OceanFirst Financial Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 18, 2024

Key Takeaways

  • Our GAAP diluted EPS was $0.42 with net interest income stable at $82 M, essentially flat versus Q2.
  • Operating expenses rose $5 M to $64 M, including $1.7 M of non-recurring costs from the Garden State Home Loans and Spring Garden Capital acquisitions.
  • The acquisitions of Garden State Home Loans and Spring Garden Capital will expand fee revenue and specialty finance offerings and are expected to be modestly accretive.
  • Credit metrics remain strong with non-performing loans at 0.28%, delinquencies at 0.15%, while CET1 capital rose to 11.3% and tangible book value increased 8% year-over-year.
  • The board declared the 111th consecutive quarterly dividend of $0.20 per share (50% of GAAP EPS), and the company repurchased 1.4 M shares year-to-date, underscoring solid capital return.
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Earnings Conference Call
OceanFirst Financial Q3 2024
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Operator

Good morning, and thank you all for attending the OceanFirst Financial Corp Third Quarter Twenty-Four Earnings Release conference call. My name is Brika, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Alfred Goon, Investor Relations at OceanFirst. Thank you. You may proceed, Alfred.

Alfred Go
Alfred Go
SVP of Corporate Development and Investor Relations at OceanFirst Financial Corp

Thank you very much. Good morning, and welcome to the OceanFirst Third Quarter twenty twenty-four 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 on Forms 8-K, 10-Q, and 10-K, for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you, and now I will turn the call over to Christopher Maher, Chairman and CEO.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Thank you, Alfred. Good morning, and thank you to all who've been able to join our third quarter two thousand and twenty-four earnings conference call. This morning, I'm joined by our President, Joe Lebel, and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. Our financial results for the third quarter included GAAP diluted earnings per share of $0.42. Our earnings reflected stabilization of net interest income, which remained essentially flat at $82 million compared to the prior linked quarter.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Operating expenses increased by $5 million-$ 64 million and include $1.7 million of non-recurring operating expenses related to the acquisitions of Garden State Home Loans and Spring Garden Capital, which we'll discuss later. These investments will support expansion in our fee revenue and specialty finance offerings, respectively, and both will be modestly accretive to earnings. Asset quality metrics continue to remain strong as non-performing loans and loans 30-89 days past due, as a percentage of total loans receivable, were 28 basis points and 15 basis points, respectively. Loan recoveries of $88,000 for the quarter. Capital levels continued to build, with our estimated common equity Tier 1 capital ratio increasing to 11.3% and continued growth in tangible book value, which increased by $0.35 to $19.28.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Tangible book value per share has grown 8% as compared to the same period last year. Capital growth was sustained this quarter, while the company repurchased an incremental 87,000 shares under the company's repurchase program. Through September 30th, 2024, we have repurchased nearly 1.4 million shares at a weighted average cost of $15.38. Further on capital management, the board approved the quarterly cash dividend of $0.20 per common share. This is the company's 111th consecutive quarterly cash dividend and represents 50% of GAAP earnings. With solid credit metrics and our bolstered capital position, we are now increasingly focused on driving organic growth in Q4 and into 2025.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

At this point, I'll turn the call over to Joe to provide some more details regarding our performance during the third quarter and our efforts to increase organic growth rates.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

Thanks, Chris. The company's loan originations for the quarter totaled $431 million and included $161 million of C&I originations. The pipeline of $352 million reflects a $92 million increase compared to the prior quarter, with a significant increase in residential loans that are directly attributable to the talent acquisition of Garden State Home Loans. Our continued focus on expanding our C&I lending teams and deepening deposit gathering channels has resulted in the onboarding of 12 new C&I bankers to date this year, including our team in Northern Virginia and two additional hires this month. While net loan growth remained modest in Q3, I expect continued growth in the C&I business for the remainder of the year, with moderate growth in residential lending due to our recent talent acquisition. Deposit balances increased by approximately 1% compared to the prior quarter.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

This increase was net of planned runoff of $200 million of brokered CDs. We remain confident in our ability to reprice and retain consumer, commercial, and government deposits in this environment and also expect additional commercial deposit growth in coming quarters from our continued focus on recruiting C&I bank teams. Asset quality metrics remain strong, with non-performing loans and criticized and classified assets representing only 0.28% and 1.9% of total loans, respectively, while delinquencies remain at low levels. These metrics compare favorably to pre-pandemic levels and continue to reflect strong credit performance in our portfolio. As Chris noted, the company recorded net recoveries of $88,000 for the quarter, and our total provision for credit losses totaled $517,000, with half of the provision being applied to our pipeline and commitments.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

The company's ACL coverage ratio remained flat at 0.69% of total loans. One last word on other income. While we did see nice improvement in our deposit and service charge revenues and a continued build of our mortgage gain on sale income, the largest increased linked quarter-

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

... was nonrecurring and attributable to the sale of a portion of our trust business and a vacant property sale, which aggregated to $2.3 million of other income. With that, I'll turn the call over to Pat to review margin and expense outlook.

