OceanFirst Financial - Q1 2023

Transcript

Operator (participant)

Hello everyone, welcome to the OceanFirst Financial Corp Earnings Conference Call. My name is Bruno, and I'll be the operator of today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Jill Hewitt. Please go ahead.

Jill Hewitt (SVP)

Thank you, Bruno. Good morning, and thank you all for joining us today. I'm Jill Hewitt, Senior Vice President at OceanFirst. We will begin this morning's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you. Now I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Maher.

Christopher Maher (Chairman and CEO)

Thank you, Jill. Good morning. Thank you to all been able to join our first quarter of 2023 earnings conference call. This morning, I'm joined by our President, Joe Lebel, 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. 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&A portion of the call and take your questions. Turning to slide three, our financial results for the first quarter include a GAAP diluted earnings per share of $0.46.

Our earnings reflect net interest income of $98.8 million, which, while down from the prior linked quarter, net interest income has increased $14.6 million or 17% as compared to the prior year period. 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 $5.3 million. The board approved a 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 first quarter, 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. Regarding liquidity, funding, and deposits, our highly granular and well-diversified deposit portfolio performed well in the first quarter. 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 two 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 deposits, and our liquidity position of $3.6 billion in March 31st provides 192% coverage of our uninsured deposits, as shown on slide five. 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 of less than $250,000. Average deposit balances for consumer and business accounts are $20,000 and $123,000, respectively. Additionally, our deposit customers are clearly long-standing relationships, as evidenced by an average account age of 10 years and 68% of accounts banking with us for five years or more. To best understand why our clients bank with us, please turn to Slide nine, 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 million transactions totaling over $100 billion for our clients.

To put that in perspective, transaction volumes at the bank equate to the total deposit base turning over about every five weeks. Detailed deposit metrics are included on slides seven through nine. For an overview on our investment portfolio. The company has $1.8 billion of investments in its portfolio. The investment portfolio comprises of high quality investment-grade assets. Slide six provides important context on two 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% total assets. We maintained a discipline around duration, favoring floating rate securities when possible. As a result, duration for the entire portfolio is just under four years.

The unrealized loss position on the portfolio is modest. Even if the entire portfolio were to be marked to market using valuations as of March 31st, 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 five quarters, placing us in a relatively high performance band among our proxy peers. 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, which focused on great risk 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 $26.9 million. That includes all charge-offs related to the Great Financial Crisis, our experience in Hurricane Sandy, and the COVID era. To put that into perspective, CRE net charge-offs average just 6 basis points per year, 92% lower than all commercial banks with assets between 10 and 50 billion. Peak annual charge-offs total just 47 basis points as compared to a peak of 455 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. 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%. Another hot topic in commercial real estate is the maturity wall, which represents the concern that even cash flowing and low LTV loans may be 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 and 2024 total just $487 million, only 4.9% 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%. Those facing a rate reset in 2024 have a current weighted average rate of 5.41%. To best understand this risk, we've conducted a rate-based stress test for all commercial real estate loans with balances in excess of $1 million.

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, 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. We actively manage our credit risk and move quickly to address concerns when they arise.

In 2020, we were among the first banks to offer blanket forbearance programs, also took two additional actions that raised some eyebrows then but will serve us well now. First, we de-risked 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. Our commercial credit portfolio does not contain any CARES Act modifications and has experienced zero net charge-offs in the five quarters since addressing that risk position. 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.

Before I turn it over to the question and answer session, I wanted to cover one last topic that's more forward-looking in nature. Over the past six 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 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. While this program will expand certain business lines, such as corporate treasury management, C&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 leverage.

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 second quarter 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. 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.

With those advantages, we'll figure out how to capitalize on the new environment. At this point, we'll begin the question and answer portion of the call.

Operator (participant)

Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. If you'd like to withdraw the question, press star followed by two, and please do also remember to unmute your microphone when it is your turn to speak. Again, that's star followed by one on your telephone keypad to ask a question. Our first question comes from Frank Schiraldi from Piper Sandler. Frank, your line is now open. Please go ahead.

Frank Schiraldi (Managing Director)

Good morning.

Christopher Maher (Chairman and CEO)

Good morning, Frank.

