OceanFirst Financial - Q1 2024

Transcript

Moderator (participant)

Good morning. Thank you for attending the OceanFirst Financial First Quarter 2024 Earnings Release. My name is Victoria, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by 1 on your cell phone keypad. I would now like to pass the conference over to your host, Alfred Goon, with OceanFirst Financial. Thank you. You may proceed, Alfred.

Alfred Goon (SVP of Corporate Development and Head of Investor Relations)

Thank you very much. Good morning and welcome to the OceanFirst first quarter 2024 earnings call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on our Forms 8-K, 10-Q, and 10-K, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you, and now I will turn the call over to Christopher Maher, Chairman and Chief Executive Officer.

Christopher Maher (Chairman and CEO)

Thank you, Alfred. Good morning, and thank you to all who have been able to join our First Quarter 2024 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. This morning we'll provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. Our financial results for the first quarter include a GAAP-diluted earnings per share of $0.47. Our earnings reflect net interest income of $86 million, representing a modest decrease compared to the prior linked quarter of $88 million. Operating expenses decreased to $59 million.

First quarter results demonstrated a stable quarter for margins, as our core net interest margin was flat at 2.77%, the same level as the prior quarter. Margins were impacted by our continuing efforts to improve the quality of deposit funding. These efforts resulted in another quarter of decline in brokered CDs, a loan-to-deposit ratio below 100%, and a negligible increase in deposit betas to 40%. We continued to see a gradual shift in deposit mix towards higher-yielding products, but that velocity is slowing and is now largely offset by the ongoing repricing of our loan and securities portfolios. Capital levels continued to build, with our Common Equity Tier 1 capital ratio increasing to 11% and continued growth in tangible book value, which increased by 0.28 or 1.5% to $18.63. These results include nearly 1 million shares repurchased under the company's repurchase program at a weighted average cost of $15.64.

Further on capital management, the board has approved the quarterly cash dividend of $0.20 per common share. This is the company's 109th Consecutive Quarterly Cash Dividend and represents 43% of GAAP earnings. We continue to remain focused on positioning the company for a variety of economic and industry outlooks through responsible growth, expense discipline, and prudent balance sheet management. At this point, I'll turn the call over to Joe to provide some more detail regarding our performance during the first quarter.

Joseph Lebel III (President and COO)

Thanks, Chris. Non-maturity deposits remain relatively stable, decreasing approximately 1% compared to the prior quarter. Overall, deposit balances declined by approximately 2%, reflecting our planned continued runoff of brokered CDs and a decline in high-yield savings balances driven by targeted refinements to both marketing efforts and rates offered. On the loan origination side, we saw a modest decline in loan balances of less than 1%, driven by reduced demand from customers combined with price and credit discipline. Given the slow start to the year, growth in loans and deposits may be modest for the remainder of 2024. Growth is expected to be lower in Q2 but ramp up in the second half of the year. Said another way, we expect our 2024 year-end loan balances to be higher than 2023 by low- to mid-single digits, with the majority of the growth coming in the third and fourth quarters.

Asset quality metrics remain strong, with non-performing loans and criticized and classified assets representing 0.35% and 1.65% of total loans, respectively. We reported 0.01% in net charge-offs to average total loans for the quarter, which marks essentially no net charge-offs in 11 of the last 12 quarters. With that, I'll turn it over to Pat to review margin and expense outlook.

Patrick Barrett (CFO)

Thanks, Joe. GAAP net interest income and margin were $86 million and 2.81%, respectively, reflecting the continued repricing of assets offset by the higher interest expense from a continued modest mix shift in funding. As Chris noted, funding costs reflect cycled and paid deposit betas, 40%, modestly from 38% in the prior quarter. While initial signs show relative stabilization in net interest margin, this is subject to unpredictability around loan growth and funding mix trends, so you shouldn't be surprised to see either stability or possibly some modest compression in the near term. GAAP non-interest expenses decreased, linked quarter, to $59 million. We continue to make every effort to hold operating expenses stable in the $58-$60 million per quarter range, but modest quarterly volatility may occur. Our effective tax rate for the quarter of 27% included a one-time non-recurring charge of $1.2 million.

