OceanFirst Financial Corp. (OCFC) Earnings Call Transcript & Summary

Good day and welcome to the OceanFirst Financial Corp. Investor Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Hewitt, Senior Vice President and Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you all for joining us this afternoon. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin today's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Please refer to our investor presentation for our forward-looking statement disclaimer. Our investor presentation and our other filings with the Securities and Exchange Commission contain risk factors that could cause actual results to differ materially from these forward-looking statements. Thank you. And now I will turn the call over to our host today, Chairman and Chief Executive Officer Christopher Maher.

Thank you, Jill, and good afternoon to all who've been able to join this call to discuss our response to and the current impact of the COVID-19 pandemic. Today, I'm joined by our Chief Operating Officer, Joe Lebel; Chief Risk Officer, Grace Vallacchi; and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our company. Just a little while ago, we released a presentation that is available on our website and that will serve as a supplement to our remarks. I will first highlight some points from the presentation before turning it over to Joe Lebel to share some intelligence from our customer base as well as noting some of the terrific support we are receiving from our OceanFirst staff. After that, we'll welcome your questions. Before our prepared remarks, I'd like to acknowledge the incredible challenges we are all facing as a result of the current public health emergency. Our thoughts and prayers are with both the families dealing with COVID-19 and the health care professionals on the front lines. These health care professionals are exhibiting a degree of dedication that is beyond admirable. One of the questions I get asked most often is how will this compare to 2008. This time, it's different. It includes aspects of 2008, 9/11, the dot-com bust and others. Here's how I view it. In 2008, we had a sick financial system and sick banks that infected the economy. Today, we have a health crisis that will result in a sick economy. However, the financial system is starting from a strong point, which can be a source of strength rather than a point of weakness. Our discussion today will review our operational readiness, explain the actions we are taking to provide relief to our clients and our employees and provide some detail regarding the forward-facing challenges for the bank in an environment like this. From a readiness perspective, the bank is positioned to continue to perform our mission as an essential community resource. We're open for business, supporting our clients and have taken extraordinary measures to support our continued ability to do so for as long as this crisis should last. That restatement is possible as a result of the activation of our pandemic response plan and weeks of work by our dedicated employees from all areas of the bank. The response effort to date has been the largest coordinated project ever undertaken by the bank. Some key aspects of our readiness response include: initiating social distancing protocols, which were announced to our staff at the end of February and effective on March 1, much earlier than many institutions in our markets. These include separating departmental staff into various locations, prohibiting bank staff movement between offices, elimination of all corporate travel, the institution of a human resources-managed clearance to work approval process and the dispersing of the executive management team. Our executive team has not been in physical proximity since March 3, a full 3 weeks ago. We also conducted a massive increase in our remote work capabilities, which has included augmenting the capacity for hundreds of ancillary staff to work remotely through several secure platforms. This included the procurement of 200 additional laptops with accompanying headsets and video equipment. Almost 100 of these laptops have been configured, tested and deployed as of today, with the remaining 100 targeted for deployment as shipments arrive in the coming weeks. Every department in the bank now has a remote work capability, and even our call center agents are actively addressing customer requests from the safety of their own homes. This effort to reduce the density of our operations facilities was no small task, but the result is a materially lower density of employees at every OceanFirst facility. Let me provide a clear example of this. Our operations department colocates approximately 155 staff during normal operations. The density of that department has been decreased to just 22 colocated staff without sacrificing our ability to support clients. That makes all our staff safer and also reduces the risk of loss of a particular facility due to a pandemic issue. Just a word about cybersecurity risk, which is an ever-present concern. We will not disclose the exact platforms we are using as a protective measure, but be assured that our approach relies on several different solutions spread across multiple geographically separated data centers. We have designed our approach to avoid a point of failure with institution-wide ramifications. We are focused on providing data security as our enterprise shifts to new delivery methods. Of course, supporting our clients means providing essential branch services, including access to cash. Early this month, we developed a methodology to continue to provide these services in our communities. For the protection of our communities, our clients and our staff, we were among the first banks to discontinue lobby services in favor of drive-throughs early last week. We initiated this action for several reasons. First, we must support our health care professionals, heed the advice of public health experts and respect both the letter of the law and the spirit of social distancing. Second, we need to protect our workforce, which is already balancing a demanding work environment with other issues such as the care of school-age children. Covering a limited number of stations is simply more sustainable given the anticipated number of employee absences in the upcoming weeks. Finally, our years of investing in digital banking allowed us to take these actions without sacrificing customer support levels. Our ability to transition all lobby services to our contact center was enabled by a multiyear strategy to serve our customers in digital channels and will serve us well into the future. The actions taken over the past few weeks position us to operate through these challenging times. That means responding to the demands of our depositors, serving our borrowers and fulfilling our regulatory obligations. While we hope the operating environment becomes easier as COVID-19 cases peak, our actions have prepared us to operate the bank in a safe and sound manner for quite some time. Next, I'd like to pivot to talk about the support programs we are offering our clients. It's worth pausing to note an important event in OceanFirst history. Superstorm Sandy's landfall in 2012 hit the direct center of our markets. At the time, OceanFirst was likely one of the most exposed financial institutions to this storm. To put this storm in perspective, at the time of the storm, our market area was limited to Monmouth and Ocean Counties, New Jersey, where FEMA estimated over 50,000 structures were either completely destroyed or substantially damaged. Over 3,000 OceanFirst borrowers sustained enough collateral damage to require casualty insurance payment management. We immediately instituted a borrower forbearance program that supported our clients during -- who were enduring a devastating economic shock. At the same time, this program will have the vast majority of deferred loans to return to contractual payment schedules within 12 months and avoid troubled debt or TDR treatment. As a result, the bank's net charge-offs totaled less than $500,000, and we cemented the bank's brand throughout our markets. We understand that Sandy and COVID-19 are quite different shocks. However, many of our clients were unable to occupy their former facilities and homes for years following that storm. We're adopting the same approach to helping our customers now. Our signature programs include loan forbearance and assistance programs for both commercial and consumer loans. This forbearance program was built on our Superstorm Sandy model, and many of these loans are expected to avoid TDR treatment. Loans that participated during the Superstorm Sandy forbearance period were associated with net charge-offs of just 1.2%, a remarkably low figure given the circumstances. The appendix to our presentation provides some important links to TDR information that fully explains the regulatory position regarding TDR treatment. Note that these loans will remain eligible collateral at the Fed's discount window, which is a clear message from our regulators regarding their view on forbearance programs. Our conservative credit culture provides us with borrowers that exhibited low leverage and strong cash flows during normal times. When the COVID-19 epidemic peaks and retreats, we expect these clients to return to work, resume their payments and remain loyal OceanFirst clients. Key to this approach is aggressive outreach to our commercial borrowers to ensure we fully understand conditions in the field. Our commercial bankers and credit staff have been focused on this issue for weeks, allowing us to collect information from hundreds of commercial customers who collectively represent, as of today, almost $1 billion of commercial loans outstanding. As you can imagine, the responses vary with clients impacted across a wide spectrum. To date, we understand that 104 of our business clients have elected to temporarily close to preserve cash. Regarding specific payment forbearance requests as of the close of business yesterday, which is the first full week since the program announcement, 195 borrowers have requested forbearance of payments related to $220 million of loans. In addition, we are processing separate requests for emergency credit from 47 commercial clients with a total request of $7 million. We expect these numbers to increase in the coming weeks, but they are very manageable in comparison to our total