OceanFirst Financial - Q2 2024
July 19, 2024
Transcript
Operator (participant)
Good morning, all, and thank you for attending the OceanFirst Financial Corp Q2 2024 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. Please press Star followed by one to ask a question, and if you wish to remove that request at all, please press Star then two. For operator assistance, please press Star zero. Thank you. I would now like to pass the conference over to your host, Alfred Goon, Investor Relations at OceanFirst Financial Corp to begin. Thank you. You may proceed, Alfred.
Alfred Goon (SVP of Corporate Development and Investor Relations)
Thank you, Brika. Good morning, and welcome to the OceanFirst second 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 Chief Executive Officer.
Christopher Maher (Chairman and CEO)
Thank you, Alfred. Good morning, and thank you to all been able to join our second quarter 2024 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. Anticipating that there may be some questions regarding the impact to bank operations as the result of the global CrowdStrike IT issue, I'm pleased to report that the bank is operating with minimal disruption.
We've had no issues with customer access to our online banking, mobile banking, customer care center, OFB Connect, which is our mobile platform for business clients, ATM machines, card and wire systems. Our branches are open and serving customers as well. We appreciate the hard work of our IT team this morning. Our financial results for the second quarter included GAAP diluted earnings per share of $0.40. Our earnings reflect net interest income of $82 million, representing a decrease compared to the prior quarter of $86 million, as the yield curve remains inverted and we experienced elevated paydowns in higher-yielding loans. Operating expenses remained stable at $59 million. Asset quality metrics continued to remain strong. Criticized and classified assets, which were already lower than our peers and below our long-term averages, decreased 15% or $25 million to $143 million.
The quarter included a net ACL build of $1.6 million and net charge-offs of $1.5 million, which includes a $1.6 million charge-off on a single commercial real estate relationship that was moved to non-accrual in the third quarter of 2023. The remaining exposure for this credit is $7.2 million, and the sale of the collateral is contracted to settle during the third quarter. Capital levels continued to build, with our estimated Common Equity Tier 1 capital ratio increasing to 11.2% and continued growth in tangible book value, which increased by 30 cents to $18.93. Tangible book value per share has grown 7% over the past year.
Capital growth was sustained this quarter, while the company repurchased an incremental 338,000 shares under the company's repurchase program. Through June 30, 2024, we have purchased nearly 1.3 million shares at a weighted average cost of $15.35. The company has 1,638,524 shares available for repurchase under the authorized repurchase program. Further on capital management, the board approved a quarterly cash dividend of $0.20 per common share. This is the company's 110th 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 the back half of the year into 2025.
At this point, I'll turn the call over to Joe to provide some more details regarding our performance during the second quarter and our efforts to increase organic growth rates.
Joseph Lebel (President)
Thanks, Chris. The bank's loan pipeline of $259 million reflects a marked increase over the $137 million in Q1 and was the highest in the past five quarters as the bank continues to pivot our organization engines or origination engines to growing and expanding C&I lending relationships from our historical CRE focus. The recruitment of C&I lenders continues with the addition of five new bankers this year and four offers accepted or pending, with additional recruiting ongoing. This includes a new team build-out with a focus on middle-market C&I and government contracting. We've also added a middle-market banker well known in the grocery space, which should expand opportunities for us in that industry.
While originations of new loans were modest in Q2, I expect growth in the C&I business in the second half of the year, which will bring with it new deposits and fee income while offsetting any small decline in CRE. For the quarter, our C&I loan balances were impacted by five borrowers who paid down or paid off loans in the normal course of business in the amount of $86 million. Overall, the impact of declines in loan and other earning asset balances accounted for approximately $2 million of our decline in net interest income from the prior quarter. Our CRE portfolio continues to perform well, and we remain committed to methodically rebalancing our commercial loan portfolio towards C&I relationships over time. Moving to deposits, balances declined by approximately 2%, as non-maturity deposits decreased 4% compared to the prior quarter.
This decline includes our continued runoff of brokered CDs of $142 million, and a decline in high-yield savings balances of $96 million, driven by targeted refinements to both marketing efforts and rates offered. As Chris noted, we booked a net ACL build of $1.6 million and net charge-offs of $1.5 million, representing a $3.1 million provision for credit losses during the quarter, increasing our coverage ratio to 0.69% of total loans. The net ACL build was driven by external macroeconomic forecasts in our modeling, rather than credit quality indicators within our own portfolio. As the quality metrics remain strong, with non-performing loans and criticized and classified assets representing only 0.33% and 1.42% of total loans, respectively.
Meanwhile, loans 30-89 days past due, as a percentage of total loans, remain minimal at 1 basis point. These metrics remain low compared to pre-pandemic levels and reflect strong credit performance in our portfolio. With that, I'll turn the call over to Pat to review margin and expense outlook.
Patrick Barrett (CFO)
Thanks, Joe, and good morning to everybody. Net interest income and net interest margin were $82 million and 2.71%, respectively, reflecting a combination of higher funding costs associated with a mix shift in funding and modestly lower average earning assets. Funding costs reflect cycle-to-date deposit betas of 42%, up from 40% in the prior quarter. We continue to believe that we're at or very near our trough in both net interest income and margin, but our outlook for both could shift modestly, subject to interest rates, loan growth or repayments, and funding mix trends in future quarters. We've said in the past that we're in a very conservative posture around new business growth and are unlikely to expand our long-standing risk appetites to stimulate short-term growth.
