.
spk05: Hey, guys. Thanks for taking my questions.
spk08: Good morning, Mike.
spk05: Morning. A couple things I wanted to hit. Number one, on kind of one of the opening slides here, you guys talk about the balance of efficiencies technology investments you guys are making. So, you know, Pat, maybe asking the expense question a little differently. I mean, you guys kind of hit the efficiency targets ahead of schedule, but I mean, as we think about some of the pressures both ways next year and kind of that, the bare minimum level of investment, you guys still want to kind of maintain, I mean, is it fair to be thinking about an efficiency ratio in kind of the low 50% range, give or take, or do you think that there's still room for, for leverage, um, in this environment?
spk03: Uh, Yes and yes, I guess, to that. So I think 50 is not a bad thing to ballpark as a proxy for right now. I think we think that we can do better for what we do, and certainly we can do better in preparing for further scale and growth across the business lines that we're in over time. So we've made a lot of technology investments over the years. We've still got a lot of disparate processes and people, and so in this environment, in any environment, we would be focused on that, but particularly in this environment, we know that our revenues over time are likely to fall, and we want to try to protect the efficiency or the operating leverage that we've achieved, even in the face of a falling revenue environment as rates come down over time. So I guess more to come on that. But again, it's an important focus for us this year.
spk05: Got it. That's helpful. And then just secondly, Chris, you mentioned the, I forget how you clarified it, but I think it was the central business district office. Can you just remind us what the total kind of office exposure is in the loan book and And as you think about growth opportunities for next year on the commercial side, Joe, as a follow-up to that, I mean, can you maybe just give a little bit more color both kind of byproduct and geographically where, you know, maybe the pipeline could rebound faster? Just curious how you guys are – what kind of activity you're seeing.
spk08: Sure. So the figure I was referring to is we would define that as office exposure in central urban markets. So for us, that would be New York, Philadelphia, Boston. Okay. But to get a little broader, Joe, what would you add to that?
spk06: Yeah, so as I mentioned earlier, we have about $1.1 billion in office in the portfolio. Central Business District office is only about $125 million, which, as Chris mentioned, is 2% of the CRE book, 1% of the total loan book. And if you strip out, as Chris mentioned, if you strip out – life sciences or credit tenants, it's down to 50 million in central business districts. So there's not much exposure there. We haven't really ever played in that space too much. We look, but we have a fairly narrow credit band, which I think has served us pretty well. In terms of growth in Cree and growth in the book, I'd say this. I think I mentioned last quarter, end of period pipeline is just a day in time. Things rotate back and forth at fairly rapid pace. at fairly rapid pace. I think we're pretty comfortable in mid single digit growth. It could be a little bit more, you know, it could be a little bit less. I think, you know, choppiness in markets goes back and forth. We've seen already, we saw some pullback in Q4 with some of our clients, yet already in Q1 we've had people out looking for opportunities. So there's still a lot of liquidity in the investor market. and people want to put money to work. There's a bunch of funds out there that we've been fortunate to bank over the years that have money available for opportunities. So I do think there will still be opportunities for us to continue to grow rapidly or responsibly, better aptly said, responsibly.
spk08: I would just kind of compliment Joe and his team. We have assembled a group of commercial bankers that specialize in a lot of different things, which gives us the opportunity to really diversify businesses not only the portfolio, but the growth we're putting on in any one period, and the geographic diversity. So we have the opportunity, you know, markets, they come and go, and they're hot and cold, and our opportunity to have seasoned bankers in some of the largest markets in the country is really proving to be an advantage. It allows us to be very selective about kind of how we choose to grow and which types of risks we take on.
spk05: Great. And then just lastly for me, it was great to see the ROE of the business. You guys talked a lot about the inputs being ahead of schedule, but the 15% level, high level for you guys over the last handful of years. There's a narrative that banks are kind of at peak earnings and there's pressures on OpEx, NIM, all those things. Just curious, I know you guys aren't willing to necessarily provide targets, but Any comments on kind of how this ROE level kind of compares to your internal expectations? And are you guys expecting, I mean, it sounds like you are, but is it fair to say that you guys expect to be able to kind of maintain that level for the majority of next year, give or take?
