OceanFirst Financial Corp. (OCFC) Q2 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the OceanFirst Financial Corporation Second Quarter 2023 Earnings Release. My name is Glenn and I will be the operator for today's call. [Operator Instructions] I will now pass you over to your host, Alfred Goon, Corporate Development and Investor Relations. Alfred, please go ahead.

Thank you, Glenn. Good morning, and welcome to the OceanFirst second quarter 2023 earnings call. I'm Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off our 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 Forms 8-K, 10-Q, 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.

Thank you, Alfred. Good morning, and thank you to all who have been able to join in on our second quarter 2023 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we will 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 second quarter included GAAP diluted earnings per share of $0.45. Our earnings reflect net interest income of $92.1 million, which while down from the prior linked quarter, has increased $1.3 million or 1.4% as compared to the prior year. Our second quarter results were impacted by industry pressures on deposit costs, increasing our deposit betas to 29%, which we believe will outperform our peer group over the cycle. Advancing a more competitive pricing strategy has protected our deposit base, which increased to $10.2 billion. Our balance sheet continues to remain solid with nonperforming loans and criticized classified assets representing just 17 basis points and 80 basis points of total assets, respectively. We continue to build capital, ending the period with a tangible book value per share of $17.72 and a common equity Tier 1 ratio of 10.2%. Turning to capital management. The Board approved a quarterly cash dividend of $0.20 per common share. This is the company's 106th consecutive quarterly cash dividend and represents a 44% of core earnings. The company did not repurchase any shares in the second quarter. At this point, I'll turn the call over to Joe to provide some more details regarding our progress during the quarter.

Thanks, Chris. Deposit growth for the quarter totaled $165.2 million. We have maintained a thoughtful approach to deposit pricing and have paid particular attention to our valued clients, the last of which were repriced in Q2. We are laser-focused on retaining our existing clients while actively attracting new clients in a profitable manner. Slowing loan growth, coupled with deposit growth in both Q1 and Q2 has allowed us to reduce the loan-to-deposit ratio to 99.3%. You will notice a small increase in net gain on sale this quarter as we begin to focus residential originations for sale to the secondary market. Loan growth in the quarter has been muted as clients are reluctant to incur the increased cost to borrow and demand in certain asset classes other than residential and multifamily construction has slowed. Regarding asset quality, delinquencies remain low, and we continue to maintain our credit discipline, which has served us well. Net charge-offs were effectively zero as a percentage of total average loans on an annualized basis. Nonperforming loans are less than 0.23% of the loan book. The maturity wall on investor CRE continues to be modest with $119 million and $344 million set to mature in 2023 and 2024, respectively, at an average rate of 5.72%. With that, I'll turn the call over to Pat to review margin, expenses and outlook.

Thanks, Joe. Net interest income and margin were $92 million and 3.02%, respectively, reflecting higher funding costs and to a lesser extent, the impact of excess liquidity compared to the prior quarter. Funding costs reflected cycle-to-date deposit betas of 29%, as Chris mentioned, and we're seeing some stabilization in our cost of deposits at period end. Additionally, with rates expected to be higher for longer, we did term out a portion of our FHLB borrowings. While we believe our third quarter margin may stabilize, we could see further modest compression in Q4 as time deposits roll over, but expect the impact to be much lower than in the past two quarters. We continue to maintain excess cash during the second quarter due to the stressed liquidity environment combined with continuing uncertainties around monetary policy. As those risks ease and the banking sector continues to stabilize, we expect to normalize cash levels, which will have a modest but positive impact on net interest margins and capital ratios in the third quarter. For noninterest expense, increased to just under $63 million compared to the prior quarter. This increase includes $1 million of nonrecurring charges related to corporate real estate and recruiting expenses. Excluding these charges, core noninterest expense is right in line with the prior quarter. Our effective tax rate for the quarter of 24% remains in line with prior periods and our guidance, and we expect to remain in this range going forward. During last quarter's earnings call, we briefly introduced a bank-wide project aimed at evaluating internal processes relative to benchmarks and developing detailed plans to improve performance. We're now in the execution phase of this project, which includes spending our C&I lending, deposit gathering 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 some of these initiatives will require additional costs, which will be self-funded by the project, we believe quarterly operating expenses will decline to the $58 million to $59 million range by the fourth quarter of this year. This does not include the potential onetime costs of the proposed FDIC special assessment, which has not been finalized, but it's expected to be approximately $3 million based on the initial proposed guidance. We're hopeful it could be lower but worst-case scenario, we think it's approximately $3 million on a onetime basis. We continue to work through additional opportunities to further improve operating leverage both on expenses and revenues as we move into 2024. And finally, we expect capital levels to remain strong through the remainder of the year and our CET1 ratio to remain above 10% and grow modestly with earnings over the course of the second half. At this point, we'll begin the Q&A portion of the call.

