OceanFirst Financial Corp. (OCFC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Christopher Maher, Chairman of the Board and President and Chief Executive Officer of OceanFirst Financial Corp. It's my pleasure on behalf of the Board of Directors and the officers of OceanFirst Financial Corp. and OceanFirst Bank N.A. to welcome you to our 2021 Annual Meeting of Stockholders. In order to comply with state health guidance and executive orders and for health and safety concerns related to COVID-19, we are holding this annual meeting virtually. I'd like to express our appreciation for your participation at this meeting, which I will chair. A copy of the agenda and rules of conduct for today's meeting is available on the virtual meeting platform. Our press release issued on January 28, 2021, confirm the company's plans to hold a virtual-only meeting. Broadridge Financial Solutions is the host of this meeting and will tabulate the stockholder votes. As shown on the agenda, we will first conduct the formal business of this meeting. Then I will report on recent operations and developments at OceanFirst and share our view on the future of your company. Following that, we will entertain a general question-and-answer session. I'd like to introduce our fellow members of the Board of Directors who are participating in the virtual meeting remotely: Angelo Catania; Anthony Coscia; Michael Devlin; Jack Farris; John Lloyd; Kimberly Guadagno; Nicos Katsoulis; Bill Moss, Joseph Murphy Jr., [indiscernible] Steve Scopellite; Grace Torres; Dr. Patricia Turner, Director of the division of Member Services at the American College of Surgeons who joined the Board in September; Grace Vallacchi, the Chief Risk Officer of the Bank and the Company; and John Walsh, our lead independent Director. Also joining me to conduct this meeting this morning is our Corporate Secretary and General Counsel; Steven Tsimbinos as well as Jill Apito Hewitt, SVP, Director of Investor Relations and corporate communications; and Matt McCue, Vice President and Assistant Corporate Secretary. There are other officers of the Bank, participating remotely, that I'd like to acknowledge at this time. Joe Lebel, President and Chief Operating Officer of the bank; Mike Fitzpatrick, EVP and Chief Financial Officer; Michelle Estep, EVP and Chief Administrative Officer; Karthik Sridharan, EVP and Chief Information Officer. We also have representatives from our independent registered public accounting firm, KPMG LLP, participating. I'd like to recognize Elias Lambros, a partner with KPMG LLP. Now we will proceed to the formal business of this annual meeting. Each stockholder has already been supplied with a copy of the company's 2021 proxy statement and 2020 annual report. Copies of these documents are also available on the virtual meeting site for any stockholder who requires them. There are 4 items for business at this annual meeting. First, the election of 15 directors for terms of one year each. Second, an advisory vote on the compensation of the company's named executive officers. As described in our proxy statement, this is commonly known as a say-on-pay vote. Third, the approval of Amendment #1 to the OceanFirst Financial Corp. 2020 Stock Incentive Plan. And finally, the ratification of the appointment of the independent registered public accounting firm for the fiscal year ending December 31, 2021. Mr. Tsimbinos, would you report on the mailing of the notice of this meeting that has been sent to all stockholders entitled to vote at this meeting?

Yes, Mr. Chairman, I have, here, an affidavit that I have duly sworn to and signed, stating that the notice of this meeting has been mailed to each stockholder as required under the bylaws.

The affidavit is accepted.

In addition, Mr. Chairman, Resolutions were adopted at the January 27, 2021 meeting of the Board of Directors of OceanFirst Financial Corp., providing for the meeting to be held today, May 19, 2021, and directing that notice be given, as provided, in the bylaws. The Board also set the record date as April 1, 2021, for determining persons entitled to, and notice of and to vote at this annual meeting of stockholders. A notice of these actions was provided to the public by press release dated January 28, 2021. Finally, the complete alphabetical list of the stockholders of record as of April 1, 2021, who were entitled to vote, showing their respective addresses and the number of shares held by each is available on the virtual meeting platform in accordance with the bylaws and applicable law.

