OceanFirst Financial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 21, 2023

Key Takeaways

  • OceanFirst reported Q1 2023 GAAP EPS of $0.46 and core EPS of $0.55 (up 12% Y/Y), declared a $0.20 quarterly dividend (105th consecutive) and paused share repurchases to prioritize capital deployment on growth.
  • The bank maintains a strong liquidity position with $3.6 billion in liquidity covering 192% of uninsured deposits, a highly granular deposit base (98% of accounts under $250 k) and a low deposit beta of 20%.
  • Its investment portfolio remains prudent and modest at 13.3% of assets, focused on investment-grade and floating-rate securities with limited duration, resulting in only a 50 bp capital impact if marked to market.
  • OceanFirst’s diversified and conservatively underwritten CRE portfolio (with low LTVs, strong cash flows and 2.5% urban office exposure) boasts a 16-year history of minimal charge-offs and passes a 7% rate stress test for over 90% of maturing loans.
  • A multi-year operating transformation is underway to expand commercial, C&I and mortgage banking capabilities while automating processes, with expense reductions expected to begin in Q4 2023 and extend into 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
OceanFirst Financial Q1 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

During the presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. I will now hand over to your host, Jill Hewitt, please go ahead.

Speaker 1

Thank you, Bruno. Good morning, and thank you all for joining us today. I'm Jill Hewitt, Senior Vice President at OceanFirst. We 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.

Speaker 1

Refer to our press release and other public filings, including the risk factors in our 10 ks, where you will find factors that could cause actual results to differ materially Thank you. And now I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Marr.

Speaker 2

Thank you, Jill. Good morning, and thank you to all who have been able to join our Q1 2023 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. Based on recent industry events, we will be adjusting our regular agenda to focus on the questions that are most relevant to the current environment.

Speaker 2

My comments will cover those areas and refer to slides filed in connection with the earnings release. The supplemental materials are also available on our company's website. After that, Joe, Pat and I will jump straight into the Q and A portion of the call and take your questions. Turning to Slide 3. Our financial results for the Q1 included GAAP diluted earnings per share of $0.46 Our earnings reflect net interest income of $98,800,000 Which while down from the prior linked quarter, net interest income has increased $14,600,000 or 17% as compared to the prior year period.

Speaker 2

Core earnings were $0.55 per share, increasing 12% as compared to the same period in 2022. Non core items primarily relate to the sale of investments that were adversely impacted by recent industry events, resulting in a pre tax securities loss of 5,300,000 The Board approved the quarterly cash dividend of $0.20 per common share. This is the company's 105th consecutive quarterly cash dividend And represents 36% of core earnings. Tangible common equity per share increased to $17.42 The company did not repurchase any shares in the Q1 and we do not anticipate repurchasing shares until we can better access The opportunity to deploy capital for prudent growth initiatives. Turning to recent events and the key questions being asked in the banking sector, I'll spend a few moments covering the company's strong liquidity position, prudently structured securities portfolio, well diversified and conservatively underwritten loan portfolio And our approach to dealing with the margin compression, which resulted from recent events.

Speaker 2

Regarding liquidity, funding and deposits, Our highly granular and well diversified deposit portfolio performed well in the Q1, with deposits following our typical seasonality And ending the quarter at 99% of the December 31st balances, excluding the addition of some brokered CDs. Recall that OceanFirst has 2 seasonal deposit businesses, a government banking business that typically hits cyclical lows At quarter end in Q1 and Q2, as well as a segment of commercial clients along the New Jersey Shore that typically build inventories In advance of the upcoming summer season, drawing down account balances in the spring. Importantly, uninsured deposits make up less than 19% of total Our liquidity position of $3,600,000,000 at March 31 provides 192 percent coverage of our uninsured deposits As shown on Slide 5. While discussing deposits, we provided enhanced disclosures that detail several important deposit metrics, Including our cycle to date deposit beta of just 20% and several other data points regarding the granularity of our deposit portfolio. For some highlights, consider that 98% of deposit accounts at OceanFirst maintain balances less than $250,000 And average deposit balances for consumer and business accounts are $20,000 $123,000 respectively.

Speaker 2

Additionally, our deposit customers are clearly longstanding relationships as evidenced by an average account age of 10 years And 68% of accounts banking with us for 5 years or more. To best understand why our clients bank with us, please turn to Slide 9, which demonstrates the primary deposit business at OceanFirst, conducting financial transactions on behalf of our clients. As you can see, In 2022, we facilitated over 43,000,000 transactions totaling over $100,000,000,000 for our clients. To put that in perspective, transaction volumes at the bank equate to the total deposit base turning over about every 5 weeks. Detailed deposit metrics are included on slides 7 through 9.

Speaker 2

Now for an overview on our investment portfolio. The company is $1,800,000,000 of investments in its portfolio. The investment portfolio comprises of high quality investment grade assets. Slide 6 provides important context on 2 key strategies employed over the past several years to avoid some of the issues that have been highlighted in recent weeks. First, we kept the size of the investment portfolio modest at just 13.3% of total assets.