Frank Schiraldi (Managing Director)

I wonder if you guys could just walk through the NIM dynamics from here. You provide a little bit of, you know, thoughts on 2Q in terms of modest or maybe more modest NIM compression. You know, it's really helpful to see the spot deposit costs you guys provide end of period, but obviously that still would imply some meaningful pressure on deposit costs quarter-over-quarter on an average basis. Do you think at that point, is it the expectation that that abates significantly? Kind of what are you thinking about, I guess, you know, margin over the next couple of quarters?

Pat Barrett (CFO)

Hey, Frank, it's Pat. I'll take a shot at what will probably prove to be a not completely satisfying answer as to timeframe. At least for the moment and into next quarter, 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. 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. You know, 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 nine basis points, were really kind of one-time benefits in our margin in the fourth quarter. They were absent due to early prepayments and prepayment penalties and resolution of problem loans. 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 10-15 basis point range in the second quarter. 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. $600 million we termed out at an average rate of in the kind of mid to 3.75 range, which will help.

Of course, the retail CD promotion and 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 brokered CDs, and FHLB funding as and if we see declines. Then I guess the last dynamic is just to remind you of is that we've got, you know, $400 million of cash sitting in the balance sheet. That actually earns pretty healthy amount just leaving it at the Fed right now. It's not a, it's not a bad investment. It outperforms the securities portfolio by about one and a half percentage points.

Christopher Maher (Chairman and CEO)

Right. 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 is it introduces an opportunity for them to talk to you about the rate they're earning on their deposits. I think we may have pulled forward some of those conversations that might have happened naturally over the course of the next month or two. Again, it's too early to tell, but the pace of conversations has changed in the past couple weeks. 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.

Frank Schiraldi (Managing Director)

Gotcha. Okay. That makes sense. 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 than the first quarter. 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, when you talk about that 15 basis points, you know, best guess margin compression.

Pat Barrett (CFO)

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

Frank Schiraldi (Managing Director)

Okay. Just lastly, I mean, certainly recognize that, you know, prudence on the liquidity and capital front is kind of the most important thing in this environment. I think you guys have, you know, provided pretty good detail and proof on the health of liquidity and capital levels. Just kind of turning back to returns, You know, 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 some continued margin compression we were talking about here.

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

Pat Barrett (CFO)

Yeah. I'd hesitate to give you a date on that, Frank, you know, we're obviously running the company to have returns better than a 1% ROA over time. 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. 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.

Frank Schiraldi (Managing Director)

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

Pat Barrett (CFO)

Thanks, Frank.

Operator (participant)

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

Daniel Tamayo (Director)

Thank you. Good morning, everybody.

Pat Barrett (CFO)

Daniel.

Daniel Tamayo (Director)

Maybe we just follow up on that profitability question, but just focusing in on the expenses. You know, 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?

Pat Barrett (CFO)

Yeah, I'll take a shot at that. The first quarter run rate is we think a good run rate for the next couple of quarters. I'm hedging just a little bit as to whether it's one or two, because we may see some improvement in the third quarter. Let's call it a three-quarter run rate through the third quarter, and then we think that we have a good opportunity to bring those down by at least 5% for the fourth quarter, largely as we anticipate, the completion of a lot of the external spend that has been in our run rate, going back to actually the fourth quarter.

We didn't talk about this a couple of quarters ago, but we've actually been working on laying out opportunities and efforts needed to improve processes and platform and get better use out of our existing technology. At a minimum, we think that that'll fall off. Professional fees would come down by probably $3 million 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&I lending, which brings good deposits along with it. We do think that there'll be some staffing efficiency as we exit and go and move into next year, and we'll continue.

I would say the total opportunity is more than 5%, but I'll just keep it to a 5% by fourth quarter of this year for now.

Daniel Tamayo (Director)

Okay. That's great color, Pat. Then I think you guys said you're expecting more savings in 2024 as well.

Pat Barrett (CFO)

Correct.

Daniel Tamayo (Director)

Great.

Pat Barrett (CFO)

That's correct.

Daniel Tamayo (Director)

Okay.

Pat Barrett (CFO)

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. Don't forget though that or 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&I and treasury management deposit gathering business. All of my comments would be net of any required investments that we would have to make. These are absolute comments.

Daniel Tamayo (Director)

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

Joe Lebel (President)

Daniel, it's Joe Lebel. 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. You can see it in the pipeline. We're well into the sevens in the pipe in terms of average rate.

