OceanFirst Financial Corp. (OCFC) Q3 2024 Earnings Report, Transcript and Summary

Good morning, and thank you all for attending the OceanFirst Financial Corp. Third Quarter '24 Earnings Release Conference Call. My name is Breeka, 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, OceanFirst. Thank you. You may proceed, Alfred.

Thank you very much. Good morning, and welcome to the OceanFirst third quarter 2024 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.

Thank you, Alfred. Good morning, and thank you to all who've been able to join our third quarter 2024 earnings conference call. This morning, I'm joined by our President, Joe Lebel; 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. Operating expenses increased by $5 million to $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 to 89-days past due as a percentage of total loans receivable or 28 basis points and 15 basis points, respectively [Technical Difficulty] loan recoveries of $88,000 for the quarter. Capital levels continue 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. 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 30, 2024, we repurchased nearly 1.4 million shares at a weighted average cost of $15.38. Further on capital management, the Board approved a 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. 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.

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. 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 remained strong with nonperforming 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 commitments. 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 increase linked quarter was non-recurring 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.

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 rate 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 talked about, nearly $2 million of that was non-recurring. Our new projected quarterly run rate, including the full quarter impact of both acquisitions is expected to be in the $63 million to $65 million range, which you should see reflected in the fourth quarter. 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 security 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, we want to maintain a posture of readiness should we choose to do any refinancing issuance. At this point, we'll begin the question-and-answer portion of the call.

[Operator Instructions] Your first question comes from Frank Schiraldi with Piper Sandler. You may proceed.

Good morning.

Hey, Frank.

I just wanted to ask the two acquisitions, 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 real estate bridge lending group. And their specialty and maybe expectations around size as that business ramps up on the balance sheet?

Sure, Frank. You hit it on the head about Garden State, 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 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, ran it really well, will be joining us and we'll continue to run it for us. 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 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. But in terms of the growth rate in the U.S., 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 probably 10% a year. I wouldn't expect much more than that.

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

About $145 million, Frank.

Okay. And I guess just last question on that. Just kind of curious, obviously, it 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, where you obviously had a pretty significant change in inflation levels, since then and interest rate levels. So just curious about how it's -- is that stuff still on the balance sheet that came over? What kind of -- what sort of years where these this $145 million in footings were originated?

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, it tends to be around 16 to 18 months. So really, the stuff that's on the balance sheet now is originated in the last two years. The credit experience has been spectacular, and they're able to, in most cases, are 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, bridge business. And almost all so folks that they know and have done multiple projects over the years. So very modest credit costs, a very strong net interest margins. And they have not missed a beat in the last couple of years.

Got you. Okay. Sorry for thinking about it incorrectly in terms of the stuff already being on the balance sheet. So now when I'm thinking about loan growth in the fourth quarter, the idea that we'll see some pick up here. I thought some of that was the acquisition. But in terms of still seeing some pick up here Joe, just kind of what are your thoughts in terms of do you think there's just a decent amount of pent-up demand? And once we get through the election, we'll see some strong 4Q catch-up or 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 run all the customers. Just curious if you can give a little color around expectation of that pickup in 4Q?

Sure. I think -- I hate to say it's a 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, the C&I bankers are going to need three or four months to sort of get that footing, talk to a client base that they've had for years and sell them on the OceanFirst proposition. And Chris and I have been pretty active in meeting prospects with those bankers. So some of those guys that we've recruited early in the year has started to hit their stride and you're seeing that in some of the numbers, seeing it in the pipeline. You're also seeing clients that have navigated through the years, especially through this year, especially looking at it in the 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 '25, which is a positive. I don't think we've seen all of that in the pipeline yet, though. And then, of course, I think 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. We're trying to obviously sell 80% of that originations in the secondary market, but we're happy to see that income.

Okay, thanks for the color.

Thanks, Frank.

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

Thank you. Good morning, everyone.

Good morning.

Maybe we start just on the funding side. You talked a little bit about how the -- 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 in the fourth quarter and -- with future rate cuts? Thanks.

Sure. So I mean, I would 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 fire will become more favorable. So it's down 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 repricing, and then Pat can comment about margin.

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 50 bps that the Fed did. So -- and we've been able to retain well over 95% of the maturing CDs that we wanted to retain. And the client has 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. Anything you want to add to that?

Yes. I would just say, first, thank you to my boss for letting me talk about projected net interest margin. You guys know it's my least favorite thing to do. Look, I think there's a whole range 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 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. 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 is lined up right now, things look good, but it will be a lot easier once we start to get some momentum on growth and start to see the effect of the repricing 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. We'll see how that plays out in the fullness of time.

All right. I appreciate all the color for everyone. Maybe a follow-up. Chris, you touched on in the release capital deployment opportunities kind of being the crux of -- how much of the buybacks, 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.