Patrick Barrett
CFO at OceanFirst Financial Corp

Thanks, Joe, and good morning to everyone on the call. Net interest income and margin were $82 million and 2.67% respectively, essentially flat to the prior quarter, as was our cycle to date deposit beta of 42%. As anticipated, we believe that we're at our trough in both net interest income and margin, but our outlook for both could shift modestly subject to interest rates, loan growth, and funding mix trends. Non-interest expense increased $5 million to $64 million during the quarter. While the majority of this increase was related to the acquisitions that Chris and Joe have talked about, nearly $2 million of that was nonrecurring. Our new projected quarterly run rate, including the full quarter impact of both acquisitions, is expected to be in the $63-$65 million range, which you should see reflected in the fourth quarter.

Patrick Barrett
CFO at OceanFirst Financial Corp

Note that with the continued expansion of our mortgage originate-to-sell capabilities, some expense volatility should be expected, primarily as a companion to mortgage production volumes. Finally, as Chris mentioned earlier, capital strengthened appreciably with growth in our CET1 ratio to 11.3%. We repurchased an additional 87,000 shares early in the quarter, but given the recent improvement in our stock price, combined with expectations of organic growth, you shouldn't expect to see material share repurchases in the near term. Note that as a matter of housekeeping, we did update our securities shelf registration this morning. While we have no near-term plans to issue any capital instruments, we do have both sub-debt and preferred equity repricing in May of next year, and accordingly, want to maintain a posture of readiness, should we choose to do any refinancing issuance.

Patrick Barrett
CFO at OceanFirst Financial Corp

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

Operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind at any time, please press star then two. and as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly while questions are registered. Your first question comes from Frank Schiraldi with Piper Sandler. You may proceed.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Morning.

Patrick Barrett
CFO at OceanFirst Financial Corp

Hey, Frank.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Just wanted to ask on the two acquisitions, you know, albeit small, just wondering if you could kind of walk us through that. I guess the mortgage business is pretty straightforward, but Spring Garden, if you could just talk a little bit more about their specialty. It seems like they're a real estate bridge lending group, and you know their specialty and maybe expectations around size as that business ramps up on balance sheet.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Sure, Frank. You hit it on the head about Garden State. You know, it's really just an augment to our efforts to convert our mortgage origination business into a gain - primarily gain on sale business. So they provide a direct-to-consumer channel that kind of augments what we're doing, and we feel very good about that. In terms of Spring Garden, Spring Garden has been a client of the bank for many years. So we've known the operation really well. Former banker Jay Goldstein, who ran that company and ran it really well, will be joining us and will continue to run it for us.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Really, the financing they provide is for the renovation and rehabilitation of housing, predominantly in urban markets, where there's an infill need, where you've got housing units that need to be kind of upgraded. Originally, they started in Philadelphia. They subsequently expanded to Philadelphia, Baltimore, Washington, D.C., and Pittsburgh, and they're doing some additional growth beyond that. The two important dynamics to this: first, it's a very profitable business. They've managed it really well over the years. The second important thing about this is, you know, close to 80% of what they do is CRA qualifying assets, which are pretty attractive to us, and their borrower composition is good as well. Nearly two-thirds of their borrowers are minority or women-owned businesses, so it helps kind of beef up our credentials in those areas.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

But, in terms of the growth rate you asked, this will not grow fast. This is a business you have to be very careful and stay on top of. So we do expect it to grow under our balance sheet, but I wouldn't think of it being a significant growth rate going forward. It's going to grow, you know, probably 10% a year. I wouldn't expect much more than that.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay. And sorry if I missed it, but what are the sort of footings currently in that business?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

About $145 million, Frank.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay. And I guess just this last question on that. Just kind of curious, obviously, seems like there's capital coming back into that business now. There was a bit of concern around that business, certainly, with production in the 2021, 2022 time frame, you know, where you obviously had a pretty significant change in inflation levels since then and interest rate levels. Just curious about how it's... Is that stuff still on the balance sheet that came over? What sort of, you know, years were these this 145 million in footings were originated?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Great. Yeah, oh, so let me just clarify on that. This has been on our balance sheet for years. We were the warehouse funder for this company. Based on their business model, you're talking about loan duration that tends to be around sixteen to eighteen months. So, you know, really, this stuff that's on the balance sheet now was originated in the last two years. The credit experience has been spectacular, and they're able to, in most cases, they're delivering net rehabilitated housing units at a pretty affordable cost in these markets, so they have not had any difficulty either renting or doing long-term finance on these loans. So this is not a kind of a lend and hold business. This is a bridge business.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Almost all of their borrowers are repeat borrowers, so folks that they know and have done multiple projects over the years. Very modest credit costs, a very strong net interest margins, and they have not missed a beat in the last couple of years.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Got you. Okay. Sorry for thinking about it incorrectly in terms of that stuff already being on the balance sheet. So now when I'm thinking about loan growth in the fourth quarter, the idea, you know, that we'll see some pickup here. You know, I thought some of that was the acquisition, but in terms of still seeing some pickup here, Joe, what are your thoughts in terms of, do you think there's just a, you know, a decent amount of pent-up demand, and once we get through the election, we'll see some strong fourth quarter catch-up?