I think, our approach has been consistent, which is pricing discipline, credit discipline, and that's gonna cause some ups and downs intra-quarter around, what you can do and what you can't do. I think we support the existing clients. We look for new clients, and if good opportunities come up, we'll do them. It also gives us a chance to look at our existing book and make determinations about, you know, what still fits and what doesn't fit. I do think you'll see some unevenness. There may be quarters where you have growth. There may be some quarters where you see some flatness.

David Bishop (Director)

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

Joe Lebel (President)

Thank you.

Operator (participant)

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

David Bishop (Director)

Yeah. Good morning, Chris and crew.

Christopher Maher (Chairman and CEO)

Good morning, David.

David Bishop (Director)

Hey Chris, question for you in terms of just the macro environment. you know, obviously the stress and fallout from Signature Bank and maybe less so for 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 alteration first.

Christopher Maher (Chairman and CEO)

I'd say a couple things. I mean, there may be some customer movement. Certainly the talent environment is gonna 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, you know, people think twice about moving from one organization to another. We'll have to wait and see those things. There is a very significant consideration that'll play out at least in the Northeast. That is, I think you're gonna 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.

I know Joe and his team will be, you know, really focused on making sure that as we grow the loan book from here, that we're paid to do so.

David Bishop (Director)

Got it. Maybe a question for Joe. Obviously a lot of attention, rightfully so on the office CRE book. In terms of some of the other segments in terms of CRE, anything else there flashing warning signals maybe that you're dotting your I's, crossing your T more, 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?

Joe Lebel (President)

Well, I think everybody. You hit it on the head, David. Everybody talks about, talks about office. You know, we've been very thoughtful in building, the CRE book over the last, you know, nine, ten dozen years around disintermediation 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 gonna 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. Then I'd just make the comment, I think, because it's important because everybody talks about, you know, the office. We're, we have $1,000,000,001 in office.

You know, 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, you know, half of our office exposure is either credit tenant or medical office. You know, the remainder is largely suburban. You know, we've talked about, you see in the deck, we're only, you know, I think it's less than 1% of total assets in the central business districts. The average size of an office loan here at the bank is less than $2 million.

While we have some large office loans and some small ones, even when you talk about the maturity wall for 2023, you know, we have 155 loans maturing. 112 of them are under $1 million. I think we've done a really good job of protecting that. Getting back to your comment about other things. We still see multifamily being pretty strong. You know, the since COVID, the average multifamily rents are up almost 20%, which is just fascinating in itself given the amount of people working from home. It just goes to show you where we stand in the country in terms of housing.

Right now I think, we're pretty comfortable with what we see, but obviously very critical on what we're doing going forward.

David Bishop (Director)

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

Joe Lebel (President)

Yeah, 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. I think the theory on that, Dave, was, we didn't want to count on this inflation of rents because I think you're going to give some of that back maybe over the next year or so. We thought the at 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. It's a pretty conservative way to look at it.

David Bishop (Director)

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

Christopher Maher (Chairman and CEO)

It was nothing significant. In fact, we remained lower than we were in the third quarter of last year. It was just one loan that went from special mention to substandard is the bulk of that migration. Well secured and it's not accrual, not something that we're concerned about.

Pat Barrett (CFO)

Great. Appreciate the call.

Operator (participant)

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

Michael Perito (Managing Director)

Hey, guys. Thanks for taking my questions and for the extra supplemental information this quarter. It was helpful. You know, you guys covered a lot of it, so I don't want to take too much time here, just two quick questions. On the first one, apologize if I missed it, just on the non-interest comp side, you know, 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, you know, trust, mortgage. Just anything we should be mindful of as we look at this kind of $9 million kind of core quarterly run rate in the first quarter.

Christopher Maher (Chairman and CEO)

I think, thanks, Michael. I think you're right to say that's kind of a four-ish number. As loan volumes decreased, swaps decreased. In this environment, we don't expect swaps to kind of pop back up anytime soon. They're noisy, in any quarter, you might have a couple larger swap deals. 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. We had the ability to find some really good talent. You may have seen the press release about Stephen Adamo joining our team. Joe and Steve are working on really focusing on the opportunities for a gain on sale business.