Excluding this charge, the full-year effective tax rate is expected to remain at 24%, in line with prior periods and guidance. Finally, as Chris mentioned earlier, capital strengthened appreciably with growth in our CET1 ratio to 11%, and we're pleased to report capital accretion even while repurchasing 958,000 shares for approximately $15 million during the quarter. At this point, we'll begin the question-and-answer portion of the call.

Moderator (participant)

Of course. We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by 1 on your cell phone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. Our first question comes from a line of Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi (Former Director of Corporate Strategy)

Good morning.

Speaker 12

Hey, Frank.

Frank Schiraldi (Former Director of Corporate Strategy)

I just wanted to ask about the, I believe in the slide deck you talked about the CET1 ratio remaining above 10%, and obviously it's well above there now at 11%. And thinking about some modest growth in the back half of 2024, it seems like you could, if you wanted to even, return, again, 100% plus of earnings through a buyback. So I'm just trying to get a sense of, when you talk about getting to that 10% threshold, how aggressive you could be on capital return with the stock at these levels, and yeah, your thoughts about capital, I guess, over the next medium term here.

Christopher Maher (Chairman and CEO)

Hey, Frank. It's Chris. Look, we're very comfortable with where we are in the capital ratios today. I think we have a little bit of room, but we also anticipate returning to growth, so we don't want to use up any of that excess capital that we might want later in the year for growth. I think, like you saw in the first quarter, if you just think about it this way, we're not using repurchases to increase our leverage. We're using all the free cash flow that we're not using for growth to fund repurchases. And if the pricing remains around this level, I would expect that to continue.

Frank Schiraldi (Former Director of Corporate Strategy)

Gotcha. Okay. Appreciate that. And then as you think about growth in the back half of this year and maybe beyond, just curious, any targets in terms of as we think about commercial real estate concentration, if you could just remind us where that is currently as a percentage of total capital and any sort of thoughts about a trend there going forward.

Christopher Maher (Chairman and CEO)

So, Frank, I think the way to think about it is that we're comfortable with our CRE exposure today, but we will not be increasing it. So what we're doing is, as loans mature, in some cases, we're allowing those, depending on the credit structure, to move off the balance sheet and replacing them with other borrowers. But that's kind of a treading water position. So most of the growth you're going to see is in classes outside of CRE. So that's kind of the right way to think about it.

Frank Schiraldi (Former Director of Corporate Strategy)

Okay. And just finally, obviously, office has been a focus of investors, and I know you don't have much in the central business districts, but I wondered if you could maybe just spend a second or two on your larger loans. I believe that, taken as an average, your loans are below $2 million in size. But if you could just spend a second maybe on your larger loans and how they're performing and the geographies there. Thanks.

Christopher Maher (Chairman and CEO)

Hey, Frank, I'll give you a couple of thoughts, and then I'll have Joe walk you through some of the numbers. First, as we've talked before, our exposure in central business district is quite low and all credits that we feel very comfortable with, so we've been through that book. One important note - I've shared this with a number of folks - our exposure in central business district in Manhattan, for example, totals just $16 million in the balance sheet. We're talking about very low numbers. The vast majority of the portfolio is suburban office and in smaller-sized loans. But Joe, maybe walk through some of the stats you have that might be helpful.

Joseph Lebel III (President and COO)

Yeah. I'll just give you a couple, Frank. So about 87% of the loans are under $10 million, and actually, the weighted average size of those loans is about $1.8 million. And we only have 9 loans over $25 million in a portfolio, and that includes a loan I think we've been pretty transparent about in the CBD book, which is a very well-known national pharmaceutical company and another very well-known confectionery company where it's their U.S. headquarters. So we're pretty confident, pretty positive. Another very large loan is headquarters of one of the Big Four banks, regional headquarters of one of the Big Four banks in the country. So that's 3 of the 9 larger loans over $25 million.

Frank Schiraldi (Former Director of Corporate Strategy)

Okay. And I guess, as we're thinking about central business district forgive me, I forget exactly what you have total, but is that kind of the book you look at? The stuff over $25 million is kind of the CBD stuff?

Christopher Maher (Chairman and CEO)

There's a correlation there. Certainly, the larger stuff tends to be in CBDs where you would see bigger buildings, but the entirety of the CBD book is about $125 million. And each of the loans that Joe mentioned is part of that. They all happen to be in CBDs.