balance sheet of over $1.2 billion. But we are not stopping there. We are currently engaged with our relationship commercial clients who have been forced to lay off a significant amount of staff. By the end of this week, we expect to launch an employee emergency loan program to assist our clients by providing financial solutions to their employees. This program will be made available to OceanFirst commercial and industrial clients that have maintained full banking relationships with us for several years. Aiding them and maintaining their connection with their workforce will support their survival. We stand by our clients, and we intend to demonstrate the value of being a loyal OceanFirst commercial client. Finally, there's a laundry list of other programs, including the waiver of certain fees, the suspension of foreclosures and other actions that simply make sense in today's environment. Joe will give you some color on the feedback we've received from clients regarding economic conditions and their plans to address the current economic situation. But before I turn it over to Joe, I'll take a few more minutes to talk about the financial impact to the bank. We are a long way from fully understanding the impact of the pandemic on our economy and have very little information regarding fiscal stimulus. Additionally, we can provide no assurance as to what actions the government will take or how such actions will impact us. We will not be able to give you precise answers in regard to the economic impact and the duration of the dislocation of the economy. However, we can walk you through how we have prepared our balance sheet for systemic shock like this one and other actions we're taking to mitigate the financial impact to the bank. Let's start with the balance sheet. For the past couple of years, you have heard us discuss the need to prepare our balance sheet for a potential turn in the economic and credit cycles. We certainly never imagined the issues as acute or as extreme as we face now, but our preparation will go a long way in this environment. First, we have conserved capital by maintaining a conservative dividend payout ratio of around 34%, at the low end of our historical range. This has allowed us to build capital as demonstrated by a tangible equity ratio of 9.7% at year-end 2019, an increase of 141 basis points over the past 3 years. Similarly, our tangible book value per share at year-end 2019 stood at $15.13, a 17% increase since year-end 2016. In addition, we have pruned the balance sheet of nonperforming loans and other real estate owned, or OREO, to create the balance sheet capacity to work through credit with our valued clients. At year-end 2019, nonperforming assets, including OREO, totaled just $18.1 million or 22 basis points of total assets. In fact, OREO balances at year-end were a mere $264,000. At the same time, the strength of our credit culture was apparent as net charge-offs totaled just $4 million over the past 8 quarters or an average annual net charge-off ratio of less than 4 basis points over that same period. Credit issues will increase in the environment we face today, but the starting point is critical. As an external validation of our work to strengthen the company, Kroll upgraded the bank's credit rating for subordinated debt to BBB+ just this past December. More recently, we suspended our share repurchases effective February 28. At that point, management determined that the efforts to control the pandemic were likely to prove inadequate and that a wider financial market issue was highly probable. Suspending share repurchases wasn't done lightly as we recognize the financial engineering opportunity. However, we have an important responsibility to our communities. Every dollar of capital that can be preserved is a dollar of capital that can be deployed in the future to fulfill that responsibility to help our communities rebuild. Moving along, I'd like to quantify the degree of stress we believe our balance sheet is positioned to weather. As the bank has grown, we transition to annual stress tests and then strengthened our stress test process as we approach the $10 billion asset threshold. This was initially performed in preparation to comply with the Dodd-Frank Act stress tests or DFAST stress testing. While the prescriptive DFAST stress test is no longer a regulatory requirement for us, we continue to perform stress tests, adopting a similar approach. This is a critical discipline, and it provides a measure of confidence regarding our ability to weather current conditions. Our stress test modeling will not perfectly reflect the current environment. However, it does illuminate the degree of credit costs the bank can endure while remaining strongly capitalized and being able to continue to pay the common dividend. Using a degree of stress similar to the 2020 CCAR severely adverse loss scenario, our model estimates that over the next 9 quarters, the bank could withstand a significant escalation of credit costs. Credit costs, including lost interest income, allowance reserve builds and net charge-offs, might exceed $300 million over that next 9 quarters. However, even in that scenario, we would have the capacity to continue to pay the current common share dividend and have an ending Tier 1 leverage ratio that is modeled to exceed 8%. We believe this financial position is attributable to a good beginning capital base with estimated common equity Tier 1 capital of about $900 million or 11.8% of risk-weighted assets, good earnings and lending for sound projects, which have strong borrower equity. I must emphasize, these figures provide the magnitude of credit costs our business could withstand. They are not an estimate of what we think might happen in the current environment. Recall that our credit has been a historical strength at OceanFirst, and we work hard to ensure our credit risk position is conservative. Since we cannot provide you with estimates regarding credit cost and charge-offs, we thought that providing a little more insight to credit concentrations would be helpful. As you can see in the presentation, credit extended to industries that we believe may significantly -- be significantly impacted by the pandemic represents just about 15% of our current balance sheet. The vast majority of these credits are secured by real estate, and no single concentration represents a material risk to the bank. As Joe will discuss later, even the industries noted are a mixed bag as the final impacts will vary widely. Some may even experience favorable conditions. Most important is my comment regarding the diversity of the pool of credit. None of us can truly understand the long-term impact of the pandemic on any particular industry, nor do we know which issues may be mitigated by fiscal policy at the federal state and local level. So our balance sheet is starting from the strong point, and stress testing indicates an ability to sustain material credit costs over a multiyear horizon, if necessary. Finally, both the level of pandemic-sensitive credits and the diversity of that credit pool are modest in comparison to our total balance sheet. Let's turn from the balance sheet to the income statement. The current interest rate environment is certainly tough for most banks. However, the compression in net interest margin may not be as severe as it might seem, especially in the next few quarters. That's largely because credit spreads have expanded in many areas, and the Fed's actions have been swift and significant. On the credit spread side, we instituted rate floors beginning on February 24. These price limits apply to fixed rate, floating rate and even swap transactions. Many of the banks we compete with have instituted similar policies, and our pipelines remain solid. On the funding side, we have the ability to shift our funding mix to favor cost-effective wholesale funding in the short term. The availability of highly attractive wholesale funding provides the ability for us to more aggressively reduce deposit rates. We have not seen deposit attrition as a result of these actions, but we're prepared for a temporary elevation in our loan-to-deposit ratio. The considerable drop in treasury rates will result in some margin compression in the next few quarters, but the imposition of loan rate floors and quick action on deposit rates should offset some of the pressure on margins. There will be modest expenses related to the pandemic as we expedited certain technology investments over the past few weeks. For many of -- these investments were capital investments in laptops, video systems and VPN technology that is reasonably cost-effective. In aggregate, they won't materially increase our overall technology spend. Other expenses related to employee compensation will likely return to normal as the pandemic eases, hopefully, in the coming weeks and months ahead. I also want to discuss capital management. The foundation of capital management is understanding our ability to generate capital internally through earnings and to obtain an accurate assessment of the capital that will be required to support the bank's operations. As noted earlier, our severe adverse stress scenario, while daunting, indicates that the company's capital position is expected to remain strong, even if credit costs increased dramatically and remain elevated over the next 9 quarters. In other words, we do not expect to require any external capital to weather the current environment. Given that statement, I think a few words about the shelf registration filed this morning are in order. Having an active shelf registration is a critical tactical step that prepares the company to issue a wide variety of instruments over the next 3 years. This capability is necessary as market conditions will change quickly. While the markets are highly disrupted currently, as the pandemic eases, which it will someday, there may be unique opportunities to take advantage of a world seeking yield. There is also the distinct possibility that our communities will have an unusually robust appetite for credit as we rebuild our economy. We need to be prepared to respond to a broad variety of events, and the shelf will position us to do that. With that, I'd like to give Joe a few minutes to share color from our clients and provide a little more insight about interest rate strategies. He will also give you a sense of the response we've had from OceanFirst staff.