Speaker 2

Then we maintain the discipline around duration favoring floating rate securities when possible. As a result, duration for the entire portfolio The unrealized loss position in the portfolio is modest and even if the entire portfolio were to be mark to market Using valuations as of March 31, the impact would be limited to 50 basis points of capital. Given our quarter end CET1 ratio of 10%, the current value of the securities portfolio does not present a material risk to the company. This discipline is further reflected in our ability to grow tangible book value per share, which is illustrated on Slide 12. Tangible book value per share has increased 9.3% over the past 5 quarters, placing us in a relatively high performance band among our practice peers.

Speaker 2

Next, I'd like to turn attention to our loan portfolios starting on Slide 10. Conservative Credit Risk Management has been a hallmark of the bank for decades. That is demonstrated by our history of credit performance, our thoughtful risk selection and diversification and our prudent portfolio management, Our history is clear. Commercial real estate performance has been exemplary through several cycles. Over the past 16 years, aggregate CRE net charge offs have totaled just $26,900,000 That includes all charge offs related to the great financial crisis, our experience in Hurricane Sandy and the COVID era.

Speaker 2

To put that into CRE net charge offs averaged just 6 basis points per year, 92% lower than all commercial banks with assets between 10,000,000,000 50,000,000,000 Peak annual charge offs totaled just 47 basis points as compared to a peak of 4 55 basis points for the comparison group. That experience is heavily influenced by our portfolio, which is concentrated in commercial real estate evidencing strong cash flows, Low LTVs and is diversified by both property type and by geography. Slide 11 provides important details regarding our risk selection And notes that urban office loans represent just 2.5% of the portfolio and less than 1% of total assets. Further, even this portfolio is weighted towards credit tenants and medical and life science uses. The entire portfolio demonstrates a debt Service coverage ratio of 1.7 times and a weighted average LTV of 56%.

Speaker 2

Another hot topic in commercial real estate is the maturity one, which represents the concern that even cash flowing and low LTV loans Maybe subject to payment shock as rates roll over at maturity. Our portfolio has been carefully structured to avoid this risk. First, aggregate maturities that face a rate reset in 2023 2024 totaled just $487,000,000 Only 4.9 percent of total loans. Next, the weighted average rates on these maturities are much higher than you might think. Loans subject to a rate reset in 2023 have a current weighted average rate of 5.99 percent And those facing a rate reset in 2024 have a current weighted average rate of 5.41%.

Speaker 2

To best understand this risk, we conducted a rate based stress test for all commercial real estate loans with balances in excess of $1,000,000 Over 90% of the tested loans are able to cover debt service at a 7% interest rate and within our amortization policies, All at the rental rates in effect at the time of underwriting. Current market rents for the majority of our portfolio are substantially higher than at origination. In many cases that will result in stronger levels of NOI or net operating income, which will provide an additional cushion that was not considered in our analysis. We'll continue to monitor this risk, but the relatively small portfolio subject to the risk And the strength of the stress test results evidence to minimal to no rate rollover risk. One final comment regarding credit risk management.

Speaker 2

We actively manage our credit risk and move quickly to address concerns when they arise. In 2020, we were among the 1st banks to offer blanket forbearance programs, But then also took 2 additional actions that raised some eyebrows then, but will serve us well now. First, we derisked the credit portfolio by selling all credits that demonstrated heightened risk attributes in the fall of 2020. Next, we implemented a practice that required all loans to return to their pre COVID loan structures, including appropriate amortization. We did not offer long term CARES Act deferrals or CARES Act credit restructures to our commercial clients.

Speaker 2

Our commercial credit portfolio does not contain any CARES Act modifications and has experienced 0 net charge offs in the 5 quarters Since addressing that risk position. So our history of exemplary performance, our conservatively underwritten and highly diversified portfolio And the lack of a maturity wall issue bode well for the future performance of our portfolio.

Speaker 3

Before I turn it over to

Speaker 2

the question and answer session, I wanted to cover one last topic that's more forward looking in nature.

Speaker 3

Over the

Speaker 2

past 6 months, the company has been preparing for a difficult operating environment. We certainly did not anticipate the exact scenario that played out a few weeks back, but we did expect that protracted inflation would likely lead to conditions that would pressure margins and present risks to the economy. To prepare for this eventuality, we have progressed a project that That included dedicating resources and hiring external subject matter experts to evaluate all internal processes, Performed a series of benchmark studies and developing detailed design plans to improve performance. We've just completed the design phase of that project And are moving to the execution phase, which will run through the remainder of 2023 and into 2024. The focus of these initiatives will include expanding our commercial and residential businesses, improving the revenue contribution of our branch network, Increasing automation of internal processes and improving infrastructure support across all lines of business.

Speaker 2

While this program will expand certain business lines Such as Corporate Treasury Management, C and I Banking and Mortgage Banking Operations, our work to date has also identified opportunities To materially reduce the absolute level of operating expense. As a result, the efforts will not just be self funding, but will also allow for a measurable improvement in operating The improvement in operating leverage will be apparent later this year with expenses beginning to decrease no later than Q4 of this year And continuing into 2024. This transformation will be well underway during the Q2 of the year. I'll conclude my remarks with one final thought. The past few weeks, while challenging, have given us a tremendous opportunity to connect with the clients that are our business.

