Earnings Call Transcript
Oceanfirst Financial Corp (OCFC)
Earnings Call Transcript - OCFC Q3 2023
Operator, Operator
Hello, everyone, and welcome to OceanFirst Financial Corp's Third Quarter 2023 Earnings Call. My name is Lidya, and I will be your operator today. I will now pass it over to your host, Alfred Goon, Senior Vice President of Corporate Development and Investor Relations, to start the call.
Alfred Goon, SVP of Corporate Development and Investor Relations
Thank you, Lydia. Good morning, and welcome to the OceanFirst third quarter 2023 earnings call. I'm Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you. And now, I will turn the call over to Christopher Maher, Chairman and Chief Executive Officer.
Christopher Maher, Chairman and CEO
Thank you, Alfred. Good morning, and thank you to all who've been able to join our third 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'll provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. Our financial results for the third quarter included GAAP diluted earnings per share of $0.33. Our earnings reflect net interest income of $91 million, representing a modest decline compared to the prior linked quarter of $92 million. Our third quarter results were impacted by modest margin pressure linked to our efforts to improve the bank's liquidity position and the quality of our deposit funding. These efforts resulted in meaningful deposit growth, a substantial decrease in brokered CDs, and a measurable reduction in the loan-to-deposit ratio. The resulting mix shift in our deposits placed some pressure on net interest margins, but that pressure has decreased significantly as compared to the past two quarters and appears to be reaching a point of equilibrium. Our deposit betas increased to 35% from 29% in the prior linked quarter. Advancing a more competitive pricing strategy through various channels has protected our deposit base, which increased 4% to $10.5 billion, while reducing brokered time deposits by $426 million and bringing our loan-to-deposit ratio to 96%. Capital remains strong as we ended the period with a tangible book value per share of $17.93 and a CET1 ratio of 10.36%, both measures improving modestly since last quarter. Turning to Capital Management. The Board approved the quarterly cash dividend of $0.20 per common share. This is the company's 107th consecutive quarterly cash dividend and represents 61% of GAAP earnings. The company did not repurchase any shares in the third quarter. While we continue to see the frequency and magnitude of external economic, geopolitical, and natural forces increase, I am reassured that over the past year, our quarterly net interest income has only declined in the range of 5%, and we are highly confident that our quarterly expense run rates as we finish 2023 are reverting to mid-2022 levels. Whether or not this becomes a new normal for the industry remains to be seen, but I'm convinced that we will remain very competitive in whatever environment may evolve. At this point, I'll turn the call over to Joe to provide some more details regarding our progress during the quarter.
Joe Lebel, President
Thanks, Chris. Net deposit growth for the quarter of $375 million was concentrated in core growth of $343 million. For the month of September, a decrease of $305 million in non-core, primarily brokered CDs, resulted in a meaningful change in deposit composition for the first time this year. Year-to-date deposit growth of $859 million is a reflection of our thoughtful and concerted effort to win meaningful deposit relationships in today's competitive and higher cost deposit environment. Continuing on the deposit front, I wanted to mention our addition of a new branch opening in December in the town of New Brunswick, located in Middlesex County, New Jersey. On the loan origination side, we continue to see tempered growth as a result of reduced demand from customers and our pricing expectations given the cost of funding. Asset quality metrics remain strong with non-performing loans in criticized and classified assets, representing 1.3% and 0.2% of total loans, respectively. The quarter included an $8.4 million charge-off on a single commercial real estate relationship as previously announced, which so far continues to be an outlier in our portfolio. Additionally, this relationship was included in our non-performing loans at September 30. Absent this, non-performing loans would have decreased $1.4 million. Net charge-offs for the year are $8.3 million, representing only 11 basis points of total average loans on an annualized basis. With that, I'll turn the call over to Pat to review margin and expense outlook.
