Q4 2022 OceanFirst Financial Corp Earnings Call
This combined with our steady growth puts us in a position to highlight that we've already outperformed both the 2022 and 2023 quarterly efficiency and profitability targets that we announced at our last Investor day in third quarter of 2021, we couldnt be more pleased with the company's financial performance.
As a reminder, the 2023 core target metrics set at that time were to earn <unk> 65 per share meet or exceed a one 1% ROA and achieve an efficiency ratio of around 50%.
Having largely achieved that performance a year earlier than originally anticipated we continue to work through how we should be thinking about financial targets going forward.
Not only are we considering the external economic and interest rate environment. We're also reviewing how our efficiency and productivity across all of our operating.
Businesses and processes compare to industry benchmarks more to come on this topic during the second quarter.
I'd expect that over the near to medium term or targets may be framed more in terms of relative performance rather than absolute goals.
At this point I will turn the call back to Chris.
Thanks, Pat now we will begin to the question and answer portion of the call.
Thank you very much as a reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star two.
When preparing to ask a question. Please ensure you amit to likely.
Star followed by one on your telephone keypad to register a question.
Our first question today comes from Frank Schiraldi from Piper Sandler Frank. Please go ahead. Your line is open.
Good morning.
Brian just wanted to ask about the.
Joe you mentioned that the pipeline.
But still I think talked about mid single digit loan growth from here. It sounds like you're thinking maybe more modest deposit growth I was just wondering where you guys sort of see your target that loan to deposit ratio moving over time.
And then also if there's any specific niches youre looking at.
No.
To drive the.
The funding side of the balance sheet.
Yes.
Sure Frank It's Chris I'll take that in terms of the <unk>.
Our strategy over the loan to deposit ratio, we love being like 95% to 100% great operating range for us. So there's a little bit higher I mean, frankly, the last couple of days of the year. We had just a couple of variations in deposits.
Timing thing.
We'd like to try and manage to stay around 100, Theres really no issue going to one or two or three but we're not going to become a bank thats going to go to 120, we don't think Thats a highly valuable franchise strategy. So I would expect as we go into this year. We think we're going to have mid single digit loan growth based on as much as we can see now.
Right, which is really early in the year, we want to try and match fund them with deposits for the most part so in terms of where we're going to get those deposits. We have a terrific group of commercial bankers.
That have had a little bit of a luxury in the last couple of years not to have to focus as much on that.
Obviously there.
Their goals and objectives. This year will be heavily focused on deposits is a great treasury team, we have a very mature product set there so youre going to see our commercial bankers and our treasury team probably doing the heaviest lift.
But we also have the opportunity in our consumer franchise.
To drive some deposit growth in consumer so.
I would think about deposit growth coming in as a blend some of which may be noninterest bearing but a lot of it may be either less price sensitive interest bearing accounts and some of it will be just be market sensitive rates I think it's a blend so when we blend on that and we look at the loan opportunities in the pipeline I think we can maintain margins. These Pat said there is an opportunity.
Potentially for additional margin improvement as long as rates continue to increase and then may be flattening out after the increases stop.
Okay great.
And then.
Pat you also paddles mentioned the securities purchases.
I'm just kind of curious.
If you could talk about the size maybe of additional.
Add to the Securities book I assume.
Reducing asset sensitivity on that.
With shorter term <unk> borrowings I guess, you don't get much spread there. So just kind of curious about.
How to think about.
The progression there.
Through the year.
Yes.
It's kind of a trade generic for future asset sensitivity versus future rocket and future returns.
Roughly $250 million towards the middle and later part of the quarter.
Agency paper.
<unk>.
Construct.
The yields on those were in the kind of low to mid fives. So net net we're if you consider incrementally we're funding it at wholesale costs, we'd probably clear about 1%.
Those increases now the combination of that and some other efforts that we're looking at we're hoping to get to where our downside sensitivity.
Is reduced from what we had last year and frankly as we move through this year.
We kind of like to try to position ourselves relatively neutral.
So that we can.
We lock in.
Margin at a higher level than certainly what we saw during the zero interest rate environment.
Underscore that Frank.
This is a.
An opportunity for us.
To try and minimize the risk to future margin compression.
Should rates begin to change in the back half of the year and going into 2024. So.
In the period of zero interest rates, we were comfortable letting the bank get pretty asset sensitive we've seen that.
Positively affect our margin in the last year.