Thanks, Chris. We provided some general detail surrounding total client requests for assistance to date, but I'd like to provide a few specific examples of how different clients in varying industries are handling their business currently. Two of our major restaurant chains have laid off more than 2,000 employees in total and are actively reducing costs by approaching vendors and landlords and will both likely accept our deferral program. Yet both remain cautiously optimistic for their businesses once restrictions are lifted, and both are in very strong financial condition. Interestingly, another of our larger hospitality groups have seen only a $400,000 decrease in bookings to date as they head toward the summer with most vacationers just pushing back reservation dates rather than canceling. This company has seen varying stress scenarios such as 9/11, the financial crisis and Sandy and come through them all. I'll end my comments on customers by noting that one of our largest building contract wholesalers with over 250 employees in multiple locations has been largely unaffected with revenues and profits slightly above budget for the year. Their only issue has been the safety and health of their workers, and they've instituted social distancing even at the point of delivery of products by truck where they have additional delivery staff each drive in separate vehicles behind the truck delivering the goods. Lastly, one of our largest CRE and multifamily property owners in New York and New Jersey with ownership in over 100 properties has seen no request for commercial or residential rent deferrals to date. While they expect to see some, they remain optimistic. Chris mentioned several adjustments we've made to our loan rates to combat NIM compression by instituting floors and minimum spreads over indexes and our approach to lengthen the weighted average maturities of our Federal Home Loan Bank borrowings that will pay dividends over time. We've also reduced deposit pricing at over $630 million in deposits with an estimated annual save over $1.75 million, with more to follow as guaranteed rates begin to burn off over time. We've seen very little runoff so far but are willing to accept some attrition in this environment. Before I finish with an update on the Two River integration, I'd briefly like you to indulge me as I tell you how humbled I am to have the dedicated efforts of our employees reflect the company we are as they support our customers daily in branches, in the call center, back-office operations and all customer-facing sales teams. Their response to the pandemic has been nothing short of spectacular as evidenced by the strong Net Promoter Scores and Google reviews detailed in the investor deck. In regard to the Two River system integration scheduled for the weekend of May 16, we remain on plan. Data mapping and the deconversion of files have been completed. The first of 2 data loads, data validation and testing have been done, and virtually all of the remaining project plan is in green status. With that, I'll turn it back over to Chris.