As Joe mentioned, we increased our provision by $3.1 million, increasing our coverage ratio to total loans to 0.69% and 0.75%, including purchase accounting credit marks. Despite strong asset quality metrics and stress test results, we've remained prudent and steadily continue to build reserve levels to address the uncertainty risk in the overall environment. It's worth noting that we've nearly doubled our allowance coverage ratio since adopting CECL four years ago, despite reporting an average of only seven basis points of annualized net charge-offs during that same time frame. Non-interest expenses remained flat from the prior quarter at $59 million. We continue to make every effort to hold operating expenses stable in the $58 million-$60 million per quarter range, but modest quarterly volatility may occur.
Finally, as Chris mentioned earlier, capital strength and deployability, with growth in our CET1 ratio to 11.2%, and we're pleased to report capital accretion even while repurchasing the 338,000 shares, or $5 million during the quarter. Looking ahead, we would not expect meaningful repurchases in the near term. At this point, we'll begin the Q&A answer portion of the call.
Operator (participant)
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. We will pause here briefly while questions are registered. We will take the first question from the line of Frank Schiraldi with Piper Sandler. You may proceed.
Frank Schiraldi (Managing Director)
Good morning.
Joseph Lebel (President)
Morning, Frank.
Frank Schiraldi (Managing Director)
Just curious to talk about the margin here. Obviously, you know, the quarter in terms of loan yield, you saw not as much pickup as you would otherwise expect, which you noted, and should be temporary. But just trying to think through some of the specifics around the potential pickup in loan yield as the book turns over here. And also what it might mean, you know, for credit migration in terms of criticized classified balances. So, like, $300 million or nearly $300 million in CRE repricing, I guess, in the back half of the year, you know, those are at rates, looks like 5.8%. Is that right? And then where are the new rates that you're repricing to?
Do you expect, you know, a decent amount of this will migrate off balance sheet?
Patrick Barrett (CFO)
Okay, Frank, there's a couple of things there. I'll give you a few things, then we'll probably turn it over to Joe for more comments about loans and Pat around margin. Just as we talk about margin first, I would say that the deposit, the modest increase in deposit costs was expected by us. That's just the trend we've been on, and we anticipated that.
... the pay downs of higher yielding loans surprised us a little bit on the earning asset side. So the compression we saw this quarter was more a function, at least from what we expected, of having the pay downs in loans that were yielding. That weighted average coupon of those loans is north of 8%. So we don't expect that to recur. That's actually probably a pretty good sign for credit. These are customers of ours who have, you know, have ample cash, and are using it to reduce their leverage. So that's a, that's a good sign. I'll, in a minute, ask Joe to talk more about perspective around the future loan growth and future loan bookings.
Joseph Lebel (President)
Just on your comment about the credit and the rolling CRE loans, we do a lot of stress testing, as you can imagine, on the CRE portfolio. One of the most critical stress tests we do is to take a look at the rolling loans, look at the coupon they're paying today, and their ability to debt service that coupon as they roll. And not just for the remainder of this year, but looking at the totality of 2025 and even into 2026. We have not identified any issue of any consequence around rolling loans. So we would expect that those loans would have the option to roll with us, pay current coupons, and stay at the bank. There is a little bit of a pressure valve in some places.
You know, there are market players like Freddie Mac who are still offering very attractive rates out there, so you might see some pressure on that. And frankly, in the CRE side, if we're getting paid, we're happy to keep it. These are good clients. But we're not going to compete on price in that market. You know, we're gonna be focused on C&I. So maybe I'd ask Joe to talk a little bit about the outlook for loan originations, Q3 and beyond, and then maybe Pat, anything you want to add to the margin discussion.
Patrick Barrett (CFO)
So I'll talk about just the outlook for loans. Look, Q2 was a pretty quiet quarter. It's evidenced by even our conservative approach in the way we report in terms of the pipeline as to where we're headed. The pipeline's very strong, and I anticipate that we'll have a significant increase in activity in Q3, and that should, you know, bode well for Q4 as well, not only with the existing team, but the team members that we're adding. So I think we had a very small amount, $56 million, in commercial closing in Q2, which is a very small number. I would anticipate that we're probably going to head back toward where we were in, you know, June of 2023. I think we had a much higher activity in that period of time. I think that's probably the path.
Then, yields are much better as well. I think that the pipeline shows that, you know, a weighted average yield of 7.98%. That's a function of both floating rate C&I and floating rate construction, which dominate the pipeline content.
Joseph Lebel (President)
I guess, this is Pat. On the margin, that we saw and that we're expecting, like Chris said, the pay downs were the part of the margin decline that was a little bit unexpected for us. Notwithstanding that, we would have seen three, maybe four basis points of compression on a combination of balance migration and rate change, but it was probably more mixed than anything else. On the funding side, we did continue to reduce brokered CD balances and some of our higher cost institutional. Our non-interest bearing balances, we were happy to see remain pretty stable. So that wasn't a surprise. I think going forward, notwithstanding the effect of any other pay downs, we may see that were accelerated or growth, then I think that our margin should be relatively stable.