Now as you know who knows where terminal rates will go but as we start to get closer to.
To be terminal rates, we want to make sure that we've got.
To reduce some of that volatility that you might see in spreads. This is very much about how we're going to look in $2024 23.
Gotcha.
But thinking about maybe additional purchases just for modeling purposes is there any sort of securities to assets maybe ratio, we should think about.
Or is it not expected to change much from what you did in the first quarter.
I don't think you're going to see a material change in that kind of outlook.
This is a very tailored approach so we're dollar averaging into a few positions.
We're going to watch the market watch what rates do watch what our own interest rate sensitivity evolves to be and also look at the peer group and make sure that we stay in the band to folks that we want to be in <unk>. So I don't think you're going to see a very different structure to our balance sheet. It just kind of around the margins.
Okay, great. Thanks for all the color.
Thanks Frank.
Thank you.
Next question is from Don you to my eye from Raymond James Daniel. Please go ahead. Your line is open.
Thank you good morning, everyone.
Good morning, starting on the on the expense base just wanted to see if that fourth quarter seemed to be about in line with what you were thinking if that remains a good jumping off point and then.
As we see the increase in the FDIC assessments take place in the quarter. Just wondering what you guys were thinking how that impacts that line item.
Right, Hey, Dan It Pat so yes.
Yes, I think fourth quarters.
Good jumping off point.
First quarter will always have.
The impact of merits and.
Related staff costs.
Comp cost that come towards the tail end of that so it will inflate a little bit and in this environment.
That might be a more permanent inflation, so we might see it tick up just a little bit with with merit increases.
But the run rate on most of our line items.
It's pretty solid right now.
You should assume.
Excuse me.
Looking across all of our expense base as well as our revenue productivity and that will take a little bit of time, but working to make sure that we are optimizing for the businesses that we do so that'll be a theme throughout the year.
For us so that's kind of underpins the professional some of the professional fees and other costs will remain elevated at.
At least for the near term the FDIC assessment will hit us like everybody else to the 10 for us it'll be about $2 million on.
On the new rate scale.
For the year for the year sorry.
Okay terrific. Thanks, Pat.
And then maybe on the.
On the fee income side.
A little bit below what.
We were all looking for.
The swap fees certainly impacted that.
So maybe your thoughts on the swap fees from here and how the rates play into that and then on.
On Trident as well a little bit below the range.
There was some seasonality there or are you thinking about that going forward.
Yes, a couple of things just on swaps and the outlook.
And then Joe May chime in a bulk load volume and tried.
If you look our clients are smart that's a good thing.
So they are resistant to buying swaps in a market, where they think that rates may be going down over the next couple of years. So.
So it's a combination of the appetite for our customers to want to be in swaps as well as.
The aggregate amount of loan volume so while loan growth has been pretty good.
Origination.
<unk> volume has come down quite a bit so we're seeing kind of slower prepayments and thats, what's affecting growth. So if you looked at the swap income that's going to vary with your new originations not with your portfolio growth.
So joining comments on swaps for Triton.
Alright, I think you hit on the head.
On the swaps relative to try that and I'd say that there's always some seasonality in the fourth quarter, but I think there's also a mechanism that rates have gone up substantially in the residential market.
While we are still doing their commercial business and we're doing more and more of a penetration there of our own book into into Triton.
That we expect it to.
Run rate may be a little bit muted over the next year until we get a little bit more normalized less volatile rate environment in the residential space.
Okay perfect. Thank you.
And then.
Lastly, just on the I guess on <unk>.
<unk> loan growth in particular.
Just curious.
Interest cap renewals.
An article in Wall Street Journal recently about how that May impact.
Values of real estate.
And the industry in the potentially loan demand there, but just curious what youre, what youre thinking about that dynamic.
In the current environment.
So a couple of things I would just point out we've always been very disciplined about stress testing every credit we put on so at the very beginning were looking at how interest rate changes over time will affect that borrowers ability to kind of roll that loan.
I think the article Youre referencing focusing on central business District office.
And the ability for those kind of cap rates and vacancies how could you could you roll that we have very low exposure in that segment. So we have less than 1% of our assets.
In Central business District office underwritten CRE.
So we don't feel we've got a significant exposure to that most of the exposures, we have been well stress tests at the beginning and have enough room that we don't think rollover risk is going to be material that we used if rates kind of top out where the market expects now.