Thank you. [Operator Instructions] We have our first question comes from Daniel Tamayo from Raymond James. Daniel, your line is now open.

Hi, good morning, guys. Thanks for taking my questions.

Good morning, Daniel.

Yes, good morning. First, I guess for Pat on the margin, on the excess liquidity, in particular, what was the impact in the second quarter? And then I think you said that, but this - but just to confirm, that will fully be kind of backed out in the third quarter, is that right?

That's right, yes. It had a single-digit basis point impact on the quarterly margin. We're maintaining levels that are probably 8x or 9x the cash that we normally would kind of pre bank failures through February. We've already started to reduce that down and expect that to get back to normal operating levels at some point during the quarter. We're going to wait and see how earnings season goes, but expect that to be, call it, a 2 basis point or 3 basis point improvement in and of itself to the overall margin trajectory.

Okay. So as we think about the relatively stable guidance for the margin in the third quarter, you've got the offset from liquidity, as you mentioned. And -- but if you're still kind of expecting further compression in the fourth quarter, what's the ex-liquidity compression that we should be thinking about in the third quarter? I'm just trying to reconcile those two things.

Ex-liquidity compression, I would say maybe 2 basis points or 3 basis points lower. So we've got internal debates about whether we're going to be plus/minus 3% margin that we printed this quarter for each of the next two quarters. And frankly, I never like talking about forward expectations of margin. But right now, with the unpredictability of deposits and around loan growth being as stable or flat as it is loan demand being as low as it is, it really kind of makes it an exercise in trying to carve out decimal points rather than broad bush trends. So things stable for the second half of the year but don't get angry if we're 5 basis points, plus or minus, higher or lower.

Got it. I will not. And that range contemplation, what, in terms of noninterest-bearing concentration from the 18% you're at?

Pretty stable. We have not seen a lot of movement in that mix since, I guess, COVID. I think we were low 20s pre-COVID, which was definitely reflective of some excess liquidity for customers, surge deposits, whatever you want to call them, and that has slowly moved down over the last three years, a little bit of an acceleration in that runoff over the last six months, but it's gotten - it's stabilized pretty nicely. And look, that's reflective of the very granular nature of our deposit base. We have lots and lots of low balance accounts that are operating accounts. You saw an investor presentation slide for us that flagged that our deposit base turns over approximately 10x a year. So people are actually spending the money every day, every month and then put it back. So these are not accounts that chase rate. So we're hopeful that, that will remain stable and 18% would be how we finished the year. I would love for it to be higher. It's just an incredibly tough environment for noninterest-bearing deposit growth.

Okay. I appreciate that color. And then I guess one more kind of high-level question for Chris on the loan growth side, you've obviously tightened the range significantly this year given the environment. Just curious, when it becomes a better environment for growth, how quickly you're able to ramp that back up? Have you had to reduce the number of lenders at all? Or would you anticipate having to hire more people? Just curious how that process would work.

We could ramp up pretty quickly. We have made some staff reductions but not among the folks that have the strongest client relationships, obviously. So I think we would be able to turn very quickly. Part of the way we look at the world now is we're building a little bit of excess capital, and we'll just kind of lean into that when the time is right. But I think we could turn as soon as the market turns and we're watching it. Maybe that's late this year, maybe it's deeper into 2024. But when that time comes, we'll be ready.

Okay.

Daniel, it's Joe Lebel. I'd add one more thing. We've added --we've hired seven new C&I bankers already this year and five new residential lenders. So we're not standing pat. We're planning for the future at the same time.

All right. Great. That's helpful. Thank you, guys.

Thank you, Daniel. We have our next question comes from David Bishop from Hovde Group. David, your line is now open.

Good morning, gentlemen.

Good morning, Dave.

Good morning, Dave.

Pat, just circling back to Daniel's question just in terms of the excess liquidity. Just from our edification purposes, how is that measure? Does that sort of the level of cash and securities percent of assets? Curious how should we think of that sort of normalizing? Is that cash coming down as is or is that investment securities coming down as well or a combination of both.

