OceanFirst Financial Corp

NASDAQ:OCFC

Earnings Call Analysis

OceanFirst Q4'23: EPS at $0.46, Moderate Margin Pressure

OceanFirst Financial Corp. reported Q4'23 GAAP earnings per share of $0.46, with net interest income slightly down to $87.8 million from $91 million the previous quarter due to modest margin pressure. This was a result of strategically declining brokered CDs and stable deposit balances. Despite this, the loan-to-deposit ratio remained healthy under 100%. Operating expenses were managed down to $58.5 million, excluding a one-time FDIC assessment. The bank's efficient capital management allowed for a quarterly cash dividend of $0.20 per share and bolstered its common equity Tier 1 capital ratio to 10.88%. The financial outlook for 2024 anticipates modest margin expansion and constant net interest income of approximately $90 million per quarter.

Corporate Performance and Dividends

OceanFirst Financial Corp. concluded the fourth quarter of 2023 with a GAAP diluted earnings per share at $0.46, paired with a net interest income of $87.8 million—a slight drop from the prior quarter's $91 million. Operating expenses saw a reduction to $60.2 million, with core noninterest expenses at $58.5 million after excluding a one-time FDIC special assessment. The company prides itself on a series of strategic improvements leading to these operations efficiencies, while projecting efforts to maintain these expense levels through 2024.

Investment in Deposits and Deposit Funding Quality

OceanFirst experienced modest margin pressures as it focused on elevating deposit funding quality. A strategic decline in brokered CDs enabled stabilization in net interest income and deposit balances, with hints of potential modest margin expansion in 2024. Deposit beta's growth to 38% signifies a reduction in deposit cost increase pace, reinforcing the bank's prudent management of its capital, as evidenced by an improved common equity Tier 1 capital ratio to 10.88% and a tangible book value per share growth to $18.35.

Dividend Consistency and Share Repurchase Possibility

Demonstrating a commitment to shareholder returns, the Board declared a $0.20 per common share quarterly dividend, marking the 108th consecutive dividend payout. Even though there weren't any share repurchases in the fourth quarter, the company has hinted at the possibility of reactivating the share repurchase program in the current quarter, with the CET1 ratio comfortably above 10%.

Strategic Positioning and Market Conditions

Despite 2023's industry challenges, OceanFirst successfully executed efforts resulting in enhanced operational efficiency and strengthening of its deposit base. Going into 2024, OceanFirst aims to sustain shareholder value by emphasizing responsible growth, stringent expense discipline, and balanced management of the company's assets and liabilities.

Deposit Growth and Loan Prospects

Growth in nonmaturity deposits by approximately 1% and a significant strategy-led reduction in brokered CDs underscored a deposit growth of $760 million for the year. This signifies both organic growth and the deepening of deposit relationships. The loan pipeline shows promising signs of increased customer demand, with management forecasting mid-single-digit growth rates in loans and deposits for 2024, possibly gaining momentum as the year progresses.

Solid Asset Quality

Maintaining strong asset quality metrics, nonperforming loans, and criticized and classified assets only constituted a marginal portion of total loans, at 0.29% and 1.44% respectively. The year rounded off with an impressively low annualized charge-off rate at just 8 basis points, showcasing the robustness of OceanFirst's lending portfolio.

Conservative Margin and Income Outlook

With a conservative forecast assuming modest asset growth, OceanFirst is optimistic about stabilizing and potentially expanding the net interest margin in the first half of 2024. Future net interest income is expected to match or surpass the current quarterly run rate of about $90 million as the company transitions through the year. The expectations factor in a hypothesis of three Federal Reserve rate cuts across the year, however, the margin's sensitivity to rate changes is expected to be manageable.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome to the OceanFirst Financial Corp. Q4 '23 Earnings Release, and thank you for standing by. My name is Dacy, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to your host, Alfred Goon from first station to begin. Alfred, please go ahead.

[Alfred Goon, executive]

Thank you, Dacy. Good morning, and welcome to the OceanFirst Fourth Quarter 2023 Earnings Call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com.

Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found in our Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you, and I will now turn the call over to Christopher Maher, Chairman and Chief Executive Officer.