spk08: Let's start with some humility and just say that, you know, it's a cloudy year. It's hard for any of us, I think, to have a lot of certainty around what's coming. But But there are a few things that have panned out in the last year that have kind of confirmed our opinions on our business. So first, you see the deposit beta. Yes, we're going to be a little more competitive around deposits in the first half of the year. But our existing deposit base has been rock solid. And that's going to continue to serve us well. So while we may have to pay up for deposits, we're not paying up on the portfolio. We're paying up on the amount of deposits we have to kind of grow to fund loan growth. So I think that's a great opportunity. In terms of loan yields, you saw the loan yield pick up, the investment yield pick up this quarter. That should continue as rates continue to rise. Pat mentioned the level of floating rate assets we have. So without growth, I think you've got some margin expansion. We may trade some of that off. You know, we run a business every day. We want to bring new clients in. You bring clients in on sunny days and rainy days and everything in between because they're good clients. So, you know, I think our outlook is generally that margin should continue to improve for a while. I don't think we're at peak margin. In terms of operating efficiency, I think we've done a good job to date. But as Pat mentioned, we're thinking hard about long-term kind of structural expenses. How can you be even more efficient as you grow? I'd kind of look back, you know, absent the pandemic, which I know was a giant shock to the system. That happened to be the point in time where we crossed $10 billion, and we had to work through a whole variety of things, including the scale to overcome the Durbin Amendment changes and things like that. We kind of feel like that's behind us, and we're just going to now continue down the path of growing the customer base. But, you know, realistically, with our price discipline and our credit cut, we're not going to be growing at double digits this year. That will be closer to a single digit. Sorry. I don't know if that helps, but that's a general outlook for us.
spk05: Great. No, no, I appreciate all that context, Chris. Thanks, guys, for taking the question. Thanks, Mike. Thank you.
spk00: Thank you. Our next question today comes from David Bishop from Hove Group. David, please go ahead. Your line is open.
spk12: Hey, good morning, gentlemen. Good morning, Dave. Chris and Joe, slide six, you break out the low geographic distribution by region. As you look out in terms of the newer markets, the Boston and Baltimore, just curious maybe where you see that potentially growing as percent of the pie over the next maybe two to three years or so. Do you think that gets to double digits here in the next two years?
spk06: I don't know where the end game is because of the cloudiness, as Chris referred to it, at least for 23. But we're pretty happy with what they've done so far. I think Boston's got a little bit of a head start. They have a little bit of a larger team, as we tend to do. We're always out looking for seasoned, successful bankers. We'll continue to do that. And the Baltimore group is largely focused on the C&I space, whereas Boston, Boston has been largely focused in CRE. So it's not easy to compare them, but if you look at the trajectory of what we did in Philadelphia and New York, I do think we have an opportunity to grow those meaningfully down the road. Some of that will be incumbent upon us to continue to fund them appropriately in this environment. So I do see, what do they call it, blue skies ahead, David, but I don't know if it will be as as rapid as the growth we've enjoyed in Philly and New York in a really good environment.
spk12: Got it. Then I think maybe, Joe, during the preamble, you mentioned some opportunities on the construction segment. Maybe just to dive into that particular where you're seeing some growth opportunities.
spk06: Sure. Well, you guys may recall that we started a construction vertical just a few years ago with the acquisition of a – A very talented banker has been in the space for 30 years and we built out that team a bit. We really saw some significant activity in 2022. We actually did about triple the volume that we did in 2021. A lot of that, as you would expect, is undrawn because these are projects that are being built out. And so we do see that even if we were to slow activity in that space because of the uncertainty, these projects are going to fund and help us support some loan growth in that segment regardless. So we're pretty bullish there, and we're reinvesting there. Again, we're very thoughtful, but we know the markets that we serve pretty well. And as you all know, especially we'll use New Jersey as an example, it's very difficult to get things approved. It takes 18 to 36 months to get things approved. When projects get approved, they get built and they get filled. So we're pretty bullish.
spk08: Also going to talk a little bit about the risk characteristics of that. If you think about our construction book, a significant chunk of it, approximating 40% is non-speculative. Another 40% that is spec is apartment-based. And those are underwritten to very modest rental expectations. So there really shouldn't be an issue as those kind of mature. And only 20% of it would relate to single-family home. And as Joe notes, in the Northeast, we tend to have a much more stable level of inventory and prices. In fact, the home prices in New Jersey, despite all the slowdown in unit sales, continue to be up about 6% year over year. So it's very prudently underwritten, very conservative, a very thoughtful portfolio that we feel very good about.