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Or, you know, is it just a combination of that as well as the new teams that you have brought over, just, new bankers that you've brought over are starting to ramp up, and bring all the customers? Just, curious if you can give a little color around the expectation of that pickup in quarter two.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

Sure. Well, I think I hate to say it's the catch-all or all of the above, but I think it is a combination, Frank. We're seeing activity from the bankers that we hired earlier in the year. Typically, a C&I banker is going to need three or four months to sort of get that footing, talk to client bases that they've had for years and sell them on the OceanFirst proposition. And, you know, Chris and I have been proactive in meeting prospects with those bankers. So some of those guys that we've recruited early in the year have started to hit their stride, and you're seeing that in some of the numbers, seeing it in the pipeline.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

You're also seeing clients that have navigated through the years, especially through this year, especially looking at it in their own demand, right? What's the consumer doing? What's the activity? Can they pass along price increases if they have them? What's the inventory supply chain like? So we're hearing almost uniformly from clients that they're fairly bullish heading into 2025, which is a positive. I don't think we've seen all that in the pipeline yet, though. And then, of course, I think that a little bit of the volatility in the mortgage business has actually helped us a bit. We've seen some bump down in rates, and some activity, and there's no doubt that the direct-to-consumer segment with Garden State Home Loans has helped on that resi side of the balance sheet as well.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

We're trying to obviously sell 80% of that originations in the secondary market, but we're happy to see that income.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Great. Okay, thanks for the color.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

Thanks, Frank.

Operator

Your next question comes from Daniel Tamayo with Raymond James. Your line is open.

Daniel Tamayo
Daniel Tamayo
Vice President and Equity Research Analyst at Raymond James

Thank you. Good morning, everyone.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

Good morning.

Daniel Tamayo
Daniel Tamayo
Vice President and Equity Research Analyst at Raymond James

Maybe we start just on the funding side. You talk a little bit about how. I know you touched on it in your prepared remarks, but just how the repricing has gone since the rate cuts in the third quarter, and then maybe how all that how you're thinking about kind of how the margin plays out, you know, in the fourth quarter and, you know, with future rate cuts. Thanks.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Sure. So, I mean, we point you first to, I just want to show something on page 10 of the slide deck. You can see that we've been running down our CD portfolio over the last several quarters, and we really wanted to push that down, knowing that there might be a point at which the rate environment would become more favorable. So it's down, you know, year over year, down by $433 million or about 16%, and that was to position us for this cycle. I'll let Joe talk a little bit about the recent repricings, and then Pat can comment about margin.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

We've been fortunate. I think early on, there was the expectation that you'd have to be a little bit more wary about reducing rates, but we were aggressively reducing rates primarily by at least the fifty basis points that the Fed did, and we've been able to retain well over 95% of the maturing CDs that we wanted to retain, and the client's been pretty stable. So we're happy about that, and we're continuing to grow client base, which is even more important and valuable because it allows us to lessen our dependence on any broker business. Pat, anything you want to add to that?

Patrick Barrett
CFO at OceanFirst Financial Corp

Yeah, I would, I would just say first, thank you to my boss for letting me talk about projected net interest margin, which you guys know is my least favorite thing to do. Look, I think there's a whole range of, of scenarios in the near term about what further rate cuts we get, how quickly we, and importantly, kind of the industry, are able to reprice and roll deposits down, combined with growth and what the mix of that growth is. So I think right now, I would say that we're, we're kind of cautiously optimistic that we could see some very modest expansion as we move forward, but that could be, that could go either direction one way or the other. But I think it's going to be fairly stable for the near term.

Patrick Barrett
CFO at OceanFirst Financial Corp

NII is probably the more important thing to talk about, the dollars of revenue. And we do feel pretty good that we're going to start to see steady, but not, like, wild growth in that as we move into and through next year. And again, a fair amount of that will be dependent on the level and the volumes of growth that we're able to achieve. So everything's lined up right now. Things look good, but it'll be a lot easier once we start to get some momentum on growth and start to see the effect of the repricings that we're all trying to do right now with deposits. And I think just about everybody tried to take 100% repricing down on the first 50 basis point rate cut from the Fed.

Patrick Barrett
CFO at OceanFirst Financial Corp

We'll see how that plays out, in the fullness of time.

Daniel Tamayo
Daniel Tamayo
Vice President and Equity Research Analyst at Raymond James

All right. I appreciate all that color from everyone. Maybe a follow-up. You know, Chris, you touched on in the release, capital deployment opportunities kind of being the crux of five-- you know, how much of the five X, maybe think about it as a plug there. But if you could just talk about a little bit about those capital deployment opportunities that you're seeing and considering.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Sure. So I think what we're leaning towards is that as growth comes on board, the best thing we can do is use that, we think, a little bit of a cushioning capital, to pick up our growth rates, organic growth rates. The second thing we're thinking about, and Pat referenced it in his comments, we have some repricing instruments next May, and there's a lot of different things we can do with those. But at current rates today, they would be a little bit expensive, so we're keeping a little capital on the side to give us some optionality. We may decide to redeem some or all of that over time. It's a pretty effective use of capital.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

You know, look, we always look at earn backs when we buy anything, including our own stock, and as our prices appreciated, the earn backs have lengthened a little bit. They're still pretty favorable, but for now, we're gonna keep the capital for organic growth and optionality around the repricing instruments next May.