Thank you, Joe. With that, we're happy to take questions from those of you on the call. So we'll pause to collect those questions.

[Operator Instructions] And our first question comes from Frank Schiraldi of Piper Sandler.

I wanted to just get your thoughts on how much do you guys think investors more broadly, how much investors are going to be able to learn over the next couple of quarters in terms of bank earnings. I mean, clearly, there'll be a moratorium in place. And so to the extent you're deferring, modifying loans, it doesn't seem like you're going to see TDRs, doesn't seem like you're going to see nonperformers or charge-offs certainly. So is the most salient sort of metric going to be loan loss provisioning? And I guess the follow-up to that is with CECL being implemented -- it looks like being implemented. What is that worth?

That's a great question, Frank. I think the way we have to think about it, there's been a lot of discussion about what is a TDR, what's not a TDR, what do regulators think and what does the PCAOB or auditors think. I think we have to all recognize that it doesn't matter what you call them. They could be TDRs, they could be deferrals. It really doesn't matter what label we affix to them. But we will have an obligation to disclose what loans we have offered a deferral on, why we have offered those deferrals, how they're performing, what their LTVs are, what -- in some cases, maybe in the commercial side, what their liquidity positions were and give you regular updates on the performance of those pools. So whether we have something that's determined to be a TDR, not a TDR, just a forbearance, I don't think we can just leave that in the portfolio. We're going to have to pull it out and, in conversations like this, tell you exactly how many forbearance agreements we have, what those conversations with customers are like, whether those businesses are operating or not operating and give you the context so that you'll understand a little bit about the risk. On the reserving side, it's going to be a real challenge. And you mentioned CECL. There's a lot of folks discussing maybe the best thing we could do at this point in the crisis is defer CECL. I'm in that camp. I signed the Mid-Sized Bank Coalition letter this week or last week to try and encourage people to do that. Thus far, the FASB appears to be tone-deaf on the issue, so we're prepared to put CECL in. We've been working on it for a couple of years. But if you ask my opinion, I would tell you that whether or not CECL is the perfect accounting treatment, now is not the time to change the reserve accounting. So we're prepared to do that. I think it all comes back to information, Frank, and us providing you with the details so that you can independently assess what you think the risk is. That's part of why we released the concentrations today. I don't want to tell you what I think is going to happen with a wholesaler loan or a warehouse loan. I mean some of those guys could be in great shape. But if I give you the data, you can make an informed decision on your own.

And then just staying on provisioning. So your comments about -- it sounds like FASB is not budging here. In terms of the way CECL works, obviously, you have, I would expect, a large day 2 mark here because the model has changed significantly since the end of the year, the economic outlook, but it's life of loan accounting as well. So under the expectation that if things stay difficult, loan growth is going to slow across the industry. So you're not going to see much loan growth this year. So what you got in the book is sort of what you got. Is it fair to assume that most that -- most of the provisioning we should see in the first quarter as you adjust for this much more dire model?