Patrick Barrett, CFO
Thanks, Joe, and good morning. Net interest income and margin were $91 million and 2.91%, respectively, reflecting higher funding costs associated with deposit growth. As Chris noted, funding costs reflect cycle-to-date deposit betas of 35%, and we clearly saw margin compression begin to stabilize throughout the quarter. While we believe our fourth quarter margin may see further modest compression, we're hopeful that such compression will be ending as we finish the fourth quarter of 2023. We continued to maintain excess cash during the quarter, reflecting the stress liquidity environment and combined with continuing uncertainties around monetary policy and the risk of a government shutdown. 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. Non-interest expense increased $1.5 million to $64.5 million compared to the prior quarter. The increase in expenses includes $2.4 million of one-time charges related to severance and other compensation linked to the company-wide strategic initiatives and investments we introduced earlier this year. As a reminder, we've been investing in improving processes and longer-term strategic growth throughout this year, focusing on expanding our C&I, deposit gathering, and residential businesses, as well as improving the revenue contribution of our branch network, increasing automation of internal processes, and improving infrastructure support across all lines of business. Progress on this project remains on track, and we've made meaningful strides to improve both internal processes and the customer experience. As a result of the work performed on this project, we believe quarterly operating expenses will decline to the $58 million to $59 million range next quarter, representing an annualized reduction of between $20 million and $25 million going forward, compared to the current expense run rate that we're tremendously pleased with. We continue exploring additional opportunities to further improve our operating leverage in 2024. Our effective tax rate for the quarter, 24%, remains in line with prior periods and guidance, and we expect to remain in this range going forward. Turning to the balance sheet, which we don't usually talk about on an earnings call, we just wanted to highlight one thing: the company completed its annual goodwill impairment test as of August 31, and we concluded that our goodwill is not impaired. However, given the depressed stock prices that many banks are experiencing combined with the volatility of those stock prices that we've seen over the last few months, we'll likely be reevaluating this conclusion at year-end. Finally, we expect capital to remain strong through the remainder of the year with a CET ratio of about 10%. At this point, we'll begin the Q&A portion of the call.
Operator, Operator
Thank you. Our first question today comes from Daniel Tamayo of Raymond James. Your line is open.
Daniel Tamayo, Analyst
Thank you. Good morning, everyone. Maybe we can start with the margin. Pat and Chris mentioned the forecast for the fourth quarter showing a similar compression to the third, followed by stability. I'm curious if you could provide more detail on the factors driving the continued compression in the fourth quarter and explain why you believe the margin will stabilize in 2024.
Christopher Maher, Chairman and CEO
I think we would start by just kind of gauging the pressure we've had on deposit costs throughout the course of the year, and we've seen it steadily decline since April of this year, and it really appears to be flattening out. So as we look through our models, which are always imperfect, and we think about the outside rate environment which is outside our control, it's challenging to come up with a forecast, but it does appear that NIM could trough in the fourth quarter; that's our best guess as of this point. And then in terms of what happens in 2024, it's really dependent upon the outside rate environment. There is the possibility for a tailwind and we're certainly working to improve the chances of that on our side, but we are going to be beholden to the market to a certain degree.
Daniel Tamayo, Analyst
Okay. But in terms of, I guess, the mix shift that you're anticipating, is it fair to say that you're going to see or you expect the remainder of the broker deposit balances to come off in the fourth quarter or the FHLB? I'm just curious kind of how you expect the entire funding side to work over the next few quarters.
Joe Lebel, President
We have historically maintained a very low level of brokered CDs. When conditions tightened in the spring, we took the opportunity to increase our liquidity by using brokered CDs as an effective means to do so. While having lower brokerage is generally preferable, I believe we are currently in a good position. Depending on how interest rates behave in the fourth quarter, we may adjust our approach slightly, although I don't anticipate significant changes. Our non-interest bearing accounts have shown steady performance, and customer behavior regarding non-interest deposits has changed since earlier this year. If deposit costs continue to rise but at a slower pace, we still have a substantial volume of loans that are repricing and new loans being issued daily, which provides us with opportunities to manage our margin. We expect some additional deposit pressure, but the overall mix should remain largely similar to what it was as of September 30, with room for improvement on the loan side.
Patrick Barrett, CFO
If I could add just one thing that isn't in the material, this is Pat, that might be helpful. We have repaid all of our short-term liabilities that we can. So everything we have left on the balance sheet is term. Our FHLB funding about $600 million matures $100 million every year starting next year or $200 million starting next year. And then our brokered CDs and our own house-issued promotional retail CDs have average remaining lives of about six months right now. So we'd have to actually break and penalize ourselves if we were going to reduce things further. So that's kind of what's driving the near-term compression. And then everything that Chris said kind of means next year is going to be probably bouncing along plus-minus range at fairly stable unless there's higher levels of loan growth, which we should hopefully coincide with expansion.
Daniel Tamayo, Analyst
Okay. All right. I appreciate all that color. And just lastly, maybe a little on the asset side. If you could provide any kind of color on what cash flows may look like in the next few quarters and on the cash side to the excess cash, just your thoughts on the pace of the reinvestment of that.
Christopher Maher, Chairman and CEO
In 2024, we have a little bit more cash flow in terms of maturing loans than we had in 2023. Maybe, Joe, if you could just talk to the market for that and then we can kind of swing back to give you a sense of the magnitude.