But we're hopeful that we can generate some growth in the second half of the year that will be accretive to the margin, and that we don't see further payoffs and pay downs. Sorry for all the hopes.
Frank Schiraldi (Managing Director)
Got it. Right. So I guess, as you guys grow in the back half of the year, you feel like you're going to be in a place, I mean, that you're not going to see NIM contract further because of that growth. I mean, would you give up some NIM in the near term, maybe to, you know, do something like position yourself a little bit better for a down rate environment? Is there any potential to see loan growth here in the near term, kind of exceed deposit growth and fund with short-term borrowings, with the idea that maybe you could lock in some lower deposit costs down the road? Or, how do you think about, as you grow the loan book, the loan-to-deposit ratio here in the near term?
Christopher Maher (Chairman and CEO)
Well, I'll take that in two parts, Frank. It's Chris. There's no question that we're in the relationship business. We want to build those relationships. Every quarter, the margins may be a little bit better or worse because of that. So if we find the opportunity to add good relationships and we have to be a little more competitively priced, we'll do it. I'd kind of differentiate between net interest income and margin. We have our eye more focused on net interest income and building that. So if we had the opportunity to grow the loan book a little bit, improve net interest income, and we have to give up a point or two on NIM, that's a good trade-off, as long as we're bringing in high-quality clients and good, and good relationships. So, that's kind of the way we would look at things.
You know, we're confident. We've got the teams in place. We know how to grow the loan book. We're just taking our time and doing it very thoughtfully and methodically.
Frank Schiraldi (Managing Director)
Great. Okay. I appreciate the call-
Christopher Maher (Chairman and CEO)
Oh, Frank, one more. One other thing I just—you did mention the loan-to-deposit ratio. So our views have not changed on that. We're comfortable operating at or near 100% loan-to-deposit ratio. We like being in the 90s. If a quarter comes up where we're, you know, at 100 or 101, that's not a big deal for us, but we're not going to go to, you know, 110, 120. We're not going to push that measure. So we're comfortable we can originate deposits on loan growth in the second half of the year.
Frank Schiraldi (Managing Director)
... I appreciate it. Thank you for the caller.
Christopher Maher (Chairman and CEO)
Thanks.
Operator (participant)
We now have Daniel Tamayo with Raymond James. Your line is open.
Daniel Tamayo (Director of Equity Research)
Thank you, guys.
Christopher Maher (Chairman and CEO)
Morning.
Daniel Tamayo (Director of Equity Research)
Just, hey, good morning. Good morning. So I guess I just wanted to ask more about on that loan growth topic. You know, you mentioned you're trying to reduce CRE concentration. You've got the C&I initiatives. How should we be thinking about the CRE book growth, you know, in the next couple of years? I mean, is that a book that you expect to see modest growth, you know, stable? I mean, as it relates to the CRE concentration, like, how quick do you expect that to come down?
Christopher Maher (Chairman and CEO)
So, you know, I guess the best way to think about that is, first, we like our CRE book, notwithstanding kind of the market tone around CRE. So we're not in any rush to kind of move to a certain ratio. We don't have a target to kind of reduce it in that sense. But we also noted—you know, we would understand that we're going to be a more valuable franchise if we have a little more diversification in our asset mix. So over time, I think you're going to see the C&I proportion of our balance sheet increase. The CRE proportion remain flat, maybe decrease a little bit. And then within the CRE book, we're optimizing the best relationships we have.
Kind of an interesting time because of the contraction in CRE lending across the industry. Some of our best clients are bringing us really good and attractive opportunities. So we're still in the business of doing CRE lending, but proportionally, I would expect that to fall on the balance sheet, and you might see our investor CRE ratios decrease over time as well. But we're not in any mad dash to go, you know, to try and run off a portfolio of customers that we like.
Daniel Tamayo (Director of Equity Research)
Okay. Well, I appreciate that. And I recognize this is next one is a tricky question as it relates to the regulators, conversations and all that, but you know, I think the market was spooked clearly by the FFW, you know, the First Foundation equity issuance in the quarter and especially for banks with high CRE concentration. So, I mean, is there anything you can say or comment on, you know, regulatory discussions or pressure that they're putting on you guys or any kind of commentary around kind of what those conversations are like with the regulators would be interesting. Thanks.
Christopher Maher (Chairman and CEO)
Yeah. I understand the question. Well, we certainly can't talk about our conversations with our regulators. I, I think our financial statements, our outlook, and this discussion should give you some comfort. If you look at the way our portfolio is performed, if you look at the way we've handled concentrations, both geographically and by asset class, we don't have a lot of, of anything. We got a lot of stuff kind of put out in different geographies, different asset classes. We have not had a lot of CRE growth in the last couple of years. The growth factor is a really important consideration that, that regulators look at. If you're growing quickly, they're gonna. You're gonna attract more attention. So when you look at our credit metrics in our portfolio, we don't. We think they're holding up well. There's no cause for concern.
