Q1 2023 OceanFirst Financial Corp. Earnings Call
The whole risk selection and diversification and our prudent portfolio management, we focus on rate risk manage.
Our history is clear <unk>.
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.
Put that into perspective, CRE net charge offs average just six basis points per year, 92% lower than all commercial banks with assets between 10% and $50 billion.
Peak annual charge offs totaled 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 evidenced 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 two 5% of the portfolio and less than 1% of total assets.
Further even this portfolio is weighted towards credit tenants and medical and life Science uses.
The entire portfolio demonstrates a debt service coverage ratio of one seven 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 the payment shock is rates rollover immature.
Our portfolio has been carefully structured to avoid this risk.
Aggregate maturities that face a rate reset in 2023, and 'twenty four totaled $487 million only four 9% of total loans.
Next the weighted average rates on these maturities are much higher than you might think.
Loan subject to a rate reset in 2023 have a current weighted average rate of 599%.
And those facing a rate reset in 2024 have a current weighted average rate of 541%.
The 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.
Alright market rents for the majority of our portfolio are substantially higher than that 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 will continue to monitor this risk, but the relatively small portfolio are subject to the risks and the strength of the stress test results evidenced to minimal to no rate rollover risk.
One final comment regarding credit risk management, we actively manage our credit risk and moved quickly to address concerns when they arise.
In 2020, we were among the first banks to offer blanket forbearance programs. But then also took two additional actions that raised some eyebrows, then but will serve us well now.
First we derisked the credit portfolio by selling all credits that demonstrated heightened risk attributes and the fall of 2020.
Next we implemented a practice that required all loans.
Turning to their pre COVID-19 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.
So our history of exemplary performance are 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.
The 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 the project that included dedicating resources and hiring external subject matter experts to evaluate all internal processes.
Performed a series of benchmark studies.
In developing detailed design plans to improve performance.
We've just completed the design phase of that project.
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.
In the past few weeks, while challenging has 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.
But those advantages will figure out how to capitalize on the new environment.
At this point, we'll begin the question and answer portion of the call.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad followed.
By one on your telephone.
One key that.
If you'd like to withdraw the question Press Star followed by two I'm pleased to also remember too and mutual microphone when does your turn to speak again.
Star followed by one on your telephone keypad to ask a question.
Our first question comes from Frank <unk> from Piper Sandler Frank Your line is now open. Please go ahead.
Good morning.
Good morning, Frank.
If you guys could just walked through.
The NIM dynamics from here you you provide a little bit of.
Thoughts on <unk> in terms of modest or maybe more modest NIM compression.
It's really helpful to see the spot deposit cost you guys provided in the period.
But obviously that still would imply some meaningful pressure on deposit costs quarter over quarter on an average basis.
Is it do you think at that point.
The expectation that that abates significantly.
Kind of what are you thinking about I guess.
Margin over the next couple of quarters.
Hey, Frank it's Pat So I'll take a shot at what will probably prove to be not completely satisfying answer.
The timeframe.
But at least for the moment and into next quarter, we arent really seeing a huge amount of or expecting a huge amount of flow or repricing action with the exception of some actions that we know we've already taken so we think that the aggregate.
Kind of costs ramping up in Q1, and some higher re pricings.
Late in April that we've done we will continue to put some pressure on our margin.
And.
That's when we say modest compression we were thinking about it in terms of.
The 30 basis points compression, we saw this quarter I'll remind you that a third of that it was nine basis points were really kind of one time benefits in our margin in the fourth quarter they were absent.
Too 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 to 15 basis point range in the second quarter, but we don't see anything on the horizon that would cause that compression to continue.
And that because we really had stacked up deposits, we've termed out about half of our <unk> borrowings we did that in March.
$600 million, we termed out.
At an average rate of in the kind of mid to three quarters or four range.
Each will help and of course, the retail CD promotion and any brokered Cds, we put on were at fixed rates.
It won't go up and they give us the flexibility to roll off with the brokerage Cds.
And Thats hlv funding.
And if we see declines.
And then I guess, the last dynamic and just to remind you of is that we've got $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 bad investment it outperforms the securities portfolio by about one five percentage points.