Joe Lebel, President
So, Dan, I think I'd start by saying that we have the opportunity to improve margin from the renewal of loan transactions. We're looking at this. As you know, we've done a variety of things on the asset quality side; stress testing, all the kinds of things you need to do. But we're hearing from clients that as loans renew, their expectations are very similar to ours. They understand the market that we're in; their relationship clients, they understand that they're going to be repriced at certain levels. Those that are in the C&I bucket are already at floating rate levels, so they've repriced the market for the most part. And we don't have a significant amount of maturities in '24. You guys are aware from the 8-K supplement, but the stuff that we do will price and provide us with a little bit of extra NIM as we go forward.
Christopher Maher, Chairman and CEO
Yeah. And maybe I just add on to that. On the asset side, we've got about $1.4 billion repricing maturing coming in next year. The loans are the bulk of that. So our securities cash flows remain relatively stable at about $40 million a quarter. Then we've got the liabilities that are repricing, and I just kind of outlined those. Those are actually a little bit more volatile with the remaining $0.5 billion of record CDs maturing fairly evenly over the next three quarters and our retail CDs have buckets and some volatility, with Q1 and Q2 being the bigger quarters of maturity. So that's kind of the general range of cash flows.
Daniel Tamayo, Analyst
Terrific. I appreciate all the color. That's all for me.
Christopher Maher, Chairman and CEO
All right. Thank you.
Operator, Operator
Thank you. Our next question today comes from Justin Crowley of Piper Sandler. Your line is open.
Justin Crowley, Analyst
Hey. Good morning, guys.
Christopher Maher, Chairman and CEO
Good morning, Justin.
Justin Crowley, Analyst
Just want to hit on some of the expense measures. Good morning. That have taken place. You saw that run through the base this quarter, and I know you're maybe not necessarily in a position to get real specific about '24. But just wondering if you can comment on perhaps any smaller initiatives that could be additive to some of the efficiency gains that are already in the run rate?
Patrick Barrett, CFO
Sure, this is Pat. I want to start by noting that any discussions about opportunities in 2024 have to be viewed in light of ongoing inflation challenges. As a result, costs across the board, including labor costs, are likely to rise. It's a tough market, and addressing these pressures without cutting vendors or staff is a challenge, but we still see some opportunities. We believe our expected run rate of around $58 million to $59 million for the fourth quarter is a solid baseline for the next year. However, managing through inflation and regular salary increases will make it a bit challenging, yet we feel optimistic about achieving that. We're also pursuing initiatives in the early phases aimed at improving some of our larger processes. We're exploring a few outsourcing options, and we still have an excessive number of vendors. Enhancing our procurement function and consolidating vendors for better negotiating power should provide us with some advantages. However, I would advise caution in assuming that our projected $58 million to $59 million might decrease due to these initiatives. This figure represents our best estimate and we expect it to remain relatively stable.
Christopher Maher, Chairman and CEO
And we think flat expenses in this environment.
Justin Crowley, Analyst
Okay. Got it. From this performance. Okay, thanks for that. I just want to revisit the margin discussion briefly. In the past, while considering the cash flow from loan securities, you mentioned the excess liquidity you're managing overall. I'm interested in your perspective on the trend of that liquidity, especially as we approach the end of the year. How do you see it impacting your overall views on the margin decline by year-end?
Christopher Maher, Chairman and CEO
I would consider two key factors that are shaping our position as of September 30. First, we have a bit more cash on hand than we typically maintained prior to the events in the spring, amounting to a couple of hundred million that could be utilized. However, overnight funding is fairly efficient, allowing us to earn a yield on that cash, so keeping this level of liquidity isn’t detrimental. The main margin pressure is coming from a slight reduction in our balance sheet. The second factor is our 96% loan-to-deposit ratio. For those who have followed us for a while, we have the capability to increase lending when the timing is appropriate. We are closely monitoring market developments and pricing. We view 2024 as a potential opportunity to lend, as terms and pricing may favor us for a change. So, those are the two factors we are considering. Neither is a major lever, but they present an opportunity.
Justin Crowley, Analyst
Okay, I appreciate it. Following up on what you just mentioned about the progress on the loan-to-deposit ratio and potential opportunities for next year, can you provide a geographical breakdown and also specify loan categories where you might focus if a more favorable lending environment develops?
Christopher Maher, Chairman and CEO
I think our focus is going to be on margin and price, and that will lead us, and will grow our credit culture and our credit standards will remain the same regardless of where or what kinds of credits we put on, but we're going to be optimizing around those opportunities to get paid well for the use of our balance sheet. The balance sheet availability is scarce in the industry, so we want to make sure we get paid for it. And at this point, there's not a big price difference between our markets. It's relatively kind of level between Boston, New York, New Jersey, Baltimore, and Philadelphia. There is a little bit more differentiation by asset class. So we're just kind of watching and seeing how those things settle out. What we didn't want to do is deploy all that cash in the short term before we have a good sense as to how well we could structure it on a longer-term basis.