When you think about the stress testing that we share with you in our disclosures, that gives you a sense as to how, you know, we're thinking about interest rate risk over time in that portfolio, you know, that kind of maturity wall issue. So when you look at all that stuff, we've got a very good portfolio. We feel good about it. But the second part of our consideration is we've always been pretty proactive about capital. So, you know, we went, you know, 18 months ago into a mode of preserving and building capital. That was very thoughtful. We wanted to protect ourselves from what might occur in the environment, and we're now. We're really happy with where capital is. So I look at this two ways: If the portfolio is performing well, we feel good about it.
There's not a lot of pressure. Then you look at your capital ratios and see that you've built them nicely over the last couple of years. That's kind of the, what I would say is a kind of textbook way to manage your CRE concentration. We feel good about it, but I, I wouldn't make any comments attributable to our regulators.
Daniel Tamayo (Director of Equity Research)
I understood. I appreciate you giving me some commentary there, Chris. I'll step back. Thanks, guys.
Christopher Maher (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. The next question comes from Tim Switzer with KBW. You may proceed, Tim.
Tim Switzer (VP of Equity Research)
Hey, thank you for taking my questions. I had a quick follow-up on-
Christopher Maher (Chairman and CEO)
Mm-hmm
Tim Switzer (VP of Equity Research)
... your comments there about, you know, you're happy with where your capital is right now. You still have a good amount of capital, though, and you've been doing buybacks for the last two quarters. Why do you not expect to do any more the rest of the year? Is that, you know, given some sensitivities evaluation, given the recent rise of shares, or is it more you're trying to preserve capital for either a potential downturn or maybe opportunities on the M&A side?
Christopher Maher (Chairman and CEO)
First, I would say that there's no reason we wouldn't buy shares back. We're just thinking about the best use of capital, which is organic growth, and we're playing that off against the opportunity to repurchase shares over time. So I think as Joe builds out his teams and the pipelines build, then we get a sense to exactly how much capital we're going to use for organic, you know, growth. Any excess capital beyond that, you know, as long as we're trading below tangible book value, I think it's a pretty attractive, you know, financial decision for us to, to buy back shares. So, number one priority is supporting organic growth. Number two priority is, taking advantage of a valuation we think is attractive. So I, I wouldn't say zero-
Tim Switzer (VP of Equity Research)
I got it.
Christopher Maher (Chairman and CEO)
... but we just said it maybe a little bit. You might not see a lot of it.
Tim Switzer (VP of Equity Research)
... Okay, so it's more based off of the anticipation of more loan growth, given the pipeline you've seen?
Christopher Maher (Chairman and CEO)
Yep. And we think generally that we, the capital levels we're at, are adequate for the risk profile of our company. So we're not trying to use repurchases to lever the company at all. We're just taking excess earnings and applying them to repurchases. So to the extent we don't need it, we'll keep our capital ratios, you know, pretty much in this neighborhood and use any excess earnings for repurchases that, you know, we don't need for growth.
Tim Switzer (VP of Equity Research)
Okay, understood. I was also interested in your comments about the hiring efforts you've made in the C&I space. I know the competition there has been—I mean, just for C&I and loan growth generally has been a little tough as banks try to diversify. What, what's the competition been like on the recruiting side? Has that been tough? And what's the pitch OceanFirst makes to potential new bankers?
Joseph Lebel (President)
Look, I think, well, one, I'd say that the competition's difficult in any environment, especially for revenue-producing people, whether it be, you know, classic C&I bankers, deposit gatherers, you know, you name it, investment folks. But, I think for us, the pitch has always been the very similar pitch, right? We're, we're steady. We're going to be in markets. We don't change our minds about whether or not we want to do things. It's been very clean, straightforward. Management team has been consistent, and when people come here, they like it, and we don't have turnover. So I think we have a good reputation in the marketplace, and I think that helps salespeople. Salespeople want to make sure, especially the people we target, which are people largely from, from what I consider to be the large regional and national banks.
Those folks get in and out of markets and businesses all the time, and we tend to be... If we're in a business, we tend to stay in a business. So we tell people that you don't have to worry about policy shifts and changes. If you bring us good business, we'll do it. So that seems to always resonate.
Christopher Maher (Chairman and CEO)
We found over the years that the best bankers just want to know they can support their clients. And as long as you can demonstrate to them that they're going to have the tools and the support and the capital and the balance sheet to do that, they're going to feel pretty comfortable. So and, you know, we have joked over the years, some of these sales processes for for new bankers can take a while. We've had bankers we've pursued for up to five years before they actually sign up. So the folks we bring on, we bring on kind of deliberately, but they're top-quality folks. They stay with us a long time. They build really durable relationships and extend our brand. So, so we're adding people every quarter. We're going to add more between now and the end of the year.
You know, we've got a positive outlook for it.
Tim Switzer (VP of Equity Research)
Great. That's a lot of good color. Thank you, guys.
Operator (participant)
Thank you. We now have David Bishop with Hovde Group. You may proceed with your question.