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 the earning on their deposits. So I think we may have pulled forward. Some of those conversations that might have happened naturally over the course of the next month or two so.
Again, it's too early to tell but the pace of conversations has changed in the past couple of 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.
Got you, Okay that makes sense.
In terms of the excess liquidity put on the books.
Obviously, the less important.
To the bottom line in NII, but I'm just wondering I assume you would expect.
On an average basis, there to be more more cash and more borrowings on the through the second quarter.
Then the first quarter and so I'm just wondering first of all if that's the case and then second of all if that's factored into your expectations on when you talk about that.
15 basis points.
First gas margin.
Gotcha.
I think you're right about that frankly that is the case and it is reflected so we expect probably many of us remain more liquid in the coming months.
Okay, and then just lastly, I mean, certainly recognize that.
Prudence on the liquidity and capital from kind of the most important thing in this environment, but I think you guys have.
Provided.
Good.
E tail.
On the health of liquidity and capital levels. So just kind of turning back to returns.
Do you when.
When you talk about the operating leverage strategies.
<unk> are going to be put in place through.
Through the end of this year and into 2024 how.
How do you think about profitability do you think.
That gets you back.
I would imagine ROA dips below 1% here just given continued some continued margin compression we were talking about here, but do you think that gets you back to a 1% ROA or maybe just how you think about.
Returns in general here.
I hesitate to give you a date on that Frank but we're obviously running the company to have returns better than a 1% ROA over time and we're working on a path to get there, it's a little uncertain with the rate environment.
Much more certain about kind of operating expenses leverage we feel very good about that so we know what we can affect in terms of our levers, but we need a little bit of cooperation from the rate cycle at some point.
Okay, Alright, great. Thank you guys.
Thanks, Brian .
Our next question comes from Daniel Tamayo from Raymond James.
Daniel Your line is now open. Please go ahead.
Thank you good morning, everybody.
Daniel maybe we just.
Follow up on that profitability question, but just.
Focusing in on the expenses.
How should we think about the.
The path of overall expenses.
The savings that you are.
I'm planning to make in these there is there any kind of.
Final point that you can help us put on how youre thinking about that.
Yes, I'll take a shot at that.
So the first quarter run rate as we think a good run rate for the next couple of quarters.
Hedging just a little bit as to whether it's one or two.
But because we may see some improvement in the third quarter.
But let's call it three quarter run rate through the third quarter and then.
That we have a good opportunity.
To bring those down.
At least 5% for the fourth quarter.
Largely as we anticipated.
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.
And so at a minimum we think that that will fall off so professional fees are going to come would come down by probably 3 million Bucks 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 ready mortgage C&I lending, which is it brings good deposits along with it.
But we do think that there'll be some some staffing efficiency as we exit and go and move into next year.
And we will continue so.
I would say the total opportunity is more than 5%, but I'll just keep it to a 5% by.
The fourth quarter of this year.
No.
Okay. That's great color and then you think.
You guys said youre expecting more savings in 2024 as well.
Correct.
Correct.
It's a little early for us to pin down on all of that I think next quarter, we'll be we'll be refining that each quarter as we move along and then don't forget though that that erosion.
I should say not don't forget.
At the same time, we've got growth initiatives working to expand capabilities and originate and sell mortgage.
As well as growth in C&I, and Treasury management deposit gathering business.
So all of my comments would be net of any required investments that we would have to make some of these are absolute.
Yeah.
Okay.
Alright, that's great I appreciate it.
And then secondly, just on the loan growth make you made a comment that you're expecting that to be.
LOE going forward if.
If you could provide any more color or detail around.
What you were thinking when you made that comment that would be great.
Daniel It's Joe Bell I think the easiest way to describe it as you support your customer base. We are still seeing loan activity you could see it evidenced by the pipeline Youre also seeing it at.
Higher rates you can see it in the pipeline.
Well into the Sevens.
The pipe in terms of average rate.
Our approach has been consistent which is pricing discipline and credit discipline.
And that's going to cause some ups and downs intra quarter around what you can do and what you can do and 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.
What still fits and what doesn't fit so so I do think youll see some unevenness there may be quarters, where you have growth you may be some quarters, where you see some flatness.
