OceanFirst Financial Corp. (OCFC) Q4 2025 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the OceanFirst Financial Corp. Q4 '25 Earnings Release. My name is James, and I will be your operator for today. [Operator Instructions] The conference call will now start, and I'll hand it over to our host, Alfred Goon. Please go ahead.

Thank you, James. Good morning, and welcome. 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 been able to join our fourth quarter 2025 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. We reported our financial results for the fourth quarter which included earnings per share of $0.23 on a fully diluted GAAP basis and $0.41 on a core basis. In terms of performance indicators, we're pleased to report a fifth consecutive quarter of net interest income growth, which increased by $5 million or 5% as compared to the prior quarter and up 14% as compared to the prior-year quarter. The current quarter results were fueled by an increase in average net loans of $446 million. Our net interest margin of 2.87% declined modestly compared to the third quarter. Total loans for the quarter increased $474 million, representing an 18% annualized growth rate, driven by $1 billion in originations. Joe will have more to add regarding our growth strategy in a few minutes, but we're very pleased to see the organic growth momentum that is a direct result of the investments we made in the first half of 2025. Asset quality remained exceptional as total loans classified as special mention and substandard decreased 10% to $112 million or just 1% of total loans. This continues to place us among the top decile of our peer group. The quarterly provision was primarily driven by improvements in asset quality and a decrease in unfunded commitments, offset by loan growth. GAAP operating expenses for the quarter were $84 million and included $13 million of expenses related to our residential outsourcing initiative, merger costs and execution costs for our credit risk transfer. On a core basis, operating expenses of $71 million were down $1 million or 2% from the linked quarter primarily driven by the impact of our strategic initiative to outsource our residential lending platform. Pat will provide additional commentary on the credit risk transfer and a detailed update on our financial outlook in a moment. Capital levels remain robust with an estimated Common Equity Tier 1 capital ratio of 10.7% and tangible book value per share increased to $19.79. We did not repurchase any shares this quarter under the existing plan as our capital was utilized to support loan growth. This week, our Board also approved a quarterly cash dividend of $0.20 per common share. This is the company's 116th consecutive quarterly cash dividend. Finally, on December 29, we announced a merger agreement with Flushing Financial Corporation and an investment agreement with Warburg Pincus. The acquisition of Flushing will directly support our organic growth initiatives in New York, positioning OceanFirst as a scaled competitor in the deepest banking markets in the country. The resulting company is expected to demonstrate improved profitability and increased operating scale, which should deliver meaningful upside to our shareholders. We continue to work towards an expected close in the second quarter of 2026, and we'll provide more updates as regulatory approval progresses. In the meantime, we remain focused on OceanFirst's continued organic growth efforts, which are proving successful as shown in the results of this quarter. At this point, I'll turn the call over to Joe for additional color on the businesses.

Thanks, Chris. I'll start with loan originations for the quarter, which totaled just north of $1 billion for the second consecutive quarter and resulted in record quarterly loan growth of $474 million. Our C&I business grew 42% for the year as we have reaped the benefit of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers. Much of that was in the second half of the year, which bodes well for interest income growth early in 2026. As discussed in the previous quarter, we made the decision to outsource the residential and title businesses, and we have worked through the remainder of the existing pipeline and expect to see measured runoff in the portfolio going forward. The loan pipeline of $474 million, while lower quarter-over-quarter, is due to the outsourcing of residential and is still markedly higher than this time last year, reflecting the robust growth in the commercial bank. Total deposits in the fourth quarter increased $528 million, with $323 million driven by organic growth across varied business lines. Among those lines, the Premier Bank team grew deposits $90 million or 37% from the linked quarter with the weighted average cost of their deposit portfolio declining 36 basis points to 2.28% as of December 31. To date, the Premier Banking teams have brought in a $332 million in deposits across more than 1,300 accounts and representing more than 350 new customer relationships. Approximately 21% of those balances are in noninterest-bearing DDA. Lastly, noninterest income decreased by $3.3 million to $9 million during the quarter primarily driven by lower title fees and a reduction in the gain on sale of loans related to the outsourcing of our residential and title platforms. We continue to see strong swap demand linked to our commercial growth and look for that to continue in the coming quarters. Overall, noninterest income levels were in line with our expectations as guided in the previous quarter. With that, I'll turn the call over to Pat to review the remaining areas for the quarter.