Any thoughts you have been other segments, Joe you've seen outside the office segment and kind of a continuing strength.
Yes.
If you look at the balance sheet and the way we have reported the credit metrics are very strong we're not seeing any noise in any one segment I think one of the things, we do well and especially in the CRE book as we.
Have diversified not only within asset classes. So.
Office industrial retail multifamily and a bunch of other stuff. We've also diversified by geographic region. So in the last few years with the advent of our affiliate and New York offices, which are now already four years old and more recently, Boston Baltimore, we've really diversified the portfolio.
Okay.
Okay. Thanks, guys I appreciate all the color.
Thank you.
Thank you our next.
Next question is from Michael Perito from <unk> Micro. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions.
Good morning, Mike.
Good morning.
Two a couple of things I wanted to hit number one on the.
Kind of wanted to opening slides here you guys talk about the balance of efficiencies and.
Technology investments you guys are making so Pat maybe asking the expense question a little differently. I mean, you guys kind of hit the efficiency targets ahead of schedule, but I mean, as we think about some of the pressures both ways next year and kind of the bare minimum level of investment you guys still want to kind of maintain I mean is it fair to be thinking about an efficiency ratio in kind.
The low 50% range give or take or do you think that there's still room for leverage in.
In this environment.
But.
Yes, and yes, I guess to that so.
I think 50 is not a bad thing to ballpark as a proxy for right now.
I think we think that we can do better.
For what we do and certainly we can do better and preparing for further scale and growth across the business lines that we're in overtime. So we've made a lot of technology investments over the years.
We've still got a lot of disparate processes.
And people and so in this environment in any environment, we would be focused on that but particularly in this environment. We know that our revenues over time are likely to fall.
And we want to try to protect the efficiency or the operating leverage that we've achieved.
Even in the face of falling revenue environment as rates come down over time so.
I guess more to come on that.
But again.
It's an important focus for us this year.
Got it.
That's helpful and then just secondly.
Chris You mentioned.
I forget how you clarified it but I think it was the central business District office.
Can you just remind us what the total kind of office exposure is in the loan book and as you think about growth opportunities for next year on the commercial side, Joe as a follow up to that I mean can you maybe just give a little bit more color, both kind of byproduct and geographically, where maybe the pipeline could rebound faster.
Curious how you guys are what kind of activity youre seeing.
Sure. So the figure I was referring to as we would define that as.
Office exposure in central urban markets, So for us that would be New York Philadelphia Boston.
So but to get a little broader in nature, what would you add to that.
So as I mentioned earlier, we have about 1 billion won an office in that in the portfolio.
Central business District office was only about $125 million, which as Chris mentioned, 2% of the CRE book, 1% of the total loan book.
If strip out as Chris mentioned, if you strip out.
Life Sciences or credit tenants, it's down to $50 million in central business district. So there's not much exposure, we haven't really ever played in that space.
Too much we look but we have a fairly narrow.
Credit band, which I think has served us pretty well.
In terms of in terms of growth in Korea and growth in the book.
I would say that we I think I mentioned last quarter.
And to end of period pipeline is just a day and time things rotate back and forth it fairly rapid a fairly rapid pace.
I think we're pretty comfortable mid single digit growth it could be a little bit more it could be a little bit less.
Choppiness in markets.
It goes back and forth we've seen already.
We saw some pullback in Q4 with some of our.
Some of our clients yet already in Q1, we've had people out looking for opportunities. So.
There is a still a lot of liquidity in the investor market.
And people want to put money to work there is a bunch of funds out there that we've been fortunate to bank over the years.
That have money available for opportunities. So I do think there'll still be up.
Opportunities for us to continue to grow rapidly or responsibly, if you'd better better better rapidly said responsibly.
Just to kind of complement Joel and his team we have assembled a group of commercial bankers.
That specialize in a lot of different things, which gives us the opportunity to really diversify.
Not only the portfolio with the growth we're putting on in any one period.
And the geographic diversity, so we have the opportunity markets.
Are they come and go and they are hot and cold and our opportunity to have seasoned bankers and some of the largest markets in the country is really proving to be an advantage. It allows us to be very selective.
About kind of how we choose to grow.
Which types of risks we take on.
Great and then just lastly for me.
It was it was great to see the ROE of the business. You know you guys talked a lot about the inputs being ahead of schedule, but.
The 15% level high level for you guys over the last handful of years.