Justin Crowley, Analyst
Okay. I appreciate that. I'll leave it there, guys. I appreciate you taking my questions.
Christopher Maher, Chairman and CEO
Thanks, Justin.
Operator, Operator
Our next question comes from Michael Perito of KBW. Please go ahead.
Michael Perito, Analyst
Hey, guys. Thanks for taking my questions.
Christopher Maher, Chairman and CEO
Good morning, Mike.
Michael Perito, Analyst
Good morning. I wanted to delve deeper into the margin. There's a lot of emphasis on the liability side. Pat, could you please repeat the amount of loans maturing in 2024? I want to ensure I heard you correctly. Additionally, with funding costs stabilizing, does your focus shift to the asset side? Your blended loan yields are around 530, which is essentially in line with the Fed funds rate. I assume incremental production is coming in higher than that. Any context you can provide regarding that would be helpful. Furthermore, what is the outlook for loan yields to create a sufficient margin from the incremental funding costs as we consider the potential for net interest margins to approach 3% again and possibly exceed that in the long term, which is crucial for return on equity?
Patrick Barrett, CFO
Sure. I'll reiterate what I mentioned regarding loan maturities. They exceed $1 billion next year, allocated fairly evenly throughout the year. There might be some fluctuations, but I don't believe they will significantly impact us. Additionally, our originations this quarter had pricing in the range of 7.5% to 8%. However, I should let Joe provide more details on the opportunities and our perspective on loan pricing.
Joe Lebel, President
Yeah, Mike. I think Chris aptly put it the right way earlier. There's opportunities now for us. The pricing has been going up quarter-over-quarter as you would expect for a variety of reasons. Not only the Fed increases, but also the availability of credit. And I think there's an opportunity for us to continue that and continue it on a prudent basis, right? I think that it does matter a little bit based on asset class. So, for example, in the resi space, our focus has been to build, and you've seen it the last couple of quarters, we're starting to build the gain on sale business, so that's not a balance sheet item. That's an opportunity for us to originate good assets and then put the assets that we want to put on the balance sheet in C&I and create rates that make the most sense for us.
Christopher Maher, Chairman and CEO
Mike, perhaps to be involved in it.
Michael Perito, Analyst
So, as we think about. Sorry. No, go ahead.
Christopher Maher, Chairman and CEO
The loans maturing have a mid-5% interest rate, while the new lending being initiated has a mid-7% interest rate. However, it's important to note that we anticipate an increase in deposit costs. Therefore, we believe there is potential for margin growth. But it's clear that there are two factors to consider here. It's crucial not to project the $1 billion without accounting for the higher deposit costs.
Michael Perito, Analyst
The last 12 months have been challenging because the assets haven't repriced as quickly as the liabilities have increased. Part of the difficulty has also been that the incremental margin on new assets hasn't been as strong as it should be, and I'm trying to understand that better. It seems like the incremental margin is improving slightly, around 3% or a bit better. However, if this incremental margin doesn't return to previous levels, it will likely be tough for the overall consolidated margin to rise from the low point of 2.80% that you are projecting for the fourth quarter.
Christopher Maher, Chairman and CEO
We're not going to be interested in putting on net growth that doesn't carry at least a three-handle in margin. So if we're going to be growing the loan book.
Michael Perito, Analyst
Yeah.
Christopher Maher, Chairman and CEO
We need to fund it appropriately or get above that because we do think that earning our way back to an over 3% margin is an important strategic objective of ours. I can't give you a time frame on it, but that's the way we want the company to operate.
Joe Lebel, President
Mike, I'll also say that we've been really thoughtful about loan growth in the last two quarters, largely because we wanted to make sure that we positioned our deposits out of the balance sheet the way we wanted. We wanted the kind of deposits that we're used to having. And in an environment like this, you want to make sure that side of the balance sheet provides you with the stable funding for the loan side of the balance sheet.
Michael Perito, Analyst
Yeah. That makes sense, Joe. And Chris, just as you think about the loan portfolio, I mean, especially with the gain on sale business now on the residential mortgage side, I mean, if you guys think about the bank two, three years from now, any thoughts on what you're kind of hoping the mix seems you're about? I think what, like almost 30% in mortgages today, about 53% CRE, maybe a little higher than that if you do the owner occupied as well. But just any updated thoughts there?