Okay, Alright, that's helpful. I appreciate it I'll step back.
Thank you.
Yeah.
Our next question comes from David Bishop from holds group. Thank you.
Your line is now open. Please go ahead.
Yes, good morning, Chris crew good.
Good morning, David.
A question for you in terms of just the macro environment.
The stress and fallout from signature bank and maybe less over 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 maybe sort of any near term impact from that.
<unk>.
Let's say a couple of things there.
It may be some customer movement, certainly the talent environment.
There's going to be interesting over the next six months to 12 months.
But that goes on both sides of it when you are in a period of uncertainty.
People think twice about moving from one organization to another so we'll have to wait and see those things. There is a very significant consideration that will play out at least in the northeast.
And that is I think you can see credit spreads expand.
There are far fewer people out lending today than there were a year ago.
I think that will translate into some opportunity for us to get paid for the work that we do and I know Joe and his team will be really focused on making sure that.
As we grow the loan book from here.
We're paid to do so.
Got it and then maybe a question for Joe obviously a lot of.
A lot of attention to the <unk>.
Absolutely so on the office CRE book, but.
In terms of some of their some of the other segments in terms of CRE anything else, they're flashing warning signals, maybe that Youre youre dotting, our i's crossing your Tibor.
More fine tuning on that maybe it's not getting as much attention out there in the press that maybe yellow or red flags here of a warning signals.
Well I think everybody it on the head David everybody talks about.
It talks about office, we've been very thoughtful in building.
Great book over the last.
910 dozen years around.
Disintermediation around geography dispersion in the asset classes.
We're seeing the.
We've definitely seen a slowing in warehousing space.
I think we're well past the point of.
The dynamics around the Covid environment.
Relative to folks shopping from home I think that's going to continue but not at the same pace people. All thought we're not really seeing that softness from our book yet, but we're thoughtful about it and then I'd just make the comment I think because it's important because everybody talks about.
The office, we have 1 billion won in office. Our office is largely diversified not only in the type of office, but also in geography.
Pretty even dispersion between our Philly and New York, New Jersey regions in terms of office. We also have half of our office exposure is either credit tenant or medical office.
The remainder is largely suburban we've talked about you've seen the deck. We're only I think it's less than 1% of total assets in the.
In the central business districts, but the average size of <unk>.
<unk> here at the bank is less than $2 million. So while we have some large office loans and some small ones. Even when you talk about the maturity wall for.
For 'twenty three we have a 155 loans maturing 112 of them are under $1 billion. So I think we've done a really good job of protecting that but getting back to your comment about other things, we still see multifamily being pretty strong.
Since COVID-19 the average multifamily rents are up almost 20%.
Which is just fascinating in itself given the amount of people working from home, but it just goes to show you, where we where we stand in the country in terms of housing so right now I think we.
We're pretty comfortable with what we've seen what we see but.
It's a very critical and what we're doing going forward.
And Joe di here, It will give you a crystal suddenly.
Introduction when you did the stress test.
Did not adjust the underlying cash flows of rents are.
Current per.
Current environment. It was what was done in underwriting correct.
Yes, exactly right, David we didn't adjust for current rent rolls or current.
Dollars per tendency we looked at the original underwriting tenancies. We also look then we obviously did that making sure that we still had those tenants and the properties, which we do.
I think the theory on that.
We didnt want to count on.
<unk> of rents because I think you're going to get some of that back maybe over the next year or so, but we thought the AD underwritten rents, which were several years ago in multifamily most of that was kind of pre COVID-19 rents.
That would provide a good floor for us so it's a pretty conservative way to look at it.
Got it and then one final question, maybe on credit did see a little bit of a shift too.
I mentioned sub standard just curious what drove the increase in substandard loans. Thanks, I'll hop off.
Yes.
The significant impact we remained lower than we were in the third quarter of last year, just one moment and special mentioned substandard is the bulk of that migration.
Well secured and.
Non accrual.
Perfect.
I appreciate the color.
Our next question comes from Michael Perito from K B W. Michael Your line is now open. Please go ahead.
Hey, guys. Thanks for taking my questions and for the extra supplemental information this quarter. It was helpful.