Speaker 2

These conversations have given us great assurance that we have a client base that values our relationship and has remained loyal to the bank. The quarterly margin weakness was disappointing, but it was driven by financial decisions to bolster liquidity and protect the balance sheet. It may take a couple of quarters to stabilize and then improve margins, but we have a rock solid balance sheet, a terrific collection of bankers and a wonderful set of client relationships.

Operator

And please do also remember to unmute your microphone when it's your turn to speak. Our first question comes from Frank Shir Dali from Piper Sandler. Frank, your line is now open. Please go ahead.

Speaker 4

Good morning.

Operator

Good morning, Frank.

Speaker 4

I wondered if If you guys could just walk through the NIM dynamics from here. You provide a little bit of thoughts on 2Q in terms of modest Or maybe more modest NIM compression. It's really helpful to see the spot deposit costs you guys provide in the period. But obviously that still would imply meaningful pressure on deposit costs quarter over quarter on an average basis. Is it do you think at that point, is it the expectation that, that abates significantly?

Speaker 4

And kind of what are you thinking about, I guess, margin over the next couple of quarters.

Speaker 5

Hey, Frank, it's Pat. So I'll take a shot at what We'll probably prove to be a not completely satisfying answer as to time frame, but at least for the moment and into next We aren't really seeing a huge amount of or expecting a huge amount of flow or repricing action With the exception of some actions that we know we've already taken. So we think that the aggregate of kind of costs ramping up in Q1 And some higher repricings early in April that we've done will continue to put some pressure on our margin. And that's when we say modest compression, we were thinking about it in terms of The 30 basis points of compression we saw this quarter. I'll remind you that a third of that, those 9 basis points were really Kind of one time benefits in our margin in the 4th quarter.

Speaker 5

They were absent due to early prepayments and prepayment penalties and resolution of problem loans. So the core decline was more like 20 basis points and we think it's going to be less than that. If I had to guess, I would say probably in the 10 basis point to 15 basis point range of the 2nd quarter, but we don't see anything on the horizon that would cause that compression to continue Beyond that, because we really have stacked up deposits, we've termed out about half of our FHLB borrowings. We did that in March. So $600,000,000 we termed out at an average rate of in the kind of mid to 3 quarters of 4 range, Which will help and of course the retail CD promotion, any brokered CDs we put on were at fixed rates, that won't go up And they give us the flexibility to roll off with the broker CDs and FHLB funding as and if we see declines.

Speaker 5

And then I guess the last dynamic is just to remind you of is that we've got $400,000,000 of cash in the balance sheet. That actually earns pretty healthy amount just leaving it at the Fed right now. It's not a bad investment. It outperforms the securities portfolio by about 1.5 percentage points.

Speaker 2

Frank, maybe just a little extra color too just on client conversations. It's a little hard for us to tell yet, but We have the sense that one of the impacts of calling all your largest customers to make them feel comfortable It introduces an opportunity for them to talk to you about the rate they're earning on their deposits. So I think we may have pulled forward some of those conversations That might have happened naturally over the course of the next month or 2. So, again, it's too early to tell, but the pace of conversations has changed in the past I think we kind of got out ahead of it, but we may have paid the price by pulling forward some of that deposit repricing.

Speaker 4

Got you. Okay. That makes sense. And then in terms of the excess liquidity Put on the books, obviously, that's less important to the bottom line and NII. But I'm just wondering, I assume you would expect On an average basis, there to be more cash and more borrowings on the books through the second quarter Then the Q1.

Speaker 4

And so I'm just wondering, first of all, if that's the case and then second of all, if that's factored into your expectations on when you talk about That 15 basis points best gas margin compression.

Speaker 2

I think you're right about that Frank. That is the case and it is reflected. So we expect that probably many of us will remain more liquid in the coming months.

Speaker 4

Okay. And then just lastly, I mean, certainly recognize that Prudence on the liquidity and capital front is kind of the most important thing in this environment, but I think you guys have provided Pretty good detail and proof on the health of liquidity and capital level. So just kind of turning back to returns, Do you when you talk about the operating leverage strategies that are going to be put in place Through the end of this year and into 2024, how do you think about profitability? Do you think that gets you back? I would imagine ROA dips below 1% here just given continued margin compression we're talking about here.

Speaker 4

But you think that gets you back to a 1% ROA or maybe just how you think about returns in general here?

Speaker 2

Yes, I'd hesitate to give you a date on that Frank, but we're obviously running the company to have returns better than a 1% ROA over time. And we're working on a path to get there. It's a little uncertain with the rate environment. It's much more certain about kind of operating expenses and leverage. We feel very good about that.

Speaker 2

So we know what we can affect in terms of our levers, but we need a little bit of cooperation from the rate cycle at some point.

Speaker 4

Okay. All right, great. Thank you, guys.

Speaker 2

Thanks, Frank.

Operator

Our next question comes from Daniel Tamayo from Raymond James. Daniel, your line is now open. Please go ahead.