Daniel Tamayo
Daniel Tamayo
Vice President and Equity Research Analyst at Raymond James

Yeah. Thanks for that reminder. That's all for me. Appreciate the color.

Operator

Thank you. We now have Tim Switzer with KBW. You may proceed.

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Hey, good morning. Thank you for taking my questions.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Good morning, Tim.

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Could you guys clarify one thing for me? You know, I'm sorry if I missed it, but what impact do you expect on your non-interest income from the mortgage business acquisition? Your guidance references a $2 million-$3 million increase in quarterly expenses in the other income section. I don't know if that's a typo or if I'm misunderstanding something there.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Well, you're not misunderstanding, Tim. The. So there's two things, though, I want to be clear. The guidance would incorporate not just the additional expenses from Garden State Home, but also Spring Garden, which is the lender we were talking about previously. So it's a combination of those two things, and actually probably a little more Spring Garden than Garden State. The best way to think a bit about it would be this: that's a business that we expect over the course of the next year, will be running at a net contribution to profitability. So you may see some volatility in expenses, because it's a commission-based sales force that as volumes come in, we're going to pay more money, too.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

But you should really see a very strong correlation between that and fee income on the gain on sale business, so that, there'll be a little bit of volatility to it. It's not going to be a giant number, so it's not going to represent a significant amount of our earnings in one direction or the other. But there will be some quarter-to-quarter volatility, predominantly based on rates and refinances and-

Patrick Barrett
CFO at OceanFirst Financial Corp

Seasonality.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Yeah, seasonality. So that guide would include kind of the baseline of the expenses we have today. Certainly in 2025, we expect to be turning a profit on those expenses. It's, you know, it's one of those things that-

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Okay, great.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

You guys all know this. The efficiency ratio of that business is high, but the capital return on that business is high as well. So we're kind of trading off one versus the other.

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Yeah, no, I think that makes sense. For Spring Garden, just to be clear, we shouldn't be modeling a large pickup in the loan balances since they're already on your balance sheet, right?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Correct. It's really the difference between what was on our balance sheet and the 145. So, you know, net, it's going to be about a $60 million pickup from that activity, plus other loan growth during the quarter.

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Okay. I understand and can you provide any details on maybe what the loan yields are on that portfolio, and then how you expect those to change over time as rates move down?

Patrick Barrett
CFO at OceanFirst Financial Corp

Tim, the loan yields typically today in today's market are about 10.5%-11%. I would imagine they'll trickle down as rates go down, but those yields will always be above where our yields are in the commercial bank, which is one of the attractiveness there. Their speed to market and their average tickets is under $500,000, typically in this 1-4 space in urban markets. And that's been a proven formula for them since they founded the company in 2016, and even prior to that, because Jay had a former business that he had sold previously. That's really been attractive to us. And of course, with our cost of funding, that gives us a much better return.

Tim Switzer
Tim Switzer
Vice President of Equity Research at KBW

Okay, great. That's all for me. Thank you, guys.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Thank you.

Patrick Barrett
CFO at OceanFirst Financial Corp

Thanks, Tim.

Operator

Thank you. We now have David Bishop with Hovde. Hovde, your line is open.

David Bishop
David Bishop
Director in the Research Department at Hovde Group

... Yeah, thanks for taking my question. Hey, sticking on the OpEx or the fee income guide. So, I think there's a slide where it says it should be breakeven, accretive to earnings no later than that first quarter of twenty-five. Chris, does that continue and I think the step up in expenses is, like, $5 million. Do we expect the fee income to is that implying that fee income should move up about, like, about this period? How we should think about just on a dollar basis, what fee income looks like?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Yeah, you're right, Dave, that the fee income and expenses related to Garden State would be roughly equivalent over time. You know, there'd be a sense of profit there. But the $5 million was a combination of Spring Garden and Garden State, so you're not going to see fee income going up by $5 million a quarter. It's probably about half and half, would be the best estimate I can give you. And again, a little bit dependent upon, you know, volumes and commission payments and all that. But think of, like, the $2.5 million of expenses and about that in fee income growing over time.