Right. That's purely on balance sheet liquidity. It's not securities driven. So we typically will keep expected cash flows that we need for a period of days, but not weeks on hand, generally less than $100 million. We have ramped that up to, I think it peaked out at nearly $600 million early on kind of in the liquidity stress period, and that's dropped down to about $450 million, and that will continue to come down. It's obviously a focus point for regulators and for all banks, not just for us. And so we've actually kind of tightened that up a little bit and are looking to reduce that gradually. We don't want to be in a big hurry to do it. And I guess the benefit of the environment - rate environment that we're in is we leave that money parked at our Federal Reserve account and are getting pretty competitive rates on an overnight basis. So the earnings hit is not nearly as significant as it would have been back in the days of kind of a 25 basis point effective Fed funds rate.

Got it. And then I appreciate the continued disclosures on the maturation of the retail CDs, the broker CDs. Just curious if you have the average rate bifurcated between those two classes that could reprice upon maturation or roll-off?

So, the brokered CDs have an average rate of about 4.5%. The retail - the CDs are primarily retail, and we've put the majority of those on the books this year and they have a weighted average rate a little closer to 5%. I think our current best offer rate is at 5.15%. But again, it's promotional, not accurate.

Promotional being new money. New money. Correct.

Got it. Got it. And then, Joe, maybe circling the credit, the slide in terms of the maturation of waterfall theory of 90% of the population debt service over 1x. Does that still hold true in terms of the assumptions you had as last quarter where you really hadn't factored in market rates, rental rates rising to that calculation.

Yes, it still does. And we're pretty happy about that, as you would expect. But it's evident really, to a certain extent, David. If you look at the weighted average rate of the actual underlying loans at the moment, right? So the sub that's maturing has got a weighted average rate of 5.70. So the market rate, I'll use the word stress or shock that we're putting on these loans as they get closer to maturity, is not significantly different than when the loans were booked. And in many instances, the underlying rents, especially in the multifamily space are markedly higher.

Got it. And then one final question, and I know that it's sort of early in the season, but any early read into the tourism season and the business health in terms of Jersey Shore tourism, what you're hearing from your customers?

Yes, I mean, I tell you we're hearing - yes, David, I'll tell you we're hearing really positive things. So, the early on indicators of occupancy, have been quite strong. So people kind of renting houses and hotel rooms and all that. And then if you think the next question is will they spend the money when they're in town and so far, we're hearing they are. So it's all positive.

Good to hear. Thanks.

Thank you. We have our next question comes from Matthew Breese from Stephens Inc. Matthew, your line is now open.

Hi, good morning.

Good morning, Matt.

Chris or Pat, I was just curious how did the margin progress through the quarter? And perhaps can you give us the month of June NIM or the end of June NIM just to give us some sense for how things kind of progress through the quarter?

Well, I'd tell you Matt that it was certainly more acute in the beginning of the quarter. So for the month of April, for example, we were carrying forward all the rate changes we made in response to the events in late March. So it was much more acute in April and May. June was flatter, but not flat. So just a slight compression in June. So it was certainly front ended. And we think we've seen a lot of signs of stabilization as we were talking earlier about the non-interest bearing accounts, but those don't seem to be changing in any great degree. And although we are pricing up when CDs renew, we also have loans maturing and repricing. So, they're not exactly in equilibrium, but they're not far off that. Pat, if you have any numbers, feel free to share them. But I don't think we're managing that margin on a monthly basis.

Yes, so if you look at the quarters being 30 basis points of compression, I'd say three quarters of that came in April. And the rest of it was spread not necessarily evenly across the last two months of the quarter. And one important thing to note and Joe referred to it in his prepared remarks a little bit. We did programmatically reprice a sector of our commercial account primarily the municipals as of the first week of April. And so, that had a pretty dramatic impact immediately, because it's 20% of our deposit base. And then after that, as Chris said, it's really just kind of the rolling effect of things that are maturing and rolling over new promotional money that's coming in largely offset by loans that are rolling, and I would say that that will - we expect that to continue. And you didn't ask the question, but I'll answer it anyway. I think that the impact of Fed rate hikes on all of that is not - is not expected to be material for the same dynamic that the assets and liabilities are really kind of on the similar cycle of repricing. So, if we do get another rate hike in, call it, September I wouldn't expect that to have more than a basis point or two impact on margin well under $1 million impact.

Okay. Great. I appreciate all that color. In the presentation, you noted that it's more likely that we see the expense benefits from the cost cutting plan in early '24 versus late 2023 before. I was curious, has the amount changed? I believe in the mid-June presentation, it was outlined that it could be a 5% to 10% decline, is the amount of the decline still intact? And when do you expect it to be kind of fully baked?