spk12: Got it. That's great. Notice in the slide deck, pretty substantial improvement in the substandard loan bucket. Maybe just some commentary, what drove that decline?
spk06: I think it's a combination of factors, David. We've had improving economic conditions post-COVID. And we were, as we tend to be, typically very conservative in looking at the client base that was adversely affected by COVID. During that period, we were quick to downgrade credit into classified or criticized credits. because we had concerns. The vast majority of those folks were paying, but it made sense for us to do what was prudent for the company. As they've rebounded post-COVID, it's allowed us to upgrade those. And we've had some payoffs from that bucket as well, and some recoveries, which we anticipated that we would. So I think it's just a foundational aspect of the way we approach things. When we have uncertainty, we'll downgrade when we need to. And when we see some more certainty, we're not afraid to upgrade.
spk08: We made two important decisions during COVID, which may not have been super popular at the time. The first was in the third quarter of 2020. We de-risked the portfolio by pushing out the stuff we thought would have a higher likelihood of having a post-COVID issue and sold that off. The second thing that we did is we did no long-term CARES Act deferrals in our commercial base. So we took a position that we gave a lot of short-term deferrals. worked with our borrowers, really made sure that we kind of got them through a difficult time. But we did not restructure the facilities and enter into these kind of longer-term IO periods or payment plans that would have allowed weakness to continue. So we were able to move through that, I think, pretty effectively. When you think about last eight quarters, two years in a row, having net recoveries on a balance sheet our size, I think that kind of proves out our thesis back in the third quarter of 20, which was not very popular, I think, held true.
spk12: Got it. Appreciate the call, guys.
spk06: Thanks, dude.
spk00: Thank you. Our next question today comes from Christopher Marinac from Jamie Montgomery Scott. Christopher, please go ahead. Your line is open.
spk02: Hey, thanks. Good morning, Chris and team. You've all mentioned 2024 as part of your thought process for managing the bank now. As we possibly have a different rate environment then, are there any lessons learned from the 2019 era when rates kind of peaked the last time with the Fed that you can implement now? I know the portfolio is a lot different, but just curious kind of if loan floors and other tactics can work or if there's any particular way you think through the structure from the past.
spk08: It's an excellent point. That's exactly what we're trying to do, to learn from the experience we went through in 2020 in particular. So coming through that COVID cycle, we had a strongly asset-sensitive position at the time. That resulted in our margins decreasing going down into the 270s. And what we've been doing, and this began in the fourth quarter and will continue over the next couple quarters, is doing what we can, and you can only do so much around the edges, but doing what you can to make sure that we have a more neutral interest rate risk position. So we're not trying to kind of game an environment, make money one way or another. What we're trying to do is ensure, to the degree we can, relative stability around the margin. So we are willing to give up some of our net interest income today to protect that margin for the longer term. And Pat walked you through the securities purchases. We have a very modest hedge position that we began in the fourth quarter as well. And again, it's not to protect against additional Fed increases. It's actually to protect against what could be Fed decreases at some point. We have no idea when they may show up.
spk02: Great. That's helpful. And Pat, can you remind us two things? How far out are you going on the hedge position? And then what's the amount of cash flow that comes off the securities portfolio each quarter?
spk03: So the hedge positions, I guess the effective durations that we're putting on are probably in the seven, eight-year range for the cash balance sheet purchases. Chris talked about swap. We only have one. It's just a three-year SOFR. So it's not going to dramatically change things. other than have a marginal improvement around sort of the downside interest rate risk exposure that you'll see in our Qs, Qs and Ks. So that's kind of the general flavor of that. And our securities book is pretty short dated as is. So I think three and a half years in aggregate. So every little bit helps. for stretching that out. With respect to the cash flows that come off the book, it's around $25 million a month.
spk02: Okay, $25 million a month. Great. Okay, that's very helpful. Perfect. Thank you all. I appreciate the time this morning.
spk08: Thanks, Chris.
spk00: Thank you. Our next question is from Manuel Navas from DA Davidson. Manuel, please go ahead. Your line is open.
spk09: Hey, good morning. Good morning. A lot of the questions have been answered, but on the construction line that might come in and help with growth going forward, does that not show up in the pipeline? Is that the right way to think about it with the pipeline being a little bit lower?