Thanks, Joe. As Chris noted, net interest income grew while margin declined modestly, as we had previously guided. Pretax pre-provision core earnings grew 9% or $3 million from the prior quarter, driven by earning asset growth over the second half of the year. Loan yields decreased modestly, reflecting the impact of floating rate resets and a continued mix shift in our portfolio. Total deposit costs increased modestly, reflecting very isolated upward repricing for certain interest-bearing accounts combined with continued competitive deposit pricing. Borrowing costs also contributed a modest 1 basis point of pressure on our margin, reflecting the net impact of our subordinated debt issuance and retirement during the fourth quarter. Average interest-earning assets increased meaningfully compared to the prior quarter, reflecting increases in both the securities and loan portfolios. Growth in securities was from our late third quarter opportunistic purchases, which also had a modestly compressing impact on our margin. Looking ahead, we expect positive expansion in both NII and margin. As Chris mentioned, asset quality remained very strong with nonperforming loans to total loans at 0.2% and nonperforming assets to total assets at 0.22%. Asset quality continues to remain at the low end of historical levels for criticized and classified loans as risk ratings across our commercial portfolio remained stable. Net charge-offs ticked up slightly, but full year net charge-offs as a percentage of total loans remained extremely low at 5 basis points. Turning to expenses. Core noninterest expenses decreased from $72.4 million to $71.2 million, driven by the sale of our title business, noncore items include restructuring charges of $7 million related to our residential outsourcing initiative, $4 million of merger-related costs and $1 million of professional fees related to the credit risk transfer transaction we executed during the quarter. Looking ahead, we expect our first quarter core operating expense run rate to remain in the range of $70 million to $71 million, with seasonal compensation increases offset by a full quarter's benefit of our residential outsourcing initiatives. Capital levels remained strong, with our CET1 ratio increasing to 10.7%, reflecting strong loan growth during the quarter combined with the benefits of the credit risk transfer transaction. This trade provided approximately 50 basis points of CET1 ratio benefit at an annual pretax cost of less than $4 million. A word on taxes, we expect our effective tax rate, which was 22% in Q4, to remain in the 23% to 25% range quarterly, absent any changes in tax policy. There are no changes to our full year guidance, as stated in the third quarter's earnings release, mid- to high single-digit loan and deposit growth. NII and NIM growing with NIM growing past 3% during the year and NII ramping in the second half of the year. Other income, $7 million to $9 million per quarter and expenses relatively flat to current run rates. Note that these are stand-alone expectations that do not reflect the impact of the Flushing acquisition. We've also added our first quarter outlook for convenience. But again, remember that the first quarter always reflects the impact of 2% fewer days and the impact that has on a lot of our P&L items and NII. At this point, we'll begin the question-and-answer portion of the call.

[Operator Instructions] And moving on to our questions, we have one from Daniel Tamayo from Raymond James.

Maybe just a clarity on your net interest income guidance, Pat. The growth in dollars matching the growth in loans, that's to be read as -- the back of the envelope math is just under $90 million, I guess, in loan growth. So that's the way to think of that. That number is the net interest income growth? Or how should we be thinking about...

No, it will -- it actually will probably grow at a bit higher clip than whatever our loan balances grow just because of the compounding effect of how big the balance sheet is today. So I was just reminding that Q1, it always looks disappointing because you have to shave 2% off for fewer days in the quarter with the drop from fourth quarter to first quarter, and then it will begin to ramp back up. I think you'll see high single-digit growth in NII for the year.

Great. Okay. That's perfect. And then let's see here, the -- I guess as it relates to the deal, any kind of updated commentary around what loan sales might end up looking like after the close?