Sure. It is intact and we hedged a little bit with our outlook and took the low end of the range. And what we have line of sight on in the short-term, which is absolutely a reduction of about 5% as we migrate through the third quarter. Which results in the decline of $3 million to $4 million of quarterly expense run rate, which we expect to print in the fourth quarter. So exactly six months from now, we'll be having the call and hopefully talking about a $58 million or $59 million expense quarter. The other 5% so the 5% to 10% range, we still feel very good about that. The timing is a little bit broader and harder to pinpoint and it's also the result of a fairly large number of small initiatives that add up. And so, I think those will kind of bleed in pretty steadily throughout the first and second quarter. I wouldn't rule out the possibility of a little bit stretching into the third quarter, but the first half of next year, we do think that we'll be able to further reduce Now, I will caveat that against - it's a little early for us to think about what kind of inflationary increases we may have to incur for staff costs. That will address as we get closer to year end. But right now we don't envision it being at all material.

Got it. Okay. Thank you for that. The last two from me, just really around credit, the first one is at this point, the footprint and the geographies you touched pretty diverse markets across the Northeast and Mid-Atlantic. As you think about the commercial real estate market across those markets, are there any areas where the valuation movements have been more pronounced? And if you could provide some color maybe on what categories you’re seeing that?

Sure. A couple things, Matt. First, I would say that not surprisingly the Northeast tends to be a lot more stable in valuations than other parts of the country. That's good and bad. We don't tend to go up as much and we don't tend to fall as much. So, we're not seeing anything across the footprint that would give us any concern at all and all the indications out of the loan portfolio are that if there's - none of those classes in the Northeast are really under pressure. That said, they're very different markets as you point out. Probably the strongest overall market, I would say would be the markets in New Jersey and Boston. For two reasons, New Jersey continues to benefit from some of the out migration from the cities. Jersey Shore is doing well and there has been a lack of certain properties in New Jersey. So the inventory has remained low even around stuff like suburban office. We're seeing the same kind of metrics up in Boston, a very strong market kind of across the board all asset classes. Obviously, in New York, you would be looking at office although we don't have much there. And in Philadelphia, I think it's a little bit more spotty. But I'd ask Joe to maybe make some comments about some of those markets and areas where you're just being extra cautious.

Yes, I think we've been pretty clear about earns about central business district loans. We don't have many I think that number is somewhere around $60 million. If you carve out the medical office and some lab space in Boston, but I think Chris is pretty much on point. The interesting thing and we've seen it a lot, the vacancy numbers have ridiculously all time - near all-time lows in New York relative to multifamily. So people are in the city. So the other asset classes that you might be concerned about outside of office, whether it be some retail or other areas that really haven't been adversely affected. I think the downtown Philadelphia markets, a little softer though the vast majority of stuff we have is performed admirably. I think the biggest challenge and - I think the industry is all questioning is - when is there any kind of normalization, asset quality has been so good for everyone with the exception of what you'd refer to as these one-off events which have been in the line of non-recurrence when you hear other folks. We're not even close to what you consider a normalized environment. So with the rate increases, you do expect that there may be some stress down the road, but nobody's seeing it yet. We definitely aren't.

Right. And the follow-up and along those lines earlier, in June, we had interagency guidance from the Fed, the FDIC, the OCC, outlining that the banks can work with CRE customers, provide combinations. I was curious what do you think that all looks like? What are the tools at your disposal? And how does it ultimately end up being disclosed?

Look, I think that's just a more of a reminder than anything, Matt, the tools that we would have used in normal times. If we use them, for example, during when Hurricane Sandy hit our market to kind of restructure loans and work with borrowers, put people on forbearance. We all used them the whole industry used them during COVID. I don't think we're talking anything like that, but I think it's just a reminder that if you have a decent borrower that you want to support that has a good path forward that you can responsibly structure that. And we have the new disclosure rules, you know, since TDRs are gone. But I think if you've got the credit that is going to be stressed and you're restructuring it, you're going to be disclosing that. So that said, one of the interesting things we've seen is our credits that have rolled thus far this year have not required any of that. So we're seeing folks maybe having a little - their cash flows may support a little lower net service but we're not seeing loans rolling that are rolling into stress situations, generally speaking.

And last one for me, just a follow-up. Are you seeing willingness from borrowers to provide a cash in refi if that's, in fact, necessary support LTVs?