Speaker 6

Thank you. Good morning, everybody. Maybe we just Follow-up on that profitability question, but just focusing in on the expenses. How should we think about The path of overall expenses and the savings that you're planning to make, I mean, is there any kind of A finer point that you can help us put on how you're thinking about that?

Speaker 3

Yes. I'll take

Speaker 2

a shot at

Speaker 5

that. So the Q1 run rate is we think a good run rate for the next couple of quarters. And I'm hedging just a little bit as to whether it's 1 or 2, because we may see some improvement in the 3rd quarter. Let's call it a 3 quarter run rate through the Q3 and then we think that we have a good opportunity To bring those down by at least 5% for the Q4, largely as we anticipate the completion A lot of the external spend that has been in our run rate, going back to actually the Q4. We didn't talk about this a couple of quarters ago, but we've actually been working on laying And efforts needed to improve processes and platform and get better use out of our existing technology.

Speaker 5

And so at a minimum, we think that that will fall off. So professional fees are going to come would come down by probably $3,000,000 a quarter. Beyond that, we think there are opportunities for efficiency in a wide range of areas that we're trying to balance against the need for Continued productivity and growth in non CRE lending, Treasury Management, resi mortgage, C and I lending, which Good deposits along with it. But we do think that there'll be some staffing efficiency as we exit and go and move into next year And we'll continue. So, I would say the total opportunity is more than 5%, but I'll just keep it to a 5% by Q4 of this year.

Speaker 6

Okay. That's great color, Pat. And then you I think you guys said you're expecting More savings in 2024 as well?

Speaker 5

Correct. That's correct. I'm just It's a little early for us to pin down on all that. I think next quarter we'll be refining that each quarter as we move along. And don't forget though that I should say, not don't forget, that at the same time, we've got growth initiatives working to expand capabilities in originate and sell mortgage business as well As growth in C and I and Treasury Management Deposit Gathering Business, so all of my comments would be net of any required investments that we would have to make.

Speaker 5

So these are absolute comments. That we would have to make. So these are absolute comments.

Speaker 6

Okay. All right. That's great. I appreciate it. And then secondly, just on loan growth, I think you made a comment that you're expecting that to be Lowe going forward, if you could provide any more color or detail around what you're thinking when you made that comment, that'd be great.

Speaker 7

Daniel, it's Joe Labelle. I think the easiest way to describe it is you support your customer base. We're still seeing loan activity. You could see it evidenced by the pipeline. You're also seeing it at higher rates.

Speaker 7

You could see it in the pipeline. We're Well into the 7s in the pipe in terms of average rate. I think our approach has been consistent, which is Pricing discipline and credit discipline, and that's going to cause some ups and downs intra quarter around, what you can do and what you can't do. And I think we support the existing clients, we look for new clients and if good opportunities come up, we'll do them. And it also gives us a chance to look at our existing book and make determinations about What still fits and what doesn't fit.

Speaker 7

So I do think you see some unevenness. There may be quarters where you have growth, there may be some quarters where you see some flatness.

Speaker 6

Okay. All right. That's helpful. I appreciate it. I'll step back.

Speaker 2

Thank you.

Operator

Our next question comes from David Bishop from Holds Group. David, your line is now open. Please go ahead.

Speaker 8

Yes. Good morning, Chris and crew.

Speaker 3

Good morning, David. Hey, Chris, question for you in terms

Speaker 8

of just the macro environment. Obviously, the stress and fallout Signature Bank and maybe less so from your market Silicon Valley. Any impact in terms of the potential or did you move over Any new relationships either deposits or loans or relationship managers maybe sort of any near term impact from that

Speaker 2

I'd say a couple of things. I mean, there may be some customer movement. Certainly the talent environment is going to be interesting over the next 6 to 12 months, but that goes on both sides of it. When you're in a period of uncertainty, People think twice about moving from one organization to another. So we'll have to wait and see those things.

Speaker 2

There is a very significant consideration That will play out at least in the Northeast. And that is I think you can see credit spreads expand. There are far fewer people out lending today than there were a year ago. I think that will translate into some opportunity for us to get paid for the work that we do. And I know Joe and his team will be really focused on making sure that as we grow the loan book from here that we're paid to do so.

Speaker 8

Got it. Then maybe a question for Joe. Obviously, a A lot of attention, rightly so, on the Office CRE book. But in terms of some of the other segments In terms of CRE, anything else there flashing warning signals maybe that you're donning your eyes crossing your team More fine tuning on that maybe is not getting as much attention out there in the press that is showing maybe yellow or red flags here from warning signals?

Speaker 7

Well, I think everybody hit on the head, David. Everybody talks about office. We've been very Thoughtful in building the CRE book over the last 9, 10000 years around Just remediation around geography, dispersion and asset classes. I think we're seeing the We've definitely seen the slowing in the warehousing space. I think we're well past the point of The dynamics around the COVID environment relative to folks shopping from home, I think that's going to continue, but not at the same pace People all thought we're not really seeing that softness in our book yet, but we're thoughtful about it.