As you'll note, looking back in our financials, that's one area where our income is underrepresented. Not that we understand the multiples on a mortgage banking business are not that high usually because of the volatility. It is a countercyclical business, and should rates come down next year and, you know, 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. Again, I'm talking about, you know, two, three, four quarters from now. That would require rates to cooperate a little bit too. We could do better there, and I'm comfortable that Joe and Steve will get that done.

Michael Perito (Managing Director)

Got it. Okay. Lastly for me. 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, you know, what the right capital is, you know, that we should be considering maybe, you know, I'd say longer term a little jokingly because obviously, you know, a lot can change. Is it fair for us to think that you guys might be more comfortable to carry 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? How are you guys thinking about that?

Christopher Maher (Chairman and CEO)

You know, I think you probably guessed right, Mike. You know, we're conservative folks, so we're going to carry a little extra liquidity and a little extra capital until we know what kind of the world thinks about acceptable liquidity and capital levels. I think it's going to be a discussion in the industry. It's going to go on for the next couple quarters. We're all going to settle in. I will share with you, we've been talking internally. I remember all the discussions in 2009 and 2010 that capital was 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 the extra liquidity and capital will impact profitability.

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, you know, whatever the capital ratios need to be, we'll adjust to and find a way to make money.

Michael Perito (Managing Director)

Great. Just one last one for Pat. Just, you know, thirteen and a half billion in assets, around a 100% loan deposit ratio. Are these decent bogeys for the, for the near term that you think could be pretty stable?

Pat Barrett (CFO)

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

Michael Perito (Managing Director)

Great. Thank you, guys. Appreciate it.

Christopher Maher (Chairman and CEO)

Thanks, Mike.

Operator (participant)

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

Christopher Marinac (Director of Research)

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 wanted to circle back to the stress test, and I'm curious if, you know, 7% is high enough in this environment.

Joe Lebel (President)

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 in markets largely non-spec, where we can get floating rate opportunities with interest reserves. You do see some of that in the weighted average in the pipe and also in the recent increases in the weighted average returns for us. I would also say that as we look at the existing portfolios, we're looking at this based on risk and based on relationship. 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.

It'll be a slow, you know, we have I think we mentioned earlier, we have a slow or small amount of maturities, coming due. That maturity wall is a small one at the moment. If you look at the pipe, the pipeline's low 7%. 7.25%, I think. 7.25%, 7.26%. 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. I think it's important.

Christopher Maher (Chairman and CEO)

I'd 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 low 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 six handle. They're not in the sevens yet, and I don't see that coming soon. There may be other credits that go into the sevens that would have different risk characteristics, but, you know, 45% LTV, you know, two times debt service, you're not seeing sevens on those, at least not in the Northeast. At least we haven't seen them.

Joe Lebel (President)

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

Christopher Marinac (Director of Research)

Got it. That's very helpful. The low LTVs, the non-spec, that makes your 7% not the same as someone else's 7%.

Joe Lebel (President)

Correct.

Christopher Marinac (Director of Research)

Got it. Okay. My next question just goes back to the concentration of office. I know half is in the credit tenant and 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.

Joe Lebel (President)

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. You know, we run our business for the long term. There are certain asset classes that may be out of favor today. You look at things one-off, one by one, and you make the decision. That being said, I think we're savvy enough to understand that if we don't get the return that we need, that we'll purposely stay away from certain asset classes as they go forward.

Christopher Maher (Chairman and CEO)

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

Christopher Marinac (Director of Research)

Nope. That's great. Thank you for that. Just last question is, I know we don't have all the granularity on kind of reserve allocations by type, but just generally speaking, 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 just the criticized level relative to the rest of the portfolio?

Christopher Maher (Chairman and CEO)

Actually, interestingly, within our, under our covers, the offices perform pretty well, so the historical losses don't have any need to generate significant reserves. Our distribution of, you know, pass versus substandard is very similar to our other office classes, our other real estate classes and collateral classes. 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, you know, some of these things we've talked about this morning. If anything, you might see a reallocation of reserves down the road if we see a blip anywhere inside the reserve.

Christopher Marinac (Director of Research)

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

Christopher Maher (Chairman and CEO)

Thanks.

Operator (participant)

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

Matthew Breese (Managing Director)

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

Christopher Maher (Chairman and CEO)

Well, you know, look, I would kind of classify it this way. We have the capacity to do buybacks. We have the powder to do that. We just wanna make sure that we put a little bit of distance between us and the expectations in the market around capital and liquidity and all of that. We keep it as an open option for the future. We have an authorization. We have the financial wherewithal to do it. We just wanna know a little more about the operating environment before we do that.