Frank Schiraldi (Former Director of Corporate Strategy)

Sure. Okay. Appreciate it. Thanks.

Christopher Maher (Chairman and CEO)

Thanks, Frank.

Moderator (participant)

Thank you for your question. Our next question comes from a line of Tim Switzer with KBW. Your line is now open.

Tim Switzer (Former VP of Equity Research)

Hey, good morning. Thanks for taking my question.

Speaker 12

Morning, Tim.

Tim Switzer (Former VP of Equity Research)

I wanted to follow up on your comments about the loan demand you've seen recently and a little bit less demand from customers. Do you think part of that is driven by an expectation for rates to be lower by the end of the year, and so they're maybe waiting for that, or is it macro-related fears? Could you maybe just provide some color around the lower demand?

Joseph Lebel III (President and COO)

Yeah, Tim. It's Joe. I would tell you that was absolutely the case early in the year, January, February. I think people were looking for some relief before taking on either an M&A transaction, a new business line, maybe some capital expenditure purchases. But we're seeing that moderate. I think people are coming to the realization that that may not necessarily be the case. The other thing that we're seeing is that we're seeing a little bit more renewed confidence. People have been able to pass along increases in some of the product costs. We're seeing that, obviously, in inflation. So we've seen, subsequent to quarter end, a little bit of an increase in pipelines. So we're seeing those green shoots start, which is a positive for us.

And I think, as Chris mentioned earlier, the vast majority of the increase in the pipe is coming from the C&I book, which is really where we've been focused.

Tim Switzer (Former VP of Equity Research)

Okay. Got it. Could you remind us or update us on what you guys believe the impact of rate cuts would be in the back half of the year to NII, and particularly if we only get, say, 1 or 2 rate cuts, how would that be different than if we got, say, a series of 5-6?

Christopher Maher (Chairman and CEO)

First, it's Chris, and Pat will probably chime in as well, but I'd give you just a sense that whether it's an incremental cut up or even down, so I think we're thinking about it both ways these days, doesn't make a big change. So we're relatively stable outlook regardless of whether it's two cuts or even one raise, right, those kinds of scenarios. So it's not going to be a big impact. We do have a significant amount of loans that are contractually maturing in the last three quarters of the year. And I think one of the ways we're thinking about higher for longer is some things we know for certain and some things we're just going to have to see play out. But on the certainty side, we know what's rolling.

We've got about $700 million worth of loans rolling, fixed-rate loans that are contractually hitting their maturity in Q2, Q3, and Q4, or their reset. So as a result, that $700 million is going to come up from where it is today. That's a significant opportunity. On the other hand, there will be a lingering deposit pressure. I mean, it's abating, but it's very hard to say exactly how that will look as the year goes on. So higher for longer doesn't concern us particularly. And one or two cuts or one raise doesn't change the outlook much either. So it's a relatively stable outlook for us.

Pat, anything to add to that?

Patrick Barrett (CFO)

No. I guess I would just emphasize that the whole uncertainty factor that we're really looking at is around the non-maturity deposit funding side. So on the term side, on the loan side entirely, the securities book entirely, and CDs and other term funding, we've got pretty high level of confidence. It's just the unpredictability of behavior of depositors in the interest-bearing space and non-interest-bearing space that has proven really difficult for us to predict. And it's hard to see that confidence level building in the near term. I think we're just going to have to see some trends develop before we have better confidence. And that's why you see our wording on our outlook from NIM: be pretty cautious around. Stable, but it might be a little compressing.

I could have said that it might even expand a little bit, but I'm just a naturally cautious guy, so.

Tim Switzer (Former VP of Equity Research)

Okay. Got it. That was all really helpful. One last question. Could you remind us what % of your loans are repriced immediately or a floating rate?

Patrick Barrett (CFO)

About 30%.

Tim Switzer (Former VP of Equity Research)

Great. Thank you.

Moderator (participant)

Thank you for your question. The next question comes from a line of Daniel Tamayo with Raymond James. Your line is now open.

Speaker 13

Hey. Good morning, guys. It's Dwayne from Yahoo Finance.

Speaker 12

Good morning.