It's a little bit too early to give you any precise figures on that. We're undergoing a process right now to review the portfolios. A lot of the work we could not really kind of get deep into when we were still in the confidential mode of negotiating with Flushing. So now we've got a little better ability to do that. So we'll update you as our thoughts evolve, but we do expect to be able to do some work on the balance sheet in a way that improves our margins and ROA outlook over time while also reducing credit risk.

Understood. And then maybe just a clarification question for you, Pat, on the expense line. Where is the recurring CRT premium expense? In what line?

It comes through other. It's just like insurance premium expense essentially.

So an expense, it's not in the yield. It won't be in the NIM or in the -- will look like OpEx...

Moving on, we have Tim Switzer from KBW.

I got a few on balance sheet growth here. So first up on commercial balances, C&I on a dollar basis, it looks like it's accelerated for 4 straight quarters, basically every quarter this year with a pretty meaningful pickup in Q4. What kind of pace should we expect for 2026?

Tim, it's Joe. Look, I think we probably snuck in a couple of Q1 stuff into Q4, but that's what the borrower wants and that's what we're going to do. But the seasonality aside, which tends to be a little slower in Q1 as everybody is waiting for year-end financial statements, I would tend to think that you're going to see very similar growth rates. I think we've got it in the 7% to 9% range, which I think is fair. Look, we put a ton of dollars into talent in that space, and I think that space is now just starting to deliver what we expected. So more to come.

Okay. Okay. That's helpful. And I think you guys disclosed this last quarter, wondering if you could talk about how much of the growth this quarter in C&I was driven from the Premier Bank in cross sales?

Yes. So I don't have the quarterly number in front of me, but I do have the half year numbers. So they generated just shy of $200 million in gross closed loans and the outstandings at the end of the year were about $64 million, which is pretty much what we figured, right? They're going to be more deposit-heavy, loan-to-deposit number is going to be really good. But they do have a solid C&I clientele, which is a benefit. And I think we'll see more of that to come in '26 as well.

Tim, it's Chris. One other thing I'd mention is that we're really pleased that the level of self-funding in the C&I customers was pretty strong this year. So we're seeing pretty strong deposits come in. The C&I teams have done a nice job with that. So we had just shy of like a 40% coverage of outstanding self-funding. So as that book rotates, we do more C&I and on a relative basis, less CRE, the deposit portfolio is going to strengthen as well.

Got you. Yes, that's great. And then on the Premier Bank specifically, it looks like the deposit growth maybe slowed down a little bit. I know it's just one quarter, there's probably some volatility, maybe some seasonality in there. But can you add some color on that? And then reconfirm if you still feel good about the target for $2 billion to $3 billion of deposits by the end of '27?

Yes. So Tim, I think you hit on the head. We had higher balances up until really the last week of the year. We had some seasonality, some distribution, some bonus payments. I think that's part for us to learn about the clientele as well. You onboard 350 new clients, you're trying to solve for what works. So we saw nothing but a ramp up until the last week. So I think you're going to see recoveries as the year goes on, you're going to see continued growth. I don't see any reason why we would back off the 2027 targets.

Moving on, we now have Christopher Marinac from Janney Montgomery Scott.

Chris and Pat and Joe, I wanted to ask about the Premier banking new money rate that came in. You may have mentioned it, I just missed it. Then I had a follow-up.

Yes. I don't know that we have the new money rate, handy. We did -- the overall portfolio was down nicely to just like a [ 2.25% ] cost. We're seeing noninterest-bearing is coming in faster now. And although the balances were seasonally weak, as Joe mentioned, we continue to open new accounts and establish new relationships at a good clip. So I think you're going to see that trend with more noninterest over time, better -- lower yields on those deposits and a faster pace of growth in Q1.

Okay. So [ 2.25% ] is the overall rate, and that works with what I was asking. Chris, as you move forward with Flushing, can you just go back through the opportunity to kind of reset deposit rates? And is there anything instructive from what you're doing now with Premier banking and those new customers with what you can do with Flushing. And I guess part of my question is also how much of that is sort of additional potential earnings beyond what you underwrote going in?