Matthew Breese (Managing Director)

Understood. Maybe a follow-up to that. You know, 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, you know, maybe give me some sense for how and what they're looking at.

Christopher Maher (Chairman and CEO)

I guess I'd just kind of make this omnibus comment, right? They're focused on everything right now, and you can understand why, right? Given the events of the last couple of months, we're getting, you know, questions on all sorts of things about the business, whether it's liquidity or concentrations or the rollover risk or... I would say, yes, they're focused on it, but they're not to any different degree than they're focused on, you know, liquidity and capital plans and stress tests and all that other stuff. No special focus. I would point out that, you know, our commercial real estate position is not changed dramatically over the last couple years. It's inched up. We've had the conversation with our regulator for quite some time about the management of that asset class.

Matthew Breese (Managing Director)

Okay. Then, you know, on page 11, the stress test where, you know, 90% of the maturing book maintains a debt service coverage ratio greater than 1. You know, I feel like a huge point here is that you stress it at the originally underwritten rents. Could you just give me some sense for, you know, maybe the asset classes where you've seen the most amount of rent increase and the asset classes where you've seen the least? Then, you know, what is the average kind of rent increase from, you know, 2018, 2019 to today?

Christopher Maher (Chairman and CEO)

I mean, you'd expect it kind of varies a little bit by geography and property type. Multifamily, as Joe said earlier, is consistently strong across the entirety of the market. That's why, you know, we're comfortable where. I should note, we didn't call this out in the slides into any special degree, we've never really operated to any degree in the rent-stabilized multifamily, so this is market rent product that we're in. Multifamily, probably the strongest. Where you see flat, and Joe mentioned this, is industrial warehouse. Some pullback and concern about, you know, 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 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. 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 Joe Label may comment a little bit on that because it's unusual to us. Retail has held up better than we would've thought.

Joe Lebel (President)

Yeah. I mean, you think about it, a year, a year and a half ago, we were all worried about retail given what had gone on. Matt, we've taken the extra step. I mentioned we're heavily suburban, heavily granularity average, you know, average loan under $2 million. Of course, geographically diversified. We've also taken the extra steps in addition to doing the math stress test. You know, we're sending folks out, we're actually doing site visits as you should. We're doing site visits a couple days a week, so you're not really just looking at. You're looking at parking lots, obviously. Are people actually back in offices? That you're walking buildings as well, and how are they maintaining?

We're doing all the prudent things you need to be doing in this environment just because we don't want to be surprised. So far, the signs are good.

Christopher Maher (Chairman and CEO)

Just one more color comment on suburban office. In at least in our markets, 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. What we have here is not necessarily there's exceptional demand in the suburbs, there's just far less product. There is some demand. 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. It's been a really interesting time. We were more concerned about suburban office probably a year, a year and a half ago.

We have been pleasantly surprised by the amount of absorption in many of our markets.

Matthew Breese (Managing Director)

Great. Okay. Last one from me. You know, you show, you know, 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 kind of the portfolio average reset at?

Christopher Maher (Chairman and CEO)

I think the 17's a good number to come from. I don't have an average on what it came out to.

Joe Lebel (President)

We'll get that for you. We'll get that for you though, Matt.

Matthew Breese (Managing Director)

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

Joe Lebel (President)

Thanks, Matt. We appreciate it.

Christopher Maher (Chairman and CEO)

All right. Thank you, Matt.

Operator (participant)

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

Manuel Navas (Senior Research Analyst)

Hey, good morning.

Christopher Maher (Chairman and CEO)

Good morning.

Manuel Navas (Senior Research Analyst)

Hey. It seems like you're successfully keeping like a core legacy deposit beta, that 12% versus 20% for the whole book. You're doing everything around the edges to kind of maintain that lower deposit beta on the legacy deposit base. Is that two-level beta how we should think about things going forward? What how are you targeting that?

Christopher Maher (Chairman and CEO)

Yeah. That's exactly our strategy is it's not all that complicated. What we've done is tried 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. You know, 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. We want to kind of keep that where it is. We're providing good service. They're happy with it. But I do think it weighs on our incremental deposit growth that the marginal cost of that growth is higher. We have to reflect that in our loan rates and think about that carefully.