You guys covered a lot of it so I don't want to take too much time here, but just two quick questions on the first one I apologize if I missed it but just on the noninterest income side.
Kind of a low watermark for you guys here on a core basis in the quarter, just any near term expectations for rebounds anywhere whether it's kind of commercial swap income trough.
Mortgage just anything we should be mindful of as we look at this kind of $9 million on a core quarterly run rate in the first quarter.
I think thanks, Mike I think youre right to say, that's kind of a flourish number as.
As loan volumes decreased swaps decreased in this environment, we don't expect swaps to kind of pop back up anytime soon although they are noisy you might in any quarter you might have a couple of larger swap deals I think that was some of the thoughts behind us focusing a little bit on our mortgage banking business, which may sound counterintuitive in a time when there is high interest rates right now.
But we had the ability to find some some really good talent you may have seen the press release about Steve a domino joining our team so.
Joe and Steve are working on really focusing on the opportunities for a gain on sale business.
Youll know looking back in our financials, that's one area where were income is underrepresented.
And not that we understand the multiples on our mortgage banking business are not that high usually because of the volatility, but it is a counter cyclical business and should rates come down next year.
Refi position, we want to be in a position to make some money off that that's probably.
The only business line, where I would expect to see the potential and again I'm talking about 234 quarters from now that would require our rates to cooperate a little bit too, but what we can do better there and I'm comfortable that Joe and Steve will get that done.
Got it Okay and then just lastly for me on the you guys spent some time talking about liquidity and carrying that at higher levels near term, but can you maybe give us an update on where you guys stand in terms of what the right capital is.
We should be considering maybe.
I'd say longer term little.
[laughter] jokingly because obviously a lot can change but is it fair for us to take that.
As might be more comfortable to carry heavier a little heavier capital than maybe otherwise normal for the kind of.
The foreseeable future until we kind of see what the full fallout from everything we see occurring is or what how are you guys thinking about that.
I think you've probably guessed right, Mike we're conservative folks so we're going to carry a little extra liquidity or in a little extra capital until we know what kind of the world thinks about acceptable liquidity and capital levels, because I think it's going to be discussion. The industry is going to go on for the next couple of quarters. We're all going to settle in I will share with you we've been talking <unk>.
Italy, I remember all the discussions in 2009 and 10 that capital is going to have to come up in banks, we're never going to earn their cost of capital in the sector was dead on investable and some of what you hear today. There is a concern right carrying the extra liquidity and capital will impact profitability, but I think just as we did after the great recession the industry is configured.
It out we will get more efficient.
<unk> had to get our margins back end.
Whatever the capital rates.
Issues need to be will adjust to find a way to make money.
Great just one last one for Pat just $13 5 billion in assets around 100% loan to deposit ratio are these decent bogey for the near term here that you think could be pretty stable.
Yeah.
Yes, I think so.
It's pretty typical for us to run at around this level of leverage and.
Again to Echo Chris's comments, notwithstanding the industry or other stakeholders in the industry deciding that thats no longer acceptable.
We're comfortable with that.
Great. Thank you guys I appreciate it.
Thanks, Mike.
Our next question comes from Christopher Christopher Merrimack from Janney Montgomery Scott Christopher Your line is now open. Please go ahead.
Thank you and good morning.
And Pat and team I, just wanted to ask about how often you're doing new commercial loans above 7% I wanted to circle back to the stress cash I'm curious is 7% is high enough in this environment.
So I think Chris.
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. So you do see some of that in the.
And the weighted average in the pipe and also in the in the recent increases in the.
And the weighted average returns for us, but I would also say that as we look at the existing portfolios. We're looking at this based on risk.
Risk and based on relationship and I think we're focused on driving those returns where it's prudent.
And where the cash flow can support it which is the vast majority of what we have in the books. So it'll be a slow we have I think we mentioned earlier, we have a slow or small amount of maturities coming due.
So that maturity wall is a small one at the at the moment, but if you look at the pipe.
Pipelines low 777 in a quarter I think 725 26.
I always get those deals done at the number you want but I think we're really focused on we.
We recognize what are what our cost of funds is and where that's going so I think it's important to also comment that if you think about the credit.