[Christopher Maher, executive]

Thank you, Alfred. Good morning, and thank you to all been able to join our fourth 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 fourth quarter include GAAP diluted earnings per share of $0.46. Our earnings reflect net interest income of $87.8 million representing a modest decrease compared to the prior linked quarter of $91 million. Operating expenses decreased to $60.2 million, excluding the FDIC special assessment of $1.7 million, operating expenses decreased to $58.5 million. We're pleased to have executed many strategic initiatives that resulted in a meaningful improvement to the bank's efficiency. This work will continue in 2024 as we make every effort to hold expenses flat for the year.

Fourth quarter results were impacted by modest margin pressure linked to our continued efforts to improve the quality of deposit funding. These efforts resulted in another quarter of substantial decline in brokered CDs, stable deposit balances and a loan-to-deposit ratio below 100%. The resulting mix shift in deposits placed some pressure on net interest margins, but margin pressure continues to abate, allowing net interest income to stabilize, and it is possible that margins may expand modestly throughout 2024. Deposit betas increased to 38% from 35% in the prior linked quarter, indicating a slowdown in the pace of deposit cost increases.

Our competitive pricing strategy through various channels has continued to protect the deposit base, which increased $265 million or 3%, excluding brokered time deposits. Resulting in our decision to reduce broker time deposits by $364 million, all while keeping our loan-to-deposit ratio below 98%. Capital levels continue to build with our common equity Tier 1 capital ratio increasing to 10.88% and continued growth in tangible book value per share to $18.35.

Turning to capital management. The Board approved a quarterly cash dividend of $0.20 per common share. This is the company's 108th consecutive quarterly cash dividend and represents 44% of GAAP earnings. The company did not repurchase any shares in the fourth quarter. However, the company may reactivate the share repurchase program this quarter. Despite a tumultuous time for the industry in 2023, the company executed on our strategic goals to improve operating expenses, diversify and strengthen our deposit base and bolster our capital position. Looking ahead to 2024, the company is well positioned to continue to create shareholder value by remaining focused on responsible growth, expense discipline and prudent balance sheet management.

At this point, I'll turn the call over to Joe to provide some more details regarding our performance during the fourth quarter.

[Joseph Lebel, executive]

Thanks, Chris. Nonmaturity deposits continued to grow, increasing approximately 1% linked quarter, while overall deposit balances declined by approximately 1%, reflecting our continued planned runoff of brokered CDs. Our strategy to change the mix and the deposit composition has proven successful with the percentage of brokered CDs to total deposits dropping to 6%. We couldn't have accomplished this without growing our deposits organically and our deposit growth for the year of $760 million demonstrates our ability to grow and deepen relationship deposits during what has been a very challenging and competitive higher cost environment for the industry.

On the loan origination side, we continue to see tempered growth as a result of reduced demand from customers combined with our pricing discipline. We have seen a slight uptick in pipelines and anticipate a resurgence in customer demand with an outlook calling for loans and deposits to grow at mid-single-digit levels in 2024. Growth may be lower in the first half of the year, but potentially accelerate as the year goes on.

Asset quality metrics remained strong with nonperforming loans and criticized and classified assets representing only 0.29% and 1.44% of total loans, respectively. This quarter, we reported essentially zero net charge-offs, bringing our full year annualized charge-off rate to a nominal 8 basis points.

With that, I'll turn the call over to Pat to review margin and expense outlook.

[Patrick Barrett, executive]

Thanks, Joe. Net interest income and margin were $87.8 million and 2.82%, respectively, reflecting higher funding costs associated with deposit growth. As Chris noted, funding costs reflect cycle-to-date deposit betas of 38% with margin compression stabilizing through the quarter. Based on our expectations for modest asset growth and assuming a continuation of the stability we're seeing in liquidity and funding, we're hopeful that we'll see margins stabilize and potentially expand as we move through the first half of 2024. But pinpointing the exact quarter that may occur depends on so many variables, I hesitate to put a degree of confidence on the exact timing. Said in another way, in terms of net interest income, we reported two consecutive quarters of approximately $90 million in NII, and we're hopeful that we'll see that quarterly run rate continue and begin to grow as we move through the first half of this year. We're very pleased to have driven core noninterest expenses down by nearly 10% linked quarter to $58.5 million. Our fourth quarter expense run rate is in line with our stated guidance and directly driven by the company-wide efforts and investments, which we executed during 2023. Note that core noninterest expense excludes $1.7 million related to the FDIC special assessment. We'll make every effort to hold operating expenses flat in 2024 to our fourth quarter 2023 run rate, some quarterly volatility should be expected.