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 cushion in capital to pick up our growth rates -- organic growth rates. The second thing we're thinking about, and Pat referenced 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, is a pretty effective use of capital. So -- and look, we always look at earn backs when we buy anything, including our own stock. And as our price is appreciated, the earn backs have lengthened a little bit but still pretty favorable, but we're going to keep the capital for organic growth and optionality around the repricing instruments next May.

Yes, thanks for that reminder. That's all for me. Appreciate the color.

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

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

Good morning, Tim.

Could you guys clarify one thing for me. I'm sorry if I missed it, but what impact do you expect on your noninterest income from the mortgage business acquisition? Your guidance references a $2 million to $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.

You not misunderstanding, Tim. 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 that's a combination of those two things and actually probably a little more Spring Garden than Garden State. The best way to think of it about it would be this. That's a business that we expect over the course of the next year, we'll 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. But you should really see a very strong correlation between that and fee income on the gain on sale business. So that there will 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, 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 one of those you guys all know this. It's -- 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.

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

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

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

So Tim, the loan yields typically today in today's market are about 10.5% to 11%. And 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 ticket is under $500,000. And typically in this 1 to 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 we had sold previously. So that's really been attractive to us. And of course, with our cost of funding, that gives us a much better return.

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

Thanks, Tim.

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

Yes, thanks for taking my question. Hey, if you want to see the OpEx and the fee income guidance. So I think the there's a slide where it is, it should be breakeven accretive to earnings, no later than first quarter '25. Chris, does that continue? And I think those step up in expenses is like $5 billion. Should we expect the sort of fee income -- is that implying that we intend to move up like about in the period and how we should think about just on a dollar basis what the looks like?

You're right, Dave, that the fee income and expenses related to the Garden State would be roughly equivalent over time, there'll 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 volumes and commission payments and all that. But think of like the $2.5 million of expenses and about that and fee income growing over time.

Okay. Got it. And then so the narrative, I get some cautiousness regarding the plateauing of average loan yields relatively flat here. Obviously, you saw the pipeline of the new origination, those deals continue that. to creep up, just curious maybe why there's not more optimism in terms of the overall loan you have to eventually pick up or continue to increase.

Yes. There is optimism there, but it's just not in Q4. So we want to see how things play out with the recent rate cuts, see how much happens in 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 90-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, 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, a little mix shift here or there or to grow in one line or another could cause NIM to be a couple of 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.

Okay. Got it. I thought that was more of a longer-term projection there. Apologies. And then -- so the increase, the amount of increase in special mention sub-standards. Any color you can provide in terms of that rate quarter.

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 1.8% 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 when we call out on age 18, the experience of the Northeast in terms of credit cycles, which is typically far more benign. So we had a couple of credits that we're keeping an eye on. We brought them down to special mention. That's what we do. Things kind of come in and come out. There was no pattern to it and no particular concern or cluster around those credits. It's not something that's bothering us. I'd appreciate the color.

Thanks, David.

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

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 in gain on sale income but I just wanted to make sure we're kind of -- there's not a near-term increase coming.

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

Sorry -- that's because we closed Spring Garden on October 1. So although the transaction expenses were in Q3, the run rate expenses will be in Q4. does that makes sense?

Yes. I got it.

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. The -- so we're seeing the expense load up front on Garden State because it takes 45 to 60 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 2025. We thought, frankly, it would probably be better for everyone involved. [Indiscernible] you for us to have clarity on the full-year outlook, inclusive of these and be better informed to do to talk about that in January with our Q4 earnings.

One little idiosyncrasy there, but just to put a point on it, we did not buy the pipeline of Garden State. So because we didn't buy the pipeline, they kind of started fresh with new applications and they were producing all along, but we did not step into the pipeline. So everything we're originating is under ours, but under our standards.

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?

So the pipeline at the end of the quarter of -- 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 gained 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.

Okay, I appreciate that. And then, Chris, obviously, there's still a lot of focus on kind of CRE concentrations. But anecdotally, we're hearing that competition from the insurance companies, agencies, some of 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 your balance sheet selectively. And then secondly, I was really curious on commercial loan. The pipeline is $828 for yield. That just struck me as a little high, curious what's in there, if it's kind of a bend towards construction or some of the new verticals you're in? Thank you.

It's a really good question. 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 whatever that attraction may be. 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, well-structured CRE credits at a higher yield. As Joe mentioned, it's over a 10% yield on those. Similarly, as you look at the pipeline, we're focusing on short duration, things in construction. And 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. We're not talking about land and entitlements and the things that are harder to put a risk evaluation on when we know absorption in the market, and we're comfortable making that kind of credit assessment, and we're going to get into more floating rate, short duration, higher-yielding assets. So that's kind of just a trend. You'll see -- you will 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.