David Bishop
David Bishop
Director in the Research Department at Hovde Group

Okay, got it. And then saw the narrative, I guess, of cautiousness regarding the plateauing of average loan yields. I think it's been, you know, relatively flat here. You know, obviously saw the pipeline from the origination, those deals continue to creep up. Just curious, maybe why there's not, you know, more optimism in terms of, you know, overall loan yields to eventually, you know, pick up or continue to increase?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Yeah, there is optimism there, but it's just not in Q4. So, you know, we want to see how things play out with the recent rate cuts, see how much happens on the liability side. We feel we've got a little straighter path in understanding what loan yields are going to be, but they roll through, so it takes a little while. So, we have a combination of repricing in Q4, the stuff that's very short duration, either floating rate or repricing in the next ninety days. And then, to your point, we will have a creep of older loans that reprice every quarter, and over time, we'll be in a better position. But, Q4, we've got a lot of puts and takes, and we're just being a little cautious there. But I'd underscore Pat's comments earlier, though.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

From a net interest income standpoint, we're pretty comfortable this is the trough, and you're going to start to see that moving up. But in any given quarter, you know, a little mix shift here or there, or a little growth in one line or another, could cause NIM to be, you know, a couple basis points one way or the other. But net interest income, which kind of feeds our EPS in the short term, we think is moving in the right direction.

David Bishop
David Bishop
Director in the Research Department at Hovde Group

Okay, got it. I thought that was more of a longer-term projection there. Apologies. And then saw the increase, the amount of increase in Special Mention, substandard. Any color you can provide in terms of that migration increase?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Sure. I'd actually point everybody to slide seven, and just kind of talk through what the numbers are there. The good news is that we've always been pretty prompt about recognizing risk as it appears in our balance sheet. I'd categorize this number, and you can see it on the slide. It's 1.89% of total loans. This is well below our 10-year average of 2.4%. It's well below the industry and significantly below the peer group. I'd also note, and we call out on page 18, the experience of the Northeast in terms of credit cycles, which is typically far more benign. So, you know, we had a couple credits that we're keeping an eye on. We brought them down to special mention. That's what we do.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Things kind of come in and come out. There was no pattern to it and no particular concern or cluster around those credits. So it's not something that's bothering us.

David Bishop
David Bishop
Director in the Research Department at Hovde Group

Got it. Appreciate the color.

Operator

Thanks, Dave. Thank you, David. We now have Matthew Breese with Stephens. You may proceed.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Hey, good morning. I don't mean to beat a dead horse just on some of the fee income expense numbers here, but I just wanted to make sure I have it right. So we have $62 million in operating expenses this quarter. Pat, I think your commentary suggested this is kind of fully baked, but I just wanted to clarify because I know the presentation suggests that there might be a little bit of a higher run rate here. And obviously, there's an asterisk because there's going to be volatility and gain on sale income. But I just wanted to make sure we're kind of - there's not a near-term increase coming.

Patrick Barrett
CFO at OceanFirst Financial Corp

There is. So I think our fourth quarter guide on that is a range, 63-65. So that would, if you take the midpoint of that, it would be 64.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

But that's, Frank, I'm sorry. And that's because we closed Spring Garden on October first. So although the transaction expenses were in Q3, the run rate expenses will be in Q4. Does that make sense, Matt?

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Got it. Okay. Yep, I got it.

Patrick Barrett
CFO at OceanFirst Financial Corp

And also think about it this way: Both of these transactions are near-term accretive to earnings without getting into a debate or discussion around whether they improve our efficiency ratio or not. They're accretive to EPS in the near term, so we're seeing the expense load up front on Garden State because it takes forty-five to sixty days to build pipe and begin to sell, so we're not really seeing much moving the needle on the mortgage banking income and the fee revenue side, but we're seeing all the expenses, and similarly, we're outlining and guiding towards the expense side more on the Spring Garden than we are on the benefit from that, because we haven't dropped our outlook and guidance for twenty twenty-five.

Patrick Barrett
CFO at OceanFirst Financial Corp

We thought, frankly, it would probably be better for everyone involved, saying to you, for us to have clarity on the full year outlook inclusive of these, and be better informed to talk about that in January with our Q4 earnings.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

One little idiosyncrasy there, but just to put a point on it, we did not buy the pipeline of Garden State.

Patrick Barrett
CFO at OceanFirst Financial Corp

Right.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

So because we didn't buy the pipeline, they kind of started fresh with new applications.

Patrick Barrett
CFO at OceanFirst Financial Corp

Right.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

They've been producing all along, but we did not step into the pipeline. So everything we're originating is under our standards.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

How much of the $140 million resi pipeline as of September 30 would you attribute to this business, and we should think about as being kind of channeled into gain on sale?