Additionally, we continue to explore opportunities to further improve our operating leverage. Effective tax rate for the quarter of 24% remains in line with prior periods and guidance, and we expect to remain in this range going forward. Finally, as Chris mentioned earlier, capital strengthened appreciably with growth in our CET1 ratio to an estimated 10.88%. At these levels and with modest organic growth expectations in the near term, it shouldn't surprise you to see the company resuming share repurchase activity as we remain very comfortable with the CET ratio above 10%.

At this point, we'll begin the question-and-answer portion of the call.

[Operator]

[Operator Instructions] Our first question today is from Daniel Tamayo from Raymond James.

[Daniel Tamayo, analyst]

Thank you. Good morning, everybody. Maybe first, just on the margin forecast for the stable and perhaps expansion this year. First, just what are your assumptions in terms of any rate cuts this year baked into that? And then just curious how that is baked into the assumption on the margin in terms of like what -- how much the margin you think is reacting -- will react to each 25 basis point rate cut?

[Patrick Barrett, executive]

Dan, it's Pat. I'll take that. So we're assuming -- we kind of go with what the Fed says and so we're assuming 3 rate cuts midyear, third quarter, year-end. And obviously, the [ Street ] has a much more aggressive expectations than that. So to the extent that rate cuts occur faster or in larger magnitude, it could move the needle for us, but not by a meaningful amount. We're talking about something that might be in the $1 million range. So it moves slowly. And unless we get a 50 basis point rate cut tomorrow, you're probably not going to see anything meaningful in the first half of the year coming out of that.

We've kind of moved our asset sensitivity and to where we're a fairly neutral position right now. So whether we get upgrades or down rates, we're probably not going to see unless it's just an order of magnitude larger than anyone's expecting. You're not going to see a lot of NII volatility.

[Daniel Tamayo, analyst]

Okay. And how much does the assumption for rate cuts impact the assumption for accelerating loan growth in the back half of the year? Or is that just more around kind of pipelines or other factors?

[Christopher Maher, executive]

Dan, it's Chris. I think the assumption on loan growth is that we spent the majority of 2023 kind of bolstering capital and making sure that we had a great understanding of the credit risk dynamics in our portfolio, and we feel very good about both of those things. So we're going to start to slowly build back towards our historical growth rate. So as Joe said, mid-single digits during the year, that's not a rate dependent decision. It's a decision that we're now generating capital and want to deploy it with our customers. The only caveat I'll leave you with that is, obviously, it's situationally dependent. We have certain credit quality standards and return dynamics that we've got to get out of our loans. So we're going to be out looking to grow the loan portfolio, but we're going to do it prudently. And we're not going to grow to chase a number. We're going to grow to improve the dynamics of the company.

[Daniel Tamayo, analyst]

I appreciate that, Chris. And I guess, you expect to be able to you put, I think, 100% loan-to-deposit ratio this year. But as loan growth accelerates, do you think you'd still be able to fund that loan growth with core deposit growth and maybe even overfunded, I guess, reduce the loan to deposit ratio as we get in the out years?

[Joseph Lebel, executive]

Yes. Danny, it's Joe. That's exactly right. I think we see loan growth as we see deposit growth. We expect that we'll fully fund loan growth with continued core deposit growth as we deepen relationships. So we're pretty comfortable, you saw the uptick in the pipeline in Q4 a little bit. I mean we have a ways to go, but we're starting to see some green shoots clients are sort of seeing their way through, navigating through and that I think will bode well for us as well.

[Operator]

Our next question today is from Frank Schiraldi from Piper Sandler.