Yes. We - in a very limited basis so far, Matt, we've asked a few borrowers to rightsize the loan, and they've done it without reservation, which is an attribute. I think there are the sophisticated borrowers that we tend to deal with are also very cognizant of the fact that they have a relationship with the bank in this environment looking for other outside new relationships may not be the best course of action. So even if it's something that they may not want to do day 1. They understand that we're operating from a perspective of good faith, and we want to continue those relationships. So we've not had any of those adverse impacts so far.

Great. I appreciate taking all my questions. Thank you.

Thanks Matt.

Thank you. [Operator Instructions] Our next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is now open.

Thanks very much. Good morning. Just want to follow up on Matt's question. Can you give us an update on sort of how the regulators are looking at commercial real estate concentration in terms of these old tests from years and years ago. Has anything really changed in your mind?

I don't know that anything has changed, Chris. I think there's just a reminder that the same disciplines they would have expected a few years ago, they expect now. In particular, when things change and markets are questionable like this, they're going to be looking to make sure you're proactively stress testing your portfolio that you're looking at what has changed. The most important thing is being able to demonstrate that you have a handle on your risk positions, whatever those are. And look, sometimes your risk position will shift a little bit in one direction or another. I think the discussion of the maturity wall is one that there would be rather high regulatory expectations around banks having done their homework, looking at individual loans, making sure they know which ones are higher risk early enough so that you can see where your portfolio might be going in advance. And this is in the existing guidance, but the way that you fund the loans is important. So liquidity does relate to risks like investor CRE risk because you're going to look to make sure that liquidity wouldn't cause an issue. And ultimately, you fold into capital plan. So we're talking earlier about loans rolling in '23 and '24, and we're now actively looking at the loans rolling in '25, that if you know you might have stress a year or two out, that you're taking the right courses of action to put the bank in a solid position. So I don't think the expectations are new, but the focus level will certainly be new, meaning that you're going to get a lot more questions. In some cases, you may have to do more reporting. The reporting intervals may change. So I do know in some cases, there are certain stats you may have to report quarterly or monthly that you wouldn't have reported before. But it strikes me that's more of a sentinel or monitoring process, not a change in expectations. But just expecting you to do exactly what the guidance says.

Great. Chris, that's helpful. And I guess when you stress test the CRE loans, it's not just about going up on interest rate. It is more liquidity and other factors, as you mentioned.

Yes. When you think about it, they're looking at - if we're - for example, relying upon the guarantor, they're going to want to see that we've done our homework around the guarantor. The guarantors position hasn't changed. We're verifying liquidity in that case. They're going to want to make sure that as we're rolling any loans over that we're stressing the cash flows and look, one of the challenges we're all going to have is that cap rates are a little hard to figure out right now. I think everybody feels like they should have increased given the environment, but there are not a lot of transactions in some markets, so you don't have a rich history of cap rates you can pull into appraisal. So they're going to look to make sure that you're thoughtful, that you've documented your work and that you have a handle on things.

Great. And my follow-up just has to do with the disclosure you made in the slides about the sort of long-term sort of customer relationships. I think eight years was one of the numbers that was in the slide. As we hopefully or sooner to the end on kind of resetting deposit rates, what's the best way to sort of think through that relationship time as we look at kind of valuing your deposit base going forward given the funding advantage that you have?

Yes, I think one of the keys to our deposit base and it was substantially built through acquisition is we were very thoughtful in the companies we acquired each of which had a very long history of having served their communities and several of the banks that we acquired were around for more than 100 years. So when we went in, in due diligence, we were particularly impressed by these multigenerational relationships with that institution. We have held the vast majority of those relationships and that kind of folds over into the quality of our deposit base. Second thing we think about is we have a little bit of a split deposit base. We do have deposits in the metro markets. So we have deposits in New York and Philadelphia and in the more densely populated parts of New Jersey. But we have a lot of deposits in areas in New Jersey that I would characterize as rural. And there's a little different flavor to those markets as well. So I think when you see the longevity of our deposit base, it reflects the fact that we were very thoughtful in which deposits we chose to acquire, that we kept those relationships intact and that our service levels have allowed our customers to value what Pat was referring to. I mean most of these accounts turn over all their dollars up to 10 times a year. We're doing a heck of a lot of ACH and Wire and Zelle and Venmo and Visa Debit and that's what they're with us for. And I think that's what's helped produce the data.

Thanks Chris. Thanks for taking all the questions this morning.

All right. Thanks Chris.