Thank you, Mr. Tsimbinos. Please file a copy of the notice, the affidavit as to the meeting of the notice and the resolutions from the January 27, 2021 Board Meeting with the minutes of this meeting. Ladies and gentlemen, I would now like to introduce you to Mr. Peter Hagberg, Pete Hagberg LLC. Mr. Hagberg has been appointed to serve as inspector of election. Mr. Hagberg, will you please present your report on the number of shares present in person, by proxy or by attorney at this meeting so we may determine whether a quorum is present.

Mr. Chairman, there are 58,922,761 shares entitled to vote as of the April 1, 2021 record date. The proxy committee of the Board of Directors is acting as proxy and representative of the holders of record of not less than 52,517,995 shares of the common stock of the company. There are not less than 53,560,906 shares present, in-person, by proxy or by attorney. Accordingly, a quorum is present.

Thank you, Mr. Hagberg. On the basis of the report of Corporate Secretary and the Inspector of Election, the Chair finds that proper notice is given and that a quorum has been properly convened. I shall now proceed with the matters on the agenda for the meeting. Mr. Tsimbinos, I know that you were prepared to read the minutes of the last annual meeting of stockholders held on May 20, 2020, but perhaps in the interest of time, we could have a motion from our stockholders to dispense with the reading. Do we have a motion?

I move to the expense of the reading of the May '20, 2020, annual meeting minutes.

And do we have a second?

I second the motion.

All those in favor of the motion waiving the reading of the minutes of the 2020 annual meeting signify by saying, yes. Yes.

Yes.

Any opposed? The motion carries. The polls for voting on all matters are hereby opened at this time, 9:07 a.m. on May 19, 2021. [Voting]

If you have already voted, you do not need to vote again during the meeting. If you have not voted or if you would like to change your vote, you may do so by clicking the vote-here button located at the bottom right of your screen. The proxy solicited by the Board of Directors can be tallied at one-time, even though they contain 4 matters for consideration. Likewise, any ballot that a stockholder seeks to cast virtually, at this time, can be handled in the same way. Accordingly, I intend to proceed to discuss each matter separately and when the discussion of each item is finished, we will move on to the next. At the conclusion of the discussion of the fourth item, we will take the votes. Mr. Tsimbinos, were there any stockholder nominations or proposals for business for this meeting properly filed with you, as Corporate Secretary?

No, Mr. Chairman.

Because no stockholder nominations are filed with Mr. Tsimbinos in advance of this meeting, and as provided by the bylaws, the business of this meeting is limited to the foregoing 4 matters in accordance with the provisions. Further information on each proposal and the recommendations the Board of Directors may be found in the proxy statement. The first proposal we will consider is the election of 15 directors. The Board of Directors has nominated Angelo Catania, Anthony Coscia, Michael Devlin, Jack Farris, Kimberly Guadagno, Nicos Katsoulis, John Lloyd, Christopher Maher, William Moss, Joseph Murphy, Jr., Steve Scopellite, Grace Torres, Patricia Turner, Grace Vallacchi and John Walsh to serve one year terms as directors, which would expire at the annual meeting of stockholders to be held in the year 2022, or at such time as their successors are elected and qualified. All nominees are presently directors of both the company and the bank. Information concerning the principal occupations of the nominees, their service with OceanFirst Financial Corp and OceanFirst Bank, and other matters which may be of interest are contained in the proxy statement. Is there any discussion with respect to the nominations for Director? If so, please type your question into the ask-a-question field and click submit. Okay. Seeing no questions, we'll move to the second proposal. The second proposal for consideration is the advisory vote on the compensation for the company's executive officers as disclosed in the proxy statement, the say-on-pay vote. Is there any discussion with respect to say-on-pay? If so, please type your question to the ask-a-question field and quick submit. Seeing none, we will move to the third proposal. The third proposal for consideration is the approval of Amendment #1 to the OceanFirst Financial Corp. 2020 Stock Incentive Plan. Is there any discussion with respect to the approval of Amendment #1 to the 2020 Stock Incentive Plan? If so, please type your question into the ask-a-question field and click submit. Seeing none will move to the fourth and final proposal for consideration. The ratification of the appointment of KPMG LLP as independent registered public accounting firm of Oceanfirst Financial Corp. for the fiscal year ending December 31, 2021. I've already introduced a representative who is here today to answer any questions of the stockholders. Is there any discussion with respect to the ratification of KPMG LLP as the independent registered public accounting firm for 2021. If so, please type your question into the ask-a-question field and click submit. Okay. Seeing no questions, I believe this concludes the discussion on all matters. I will now reintroduce each item individually and call for the vote. Again, if you've already voted, you do not need to vote again during this meeting. If you have not voted or if you would like to change your vote, you may do so by clicking the vote-here button located at the bottom right of your screen. The nomination for directors are already before the meeting by virtue of the report of the Board, so no further action with respect to this item is required. We shall now proceed to call the vote on the director -- for the election of directors. As to the second matter, the say-on-pay proposal. Do I hear a motion for the approval on an advisory basis of the compensation of our named executive officers described in the proxy statement?