Speaker 13

How can I help you with anything on my client?

Daniel Tamayo (VP and Senior Research Analyst)

Hey. I appreciate the guidance on the range for expenses in the $58 million-$60 million per quarter through the year. I was hoping that we can get a finer point on maybe the cadence of expense growth. Does it just kind of imply volatility each quarter through that $58 million-$60 million range, or should we kind of expect a little bit of a ramp-up as we go through the year here?

Patrick Barrett (CFO)

No. I think you should expect it to be flat throughout the year, but it could bounce around a little bit. You do have some volatility, but we're going to work really hard to keep it below 59. So we put the range out there so that you can do the math and come up with 59, which is a pretty good average estimate, but you should expect that that's the one thing every day that we know that we can control, and it's not up to customer behavior.

Daniel Tamayo (VP and Senior Research Analyst)

Appreciate that, callers.

And then maybe additionally there, are there any timing of any additional initiatives that you guys are working through that are implemented through the year?

Christopher Maher (Chairman and CEO)

I mean, the only thing that we would anticipate doing over the course of the year is we always hire good talent when we find it in the markets. So if we find good talent, good commercial bankers, we're going to hire them. We have some room in the budget to do that. We have other expenses that are coming down. So if we're hiring our typical pattern of a few people every quarter, we can hold expenses right where they are. If we find an opportunity to do something better than that, then we'll change our expense guidance and let you know. But that would be, in our view, a very positive outcome. So any significant volatility in expenses would be linked to something that we think would be good news.

Daniel Tamayo (VP and Senior Research Analyst)

Chris, and then maybe lastly, just looking kind of at the fee lines here, kind of stripping out the noise of some of the equity gains and the trust sale, taking out maybe the BOLI gain during the quarter, we kind of just imply a run rate a little bit under $9 million there, and kind of with the main variance being a little bit lighter service charges than we were looking for. Is that kind of $9 million level kind of fair to look at as run rate going forward, or is there kind of maybe some seasonality or one-time things in the service charges that may boost that going forward?

Christopher Maher (Chairman and CEO)

Seasonality would not play a significant role, but I'm always cautious on this line given public policy around fees. I would expect that as we continue the dialogue over which fees are more or less responsible than others, you could have some vulnerability there to fees we may decide to change to make sure we're in line with the current regulatory thinking. Seasonality wouldn't come into it. This is really just kind of listening to our regulators and to their views on different fee lines may cause us to reexamine fees in the next few quarters.

Patrick Barrett (CFO)

Okay. That's all I had.

Daniel Tamayo (VP and Senior Research Analyst)

Thanks for the color, guys.

Christopher Maher (Chairman and CEO)

All right. Thank you.

Moderator (participant)

Thank you for your question. The next question comes from a line of David Bishop with Hovde Group. Your line is now open.

David Bishop (Managing Director)

Hey. Good morning, gentlemen.

Joseph Lebel III (President and COO)

Morning, Dave.

David Bishop (Managing Director)

Hey, Joe, quick question in terms of maybe the outlook for low- to mid-single-digit growth, mostly in the back half. Obviously, the pipeline numbers have come under pressure here. Do you have sort of line of sight in terms of maybe what's beyond the published numbers in terms of the greater-than-90-day pipeline that gives you confidence that you may hit those bogeys in the second half of the year?

Joseph Lebel III (President and COO)

Yeah, Dave. I think the easier answer is this. We'd added eight C&I lenders last year. It takes them some time to ramp up. We've added two more in the first quarter. We have a couple more scheduled to start pretty much any day here in Q2. So we're absolutely seeing an increase in pipe subsequent to the end of Q1. I think you're going to see that start to filter through closings in Q2 into Q3. And I expect the folks that have finally gotten to that point where they're ramping up to continue to bring that kind of business to us. So I think that's the measure of what we're seeing so far and what our expectations are.

David Bishop (Managing Director)

Got it. Then I saw on the slide deck some narrative regarding the high-yield savings product. It sounds like you moved down pricing. It looks like the spot rate was down 30 basis points from the quarterly average. Am I reading it right that overall balances have remained stable, and is there more opportunity to move those rates down, maybe either there or even money market or interest-bearing checking?