[Frank Schiraldi, analyst]

Given that the cost of deposits and the spot rate being slightly below the average for the quarter, is that a -- can we -- sounds like you're still thinking that there could be some deposit cost increase in the first half of the year before we see margins stabilize? Or is it potentially we're already at stabilization on the deposit cost side? And we could be closer to NIM drop here.

[Christopher Maher, executive]

Yes. We would be very cautious, Frank, predicting anything about the deposit cost because of the -- it's really unknown how consumers and businesses are going to respond to the perception of that lower rates. So I think there's a lot of discussion about rates. Consumers and businesses may have different expectations about what they want for rate. I think what you saw in the mechanism in the fourth quarter is during the course of the quarter, we rolled off a substantial amount of brokered CDs. So that would cause the spot rate at the end of the quarter to not reflect all those brokered CDs. So that was kind of the impact. That impact will diminish a little bit over time.

[Frank Schiraldi, analyst]

Okay. Great. And then Pat, you mentioned getting to -- getting close to neutral here on rate sensitivity. What does that assume? And what do you assume for in your guide for deposit betas on the way down as we see these three rate cuts. Are you guys expecting modeling an immediate reaction to the rate cuts in terms of deposit beta? Or is there some lag effect?

[Patrick Barrett, executive]

I think we would definitely expect a lag effect. I mean we saw we saw a 1-year lag effect for the most part on the way up and can't imagine that it would be dramatically shorter than that. So I think 2024 is going to be baked in kind of higher funding cost year from a core deposit perspective. And frankly, people are still expecting -- I mean, we're still competing on rate for just about all of our deposits right now.

[Christopher Maher, executive]

Frank, it's Chris. I'd add that if you think about kind of supply and demand and deposits for the industry, right, there are a lot of banks who would love to grow their deposit portfolio right now. So although the Fed may make rate cuts and you may see overall rates come down, we expect the competition among banks for deposits to remain brisk. So I think you're going to see, as Pat said, a fair lag.

[Frank Schiraldi, analyst]

Okay. And then just lastly on that front, -- sorry if I missed it, but in terms of the guide for the loan growth and deposit growth is pretty broad in the deck. And you guys talked about a little bit on the call. But -- so my understanding is the most likely scenario as we sit here like low single digits to start the year. And then the idea is that, that could pick up through the year, given what the environment looks like? Is that the sort of the guide here?

[Joseph Lebel, executive]

Yes. Frank, it's Joe. That's the most likely scenario. I tend to think that we could see a little out performance but that conversely, we could see a little slow performance. So -- it's sort of choppy out there a little bit. There's a lot of noise, a lot of conversations we're having. As I mentioned earlier, the pipeline is up, but still got to get to fruition. So I definitely think we're going to see positive growth. The question is how fast it ramps up to what we consider to be more normalized environments.

[Frank Schiraldi, analyst]

Okay. And then just lastly, Chris, you mentioned the deposit environment, obviously, it's quite competitive. And just curious, any sort of strategy you can talk about that you're using to bring in the incremental dollar geographically or size range of a given competitor. Where is the opportunity here to bring in the incremental deposit dollar?

[Christopher Maher, executive]

I'll make a few comments, and I'll ask Joe to follow in as well. One of the things we have not talked much about is that while we have reduced operating expenses, we've actually kind of apples-to-apples reduced them more than you would think. And we've then dedicated some of that save to reinvest in a couple of key platforms in both the hiring of bankers and treasury and all that. So Joe, maybe talk a little bit about the bankers you've added this year. So we despite having kind of brought the expenses down.

[Joseph Lebel, executive]

Yes. So Frank, a little color here. We've added 8 C&I bankers all throughout 2023 in all the footprint. So a couple of in Boston, Philadelphia, New Jersey, New York. And then I -- so they've been hitting the ground running and bringing some deposits. And I think the other point I'd mention, for us, historically, being core deposit driven, we didn't offer competitive rates for some of the excess cash that many of our clients have had. And in the last year, we've dedicated ourselves going out and getting that cash back. So we've deepened relationships with existing clients as well as adding some new operational accounts. So I think it's been a testament to one of the reasons the deposits have done well, both on the retail and in the commercial bank.