I am Jill Hewitt, a stockholder of OceanFirst Financial Corp., and I move that the following resolution be adopted. Resolve that the nonbinding approval of the compensation of the company's named executive officers as described in its 2021 proxy statement having been presented to be considered at this meeting, be and hereby is granted in all respects.

Would anyone care to second the motion?

I second the motion.

Thank you. The motion on say-on-pay has been made and seconded and the vote will now be taken. As to the third matter, do I hear a motion on the approval to the OceanFirst Financial Corp. 2020 Stock Incentive Plan?

I am Matthew McCue, a stockholder of OceanFirst Financial Corp, and I move that the following resolution be adopted. Resolved that the approval of Amendment #1 to the OceanFirst Financial Corp. 2020 Stock Incentive Plan having been presented to and considered at this meeting, be hereby ratified and approved in all respects.

Would anyone care to second the motion?

I second the motion.

The motion on the approval of Amendment #1 to the 2020 Stock Incentive Plan has been made and seconded and the vote will now be taken. As to the fourth and final matter, do I hear a motion on the ratification of the appointment of our independent registered public accounting firm?

I am Jill Hewitt, a stockholder of OceanFirst Financial Corp., and I move that the following resolution be adopted. Resolved that the appointment of KPMG LLP as independent registered public accounting firm of OceanFirst Financial Corp. for the fiscal year ending December 31, 2021, having been presented to and considered at this meeting be hereby ratified and approved in all respects.

Do I have a second for this motion?

I second the motion.

The motion on the ratification of the appointment of KPMG LLP as the independent registered public accounting firm for OceanFirst Financial Corp. for the fiscal year ending December 31, 2021, has been made and seconded and the vote will now be taken. This is the last opportunity for any stockholder who has not already voted to cast their votes using the virtual meeting platform now. If you have already voted, you do not need to vote again during the meeting. If you have not voted or if you would like to change your vote, you may do so by clicking the vote-here button located at the bottom right of your screen. [Voting]

Mr. Tsimbinos, will you please collect the master ballot, which is being cast by the proxy committee. The polls for voting on the matters before this meeting are hereby closed. I see the vote tally is complete. Mr. Hagberg, would you now present your report on the vote.

Thank you, Mr. Chairman. The preliminary vote report shows that much of the 15 directors has received the majority of the votes cast in favor of their election. And each nominee has been duly elected to the Board. The compensation of the named executive officers has been approved by advisory vote; Amendment #1 to the OceanFirst Financial Corp. 2020 Stock Incentive Plan has been approved. The appointment of KPMG LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2021, has been ratified.