Thank you, Chris. Our next question comes from Manuel Navas from D.A. Davidson. Manuel, your line is now open.

Hi, good morning.

Good morning.

I understand the liquidity deployment benefit to - potential liquidity deployment benefit to NIM. In the slide deck, you talk about that it could potentially offer upside to loan growth. Is that kind of contemplated in the low single-digit guide and just kind of towards the high end of the range? Or is like demand not justifying that type of benefit? Any clarification would be great.

So I'll start and say that it's evident that demand has slowed a bit on both sides, right? So I think the fiscal C&I borrower has seen the borrowing costs double those that run profitable companies have just - I'd say they wouldn't cancel activity. I think they're delaying some activities for growth. So that's impacting loan demand in C&I. On the CRE side of the house, I think valuations are the most important thing. If you're a buyer, you're wanting to really be fully vetted on is this the bottom? Is this an opportunity to buy. If you're a seller, you're still trying to adjust to what may be newer normal with higher rates. So the good news for us is that the loans that we are doing, we're doing at yields that have gotten markedly - we're happy with that. So that's a good news. I don't know if like the actual volume today on a quarterly basis, I think we'd like it to be higher. But you just do the good loans that you can do and put them in perspective.

So I'll take the supply side answer. Joe just gave you the demand side answer. If you think about how our liquidity has moved over the course of this year, we've brought our loan-to-deposit ratio down pretty meaningfully from fourth quarter heights. And we like where we are. We have come through arguably one of the most rapid and severe shocks to the banking system that any of us have seen without seeing for the most part, any behavioral change in our deposit base. And so, we're at a point where we're not just going to keep driving our liquidity higher for the sake of printing a lower loan-to-deposit ratio. If we don't see a need to, we're not going to change our risk appetite and go out and try and find loans. But we think that we're very well positioned to kick start things - resume higher loan growth as the right kind of spend emerges.

And thinking about the right type of demand, I noticed your origination yields were pretty close to what you have in the pipeline. Can you comment on if that's - the pipeline yields have improved so far this month? Is that a question of mix? Just I would have liked pipeline yields to be a little bit higher.

Well look, you always want pipeline yields to be a little higher. I'm happy with how fast the origination yields have come up. I think there's always that dichotomy between customer relationship on one end of it. And of course, on the other end of it, the fact that we're funding costs have gone up substantially. But if you look at even just six months ago, we were talking about origination yields in the low sixes, and now you're in pushing the higher sevens. I will tell you that where we see a lot of activity in the construction book for us, those yields are 9% plus. So, I think as we bleed through the remainder as we have bled through the remainder of stuff that was in the pipe, older stuff that was in the pipe that may have had treasury spreads below where we're quoting today, you'll see those yields continue to rise.

Is there any color on kind of the construction line utilization. We've been talking about that for a couple of quarters. I know it's not in the pipeline per se. Like how much has been added from that from what was available, how much is still to come?

Yes, I don't have the exact on what's still to come. But I would tell you, from a utilization perspective, it's a little bit better than C&I. C&I borrowers tend to utilize about 40% of their availability on average, 40%, 42% of their availability. The construction book for us is typically pushing 50% of availability. And of course, some of that has to do with the fact that those that are at the end of projects tend to be converting to perm, those that are construction in multi or any other kind of stuff. And the for-sale stuff tends to as they finish, they're paying you off, because they're selling properties. So on average exposures maybe 50%, a little over 50%.

And mix to the construction book is the properties are moving very quickly. So it's not surprising at the rates that construction loans cost. Folks are saying, look, I want to finish this project as quickly as possible because ironically, the term rate, right, is a lot lower than the construction rate. So there is a rush to get thing things done. And this lack of inventory throughout our markets in the Northeast, means that if you can finish it, whether it's for sale or for rent, you can get it stabilized. So, we have seen the duration come down a little bit. And you know what, from a credit perspective, I'm not upset about that. I'd love to see projects kind of finish early, get sold out faster than you think. But it does have a little bit of an impact on the yield.

And my last question is on - just can you touch on the resi mortgage trends and if there's any other fee initiatives that can be started this year. I know those are more as part of the full kind of operating leverage strategy. But just if you can update any of the fee side of that plan, especially in light of the newer resi mortgage trends?