Speaker 7

And then I'd just make the comment I think because it's important because everybody talks about The office where we have $1,100,000,000 in office. Our office is largely diversified not only In the type of office, but also in geography, we have pretty even dispersion between our Philly, New York, New Jersey regions in terms of office. We also have half of our office exposure is Either credit tenant or medical office. And the remainder is largely suburban. We've talked about, you've seen the deck, we're only I think it's less than 1% of total assets in the central business districts.

Speaker 7

But the average size Our ops loan here at the bank is less than $2,000,000 So while we have some large ops loans and some small ones, even when you talk about the maturity wall For 23, we have 155 loans maturing, 112 of them are under 1,000,000. So I think we've done a really good job Protecting that, but getting back to your comment about other things, we still see multifamily being pretty strong. Since COVID, the average Multifamily rents are up almost 20%, which is just fascinating in itself given the amount of people working from home. But it just goes to show you where we stand in the country in terms of housing. So right now, I think we're pretty comfortable with what we see, But, it's obviously very critical on what we're doing going forward.

Speaker 8

And Joe, do I hear it was either you Chris that said in the Introduction, when you did the stress test, you did not adjust underlying cash flows or rents or current Current environment, it was what was done in underwriting, correct?

Speaker 7

Yes, exactly right, David. We didn't adjust for current rent rolls or current Dollars per tenancy. We looked at the original underwriting tenancies. We also looked and we obviously did that making sure that we still had those tenants in the properties, Which we do.

Speaker 2

I think the theory on that, Dave, was we didn't want to count on this inflation of rents. Think you're going to give some of that back maybe over the next year or so. But we thought the Underwritten rents, which were several years ago. In multifamily, most of that was kind of pre COVID rents. That would provide a good floor for us.

Speaker 2

So it's pretty conservative way to look at it.

Speaker 8

Got it. And one final question maybe on credit. Did see a little bit of a shift to special mention to substandard. Just curious what drove the increase in substandard loans? Thanks, and I'll hop off.

Speaker 2

It was nothing significant. In fact, we remained lower than we were in the Q3 of last year. It was just one loan that went from special mentioned the substandard Is the bulk of that migration well secured and not in some accrual, not something we're concerned about.

Speaker 8

Great. Appreciate the color.

Operator

Our next question comes from Michael Perito from KBW. Michael, your line is now open. Please go ahead.

Speaker 9

Hey guys, thanks for taking my questions and for the extra supplemental information this quarter. It was helpful. You guys covered a lot of it, so I don't want to take too much time here. But just two quick questions. On the first one, apologize if I missed it, but just on the non interest income side, Kind of a low watermark for you guys here on a core basis in the quarter, just any near term expectations for rebounds anywhere, whether it's kind of Commercial swap income, trust mortgage, is there anything we should be mindful of as we look at this kind of $9,000,000 kind of quarterly run rate in the Q1?

Speaker 2

Thanks Mike. I think you're right to say that's kind of a 4 ish number. As loan volumes decreased, Swaps decreased in this environment. We don't expect swaps to kind of pop back up anytime soon, although they're noisy. You might even in any quarter, you might have a couple of larger swap deals.

Speaker 2

I think that was some of the thought behind us, focusing a little bit on our mortgage banking business, which may sound counterintuitive at a time when there's high interest rates right now. But we have the ability to find some really good talent. You may have seen the press release about Steve Adamo joining our team. So Joe and Steve are working on Really focusing on the opportunities for a gain on sale business. As you'll know looking back in our financials, that's one area where Our income is underrepresented.

Speaker 2

And not that we understand the multiples on a mortgage banking business are not that high usually because of the volatility, But it is a countercyclical business and should rates come down next year and refi position, we want to be in a position To make some money off that, that's probably the only business line where I would expect to see the potential. And again, I'm talking about 2, 3, 4 quarters from now that would require rates to cooperate a little bit too, but we could do better there and I'm comfortable that Joe and Steve will

Speaker 9

Got it. Okay. And then just lastly for me on the You guys spent some time talking about liquidity and carrying that at higher levels near term. But can you maybe give us an update on where you guys stand in terms of What the right capital is that we should be considering maybe, I'd say longer term a little jokingly because obviously A lot can change, but is it fair for us to think that you guys might be more comfortable to carry heavy a little heavier capital than maybe otherwise normal for the Kind of foreseeable future until we kind of see what the full fallout from everything recently occurring is or how you guys think about that?

Speaker 2

Yes, I think you probably guessed right, Mike. We're conservative folks, so we're going to carry a little extra liquidity or in a little extra capital until we know what Kind of the world thinks about acceptable liquidity and capital levels because I think it's going to be a discussion in the industry.

Speaker 5

It's going to go on for

Speaker 2

the next couple of quarters. We're all going to settle in. I will share with you, we've been talking internally. I remember all the discussions in 2,009 and 2010 That capital is going to have to come up and banks were never going to earn their cost of capital and the sector was dead and uninvestable and some of which you hear today. There is a concern, right, carrying extra liquidity and capital will impact profitability.

Speaker 2

But I think just as we did after the Great Recession, the industry is going to figure it out. We'll get more efficient. We'll figure out how to get our margins back and whatever the capital rates ratios need to be, we'll adjust to and Find a way to make money.