David Bishop (Director of Research)
Yeah, good morning, gentlemen.
Joseph Lebel (President)
Hey, David.
David Bishop (Director of Research)
Chris or Pat, just curious on, you know, we spent a lot of time talking about the loan growth side, but on the funding side, you know, you said you paid down some of the brokered and high-cost savings accounts this quarter. Are there any sort of tranches or big tranches of maybe CDs or broker deposits that are maturing, that there's an opportunity to reprice here in the next couple of quarters? Just curious what the sort of the funding side of the balance sheet looks like from a repricing perspective.
Patrick Barrett (CFO)
Hey, David, it's Pat. It's actually pretty steady around, I don't know, $200 million-ish on average that rolls every month, I guess, over the next six to nine months or so. So we deliberately ladder into these so that we don't have any big slugs of it coming due at any one time. So that gives us opportunities to kind of manage how we roll. Brokered CDs are a little bit lumpier than that, so I'm talking about more, on the retail CD side. But we only have about $250 million, I think, that's rolling between now and year-end. And we'll continue to look at that and decide, you know, whether we want to keep it or not. If it's economic, we generally would roll the brokered CDs. It's proven to be less economic this year.
You'll remember last year, when we layered in about 8 or 9% of our total deposit base, it was actually a 20-30 basis point advantage over other sources of funding, and so we thought it was a good deal, and we've been slowly letting it roll as it became less economic to do that. So, it'll be pretty steady in kind of normal way, cash flows for us.
David Bishop (Director of Research)
Got it. Appreciate that. Then, Chris, sort of a holistic question, maybe a tougher question, maybe to answer and ask, but, you know, obviously, ROA has been depressed here. You know, it's been a tough yield curve over the, you know, past couple of years. From a board perspective, you know, is there sort of a sense that, you know, is there a bright line ROA that you have to hit to sort of, you know, sort of earn or maintain independence? Does that come up in the dialogue, if any? Is that something that's in the lexicon these days in terms of, you know, reaching a set return on, you know, equity or return on assets?
Christopher Maher (Chairman and CEO)
Sure. Well, yeah, we, as you can imagine, that comes up often. Comes up among management, certainly with the board. I think if you back into the world this way and think about leverage, there's only a kind of a range of leverage that would be, I think, workable for a regional bank like us. Once you know that leverage, you're going to have to have a certain ROA in order to be able to return, you know, a cost of capital. We have for years felt that the required investor return for us over the long haul should be in the upper teens. That reflects our risk, the risk position of our company, you know, things like the dividend yield and liquidity and all of that. So, that's our aspiration.
If you back into our leverage position, that requires an ROA that is north of 1%, probably approaching 1.20%. We have done that in the past, and I think we can get there again. You know, the last two years of the inverted yield curve has not helped with that, and I'm not sure that goes away in the next, you know, two or three quarters. I think that inversion may stick around for a bit. But our thought is with the loan growth, we're talking about building second half of this year, going into 2025. Although margins may still be tight on that, the operating leverage will pick up, and we have an opportunity to build back to that level.
So while we certainly recognize that to earn our independence, there's a little bit of a line in the sand that you better have a path to get yourself north of a one ROA, and we think we have the visibility on that for now, but there's a lot, you know, obviously, going on with rate markets and things like that. Interestingly, you know, with all the discussion about, you know, what is the Fed gonna do or not do, we're probably more impacted over the next couple of years by what the 5-year and the 10-year do. That's got a significant impact to our business. So the longer end of the yield curve is something we watch as much as the short end, even though it gets less attention.
Joseph Lebel (President)
Got it. Appreciate the color.
Operator (participant)
Thank you. We will move on to the next question, and we have Manuel Navas with D.A. Davidson. You may proceed.
Manuel Navas (Senior Research Analyst and Managing Director)
Hey, just a quick follow-up on that 1.20 ROA long term. Does that, does that also assume a kind of return to, I think, more aspirational 10% loan growth?
Christopher Maher (Chairman and CEO)
Yeah, I, I think that's the way you get there. That's the path. And if you think about-
Manuel Navas (Senior Research Analyst and Managing Director)
Okay
Christopher Maher (Chairman and CEO)
... you know, just building that over time. It's not something that's gonna happen, certainly this quarter. But the other complication, just may add a little bit of time to this, is we're not just rebuilding or building the loan book, we're also doing a mix shift. And while we think that's really valuable for us over the long term of the company, it just takes a little bit longer. You know, most of these C&I relationships are only partially drawn, so you're not putting out dollar for dollar like you were in commercial real estate. Undoubtedly, we think that's much more valuable for our company, but it does complicate the time it takes to kind of rebalance a little bit and achieve that 10% growth rate.
But, we've, we've always thought that that's a nice, prudent level of growth that you should be able to sustain year after year. And I, and I'd point out that, you know, prior to COVID, fourth quarter of 2019, we had achieved that 1.20 ROA after, you know, working on operating leverage for a few years. COVID set us back. We had achieved it again, the fourth quarter of 2022, and then we had the liquidity crisis we went into. So, we know how to get there, and we're comfortable we'll get on the path to get there. But I, I would just hesitate to give you a, an, a very precise date on which we think we'll be there.