Patrick Barrett
CFO at OceanFirst Financial Corp

So the pipeline at the end of the quarter of this, I think it was $169 million. $59 million of that came from Garden State, which is pretty good pretty quickly. Typically, you'd expect 80% of the Garden State originated stuff to be gain on sale eligible, and we're trying to work toward that similar number in our world, as well. I think it will take us a few quarters to get there, largely because we have a sales force that is very successful in a wide range of product set, including jumbo mortgages, which is a little thinner market for secondary sales.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Okay. I appreciate that. And then, Chris, obviously, there's still a lot of focus on kind of CRE concentrations, but, you know, anecdotally, we're hearing that competition, you know, from the insurance companies, agencies, and the bigger banks is picking up. And so there's the ability for this stuff to kind of refi off your balance sheet, and I think we're seeing some increased payoff activity this quarter. I was just curious if you could kind of comment on that, whether or not you're seeing that as well, and you're being given the opportunity to see some of this refi off the balance sheet selectively. And then secondly, I was really curious on commercial loans, the pipeline is 8.28% for yield. That just struck me as a little high.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Curious what's in there, if it's kind of a bend towards construction or some of the newer verticals you're in. Thank you.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Yeah. Those are really good questions. So first, you're spot on that the competitive market around commercial real estate is freed up. You're seeing private credit, you're seeing insurance companies, and let's not forget the GSEs. Freddie Mac is one of the biggest writers out there and has a voracious appetite for multifamily at standards that are looser than most bank standards. So there is an opportunity, I think, to see some rotation there. The way we're thinking about it is that this portfolio has worked really well for us. We continue to feel good about the credit quality. We will let a fair amount of credits roll off to folks that are willing to either offer looser structures or lower pricing or, you know, whatever that attraction may be.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

You'll see our CRE concentration slowly go down. It's not going to drop quickly, because we're also going to take the opportunity to do the things that we do well, and Spring Garden is a good example of that. We will rotate out of slightly longer duration CRE paper at a lower yield into shorter duration, you know, well-structured CRE credits at a higher yield. You know, as Joe mentioned, over a 10% yield on those. Similarly, as you look at the pipeline, we're focusing on short duration things in construction. Just to remind, I know we've said this before, when we get involved in construction, it's generally up and out of the ground. You know, we're not talking about land and entitlements and the things that are harder to put, excuse me, a risk evaluation on.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

When we know absorption in the market, and we're comfortable making that kind of credit assessment, then we're going to get into more floating rate, short duration, higher-yielding assets. So, so that's kind of just a trend. You'll see concentrations come down, but we're not going to run the portfolio off dramatically or quickly. We're going to rotate it into segments we think are going to pay us a better return on capital.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Got it. Okay. I had two other ones. The first one is, Pat, just—I just wanted to make sure I have prior kind of guidance correct, in that floating rate loans is about a third of the book. Just want to make sure that's still accurate. And I would love to hear your thoughts around expectations for loan and deposit betas, you know, as we enter a sustained kind of rate cutting period.

Patrick Barrett
CFO at OceanFirst Financial Corp

Sure. So, so yeah, that remains a pretty good proxy, I would say, for the earning assets in general, loans and securities. There's a little bit of a mix difference between securities versus loans, but a third, a third, and third is kind of what I carry around with me in my head, and some of that might be very short-term repricing of adjustable versus a true variable. But, for modeling purposes, I think that remains good. From a beta perspective, I mean, the, it, it's super early right now to give guidance on that. And again, we've just reduced our kind of rollover and promo rates by 50 basis points a few weeks ago.

Patrick Barrett
CFO at OceanFirst Financial Corp

It's super early days to tell, and I think that's kind of going to just have to play itself out in the fullness of time. But I'd just draw your attention kind of to the spot, the average versus the spot, costs of our deposits, which you do see, and that's on page 10 in the slides. So you do see the early signs, I guess, of deposit pricing coming down. Whether that comes down, you know, with a beta of a one or a beta of a 10% or something in between, relative to how quickly loan yields come down.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

... I think we'll feel a lot better talking about that as we get through the rest of this year and into the first quarter, I think.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

I appreciate that. And then just last one is on capital strategies. You know, you have two things going on, and in May, the reset date for your sub debt and preferreds hits, and it looks like both of those sources of capital will flip to, you know, right around 10%, maybe a little higher for the preferreds. And the second thing-

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Mm-hmm

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

It feels like the sub debt market has changed a little bit. You know, it used to be banks that predominantly bought the paper. I don't know if that's true today. But regardless, it feels like the sub debt might be at the cusp of where you would go to common. And I was curious, as we think about May, if that cost to capital is such a point where you might actually do that. Is there a likely outcome here where it's not re-upping fully in sub debt, but we see some common component?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

You're, you're right to point that out, that that could be an option when the instruments reprice. And we're going to make that evaluation based on what's the right mix of capital and the cost of capital. One of the things we're, we're doing right now is making sure we have everything lined up so that we have every option available to us. We've been watching the sub debt market this year. There are some banks buying sub debt, but frankly, we've seen some of the sub debt issues appear pretty high priced to us. You know, and, and I don't know that we would have any interest in doing something that had a coupon or the coupons you're seeing in the last few deals.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

And we want to keep the optionality of being able to just pay it down on our own. So, and that may not mean we pay the whole thing off at its repricing date, but we may chunk it down at that point, and then in a couple of quarters afterwards, just redeem it. So we're preparing to have the option to, you know, take it out using earnings, take it out using capital we've built up over time, or if the capital markets are functioning well, and we think there's well-priced instruments out there, we'd look at the capital stack. That said, we're kind of loath to issue common unless there's a really, really good reason, so it would have to be compelling.

Patrick Barrett
CFO at OceanFirst Financial Corp

It's not a particularly-

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Appreciate all that.