There is a narrative that banks are kind of at peak earnings and there's pressures on Opex name all of those things just curious I know you guys aren't willing to necessarily provide targets, but any comments on kind of how that ROE level kind of compares to your internal expectations or are you guys expect any it sounds like you are but is it fair to say that you guys expect to be able to kind of.
Maintain that level for the majority of next year give or take.
Let's start with some humility and just say that.
It's a cloud a year, it's hard for any of US I think to have a lot of certainty around what's coming but but there are a few things that have panned out in the last year that have kind of confirmed.
Our opinions on our business. So first you see the deposit beta.
Yes, we're going to be a little more competitive around deposits in the first half of the year, but our existing deposit base has been rock solid and and that's going to continue to serve us well. So while we may have to pay up for deposits, we're not paying up on the portfolio were paying up on the amount of deposits. We have to kind of grow to fund fund loan growth. So I think thats a great opera.
<unk>.
In terms of.
Loan yields you saw the loan yield pickup divestment youll pick up this quarter that should continue as rates continue to rise Pat mentioned the level of floating rate assets, we have so.
So without growth I think you've got some margin expansion, we may trade some of that off we run our business every day, we want to bring new clients in you bring clients in on Sunny days and rainy days and everything in between because they're good clients.
So I think our outlook is generally that margin should continue to improve for a while I don't think we are at peak margin.
In terms of operating efficiency.
I think we've done a good job to date.
But as Pat mentioned, we're thinking hard about long term kind of structural expenses, how can you be even more efficient as you grow.
I'd kind of look back at.
<unk>, which I know was a giant shock to the system.
That happened to be the point in time, where we crossed $10 billion and we had to work through a whole variety of things, including the scale to overcome the Durbin amendment changes and things like that we kind of feel like thats behind us and we're just going now continued continue down the path of growing the customer base.
But.
Realistically with our price discipline in our credit cut we're not going to be growing at double digits. This year that'll be closer to single digits. So I don't know if that helps but that's a general outlook for us.
Great.
I appreciate all that context, Chris Thanks, guys for taking the question.
Thanks, Mike Thank you.
Thank you. Our next question today comes from David Bishop from Hovde Group.
David. Please go ahead your line is open.
Hey, good morning, gentlemen.
Morning, Dave.
Chris Joe Slide six you break out the geographic distribution.
By region as you look out in terms of the newer markets Boston and Baltimore.
Curious, maybe where you see that potentially growing as a percentage of the pie over the next maybe two to three years or so do you think that gets to the double digits here in the next the next two years.
Okay.
I don't know where the end game is because of the cloudiness as Chris referred to it at least for 'twenty, three but we're pretty happy with what they have done so far I think.
I think Boston has got a little bit of a head start to have a little bit of a larger team.
We tend to do we're always out looking for season.
Successful bankers will continue to do that and the Baltimore group is largely focused on the C&I space, whereas Boston has been largely focused in CRE. So so it's not easy to compare them, but if you look at the trajectory of what we did in Philadelphia and New York I do think we have an opportunity.
<unk> to grow those meaningfully down the road some of that will be.
Some of that will be incumbent upon us to continue to fund them appropriately in this environment. So I do see I do see really call. It Blue skies ahead David.
Don't know if it'll be.
As rapid as the as our growth we've enjoyed until you're in New York in a really good environment.
Got it and then I think maybe Joe during the preamble you mentioned some opportunities on that.
The construction segment.
Segment, maybe just dive into that particular, where you're seeing some growth opportunities.
Sure.
You guys may recall that we started a construction vertical just a few years ago with the acquisition of.
Our very talented bankers, but in this space for 30 years, and we've built out that team a.
A bit we really saw some significant activity in 2022 actually did about triple the volume that we did in 2021 a lot of that.
You would expect is undrawn because these are projects that are being built out.
And so we do see that even if we were to slow activity in that space because of the uncertainty.
These projects are going to fund and help us support some.
Loan growth in that segment.
Regardless, so we're pretty bullish there and where we're reinvesting there where again, we're very thoughtful but we know the markets that we serve pretty well as you all know, especially we use new Jersey's example, it's very difficult to get things approved.
It takes 18 to 36 months to get things approved when projects get approved they get built and they get filled.
So we're pretty bullish.
Kind of talk a little bit about the risk characteristics of that.
You think about our construction book a significant chunk of it approximating 40% is non speculative.
Another 40% spec is apartment based.