Yes. So I think there's a tremendous opportunity there, Chris. So let me just kind of walk through mechanically what we think it is. And I hope you understand also kind to shy away from any numbers around that opportunity. But the premise is -- well, first, I should say, if you look at Flushing's numbers, they've done a nice job of building noninterest-bearing accounts at a pretty good clip. They've built nicely over the course of the year and have had some momentum on their side. I think our Premier folks who operate in the markets where the Flushing branches are today, will find a higher rate of success because they have the opportunity to offer that kind of branch distribution network over time. And then I think the real important part of this is that for both us and for Flushing, being a stronger, larger regional bank is going to help us in recruiting top-tier talent. So I think we are a more attractive destination for career commercial bankers who are looking for a platform to continue to build their brand and build their teams and build their legacy. So I kind of see it in a few ways. Flushing was doing a great job on its own. We can probably do a little better with our Premier teams giving them a branch distribution network. And then we're going to be a much more competitive place to land. I think as we go through the first few quarters as a combined company, hopefully later this year, we'll be able to put a finer point on what we think that growth rate will look like. But those deposit markets are absolutely massive. So although you do -- in the Northeast, you're always picking up share from someone else. That's kind of the name of the game. There's a lot of share out there in the markets. We're picking. And we really like the branch distribution network where it is, the neighborhoods they're in, the streets they're on. And I think that's going to help both of us grow faster than either one of us would have grown stand-alone.

Great. That's helpful, Chris. And I guess, without getting too deep in the weeds, I mean, in general, it doesn't seem like what you had told us in late December really is dependent on adjusting these rates that, as you can have success later on that, then that creates future opportunities for earnings.

Yes. So with the one caveat, we are thinking through the balance sheet and in every bank, you have a variety of different funding sources and a variety of different assets. And this is an opportunity for us to be very thoughtful about thinking through the higher cost deposits and the lower-yielding loans and securities, and kind of saying -- looking at that mix and say the marginally highest-cost funding and the lowest-yielding assets present an opportunity to be much more efficient together. And that's really what the balance sheet process is about. And that's something that we may not be able to solve exactly at closing, but we would hope that within 30 days of closing, we would be able to provide some really good data on that.

We now have David Bishop from Hovde Group.

A quick question on the -- back to the C&I growth here and maybe for Joe. Just curious geographically, maybe where you're seeing the best strength there? And is any of this growth also driven by maybe expiration of noncompetes or handcuffs that were maybe placed against some of these lenders you had hired over the past year?

So the good news is it's pretty geographically dispersed, David, which I appreciate because we've hired lenders in all markets. Yes, we are -- some of the handcuff stuff that comes off, even if it's really like what I consider to be not really true handcuffs, people do feel that obligation, and that's a fair assessment. So I anticipate that we'll see more and more out of those folks as they get a little deeper into their OceanFirst tenure. But I don't -- I wouldn't say that there's anywhere where we're not performing up to standard. And then I think I've mentioned earlier that we've even got some of that activity from the Premier Bank, which is really valuable in terms of some of their clientele in -- New York City-centric.

And there's like a positive flywheel as these new bankers come on. Their first few clients take a little bit of time. And then those clients have a good experience. They tell not just their friends but the accountants, the attorneys and get better known and then it becomes incrementally better to pick up kind of the second round of clients and the third rounds of the -- we see a lot of opportunity going forward.

Got it. And I saw the earnings narrative on the deposit funding side, sounds like one large deposit client reset in terms of deposit rates from 0 upwards. I don't know, Pat or Joe, if you have that number in terms of maybe what the NIM headwind? And is that sort of just a onetime, a [ femoral ] impact?

Yes, it's onetime. It happens all the time where customers don't know where they want their money and they keep it out of higher-earning promotional type of things if they think they need it. So it was just -- it was noteworthy because of its size, and it's very infrequent and we would expect not recurring.

And it was fully reflected in Q4. It -- actually, it was kind of like a late Q3 thing. So you're not going to see that drag or provide a headwind going into Q1. So...

I could have just said that NIM hardly moved at all just due to a lot of little things and noise, but that didn't feel like it was a good enough explanation for 3 basis points of contraction. So it was that kind of quarter...