Christopher Maher (Chairman and CEO)

Yeah. I think the good news is we're in the fine-tuning stage of this rate cycle, meaning we're kind of deciding which money we want to keep at what prices and money that may not be economical for us to keep, and we can kind of pull back off it. So that stability is a welcome change. We saw that in the fourth quarter coming into the first quarter. And let's be clear, when we reduced those rates, we lost some deposits. That's why you saw some of the deposit contraction in Q1, but that was planned. And we actually hit pretty much what we expected to in terms of attrition in the high-yield book. So I would expect us to be fine-tuning deposit pricing over the course of the year.

One of the questions we get often, it goes back to Fed rate policy and people trying to predict there are going to be cuts and all that. Obviously, we care a lot about what the Fed does, but I would not assume that there is any linkage between Fed rate policy and depositor rate expectations. Depositors are going to want what they're going to want. They're going to shop where they shop. And that's what makes it a little bit difficult at this point in the cycle to kind of get a beat on things. We certainly feel the pressure is easing, but it is way too early to make a longer-term blanket statement about that.

David Bishop (Managing Director)

Got it. And then in the same vein, do you have any sort of outlook in terms of brokered deposits maybe maturing this quarter?

Christopher Maher (Chairman and CEO)

Over time, we generally want to just continue to reduce that brokered segment. Traditionally, we have not relied on brokered funding. We saw it as a really good option to kind of bolster liquidity at a time when it made a lot of sense to do so. And it is a great option to manage interest-rate risks. So what we did with our brokered book is we went out right after rates first started to rise, and we immediately kind of pulled down funding that we knew would have a very certain interest-rate characteristic to it for a duration. Now that we're somewhere near the top end of the cycle, extending the duration through brokered CDs doesn't make sense. So rolling them off also takes not just volatility out, but allows us to maybe become a little bit more liability-sensitive over time.

David Bishop (Managing Director)

Got it. Then one final question. Looks like maybe a modest tick-up in the special mention loan category maybe looks to be off the CRE. Just curious about maybe some commentary, what your hope of the change in risk rating. Thanks.

Joseph Lebel III (President and COO)

Yeah, Dave. I'll give you a little feedback. It's primarily three loans. Just a little color. One was a construction build-to-suit. There was a little delay getting the tenant in. The tenant is in and paying. And the two other loans, one was an office loan in Philadelphia, which is fully occupied. It's just some little bump in the road with the principal. I think two of the three, if not all three, are cleaned up by the end of Q2. But it's just prudent to put them in the category where they belong if you have some concerns.

David Bishop (Managing Director)

Got it. Appreciate the color.

Moderator (participant)

Thank you for your question. Our next question comes from a line of Christopher Marinac with JMS. Your line is now open.

Christopher Marinac (Analyst)

Hey. Thanks. Good morning. I'm just going to continue where Dave left off on his last question. So if we look at the level of criticized loans, do you see that driving at all your reserve levels going forward, or is the reserve still built on kind of across the cycle and the low charge-offs continue to kind of speak for itself?

Christopher Maher (Chairman and CEO)

Yeah. No, I don't think, Chris. It's a good question. I don't think there's any linkage there. We don't expect any kind of going forward unless there's a change in the outlook, which, frankly, we don't see. So the way I would think about it is if you look at the allowance this quarter, if we had just gone with the external observable factors, both the economic forecast as well as our history of charge-offs, you might have made an argument to release reserves. We didn't think that was prudent at this point in the cycle, so our qualitative factors came up a little bit. But that's kind of what's going on. Quantitatively, it would have been a quarter where you could have considered releasing. I know some banks have. We just chose to be a little bit more conservative.

Patrick Barrett (CFO)

Great. And then just to follow up about overall commercial growth, where do you think customers are now? I mean, we know there's a lot of pencils down with the large regionals, but given that you may not want to do commercial real estate, as you mentioned, so just specifically in C&I, where is the customer attitude? And are you dependent on them kind of being more optimistic in the second half of the year?