And those are underwritten to very modest rental expectations. So there really shouldnt be an issue as those kind of mature and only 20% of it would relate to single family home and as Joe notes in the northeast we tend to have a much more stable level of inventory and prices.
<unk>.
The home prices and New Jersey, despite all the slowdown in unit sales are.
To be up about 6% year over year. So that's very prudently underwritten very conservative.
Very thoughtful portfolio that we feel very good about.
Got it Thats great color then.
I noticed in the slide deck pretty pretty substantial improvement in the sub standard loan bucket, maybe just some commentary what drove that decline.
Well I think it's a combination of factors, David we've had improving economic conditions post COVID-19.
And we were as we tend to be typically very conservative in.
And looking at the client base that was adversely affected by Covid during that period, we were.
Downgrade credit in the classified or criticized because we had concerns.
Vas majority of those folks were paying but.
It made sense for us to do what was prudent for the company as they've rebounded post COVID-19, it's allowed us to upgrade those and we've had some pay offs from that from that bucket as well and some recoveries, which we anticipated that we would so I think it's just a foundational aspect of the way we approach things when we have uncertainty we will downgrade when we need to.
And when we see some more certainty we're not afraid to upgrade.
We made two important decisions during COVID-19.
Which may not have been super popular at the time. The first was in the third quarter of 2020, we derisk the portfolio by pushing out the stuff, we thought we'd have a higher likelihood of having a post COVID-19 issue and sold that off.
The second thing that we did is we did know cares no long term cares act deferrals in our commercial base. So we took a position that we gave a lot of short term deferrals worked with our borrowers really made sure that we kind of got them through a difficult time, but we did not restructured the facilities and enter into these kind of longer term Io periods.
Sure.
Payment plans that would have allowed weakness to continue so we were able to move through that I think pretty effectively when you think about last eight quarters two years in a row, having a net recoveries on our balance sheet. Our size I think that kind of proves out our thesis back in the third quarter of 'twenty, which was not very popular I think held true.
Got it I appreciate the color guys.
Thanks, Dave.
Thank you. Our next question today comes from Christopher <unk> from Janney Montgomery Scott Christopher. Please go ahead. Your line is open.
Hey, Thanks, good morning, Chris and team.
<unk> all mentioned 2024 as part of your thought process for managing the bank now.
We possibly have a different rate environment. Then are there any lessons learned from the 2019 era when rates kind of peaked last time with the fed that you can implement now I know the portfolio is a lot different.
But just curious kind of loan floors and other tactics can work or.
If there is any particular way you think through the structure from the past.
It's an excellent point and that's exactly what we're trying to do to learn from the experience. We went through in 2020 in particular, so kind of coming through the Covid cycle.
We had a strongly acid asset sensitive position at the time.
That resulted in our margins decreasing going down into the $2 <unk>.
And what we've been doing in this began in the fourth quarter will continue over the next couple of quarters.
Is doing what we can and you can only do so much around the edges, but doing what you can to make sure that we have a more neutral interest rate risk position. So we're not trying to game it environment and make money one way or another we're trying to do is ensure that.
Three we can relative stability around the margins. So we are willing to give up some of our net interest income today to protect that margin for the longer term.
Pat walk you through the securities purchases, we have a very modest hedge position that we began in the fourth quarter as well and again.
To protect against additional fed increases its actually to protect against what could be fed decreases.
At some point, we have no idea when they may show up.
Great. That's helpful and Pat can you remind us two things how far out.
Youre going on the hedge position and then.
What's the amount of cash flow that comes off the securities portfolio each quarter.
So.
The hedge position I guess I guess, the effective durations that we're putting on are probably in the seven eight year range.
For the cash balance sheet purchases.
Chris talked about swap, we only have one to three year.
Silver.
So.
Is that going to dramatically change things other than have a marginal improvement around sort of the downside interest rate risk exposure.
Youll see in our cubes accusing case right. So.
That's kind of the general.
Flavor of that in our Securities book is pretty short dated as is so think three and a half years.
In aggregate.
So every little bit helps.
For stretching that out.
With respect to the cash flows that come off the book, it's around $25 million a month.
Okay $25 million a month.
Great. Okay. That's very helpful. Perfect. Thank you all I appreciate the time this morning.
Thanks, Chris.
Thank you.
Next question is from Manuel <unk> from D. A Davidson Manuel. Please go ahead. Your line is open.