Speaker 9

Great. Just one last one for Pat. Just $13,500,000,000 in assets around 100 percent loan to deposit ratio. Are these decent bogeys for the near term here that you think could be pretty stable?

Speaker 5

Yes, I think so. It's pretty typical for us to run it around this level of leverage. And again, to echo Chris' comments, notwithstanding The industry or other stakeholders in the industry deciding that that's no longer acceptable, we're comfortable with that.

Speaker 9

Great. Thank you, guys. Appreciate it.

Operator

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

Speaker 10

Thank you. Good morning. Chris and Pat and team, I just wanted to ask about how often you are doing new commercial loans above 7%. I want to circle back to the stress test and I'm curious if 7% is high enough in this environment.

Speaker 7

So I think Chris I'd say the following relative to weighted average. I think one of the advantages that we've had With our balance sheet and our footprint has been the advent of Focused construction lending end markets largely non spec where we can get floating rate opportunities with Interest reserves. So you do see some of that in the weighted average in the pipe and also in the recent increases in And the weighted average returns for us. But I would also say that as we look at the existing portfolios, We're looking at this based on risk and based on relationship. And I think we're focused on driving those returns where it's prudent And where the cash flow can support it, which is the vast majority of what we have in the book.

Speaker 7

So it'll be a slow we have a I think we mentioned earlier, we have a slower small amount of maturities Coming due. So that maturity wall is a small one at the moment. But if you look at the pipe, The pipeline is low 7, 7.25 percent, 7.25 percent, 7.26 percent. You don't always get those deals done at the number you want, But I think we're really focused on, we recognize what our cost of funds is and where that's going. So I think it's important.

Speaker 2

Also comment Chris that, if you think about the credit characteristics of the loans that we have rolling that we applied this to, you're talking mobile LTV, high debt service coverage ratio, many times personal guarantees or other structures. For those loans in the market today, those would typically Carry a high 6 handle. They're not in the 7s yet, and I don't see that coming soon. There may be other credits that go into It would have different risk characteristics, but 45 percent LTV, 2 times debt service, you're not seeing 7s on those, at least not in the Northeast,

Speaker 7

And I think we're being more thoughtful for our existing clients versus those new opportunities where we recognize what yields we need to get going forward.

Speaker 10

Got it. That's very helpful. So the low LTVs, the non spec that makes your 7% not the same as someone else's 7 Got it. Okay. And then my next question just goes back to the concentration of office.

Speaker 10

I know half Is in the credit tenant medical as you had described. Do you want that to kind of slip back over time? Will it naturally fall back To another level, I'm just curious how you think about that now.

Speaker 7

I think it's well diversified, but I think we're Also smart enough and cognizant of what's going on in markets today. I've always taken the approach of you do good loans when good loans present themselves to you, you don't take undue risk. And we run our business for the long term. So there are certain asset classes that may be out of favor today. But you look at things 1 off, 1 by 1 and you make the decision.

Speaker 7

That being said, I think we're savvy enough to understand that If we don't get the return that we need, that will purposely stay away from certain asset classes as they go forward.

Speaker 2

We've seen a little bit of this, Chris. I don't know if this will turn into a trend, but given the negative commentary about office nationally, It's become like a pariah asset class. We've seen a couple of exceptionally conservative deals, LTVs and debt service and tenancy that government agencies, things like that, that are priced just very differently than they would have been 6 months ago. So we don't intend to build this concentration, but if we have a client that has an exceptionally conservative property, We're going to work on the credit. We're not going to work on the popularity.

Speaker 10

No, that's great. Thank you for that. And just last One question is I know we don't have all the granularity on kind of reserve allocations by type, but just generally speaking, is it would it be fair to presume that you've got a higher allocation of reserves to office, just given the property type as well as the criticized level relative to the rest of the portfolio.

Speaker 2

Actually interestingly, within our under our covers, the offices performed pretty well. So the historical losses don't Have any need to generate significant reserves. And then our distribution of past versus substandard It's very similar to our other office classes, our other real estate classes and collateral classes. So there's nothing unusual about the allocation there. We do have I would point out that the majority of our reserve is actually qualitative, because over the last year we've been trying to make sure we account for Not just risk we see today in the book, but risk that may emerge based on economic conditions and some of these things we've talked This morning.

Speaker 2

So, if anything you might see a reallocation of reserves down the road if we see a blip anywhere inside the reserve.

Speaker 3

Got it. Thank you both. I really appreciate it.

Speaker 2

Thanks.

Operator

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

Speaker 11

Good morning. I was hoping to get a little bit more color on buybacks. It feels like concerns around capital for the industry are Really focused on unrealized losses in securities portfolios, which given your book and lack of meaningful AOCI, you've done a really good job on. So Understanding being conservative, but also recognizing where the stock is, why not fight on the buyback?

Speaker 2

Look, I would kind of classify it this way. We have the capacity to do buybacks. So we have the power to do that. We just want to make sure that we get put a little bit of distance between us and the expectations in the market around capital and liquidity and all of that. And we keep it as an open option for the future.

Speaker 2

So we have an authorization. We have the financial wherewithal to do it. We just want to know a little more about the operating environment before we do that.