Unfortunately, Frank, I think you're going to see provisioning all throughout the year, and I'll tell you why. So let's just assume that CECL is moving forward. Like many other banks, it's based on an economic forecast. We're going to have an economic forecast as of March 31. And as you said, there'll be kind of a big probably day 2 mark because the economic forecast is going to change. Whatever that GDP number is, it's not going to be the one we thought it was 2 months ago. As a result, we're going to have to, through CECL, put on a few more reserves. There are other economic indicators that will play out during the year. We're going to have unemployment numbers in the second quarter. We'll probably have payment delinquencies in the third quarter. And each time we have those kind of benchmarks move through the CECL model, that requires some additional provisions. And then by later in the year, there's no doubt, most banks will have some level of charge-offs. And those charge-offs are going to have to go through your income statement because we're not going to reverse what we have in the reserve that quickly. You're only going to do that after the crisis has clearly passed. So I don't think it -- look, the industry is in great shape. And what I mean by that is we've picked up about 200 basis points of common equity across all of our balance sheets as an industry. That is a huge amount of capital. We're also pretty profitable, and many banks are today. So I think we've got earnings we can take some of this out of. So I don't think we should be overly concerned about it. But I don't think this is anything that we're going to be able to put a number on in the first quarter and then we're going to have gotten the number right, it just stays that number going forward.

Okay. And then just finally, if I could. Just on -- I think you might have mentioned $7 million in drawdowns. I know you mentioned $7 million. I don't know if that was additional drawdown. But I just wanted to get your thoughts on that's something investors have been a bit concerned about over the last few weeks is the idea that you're going to see significant drawdowns in the first quarter, which could strain some bank's capital levels or liquidity. So just wanted to get your -- is that right, is that what you said? And I would assume you expect more in the coming weeks.

Yes. Let me be clear on that figure. The $7 million figure were new requests for credit by commercial customers who were asking for additional credit to get through this period of time. But you raised good question about drawdowns. We have not seen drawdowns in any scale to date. The last number I saw was we've had $11 million worth of draws in our commercial lines. So that's not a really big number, and we're not overly concerned about it.

Our next question comes from Russell Gunther of D.A. Davidson.

I had a couple of follow-up questions to the disclosure, I believe, on Slide 17. Hoping you could provide a little more granularity as to how the accommodation and food service breaks down within those 2 different buckets to start. And then just additional color on the type of accommodations or hotels and type of food service or restaurants.

Russell, Joe Lebel. We have -- of the $363 million on -- or really $385 million on Slide 17, about $180 million of that is hotel exposure and the remainder of that is a variety of different size restaurants. It could be beds and breakfast and a bunch of other stuff like that, but the hotel's about $180 million. And then as you could see by the slide, almost over 90% of it is real estate secured. And just to give you a little color on hotel exposure for us. So we have a -- because of our familiarity in the space, we have a policy of 65% max loan to LTV, and a debt coverage of 1.50 or better. And our average debt coverage is well above the 1.50, and the weighted average LTVs is well below 65%.

Okay. I appreciate that. And then could you guys comment on your exposure to Atlantic City currently and thoughts around how that in particular market would be impacted and what that exposure could look like for OceanFirst.

Fortunately, I can tell you that Atlantic City has not been an area where we've gained any traction in lending. So it's not been a focus for us, and we don't lend to casinos. And I think we only have one client that I'm aware of that has a little bit of business with casinos. So it's not a lot of exposure would be a rounding error.

Our next question comes from Christopher Marinac of FIG Partners.

Chris and team, just wanted to ask about the -- when you mentioned the $300 million kind of macro number during the call, is there a certain level of default rate that gets you that number? And just what's the magnitude of that in comparison to what you experienced with Sandy several years ago?

Yes. So that's a way higher default loss rate than we experienced in Sandy. That correlates to an economic scenario where GDP contracts by about 8%, but it's protracted over a 9 quarter time frame. So the -- so you have 2 things going on here. This contraction may be much sharper, but it may be much shorter. And then the other thing is in a garden-variety recession, there may not be anywhere near the amount of fiscal stimulus we're going to see with this thing. So it's really hard to handicap what the performance will be. But we thought as a magnitude issue, it might be helpful. And Grace handles the stress testing, so I'll ask her if she's got any comments to add to that.

Actually, no, I don't. The approach of the stretch stress test is really to look at individual loans and, under these conditions, the impact to their collateral -- to the value of the collateral or to the impact of the value of the company based on an EBITDA multiple. So we focus more on that and what that's telling us, then backing into them what that means in terms of the default rate. I can tell you it's about a 2% loan loss rate, though.

Okay. And then if it does come to pass that the numbers are as high as the stress test level, will you have visibility on that number sort of in 6 or 9 months? Or Chris, will it take longer to actually get to that amount? I'm just sort of thinking of the timing of how you would have to reserve and grow -- account for those reserves if it is, indeed, $300 million?