spk08: These are undrawn facilities that, you know, have like a two-year life as they're kind of drawing down and building and then kind of convert after that. So we can kind of project that there will be some draws coming in in the first half of the year that are expected and natural. And they would not be in the loan pipeline.
spk09: The loan pipeline has some really nice higher loan yields. um, what, what would be the construction lines coming in at as well? And do they kind of have a similar, like, I think it's like six and a half percent yields roughly.
spk06: Well, I think the, uh, the average construction transactions are higher anywhere between half and one over prime. You know, that you want to get paid for the risk you take in the environment that you're in. I'm sure some of our borrowers are disappointed that the rates have continued to rise, but, uh, They'd look at it from the long term, and it's a little disintermediation, as you would expect. If you build a multifamily project today and it may cost you prime plus one to build it, you could still at the end, when you fill it up and stabilize it, get an end loan at $200 over a seven or ten-year treasury, which is five and a half today. So they look at that as we do. It's a window to pay for the risk of the construction, and then when you get to the end game, you're going to – stabilize it and get much better cash flows.
spk09: That's helpful. How much of your view on loan growth includes the probability of a slowdown? You did suggest that there's some slower activity, but if you were as positive on the economy, could you have probably more loan growth or is it kind of you're purposely being more selective, you're seeing better yields, you're price conscious. How are you kind of balancing that today versus maybe a year ago?
spk08: I think that you can start with the market has fewer opportunities, right? So you can see in some of the things that have been growing most quickly in the last few years, I'll take kind of warehouses as an example, right? There are very few people going out to build net new giant warehouses. So you see a little bit less economic activity, so that does pull down the opportunity for all of us. And then, you know, as rates go up, borrowers are a little discriminating over which projects they want to take on. So if they're going to pay and, you know, if you're paying over prime, you could be paying something with an aid handle, right? So you're going to be judicious about using that capital when you can make it work for you, but you're not entering into that lightly. So I think there's a little lower demand. I think there's, you know, our traditional discipline kind of filters out a lot of what's in the market anyway. And I'll go back to my comments about participating in multiple markets and having a great group of bankers. You know, we can kind of trade off, you know, if New York is hot or Philly's hot or Boston's hot or New Jersey's hot, you can kind of look for the deals you need and the places you need them. But the overall tone is slower. To your point about a recession – It's very hard to understand whether the recession is coming or how severe. The other thing I think that's greatly overlooked is the geographic impact of a recession. So historically, and I have no reason to believe differently, the Northeast has been less impacted by business cycle risk around things kind of boom and bust cycles. So even in mild recessions, there seems to be a fair amount that goes on in the Northeast. That's our market. So we don't We have not observed in our markets the kind of significant overcapacity or overbuild or vacancy rates with some selective, you know, some markets like the Central Business District office is certainly an area that we've got an eye on.
spk09: That's really helpful. If the probability of a recession grows, where do you think the loan loss reserve heads to? I know you have about 57 basis points now. It's about 65 with marks. You have to head more to the severely adverse scenario. Where would that kind of push up to?
spk08: As you can imagine, like everyone, right, we've had our trials and tribulations with CECL. And the kind of high-class problem to have is when you have no charge-offs, it's really hard to come up with a quantitative allowance. That said, the majority of our allowance is qualitative, and it assumes that there is some risk of a recession coming in the near term. So I think if there were a recession, we'd have to evaluate where is that hitting geographically, which product segments, what are our exposures in those segments. So I wouldn't want to hazard a guess about where that number would go. What I would say is that I'm very comfortable that the composition of our loan portfolio and the underwriting in credit risk management would leave us better than the peer group, which is why you tend to see our reserve being a lower coverage ratio. Our net charge-offs are about 80% lower than the $10 to $50 billion bank peer group. So we have a lower loss reserve. Those two things are correlated. So yes, it could go up. Yes, I don't know which segments would be hurt and to what degree. But I think the relative performance point that Pat made earlier, I think we're going to show that our credit discipline will hold.
spk03: And just as a wonky data point, we use the Moody's S2 as kind of our foundation for our quantitative models and still have to layer in a whole bunch of qualitatives to get to the point where we are today.
spk09: Okay. I appreciate that, Colin. I can step back into the queue.
spk08: Thank you.
spk00: Thank you. Our next question is from Matthew Brees from Stevens. Matthew, please go ahead. Your line is open.