Speaker 11

Understood. Maybe a follow-up to that, understanding capital ratios, but also commercial real estate concentrations. Are the regulators paying any more attention to CRE concentrations in the wake of all this? If so, maybe give me some sense for how and what they're looking at?

Speaker 2

I guess I just kind of make this omnibus comment, right. They're focused on everything right now. You can understand why, right? Given the events of the last couple We're getting questions on all sorts of things about the business, whether it's liquidity or concentrations or the rollover risk or So I would say, yes, they're focused on it, but they're not to any different degree than they're focused on liquidity and capital plans and stress tests and all that other stuff. So No special focus and I would point out that our commercial real estate position has not changed dramatically over the last couple of years.

Speaker 2

It's inched up. But we've had the conversation with our regulator for quite some time about the management of that asset class.

Speaker 11

Okay. And then on Page 11, the stress test where 90% of the maturing book maintains a debt service coverage ratio greater than I feel like a huge point here is that you stressed it at the originally underwritten rents. Could you just give me some sense for Maybe the asset classes where you've seen the most amount of rent increase and the asset classes where you've seen the least? And then what is the average kind of rent increase from

Speaker 2

You'd expect it kind of varies a little bit by geography and property type. But multifamily, as Joe said earlier, is consistently strong across the entirety of the market. That's why we're comfortable. And I should note, We didn't call this out in the slides to any special degree. We've never really operated to any degree in the rent stabilized multifamily.

Speaker 2

So this is market rent Product that we're in. So multifamily probably the strongest. Where you see flattish and Joe mentioned this is industrial warehouse, some pullback and about do we need all this capacity? You've seen the headlines about Target and Walmart and Amazon pulling back their needs For Warehouse Space, nothing of great concern there, but softer than it was, softer than it was a year ago. The Central Business District office is an open question because I don't think anyone knows exactly what the real vacancy is.

Speaker 2

And I wouldn't even look at the rates that are out there today as being indicative. I would tell you that the suburban office has done surprisingly strong and maybe I may comment a little bit on that because it's unusual to us and retail has held up better than we would have thought.

Speaker 7

Yes. I mean if you think about it a year, 1.5 years ago, we were all worried about retail given what had gone on. But Matt, we've taken the extra step. I mentioned we were heavily suburban and then Heavily granularity average loan under $2,000,000 and then of course geographically diversified. We've also taken the extra steps in addition to doing the math stress test.

Speaker 7

We're sending folks out and we're actually doing site visits as you should. And We're doing site visits a couple of days a week. So you're not really just looking at you're looking at parking lots, obviously, are people actually back in offices, but that you're walking buildings as So we're doing all the prudent things you need to be doing in this environment just because we don't want to be surprised. And so far the signs are good. Just

Speaker 2

one more color comment on suburban office. At least in our There's been almost no creation of suburban office for maybe 15 years, because the class had been under pressure for a Long time with all the migration into urban markets. So what we have here is not necessarily there's exceptional demand in the There's just far less product and there is some demand. And some of the demand is interesting. The stuff we did up in Boston is Life Sciences repurposing of kind of those office park situations, those are rock solid properties.

Speaker 2

And so it's been a really interesting time. We were more concerned about suburban office probably a year, year and a half ago. We have been pleasantly surprised by the amount of absorption in many of our markets.

Speaker 11

Great. Okay. Last one for me. You show the amount of these loans that hold a greater than 1.0 debt service coverage On a rate reset, I'm just curious, what is the average pre and post? I think you show weighted average debt service coverage On Page 11, again, at 1.7, under the stress test, where does it where does kind of the portfolio average reset at?

Speaker 2

I think the $1.7 is a good number to come from. I don't have an average on what it came out to. So We'll get that for you though, man.

Speaker 11

Okay. All right. I'll leave it there. Thanks for taking my questions. All right.

Speaker 2

Thank you, man.

Operator

Our next question is from Manuel Nieves from D. A. Davidson. Manuel, your line is now open. Please go ahead.

Speaker 3

Hey, good morning. It seems like you're Successfully hey, since you're successfully keeping like a core Legacy deposit beta of that 12% versus 20% for the whole book, and you're doing everything around the edges to kind of maintain that lower deposit beta The legacy deposit base, is that two level beta how we should think about things going forward? How are you targeting them?

Speaker 2

Yes, that's exactly our strategy. It's not all that complicated. What we've done is try to Separate the price pressure on our existing base versus the price pressure of deposits we need to acquire and not to kind of Let the contagion go from one to the other. Our existing customers that we're doing a tremendous amount of transactions for, They value being with us because we're moving their money around for them a lot every day and they're not looking for a giant rate. So we want to kind of keep that We're providing good service.

Speaker 2

They're happy with it. But I do think it weighs on our incremental deposit growth The marginal cost of that growth is higher. So we have to reflect on our loan rates and think about that carefully.

Speaker 5

I think a lot of it is pretty well articulated on the slide where we talk about the transaction volume and the number of times our deposit base turns. When you have DDA and checking account concentrations like we do And people are using those to pay bills and to pay employees and to pay other things. They're not looking for yield. And so our non interest bearing It's held up pretty well. It's still 20% of our base and excluding Brokered CDs and retail CDs, we're absolutely thrilled with the fairly low levels repricing that we've needed to do.