Hey, good morning.
Good morning, a lot of my questions have been answered, but on the construction line.
That might come in and help with growth going forward does that does that not show up in the pipeline.
Is that the right way to think about it with the pipeline being a little bit lower.
It is construction.
These are undrawn facilities that have like a two year life is there kind of drawing down and building and then convert it to that so we can kind of project that there'll be some draws coming in in the first half of the year.
Our expected natural.
And it would not be in Nevada.
What commitments.
The loan pipeline has some really nice.
Higher loan yields.
What would be the construction lines coming in as well when do they kind of having similar.
It looks like six 5% yields roughly.
Well I think the.
The average construction transactions are higher anywhere between happen one over prime.
You want to get paid for the risk you take.
In the environment that you're in.
Sure some of our borrowers are disappointed that the rates will continue to rise but.
They look at it from the long term and it's a little disintermediation as you would expect if you build a multifamily project today and it may cost you Prime plus one to build it.
You could still at the end when you fill it up and stabilize it.
Get a get in loan at 200 over a seven or 10 year Treasury, which is.
$5 five today. So so they look at that as we do it's a window to pay for the risk of the construction and then and then when you get to the end game youre going to stabilize it and get much better cash flows.
Okay.
That's helpful.
How much.
Of your view on loan growth.
<unk>.
Include the probability of a slowdown.
You.
This suggests that there is some slower activity, but if you were as.
Positive on the economy could you have.
Probably more loan growth or is it kind of your you are purposely being more selective youre seeing better yields your price conscious.
How are you kind of balancing that today versus maybe a year ago.
I think that you can start with the market has fewer opportunities right. So you can see in some of the things that have been growing those quickly in the last few years I'll take kind of warehouses and example, right. They are very few people going out to build net new giant warehouses.
So youll see a little bit less economic activity, so that does pull down the opportunity for all of us.
And then as rates go up borrowers are a little discriminating over which projects they want to take on so if theyre going to pay and if youre paying over prime you could be paying something with an eight handle right. So.
Youre going to be judicious about using that capital when you can make it work for you.
But youre not entering into that lately. So I think there is a little lower demand.
There is our traditional discipline kind of filters out a lot of what's in the market anyway.
And go back to my comments about participating in multiple markets and having a great group of bankers.
So we can kind of trade off.
If new York is Hydrophilia Hot or Boston, New Jersey is hot you can kind of.
For the deals you need in the places you need them.
So but.
The overall tone is slower.
To your point about a recession.
It is very hard to understand whether the recession coming or how severe the other thing I think thats greatly overlooked is the geographic impact of a recession.
So historically and I have no reason to believe differently. The northeast has been less impacted.
By business cycle risk around things kind of boom and bust cycles. So even in mild recessions through seems to be a fair amount that goes on in the northeast that's our market. So we don't.
We have not observed in our markets kind of a significant overcapacity or overbuild or vacancy rates with some selective sub.
Sub markets like Central business District office is certainly an area that.
We've got an eye on.
That's really helpful.
It is the probability of a recession grows.
Where do you think the loan loss reserve heads to I know you have about 57 basis points now.
It's about 65 with marks.
Where is that.
Yet the head more to distribute a severely adverse scenario, where would that kind of pushing up too.
And as you can imagine like everyone right.
We've had our trials and tribulations with with seasonal.
And the kind of a high class problem to have when you have no charge offs, it's really hard to come up with a quantitative allowance that said the majority of our allowances qualitative and it assumes that there is some risk of a recession coming in the near term.
So I think if there were a recession, we'd have to evaluate where is that hitting geographically, which product segments. What are our exposures in those segments. So I wouldn't want to hazard, a guess about where that number would go up.
What I would say is that I'm very comfortable that the composition of our loan portfolio and the underwriting and credit risk management would leave us up better than the peer group, which is why you tend to see our reserve being a lower coverage ratio.
<unk>.
Our net charge offs are about 80% lower than the 10% to $50 billion Bank peer group. So we have a lower loss reserve. It doesn't those two things are correlated so.
Yes, it could go up yes, I don't know, which segments would be hurting to what degree.
But I think the relative performance point that Pat made earlier I think we're going to show that our credit discipline.
And just as a data point.
We use the Moody's <unk>.
Our foundation for our quantitative models.
And still have to layer in a whole bunch qualitative to get to the point, where we are today.
Okay.
I appreciate that color I can step back into the queue.