Christopher Maher, Chairman and CEO
I believe we will continue to see a shift in the mix towards commercial. When I first joined the company, we had an inverted structure with around 70% residential. We will keep working on this shift. We still aim to offer residential finance in our markets, but we envision it more as a fee-based business. In certain situations, we are open to keeping it on the balance sheet, especially for 15-year self-liquidating and adjustable loans for relationship customers, where we can make appropriate decisions. However, I anticipate that residential will grow slowly while commercial will see an increased growth rate over the next year. Thus, you can expect the mix to continue evolving each quarter, with a higher percentage of commercial and a lower percentage of consumer and residential.
Michael Perito, Analyst
Helpful. And then just lastly for me, would love kind of a growth and credit comment on kind of each of your markets. I mean, I think the last time you guys spoke, it sounded like Boston and Baltimore had some decent trends. There were some more concerning stuff going on in Philly and New York. But we would love any updated thoughts you're willing to provide on kind of growth opportunities in those markets and then just credit outlook near term if there's kind of any deterioration or anything you're seeing that has you more cautious on one versus the other?
Christopher Maher, Chairman and CEO
I'll provide an overview. One key point I emphasize is that nearly all of our franchise is in the Northeast, which typically experiences slower growth but remains remarkably stable during weaker economic times. It's uncertain whether we'll face a soft landing, but generally, the Northeast tends to perform better in times of economic weakness, and we've made a point to maintain our franchise here. The markets are quite similar. Boston has a strong life sciences sector that has helped it remain stable even during COVID. New York experienced initial public safety concerns that appear to have been mostly resolved. While there are still worries about the office sector, we no longer have significant exposure there. Philadelphia is still grappling with public safety issues, so we’re being a bit more cautious. New Jersey, on the other hand, has been performing exceptionally well, likely benefiting from an increased interest in spending time outside urban centers, as it is ideally located between two major cities. Joe, do you have any customer insights or other relevant information regarding different regions or industries?
Joe Lebel, President
So I'd summarize Chris's comments about geographies by saying that we stress test the portfolio. We're doing it almost every quarter. We're doing the kind of things you need to do to be proactive. And we're not seeing any real bumps from anywhere in terms of the geographies and client bases and asset classes. On the other end of the spectrum, clients are basically telling us, while many remain cautiously optimistic, they're telling us they're delaying on major opportunities to do things, whether it's M&A, large equipment purchases, new lines of business, until they see more clarity on a national economic scale. So it's not something we're surprised by, it's not something new we've heard it over the last couple of quarters. I think we'll continue to hear it. But on a positive front, I'll give you an example. We've seen a couple of our largest C&I clients pay lines off to zero and have multimillions in the bank. I think they're much better positioned today than they were in prior crises, easily over 2008-09. So that's a real positive.
Michael Perito, Analyst
Great. Well, thank you, guys. I appreciate all the color on my questions. Thanks.
Christopher Maher, Chairman and CEO
Thanks, Mike.
Joe Lebel, President
Thanks, Mike.
Operator, Operator
Our next question today comes from David Bishop of Hovde Group. Your line is open.
David Bishop, Analyst
Yeah. Good morning, gentlemen.
Christopher Maher, Chairman and CEO
Good morning, Dave.
David Bishop, Analyst
Chris, Joe, or Pat, I have a question for all of you. The slide deck indicated that deposit growth appears to be around $328 million from a stock high-yield savings account. I'm curious about the duration of that and what it might be indexed to. It seems like those funds could return if rates start to decline next year.
Christopher Maher, Chairman and CEO
We aimed to manage our deposit flows carefully, ensuring that we didn't overly concentrate on any duration issues in our deposit base in case conditions change in the future. While we aren't forecasting rate movements, we believe it's wise to have a portion of deposits that allows us to adjust rates as needed in the future. We avoided implementing fixed-term funding, so there are no indexes involved. Instead, we maintain a rate that we can modify over time if we deem it necessary.
David Bishop, Analyst
Got it. And then, in terms of, I appreciate the continued guidance in terms of the downdraft and expenses that are expected in the fourth quarter. Just curious where you see this coming out of? How should we expect that to look? Is it coming out of salaries and benefits, occupancy, data processing, or other, just curious what are sort of the main segments where you'll see expenses reduce?
Christopher Maher, Chairman and CEO
It's coming out of all the above. So we had a couple of significant contracts we're able to renegotiate, that was a big win. We've been able to fundamentally fix processes. And I don't want to— the expense part of this has been terrific. There's a real customer experience improvement as well. We were able to significantly reduce the amount of time it takes to open an account. We're able to pull some processes out of the branches that could have been distracting to building new relationships and either modernize them, automate them, or do away with them. So it was kind of a comprehensive look at everything within the company. So there are equal parts in — there are compensation impacts, there are IT impacts, there are vendor impacts. So it's a pretty full spectrum process and it's taken us about a year to get through to the bottom of all these. And even as Pat said, we have some things we know we'll be able to accomplish, but it'll take another quarter or two. So I think if you think quarter-over-quarter where we see the decrease coming, about 50% of that decrease would be in compensation-related lines and 50% would be in professional fees.