Speaker 5

I'd say with the exception of maybe the government, the municipal accounts, which have tended to Behave more as a group and are expecting kind of broad based repricing and we've had to do that.

Speaker 3

As you've kind of felt that the rate increases you've done so far I kind of stabilized a little bit. Do you have a one number beta assumption for the whole book? Or do you kind of separate it out into 2 levels?

Speaker 2

I'm not sure we have enough room for it to give you that number. I would say though you're accurate that we think that the worst is behind us in that regard. And you can appreciate If we were to make decisions over the last 45 days over whether we should pay a price and Hug a depositor, we've decided to do that, right. So we've there in the side of being conservative. So as I said earlier that I think that pulled forward some of it.

Speaker 2

We're seeing a lot fewer of those conversations now. So I think that tempo is going to slow down. And what we did the last 2 weeks, 3 weeks in March Where things we probably would have done in April or May anyway, we just did them a month or 2 earlier.

Speaker 3

Okay. On the loan growth and the pipeline, I think previously some of the construction fundings you guys have expected weren't showing up in the pipeline. Are they all there now? Is that pipeline encompass all kind of future construction funding?

Speaker 2

It would be undrawn commitments. Yes. That would be an undrawn commitment. That's where you would find that. We wouldn't put that in the pipeline of the existing construction loans that have yet to draw.

Speaker 3

Okay. And then in some of the revenue opportunities that you highlighted before, including Mortgage banking, is there any numbers you can place And also where are you thinking big picture? Are you thinking more of very local businesses? Are you considering regional, national businesses? Just kind of some of your thoughts there.

Speaker 2

We have a treasury product that's done quite well so far and we want to kind of double down on that product. And that product serves a wide variety of folks. So we've got small businesses that are clients of that. We have companies that are clients of that And we have midsized businesses that are clients. We have to keep $100,000 and we have folks that keep $20,000,000 And we've got the product suite to do that and shown competitiveness in that.

Speaker 2

That's interestingly a deposit opportunity, but also a fee opportunity because one of the things we've learned as we went through this, you saw all the transaction volume, right, Maybe there are some segments that could pay us more appropriately for the stuff that we're doing for them. So we'll try and look at that. But It's too early for us to give you a specific number. And around mortgage, given the rates and the volumes today, you're not going to see that change in the Q3. But that market is notorious.

Speaker 2

It changes quickly. We've been in mortgages since 1902. But admittedly in the last decade, we've

Speaker 7

I think the only thing I'd add there is that we do expect to expand the geography because we Historically, it's been New Jersey based, Central Southern New Jersey based residential mortgage lender and we have Licensing in most of the states, I think 47 states and not that we're running national tomorrow, but we're in Boston and New York and Philadelphia and Baltimore. And I do think there's an opportunity now when the market is quiet to Put on some good talent and treat them fairly and prepare for the next not only refinance opportunity, but also purchase opportunity as rates get The more normalized.

Speaker 2

One of the things we determined in our strategic review in the last 6 months is that, we have an infrastructure That's appropriately tuned to do most of what you would need to do. We're just taking that out and trying to get more value out of it.

Speaker 3

That's really helpful. As loan growth kind of downshifts And hopefully the environment clears up for capital deployment. Is buyback kind of the preferred use Of capital.

Speaker 2

It all depends on kind of what we see in the market. If the credit spreads we're seeing now, We love the commercial banking business. I don't know if those are going to persist, but we'd have to get a little more comfortable about the environment, about the marginal cost of funding. But The first thing we'd like to do is to grow the bank, but absent a prudent opportunity to do that, we'll build capital. If we don't think we can do it and capital starts

Speaker 3

Okay. Thank you very much for the comments.

Speaker 2

Thank you.

Operator

We currently have no further questions. I would like to hand back to Christophe Meir for Final remarks. Please go ahead.

Speaker 2

All right. Thank you very much. A few important additional comments before we finish the call. Today, we'll be commencing mailing the materials for our Annual Meeting of Stockholders, which will be held virtually on May 23 at 8 am Eastern Time. We encourage stockholders of record on April 4, 2023 to review the materials and vote your shares.

Speaker 2

Also recently we transitioned the Investor Relations Officer role from Jill Hewitt to Alfred Goone. Alfred joined our finance team in March of 2020. I know many of you have already started reaching out to Alfred directly. But if you've not, I encourage you to contact Alfred with any questions. Jill is still with OceanFirst, will continue to head our corporate communications function and will now lead the company's marketing department.

Speaker 2

As a special thanks, Jill spent more than a decade with me working through these earnings calls and she did it much longer than that with my predecessor, John Garbrino. So I know that Many of you have spent time with her and we appreciate all the time and effort she's put forth to try and make us look as good as we can look. We appreciate your time today And your support of OceanFirst Financial Corp. And we look forward to speaking with you after our Q2 results are published in July or next month at the Virtual Annual Shareholders Meeting. Thank you.

Operator

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines. Thank you.

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