Look, I think we have a - as we've mentioned, an opportunity to try to drive activity. We want to originate to sell as best as we can. That's really driven by the availability of inventory, especially in our - especially in our marketplace. I mean the lack of inventory in the residential space is really - in a good news perspective, it's prop of valuations, in a bad news perspective, those folks have 3.5% more each year, at least for the time being are actively looking to sell and turn that into something else. I do think that as we go through our initiatives and the way we run our business, the opportunity for us to drive additional fee revenue from treasury management, we have a significant amount of our clients in the corporate bank that are - treasury clients, but we're trying to deepen those relationships. One of the opportunities we have now when loan demand is a little bit lower is to take our commercial bankers and treasury management consultants and be out. Have conversations with clients about how we can best help them monetize and maximize their cash and use of cash and that, if they choose to use our treasury products will help generate fee income for us. And I think we'll start to see more and more of that as we deepen that wallet share as we head into '24.

That's really helpful. Thank you, guys.

Thank you. We have our next question comes from Frank Schiraldi from Piper Sandler. Frank, your line is now open.

Good morning.

Good morning, Frank.

Hi, Frank.

Just on the - just talking about loan growth, it seems like that the pullback in growth is just, I don't know, just as much as the demand issue as this funding but Pat, you mentioned the loan deposit ratio under 100% and being comfortable there. Is that kind of - do you expect to see that or you expect that to be a governor though from here to remain below 100% on that ratio?

I guess I think it's pretty - sorry, go ahead, Chris.

Well, Frank, what I'd say is that 100% has always been an area where we're comfortable where we're fully rent. So, we don't get all hung up on whether it's 101 or 99, but given the events of this year, we thought better to favor being under 100%. So, we'll watch it as this liquidity situation eases. We might occasionally get up to 100% or show like a 101 quarter, but we've never been a company that wanted to drive that much above 100%, and that remains. So, we're just going to be a little bit on our conservative end. We haven't really changed our overall outlook.

Okay. And then given you mentioned you do have the ability to ramp up loan growth quickly if you - if it makes sense. Is that more likely to come on the C&I side and therefore reducing exposure pre. And what do you think kind of and - what would you say the main driver could be to see growth ramp back up again to sort of more normalized levels? Is it - as simple as having comfort that the Fed is done raising rates? Do you think that brings a lot more demand back into the system? Or kind of what are your thoughts on leverage to see loan growth ramp up for the year?

And maybe, Joe, why don't you walk through that?

Yes Frank, I would tell you, the absolute understanding if the Fed is finished raising, I don't be worried about when and if they lower. If they - if the corporate client feels that certainty and the economic conditions sort of they see - it's a little bit more clarity. I think Chris made the same comment about deposits, right? Loan-to-deposits, if you're comfortable with your deposit franchise and its stability, whether it's 99 loan-to-deposit, one or two loan-to-deposits, I don't think it matters. It's more around what your comfort factor is there. I think it's the same with the corporate borrower. Corporate borrowers are telling us at least. They're not shelving projects. They're just putting the stuff on hold for the time being. They want to see where things shake out. And it's not all rate driven, which I think is fascinating. I haven't had a lot of corporate borrowers tell me that they're adversely affected solely on rates. I think a lot of our corporate borrowers have said, look, we knew rates were too low for too long. We benefited by that. It's not intimidating by us. They're looking at it from the other end, which is if they do these projects, what's the end game? Can they see that result in revenue. So, I do think that we'll see increased borrowings in the C&I space if we can get, if we get some certainty. I also think we have the opportunity to see more in the residential construction space. I think there's been recently some articles about new home builders starting to benefit a bit just because there's a lack of inventory. I also think there is an opportunity for them to do more if they get more clarity around rates because they're really driven typically off the 10-year treasury. If you get a little bit more or a little bit less volatility. Even if mortgage rates end up in the high 5s, low 6s, I think if that rate is stable, I think we'll see more activity.

Great. That's great color. And then Pat, since you mentioned you don't like talking about forward curve for the NIM, I figured I'd ask about 2024. We get - if we get the one or two rate hikes from the Fed, you talked about your kind of expectations through the end of the year. I mean I would imagine that you do have an inflection point then early in 2024. And if we get sort of a rate environment stays where it is, just kind of curious where you think a more normalized NIM would be as that loan book continues to reprice higher?

Yes. Impossible to know. So thank you very much, framing it that way. But I actually would expect that margin behaviors are going to be as much influenced by deposit stability and deposit trends as they are by Fed rate hikes. The forward curve is already telling us where the Street thinks rates are going to go, and it's going to be lower. We have a pretty good operating history of operating somewhere between 3% and 3.5% for margin. So I wouldn't be surprised if we can revert back to something in that range, kind of midpoint of that range. But the timing of that is just really hard to say how fast that could happen and how much of it is going to be dependent on changes in rate expectations versus deposit behaviors. We are leveraged. And so we do have to go out and fund incrementally more than we did back when we had $2 billion, $3 billion of excess liquidity.