[Frank Schiraldi, analyst]

Okay. Great. I appreciate the color.

[Operator]

Our next question today is from Michael Perito from KBW.

[Michael Perito, analyst]

Pat, I want to ask a similar question that I asked last quarter, just kind of get the updated thoughts kind of where, as we think about why NIM might stabilize, right, it sounds like it's too early to necessarily call bottom on deposit costs rising. But I think maybe it sounds like with loan growth reengaging more consistently at better incremental spreads to like the 280 consolidated NIM you have today, that starts to become maybe a bigger impact, particularly as it compounds in the back half of '24, which just long-winded way of asking, can you give us kind of an updated view kind of where the average kind of credit -- commercial credits being originated today relative to the $5.40 blended yield in the fourth quarter? And are you still seeing that rise? Or is that also starting to stabilize that incremental kind of new yield on commercial origination.

[Patrick Barrett, executive]

We're actually definitely seeing that rise on new money and on renewals. So I think -- I'll caution you that when numbers are small, you shouldn't extrapolate them. But on the originations we had in the fourth quarter, we were originating at an average rate of about 770. Our pipeline although it's grown, it's still a lot smaller than it normally is and was a year, 1.5 years ago. But our pipeline yields are at around 8, so we're definitely getting the pricing that we're looking for on originations. And then we continue to have the portfolio role. So we'll have somewhere in the neighborhood of $0.5 billion per quarter of loans that are going to roll. And those are going to reprice into whatever terms they are as they mature and renew. So we definitely have all the pieces in place to see NIM expansion, notwithstanding changes in deposit customer behavior or the need to fund incremental growth in a very competitive environment.

[Michael Perito, analyst]

That's helpful. And then just in terms of the 2024 outlook. Any kind of initial thoughts around noninterest income, which I didn't see necessarily anywhere in the guide. Just is there obviously, probably a couple of key pieces, maybe swaps mortgages. Just any thoughts about what might transpire over the year in your budget as we think about what the contribution looks like?

[Christopher Maher, executive]

So we have -- look, there's an opportunity, we wouldn't provide guidance and be very difficult to quantify for you. But the three main areas that could be impacted by 2024 volumes are, as you mentioned, swaps, but also gain on sale income in residential and the title insurance business that we own as well. So it's really far too early to tell how much the unit volumes will increase. But you could imagine over the course of 2024, we certainly expect units to be higher in '24 than they were in '23, which should bode well for swap income, gain on sale and title insurance revenues.

[Michael Perito, analyst]

Chris. That's helpful. And then just lastly, and I'll step back. Just on -- I know you commented a little bit on it already, just to maybe go a layer deeper, just around buybacks. I think you were pretty clear in terms of why you didn't elect to use them in '23. It was kind of a build-liquidity build-capital year. It feels like the footing underneath you guys is much more certain now. As we think about the $2.9 million authorization remaining, are you willing to provide any more color about how kind of attractive the opportunity is to deploy capital that route today, particularly if loan growth might be a little bit more back half heavy in '24? I mean it's kind of now the time to maybe buyback some shares? Or just any expanded thoughts there would be great.

[Christopher Maher, executive]

Thanks for bringing that up. The -- and you're exactly spot on. When you get into a period like we did in '23, you want to be extra careful to make sure that you understand your risk positions, you understand your liquidity position and you don't have anything that would be a lean against capital. So we built capital up over the course of the year. We're really happy with where capital is now, and we expect to maintain it. So the math around this, I think, will be pretty straightforward. To the extent we can grow customer relationships, that's always the best thing we can do with capital. But if that growth is a little more back-ended or takes a little more time than these valuations, we would expect to deploy capital through repurchases to maintain our capital ratio. And kind of interestingly, as we do the math, that's about a neutral proposition. So whether we're doing an incremental repurchase or bringing on new clients has about a neutral impact to earnings per share. And that's fine. We'd always rather have a customer, so that's our priority. But if we can't have the customer, we can get the same benefit by doing the buybacks. And certainly trading below book value is a great opportunity to make -- to take advantage of.