Okay. The report of the inspector of elections as presented is accepted. Mr. Tsimbinos, please safeguard the ballots, proxies as well as the oath certificate and report of the inspector of elections and maintain them among the records. This brings us to the end of our formal business agenda of our meeting, and I thank you for your attention and the votes that you've cast. On behalf of our Board of Directors, let me express our appreciation for your support of the Board's recommendations on all proposals, again this year. As promised, I will now report on the past year, recent developments and share our view on the future of your company. Let me call your attention to the forward-looking statement disclosure. Please take careful note of the caution we make regarding forward-looking statements, which allow us to speak with you openly and candidly today. Okay so if we move to the presentation, I'd like to discuss the events of the past year, the position of our company going forward, and certainly, have an opportunity to take any questions at the end. Just to update you in terms of our company today, we continue our record of growth, having closed the Two River and Country Bank acquisitions on January 1, 2020. Between those acquisitions and our organic expansion into the Philadelphia market, we've now reached $11.6 billion in assets. And to put that in perspective, the New York operation is now about $1.3 billion worth of assets, and our organic expansion in Philadelphia crossed $1 billion of assets in the first quarter of this year. So we're very proud with that performance. The company has grown in market cap and in shareholder liquidity, and we were able to continue our dividend during what was a very difficult year for our country. Just a quick discussion of the management team. I thought it would be appropriate to recognize and congratulate Joe Lebel, who is promoted to President of OceanFirst Bank, effective January 1, 2021. Joe has been with us for quite some time. It's been my pleasure to work with him ever since I joined the company of the development of our commercial banking business. So we're really pleased to have Joe leading us forward as President of the bank. I'd also like to call special attention to Mike Fitzpatrick, who this past quarter, celebrated his 100th quarter of filing our public financial statements. There are very few companies that can boast a CFO with that tenure and experience, and they're very few CFO who can boost the opportunity to have reported publicly in such a professional, timely and accurate way over 100 quarters. I would also like to just draw your attention to our alignment with you, our stockholders. Insider at the company as well as the Directors control about 9% of the company. So we continue, despite our growth, that have a very strong alignment between our interests and your interests. Moving forward and looking at the post-COVID environment. The first thing I would draw your attention to is we made some significant decisions in the third quarter of 2020, which negatively impacted earnings, but allowed us to derisk the balance sheet. And that was important because there's still a lot of uncertainty in the markets. And we needed to pull forward and resolve those loans we thought that might present a risk, down the road and prevent us from spending our full time and attention on strategic initiatives to improve the performance of the company. In the first quarter, we continued to demonstrate both organic growth of over $100 million and organic deposit growth. And most importantly, we were to add over $250 million of non-interest deposits in the first quarter of 2021. That bodes well for us in the future as we take what is now a little over $1 billion in cash and deploy that into loans to improve our net interest margins and help the performance of the company over time. In terms of digital, we also crossed an important milestone last year. We have now conducted over 220,000 video transactions for our customers. So financial transactions over a video interface with our customers. Our customers every day, demand more from us at digital, and we're making sure we're making the investments there to be able to fulfill their requirements. And certainly, by closing the last 2 acquisitions in January of 2020, we demonstrated a continued disciplined and professional approach to consolidating banks in our markets, improving our business and staying competitive. That brings us to 7 whole bank acquisitions over the last 5 years. Taking a look for a minute about our competitive position and trying to be very clear about how we compete and how we go to market every day. I think it's important to understand our position in our core markets, how that position relates to other smaller community banks and larger national banks. We are uniquely positioned and will continue to be uniquely positioned to provide the breadth of services, the quality of services that are available at the largest national banks with that hometown feel of community banks. So if you look at the community banks listed on the right here that operate in the Central and Southern New Jersey region, if you add all of their deposits up, it's just slightly higher than our total deposits. So that gives you a sense of our competitive position versus them. But more importantly, we wake up every day to compete with the largest banks in our country. If you look at the mega banks on the left, they represent over $131 billion of deposits in our core markets, and they are our competitive target each and every day. That's where we source talent. That's where we source clients. And that's where we spend all of our time in terms