Christopher Maher (Chairman and CEO)

Yeah. I think we all are, but I think we're seeing already the conversations we're having are that customers are getting a little bit more optimistic. I think the other thing is we've continued to recruit lenders largely from the nationals. Largely, what we're hearing a lot from our new folks is that there's a limited appetite for any type of lending at the highest level, which is beneficial for us as time goes on. It's still a relationship business, so I expect that to be the case. On the CRE side, what's fascinating - we've talked about this a bit - I think there's a little bit of a limitation on banks wanting to do CRE, but there are plenty of alternative lenders in the space. One of the ones we talk about a bunch is the government entities.

We saw that a little bit in Q1. Not that it was prevalent, but one of our better borrowers refinanced a $26 million transaction with one of the GSEs at 6% fixed with an extended IO period. We're not pricing like that, and we're not structuring like that. That's still a challenge. But in today's world, I don't think that's monumental, but it's just something to be aware of. Maybe one more comment too, Chris. The interesting phenomenon we've noticed among our long-term kind of generational C&I clients is the good news story to this is they have virtually no debt. They've paid all their lines and loans down. So that affects our earnings a little bit because we're not showing those outstandings. But these families have shared with us that they're poised and ready.

I mean, Joe, you might add to that, but at some point, they will become net borrowers again. We hope that's in the next couple of quarters.

Joseph Lebel III (President and COO)

We've told that story of one of our better C&I clients has been chasing two other acquisitions for a period of years and not been successful. And now he finally believes he will be successful. And with his balance sheet and our ability to lend, I think he finally gets that opportunity. But people are cautious still. There's still some of that in the market.

Christopher Marinac (Analyst)

Great. Thank you again for the background here. Appreciate it.

Joseph Lebel III (President and COO)

Thanks, Chris.

Christopher Maher (Chairman and CEO)

Thanks, Chris.

Moderator (participant)

Thank you for your question. The next question comes from a line of Matthew Breese with Stephens Inc. Your line is now open.

Matthew Breese (Managing Director and Research Analyst)

Hey. Good morning, everyone. I guess the obvious question is how much more should we expect in the way of buybacks? I think you have a remaining $2 million share authorization. So the first part is, is it reasonable to assume that that gets exhausted by the end of the year? But the second part is just more of a philosophical one. I can't remember the last time I saw OceanFirst buy back this many shares. And I would love to hear kind of capital strategy in light of valuation and the environment and in light of the other options you have on the table.

Christopher Maher (Chairman and CEO)

Yeah. Well, it's a great question, Matt. And I think there's a really simple answer for it. When we look at the value of our shares, we think there's an opportunity there. We feel very good about the balance sheet. We feel very good about credit. We feel very good about our long-term prospects. And the sector, including us, is just trading at reasonably cyclical lows. So as long as we're below tangible book value, it's a very compelling investment decision. That said, to your earlier point, Matt, we're a growth company, and we're anxious to be back in the growth side. But we do get this opportunity as we grow loans in the second half of the year. We have the opportunity, potentially, with margin stabilization and a little bit of growth, to see some earnings power as well.

So if we're returning to growth, you're going to see earnings growth as well, which should provide some more growth capital too. So we don't want capital levels to drift up. We do have certain floors. We want to make sure we're above. But trading substantially below tangible book value for us is just a unique opportunity. And you asked about the outlook. Look, the first quarter would probably represent. I couldn't see us doing more than that because we do want to preserve capital for growth. But if we continued it anywhere near that level, by the end of the year, we would fill our current plan. We'd have to think about whether we wanted to do another plan. So I think it's going to depend a lot on, believe it or not, kind of margins, structure, and growth opportunities.

We can bring on new clients, but we want to make sure we're bringing them on at the right margins. It is not the right part of the cycle to give up your margin discipline and chase just standalone EPS at the end of what could be a multiyear expansion. The soft landing is not off the table. But you could also imagine that by 2025, we're in a recession, right? I mean, we don't know what the Fed's going to have to do later in the year. So we're not going to drive capital levels down. But at these prices, if we have excess capital, we're going to use it.

Matthew Breese (Managing Director and Research Analyst)

Okay. I appreciate that. And then turning to credit, I just was curious about the actual process for getting LTVs and getting debt service coverage ratios. Is the LTV at origination, or is it more recent? If you have kind of an average age of LTV, that would be great. And then are the debt service coverage ratio are those updated annually? So are those fairly fresh?