Patrick Barrett
CFO at OceanFirst Financial Corp

It's not a needle mover from an earnings perspective either. I think if you look at the magnitude, you know, both of those reprice with like 500-600 basis points higher than benchmark yields. But you got to remember that we issued right after the lockdowns were starting with COVID, and so things were a bit dislocated at that point. But even if we look at going up 500-600 basis points of coupon on both of those instruments, we're talking about $10 million pre-tax on an annual basis for both of those combined. So doing nothing is not going to be a huge earnings drag.

Patrick Barrett
CFO at OceanFirst Financial Corp

So as Chris said, we feel good about having a lot of optionality, and seeing how bank spreads hopefully recover, what pricing looks like, and being opportunistic about it. But we certainly don't want to do it when bank spreads are still at all-time highs and people are issuing sub debt at, you know, nines and tens. That's not an attractive place to get into the market.

Matthew Breese
Matthew Breese
Managing Director and Senior Equity Research Analyst at Stephens Inc

Understood. All right, I'll leave it there. Thank you very much.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Thanks, Matt.

Operator

Thank you, Matt. We now have Manuel Navas with D.A. Davidson. Your line's open.

Manuel Navas
Managing Director at D.A. Davidson Companies

Hey, good morning.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Good morning.

Manuel Navas
Managing Director at D.A. Davidson Companies

A lot of my questions have been answered, but I just wanted to kind of follow up on what's kind of the customer profile driving the strong deposit growth, retail versus commercial? It seems like it's not high yield savings. You had a little bit of retail CD growth. Like, can you just kind of walk through that a bit?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Yeah, I think if I were to give you just a broad trend, you know, over the years, we had probably given up a little bit of wallet share in the consumer business to banks that were paying higher yields. For many years, I think our highest consumer yield was, like, fifteen basis points. And so when the market turned a little bit and we were in a position to offer any rate at all, we were able to pull back some of that wallet share. So the single biggest component would be wallet share in the consumer business, but we've made gains kind of across the board. You know, our government banking business has done well, commercial banking has done well.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

So it's a little bit everywhere, but probably the single biggest source of it would be a wallet share gain in our consumer households, which is nice to see. We do operate in very dense markets where there's a tremendous amount of deposits available. So we're able to kind of pull that in when we became a little bit of a rate payer. And early indications are we're holding that fine, even with the repricings that we've done. And our repricing started actually before the Fed moved, so we've got a little bit of experience there. It's too early to call a particular beta, but the consumers are hanging in there with us.

Manuel Navas
Managing Director at D.A. Davidson Companies

And so the PNI team deposit ramp hasn't really hit yet. This was great growth just from more on the retail franchise. Is that the right summary?

Patrick Barrett
CFO at OceanFirst Financial Corp

Yeah, we've seen some increase in the new bankers that we've brought in, but not to the extent that we expect going forward, which I think is positive.

Manuel Navas
Managing Director at D.A. Davidson Companies

Okay. On the fee businesses, they seem to offer nice revenue diversification. They appear to be a little bit more standalone. Can you talk about how they offer, if at all, any synergies?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

You know, I think that there's an opportunity. Anytime you identify a company that has specialized and done something really well because they do just one thing, if you're thoughtful about it, you're adding talent and capabilities that should help improve kind of the DNA of your company. And the people kind of inspire you to be better. So, there's no question in both of these cases, we're bringing talent on. There are virtually a very few expense saves in either of these deals. We're bringing everybody on, we're bringing their capabilities on, their competencies, their systems and approaches. So, in a way, you know, we hope to make them a little better by giving them a platform and a balance sheet and attributes they don't have today.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

And we hope that they're going to make us a little better in thinking about customer response times and things like that. The, probably the biggest cultural commonality between Garden State and Spring Garden is this focus on speed and the focus on delivering for your customers answers and credit facilities at a very rapid pace, and they get paid for doing that. And you know, we could always be, you know, you can always be faster. Customers are never going to say, "I wanted to wait another few days to get my loan approved." So, so I think that's going to help us just in DNA and culture and mentality. But Joe, anything else you'd add? Yeah, I'll add one more thing, and probably just a good case in point.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

As you grow, as we've grown, it's much more difficult for a bank our size to do what I consider to be very small construction loans. This is what Garden State or this is what Spring Garden does very well. So, look, it's not going to be a watershed volume of activity, but those clients that maybe had looked to us to do very small construction under $300,000, $400,000, or $500,000, now we have an avenue and a speed to market that's a lot faster than we can be. So sometimes you got to admit where you're good and where you're not so good, and I think this is going to be a benefit to us.

Manuel Navas
Managing Director at D.A. Davidson Companies

I appreciate that extra color. Can I shift briefly to the NIM and NII? What's embedded in that forecast for kind of a stable near-term NIM, steady NII growth in terms of rates? And what is the sensitivity if the Fed changes its pace, skips a meeting, or goes back to a fifty basis point cut? Just kind of thoughts around that sensitivity to different types of rate scenarios.