[Michael Perito, analyst]

Helpful guys. Stay safe with the storm, and I appreciate you taking my question.

[Operator]

Our next question is from David Bishop from Hovde Group.

[David Bishop, analyst]

Chris, a quick question in terms of -- you noted another quarter may be challenging in terms of the noninterest-bearing deposits. Has there been any change in terms of -- I don't know if you track where they go, is it continue to run off to some of the bigger the JPMorgans of the world, are you retaining them in other OCS product, OceanFirst products? And remind us if there's any seasonality in that end of view runoff?

[Christopher Maher, executive]

Yes. No, we're certainly keeping the deposits here at the bank for the most part. As Joe mentioned, we've taken the opportunity to deepen relationships. The good news about that is you get customers to bring money in from other banks. The bad news is sometimes they want to move some of their noninterest-bearing accounts into other accounts. So we're not seeing any competitive losses of magnitude to anyone, whether it's a big bank or a small bank. So that's really what's driving it. And -- as we look forward, I would also mention that we have a lot of transaction accounts that are not captured in the noninterest-bearing designation. So we have a lot of interest-bearing checking, that are truly transactional accounts. So while the noninterest number is important to us, the transaction account number is more important to us, and that's been pretty stable.

[Patrick Barrett, executive]

I'd just -- David, it's Pat. I'll just throw into -- we do have seasonality, but it tends to be intraquarter. So if we changed our year-end to October 15, then you would probably see kind of peak noninterest-bearing levels every quarter instead of trough, which is wait and see today, but it's a very -- it's the government business. So that does drive inflows throughout the quarter that come back out again, just in time for us to report.

[David Bishop, analyst]

Got it. And then I noticed a modest uptick in substandard loans I don't know if any -- was there any commonality in segments? Just curious, some color behind that increase?

[Christopher Maher, executive]

Yes, there's no theme and there was nothing of note in terms of a trend that would cause any concern. The -- I would note that the level of substandard remains well below our long-term average of around 2%. It's below the level of pre-pandemic. So this is really just kind of a reversion to normalcy, right? That credits go through cycles and all that. But there's no large segment of the portfolio that gives us any concern and no commonality among them.

[Operator]

Our next question is from Matthew Breese from Stephens, Inc.

[Matthew Breese, analyst]

The first one for me is maybe for Pat. Taking the lower end of the NIM guide, which is calling for stability, what is the expectation for deposit costs by year-end? And is there any sort of peak and reduction in deposit costs within that assumption throughout the year?

[Patrick Barrett, executive]

I think we're assuming that we're peaking on deposit costs right now with some -- a little bit of adjustment for some of the more institutional deposits that we have and allowing a runoff of those, but we're assuming we're going to be rolling our OceanFirst CD program at generally kind of similar rates to where we are today. We've been pretty successful at rolling at those. We're not aggressively growing institutional and sweep deposits right now, but we always have that to turn on.

And then across the core deposit base, we're assuming a fairly stable mix in pricing. And as we touched on earlier, if we do begin to see improvement or i.e., lowering of cost, that's certainly going to be on the back half. So we look forward to being able to put a couple of months together and start talking about a trend like that, but we just aren't seeing it quite yet.

[Matthew Breese, analyst]

Okay. So the NIM stability guide basically assumes deposit costs are flat and expansion assumes maybe there's some reduction? Is that a fair statement?

[Patrick Barrett, executive]

Yes.

[Matthew Breese, analyst]

And then flip into the loan pipelines, I mean, the rates are considerably higher than what's on the balance sheet today. I mean I think it's the widest I've seen in 5 to 10 years, that difference -- so I'm curious on the loan side, if we should see an acceleration in terms of loan yield expansion from here? And any sort of frame of reference for the extent we might see that would be helpful.