And I know this number bumps around, especially at the end of the year, but did see a noticeable pickup in the early-stage delinquencies in the 30- to 89-day bucket. Any commentary there that could be driving that?

Yes. It was just one loan, Dave, that has a federal government lease where the lease payment is a little bit late. So we don't have any concern in the long term, but it was already a loan that we had in the substandard bucket. We've been watching it because of that tenancy. So we'll give you an update as time goes on, but they have a good lease in place. It looks like it was just a payment issue, meaning their collection of their rent was just delayed administratively.

Got it. And then maybe a holistic question for you, Chris. It looks like the Netflix studio is entering into sort of the final stages, they're building the studios, sound stages and such. Any thoughts about maybe is there a potential to sort of set up branches within that footprint or any sort of branding within that community or within that development to sort of take advantages of branding the company there and backing the caterers, the builders, et cetera. Do you see any sort of longer-term opportunities as that builds out?

That's going to be a tremendous thing for the Monmouth County, which is our second strongest county after Ocean County. So I think we've got a few branches that provide some good coverage for that market already. I don't know that we'll need to open other branches. But I'll make a broader comment. That's a great kind of boom to the Monmouth County market. But we continue to see over the course of our core, call it, the Jersey Shore market, that the post-pandemic period has been a seismic shift, more people were down at the shore more parts of the year. There's been a significant demand for the infrastructure you need, everything from hospital systems having to expand to hospitality and office and all sorts of stuff. So our core, our strongest market in kind of the Central New Jersey Shore is doing pretty well. And I think that's going to be a pretty sticky thing. We see that happening probably for several more quarters.

Next up, we have Matthew Breese from Stephens Inc.

On Premier Banking, I guess I was a little bit surprised by the loan and deposit growth guide and outlook maintaining 100% loan-to-deposit ratio. I was thinking once the Premier banking effort got up and running, there would be a reduction to that ratio. I was hoping you could maybe talk a little bit to that. And then the other one is, I know it's still early days with these teams, but on the DDA side, is 30% DDAs from Premier banking, that's still the right long-term number?

I'll take the first side and then Joe can take the question about the noninterest bearing. In terms of the loan-to-deposit ratio, we'd like to see that down under 100%. On any particular quarter, it's a little bit of wait until the last few days as you see deposits come in or go out. I don't expect us to be a bank that's going to wind up at a 90% loan-to-deposit ratio, but I'd like to be substantially lower than 100%. I think we're going to see how things play out. We're opportunistic too, about earnings and making sure that we've got the right earnings power. And I would note that we've got a very robust set of deposit verticals. So we have our consumer deposit vertical. We have a government banking vertical, we have our corporate cash management and C&I vertical, and we have the Premier vertical, which overlaps a lot with the C&I vertical. So we have a lot of different sources of deposits and feel comfortable running at the higher end, which is not unusual for banks in the Northeast. But to your point, we'd like to be further under 100%. I think you may see that over the next several quarters, but not dramatically under 100%.

I think on the second half, Matt, I'd tell you that between 25% and 30% is actually, in my mind, still the right number. What we're hearing a lot from clients and clients that I've met personally is that their anticipation in midyear '25 or late-year '25 was a transition into full operating businesses coming across to OceanFirst in '26. So we still have a significant number of unfunded operating accounts that we've opened, getting ready for people to migrate. So I anticipate you're going to see a higher percentage of DDA as time goes on during the 2026 fiscal year.

Got it. Okay. And then, Chris, going back to Flushing, you had mentioned that there was some higher-cost components. Of the $7.3 billion of Flushing deposits, could you just describe some of the business lines tied to the higher-cost components? And then oppositely, what are the highest-quality parts that you're more likely to kind of keep and grow? What's on the whiteboard there?