Thank you.
Thank you.
Next question is from Matthew Breese from Stephens Matthew. Please go ahead. Your line is open.
Hey, good morning.
Hey, Matt.
I was hoping for a little bit more color around that.
The near term NIM outlook, and I know theres some questions around what the fed is going to do so maybe ask you an age old question, which is per 25 basis point hike what is the expectation for NIM expansion at this point.
Well the one comment I can make is the expectation is expansion. So that's an important though right not contraction.
We I think the last time, we spoke with.
With all of you.
We were thinking that it might be single high single digit NIM expansion and then deposits outperformed in the fourth quarter and we did much better than that so.
A lot of it is going to be determined ultimately by how much.
Deposit pressure, we see we havent seen a lot to date, so we still see some modest expansion as long as the fed is raising rates.
We think that will continue for about a quarter. After they stop raising rates and then you should start to see it flatten out so.
Could be 10 basis points, but I would hesitate to give you a number.
Okay.
Maybe get a little bit more specific on the components.
Could you just re quantify for us how much of the loan portfolio I think it's the majority is fixed rate and then what is the roll off yield versus the roll on yields.
So we have about.
68% or so.
The book is fixed.
The vet and the rest obviously is flow.
And then the roll off yield would probably have like a high three to four handle.
Pay offs and.
The new facilities coming on as a high fives.
Six and change.
Okay.
And then what was the if you can provide at the end of the quarter all in cost of deposits.
Yeah.
I don't think we publish that.
Hesitate to introduce a new number Matt I appreciate where the question is coming from.
Yes, it hesitated.
But I think that.
When I think about deposit betas, I think youre still going to see us on the low end of the pack going forward.
Okay.
If we do see a slowdown in loan growth.
Obviously, the balance sheet has been a bit more protected from a OCI. So your tangible equity ratios is pretty solid I know there are some.
<unk>.
Regulatory bank level capital ratios that are a little bit thinner, but I just wanted to get your thought on capital management and where the stock is thoughts around buyback.
Sure.
Great question, and obviously, we've not been doing buybacks. So the question would be what is our appetite.
I think kind of starts with a fundamental view on our business, we really feel good not just about the year. We had in terms of financial metrics, but about where we are in customer relationships and the buildout of the commercial banking teams.
Core markets, because we've been adding bankers in new Jersey right. It's not just about the expansion markets. So we feel really good about that obviously, we see growth slowing a little bit as we kind of go through.
It could be maybe at the beginning of a recession. This year, but we don't we're in the camp with many others that the recession will not be will not be particularly.
<unk> to us and there'll be another side to it so.
We think we have a great opportunity to continue to grow over the next couple of years.
So, we're allowing that equity position to build up and.
We have no doubt that we will find a good opportunity to use it for our shareholders in the coming year or two and we'll be patient about it. So it's a little slower growth this year with a faster growth next year or.
That may be the case, but at this point, we are building up our capital levels, because I'm confident we'll find good use for it.
Okay understood.
The last one.
Oddball question, but there's been some undulations in unrealized gains in investments.
$100 million equity portfolio, just curious how granular is it what is it.
Are there anything.
Outside of the investment this quarter that you do have kind of pointed out note highlight.
I don't think in the equity portfolio youre likely to see much movement positive or negative.
Absent a giant move in interest rates so.
$100 million, you're referring to is our preferred instruments that carry a good yield.
But there it's mostly banks.
It's pretty granular there's no giant positions in there we've got kind of limits about how much of any one instrument, we're going to take.
And it has a decent cash flow coming off it so.
As rates rates.
Rates were to continue to go up a lot maybe you would have a little bit but I don't think there is much risk of that in either direction. It shouldnt be a material number for us.
Okay and I appreciate that.
We're really pleased to have had the opportunities in the second half of the year with auxiliary and with nest egg those were very unusual and theres nothing about them that I would expect to recur in the short term.
Understood. Thank you very much that's all I had.
Yeah.
Thank you. This is all the questions. We have today, so I'll hand back over to Chris for any closing remarks.
Alright, Thank you very much.
Our fourth quarter results were consistent with our strong performance throughout 2022, and they leave us well positioned for what may be an economically challenging year in.
2023.
We appreciate your time interest and Ocean first and we look forward to speaking with you. After our first quarter results are published in April . Thank you very much.
Yes.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Okay.
Yeah.
Okay.
Okay.