No, I appreciate that color. I know it's obviously a tough question, but -- and lastly, just on the repurchase front. I would imagine it seems like stock repurchases are kind of at the lower end of priorities and is that kind of just the way to think about it, at least through the near term here?

Yes. I think that's the right way to think about it, Frank. We're not - we're going to watch how the market unfolds before we would even consider that. We have an opportunity to deploy that capital over time and organic growth and other things. So it's not on our radar right now. Obviously, we watch things as the market unfolds in the next couple of quarters?

Great. All right. Thanks guys.

Thank you, Frank. We have our next question comes from Michael Perito from KWB. Michael, your line is now open.

KWB, I like that. That's good. Good morning, guys. How're you?

Good morning, Mike. How're you?

Good. Just two quick ones. Obviously, you guys covered a lot, so I appreciate all the color. Just to backtrack to, I think, two or three questions ago about the fees. Pat, is it fair to think I know you don't like to provide guidance on this specifically, but the first half of this year, is this kind of theoretically a low point on fees for you guys with the mortgage business possibly picking up a little on the gain on sale side and then hopefully maybe some swap income coming back if rates stabilize?

Yes. I think that's a very fair assumption. So everything was depressed or suppressed.

Got it. And then just secondly, to kind of pull together a few of your answers to other questions here. I mean there's obviously a few moving variables to this, and the NIM is probably the largest one. But are you guys willing to kind of provide any updated context around - you guys are making these expense initiatives. And if the NIM does - if we forget about the win for a second, but if the NIM does eventually come back into that range at that you were speaking to, what the kind of efficiency ratio of the bank might look like or what you guys think you could reach or aspire to? I mean, I know before all of this, there was talk of getting into the low 50s. Is that still kind of how you guys are managing the bank assuming normalized margins over a period of time? Or any updated context there would be great.

Mike, it's obviously a hard question to answer, given we don't know when things might change, but I would say this, we're trying to improve operating leverage in all environments. So if the NIM came back to the more historical 3.25 to 3.5 rate, we would expect to be get the efficiency ratio down to 50% or even possibly below 50.

Perfect. Thank you, guys. Appreciate it.

Maybe thinking about it a little more - Mike, maybe think about it a little more in terms of overhead ratio, kind of take the revenue volatility and the impact of NIM and rate changes out of the equation. So we're in the 1.8 range as a percentage of assets, total expenses, percentage of assets. And we think that we can bring - continue to bring that down further, maybe into the low 7s and keep working on it.

Yes. No, that that's helpful perspective as well, and it makes sense. Appreciate it, guys. Thanks for all the color this morning.

Thank you, Mike.

And apologies, Michael. We have our last question comes from Manuel Navas from D.A. Davidson. Manuel, your line is now open.

Hi, I jump back on and some of my questions have been answered. But I do have a smaller question. What were the terms of the term out of FHLB? Can you give any details on that? And just kind of how you're thinking about wholesale borrowings and broker deposits across the back half of the year?

Sure. So we termed out about 50% of our FHLB borrowings across a range of two, three and four year maturities and we did it early in the year - earlier in the year. So those will be maturing starting late '24 than '25, '26. Interestingly, the rate differential between overnight two, three, and four was only like 15 basis points. So if you take the higher for longer assumption, we kind of locked in all of that just below 5%. And we're comfortable we'll need that level of wholesale borrowing for at least the next couple of years.

Okay. That's helpful. Any thoughts on the back half of the year or using broker deposits, thinking about seasonality.

Yes, I think our goals are going to be through a combination of organic growth initiatives that we continue to work on and other channels of non-broker deposits, whether it's institutional or other types to be able to chip away at the brokered CD levels that we have today, which is about $1 billion and over time, get that back down to zero which is where we were the first quarter of last year and generally where we operate. So think of this as a high watermark for brokerage CDs and we'll take those off as they roll and as other funding avenues continue to improve.

Thank you. Appreciate that.

Thank you. We have no further questions on the line. I will now hand back to Christopher for closing remarks.

Thank you. We appreciate your time today and your support of OceanFirst Financial Corp., and we look forward to speaking with you after our third quarter results are published in October. Thanks, and enjoy the rest of the summer. Take care.

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