I think a lot of it is, you know, 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, you know, 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. Our non-interest bearing has held up pretty well. It's still, you know, 20%.Of our base.

Excluding brokered brokered CDs and retail CDs, we're absolutely thrilled with the fairly low levels of repricing that we've needed to do. 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.

Manuel Navas (Senior Research Analyst)

As you've kind of felt that the rate increases you've done so far might kind of, you know, stabilize a little bit, do you have a one number beta assumption for the whole book? Or do you kind of separate it out into two levels?

Christopher Maher (Chairman and CEO)

I'm not sure we have enough growth or could give you that number. I would say, though, you're accurate that we think that the worst is behind us in that regard, you can appreciate if we were to make decisions over the last 45 days over whether we should, you know, pay a price and, you know, hug a depositor, we've decided to do that, right? We've erred on the side of being conservative. As I said earlier, that I think that pulled forward some of it. We're seeing a lot fewer of those conversations now. I think that the tempo's gonna slow down. What we did the last two weeks, three weeks in March were things we probably would've done in April or May anyway. We just did them a month or 2 earlier.

Manuel Navas (Senior Research Analyst)

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

Christopher Maher (Chairman and CEO)

That would be an undrawn commitment. Yeah, that would be an undrawn commitment.

Manuel Navas (Senior Research Analyst)

Yeah.

Christopher Maher (Chairman and CEO)

That's where you would find that. We wouldn't put that in the pipeline.

Manuel Navas (Senior Research Analyst)

Okay. I just thought...

Christopher Maher (Chairman and CEO)

Of the existing construction loans that have yet to draw.

Manuel Navas (Senior Research Analyst)

Okay. In some of the revenue opportunities that you highlighted before, including mortgage banking, is there any numbers you can place around it? 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.

Christopher Maher (Chairman and CEO)

I think we have a treasury product that's done quite well so far. We want to kind of double down on that product. That product serves a wide variety of folks. We've got small businesses that are clients of that. We have entities that are clients of that. We have mid-sized businesses that are clients of that. We keep $100,000, and we have folks that keep $20 million. We've got the product suite to do that and shown competitiveness in that. That's interestingly a deposit opportunity, but also a fee opportunity because one of the things we learned as we went through this, you saw all the transaction volume, right? That maybe there are some segments that could pay us more appropriately for the stuff that we're doing for them.

We'll try and look at that. It's too early for us to give you a specific number. Around mortgage, you know, given the rates and the volumes today, you're not gonna see that change in the third quarter. You know, that market is notorious. It changes quickly. We've been in mortgages since 1902. Admittedly, in the last decade, we've spent less time on them. Any comments you'd make, Joe?

Joe Lebel (President)

I think the only thing I'd add there is that we do expect to expand the geography because we historically have been a New Jersey based, central, southern New Jersey based residential mortgage lender, and we have licensing in most of the states, I think 47 states. Not that we're running national tomorrow, but we're in Boston and New York and Philadelphia and Baltimore. 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 more normalized.

Christopher Maher (Chairman and CEO)

One of the things we determined in our strategic review in the last six 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.

Manuel Navas (Senior Research Analyst)

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?

Christopher Maher (Chairman and CEO)

Like, 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, you know, we'd have to get a little more comfortable about the environment, about the marginal cost of funding. The first thing we'd like to do is to grow the bank. As an approved opportunity to do that, we'll build capital. If we don't think we can do it and capital starts to build up to a point, yeah, buybacks are a nice tool.

Manuel Navas (Senior Research Analyst)

Okay. Thank you very much for the comments.

Christopher Maher (Chairman and CEO)

Thank you.

Operator (participant)

We currently have no further questions. I would like to hand back to Christopher Fuhrman for final remarks. Please go ahead.

Christopher Maher (Chairman and CEO)

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 23rd at 8:00 A.M. Eastern Time. We encourage stockholders of record on April 4th, 2023, to review the materials and vote your shares. Recently, we transitioned the investor relations officer role from Jill Hewitt to Alfred Goon. Alfred joined our finance team in March of 2020. I know many of you have already started reaching out to Alfred directly. 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.

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 Garbarino. 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. We look forward to speaking with you after our second quarter results are published in July or next month at the virtual annual shareholders meeting. Thank you.

Operator (participant)

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