Credit characteristics of the loans that we have rolling that we applied this to you.
Youre 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 there theyre not in the <unk> yet.
Yeah.
I don't see that coming soon there may be other credits that go into the sevens it would have different risk characteristics, but.
45% LTV two times debt service.
Youre not seeing seven done those at least not in the northeast, we Havent and I think we're being more thoughtful for our existing clients versus those new opportunities, where we recognize what yields we need to get going forward.
Got it that's very helpful. So the low ltvs the non spec that makes your 7% not the same as someone else was 7%.
Correct.
Got it Okay and then my next question just goes back to the concentration of office I know <unk> is in a credit tenant and medical as you described.
You want that just kind of slipped back over time will it naturally fall back to another level I'm just curious how you're thinking about that now.
I think it's I think it's well diversified but I think we're also smart enough and cognizant of what's going on in markets today.
<unk> taken the approach of you do good loans when good loans present themselves to you you don't take undue risk.
We run our business for the long term. So there are certain asset classes that may be out of favor today.
But.
You look at things one off one by one and you make the decision.
That being said I think we're setting up to understand that.
And if we don't get the return that we need.
That will purposely.
Stay away from certain asset classes as they go forward.
<unk> seen a little bit of this Chris I don't know if this will turn into a trend, but given the negative commentary about office nationally.
It's become like a pariah asset class.
Seen a couple of exceptional lead conservative deals Ltvs and debt service tendencies.
Government agencies things like that that are priced.
Very differently than they would have been six months ago. So we don't intend to build this concentration, but if we have a client that has an exceptionally conservative property.
Work on the credit we're not going to work on the popularity.
No. That's great. Thank you for that and just last question is I know, we don't have all the granularity on kind of reserve allocations by pipe, but just generally speaking is it would it be fair to presume that you've got a higher allocation of reserves to office, just given the property type as well as.
Cortisol level relative to the rest of the portfolio.
Actually interestingly within our under our covers the offices performed pretty well so the historical losses don't have any need to generate significant reserves.
And then our distribution of pass versus.
Substandard.
Is very similar to our other office class.
Other real estate classes and collateral classes. So theres 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.
Some of these things we've talked about this morning so.
If anything you might see a reallocation of reserves down the road, if we see a flip anywhere in sight.
Got it. Thank you both I really appreciate it.
Thanks.
Our next question is from Matthew Breese from Stephens Matthew Your line is now open. Please go ahead.
Morning.
I was hoping to get a little bit more color on buybacks. It feels like concerns around capital for the industry are really focused on unrealized losses and securities portfolios, which given your book and lack of meaningful OCI you've done a really good job on so understanding being conservative, but also recognizing where the stock is why not buy.
On the buyback.
Well look I would kind of classify it this way we have the capacity to do buybacks. So.
We have the powder to do that.
We just wanted to make sure that we get to put a little bit of distance between us and the expectations in the market around capital and liquidity and all of that and we keep it as an open option for the future. So we have an authorization we have the financial wherewithal to do it we just want to know more about the operating environment before we do that.
Understood.
Maybe a follow up to that.
They understand the capital ratios, but also commercial real estate concentrations are the regulators paying any more attention to CRE concentrations in the wake of all this if so maybe you can be some some sense for how and what they are looking at.
I guess I'd kind of be this omnibus comment right there.
We're focused on everything right now you can understand why given the events of the last couple of months.
We're getting.
Questions on all sorts of things about the business, whether it's liquidity or concentrations or the rollover risk or so I would say, yes. They are focused on it but not to any different degrees and theyre focused on.
Liquidity and capital plans and stress tests and all that other stuff so.
Special focus and I would point out that our commercial real estate position has not changed dramatically over the last couple of years and stuff.
We've had the conversation with our regulator for quite some time about the management of that asset class.
Okay.
And then on page 11.
Distressed cash towards 90% of the maturing book maintains a debt service coverage ratio of greater than one.
I feel like a huge point here is that you stressed it at the originally underwritten rents could you just give me some sense for.
Maybe the asset classes, where you're seeing the most amount of rent increase in the asset classes, where you're seeing the least in what is the average kind of rent increase from 2018 2019 to today.