Yes, I think that we're going to have clarity, but you have to -- the starting date for the clarity is going to be about 90 days after we kind of consider the pandemic over. So I don't know what the -- I can't give you much guidance on whether we're going to be at this for weeks or months. But as we follow these loans, most of the portfolio we -- exposure, we think, is the hospitality group, right, and you look at that. So I think if they're back up and running for about 90 days, we're going to have a sense as to how many plates are getting pushed out for dinner and how many hotel rooms are occupied and all that. And I think that would -- so it's not going to take years for us to figure this out. But I think we need to -- the economy has to be more normalized, and that has to continue for enough time that we can get a real handle on what our businesses are doing. And I think it'll be -- it won't be hard to figure that out then. It's just hard to figure it out now.

[Operator Instructions] And our next question will come from Collyn Gilbert of KBW.

Chris, if I could just start or maybe, Joe, directly to you. But just on the $232 million that has come to you requesting hardships, how -- can you just kind of give some examples on how you're accommodating those requests, how you're looking to restructure some of those loans? Or just what that's kind of looking like?

Yes. Collyn, for us, I think the programs that we had in Sandy really tie in, in this sense -- although it may be a bit different because we had similar scenarios with corporate borrowers back then, especially even as a smaller bank, the seasonality, right, in the shore marketplaces. So in most instances, we've seen requests for 90 days' worth of interest-only or 90 days worth of principal and interest deferral, which we're granting it a fairly rapid pace. What's interesting, and Chris mentioned earlier, we have about $7 million worth of new dollar requests for working capital -- temporary working capital facilities, which is not a big number at all. And I think a lot of that has to do with the strength of the borrowers that we have. So they, at this stage, look at it as a window where -- protect their -- as I mentioned the example of a couple of very large restaurant chains, protect the capital outlays for the next 90 days until they can get businesses open and sort of back to some semblance of normalcy. And we expect that, that's going to ramp up over time. I don't think people are going to crowd into the restaurants the minute we open the door. So we're prepared to do whatever is necessary, but we've done that type of structure previously with great success.

Okay. Okay. And then what was -- I may have missed the detail of it. Did you say early on in your comments, Chris, that one of the programs or accommodations that you're doing is offering a program to your C&I borrowers, employees. What was -- okay, can you just explain that program a little bit in detail and what the objective is there?

Sure. So we have a very small number of large employers that have been loyal to OceanFirst for years. So these are the folks that have -- they may have a credit line, working capital line. They may have mortgages. They likely have their own personal accounts with us, all their deposits, treasury cash management. These folks have been all-in with us for years, and we need to be similarly all-in with them. And what that means is, in the case of some of the hospitality businesses, I'll tell you what they're concerned about. What was their biggest issue 90 days ago, staffing, right? So if they lose their connection with their employees and pandemic passes and the sun comes out and we can reopen the restaurants, if they don't have the kitchen staff, the waitstaff, the bar staff to be able to operate, they're dead in the water. So we're working with them this week to have a program. We would work with them so that the bank would directly extend small dollar loans to select members of their staff to help their staff get through this period of time. So in aggregate, it's not going to be a lot of dollars. But you know what? For some of these folks, $500 or $1,000 might make a huge difference in, look, their ability to just buy groceries and find things like that over the next few weeks. If you're waitstaff in a restaurant, you live on tips, and unemployment is not going to help you with that. So our belief is that if we support those customers supporting their employees, that's going to cement our relationship. And I'll tell you in the years ahead, we're going to tell people, look, you have a choice to make about who you bank with. If you bank with OceanFirst, we're going to stick by it.

Okay. That's great. And then can you just talk a little bit about what you might be seeing or you're expecting to see within, like, some of the municipalities that you do business with?

Yes. So far, we've had some pretty good conversations. We do expect -- they're a little nervous about the issuance of BANs, or bond anticipation notes. We typically have been a source for them in that, and we'll continue to do that. So there's been a little bit of dislocation in that market. But again, the same principle applies for the municipalities and school districts and county governments that have banked with us for 20 years. We're going to be there for them. So if they need us to step in and cover them for a BAN, we'll go ahead and do that. We've done temporary credit facilities for these entities many times in the past. So I think that there is a little bit of confusion right now with the kind of the fog of the situation. But we're going to be there for them, and I think this makes the difference.

Okay. Okay. That's helpful. And then just if you look at the sort of the time line you guys have on Slide 4 and sort of how you've responded for the last 3 months, if we were to look out April, May, June, sort of what's next for what you intend to tackle as an organizationally -- as an organization operationally and then financially, obviously, how people shakes out? It's going to be a big one. But just kind of -- if you could sort of give us the road map for what the next 90 days look like for you guys.

Sure. Well, the backdrop is and the reason that we're talking to you today is that we have been 100% focused for the last probably 45 days getting our own house in order. We needed to ensure that regardless of what may come in the coming weeks and restrictions on movement and potential illness in our employee base, that we had a robust ability to just run the bank. And I think we're highly comfortable with that today. Beginning last week, we've pivoted to starting to work with our commercial clients. So the next 30, 60, 90 days is all about credit. It's about working with our borrowers. It's about making sure they have what they need. We're doing things by electronic signature, in many cases. We've got probably the largest residential loan pipeline we've had in our history. It's almost $200 million. So we're heads down making sure we're providing the credit we need to into our markets. And then I think as we kind of pass into the summer, we can pick our heads up a little bit. Hopefully, we've all got the pandemic in the backdrop, and then we just see what net new opportunities our community may need us to fund. The only other significant thing we have going on now is we're working very hard on optimizing our funding costs because of the Fed's moves, and they've been quick and dramatic. And we have this wholesale funding ability, we're having client discussions with our big depositors, we really need to pull those costs down to mitigate the compression on NIM. It won't be perfect, but I think we can make some progress on that.