Got it. Okay. I had two other ones. The first one is Pat, I just wanted to make sure I have prior kind of guidance correct and that floating rate loans is about one-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 as we enter a sustained kind of rate-cutting period.

Sure. So yes, 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 one-third, one-third, one-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'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. 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 average versus the spot cost 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 with the beta of one or a beta of a 10% or something in between relative to how quickly loan yields come down I think we'll be able to -- 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.

I appreciate that. And then just last one is on capital strategies. You have two things going on in May, the reset date for your sub-end preferred hits. And it looks like both of those -- the sources of capital will flip to right around 10%, maybe a little higher for the preferreds. And the second thing is if you like the subject bucket has changed a little bit. It used to be banks that predominantly bought the paper, I don't know if that's true today. But regardless, it feels like -- 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 of capital is such at a point where you might actually -- is there a likely outcome here where it's not re-upping fully in sub debt, but we see some common components.

I don't -- you're right to point that out 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 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 appeared pretty high price to us. And I don't know that we would have any interest in doing something that had a coupon of the coupons you're seeing in the last few deals. 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 take it out using earnings, take it out using capital we've built up over time or the capital markets are functioning well, and we think there's well-priced instruments out there. We 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.

And it's not a particularly -- it's not a needle mover from an earnings perspective either. I think if you look at the magnitude, both of those reprice with like 500 to 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 or 600 basis points coupon on both of those instruments. We're talking about $10 million pretax on an annual basis for both of those combined. So doing nothing is not going to be a huge earnings drag. So as Chris said, we feel good about having a lot of optionality in 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 $9 million and $10 million. That's not an attractive place to get into the market.

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

Thanks, Matt.

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

Hey, good morning.

Good morning.

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?

I think if I were to give you just a broad trend. 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 yields -- -- for many years, I think our highest consumer yield was like 15 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. Our Government Banking business has done well, Commercial banking has done well. 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. Early indications are we're holding that fine even with the repricing that we've done and argue pricing 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.

And so the C&I deposit ramp hasn't really hit yet. This was great growth just from more on the retail franchise. Is that the right number?

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

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?

I think that there's an opportunity. Any time 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 that 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 -- there are 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, we hope to make them a little better by giving them a platform and a balance sheet and attributes they don't have today. And we hope that they're going to make us a little better in thinking about customer response times and things like that. But 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 can always be faster. Customers are never going to say, I wanted to wait another few days to get my loan approved. So I think that's going to help us just in DNA culture and mentality, but Joe, anything else you'd add?

Yes, I'll add one more thing. And probably just a good cation point. 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 Gardens -- 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.

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-ish, in term of NIM, steady NII growth in terms of rates? And what is the sensitivity that changes its pace skips a meeting or goes back to 50 basis point cut, just kind of thoughts around that just to be the different types of rate scenarios.

Yes. We pretty much don't deviate from what the Street or some combination of the Street and the dot plot -- so near-term, we've still got the likelihood of a November and December rate cut and then steadily cutting through 2025 down to a terminal of, I think, [350] (ph) by the beginning of 2026. 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 50 basis points versus 25 basis points in September for that initial rate cut. And kind of the bid offer on that was about $0.5 million a quarter, from an acceleration perspective. But again, that's really just a timing question if you ultimately assume that the Fed is going to lower rates back down to something in the [350 -- 325, 350] (ph) 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, 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.

Thank you. I appreciate that.

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

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? Could you see some now? And how long does it take as next year develops?

It's a good question, Chris. The portfolio is not that sensitive to rates. It will be more sensitive to occupancies and leases and tenants and all that. Which, by the way, we stress and have much concern about. Around the margin, you might see a few of these credits that are in special mention, criticized classified able to kind of carry. But our experience has been that virtually everything that has rolled even to base rates has rolled without stress. I mean the SCRs 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 derisks the 2025 maturity wall a little bit. It would also play into other folks coming into the market. I know there's 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. So I really think probably the worst concerns around CRE are behind us, although you always have to be thoughtful. There will be a credit here and there from time to time that has an issue. So you never -- we want to be very humble about these things.

Great. That's helpful. Thank for the background, Chris. And just a 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 others that you've been in for several years?

It certainly could. It's a giant robust market. Over 5 million people in that metropolitan area. Our focus there, though, is in C&I. So the speed at which it grows maybe 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?

I think you hit it right in 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.

Sounds good. Thank you both. Appreciate it.

Thanks, Chris.

Thank you. That does conclude the question-and-answer session. And I would like to hand back to Chris Maher, CEO, for his final remarks.

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.

Thank you all for joining the OceanFirst Financial Corp Q3 '24 earnings release conference call. The time reserved for this call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.