Manuel Navas (Senior Research Analyst and Managing Director)
I appreciate that. Stepping back towards discussing the C&I team, some of the new lenders and those that are still to come, have they been ramping as expected, or has competition kind of slowed their ramp? Rates could be part of it, too. And how is the C&I team doing on the deposit generation as well?
Joseph Lebel (President)
So I'd tell you that the folks that we've hired have met or exceeded expectations. I think that the interesting, you know, sort of semi answer to the question is... I'll use the example of the last quarter. We had five of our better C&I borrowers pay us down on their loan balances because they're doing so well, and they have cash. So the good news is, I have cash from my C&I borrowers in the bank at reasonable rates and some in operating accounts where I'm not really paying a rate. The bad news is, they're done so well with cash that they're paying down my loan rate-yielding assets because they have the ability to do so. So it's a little bit of a balancing act. Look, it's... there's competition out there.
The only thing I really worry about in the C&I space today in terms of competition is, we have an environment where there are people getting into this space that don't understand this space. And, you know, you always worry about people putting on, assets in the C&I space that are not structured properly. I'm happy to compete on price within reason. I'm not gonna compete on the structure aspect. That's just a long-term road to ruin. But, our folks so far that we've put in place have done fine.
Manuel Navas (Senior Research Analyst and Managing Director)
That, that's good, that's good to hear. In terms of the NIM outlook, you know, you talked about some of the wholesale funding that's coming up. What are the assumptions around wholesale funding? Is it the assumption that they stay at current levels and just reprice, or is assumed in the guide that you pay them off? Like, is deposit growth a wild card here, potentially? How should I think about how you're viewing and planning for on wholesale funding payoffs?
Christopher Maher (Chairman and CEO)
We, we don't have a ton of overnight wholesale funding that's out there. We've got about $800 million or so of borrowings, but 600 of that is termed. Seems like years and years and years ago, I guess it was about 5 quarters ago, we termed out 3 buckets of $200 million per bucket, FHLB borrowings, and those start to mature in 2025, and then 2026, and then 2027.
... so that's three-quarters of that. We also, aside from that, really don't have much in terms of longer-term funding that's out there, even in our CD book. It's relatively short. So we're pretty well positioned to take advantage of lower funding costs as they occur. The flip side of that is, just to maintain our current liquidity levels, growth means that we're funding it at today's shorter-term, higher rates, which, again, can squeeze profitability. But does make us think carefully about the profitability of any loans that we're going to do, because we are kind of funding incrementally as we go along. Does that help or answer your question?
Manuel Navas (Senior Research Analyst and Managing Director)
That, that does. That does. Shifting gears for my last question. Can you discuss the upward trajectory of the loan loss reserve? It's just ticking up. And you're not responding to regulatory pressure, but you are building capital and building reserves. Is that kind of part of seeing the landscape and trying to be proactive? Is that the right way to think about it, rather than being responsive to any particular regulatory concern on the CRE concentration issue?
Christopher Maher (Chairman and CEO)
It's exactly, you know-
Manuel Navas (Senior Research Analyst and Managing Director)
Where would you kind of like to land?
Christopher Maher (Chairman and CEO)
The first part of the question is easier than the second part. But I would say-
Manuel Navas (Senior Research Analyst and Managing Director)
Sure.
Christopher Maher (Chairman and CEO)
This is completely an external function, where we're thinking about the environment, we're thinking about pure loan loss reserves. We're looking out at what the credit conditions might be. Let's say, the soft landing isn't quite as soft as people would like it to be. I just want to have a little bit of an extra margin there. It's not a, not a giant difference. There is nothing inside our loan book that is driving us to feel that we need any significantly higher reserve than we have today. So it's just been sort of a gradual evolution as we've watched things like the Moody's forecasts and where unemployment is going and things like that. We just want to make sure we're a little bit more prudent.
I would say that it is clear to us, and CECL is terrible in this regard, but, you know, CECL really anchors you back to your loss histories, and our loss histories have been really good. So it's hard to kind of satisfy the standard you would need around quantitative allowance. As we build the C&I book, I think we'll also have the opportunity to-
Manuel Navas (Senior Research Analyst and Managing Director)
Right
Christopher Maher (Chairman and CEO)
... maybe have a little bit higher reserve level against C&I. First of all, it tends to deserve that anyway, and although we've done C&I for decades, this is a little larger concentration for us and into some new verticals. So I think we're taking the opportunity, and I wouldn't be surprised if you see us take the opportunity to build a little reserve as we build that book up to a bigger part of our balance sheet. But at the end of the day, we're not going to, you know, change our credit discipline. We don't expect different outcomes in credit performance, so I don't see us being heading towards a reserve-heavy bank. But you might see what you've seen over the last year.
You might see, if economic conditions continue to be a little questionable, you might see a couple basis points a quarter from here, from here from time to time. No big moves.
Manuel Navas (Senior Research Analyst and Managing Director)
Thank you. I appreciate the commentary. I'll step back and turn it to you.
Patrick Barrett (CFO)
Thanks, Manuel.