You would expect it kind of varies a little bit by geography and property type.
But multifamily as Joe said earlier is consistently strong across the entirety of the market. That's why we're comfortable there and I should note.
We didn't call this out in the slides to any special degree.
Never really operated to any degree in the rent stabilized multifamily. So this is market rent product that were in.
So multifamily probably the strongest.
Where do you see flattish and Joe mentioned this is industrial warehouse, some pullback and concern about do we need all this capacity you've seen the headlines about target and Walmart and Amazon pulling back their needs for for warehouse space nothing.
Nothing of great concern, there, but softer than it was softer than it was a year ago.
The Central business District offices is an open question because I don't think anyone knows exactly what the real vacancy is.
And I wouldn't even look at the rates that are out there today as being indicative I would tell you that the suburban office has done surprisingly strong and maybe to comment a little bit on that because it's unusual to us and retail has held up better than we would've thought.
Think about it a year year and a half ago, we were all worried about retail given what has gone on but Matt we've taken the extra step I've mentioned, we're heavily suburban and then.
Heavily granularity average average loan under $2 million and then of course geographically.
Diversified we are also taking the extra steps in addition to doing the math stress test.
And folks out and we're actually doing site visits as you should and we are doing site. This is a couple of days weeks. So youre not really just looking at you're looking at parking lots, obviously, our people actually back in offices, where they can walk in buildings as well and how are they maintaining so we're doing all the prudent things you need to be doing.
In this environment, just because we don't want it to be surprised and so far the signs are good.
One more color comment on suburban office and at least in our markets. There has been almost no creation of suburban office for maybe 15 years.
The class had been under pressure for a long time with all the migration into urban markets.
So what we have here is not necessarily there is exceptional demand in the suburbs.
Just far less product and there is some demand.
And some of the demand it's interesting the stuff we did up in Boston is life Sciences Repurposing.
Of kind of those office park situations.
Those are rock solid properties and so it's been a really interesting time, we were more concerned about suburban office, probably a year year and a half ago and we have been pleasantly surprised by the amount of absorption in many of our markets.
Great. Okay last one for me.
You show the amount of these loans that that hold the greater than one point out that debt service coverage.
On a rate reset I'm just curious what is what is the average premium post I think you show weighted average debt service coverage on page 11 again at one seven.
Under the stress test, where does it where does it kind of the portfolio average reset at.
I think the $1 seven number that comes from.
I don't have an average of what it came out to site.
We'll get that for you than that.
Okay.
I'll leave it there thanks for taking my question.
Alright, Thank you Matt.
Our next question is from Manuel <unk> from D. A Davidson Manuel Your line is now open. Please go ahead.
Hey, good morning.
Seems like good morning successfully.
Okay.
<unk> successfully keeping like a core.
Legacy deposit beta at that 12% versus 20% for the whole book.
And youre doing everything around the edges to kind of maintain that lower deposit beta on the legacy deposit base.
Is that two two level data, how we should think about things going forward.
How are you targeting there.
Yes.
Exactly our strategies, it's not all that complicated what we've done is try to separate the price pressure on our existing base versus the price pressure of deposits, we need to acquire and not to kind of let the contagion go from one to the other.
Our existing customers that we are 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 theyre not looking for a giant rates. So we want to kind of keep that where it is we're providing good service theyre happy with it.
But I do think it weighs on our incremental deposit growth the marginal cost of that growth is higher so we have to reflect on our loan rates and think about that carefully.
And I think a lot of it is.
Pretty well articulated on this slide where we talk about the transaction volume and the number of times our deposit base turns.
When you have.
DDA and checking account.
Concentrations like we do and people are using those to pay bills and to pay employees and to pay other things, they're not looking for yield and so our noninterest bearing.
Held up pretty well, it's still 20% of.
Of our base.
And.
Excluding brokered.
Brokered Cds and retail Cds.
We are absolutely thrilled with the fairly low levels.
Pricing that we've needed to do I'd say with the exception of maybe the government municipal accounts, which have tended to behave more as a group and are expecting kind.
Kind of broad based repricing and we've had to do that.
Okay.
You kind of felt that.
The rate increases you have done so far.
I kind of.