Christopher Maher (Chairman and CEO)

Yeah. So there are a couple of things, Matt. So the debt service coverage ratio is updated annually. If we detect an issue in a loan where we have a concern, we would go out and update the appraisal. Based on what we see in the portfolio, most of our appraisals are origination-based appraisals. We do not have a vintage chart, but we'll think through that. Maybe we'll add a vintage chart for our next investor presentation just to give people a sense. But there's not really a big cluster of loans in any one vintage. The other thing I'd mention is that one of the reasons we feel comfortable about our office book is that a lot of that book was originated after COVID. We were very careful to focus on medical use and things that we thought were long-term, durable kinds of office products.

So we'll work on a vintage for you. I'd also point you in the investor deck to the variety of stress tests we do. So we kind of take these loans and stress test them and then look at the NOIs and the debt service coverage ratios post-stress. And those hold up really well. So we feel pretty good. That whole income side of the equation, we are on top of, and it's very current. The appraisal side would be subject to vintage, but we'll think about getting you a table on that.

Matthew Breese (Managing Director and Research Analyst)

Okay. And then, Joe, I think you had mentioned that there's 9 and you can correct me if I'm wrong. There's 9 office loans over $25 million. You referred to three of them. I was curious in the other pool of what else is over $25 million, is there any of those loans that are non-pass? And I would love to hear thoughts on why, concern, and any potential for lost content from your view.

Joseph Lebel III (President and COO)

Yeah. So good news. The other loans, all the loans are pass. And unequivocally, I could tell you at least the top three or four we're really happy with. I'd have to go look at the other ones, but the fact that they're rated a pass tells you pretty much the story. We've really had, with the one exception in Q3, we've had really good performance in this book. And we talk a bunch about it, and we talk a bunch about the fact that a lot of it is in suburban markets, very little CBD, very little urban, period. And as Chris mentioned, we've got a lot of diversity in the book in geography, medical, credit, tenant, the whole ball of wax. So I think we've done what we've done. The money is out. It's performing.

We're on top of it.

Matthew Breese (Managing Director and Research Analyst)

Then switching to deposits, how much more in high-cost savings or brokerage is there kind of targeted to run off? Is the deposit growth guide all in, or is it just off of kind of the core deposits?

Christopher Maher (Chairman and CEO)

Well, the deposit growth guide is all in. I think that for the most part, we don't have much in brokerage. Pat can give you the number, but we're not trying to drive that down quickly or in any material amount. It shouldn't be much of a headwind. The high-yield savings, I think there'll be a little bit more of that running off in Q2, but nothing significant. Then brokerage is just going to wind down over the next several quarters.

Matthew Breese (Managing Director and Research Analyst)

Okay. And then last one from me. It looks like a lot of your peers are waving in talent from some recently disrupted institutions, if you will. Are you seeing any of that come your way, or is there opportunity to bring in some deposit-gathering folks or commercial lending talent down in your neck of the woods?

Christopher Maher (Chairman and CEO)

I think there's a great opportunity. This is something we've done over the years, and we'll continue to do it. There are a lot of reasons that people kind of reevaluate where they are. But when you go through periods like this, really high-quality bankers sometimes have challenges wherever they are for whatever reason. We have a lot of conversations and a lot of talk. We've said over the years, and we mean it, when we find good people, we hire them. We don't say, "Gee, we only have a budget for two people this year." We don't do the opposite either. We don't just hire people because we think we've got to hire three bankers this month or something. I would expect you'll see us continue to add talent from a variety of places.

Matthew Breese (Managing Director and Research Analyst)

Okay. Is there any comments on how much talent? I know, Joe, you had mentioned, I think, a handful. And I'll leave it there. Thank you.

Joseph Lebel III (President and COO)

Yeah. I think these would describe now. We've had a few already. We have an inside joke in the company that says that we don't have a budget for talent. And as Chris mentioned, all that means is that whenever we find good talent, we're going to try to hire them. So if we can find good talent, we'll add as many as we can add.

Christopher Maher (Chairman and CEO)

Matt, for today, it's still going at the kind of the pace we've seen over the last couple of years, a couple of bankers, a quarter. If that pace changes, we'll be communicating about it.

Matthew Breese (Managing Director and Research Analyst)

Perfect. I appreciate it. Thank you.