Operator (participant)
Thank you, Manuel. We now have Matthew Breese with Stephens.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Hey, good morning.
Patrick Barrett (CFO)
Good morning, Matt.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
I was hoping you could provide an update on the percentage of loans that are pure floating rate, I mean, priced off something like Prime or SOFR, and what the blended yield is on those loans?
Patrick Barrett (CFO)
Sure. Hey, Matt, it's Pat. So our pure floating rate is just under 29% of our loan book. It's about $2.9 billion. Those are split about one third Prime, two-thirds SOFR. I don't have the exact numbers right in front of me, but I want to say it's about $900 million that's based off Prime. So the remainder-
Matthew Breese (Managing Director and Senior Equity Research Analyst)
And when we talk-
Patrick Barrett (CFO)
When we talk about our fixed and floating rate, as you know, make up of being 55, 45-ish, which we've said in the past frequently, it's 54, 55 fixed rate. The floating includes adjustable, when we talk about that, which is about $1.7 billion, and then the fixed rate is $5.5.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Is it safe to assume that the pure floating rate paper is, you know, capturing a spread of, call it, you know, I don't know, 2 points over SOFR, 2.5 points over SOFR? I'm trying to get a sense for, you know, if we look at that fixed rate portion of your book, what is that yielding and what's the repricing opportunity? And when does that start to kick in for the NIM?
Patrick Barrett (CFO)
Yeah, I think historically, kind of depends on the age, the vintage of it, but historically, we've kind of averaged about 2.50 over benchmark. That obviously is compressed over time with competition, and it's probably more in the 2-2.25. So I think you're in the right ZIP code.
Christopher Maher (Chairman and CEO)
Hey, Matt, it's Chris. One of the things that we do watch really carefully, this was my comment about watching, say, the 5-year, is a lot of those adjusting loans as they roll, they're indexed off the 5-year. So as the 5- and 10-year kind of fall a little bit, that can affect outcomes as well.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Just for the fixed rate and the ARM book, what is kind of the roll-on versus roll-off dynamic that you're referring to, Chris?
Christopher Maher (Chairman and CEO)
... So I think if you look at our maturity wall, that's probably the best numbers you can see. You can see by period, how many loans we have rolling through, what rate they're coming from. Just to caution, we were trying to show a credit perspective in that, so we're using the rates the customer is paying, not the rate we are earning. We're actually earning a little higher than those rates because of swaps. So probably, I mean, it's probably 30, 40 basis points difference between the stated rates in that maturity wall slide, in terms of what we're being paid today. And you kind of roll that forward and look at, you know, pick a number 225 over the over the curve as they roll.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Okay. And just playing this out, I mean, at what point do we start to see this dynamic really take hold and, and propel the margin higher? And in quarters past, we've talked about kind of a natural landing point for the NIM, for a bank like yours, being kind of the 3%-3.25% range. When can we start to see meaningful progress towards that?
Christopher Maher (Chairman and CEO)
I think, look, we can make progress between where we are now and just kind of pick a number and say 3 over time. But to get much above 3, you're not going to see that in an inverted yield curve. So we would need a normalization of the curve to get much beyond that. You know, it is really important, the new growth we do and what rates that comes in at. You know, as Joe mentioned, our pipeline today, which we're really concentrating on that, C&I borrower, you know, carries almost an 8% handle. That will help. That will help us get back towards 3. But if you're looking at our long-term average, closer to 3.25, I don't see us being able to achieve that without moving the yield curve.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Okay. And then, what is a good tax rate to use from here?
Christopher Maher (Chairman and CEO)
24%. I keep saying 25 approximately-
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Okay.
Christopher Maher (Chairman and CEO)
- and we keep printing 24, so I'm changing it, and it's 24% now.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Okay. And then just, just the last one for me. You have a, I think, $125 million of sub-debt reaching its call date about this time next year, maybe a little earlier.
Christopher Maher (Chairman and CEO)
Mm-hmm.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
One, what is kind of the current thinking around that, in terms of, you know, paying it off or reissuing? And then secondly, just curious, at this point in the game, does the sub-debt count towards a CRE concentration, or have we moved to the Tier 1 plus allowance methodology?
Christopher Maher (Chairman and CEO)
I'll give you the first part of that, and then Pat will follow up on the second. So the thinking on it is, you know, look, when it matures next May, if rates are what they are today, it's going to be more expensive than we'd like, and we'd probably look to refi that. At the issuances that we've seen in the last, call it 60 days, we're not, you know, excited or anxious to do anything with that today. We're watching carefully whatever the Fed does. We're watching carefully to see if capital markets activities by other regional bank issuers come out. We're kind of watching that market, but it's conceivable we might take an opportunity to issue in advance of that, but not at today's rates, and we don't feel any pressure around that.
So, yeah... And look, it still continues to be available to us next year, just reprices and, you know, with the margins would be more expensive than today's issuance rates. So, there is an opportunity for us to, to refi that. But Pat, just on the capital treatment?