of focusing competitiveness. And importantly, looking at treasury management for a minute. This is a business, I wanted to highlight this year because of the incredible progress we've made. I referenced earlier that we've grown non-interest deposits by over $250 million just in the first quarter of this year alone. And that's a result of us providing extraordinary solutions for our corporate clients and a full menu of products and services that compete with the largest banks in the country. This business has now grown to almost 40,000 clients and over $3.6 billion of our deposits, a very substantial business and a really important strategic advantage as we move forward. Moving to digital. I talked about digital a little bit earlier and the development and the investment we have made to make sure that we are providing those digital services that our clients need. As you can see on this slide, in 2015, we began our first dedicated digital effort and put together a team to service customers across those platforms. That team has now grown to over 81 professionals. And these are folks who routinely interact with our customers over video, support them on their mobile banking platforms, electronic payment platforms and/or the linchpin to us providing the kinds of services and the quality of services that our customers will demand in years to come. And this does not include -- the 81 folks do not include our information technology professionals. That group is growing every day, where we have almost 60 additional employees focused just on information technology systems. And in fact, our total expenses towards information technology are now approaching almost 20% of the bank's total expense base. So that underscores our commitment to making sure we will be here on the other side of the digital divide. Moving to the first quarter of 2021 and our results. Net interest margins have stabilized. So the GAAP interest -- net interest margin came down a little bit, but our core margin, the more important margin, was up about 4 basis points, and that should continue to improve as hopefully, we deploy our cash into loans. We had record loan originations of $748 million. That excludes another $50 million or so in PPP loans, so a tremendous quarter in terms of loan origination. And we ended with a strong loan pipeline. Our deposit costs continued to decrease, coming down in the first quarter to 37 basis points, and we expect additional improvements to that in the second quarter. And we did realize an additional gain on certain investments we made later in 2020 that helped us drive some earnings in the fourth quarter of 2020 and the first quarter of 2021. Collectively, those earnings help drive tangible book value per share, up about 4.7% just in the past 2 quarters. While we continue to pay attention and to protect our customers, our employees, our staff and make sure that we got through the tail end, what hopes to be the tail end of the pandemic. We are committing resources to expansion. We have hired between last year -- late last year and early this year, almost 19 commercial bankers, and we will continue to expand, not just in our markets, like Philadelphia, but also some new markets. And during our first quarter earnings call, we referenced a commercial banking team that we picked up in Baltimore, where we'll be able to establish a commercial loan production office there this quarter. So there's lot to do, a lot of organic growth ahead, and we think that's going to help us generate attractive returns. Looking at our returns for a minute. Obviously, the pandemic had a significant impact on our business. There were 2 reasons that pandemic provided an impact. Obviously, the first was credit provisions we took to make sure that we would not have any lingering credit issues over the next year or 2. The second thing is that interest rates have come down dramatically and quickly. And we are an asset-sensitive bank, meaning we are positioned for a rising rate environment. So that compressed our net interest margins and cost us earnings in 2020. As we deploy the $1 billion in cash we have in the balance sheet into loans at higher yields, we expect to be able to rebuild margins and rebuild earnings power and return to the -- returns you may have seen in prior years. And then I don't want to lose sight of managing the capital that you, our shareholders, have allocated to us. So over the last several years, through dividends and share repurchases we have returned $242.9 million to our shareholders. And I'm particularly proud of this. When I joined the company, the market cap of our company was lower than that amount. So we've now, since my tenure at the company, returned out to the shareholders through share repurchases and dividends, more value than the company was worth on the day I joined. Finally, the community is our foundation. It's how we earn our right to be in our business. And the OceanFirst Foundation continues to go strong. For those of you not familiar, we were the first bank in the United States to set up a foundation in connection with our initial public offering. And since doing that, in almost 25 years ago today, we have an important anniversary coming up. We have donated over $42.5 million into our communities to support a variety of nonprofits that help improve the quality of life and the stability of our communities. And many of our employees are in lockstep, volunteering their time and energy right alongside those dollars. So that concludes our presentation about the state of the company. At this point, we'd be happy to open the floor up to questions. Just give us a second here as we assemble our question roster.