spk11: Hey, good morning. I was hoping for a little bit more color around, you know, the near term NIM outlook. And I know there's some questions around what the Fed is going to do. So maybe ask you an age-old question, which is, you know, per 25 basis point height, what is the expectation for NIM expansion at this point?
spk08: Well, the one comment I can make is the expectation is expansion. So that's an important no, right? It's not contraction. You know, we, I think the last time we spoke with all of you, we were thinking that it might be, a high single-digit NIM expansion, and then deposits outperformed in the fourth quarter, and we did much better than that. So a lot of it is going to be determined ultimately by how much deposit pressure we see. We haven't seen a lot to date. So we still see some modest expansion as long as the Fed is raising rates, and we think that will continue for about a quarter after they stop raising rates, and then you should start to see us flatten out. So it could be 10 basis points, but I I would hesitate to give you a number.
spk11: Okay. And maybe to get a little bit more specific on the components, could you just re-quantify for us how much of the loan portfolio, I think it's the majority, is fixed rate and then what is the roll-off yield versus the roll-on yield?
spk06: So we have about 68% or so of the book is fixed and the And the rest, obviously, is float.
spk08: And then the roll-off yields would probably have like a high three to four handle, the payoffs. And the new facilities coming on is a high five.
spk06: Yeah, six and change.
spk11: Okay. And then what was the, if you can provide at the end of the quarter, all in cost of deposits? Yes.
spk08: I don't think we published that, so I hesitate to introduce a new number, Matt. I appreciate where the question's coming from, but I hesitate to introduce it. But I think that when I think about deposit betas, I think you're still going to see us on the low end of the pack going forward.
spk11: Okay. If we do see a slowdown in loan growth, obviously the balance sheet has been a bit more protected from AOCI, so you're tangible. equity ratios is pretty solid. I know there are some regulatory bank-level capital ratios that are a little bit thinner, but I just wanted to get your thought on capital management and where the stock is, thoughts around buyback.
spk08: Sure. It's a great question, and obviously we've not been doing buyback, so the question would be, what is our appetite? I think it starts with a fundamental view on our business. We we really feel good not just about the year we had in terms of financial metrics, but about where we are in customer relationships and the build out of the commercial banking teams in our core markets. Cause we've been adding bankers in New Jersey, right? It's not just about the expansion markets. So we feel really good about that. Obviously we see a growth slowing a little bit as we kind of go through, um, you know, what could be the, maybe it's the beginning of a recession this year, but we don't, we're in the camp with many others that the recession will not be deep will not be you know particularly uh distracting to us and there'll be another side to it so um we think we have a great opportunity to continue to grow over the next couple years um so we're allowing that uh equity position to build up and uh we have no doubt that we'll find a good opportunity to use it for our shareholders and in the coming year or two and we'll be patient about it so If it's a little slower growth this year, a little faster growth next year, that may be the case. But at this point, we're building up our capital levels because I'm confident we'll find a good use for it.
spk11: Understood. My last one, just an oddball question, but there's been some undulations in unrealized gains in investments. There's a $100 million equity portfolio. I'm just curious, how granular is it? What is it? You know, are there anything outside of the investment this quarter that you'd kind of point out, note, highlight?
spk08: I don't think in the equity portfolio you're likely to see much movement, positive or negative, absent a giant move in interest rates. So the $100 million you're referring to is preferred instruments that carry a good yield. You know, but it's mostly banks. It's pretty granular. There's no giant positions in there. We've got kind of limits about how much of any one instrument we're going to take. And it has a decent cash flow coming off it. So, you know, as rates were to continue to go up a lot, you know, maybe you would have a little bit. But I don't think there's much risk of that in either direction. It shouldn't be a material number for us.
spk11: Okay.
spk08: I appreciate that. We're really pleased to have had the opportunities in the second half of the year with Auxiliar and with NESTEC. Those were very unusual, and there's nothing about them that I would expect to recur in the short term.
spk11: Understood. Thank you very much. That's all I had.
spk00: Thank you. This is all the questions we have today, so I'll hand back over to Chris for any closing remarks.
spk08: All right. Thank you very much. You know, our fourth quarter results were consistent with our strong performance throughout 2022, and they leave us well positioned for what may be an economically challenging year in 2023. As always, we appreciate your time and interest in Ocean First, and we look forward to speaking with you after our first quarter results are published in April. Thank you very much.
spk00: Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.
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