Stabilized a little bit.
Do you have a one number beta assumption for.
The whole book or do you kind of separated out into two levels.
I'm not sure we have enough growth could give you that number I would say that.
Youre accurate.
And we think that the worst is behind us in that regard.
Okay you can appreciate.
If we were to make decisions over the last 45 days over whether we should pay a price.
Hug a depositor, we've decided to do that right. So we've entered in the side of being conservative. So as I said earlier that I think that pulled forward. Some of it we're seeing a lot fewer of those conversations now so I think that the temp.
Tempo is going to slow down and but what we did the last two weeks three weeks in March where things, we probably would've done in April or May anyway, We just did a month or two earlier.
Okay.
Although loan growth in the pipeline.
I think previously some of the construction fundings you guys had expected werent showing up in the pipeline are they all there now.
Yeah.
Is that pipeline encompasses all kind of.
Future construction, so it wouldn't be an undrawn commitments.
Yes that would be an undrawn commitments, that's where you would find that we wouldn't put that in the pipeline.
Okay existing construction loans that have yet to drill.
Okay.
And then in.
And sometimes the revenue opportunities that you highlighted before including them.
Mortgage banking.
Okay.
Is there any numbers you can place around it also.
Do you think big picture, you're thinking more various local businesses are you considering a regional national businesses, just kind of some of your thoughts there.
We have a treasury product that's done quite well, so far and we want to kind of double down on that product and that product serves a wide variety of folks. So we've got some small businesses that are in line for that.
The teams that are clients of that and we have mid sized businesses of our clients.
To keep $100000 and we have folks that keep $20 million in and we've got the product suite to do that and shown competitiveness index. That's interestingly a deposit opportunity, but also have the opportunity because.
One thing we learned as we went through this you saw all the transaction volume right.
Maybe there are some there are some segments that could pay us more appropriately for the stuff that we're doing for them. So we're trying to look at that but.
It's too early for us to give you a specific number around mortgage.
Given the rates and the volumes today youre not going to see that change in the third quarter.
But that market is notorious it changes quickly we've been in mortgages since.
<unk>.
But admittedly in the last decade, we've spent less time on them.
Any comments you'd make so I think the only thing I'd add there is that we do expect to expand the geography, because we historically have been new Jersey based central Southern New Jersey based residential mortgage lender and we have licensing and most of the states I think 47 states and.
Not that we're running national Tomorrow, but we're in Boston, and New York, and Philadelphia and Baltimore.
I do think there is an opportunity now when the market is quiet.
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.
One of 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.
Yeah.
Okay.
That's really helpful.
As as loan growth kind of Downshifts.
And hopefully the environment clears up for capital deployment is buyback kind of the preferred use of capital.
It all depends on kind of what we've seen in the market. If the credit spreads. We're seeing now we love the commercial banking business I don't know if those are going to persist, but we'd have to get a little more comfortable about the environment about the marginal cost of funding, but the first thing we'd like to do is to grow the bank.
Absent a prudent opportunity to do that with the capital.
Capital if we don't think we can do it in capital starts to build up to a point and yet by Baxter.
A nice tool.
Okay. Thank you very much for the comments.
Thank you.
We currently have no further questions I would like to hand back to Christoph and therefore final final remarks. Please go ahead.
Alright. Thank you very much few important additional comments before we finish the call.
They will be commencing mailing the materials for our annual meeting of stockholders, which will be held virtually on may 20, <unk> at eight am eastern time.
Encourage stockholders of record on April four 2023 to review the materials and vote your shares.
Also recently, we transition the Investor Relations officer role from Jill Hewitt two Alpha <unk>.
Albert joined our finance team in March of 2020.
I know many of you have already started reaching out to alpha directly but if you have not I encourage you to contact alpha with any questions. Joel is still with Ocean first we'll continue to hit 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.
My predecessor.
John Garbarino, so I know that.
Many of you have spent time with her and we appreciate all the time and effort. She has put forth to try and try and make it look as good as we can look.
We appreciate your time today.
And your support of Ocean <unk> Financial Corp, and 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.
Ladies and gentlemen. This concludes today's call you may now disconnect your lines. Thank you.
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Yes.
Yes.
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