Great. Chris, we do have a couple of questions. So I'll get started with that. The first question is from one of our shareholders, Mark Zashon, and he asked how important is wealth management for OceanFirst Bank?

That's a great question. So we -- a trust division in trust powers. And we also have a phenomenal new product called NestEgg that provides a wide variety of investment alternatives for folks that are more nontraditional investors with smaller amounts of money to invest. We think that wealth management is an important part of our business. Many of our commercial clients, our multigenerational business owners and their personal wealth and their family's wealth is tied up in their company, and we often use our trust powers to help them make important decisions about the wealth and the wealth management of their families. That said, this is a very competitive market. It's a market where margins have been squeezed for most providers for many years. And so we're very careful to make sure that when we do wealth management business, we're doing it for the right reasons, for the right people. And that we charge and receive an appropriate fee for having done so. So it's not a very fast-growing business in our company, but it is an important attribute that we have, and many of our commercial clients look to us to help them in one way, shape or form that way.

Great. Thank you. Also continuing with Mr. Zashon's question. He asked, how does the bank hedge the low interest rate environment? And does the bank see the level of interest rate? How does the banks see the level of interest rates through 2021 and 2022?

That's a great question and a very important question for any bank and especially us. The first comment that I would make is that we do not take interest rate bets, meaning that we're not trying to run our business in order to make money off a particular movement in interest rates. And that's very important. So we've chosen to reduce our level of risk in that way. By nature of the kind of company we run, we are a commercial bank. Many of our loans float, meaning that the interest rates change dynamically or are short-term in nature. And many of our deposits are held in noninterest bearing accounts. Because of that, we generally perform better in rising or higher rate environment than we would in a rate environment like this. Our general outlook, while the rate environment has compressed margins is that it would be a very bad time to give up our disciplines over interest rate risk management. I'm sure you're seeing the signs of inflation in the economy, the discussion many people are having. Should that inflation become persistent and rates move higher, we want to make sure that we're not quite unaware. So we've made the conscious decision not to extend the duration of our assets so that we can preserve our interest rate sensitivity position and protect our shareholders. We are hoping for a more normalized interest rate environment might occur over the next 6 to 12 months. And in that environment, we believe that we may be significantly more profitable than we are today. Should it occur.

Great. Just as a reminder, we do invite everybody to ask questions. [Operator Instructions] I'm going to continue with Mr. Zashon. He has another question. And he asked, how does your bank see the M&A landscape as well as tuck-ins. Will there be banks that are smaller in size that might need to be put up for sale due to the regulatory as well as technology and cybersecurity burdens of a smaller company?

Another great question, Mr. Zashon. So in terms of M&A, obviously, having completed 7 acquisitions over the last 5 years, we've chosen to be an active participant in the consolidation of our industry. The forces that are causing consolidation are going to endure, and they are really twofold knowledge and scale. You simply cannot make the technology investments we're making if you're a smaller company. And the second, as you point out, the regulatory compliance burdens are uniform over many institutions. And if you don't have a certain scale, that inhibits your ability to buy the technology and source, the professional resources and staff you need to be highly compliant. So we look at our company. We don't feel reliant on acquisitions to drive our business. I mentioned our organic growth strategies, our expansion into Philadelphia, our continued expansion by hiring lenders in our core markets like New Jersey and New York and then also the reach out into new markets like Baltimore. That said, if we have the opportunity to add acquisitions to the organic strategy, in a prudent manner, we've certainly shown that we have a record of doing that, doing it well and providing shareholder value over time.

Great. [Operator Instructions] So Mr. Donley, thank you very much. You say, as a very small shareholder may I express our confidence and appreciation to the officers and staff of the bank. And this year, we were able to increase our ownership a bit. So thank you.

Thank you.

Anyone else? Mr. Zashon says, this is a great virtual meeting by your company. Thank you.

Thank you, Mr. Zashon. And I want to thank all the shareholders that have been here dedicating your time and energy today for your faith and confidence in our company. We all hope that 2020 is a year that we won't have to repeat, but our company is well positioned for the future. We have the liquidity, the capital. We are winning clients. We are winning who can help build out our commercial banking business. So we're very pleased with our trajectory and our opportunity going forward. On behalf of the Board, we thank you for your continued support. And I'd offer to address any other questions offline. Please submit your questions to our Investor Relations folks, and we'll certainly get back to you. As indicated in the rules of conduct, we're going to conclude the questions at this point. And I would ask if there is a motion to adjourn the meeting.

I move that the meeting be adjourned.

I second.

All in favor, aye.

Aye.

Any opposed? No. There being no objections, I declare the meeting closed. Thank you very much for your time and attention and look forward to catching up with you after our second quarter earnings are released. Thank you. Take care.