David Bishop, Analyst
Got it. And then one last question in terms of the capital deployment, capital outlook. Appetite for buybacks at this point? Thanks.
Christopher Maher, Chairman and CEO
Look, we have a strong capacity to buy back, but we have been favoring building capital and kind of watching the markets. I just want to make this point, that's not a comment about how we feel about us, it's about us watching the world. So external factors are holding us back as we watch what's going on in the markets and make sure we feel we've got a full understanding. So that's kind of what the issue is about why we're not buying back today. We have the capacity to do so. And certainly, we think it could be a financially attractive thing to do. We just want to make sure we understand the environment best.
David Bishop, Analyst
Got it. Appreciate the color.
Christopher Maher, Chairman and CEO
Thanks, Dave.
Patrick Barrett, CFO
Thanks, Dave.
Operator, Operator
The next question today comes from Matthew Breese of Stephens, Inc. Please go ahead.
Matthew Breese, Analyst
Hey. Good morning, everybody.
Christopher Maher, Chairman and CEO
Good morning, Matt.
Matthew Breese, Analyst
I wanted to revisit the office loan charge-offs. Good morning, everyone. Regarding the office loan charge-off, was there anything unique about that loan and charge-off, or was it what we would typically expect for an office in New York? Lower occupancy and lower asking rents per square foot seem to represent a significant change in valuation, and I would appreciate some more details on that.
Christopher Maher, Chairman and CEO
I think there are a few factors at play here, Matt. First, this is what you would expect from urban office space in a place like New York, especially since it’s just a block and a half from Times Square, which is a vibrant area. Three things happened in this case. First, we had some vacancy, but I want to be cautious in saying that. The building is more than half tenanted and generating cash flow, so the vacancy is manageable. The second factor is that this was a B office, and it’s important to remember that when the loan was made in 2019, B office spaces were seen as relatively stable due to lower rents and generally stable occupancy rates. There’s the issue of vacancy, which leads to a reduction in the asking price for any rental space, and there's the cost associated with re-tenanting. The last factor, which likely has the biggest impact, is figuring out the valuation of New York City office space of this kind right now. The sponsor had been supporting this credit over the past couple of years and even made a principal paydown just over a year ago because they liked the asset. Ultimately, they reached a point where they had to make a different decision. As we've mentioned before, there’s nothing else in our portfolio that resembles this scenario.
Matthew Breese, Analyst
So as we think about the spectrum of office, and it's funny, we've kind of as an industry oscillated between what's safest, Class A, Park Ave, or suburban. After going through this experience, how would you kind of rank order the riskiest portions of office versus the safest? And maybe give us a flavor for what you have exposure to within that?
Christopher Maher, Chairman and CEO
I think I would start by emphasizing that location is crucial in real estate, regardless of the type, and specific micro markets are key. It's important to analyze the particular market, including vacancy rates and demand for space, as these factors drive the dynamics. Among the segments we favor, there are many office categories that require a physical presence. For example, medical offices demand in-person visits, and we've seen a lot of activity in medical lab work in Boston. That's a strong example since, like dentists, these services can't be performed remotely. Another area we prefer is those with exceptionally reliable tenants. This includes government or credit tenants where cash flows are structured and dependable, making them solid investments. We've also noticed a trend in suburban markets between New York and New Jersey, where there has been minimal office construction over the past decade. Consequently, even a slight shift in office demand from Central Business Districts in New York or Philadelphia to suburban areas has filled any existing vacancies. In fact, after stress testing our entire office portfolio, we found that current occupancy rates are higher than when we initially acquired those assets. However, this varies case by case. For instance, Class B office buildings in central New York City may struggle to attract tenants these days, but fortunately, that’s not the type of business we pursued.
Matthew Breese, Analyst
Got it. And then, I know this was part of a, like, a syndicated loan. What is the overall size of your syndicated loan portfolio and how has credit in that portfolio performed?
Christopher Maher, Chairman and CEO
So the vast majority of what we do, we originate. So we have 93% of what we've lent is us as the lead, actually a little more. So less than 7% is the syndicated book, less than half of that is shared national credits. 97% of that book is pass-rated or better, and we don't see any trends in the book that would be of any concern.