Patrick Barrett
CFO at OceanFirst Financial Corp

Yeah, we pretty much don't deviate from what the street or some combination of the street and the dot plot say. So near term, we've still got the likelihood of a November and December rate cut, and then steadily cutting through twenty twenty-five down to a terminal of, I think, three fifty by the beginning of twenty twenty-six. So there's nothing there that we're taking a position on. From a sensitivity to either the doubling up or the skipping of those rate cuts, we did some quick math when we got fifty basis points versus twenty-five basis points in September for that initial rate cut. And kind of the bid-offer on that was about $500,000 a quarter from an acceleration perspective.

Patrick Barrett
CFO at OceanFirst Financial Corp

But again, that's really just a timing question if you ultimately assume that the Fed is going to lower rates back down to, you know, something in the 3.50%, 3.25%, 3.50% terminal rate range. So over the long term, it doesn't have much impact at all. If rates come down a little bit faster, or a little bit slower, it probably is not going to materially change the margin percentage either, although we might get a little bit more compression or expansion in a given quarter, but the dollars associated, that really, shouldn't be significant. We're a little bit more asset sensitive this quarter than we were last quarter, but we still remain fairly close to neutral.

Manuel Navas
Managing Director at D.A. Davidson Companies

Thank you. I appreciate that.

Operator

Thank you. Our final question comes from the line of Christopher Marinac with JMS. You may proceed.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Hey, good morning. Just wanted to ask about possible credit upgrades with lower interest rates, and what's the kind of glide path for that? You know, could you see some now, and how long does it take as next year develops? You know, it's a good question, Chris. The portfolio is not that sensitive to rates. It'd be more sensitive, more sensitive to occupancies and, and leases and tenants and all that, which, by the way, we stress and we don't have much concern about. Around the margin, you might see a few of these credits that are in, you know, special mention, criticized, classified, able to kind of carry. But, our experience has been that, you know, virtually everything that has rolled, even at today's rates, has rolled without stress.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

I mean, the DSCRs may come down a little bit, but in many cases, especially outside of office, you've seen rents increase over time. So these are loans we underwrote in 2019. They're coming due, and the rents might be up 30%, so they're handling the interest rate stress pretty easily. So it's maybe a handful of credits, but we don't have a lot that we're watching anyway, so it wouldn't make a significant difference. Probably de-risks the 2025 maturity wall a little bit. It would also play into other folks coming into the market. I know there was a question earlier. What we're finding is that more and more people are stepping into the market, especially private credit. So there are takeouts for a lot of these loans.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

So, you know, I really think probably the worst concerns around CRE are behind us. Although, you know, you always have to be thoughtful. There will be, you know, a credit here and there from time to time that has an issue. So you want to be very humble about these things.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Great. That's helpful. Thanks for that background, Chris. And just to follow up about the DC marketplace, as you continue to expand and hire more people and just do more business there, would that market become bigger over time than, say, Philadelphia or, or others that you've, you know, been in for several years?

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

It certainly could. It's a giant, robust market, you know, over five million people in that metropolitan area. Our focus there, though, is in C&I, so the speed at which it grows may be a little bit slow, just because it takes a little while to move over C&I clients. It takes them a little while to move over balances, and then you have the whole utilization, where your better clients may not draw a lot of credit in the short term. But we've been very pleased with the talent that's joined us in that area. Anything you'd add, Joe?

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

No, I think you hit it right on the head. I was going to mention that the focus is in the operating business lines there, not CRE, which is probably a good thing in this day and age.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Sounds good. Thank you both. Appreciate it.

Joe Lebel
Joe Lebel
President at OceanFirst Financial Corp

Thanks, Chris.

Operator

Thank you. I can confirm that does conclude the question and answer session, and I would like to hand it back to Chris Maher, CEO of OceanFirst, for final remarks.

Christopher Maher
Christopher Maher
Chairman and CEO at OceanFirst Financial Corp

Thanks very much. We appreciate your time today and your continued support of OceanFirst Financial Corp. We offer our best wishes to all for the upcoming holiday season, and we look forward to speaking with you again after our fourth quarter results are published in January. Thank you.

Operator

Thank you all for joining the OceanFirst Financial Corp. Q3 2024 earnings release conference call. I can confirm today's call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.

Executives
    • Christopher Maher
      Christopher Maher
      Chairman and CEO
    • Alfred Go
      Alfred Go
      SVP of Corporate Development and Investor Relations
    • Joe Lebel
      Joe Lebel
      President
Analysts
    • David Bishop
      Director in the Research Department at Hovde Group
    • Manuel Navas
      Managing Director at D.A. Davidson Companies
    • Tim Switzer
      Vice President of Equity Research at KBW
    • Matthew Breese
      Managing Director and Senior Equity Research Analyst at Stephens Inc
    • Frank Schiraldi
      Managing Director and Senior Research Analyst at Piper Sandler
    • Christopher Marinac
      Director of Research at Janney Montgomery Scott
    • Patrick Barrett
      CFO at OceanFirst Financial Corp
    • Daniel Tamayo
      Vice President and Equity Research Analyst at Raymond James
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