Patrick Barrett (CFO)
Yeah. So the subdebt Tier 2, and typically, everybody issues from the holding company, your, your listed vehicle. And then, to the extent that you need or want it to have Tier 1 treatment for your bank, you would then inject the capital down into the bank. So that would kind of drive the denominator of the Tier One plus allowance, is any subdebt that's been put down into the bank, and it would be for the calculations of where all your loans are and where the bulk of your capital is residing, which would be in the bank. We've also just to remind you, it's May of next year, we have the 125 that will reprice. And we also have 57, I think, of preferred, that also reprices in May of next year.
And those are at 5.25% and 7%, respectively. So the, the subdebt, you know, issues and is benchmarked off of a, a longer-term Treasury. So the short-term rates are much less important when we think about it than where we think the longer end of the curve is today versus where it might be then. So it's not that big of a difference. It's really just the additional months of carry if we were to issue anything in advance of that date versus the higher interest rate that we'll pay once those coupons reset in May, which the shorter the time gets, the less it kind of matters. And so with, with capital thinking, you kind of like to do it when you can rather than when you have to.
And so we've been thinking about this and talking about it already for the better part of this year, and we'll be opportunistic and thoughtful about it. But, you know, net-net, in this environment, more capital is good, just like more allowance is good. So there's an intangible trade of the extra cost of carry for that capital versus the perception of the strength of your balance sheet, so.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Understood. That's for the sub, any change in thinking on how to navigate the preferred repricing?
Patrick Barrett (CFO)
Yeah, not really. Retail seems to be... There, there's such a thirst for retail preferred, and, and folks seem to be relatively indifferent if it's rated.
Christopher Maher (Chairman and CEO)
... So that's a pretty easy out on the replacement of the preferred, and it's a fairly small issuance bucket. The sub is generally, whether you price it institutional or retail or not, consumed almost entirely by institutional investors. So you need to be kind of thoughtful about the timing and the competition for capital and how the issuance is going to be viewed by the Street, of course, which we've seen positive reactions and negative reactions to capital issuance just in the last 90 days, by banks of our size or, you know, community to small regionals. So we're also trying to navigate that perception challenge as well.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Great. I appreciate all the color. I'll step back. Thank you.
Christopher Maher (Chairman and CEO)
Thanks, Matt.
Operator (participant)
We now have Christopher Marinac with Janney Montgomery Scott. You may proceed.
Christopher Marinac (Director of Research)
Thanks for hosting us this morning. Chris, I wanted to follow up on the allowance point you made two callers ago. So when you have the idiosyncratic losses like you had, this one-off credit, does that give you any positive evidence to build that component, particularly as you have new loan growth?
Christopher Maher (Chairman and CEO)
You know what? It would, Chris, if we could find other loans like that in the book, and the problem is we don't have them. You know, our central business district concentration is now $125 million. We've been through that with a fine-tooth comb, understand, you know, everything about it, and we don't have any other credits that meet the same criteria as the one where we had the issue last year. So it's kind of hard to extrapolate and push that out.
As we did our stress tests, looking at the maturity wall, as we did our stress tests, looking at different asset classes, looking at all of our construction loans, you know, as we go through all these things, we're obviously looking for information that would support either the allowance we have today or require us to adjust the allowance. And the positive news is those stress tests have been so positive that it hasn't really given us a lot of support to move the allowance in any particular way. But we understand that we're a little bit of an outlier in the total allowance, and we don't like being outliers in anything, so we look at it really carefully every quarter and make thoughtful decisions about it.
Christopher Marinac (Director of Research)
Nope, I understand. Thank you for that. And then, just a, I guess, a bigger picture question. The production that you anticipate the next two or so years, how much of that will come by region? I just was curious about, you know, the... Would you have more in the Northeast and in the, the Baltimore-Washington area, just as those are newer, to contribute to a bigger percentage?
Christopher Maher (Chairman and CEO)
I think you're still going to see the majority of activity happen in our, kind of our most concentrated market, which is the corridor between Philadelphia and New York. But we do get meaningful numbers out of the other regions as well, and some of the hiring we've done has been down in the Baltimore-Washington area, especially that government contracting work. You know, so there will be measured growth in other areas, but given the size of our franchise, we still—our strongest markets are the ones closest to home. So, I think you're still going to see the majority, call it 50%-75% of growth comes right in our core market in the Northeast. We really like being in the Northeast, and especially as we see some of the volatility.
You know, you've heard this around, you know, multifamily in certain parts of the country. You've seen, residential home prices starting to waver in certain places, rents falling. Fortunately, the Northeast tends to avoid both the up and downswings, so we feel pretty good about our market, and we're not going to change it, materially.
Christopher Marinac (Director of Research)
Great. Thanks again for taking all of our questions this morning.
Christopher Maher (Chairman and CEO)
All right. Thanks, Chris.
Operator (participant)
Thank you. I would like to hand it back to Chris Maher for some closing remarks.
Christopher Maher (Chairman and CEO)
All right. Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you again after our third quarter results are published in October. Thanks very much.
Operator (participant)
Thank you all for joining. I can confirm that does conclude the OceanFirst Financial Corp. Q2 2024 Earnings Release Conference Call. Please enjoy the rest of your day, and you may now disconnect from the call.