Matthew Breese, Analyst
Okay. I'm sorry, I might have missed that in your comments. But how much of that is out of market? Meaning out of your Boston, Baltimore, New York City, New Jersey footprint?
Joe Lebel, President
I don't have the number in front of me, Matt. There's no particular trend that's not concentrated in one area or another.
Matthew Breese, Analyst
Okay. I appreciate that. Last one from me. I noticed in your 10-Q that the CRA rating was downgraded to needs improvement or needs to improve. I was curious your thoughts around that and what does the remediation effort looks like and what should we expect in terms of impacts of the P&L or balance sheet as you go through that?
Joe Lebel, President
There was a specific issue that came up during our last CRA exam that we have been addressing with our regulator for a while. I wouldn't describe it as something that will significantly alter our financial obligations to resolve. The CRA period currently under review will end on December 31 of this year, so we expect our next CRA exam to take place sometime in early 2024, though I can't specify an exact date.
Christopher Maher, Chairman and CEO
So we don't think it's a big cost to remediate. It was a very narrow issue, and we've been working on that remediation for some time with our regulator.
Matthew Breese, Analyst
Great. Okay, I will leave it there. Thank you for taking my questions. Appreciate it.
Christopher Maher, Chairman and CEO
Thanks, Matt.
Operator, Operator
Our next question today comes from Christopher Marinac of Janney Montgomery Scott. Your line is open.
Christopher Marinac, Analyst
Hey. Thanks for taking our questions. Mine here is just goes back to the loan marks that we see in the 10-Q each quarter. Will those get lower and better as next year plays out, particularly as you have some of this loan turnover that you referenced earlier in the call?
Christopher Maher, Chairman and CEO
Yeah. They should over time, they're just going to kind of bleed themselves out. The only caution I would have on that is that it depends on what the Fed does, right? Actually, it depends less on what the Fed does. It depends on where the long end of the curve goes. So if we're in this rate environment higher for longer, you're going to see those kind of amortize themselves off as the loan book rolls through. If rates change meaningfully, that could be a different situation.
Christopher Marinac, Analyst
Thank you for that, Chris. In your presentation, you highlighted the long duration of your customer relationships. Do you still see that advantage when it comes to repricing the book? I understand that overall rates have increased, but I’m curious about how the pricing based on those customer relationships is impacting your overall performance in the book.
Christopher Maher, Chairman and CEO
I think there is a benefit. I think we've learned a lot this year about some of the backward-looking deposit tests. Maybe some segments of our customers responded more predictably than other segments did, so we're kind of learning a little bit about that. But overall, we're very pleased with the level of retention among our customer base, and we think we still have the opportunity to grow. We have a tremendously large deposit market, so while it's a tough environment to grow in, we have a very small market share, so I think we can continue to grow those. Our customers do 43 million transactions a year with us. Largely, the best customers we have are those that have chosen to do things with us to move money around. We're helping them with everything from ACH to Wire to Zelle. That's why they're with us. And I think that's a pretty durable relationship. That said, look, in a higher rate environment, we've had to make sure that we've paid enough. Loyalty will carry you. It won't carry you all the way. It'll just carry you so far. So you want to make sure you're providing both quality of service, access, transaction capability, but you also have to provide some rate yield as well. We feel pretty good about it.
Christopher Marinac, Analyst
Got it. Thank you for that. Got it. And then just one quick question, might be for Pat. But I may have missed it earlier, but the FDIC, a special assessment, do you anticipate that being part of fourth quarter or would that possibly go into first quarter?
Patrick Barrett, CFO
Wow. If I could predict that, then I probably wouldn't be doing this job. We don't know when that's going to hit and be effective. And frankly, we're not 100% sure what the impact will be. But best estimate based on what's out there.
Christopher Marinac, Analyst
Got it.
Patrick Barrett, CFO
Now, which hasn't been finalized, is that it'll be around $2 million, kind of a one-time thing. And that's roughly a quarter's worth of our $8 million run rate from our current assessment that's included in this year's P&L. We'll see. I don't foresee a situation where we wouldn't be impacted by it, although there was considerable lobbying, especially from those on the margins, the lower end. However, we haven't seen any progress in changing what was proposed or obtaining further details on when, if at all, this will take effect.
Christopher Marinac, Analyst
It is still to be determined whether it will happen in the near term. That's what I want to clarify. Thank you, Pat. I appreciate you taking the time.
Patrick Barrett, CFO
You should just choose a date and rely on it, because I can't envision a scenario where that wouldn't occur since it's already established and doesn't need a new proposal from Congress or the Senate. It's simply out there. Therefore, we're not specifying a particular time for it; it will just happen sometime in 2024.