Our next question comes from Matthew Breese of Stephens.

Going to the $300 million figure you provided, along with that stress test, was there any other assumptions made in terms of the top line, PPNR perhaps, and how that is affected by a long protracted reduction in GDP? Just want to get a sense for the assumptions behind that.

Yes. Probably the biggest assumption is compression in the net interest margin because, obviously, there's a big variance depending on what you assume earnings are going to be and how much of your earnings you can use to address credit charges. So we don't want to get into giving you all the nits of the stress test, but I will tell you that we modeled the significant compression in our net interest margin as part of that. Grace, anything you'd add to that about either modeling or assumptions that you think is important to talk through?

I think that's the most important, Chris. Of course, the model showed -- projects a lower loan growth rate in the severely adverse scenario. So that's a factor that's probably not a surprise. I guess the big thing truly is the margin. And the last thing is the continuation of the dividend, which are probably the key assumptions.

Okay. And I'm assuming buybacks are suspended that analysis as well?

Correct.

Okay. And then going back to CECL. On the one hand, if CECL goes through, I would love just a description or a range of -- if GDP is, in fact, compressed by some of the estimates they're talking about, what should we expect for -- in the immediate term that true-up provision? What could it look like? To what extent could it change? Because over the last couple of years, provision for the bank has been rather modest. And I just wanted to get a sense for, are we talking a change of large multiples or a handful of millions of dollars?

I wish I could give you a better number on that, Matt. I think that the stress test would give you the best guidance. But the stress test looks at a protracted 9 quarter pretty ugly scenario. It doesn't look at a very sharp, more extreme scenario. If this behaves more like Sandy and less like a recession, I would tell you that we may not have significant credit charges, but we just don't have the visibility about how quickly people are going to get back. And some of it for us, too, at least in the short term, is going to be just timing as to how much of the summer season, some of our folks salvage. Many of our hotel loans are clustered along the Jersey Shore. And they usually do quite well starting in probably -- really, their market hits a little bit in June, but it's really July, August and even into September. So if we're clear of this and people don't want to get on a plane, they decide to go to Jersey Shore, I think this could be more on the modest side. But I would also point out that there are qualitative factors even under CECL. So if the model does something extreme, we have an ability to say, hey, look, the math is looking a little bit unusual here. Let's temper this a little bit until we have more information. So I don't think that when I think about some of the numbers I've seen -- everybody has seen probably in the last few weeks, maybe GDP going down 20% or 30% or something like that, that -- you run that through a CECL model, that's going to be a big number. But it doesn't mean we won't make judgment that that's a temporary 10%, 20%, 30% decrease in the economy, and maybe we'll be back to flat by year-end, and we may adjust some of the CECL provisioning based on that.

Understood. Okay. Yes. That was exactly what I was referring to. And then let's just say you do get the option to go back to the old methodology. I mean given there's only a week left in the quarter, could you, in fact, implement the old system this quickly? And are you still running parallel test and have that ability?

Yes. We -- look, we could do that. I think we would crush some of the people who've been working for 1.5 years to make sure they were ready. They'd be kind of disappointed in a weird way. But we still have those models, and they're not terribly difficult to roll through. So we're prepared for CECL, but we're also prepared if CECL is not there, and we'll respond to it. I will say that a lot of this really will be looking at the first 90 days after the pandemic clears because that's going to give us the best sense as to how -- we have businesses that may not miss a beat at all, that may -- look, they've lost something in their income statement, but their balance sheets are pretty good. And unfortunately, they've had to lay staff off. They've had to do things -- they're asking for, in some cases, rent deferrals and that kind of stuff. But if the business recovers by July or August, I don't think it's a terribly deep shock for most of us.

Okay. And then just in terms of the pipeline, how have loan originations -- how has that changed? Should we anticipate a much less pace of organic growth for the bank?

I think that, first, I'll say that first quarter has been a very solid quarter for us. Chris mentioned earlier that almost $200 million residential pipeline. Interestingly, the biggest challenge we have short term is the dynamic around the county clerks offices and the ability of folks not only to get into work, but to get mortgages recorded, get title insurance, get variety of things. There are certain clerks offices in our state that have closed. We're working around that. And that's the same in the commercial space. We've had a very solid quarter. The pipeline is substantial going into the last week of this quarter for Q2. We do have a variety -- and we don't lose sight of the fact that rates are very good for borrowers, and we do have a variety of borrowers that have looked at this opportunity to buy property. So buy buildings, buy office buildings, buy retail centers. So the pipeline is substantial. And I think if that holds in, we'll have a decent second quarter as well. I think the one thing we're taking advantage of is we're beginning to sell, on a full basis, some of our residential stuff in the secondary market. So that will -- that may impact net loan growth just by virtue of the fact that we don't want to hold some of this low rate paper. But I think originations in Q2 should be okay.