So if you think about -- everyone has kind of pockets of deposits and everyone has more kind of promotionally-priced deposits. You think about their national deposit vertical, the iGObanking, for example, or BankPurely, which is not a lot of dollars. It's a good capability for us to have and preserve going forward but those are higher-cost deposits. Not surprising, some of the government deposits are higher cost because they wind up being excess fund accounts and you've got to be competitive on that. And then there are some money market accounts across the base that have been kind of priced more to acquire deposits. But there's still a pretty big slug of long-term high-quality deposits that either historically have been at Flushing for a long time, I remember the bank was chartered in 1929, so they've got a really long history. Very strong in Queens, very strong in the Asian communities, significant number of the branches they've opened in the last several years have been to serve the Asian communities around the city, which are not just in Flushing but places like Bay Ridge, and Lower Manhattan, Sunset Park, kind of those areas. So I think the real opportunity here is those long-term consumer accounts that go back in a lot of the franchise, the Asian markets and a lot of their commercial clients keep operating accounts with them. So that's all high-quality stuff. Around the edges, we might decrease the amount of dollars that are out in iGObanking, maybe some of the higher-yield money market, maybe some of the higher-cost government. That's kind of the high quality, lower quality. And I think every bank has some of that. We're looking at our own stuff, too, in the way we price it.

Understood. Very helpful. And Pat, just looking at deposit costs up this quarter, and I know you mentioned there was an isolated incident. Obviously, Premier banking as a blend is higher than the average cost, could you help us out with the deposit cost outlook for the year? Where do we peak and without any rate cuts or using your rate cuts to kind of forecast, where do you expect deposit cost to be at the end of the year?

Yes. I am not going to give you a guess of where deposit costs are going to be at the end of the year, but I do think that they're going to keep coming down. They are coming down. They're lagging a little bit from a speed of repricing relative to rate cuts, which is exactly what happened when we were in an uprate environment, we lagged before they started going up. So I think we're seeing the same kind of things. So starting off slowly, repricing and then picking up. I'm encouraged by the fact that all of our spot rates across all of our deposit types are noticeably lower than the averages for the quarter. So they are steadily coming down already. Rate cuts help because there's a lot of promotionally-priced stuff. It's not contractually indexed, but a lot of the larger promotional balances definitely are linked there. And frankly, the pace of loan growth and the opportunity for loan growth is going to drive a lot of how that ends up occurring, similar to the loan-to-deposit ratio. It's less something that we drive the business towards rather than an outcome. And if there's high-quality loan growth that is a little bit higher than our deposit growth outlook, then we'll probably fill the buckets with some higher-cost deposits just to secure the longer-term lending relationships. So I think you'll probably see deposit costs and loan yields roughly moving in line with each other with a slight edge on the loan yields due to growth, and that's going to drive our margin, I think, steadily improving as we move through the year, a handful of basis points every quarter. That's a backhanded way of not answering your question exactly. So...

All very helpful. And maybe just to drill in on one category that looks like it has the most room, your time deposit costs, the spot cost at the end of the quarter was 3.64%. What is kind of the blended all-in cost of CDs as they -- I know there's going to be some promotional stuff in there, but the all-in blend of [ stuff ] resets.

Yes. Well, one thing, Matt, I'd note that when we think about the balance sheet restructure, to your prior question, that's the first dollars we're going to give up. We don't have a lot of brokered, but we do have some, and we've kept those durations really short. So as we kind of zero-in on the combined balance sheet with Flushing, the very first thing we will do is let those brokered runoff, and those are in the high 3s, but coming down. So even if we kept them, they would be coming down. So I think there's a strong opportunity there. And all of that is probably -- the weighted average duration on that is under 6 months, Pat?

Yes. It's about 4 months. So we can pretty rapidly change prices, and we actually do. We don't wait for a rate cut and mess around with kind of daily changes and we see are we able to keep rollover balances or not? Are we attracting any new balances or not? With, again, that being just one of the components of funding base that we need to maintain to support whatever the loan growth rate is.

And that is it for all the questions. Thank you, everyone, for participating on that. And the Q&A is now clear, and I'll hand it back to Chris Maher for some final remarks.

All right. Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in April about our first quarter results. Thanks very much. Bye.

And this concludes today's call. Thank you all for joining. You may now disconnect your lines. Have a great one.