Christopher Marinac, Analyst
Got it. Okay. Great. Thanks very much for all the insights today.
Christopher Maher, Chairman and CEO
Thanks very much.
Operator, Operator
Our final question today comes from Manuel Navas of D.A. Davidson. Please go ahead.
Manuel Navas, Analyst
Hey. Good morning.
Christopher Maher, Chairman and CEO
Good morning.
Manuel Navas, Analyst
I want to stay on the deposit growth. The high yield savings, what channel is that coming from? Is that coming from branches, from your commercial lenders? Where are those funds being sourced?
Christopher Maher, Chairman and CEO
That's a direct marketing channel. So one of the things you have to do to optimize your pricing is manage pricing by each channel. So we have highly competitive offers that we have in the branch. We have highly competitive offers we bring direct out to customers, and obviously, we negotiate individual deals with our commercial folks. So, it's kind of trying to figure out, what do you have to pay to move the needle in each of those channels. And it's a different yield in each one. And you try and come up with the best mix you can, but that is a direct marketing channel.
Manuel Navas, Analyst
Is the branch opening related to that? Is it a shift in how you want to gather deposits, or is it unrelated?
Christopher Maher, Chairman and CEO
Yes and no. It's not really a shift in the way we think about deposits, but there's a little bit of a shift in that. We spent years pruning our branch network. And I think very effectively we closed 77 branches over a series of years. So as we go forward now and the company grows, we're not going to grow by opening a pile of branches. We don't think that that makes sense. There's a little bit of a hole in our geography here. It's a county seat. There's about $1.7 billion in deposits there, a lot of commercial activity. So from time to time, I think you may see us in 1s or 2s over time, open a branch here or there because we think the branch has relevance. But I would not view this as a shift where you see we're going to open any number of branches next year. We have no plans to open any branches beyond this at current. But as we work in markets and we think we're kind of resonating, we may from time to time open branches that are kind of geographically separated from the rest of our group.
Manuel Navas, Analyst
I appreciate that. As you paid off most of the short-term kind of wholesale-ish really borrowings or broker deposits and you brought in some more deposits with the high yield channel, some other channels probably will pick up. Where is the trigger for kind of an increase to loan growth?
Christopher Maher, Chairman and CEO
So I think we're thinking about that hard right now in this quarter and we just want to make sure that we've got the best-informed view about how those flows come in, what the marginal cost of deposit gathering is, and what the marginal yields we're going to get in each of the loan segments. So we're going through that plan now. I'll tell you this; there is demand in the market. We just have to decide which products we want it in and what yield and structures are going to be best for us. So we're working through that now. I don't think you're going to see meaningful loan growth in Q4. It'll be around what you've seen in Q3, if that. But as we go into 2024, we're kind of gearing up to figure out what the right growth number is there and what the mix of growth will be.
Manuel Navas, Analyst
With the operating leverage strategies you've been putting into place, at the beginning of that, a lot of it was contemplating lower rates. Has that plan shifted across the year now that we're kind of the consensus is today it could change pretty quickly? Is it a higher for longer environment? Can you kind of talk about how that operating leverage strategies have incorporated that shift?
Christopher Maher, Chairman and CEO
I think the main one would be not so much around operating leverage, but we have two different fee income lines that will be constrained as long as we're in this rate environment. The first is swaps, and the second one is the gain on sale and residential. We're still focused on them because they're important businesses in the long run. But the outlook for them in the short run is going to be constrained in this rate environment. So I don't think the operating leverage initiatives would have changed much, but the gain on sale in particular and the work we've done around swaps are just going to be kind of not quite on pause, but they're going to be minimally contributing until we see some change in the rate environment.
Manuel Navas, Analyst
So that was kind of like the fee side of the operating leverage. It's probably has a little bit longer tail just because of the rate environment.
Christopher Maher, Chairman and CEO
Correct. We will still hire capable commercial bankers if the opportunity arises, but our appetite for hiring is not as strong as it was two years ago. Therefore, we will be selective before increasing our headcount, and you won't see much change in that area.
Manuel Navas, Analyst
Okay. I appreciate it. Thank you.
Christopher Maher, Chairman and CEO
All right. Thank you.
Operator, Operator
We have no further questions, so I'll turn the call back over to the CEO, Chris Maher, for closing remarks.
Christopher Maher, Chairman and CEO
All right. Thank you. We appreciate your time today and your support of OceanFirst Financial Corp. We offer our best wishes to all throughout the upcoming holiday seasons. We look forward to speaking with you after our fourth quarter results are published in January. Thank you very much.
Operator, Operator
This concludes today's call. Thank you for joining. You may now disconnect your line.