Christopher Maher (Chairman and CEO)

Thanks, Matt.

Moderator (participant)

Thank you for your question. The next question comes from a line of Manuel Navas with D.A. Davidson. Your line is now open.

Manuel Navas (VP and Research Analyst)

Hi. Good morning. So on the core deposit engine, are you seeing the C&I lenders that you've brought on actually bring in deposits so far, or do you have a visible pipeline to this point?

Joseph Lebel III (President and COO)

So we are seeing them bring in deposits. If anything, they're bringing in deposits before they're bringing in loans because, as you all know, sometimes there's limitations or maturities or prepayments that prohibit loans coming over as fast as some deposits early on. But I think, Manuel, we'll see more and more of that in Q3 and Q4.

Manuel Navas (VP and Research Analyst)

That's kind of giving you that confidence to let some of the high-yield reprice and run off of it, the high-yield savings channel?

Joseph Lebel III (President and COO)

Yep.

Christopher Maher (Chairman and CEO)

Also, we need to understand exactly what those dynamics are. Until you start moving rates, you really don't know what that kind of runoff tolerance will be. We're beginning that process of moving rates around a little bit so we know what that marginal pricing should be. We've always been big fans of you could do every deposit survey you want, but the actual experience of pricing and watching deposit flows will tell you exactly what your market is. We're just trying to make sure we're on top of that.

Manuel Navas (VP and Research Analyst)

Yeah. I'd also add that those levers, we have a high confidence level in our ability to ramp those back up quickly if we want to, whether it's high-interest savings, brokerage CDs, certainly, or even time deposit specials, retail and/or other customer segments. So with that confidence level, we're feeling a lot better about letting some things mature and roll off, not replacing and rolling them, and starting to dial back some of the highest rates that we've had on offer. And we'll learn from that and be prepared, hopefully, to see growth pick up in core deposits. I appreciate that color. Can we have a bit of a general update on the operating leverage strategies and where you sold the trust business and just kind of how that fits in?

Christopher Maher (Chairman and CEO)

Yeah. I'd make a couple of comments. First, the trust business sale is a strategic partnership where we think that with a partner, we can do more in that business than we do today. It's relatively neutral to the P&L, so you're not going to see much change in the P&L. In terms of the operating leverage strategy, I think the way we're thinking about the company is that we have now, for the most part, fully absorbed all the expenses attendant with coming over $10 billion. Obviously, if you add a banker here or there, you've got some expense, but the marginal cost to support growth is quite low. So our view here is hold that non-interest expense line, allow non-interest expense to assets to decrease as we grow. And that's where you're going to see the leverage come in.

And then I think there's a second story from that, which is at some point, and I offer no calendar for this, we might have a yield curve that's not inverted, right? And at that point, you're going to have the revenue side kind of kick in as well. So this guidance about flat expenses doesn't mean that we're going to need to add dollars to grow. We can grow off this expense base. And then this kind of second cylinder that would hit would be at some point down the road if rates normalize.

Manuel Navas (VP and Research Analyst)

I appreciate the commentary. Thank you.

Christopher Maher (Chairman and CEO)

Thanks.

Moderator (participant)

Thank you for your question. There are no additional questions waiting at this time. I would now like to pass the conference back to Chris Maher for any closing remarks.

Christopher Maher (Chairman and CEO)

Thank you. Before we close the call, I want to remind everyone that our annual meeting of stockholders will be held virtually on May 21st at 8:00 A.M. Eastern Time. For the 2024 annual materials, we have transitioned to a Notice and Access model for all meeting materials. Notice and Access grants stockholders access to the full set of materials electronically. By reducing paper waste and mailings, we're able to decrease operating costs and further our environmental goals as a company. If you have received a notice and would like to receive a printed version of our proxy materials, please follow the instructions provided on your notice and submit your request prior to May 7th, 2024. If you have any questions or need any assistance with requesting these materials, please don't hesitate to contact us.

We encourage stockholders of record on March 25th, 2024, to review the proxy materials and vote your shares. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you during our annual stockholders meeting on May 21st. Thank you.

Moderator (participant)

That concludes today's call. Thank you for your participation, and enjoy the rest of your day.