[Joseph Lebel, executive]

Matt, it's Joe. I'll start by saying this. The -- we've seen a mix shift in the pipelines, which is good, especially in the commercial pipe, more towards C&I credit and a little bit less in CRE credit. So those C&I credits, as you know, tend to be floating rate based on prime or multiple of SOFR. So that's why you're seeing the increased yield, which, by the way, is a good thing. We're very happy about that. Because those relationships come with deposits and a variety of other things. So we'll -- have some right sensitivity as the Fed starts to move, but that will benefit, hopefully, in the deposit costs in the end game, as well. So I do think you're going to see higher yields probably a little too premature to declare victory and think that we can expand margin just on loan yields. But we're pretty happy with what we're seeing so far.

[Christopher Maher, executive]

I might add to that, too, that if you look at the rolling just the CRE loans that are rolling that are in our supplemental presentation, they're carrying yields in the 6s. So we're not rolling loans from 3% to 8%. We're rolling loans from 6% to 7% and change because the rolling loans are probably a little bit lower than that newly originated C&I pipeline stuff that Joe refers to. So this is something that will play out over time. And if you kind of freeze rates where they are now, we have a backlog of loans that have to roll. So that will be a little bit of a tailwind. We just don't know if it's enough to overcome any deposit headwind.

[Matthew Breese, analyst]

Got it. And could you just remind us of what percentage of the overall loan book floats immediately or within, call it, 60, 90 days?

[Patrick Barrett, executive]

Call it 1/3, 1/3 and 1/3. So we've got 1/3 that resets at least quarterly, if not more frequently. We've got a 1/3 that's hard fixed and then we've got 1/3 that are adjustable and those are spread out over a series of maturities and dates in the role when they roll.

[Matthew Breese, analyst]

Okay. Last one for me, which is just on Chris, your prior point on stuff that's rolling particularly in commercial real estate, how well do these properties handle higher rates? Could you provide some colors on before and after debt service coverage ratios? And then if there was a reappraisal on any of the stuff how do the valuations and loan-to-value ratios respond?

[Christopher Maher, executive]

So there's more detail in our supplemental, but I will kind of give you kind of the headlines. We've had a lot of stress testing of the loan book over the course of the year. We've looked at rolling maturities, all office loans, kind of every facet we can look at. We have updated as we have financial statements from clients about cash flows and rentals, and if you were to stress particularly the rolling CRE, the stuff that rolls over the next 2 years and stressed at an interest rate of 7%, what you find is it still that serves pretty easily. So it's in the 124 range, I think, of debt service. So we're comfortable at that rate, the portfolio doesn't really have much stress that would be interest rate related.

And then I would point out another phenomenon. Some of these loans are eligible for either CMBS or some of the GSE programs. And what we're finding is that their pricing is even more affordable than that. So although we did all that stress at 7%, that's not a market rate for those loans. So we don't expect a whole lot of concerns around that. In fact, it might be that some of that may wind up coming off the balance sheet because we're not willing to renew it at rates that are available in the market today.

[Operator]

Our next question today comes from Manuel Navas from D.A. Davidson.

[Manuel Navas, analyst]

Just to I guess, dive into the pipeline a little bit better. So most of the pipeline right now on the commercial side is C&I and is that indicative that CRE is still muted and CRE can kind of grow as we start to get the cuts that you foresee in your forecast?

[Joseph Lebel, executive]

I think we've been fortunate, as I mentioned earlier, Matt, to hire 8 more C&I bankers during 2023. Those folks have now gotten fully immersed in the OceanFirst culture, so to speak, and are starting to see green shoots and their opportunities. Look, we still love CRE. We're good at that. But I think as it's been well documented CRE has had some more recent concerns around valuations and there's not a lot of activity. So the activity that's in the market, we're absolutely interested in. And as Chris mentioned earlier, we're happy to compete. We've done a decent amount of construction in the last couple of years. So we're pretty happy with that. That continues to -- as the projects complete lease-up according to terms or better-than-expected terms. So we'd like to do more. We're just not seeing a lot of it yet.

[Manuel Navas, analyst]

On those C&I hires, you talked a little bit about deepening relationships. Is that kind of the commercial lending channel how much of the deposits are being driven from that commercial lending channel in the fourth quarter?

[Joseph Lebel, executive]

Well, I don't have that answer in front of me, but I will tell you that -- we've been very fortunate to not only defend, but attract new deposits in the market in the commercial bank. I'm sure we can get you some color after the call, if that makes sense.