Understood. Okay. And then -- and Chris, just bigger picture. I know as we consider kind of what's happened in the stock price and where it trades relative to book, it does suggest that the market's concerned about some level of credit or credit losses. I mean listening to you, it doesn't sound like you feel that way in the immediate term at least. Could you just give us a sense for your concern for the overall well-being and health of tangible book value over the next 3 to 6 months, if you could?

Well, I think it starts with what we see in terms of the strength of the borrowers that are on the balance sheet, right? Because the only thing that's going to threaten book value is going to be credit at this point. And we have the advantage of -- we're now a weekend. We made hundreds of calls. We've touched $1 billion of our commercial book already and discussing with them how are they, they open, they close. We're hearing some rough stories where people have had to close and lay off hundreds of people. We're hearing other stories where people are doing fine. So I don't think -- given our continued earnings power, the stress test we discussed before, there is a long way before we're talking about a book value issue. And I think if -- I don't know what the exact nature of the fiscal stimulus will be, but I do think we see the institutions in this country, everything from the Fed to the federal government, they are focused on doing every single thing they can to get this economy moving again. And that's very different from a traditional recession. So I think there's a long distance between us having to worry about book value and where we are today. But I have to acknowledge we're in an unproven ground here. And anyone who tells you that they've got it all figured out is probably a fool. So we think we're in a pretty good position. We've worked hard to make sure the bank is advantaged going into this kind of a disruption. But we're humbled. And I can't tell you that I've got some giant forecast that we'll kind of give you the endgame.

[Operator Instructions] And our next question will come from William Wallace of Raymond James.

I wanted to follow up on a line of questioning from Matt. I thought he was going to ask this question. But you gave some commentary around why you think CECL should be delayed, and the bill that we've seen from the Senate has that provision in it. If it's delayed, given -- obviously, there's going to be a lot of uncertainty when we -- when you're doing your first quarter numbers. But let's assume, by the time you get to the second quarter, we have a better view as to how perhaps prolonged this situation might be. Would you anticipate that the reserve build -- I would imagine it would still need to be sharp given how severe we've changed our economic growth. Wouldn't the old reserve methodology also have a pretty sharp increase in the reserve need, maybe not in the first quarter, but in the second quarter, assuming we are looking at a more prolonged scenario? Or am I wrong about that?

No. No, you're not wrong about that at all. I think that as we go through what we talked about our forbearance requests, right, we've had $200 million worth of credits as for forbearance. So there's no question that we're going to take a provision. I can't tell you the dollar amount. But we're going to set aside funds because some of those loans are going to be troubled and not be able to pay us back. So I think the reserve build is going to happen either way. I think it's the extremes that you could wind up with under CECL and this idea that an economic forecast drives your reserve rather than your own data on your own loan pool, and that's a very different thing. So -- and they're -- and even under CECL, there are adjustments you can make, and there are qualitative factors we can bring into account. But you're right to assume there's a reserve build. I don't think anyone is going to go through this quarter and not start putting reserves aside. But I think those would be less sharp and more grounded in the institution zone history. The worst charge-offs in our history were in 2011, and that was 58 basis points. That was the worst year we've had, at least as a public company. So that's not -- I mean, look, it's a lousy year. But in that year, it didn't even wipe out earnings, right? And that was a pretty bad market. So I think you can take reserves. You can take provisions. You can put funds aside. It's the extreme nature of some of the calculations in CECL that -- where the complexity just kind of piles on.

[Operator Instructions] And our next question will come from Erik Zwick of Boenning and Scattergood.

Just one question for me and really kind of a follow-up to Joe's commentary around kind of the confidence in the pipeline and origin activity going forward. Just curious if you have any concerns around the ability to close any certain loans just given kind of stay-at-home provisions that might prohibit borrowers or appraisers or lawyers from being able to get together. Or can those all be kind of worked around? Or could that potentially slow down some activity?

Yes. I think as Joe noted, we are dependent upon third parties. And by the way, that's a story around the bank, right? So it's not just related to loan closings. We're relying on third parties in a lot of what we do. But as it relates to the loan pipelines, I think we mentioned the $200 million residential pipeline. We have a $400 million commercial pipeline right now. And we need -- in many of those deals, we're going to need county clerks to be able to help the title companies and move things around. I would tell you that our attorneys have been terrific, both internal and external, that we are for small dollar loans. We're doing some electronic signature work to make things flow even smoother. But there is a chance that if we don't have the cooperation of some of the government entities, that would be my concern. The title companies are open for business they're doing great work. Our attorneys are doing great work. It's really, can you get to the county clerk if you need to? So there is a risk there.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Christopher Maher for any closing remarks.

All right. Thank you very much. I was kind of like -- feel compelled to remind everyone that OceanFirst has been around since 1902. This is, in fact, not even our first pandemic, although none of us were around for the first one those guys went through with the flu. But we have been through a couple of world wars and financial crises and depressions and recessions and panics. And we are very much looking forward to celebrating our 118th anniversary this June. And I think we'll get through this one, too. I appreciate everybody's time and attention today, and I hope you found the information productive. We will talk to you next at our earnings conference call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.