[Manuel Navas, analyst]

Okay. That's great. As thinking about it as a capital builds, and you talked a little bit about the buyback, especially when growth is a little bit slower. What are your kind of thoughts on M&A [ buying? ] Just kind of what's the opportunity out there if you find the right partner and capital stays elevated?

[Christopher Maher, executive]

I'd start with our best investment is in ourselves, especially as we're currently trading below tangible book. So that would be our priority. We're going to continue the organic growth and build out the franchise. There are kind of two, I think, precursors to M&A returning to the industry, a little better understanding of rates and rate marks and financial conditions. And then a little more transparency from the regulators regarding what they're looking for in responsible M&A transactions. So that said, I don't think it's a short-term, but in the long term, I think there's obviously going to be more industry consolidation. I think we've done that well in the past, and we'd like to play a role going forward. But right now, most of our focus is on organically performing and improving our franchise.

[Operator]

[Operator Instructions] Our next question is from Christopher Marinac from Janney Montgomery Scott.

[Christopher Marinac, analyst]

Chris, I wanted to ask you or Joe, about the pace of new customers. And I know you talked a couple of times this morning about bringing in new deposits and having that success last year. Should that pace accelerate under the right circumstances? And can you just kind of walk us through kind of what would kind of drive that? Is it more external economic factors that would drive the pace of new customers to you?

[Christopher Maher, executive]

Yes. We'd certainly like to see more growth going forward. And I think the way I would sum things up is that for a decent chunk of the year, if you think about events in March, April and even into May, there was such unrest that customers were not willing to move from any bank to any other bank, right? If they were happy where they were, they were just kind of staying put the same one for staff. We've been pleased to be able to add a few new bankers that Joe referenced. Historically, we have grown organically over a long period of time at like a 10% per year rate. We'd love to get ourselves back to that. It's not going to happen, I don't think, in 2024, but that's a really good number for our franchise. Our markets support it. We can find a talent to do that. So this is the year where we -- growth rates pick up, but our long-term outlook would be to position the franchise to grow at about 10% a year. And I think we have the markets and the people to do that. It's just take a little while to return back to that level. So we're bullish but it's going to take a little time to work through that.

[Christopher Marinac, analyst]

Got it. That's helpful. And just a follow-up for Pat or whoever the loan marks some fair value that we've seen in past quarters, did those improve this quarter? And is there opportunity for that to change further with rates this year?

[Patrick Barrett, executive]

I really want to thank you for closing the call down with that question. It's something we wouldn't get that. Yes. You're going to see loan marks improve this quarter. You're going to see that across the industry with the change in curves and rate expectations. We spent a fair amount of time looking at that and taking a look at how our mix is the same or differs from others. Because we've noticed that we tend to have very conservative loan marks that are out there from a fair value exposure perspective. We feel good about those fair value marks. We think we've probably got a little bit of room for improvement to be a little more in line with some of the assumptions in our discount rates. But we've got probably a bit heavier concentration of longer-term residential than many others do, and that will tend to drive bigger fair value marks. But I think you'll see the gap between kind of average and high and low narrow pretty meaningfully as people report this quarter.

[Christopher Marinac, analyst]

That's great. I'm sorry to bring up a sore topic, but we appreciate the background a lot.

[Patrick Barrett, executive]

It's not sore. It's just -- it's a pretty deep topic. Let's take [interview] offline on that sometime.

[Christopher Maher, executive]

Chris, it's Chris. I'll add to Pat's comments. These are -- they're like notoriously sensitive calculations and we're kind of looking at them and they're very circular in some cases where as your prepayment speed assumptions changed and your rates change and kind of one thing feeds into another. The good news is that getting better, and we're going to continue to put a finer point on that.

[Christopher Marinac, analyst]

No, understood, and I appreciate it.

[Operator]

Thank you. This is our final question today. So I'd like to hand back to management for any closing remarks.

[Christopher Maher, executive]

All right. Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you after our first quarter results are published in April. Thanks very much, and have a safe weekend.

[Operator]

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.